[Federal Register Volume 79, Number 30 (Thursday, February 13, 2014)]
[Notices]
[Pages 8771-8775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-03132]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71513; File No. SR-CBOE-2013-100]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Approval of Proposed Rule Change Relating
to CBSX Trading Permit Holder Eligibility
February 7, 2014.
I. Introduction
On October 23, 2013, Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to add Rule 50.4A to the rules of
the CBOE Stock Exchange, LLC (``CBSX'').\3\ The proposed rule change
was published for comment in the Federal Register on November 12,
2013.\4\ The Commission received four comment letters on the
proposal.\5\ CBOE responded to the comments on December 20, 2013.\6\ On
December 20, 2013, the Commission extended the time period for
Commission action to February 10, 2014.\7\ This order approves the
proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ CBSX is a stock execution facility of CBOE.
\4\ See Securities Exchange Act Release No. 70806 (November 5,
2013), 78 FR 67424 (``Notice'').
\5\ See letter from Chris Concannon, Executive Vice President,
Virtu Financial BD, LLC, to Elizabeth M. Murphy, Secretary,
Commission, dated November 11, 2013 (``Virtu Letter''); letter from
Martin H. Kaplan, Gusrae Kaplan Nusbaum PLLC, to Kevin M. O'Neill,
Deputy Secretary, Commission, dated November 18, 2013 (``Gusrae
Kaplan Nusbaum Letter''); letter from James Ongena, General Counsel,
Chicago Stock Exchange, Inc., to Elizabeth M. Murphy, Secretary,
Commission, dated December 3, 2013 (``CHX Letter''); and letter from
Mary Ann Burns, Chief Operating Officer, Futures Industry
Association, to Elizabeth M. Murphy, Secretary, Commission, dated
December 3, 2013 (``FIA Letter'').
\6\ See letter from Corinne Klott, Attorney, CBOE, to Elizabeth
M. Murphy, Secretary, Commission, dated December 20, 2013 (``CBOE
Letter'').
\7\ See Securities Exchange Act Release No. 71152, 78 FR 79035
(December 27, 2013).
---------------------------------------------------------------------------
II. Description of the Proposal
The Exchange proposes to adopt Rule 50.4A regarding eligibility for
CBSX Trading Permit Holders. Proposed Rule 50.4A provides that a CBSX
Trading Permit Holder (``TPH'') may become or remain a CBSX TPH only if
it is a member of a national securities association.\8\ All CBSX TPHs
would have six months from the approval of the rule filing to become a
member of a national securities association. The proposed rule also
provides that CBSX will terminate, upon written notice, the TPH status
of any CBSX TPH that fails to meet this requirement.
---------------------------------------------------------------------------
\8\ Currently, Financial Industry Regulatory Authority, Inc.
(``FINRA'') is the only registered national securities association.
CBOE states that this proposal furthers compliance with Undertaking
O of the June 11, 2013 Order Instituting Administrative and Cease-
and-Desist Proceedings involving CBOE and C2 Options Exchange, Inc.,
which requires CBOE to enhance its regulation of CBSX-only TPHs.
CBOE notes that this proposed rule change is only one component of
its efforts to enhance its regulation of all CBSX TPHs, including
CBSX-only TPHs. CBOE notes that although there will technically no
longer be any CBSX-only TPHs if the proposed rule change is
approved, the Exchange still believes that the proposal will enhance
the general regulatory oversight of CBSX TPHs, including those
former CBSX-only TPHs.
---------------------------------------------------------------------------
CBOE states that it conducts surveillance of trading on CBSX and
examines the securities-related operations of TPHs for compliance with
CBSX Rules and the federal securities laws, rules and regulations. CBSX
TPHs may submit orders to other trading venues as customers through
executing broker-dealers, which are ultimately executed on those other
trading venues (``away trading activity''). Because away trading
activity does not occur on CBSX's market, CBOE states that it does not
have access to all necessary order and trade information for this
trading activity, as it does for trading activity done directly on
CBSX, from which it can directly conduct systematic surveillance
reviews.
