[Federal Register Volume 79, Number 19 (Wednesday, January 29, 2014)]
[Notices]
[Pages 4779-4783]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-01655]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71371; File No. SR-CBOE-2014-001]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed
Rule To Amend CBOE's Rules To Enhance the Independence and Integrity of
the Regulatory Functions of the Exchange
January 23, 2014.
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 January 10, 2014, the 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 and II below, which Items have been prepared by
the Exchange. The Exchange filed the proposal as a ``non-
controversial'' proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ The
Commission is publishing this notice to
[[Page 4780]]
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CBOE proposes to amend its rules to enhance the independence and
integrity of the regulatory functions of the Exchange. The text of the
proposed rule change is available on the Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's
Office of the Secretary, and at the Commission.
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 self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend certain rules to enhance the
independence and integrity of the regulatory functions of the Exchange.
Specifically, the Exchange seeks to amend Rule 2.1 (Committees of the
Exchange), Rule 4.4 (Gratuities), Rule 17.2 (Complaint and
Investigation), Rule 17.3 (Expedited Proceeding), Rule 17.4 (Charges),
Rule 17.8 (Offers of Settlement) and Rule 17.50 (Imposition of Fines
for Minor Rule Violations).
First, the Exchange proposes to amend Rule 2.1 (Committees of the
Exchange). Rule 2.1 currently provides that the Chief Executive Officer
(``CEO'') shall appoint the chairman, vice-chairman and members of the
Exchange Committees, as well as fill vacancies and remove members of
the Exchange Committees. The Exchange proposes to adopt an exception to
that rule. Particularly, the Exchange proposes to provide that the
Nominating and Governance Committee, with the approval of the Board,
shall appoint the chairman, vice-chairman and members of the Business
Conduct Committee (``BCC''), as well as fill vacancies in the BCC and
that the Board shall have the ability to remove any member of the BCC,
at any time, with or without cause. The Nominating and Governance
Committee is comprised of at least five (5) Directors and is a standing
committee of CBOE's Board of Directors. The BCC is an Exchange
Committee charged with handling disciplinary matters that arise from
Exchange business. The BCC additionally reviews recommendations by the
Exchange's Regulatory staff and authorizes the issuance of formal
charges arising out of the matters investigated or examined by the
Regulatory Services Division. Given the BCC's responsibilities, the
Exchange believes that authority relating to the composition of the BCC
should rest with the Nominating and Governance Committee, rather than
the CEO. Additionally, the Exchange believes that the power to remove
members of the BCC should rest with the Board, rather than the CEO.
This transfer of authority enhances the independence of the regulatory
functions of the Exchange.
Next, the Exchange seeks to amend Rule 4.4 (Gratuities). Rule 4.4
provides that a Trading Permit Holder (``TPH'') may not give any
compensation or gratuity in any one year in excess of $50.00 to any
employee of the Exchange or in excess of $100.00 to any employee of any
other TPH or of any non-TPH broker, dealer, bank or institution,
without the prior consent of the employer and of the Exchange.
Additionally, the Exchange's Conflict of Interest Policy (``Policy'')
currently prohibits Regulatory Services Division and Office of
Enforcement employees from accepting any gift of more than nominal
monetary value (e.g., a coffee mug) from any TPH or associated person
of a TPH. In unique circumstances, the Policy provides that an
exception may be granted by the Division Head or, for the Division
Head, by the President. The Exchange is proposing to amend Rule 4.4 to
provide that a TPH may not give any compensation or gratuity of any
monetary value to any Regulatory Services Division or Office of
Enforcement employee.\5\ The Exchange does not believe that its
Regulatory Services Division or Office of Enforcement employees should
be permitted to receive gifts or gratuities of even a nominal value
from TPHs or their associated persons, in light of the responsibility
of these Exchange employees for regulatory matters involving TPHs and
their associated persons.
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\5\ The Exchange intends to make conforming changes to its
Policy upon the effectiveness of this proposed rule change.
