[Federal Register Volume 79, Number 1 (Thursday, January 2, 2014)]
[Notices]
[Pages 169-173]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-31366]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71190; File No. SR-CBOE-2013-126]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change Relating to
Supervision
December 26, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on December 18, 2013, Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I, II, and III below, which Items have been substantially
prepared by the Exchange. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CBOE proposes to adopt a rule requiring each Trading Permit Holder
(``TPH'') to establish and maintain a system of supervision and written
supervisory procedures. The text of the proposed rule change is
available on the Exchange's Web site at http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx, at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the
[[Page 170]]
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Effective and comprehensive compliance policies and procedures and
supervisory systems are critical to investor protection and market
integrity; therefore, the Exchange proposes to adopt Rule 4.24 that
would require its TPHs to establish and maintain a system to supervise
each of their business activities and the activities of their
associated persons.\3\ As more fully described below, the proposed rule
would also require TPHs to: (1) establish, maintain, and enforce
written supervisory procedures; (2) inspect every office or location of
the TPH at least once every three calendar years; and (3) conduct an
annual review and submit to the Exchange on an annual basis a written
report on the TPH's supervision and compliance efforts during the
preceding year.
---------------------------------------------------------------------------
\3\ Article 1, Section 1.1(f) of the Exchange's Bylaws defines
``Trading Permit Holder'' to mean ``any individual, corporation,
partnership, limited liability company or other entity authorized by
the Rules that holds a Trading Permit.'' The proposed rule would
also apply to CBOE Stock Exchange (``CBSX'') Trading Permit Holders.
CBSX is CBOE's stock trading facility.
---------------------------------------------------------------------------
The Exchange does not currently have a comprehensive rule that
directly addresses the obligation of every TPH to properly supervise
its business and employees. The proposed rule would impose a more
definitive supervision requirement on TPHs than is currently contained
in the Exchange's rules, and would cover all business activities of a
TPH.\4\
---------------------------------------------------------------------------
\4\ The proposed rule is modeled after similar rules of other
self-regulatory organizations (``SROs''), i.e., PHLX Rule 748, NASD
Rule 3010, FINRA Rule 3130, NYSE Amex Rule 320, NYSE Rule 342, and
NYSE Arca Rule 11.18.
---------------------------------------------------------------------------
Currently, the only supervision obligations that are expressly
codified in CBOE Rules are found in Rule 4.2--Adherence to Law and Rule
9.8--Supervision of Accounts. Rule 4.2 reads as follows:
No Trading Permit Holder shall engage in conduct in violation of
the Securities Exchange Act of 1934, as amended, rules or
regulations thereunder, the Bylaws or the Rules of the Exchange, or
the Rules of the Clearing Corporation insofar as they relate to the
reporting or clearance of any Exchange transaction, or any written
interpretation thereof. Every Trading Permit Holder shall so
supervise persons associated with the Trading Permit Holder as to
assure compliance therewith.
While it requires a TPH to supervise persons associated with the
TPH, Rule 4.2 does not expressly require a system of supervision, or
written procedures covering each line of business to be established and
maintained The proposed rule would clearly place responsibility on TPHs
to establish and maintain a formal plan of supervision that covers each
of its business activities and associated persons.
CBOE Rule 9.8, a component of Chapter 9--Doing Business with the
Public, is applicable only to TPHs conducting non-TPH customer business
in options. The proposed rule would mirror many of the requirements in
Rule 9.8, in that Rule 9.8 requires TPHs to: (1) establish, maintain,
and enforce written supervisory procedures; (2) conduct office
inspections; and (3) conduct an annual review and submit to the
Exchange an annual written report on the TPH's supervision and
compliance efforts during the preceding year. However, the proposed
rule would not be limited to supervision of activities related only to
TPHs conducting non-TPH customer business in options. Therefore, the
proposed rule would provide greater utility for enforcing TPH
obligations for other business areas such as proprietary trading.
The Exchange believes the proposed rule would clarify: (1) the
responsibility of the TPH for the acts of its associated persons; and
(2) the requirement of each TPH to supervise those associated persons
for which it is responsible. Proposed Rule 4.24(a) would generally
establish each TPH's responsibility for the supervision and control of
the TPH. The proposed rule would also require that each associated
person, in addition to each office, location, department, business
activity, trading system, and internal surveillance system of a TPH, be
under the supervision and control of an appropriately qualified
supervisor as described in proposed Rule 4.24(c).\5\
---------------------------------------------------------------------------
\5\ Proposed Rule 4.24(a) is modeled after PHLX Rule 748(a),
NYSE MKT Rule 320(b), NYSE Rule 342(a), NYSE Arca Rule 11.18(b) and
NASD Rule 3010(a).