The Exchange notes that, although other national securities
exchanges require their members to be members of another national
securities exchange or a national securities association,\9\ the other
national securities exchanges may not have direct access to the order
and transaction information related to the away trading activity of
their members, as is the case with CBOE, and thus may not be in a
position to review the away trading activity for potential violations
of federal securities laws, rules and regulations.\10\ The Exchange
states that requiring a CBSX TPH to be a member of a national
securities association (i.e. FINRA), but not providing it the option of
becoming a member of another national securities exchange, is
appropriate to ensure that the CBSX TPH's away trading activity is
subject to appropriate regulatory review. According to the Exchange,
FINRA rules currently require each FINRA member to submit order data
for trading activity on all venues (including away trading activity) to
FINRA on a regular basis.\11\ The Exchange explains that this order
data audit trail provides FINRA the necessary information related to
each member's away trading activity to review for and detect possible
violations of the federal securities laws, rules and regulations. This,
in turn, would allow FINRA to detect possible violations of federal
securities laws, rules, and regulations, and take appropriate
regulatory and disciplinary action against a CBSX TPH as one of its
regulators, or otherwise refer such matter to CBOE for review and
consideration of disciplinary action.
---------------------------------------------------------------------------
\9\ See, e.g., BATS Exchange, Inc. Rule 2.3, BATS Y-Exchange,
Inc. Rule 2.3, EDGA Exchange, Inc. Rule 2.3(a), EDGX Exchange, Inc.
Rule 2.3(a), NASDAQ Stock Market LLC Rule 1002(e), and New York
Stock Exchange LLC Rule 2.
\10\ The Exchange notes that it may obtain an audit trail of
this ``away activity'' from which it will be able to conduct direct
systematic surveillance reviews once the National Market System
consolidated audit trail is finalized and implemented.
\11\ See, e.g., FINRA Rules 7440 and 7450.
---------------------------------------------------------------------------
Proposed Rule 50.4A requires CBSX TPHs to become a member of FINRA
within six months of the date of approval of this rule change.\12\ CBOE
will announce the date by which CBSX TPHs must comply with this new
requirement (the ``Compliance Date'') in a Regulatory Circular.\13\ The
Exchange notes that if it determines that there are extenuating
circumstances which result in a CBSX TPH not being able to comply by
the Compliance Date, the Exchange may permit the CBSX TPH to retain its
TPH status beyond the Compliance Date for such period of time as the
Exchange deems reasonably necessary to enable the CBSX TPH to become a
member of FINRA.\14\
---------------------------------------------------------------------------
\12\ As of December 20, 2013, 38 CBSX TPHs would be affected by
this eligibility requirement (i.e., are not already members of
FINRA).
\13\ The Exchange will also issue periodic written reminders to
all CBSX TPHs affected by this requirement that the CBSX TPH must
become a FINRA member by the Compliance Date.
\14\ The Exchange notes that the ability to extend certain time
limits where extenuating circumstances exist is consistent with and
similar to other Exchange rules. See e.g., CBOE Rule 3.19 and CBOE
Rule 3.30.
---------------------------------------------------------------------------
[[Page 8772]]
III. Discussion of Comment Letters, CBOE's Response, and Commission
Findings
After careful review and for the reasons discussed below, the
Commission finds that the proposed rule change is consistent with the
requirements of the Act, including Section 6 of the Act,\15\ and the
rules and regulations thereunder applicable to a national securities
exchange.\16\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\17\ which
requires, among other things, that the rules of a national securities
exchange be designed to 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, and not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers. In addition, the Commission finds that the
proposal is consistent with Section 6(b)(2) of the Act,\18\ which
requires that the rules of a national securities exchange provide that
any registered broker or dealer may become a member of such exchange.
The Commission also finds that the proposed rule change is consistent
with Section 6(b)(8) of the Act,\19\ which requires that the rules of a
national securities exchange not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Act.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78f.
\16\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\17\ 15 U.S.C. 78f(b)(5).
\18\ 15 U.S.C. 78f(b)(2).
\19\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
The Commission received four comment letters on the proposed rule
change.\20\ All four commenters object to the proposed rule change,
argue that it is inconsistent with the Act, and recommend that CBOE
either enter into a regulatory services agreement or a Rule 17d-2 \21\
plan with FINRA. In response, CBOE states that none of the comments
provide a basis for disapproval of the proposal and reiterates its
position that the proposal meets the standards for approval under the
Act.\22\ The comments, CBOE's response, and the Commission's findings
are discussed in detail below.
