[Federal Register Volume 79, Number 46 (Monday, March 10, 2014)]
[Notices]
[Pages 13365-13366]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-05031]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71644; File No. SR-CBOE-2013-126]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving Proposed Rule Change Relating to
Supervision
March 4, 2014.
I. Introduction
On December 18, 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 require each Trading Permit
Holder (``TPH'') \3\ to establish and maintain a system of supervision
and written supervisory procedures.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\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.
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The proposed rule change was published for comment in the Federal
Register on January 2, 2014.\4\ The Commission received no comments on
the proposal. The text of the proposed rule change is available at the
Exchange's Office of the Secretary, on the Exchange's Web site at
http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx, and at the
Commission's Public Reference Room.
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\4\ See Exchange Act Release No. 71190 (Nov.14, 2013), 79 FR 169
(Jan. 2, 2014).
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This order approves the proposed rule change.
II. Description of the Proposal
The Exchange believes that it does not currently have a
comprehensive rule that directly addresses the obligation of every TPH
to properly supervise its business and employees. The only supervision
obligations that are expressly codified in CBOE's Rules are in Rule 4.2
(Adherence to Law) and Rule 9.8 (Supervision of Accounts). While the
former requires a TPH to supervise persons associated with the TPH, it
does not expressly require the establishment and maintenance of a
system of supervision or written procedures covering each line of
business. The latter, a component of Chapter 9 of the CBOE Rulebook
(Doing Business with the Public), does provide explicit supervisory
obligations, however, it is applicable only to TPHs conducting non-TPH
customer business in options.
CBOE proposes to adopt CBOE Rule 4.24, which would require every
TPH to establish and maintain a system of supervision and written
supervisory procedures for each of their business activities and the
activities of their associated persons. In particular, the proposed
rule would 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.
The proposed rule would mirror many of the requirements in CBOE
Rule 9.8, such as requiring 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. The proposed rule would not, however, be limited to
supervision of activities related only to TPHs conducting non-TPH
customer business in options.
CBOE believes that 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.\5\
In particular, the proposed rule would clearly place responsibility on
TPHs to establish and maintain a formal plan of supervision that covers
each of their business activities and associated persons. Consequently,
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. In addition, CBOE believes that the
proposed rule would provide greater utility for enforcing TPH
obligations for all its business areas such as proprietary trading.
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\5\ The Exchange modeled its proposed rule after rules of other
self-regulatory organizations, e.g., PHLX Rule 748, NASD Rule 3010,
FINRA Rule 3130, NYSE Amex Rule 320, NYSE Rule 342, and NYSE Arca
Options Rule 11.18.
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III. Discussion and Commission Findings
After careful review of the proposal, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder that are applicable to a national
securities exchange.\6\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,
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,
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.\7\
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\6\ In approving the proposal, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\7\ 15 U.S.C. 78f(b)(5).
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The Commission ``has long emphasized that the responsibility of
broker-dealers to supervise their
[[Page 13366]]
employees is a critical component of the federal regulatory scheme.''
\8\ Effective and comprehensive supervisory policies and procedures,
among other things, are critical to a firm's ability to surveil for
misconduct.
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\8\ Commission, Division of Market Regulation (now known as
Division of Trading and Markets), Staff Legal Bulletin No. 17:
Remote Office Supervision (Mar. 19, 2004).
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Accordingly, the Commission believes the proposed rule change would
help TPHs prevent fraudulent and manipulative acts and practices and
improve investor protection by requiring TPHs to clearly delineate
their supervisory obligations.
In particular, the Commission believes that compelling every TPH to
establish and maintain written supervisory procedures regarding each of
their business activities and associated persons would provide TPHs and
their supervisory personnel with a clearer understanding of their
supervisory responsibilities to help them carry out those
responsibilities. In addition, the Commission believes that requiring
TPHs to inspect all of their offices or locations at least once every
three calendar years would strengthen TPHs' ability to carry out their
compliance and surveillance functions. Similarly, the Commission
believes that requiring TPHs to 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 would help
foster a culture of compliance within each TPH by promoting a dialogue
throughout the TPH of its compliance efforts and procedures.
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. Consequently, the Commission believes that the
Exchange's proposal would foster an environment within each TPH that is
more likely to help decrease the likelihood of fraudulent and
manipulative acts and practices and increase investor protection.
Accordingly, the Commission believes that the proposed rule change
is consistent with the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\9\ that the proposed rule change (SR-CBOE-2013-126) be, and hereby
is, approved.
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\9\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-05031 Filed 3-7-14; 8:45 am]
BILLING CODE 8011-01-P