---------------------------------------------------------------------------
Proposed Rule 4.24(b) would provide for the designation of a
general partner or principal executive officer to assume overall
authority and responsibility for the supervisory system of the TPH.
This designee would then be responsible for: (1) Delegating to
qualified principals responsibility and authority for supervision and
control of each office, location, department, business activity,
trading system, and internal surveillance system, as well as providing
for appropriate written procedures of supervision and control; and (2)
establishing a separate system of follow-up and review to determine
that the delegated responsibility and authority is properly
exercised.\6\
---------------------------------------------------------------------------
\6\ Proposed Rule 4.24(b) is modeled after PHLX Rule 748(b),
NYSE MKT Rule 320(c), NYSE Rule 342(b) and NASD Rule 3010(a).
---------------------------------------------------------------------------
Proposed Rules 4.24(c) and (d) would provide for the qualifications
of supervisors and the standards of supervision, respectively. Under
proposed paragraph (c), TPHs would have to make reasonable efforts to
determine that those persons with supervisory control, as described in
proposed Rules 4.24(a) and (b), are qualified by virtue of experience
or training to carry out their assigned responsibilities. This
paragraph would also require supervisors to meet the Exchange's
qualification requirements for supervisors, including completion of the
appropriate examinations.\7\ For example, CBOE Rule 3.6A--Qualification
and Registration of Trading Permit Holders and Associated Persons sets
forth required examinations for associated persons engaged in the
securities business of a TPH. Proposed paragraph (d) would require that
any person with supervisory control, as described in proposed Rules
4.24(a) and (b), reasonably discharge his or her duties and obligations
in connection with such supervision and control in order to prevent and
detect violations of applicable securities laws and regulations and
applicable Exchange rules.\8\
---------------------------------------------------------------------------
\7\ Proposed Rule 4.24(c) is modeled after NASD Rule 3010(a)(6)
and PHLX Rule 748(c).
\8\ Proposed Rule 4.24(d) is modeled after PHLX Rule 748(d),
NYSE MKT Rule 320(b) and NYSE Rule 342(a).
---------------------------------------------------------------------------
Proposed Rule 4.24(e) would require each TPH to establish,
maintain, and enforce written supervisory procedures, and a system for
applying such procedures, to supervise each of its business activities
and the activities of its associated persons that are reasonably
designed to achieve compliance with applicable securities laws and
regulations as well as applicable Exchange rules. The proposed rule
would also require that the written supervisory procedures be amended
as changes occur to a TPH's personnel or supervisory procedures and
within a reasonable time after changes occur in applicable securities
laws and regulations and the rules of the Exchange. Additionally, the
proposed
[[Page 171]]
rule would require TPHs to maintain a record of the name, title,
registration status and location of all supervisory personnel required
by the proposed rule, the dates for which supervisory designations were
or are effective, and the responsibilities of the supervisory personnel
as these relate to the types of business the TPH engages in, and
applicable securities laws and regulations, including applicable
Exchange rules. TPHs would be required to preserve such record for a
period of not less than three years, the first two in an easily
accessible place. Lastly, the proposed rule would require a copy of the
written supervisory procedures to be kept and maintained at each
location where supervisory activities are conducted on behalf of the
TPH.\9\
---------------------------------------------------------------------------
\9\ Proposed Rule 4.24(e) is modeled after PHLX Rule 748(h) and
NASD Rule 3010(b)(1), (3) and (4).
---------------------------------------------------------------------------
Proposed Rule 4.24(f) would require that each TPH perform
inspections of every office or location of the TPH at least once every
three calendar years. An inspection could not be conducted by any
person within that office or location who has supervisory
responsibilities or by any individual who is directly or indirectly
supervised by such person(s). This provision is intended to help ensure
that all activity of an office or location is monitored for compliance
with applicable regulatory requirements by persons who do not have a
personal interest in such activity. The proposed rule would require the
examination schedule and an explanation of the factors considered in
determining the frequency of the examinations in the cycle to be set
forth in the TPH's written supervisory procedures. When establishing
the inspection cycle, the TPH would be required to consider the nature
and complexity of the securities activities for which the office or
location is responsible, the volume of business done, and the number of
associated persons at each office or location. For each inspection, the
TPH would be required to retain a written record of the dates upon
which each inspection is conducted, the participants involved, and the
results thereof.\10\
---------------------------------------------------------------------------
\10\ Proposed Rule 4.24(f) is modeled after PHLX Rule 748(g) and
NASD Rules 3010(c)(1)(B) and (c)(3).