---------------------------------------------------------------------------
\20\ See supra, note 5.
\21\ 17 CFR 240.17d-2.
\22\ See CBOE Letter.
---------------------------------------------------------------------------
A. Statutory Requirements for Exchange Membership
Two commenters \23\ argue that the proposed rule change violates
Section 6(b)(2) of the Act \24\ because the proposal would impose
requirements for exchange membership beyond those contained in the Act.
Section 6(b)(2) of the Act provides that ``[a]n exchange shall not be
registered as a national securities exchange unless the Commission
determines that . . . subject to the provisions of subsection (c) of
this section, the rules of the exchange provide that any registered
broker or dealer . . . may become a member of such exchange. . .'' \25\
The two commenters state that the proposal violates Section 6(b)(2)
because it effectively denies or excludes certain registered broker-
dealers from membership (TPH status) with CBSX.\26\ One of the
commenters asserts that CBOE incorrectly interprets Section 6(b)(2) as
permitting it to exclude certain registered broker-dealers based on
their affiliation with certain other self-regulatory organizations
(``SROs'').\27\ The other commenter points to Section 6(c) of the
Act,\28\ which provides specific reasons for which a registered broker-
dealer may be prohibited from becoming a member of an exchange, as
further evidence that the proposal is in violation of Section 6(b)(2)
of the Act.\29\ The commenter notes that none of the bases in Section
6(c) permit an exchange to deny membership to a broker-dealer solely on
the basis of not being a member of a national securities
association.\30\
---------------------------------------------------------------------------
\23\ See Virtu Letter and FIA Letter.
\24\ 15 U.S.C. 78f(b)(2).
\25\ Section 6(c) of the Act provides bases for denial of
membership in a national securities exchange, including failure to
register as a broker-dealer, statutory disqualification, or failure
to meet the standards of financial responsibility or operational
capacity, or a showing that the party has or that there is a
reasonable likelihood that they may engage in acts or practices
inconsistent with just and equitable principles of trade.
\26\ See Virtu Letter, at 2; FIA Letter, at 3-4.
\27\ See Virtu Letter, at 2.
\28\ 15 U.S.C. 78f(c).
\29\ See FIA Letter, at 3-4.
\30\ Id.
---------------------------------------------------------------------------
In response, CBOE states that it is incorrect to infer from these
statutory provisions that any registered broker-dealer meeting the
general requirements of Section 6(b)(2) and that does not fall within
the categories enumerated in Section 6(c) is always entitled to
membership.\31\ CBOE notes that the rules of national securities
exchanges virtually always provide bases for denial of membership in
addition to those enumerated in Section 6(c) of the Act.\32\ CBOE also
notes that other national securities exchanges have membership with
another national securities exchange or national securities association
as a condition for membership.\33\
---------------------------------------------------------------------------
\31\ See CBOE Letter, at 3.
\32\ Id.
\33\ See CBOE Letter, at 3-4. CBOE also noted that former NYSE
Rule 2(b) required membership in FINRA as a condition precedent to
becoming or remaining a member organization. Id., at 4.
---------------------------------------------------------------------------
The Commission believes that the proposed rule change is consistent
with Section 6(b)(2) and Section 6(c) of the Act. While Section 6(c)
specifies certain bases upon which a national securities exchange can
deny membership to, among other entities, a broker or a dealer, Section
6(c) is not intended to provide an exclusive list of reasons a national
securities exchange can deny membership to a party. National securities
exchanges may have requirements for exchange membership beyond those
contained in the Act so long as they are consistent with the Act.\34\
For example, the Commission has approved the rules of several national
securities exchanges that require membership with another SRO as a
condition of membership.\35\ The Commission believes that CBOE's
proposal requiring CBSX TPHs to be members of FINRA, another SRO, is
consistent with Section 6(b)(2) and Section 6(c) of the Act.
---------------------------------------------------------------------------
\34\ See e.g. CHX Article 3; Rules of BATS Exchange, Chapter II;
Nasdaq Stock Market Rule 1000 series.
\35\ See supra, note 9.