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The Exchange also proposes to amend Rule 17.2 (Complaint and
Investigation) to eliminate the authority of the President, other
Exchange officials designated by the President, the Board, or the BCC
to order an investigation of possible violations within the
disciplinary jurisdiction of the Exchange and provide instead that only
the Exchange's Regulatory staff, and any successor thereto, in its sole
discretion shall determine whether to investigate or examine possible
violations within the disciplinary jurisdiction of the Exchange. The
Exchange believes providing Regulatory staff sole discretion as to what
matters to investigate or examine further supports and provides for the
autonomy and independence of the Exchanges' regulatory functions as
well as helps to ensure that all decisions regarding resolution of any
examination, investigation, or prosecution shall be made without regard
to the actual or perceived business interests of the Exchange or any of
TPHs. The Exchange notes that the Board, President, and BCC, along with
other Exchange employees and Trading Permit Holders, will continue to
have the ability to submit oral or written complaints alleging possible
violations within the disciplinary jurisdiction of the Exchange. The
Exchange additionally notes that the proposed rule change conforms its
rules to its current practice. The Exchange also proposes to clarify
that Regulatory staff has the sole discretion to determine whether to
request that the BCC authorize the issuance of a statement of charges
pursuant to Rule 17.4 (Charges), which will add transparency to the
rules regarding Regulatory staff's role and responsibilities.
The Exchange also seeks to amend Rule 17.2 to provide that the
Regulatory staff shall have the sole discretion to determine whether to
request that the BCC authorize the issuance of a statement of charges
pursuant to Rule 17.4 In those instances where an investigation results
in the Regulatory staff finding that there are reasonable grounds to
believe that a violation has been committed and a formal regulatory
action (i.e., Statement of Charges) is warranted, Regulatory staff will
submit a written report of its investigation to the BCC.\6\
Additionally, the Exchange
[[Page 4781]]
proposes to provide in those instances where an investigation results
in the Regulatory staff finding that there are reasonable grounds to
believe that a violation has been committed, but non-formal regulatory
action (i.e., a Letter of Information, a Letter of Caution or a Staff
Interview) is warranted in lieu of the issuance of a statement of
charges, the Regulatory staff will have the power and authority in its
sole discretion to impose such non-formal regulatory action without the
submission of a written report of its investigation to the BCC.
Further, the Exchange proposes to provide that in the event the
Regulatory staff finds in its sole discretion that there are not
reasonable grounds to believe that a violation has been committed, the
Regulatory staff will close the investigation (i.e., File Without
Action) without the submission of a written report of its investigation
to the BCC. The Exchange believes that this proposed rule change
further supports and provides for the autonomy and independence of the
Exchanges' regulatory functions as well as makes explicit in the rules
the roles and responsibilities of Regulatory staff. Finally, the
Exchange proposes to add Interpretation and Policy .05 to Rule 17.2 to
make clear that references to ``Regulatory staff'' in Chapter XVII,
mean the Exchange's employees in the Regulatory Services Division.
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\6\ Pursuant to CBOE Rule 17.10, the Regulatory Oversight and
Compliance Committee will review any decision not to authorize the
issuance of statements of charges that were recommended by
Regulatory staff, and refer such matters to the Board of Directors
for further review, as appropriate. The Board of Directors may order
review of such decisions, and may affirm, reverse or modify, in
whole or in part, the decision of the BCC not to authorize the
issuance of statement of charges.
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In addition, the Exchange seeks to make explicit in the Rules the
roles and responsibilities of certain Exchange staff. First, the
Exchange proposes to replace references to ``Exchange'' with
``Regulatory staff'' in Interpretation and Policies .01, .03, and .04
of Rule 17.2 to make clear that those references are to Regulatory
staff, in particular. The Exchange also seeks to make similar
clarifications in Rule 17.3 (Expedited Proceeding), Rule 17.4
(Charges), Rule 17.8 (Offers of Settlement), and Rule 17.10 (Review).
Particularly, Rule 17.3 governs expedited proceedings, Rule 17.4
governs if and how statement of charges is to be issued, Rule 17.8
governs Offers of Settlement, and Rule 17.10 governs the review by the
Board of Directors of decisions related to the disciplinary process.
Each of the aforementioned rules sets forth the respective duties and
responsibilities of ``staff'' as it relates to either expedited
proceedings, statement of charges and offers of settlement. The
Exchange believes however, that the term ``staff'' is vague and does
not provide clarity as to which staff has certain roles and authorities
under these rules, which historically, has been the Regulatory staff.