---------------------------------------------------------------------------
As noted above, effective and comprehensive compliance policies and
procedures and supervisory systems are key to investor protection and
market integrity. Therefore, it is essential that TPHs put adequate
emphasis on the importance of compliance throughout the firm. To
promote regular discussion and review of its supervisory system,
proposed Rule 4.24(g) would require each TPH to conduct an annual
review and submit to the Exchange on an annual basis a written report
on the TPH's supervisory system.
Paragraph (g)(1) of proposed Rule 4.24 would require that each TPH
conduct annual meetings or interviews with all associated persons to
discuss compliance matters relevant to their activities. The TPH would
be required to maintain a written record of the dates the meetings or
interviews were held, who was present at each meeting or interview, and
the results thereof.\11\
---------------------------------------------------------------------------
\11\ Proposed Rule 4.24(g)(1) is modeled after PHLX Rule
748(e)(1).
---------------------------------------------------------------------------
Proposed Rule 4.24(g)(2) would require TPHs to prepare a written
report on the firm's supervision and compliance efforts during the
preceding year and on the adequacy of the firm's ongoing compliance
processes and procedures. TPHs would be required to submit such report
to the Exchange by April 1 of each year. The proposed Rule would
require that the report include four elements: (1) a tabulation of
customer complaints (including arbitrations and civil actions) and
internal investigations, if any; (2) identification and analysis of
significant compliance problems, plans for future systems or procedures
to prevent and detect violations and problems, and an assessment of the
preceding year's efforts of this nature; (3) discussion of the
preceding year's compliance efforts, new procedures, educational
programs, etc. in the areas of antifraud and trading practices, books
and records, finance and operations, supervision, internal controls,
and anti-money laundering; and (4) a certification signed by the TPH's
Chief Executive Officer (``CEO'') or equivalent officer.\12\
---------------------------------------------------------------------------
\12\ Proposed Rule 4.24(g)(2) is modeled after CBOE Rule
9.8(g)(1)-(5).
---------------------------------------------------------------------------
The certification signed by the TPH's CEO (or equivalent officer)
would be required to include four components, the last three of which
would be intended to foster regular and significant interaction between
senior management and the Chief Compliance Officer (``CCO'') regarding
the TPH's comprehensive compliance program:
The first component relates to requirements found in paragraph (e)
of the proposed rule.\13\ Specifically, the CEO (or equivalent officer)
would be required to certify that the TPH has in place processes to:
(1) establish and maintain policies and procedures reasonably designed
to achieve compliance with applicable Exchange rules and federal
securities laws and regulations; (2) modify such policies and
procedures as business, regulatory and legislative changes and events
dictate; and (3) test the effectiveness of such policies and procedures
on a periodic basis.\14\
---------------------------------------------------------------------------
\13\ See Proposed Rule 4.24(g)(2)(D)(i).
\14\ Proposed Rule 4.24(g)(2)(D)(i) is modeled after FINRA Rule
3130(c)(1) and CBOE Rule 9.8(g)(5)(i).
---------------------------------------------------------------------------
The second component would require the CEO (or equivalent officer)
to certify that he or she conducted one or more meetings with the
firm's CCO during the preceding 12 months in which they discussed and
reviewed the matters described in the certification, including the
TPH's prior compliance efforts.\15\ The CEO (or equivalent officer) and
CCO would also be required to identify and address any significant
compliance problems or plans for emerging business areas.\16\
---------------------------------------------------------------------------
\15\ See Proposed Rule 4.24(g)(2)(D)(ii).
\16\ Proposed Rule 4.24(g)(2)(D)(ii) is modeled after FINRA Rule
3130(c)(2) and CBOE Rule 9.8(g)(5)(ii).
---------------------------------------------------------------------------
The third component of the certification would require the CEO (or
equivalent officer) to certify that he or she reviewed a report
evidencing the processes covered in the first component of the
certification.\17\ This report would also be reviewed by the CCO and
such other officers as the TPH deems necessary in order for the CEO to
make the required certification. Further, the CEO would be required to
certify that the report was submitted to the TPH's board of directors
or audit committee by April 1st of each year. If a TPH does not utilize
these types of governing bodies in the conduct of its business, the TPH
would be required to have the report reviewed by any governing body or
committee that serves a similar function in lieu of a board of
directors or audit committee.\18\
---------------------------------------------------------------------------
\17\ See Proposed Rule 4.24(g)(2)(D)(iii).
\18\ Proposed Rule 4.24(g)(2)(D)(iii) is modeled after FINRA
Rule 3130(c)(3) and CBOE Rule 9.8(g)(5)(iii).