---------------------------------------------------------------------------
B. Discrimination Among CBOE Members
Two commenters assert that the proposal violates Section 6(b)(5)
\36\ by discriminating against CBSX TPHs.\37\ Section 6(b)(5) provides,
among other things, that the rules of an exchange must not be designed
to permit unfair discrimination between customers, issuers, brokers, or
dealers. One commenter states that the proposal results in certain CBOE
members that are not FINRA members being denied access to CBSX (CBOE's
exchange facility for equities), while other CBOE members that are not
FINRA members will continue to have access to the CBOE options
facility, thus effectively discriminating against members that trade
equities.\38\ The other commenter shares the same concern and states
that this disparate treatment is impermissible under the Act.\39\
---------------------------------------------------------------------------
\36\ 15 U.S.C. 78f(b)(5).
\37\ See Virtu Letter; CHX Letter.
\38\ See Virtu Letter, at 2.
\39\ See CHX Letter, at 3.
---------------------------------------------------------------------------
[[Page 8773]]
CBOE responds to these concerns by stating that Section 6(b)(5)
requires only that exchange rules be designed not to permit unfair
discrimination and that CBOE may impose ``requirements on a subgroup of
members who elect to avail themselves of specified exchange services or
who conduct specified types of business,'' while not imposing such
requirements ``on other members who choose not to use such services or
conduct such types of business, or otherwise where such additional
requirements would serve a valid regulatory purpose.'' \40\ The
Exchange argues that the proposed rule is justified by the need for
greater regulatory oversight of the away trading activity of CBSX TPHs.
Because away trading activity does not occur on the CBSX market, CBOE
states that it does not have access to all the necessary order and
trade information for this trading activity with which to directly
conduct systematic surveillance reviews relating to this trading
activity.\41\ CBOE believes that because FINRA's rules require each
FINRA member to submit order data for its trading activity on all
trading venues on a regular basis, FINRA has greater access to off-
exchange trading activity conducted by its members than do national
securities exchanges.\42\ Therefore, CBOE believes that its proposal to
require FINRA membership of CBSX TPHs is reasonably designed to enhance
regulatory oversight of CBSX TPHs so it does not unfairly discriminate
among CBOE TPHs, but rather imposes a reasonable additional obligation
on those CBOE TPHs who choose to be CBSX TPHs as well.\43\
---------------------------------------------------------------------------
\40\ See CBOE Letter, at 6.
\41\ Id.
\42\ Id., at 6-7. CBOE also explains that, as a member of the
Intermarket Surveillance Group, CBOE receives an equity audit trail
of all equity market orders and trade information for away trading
activity, but that the audit trail does not provide the necessary
granular level of detail to denote when a CBSX TPH is executing a
trade as a customer through another broker-dealer on an away market.
CBOE states that without such granular information, the Exchange is
limited in the reviews it can conduct of this activity. Id., at 6,
note 22.
\43\ Id., at 7.
---------------------------------------------------------------------------
The Commission believes that the proposal is consistent with
Section 6(b)(5) of the Act. The Commission believes that the proposal
does not unfairly discriminate against CBSX TPHs. As CBOE stated,
Section 6(b)(5) does not prevent an exchange from imposing additional
requirements on a subgroup of members who elect to avail themselves of
specified exchange services or who conduct certain types of business.
Here, CBOE's proposal to require CBSX TPHs to be members of FINRA while
not requiring CBOE TPHs to be members of FINRA is not unfairly
discriminatory because it will apply equally to all CBSX TPHs and
enhance the regulatory oversight of CBSX TPHs' trading activity.
C. Cost
Three commenters argue that the proposed rule change imposes a
substantial cost on CBSX TPHs by requiring dual membership with
FINRA.\44\ One commenter believes that the proposal will make it
prohibitively expensive for some CBSX TPHs to continue to hold CBSX
trading permits or become members of other exchanges, thereby imposing
a burden on competition not necessary or appropriate in furtherance of
the purposes of the Act in violation of Section 6(b)(8).\45\ The
commenter argues that CBSX TPHs that are proprietary trading firms that
do not carry public customer accounts would be required to bear the
same costs of FINRA membership as CBSX TPHs that carry public customer
accounts.\46\ The commenter further states that the ``burdens on
competition are not appropriate because [s]ection 17(d) of the Act
provides the mechanism through which an SRO could share certain
regulatory responsibilities with other SROs . . .'' \47\ Another
commenter criticizes the proposal stating that dual FINRA membership
places a large burden on members including, but not limited to, an
additional layer of regulatory costs and being subject to compliance
with FINRA rules, which have no relevance to proprietary traders who do
not have public customers.\48\
---------------------------------------------------------------------------
\44\ See Gusrae Nusbaum Kaplan Letter, CHX Letter, and FIA
Letter.