Accordingly, the Exchange wishes to make it explicitly clear that the
``staff'' referred to in these rules is the Exchange's Regulatory
staff, which will provide additional clarity and reduce confusion. The
Exchange notes this is a clarifying, non-substantive change. The
Exchange also proposes to amend Rule 17.10(d) to correct the reference
to the Regulatory Oversight and Compliance Committee.
Finally, the Exchange also proposes to amend Rule 17.50 (Imposition
of Fines for Minor Rule Violations). Rule 17.50 provides that in lieu
of commencing a disciplinary proceeding pursuant to Rule 17.2, the
Exchange may, in certain instances, impose a fine on a TPH or
associated person of a TPH with respect to certain rule violations.
More specifically, subparagraph (c) of Rule 17.50 provides that any
person against whom a fine is imposed pursuant to certain subsections
of Rule 17.50 (e.g., violation of position and exercise limit rules or
Locked or Crossed Market violations) may contest the Exchange's
determination by filing a written answer and have the matter become
subject to the review of the BCC. Additionally, the filing may request
a hearing, if desired, which would be subject to Rule 17.6, which rule
governs hearings before the BCC. Rule 17.50(c) also provides that for
violations of trading conduct and decorum policies in particular, a
person may only contest the determination to the BCC if the fine
exceeds $2,500. Pursuant to subparagraph (d) of Rule 17.50, if the fine
for violations of trading conduct and decorum policies does not exceed
$2,500, the individual may still contest the Exchange's determination,
but the matter would become subject to the review of the Appeals
Committee, rather than the BCC and, if requested, any hearing would
consequently be subject to the hearing procedures set forth in Chapter
19 (Hearings and Review). Similarly, fines imposed for failure to
submit trade data on trade date, regardless of the amount, may be
contested but will also become subject to the review of the Appeals
Committee, instead of the BCC. Moreover, Interpretation and Policy .04
provides that the BCC may consolidate into one hearing the review of
(i) a fine imposed for violations of trade conduct and decorum policies
that exceeds $2,500 and (i) a fine imposed for violations of trade
conduct and decorum policies that does not exceed $2,500, so long as
the alleged violations involve the same or related transaction or
occurrence and the review is not based on written submissions. The
Exchange proposes to eliminate the distinction between the type of
violations set forth in Rule 17.50 by eliminating subparagraph (d) of
Rule 17.50 in its entirety and provide instead that all violations set
forth in paragraph (g) of Rule 17.50 may be contested to the BCC and,
if requested, subject to the hearing procedures of Rule 17.6. Given the
BCC's role and responsibilities noted above, the Exchange believes that
the BCC is the appropriate committee to review and/or hear contests to
fines imposed due to non-compliance with certain Exchange rules.
Particularly, the Exchange believes the BCC should review and/or hear
all contests to fines imposed pursuant to section (g) of Rule 17.50 in
its entirety, including violations for trade conduct and decorum
policies and failure to submit trade data on trade date. The proposed
change also provides consistency and certainty as to how all contests
to fines imposed pursuant to section (g) are handled.
Lastly, the Exchange proposes to delete language in subparagraph
(c)(3) of Rule 17.50. More specifically, Rule 17.50(c)(3) currently
provides that among others, any member of the Board may require a
review by the Board of any determination made by the BCC under this
rule. The Exchange proposes to eliminate the language ``any member of''
to provide that an individual Board member cannot alone require a
review, but rather the request for a review must be a Board action. The
Exchange believes that it is appropriate for the Board to determine
whether to request review of a determination of the BCC under Rule
17.50, as opposed to an individual Board member, and notes that such
change is consistent with Rule 17.10 relating to the Board's authority
to review decisions by the BCC made pursuant to Rules 17.7 and 17.9.
2. Statutory Basis
The Exchange believes the proposed rule changes are consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\7\ Specifically, the
Exchange believes the proposed rule changes are consistent with the
Section 6(b)(5) \8\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged
[[Page 4782]]
in regulating, clearing, settling, processing information with respect
to, and facilitating transactions in securities, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest. The Exchange also believes the proposed rule changes are
consistent with the Section 6(b)(7) \9\ requirements that the rules of
an exchange provide a fair procedure for the disciplining of members
and persons associated with members, the denial of membership to any
person seeking membership therein, the barring of any person from
becoming associated with a member thereof, and the prohibition or
limitation by the exchange of any person with respect to access to
services offered by the exchange or a member thereof.