---------------------------------------------------------------------------
The fourth component of the certification \19\ would require the
CEO (or equivalent officer) to certify that he or she consulted with
the CCO and other officers referenced in proposed Rule
4.24(g)(2)(D)(iii) and other such employees, outside consultants,
lawyers and accountants, to the extent he or she deems appropriate, in
order to attest to the statements made in the certification.\20\
---------------------------------------------------------------------------
\19\ See Proposed Rule 4.24(g)(2)(D)(iv).
\20\ Proposed Rule 4.24(g)(2)(D)(iv) is modeled after FINRA Rule
3130(c)(4) and CBOE Rule 9.8(g)(5)(iv).
---------------------------------------------------------------------------
Finally, proposed paragraph (g)(3) would deem any TPH to have met
the requirements of proposed Rules 4.24(g)(1) and (2) if the TPH
specifically includes its options compliance
[[Page 172]]
program within an annual compliance review and written report that
complies with substantially similar requirements of the Financial
Industry Regulatory Authority, Inc. or any other SRO.\21\ In that case,
the TPH would still be required to submit a copy of such written report
to the Exchange by April 1 of each year.
---------------------------------------------------------------------------
\21\ Proposed Rule 4.24(g)(3) is modeled after CBOE Rule
9.8(g)(5).
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\22\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) of the Act,\23\ which requires
that the rules of an exchange be designed to, among other things,
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, and, in general, to protect
investors and the public interest.
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78f(b).
\23\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Compliance with applicable Exchange rules and federal securities
laws is the bedrock of investor protection and market integrity.
Therefore it is critical that TPHs employ comprehensive and effective
compliance policies and procedures. The Exchange believes the proposed
rule change would help promote just and equitable principles of trade
and protect investors and the public interest by upgrading and
strengthening the Exchange's rules pertaining to supervisory
obligations of its TPHs.
TPHs are on the front line of defense against fraudulent and
manipulative acts and practices. TPHs are in the unique position to
identify potential rule violations or other inappropriate activity and
correct it before intervention by the exchanges or the Commission. The
Exchange believes a comprehensive supervision rule such as proposed
Rule 4.24 should help to prevent fraudulent and manipulative acts and
practices consistent with Section 6(b)(5) of the Act.
The Exchange believes that the proposed rule change should
strengthen the Exchange's ability to examine TPHs for compliance with
supervisory requirements by compelling that written supervisory
procedures be maintained. Written supervisory procedures should provide
TPHs and their supervisory personnel with a clear understanding of
their supervisory responsibilities thus helping to ensure that those
responsibilities are carried out effectively and efficiently. The
Exchange also believes the proposal to require inspections of offices
or other locations of TPHs would help strengthen the ability of TPHs to
carry out their compliance and surveillance functions. By requiring
written supervisory procedures and inspections that are reasonably
designed to prevent and detect violations of applicable securities laws
and regulations, as well as Exchange rules, the proposed rule would
help to ensure that TPHs have the necessary processes in place to
identify potential rule violations or inappropriate activity.
Furthermore, the Exchange believes the proposed requirements for an
annual certification and written report would enhance focus on a TPH's
compliance and supervision systems by promoting a dialogue throughout
the TPH of its compliance efforts and procedures, thereby decreasing
the likelihood of fraudulent and manipulative acts and practices and
increasing investor protection.
Lastly, the Exchange believes the proposed rule change furthers the
objectives of Section 6(b)(1) \24\ of the Act, which provides that the
Exchange must be organized and have the capacity to be able to carry
out the purposes of the Act and to enforce compliance by the Exchange's
TPHs and persons associated with its TPHs with the Act, the rules and
regulations thereunder, and the rules of the Exchange. Requiring
comprehensive supervision by TPHs and their associated persons of their
activities should promote the Exchange's ability to enforce compliance
by TPHs and their associated persons with the Act and the regulations
thereunder.
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78(f)(b)(1).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange believes the
proposed rule change would upgrade and strengthen the Exchange's rules
pertaining to supervisory obligations of its TPHs. As noted below, the
proposed rule change is based on similar rules of other SROs.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2013-126 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2013-126. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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
[[Page 173]]
public in accordance with the provisions of 5 U.S.C. 552, will be
available for Web site viewing and printing in the Commission's Public
Reference Room, 100 F Street NE., Washington, DC 20549 on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
the filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-CBOE-2013-126 and should be submitted on or before
January 23, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
Lynn M. Powalski,
Deputy Secretary.
---------------------------------------------------------------------------
\25\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
[FR Doc. 2013-31366 Filed 12-31-13; 8:45 am]
BILLING CODE 8011-01-P