\45\ See CHX Letter, at 2-3.
\46\ Id., at 3.
\47\ Id.
\48\ See Gusrae Nusbaum Kaplan Letter, at 2.
---------------------------------------------------------------------------
A third commenter points out that ``undertaking FINRA membership is
a significant, time-consuming and expensive exercise.'' \49\ The
commenter explains that FINRA membership would require firms (1) to
review and analyze the applicability of a vast array of rules and
interpretations from FINRA, the majority of which are designed for
firms that transact customer business; (2) to amend filings with other
exchanges, incurring additional unnecessary filing costs; (3) to
maintain blanket fidelity bond coverage, which the commenter states is
typically designed to insure a firm against intentional fraudulent and
dishonest acts involving customer funds or customer accounts, while the
firms affected by the proposed rule change do not transact customer
business; (4) to incur the costs of reporting to FINRA's order audit
trail system; and (5) to require their associated persons to pass
additional exams, since certain exams (such as the Series 56) are not
recognized by FINRA.\50\ The commenter states that if this proposed
rule goes into effect, CBSX would be the only exchange requiring FINRA
membership for member firms that do not transact customer business and
therefore would position CBSX as an outlier and subject to possible
regulatory arbitrage, which could increase market fragmentation.\51\
---------------------------------------------------------------------------
\49\ See FIA Letter, at 4.
\50\ Id., at 4-5.
\51\ Id., at 6.
---------------------------------------------------------------------------
In response to these concerns, CBOE states that any CBSX TPH that
finds it burdensome to become a FINRA member can resign its CBSX
membership and become a member of a national securities exchange that
does not require membership with FINRA.\52\ CBOE states, ``[t]here are
any number of national securities exchanges that would provide the
alternative, so the Proposal imposes no burden on competition that a
CBSX TPH cannot easily eliminate if it chooses.'' \53\ CBOE also states
that if a CBSX TPH cannot comply with the proposal by the Compliance
Date due to extenuating circumstances, CBOE may permit the CBSX TPH to
retain its status as a TPH for a time CBOE deems reasonably necessary
for the CBSX TPH to become a member of FINRA.\54\ Regarding dual
registration, CBOE notes that other national securities exchanges
require membership in another SRO.\55\ Further, according to the
Exchange, CBSX TPHs that do not conduct a public customer business
would be subject only to those FINRA rules that were applicable to
their business.\56\ CBOE also notes that if associated persons of CBSX
TPHs are currently licensed in a registration category that FINRA does
not recognize, FINRA's rules permit FINRA to waive its licensing
requirements and accept other standards for qualifying for
registration.\57\
---------------------------------------------------------------------------
\52\ See CBOE Letter, at 9.
\53\ Id.
\54\ Id., at 10.
\55\ Id., at 9.
\56\ Id., at 11.
\57\ See CBOE Letter, at 11.
---------------------------------------------------------------------------
The Commission believes that the proposal is consistent with
Section 6(b)(8) of the Act and does not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act. As CBOE stated, any firm that determines not to become a
FINRA member can join another national securities exchange
[[Page 8774]]
that does not require FINRA membership. The Commission, as noted above,
has approved the membership rules of several exchanges that require
membership with another SRO as a condition of membership.\58\
---------------------------------------------------------------------------
\58\ See supra, note 9.