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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
\9\ 15 U.S.C. 78f(b)(7).
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In particular, the Exchange believes that the elimination of: (i)
the CEO's authority relating to the composition of the BCC and (ii) the
President, (or Exchange Official designated by the President), the
Board, and BCC's authority to order the investigation of a possible
violation within the disciplinary jurisdiction of the Exchange aligns
the CBOE Rules with the Exchange's current practices and provides for
further separation of those responsible for the business activities of
the Exchange from the decision-making structure over the regulatory
process. This separation enhances the Exchange's disciplinary and
regulatory process by furthering the independence of its regulatory
process and reducing a potential conflict of interest, as well as an
appearance of inappropriate influence, thereby ensuring an effective
and fair disciplinary process and promoting just and equitable
principles of trade and protecting investors and the public interest
investors and public interest.
Additionally, the Exchange believes the proposed rule change to
Rule 4.4 further enhances the independence of the Regulatory Services
Division and Office of Enforcement and eliminates a potential conflict
of interest, as well as an appearance of influence, thereby promoting
an effective and fair disciplinary process and enhancing the protection
of investors and the public interest.
The Exchange also believes that clarifying the CBOE Rules to
explicitly state that Regulatory staff has sole discretion as to what
matters to investigate or examine further supports and provides for the
autonomy and independence of the Exchanges' regulatory functions as
well as helps to ensure that all decisions regarding resolution of any
examination, investigation, or prosecution shall be made without regard
to the actual or perceived business interests of the Exchange or any of
TPHs, thereby enhancing the protection of investors and the public
interest. Additionally, the Exchange believes that providing Regulatory
staff sole discretion to (i) impose non-formal regulatory action
without the submission of a written report of its investigation to the
BCC in those instances where an investigation results in the Regulatory
staff finding that there are reasonable grounds to believe that a
violation has been committed or (ii) close an investigation without
submission of a written report of its investigation to the BCC where
Regulatory staff finds that there are not reasonable grounds to believe
that a violation has been committed, further supports and provides for
the autonomy and independence of the Exchanges' regulatory functions as
well as makes explicit in the rules the roles and responsibilities of
Regulatory staff.
The Exchange also believes that replacing vague references to
``Exchange'' and ``Staff'' with ``Regulatory staff,'' in Chapter 17
makes it explicitly clear which staff has certain roles and
responsibilities delegated under these rules, thereby eliminating
potential confusion. Finally, the Exchange believes that given the
BCC's charged role and responsibilities, the BCC is the appropriate
committee to review and/or hear contests to fines imposed pursuant to
section (g) of Rule 17.50 in its entirety, including violations for
trade conduct and decorum policies and failure to submit trade data on
trade date. The Exchange believes this proposed rule change also
provides consistency as to how contests to fines imposed pursuant to
section (g) of Rule 17.50 are handled.
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 does not believe
that the proposed rule change will impose any burden on intramarket
competition because it applies to all TPHs. The Exchange does not
believe the proposed rule changes will impose any burden on intermarket
competition as it will merely enhance the independence of its
regulatory decision-making and eliminate gratuities from TPHs to
employees of the Regulatory Services Division or Office of Enforcement
that might appear to undermine that independence.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \10\ and Rule 19b-4(f)(6) thereunder.\11\
Because the foregoing proposed rule change does not: (1) Significantly
affect the protection of investors or the public interest; (2) impose
any significant burden on competition; and (3) become operative for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate, it has become effective
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\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6)
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pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) \13\ thereunder. At any time within 60 days of the filing of
the proposed rule change, the Commission summarily may temporarily
suspend such rule change if it appears to the Commission that such
action is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Act. If the Commission takes such action, the Commission will
institute proceedings to determine whether the proposed rule change
should be approved or disapproved.
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\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires the Exchange to give the Commission written notice of the
Exchange's intent to file the proposed rule change, along with a
brief description and text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission. The
Exchange has satisfied this requirement.
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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
[[Page 4783]]
Send an email to [email protected]. Please
include File Number SR-CBOE-2014-001 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-2014-001. 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 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 CBOE. 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-2014-001 and should be submitted on
or before February 19, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2014-01655 Filed 1-28-14; 8:45 am]
BILLING CODE 8011-01-P