---------------------------------------------------------------------------
D. Section 15(b)(8) of the Act and Rule 15b9-1 Thereunder
One commenter \59\ argues that the proposal conflicts with Section
15(b)(8) of the Act \60\ and Rule 15b9-1 thereunder.\61\ Section
15(b)(8) of the Act prohibits a registered broker or dealer from
effecting a transaction in a security unless the broker or dealer is a
member of a national securities association or effects transactions in
securities solely on a national securities exchange of which it is a
member. Rule 15b9-1(a) exempts a broker or dealer from becoming a
member of a national securities association if it: (1) Is a member of a
national securities exchange; (2) carries no customer accounts; and (3)
has annual gross income of no more than $1,000 that is derived from
securities transactions otherwise than on an exchange of which it is a
member.\62\ The commenter believes that the proposed rule change
conflicts with these provisions because it would require all CBSX
TPHs--even those that would qualify for the Rule 15b9-1 exemption--to
become members of a national securities association.\63\ The commenter
states this directly contradicts Rule 15b9-1, which recognizes that
certain broker-dealers should not be required to become members of a
national securities association.\64\
---------------------------------------------------------------------------
\59\ See CHX Letter, at 2.
\60\ 15 U.S.C. 78o(b)(8).
\61\ 17 CFR 240.15b9-1.
\62\ Rule 15b9-1(b) states that the gross income limitation in
(a) does not apply to income derived from transactions (1) for the
dealer's own account with or through another registered broker or
dealer or (2) through the Intermarket Trading System.
\63\ See CHX Letter, at 2.
\64\ Id.
---------------------------------------------------------------------------
In its response, CBOE states that neither Section 15(b)(8) nor Rule
15b9-1 preclude CBOE from adopting a more restrictive rule concerning
when a member must become a member of a national securities
association.\65\ In fact, CBOE claims that exchanges often impose
requirements on their members that are stricter than those specifically
enumerated in the Exchange Act and Commission rules.\66\ CBOE believes
that Rule 15b9-1 ``has no application if the requirement to become a
member of a national securities association is required not by Section
15(b)(8) of the [Act], but by some other authority, such as an exchange
rule.'' \67\
---------------------------------------------------------------------------
\65\ See CBOE Letter, at 5.
\66\ Id.
\67\ Id.
---------------------------------------------------------------------------
The Commission does not believe that the proposed rule change
conflicts with Section 15(b)(8) or Rule 15b9-1. As CBOE stated,
national securities exchanges may impose requirements on their members
that are more stringent than those imposed by the Act or by Commission
rules. Therefore, the requirement imposed by proposed Rule 50.4A that
CBSX TPHs become members of FINRA, although more restrictive than
Section 15(b)(8), is consistent with the Act and not in violation of
Section 15(b)(8) or Rule 15b9-1.
E. Satisfaction of Regulatory Obligations
One commenter \68\ believes that the proposed rule change is an
admission of CBOE's failure to satisfy its exchange obligations, in
violation of Section 6(b)(1) of the Act, which requires an exchange to,
among other things, enforce compliance by its members with provisions
of the Act and the rules thereunder.\69\ The commenter argues it is not
appropriate for an exchange to alter its membership requirements in
order to satisfy its regulatory burden and that if CBOE fails to
satisfy its regulatory responsibilities, then CBOE's status as an
exchange and its ability to operate the CBSX must be scrutinized.\70\
This commenter and another commenter observe that the issue of CBOE not
having access to all necessary order and trade information for away
trading activity is not unique to CBOE, yet other exchanges have been
able to fulfill their exchange obligations regardless.\71\
Specifically, the other commenter argues that other exchanges have not
shifted the costs associated with surveillance and monitoring to
certain of its member firms by imposing a burdensome new membership
requirement at FINRA in order to discharge their regulatory
obligations.\72\ A third commenter states that the proposal is an
inefficient attempt by the CBOE to remedy a fundamental break down in
its regulatory structure, that instead of building up its own
surveillance and enforcement departments and abilities, the CBOE is
shifting the burden entirely onto its members and FINRA.\73\ Finally, a
fourth commenter states that it is concerned with the precedent that
will be set if the proposal is approved, specifically that an SRO will
be permitted to adopt rules that will unilaterally shift some of its
responsibilities to another SRO.\74\
---------------------------------------------------------------------------
\68\ See Virtu Letter, at 1, 3.
\69\ 15 U.S.C. 78f(b)(1). Section 6(b)(1) of the Act states that
``[a]n exchange shall not be registered as a national securities
exchange unless the Commission determines that . . . [s]uch exchange
is so organized and has the capacity to be able to carry out the
purposes of this title and to comply, and . . . to enforce
compliance by its members and persons associated with its members,
with the provisions of this title, the rules and regulations
thereunder, and the rules of the exchange.''
\70\ See Virtu Letter, at 3.
\71\ Id. and FIA Letter, at 6.
\72\ See FIA Letter, at 6.
\73\ See Gusrae Kaplan Nusbaum Letter, at 2.
\74\ See CHX Letter, at 1.
---------------------------------------------------------------------------
All four commenters suggest that a better resolution would be for
CBOE to enter into a Rule 17d-2 plan or a regulatory services agreement
with FINRA in lieu of the proposed rule change.\75\ One commenter
recommends that CBOE either adopt a rule requiring its members to send
their trading activity data to FINRA, or that CBOE enter into a
regulatory services agreement with FINRA allowing FINRA to collect this
data and surveil it.\76\ The other commenters were in favor of CBOE
entering into Rule 17d-2 plan.\77\
---------------------------------------------------------------------------
\75\ See Virtu Letter, at 1-2; Gusrae Kaplan Nusbaum Letter, at
3; CHX Letter, at 3; and FIA Letter, at 6.
\76\ See Gusrae Kaplan Nusbaum Letter, at 3.
\77\ See Virtu Letter, at 1-2; CHX Letter, at 3; and FIA Letter,
at 6.
---------------------------------------------------------------------------
In response, CBOE reiterates that the proposal is designed to
enhance the regulation of CBSX.\78\ CBOE explains that it does not have
access to all of the necessary order and trade information for away
trading activity and that the proposal addresses this limitation on its
ability to oversee away trading activity.\79\ CBOE further explains
that entering into a 17d-2 agreement with FINRA is not possible to
address the away trading activity of CBSX TPHs because a 17d-2
agreement is available only with respect to broker-dealers that are
members of each SRO that is a party to the agreement, and by
definition, the proposal addresses the situation in which CBSX TPHs are
not FINRA members.\80\ CBOE acknowledges that there may be other ways
to accomplish its regulatory goal, but that it has determined that its
proposal is a reasonable method of achieving its regulatory
objectives.\81\ CBOE also reiterates its position that its proposal is
consistent with the Exchange Act and notes that this is further
evidenced by the fact that the Commission has previously approved
exchange rules requiring members to be members of at least one other
SRO.\82\
---------------------------------------------------------------------------
\78\ See CBOE Letter, at 7.
\79\ Id.
\80\ Id., at 7-8.
\81\ Id., at 8.
\82\ Id. CBOE also stated that because other exchanges also
require their members to be members of at least one other SRO, it is
evident that its proposal does not reflect that it is in violation
of Section 6(b)(1). Id., at note 25.
---------------------------------------------------------------------------
[[Page 8775]]
The Commission does not believe that CBOE's proposal, in and of
itself, provides evidence that CBOE has failed to meet its exchange
obligations. The Commission also notes that CBOE's proposal in no way
(1) reduces CBOE's obligations under the Act to meet its regulatory
responsibilities as an SRO, or (2) shifts any of CBOE's
responsibilities to FINRA. The Commission agrees with CBOE that a Rule
17d-2 plan is available as an option only with respect to broker-
dealers that are members of each SRO that is a party to the agreement.
CBOE has proposed to require CBSX members to be members of FINRA in
order to enhance regulation of their away trading activity. Whether or
not there may be other less costly or burdensome ways to enhance
regulation of away trading activity by CBSX members, the issue before
the Commission is whether the current proposal is consistent with the
Exchange Act and the rules and regulations thereunder applicable to
SROs. If so, the Commission must approve the proposed rule change. The
Commission believes that the proposal is consistent with the Act. As
stated above, exchanges may impose membership requirements that are
more stringent than those contained in the Act. The Commission has
previously approved rules of other exchanges requiring membership in
another SRO.
IV. Conclusion
For all the reasons discussed above, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to national securities
exchanges. It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\83\ that the proposed rule change (SR-CBOE-2013-100) be, and it is
hereby approved.
---------------------------------------------------------------------------
\83\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\84\
---------------------------------------------------------------------------
\84\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-03132 Filed 2-12-14; 8:45 am]
BILLING CODE 8011-01-P