[Federal Register Volume 61, Number 238 (Tuesday, December 10, 1996)]
[Notices]
[Pages 65098-65099]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31333]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38012; File No. SR-CBOE-96-63]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Incorporated Relating to
the Collection of Commission Income by an Non-Executing Floor Broker
and Pooling of Floor Brokerage
December 3, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), \1\ and Rule 19b-4 thereunder, \2\ notice is hereby given
that on October 21, 1996, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Item I, II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to
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.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Chicago Board Options Exchange, Incorporated proposed to delete
Rule 6.25, Pooling of Floor Brokerage, and Rule 14.6, Collection of
Floor Brokerage. The text of the proposed rule change is available at
the Office of the Secretary, CBOE 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 these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
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
The purpose of the proposed rule change is to delete two rules,
Rule 6.25 and Rule 14.6, which place limitations on the conduct of a
floor brokerage business on the floor of the Exchange. The Exchange
believes that these rules are now no longer necessary to achieve their
original purpose, i.e., to ensure that customer orders are handled with
due diligence, in light of the adoption of rules which specifically
govern floor broker behavior and in light of changes in the industry
over the last twenty years since these rules were adopted.
Rule 6.25
Rule 6.25, Pooling of Floor Brokerage, prohibits a member
organization that has one or more floor brokers who are nominees of or
whose memberships are registered for the member organization to enter
into any agreement, arrangement, or understanding with another such
organization whereby such organizations are to handle floor brokerage
for each other. The rule 6.25 prohibition does not apply to the
handling of floor brokerage by one such firm for another on an
occasional basis or to an arrangement permitted by the Equity Floor
Procedure Committee in writing. Buy its terms, the Rule also does not
prohibit an independent floor broker from handing floor brokerage for a
member organization.
Both Rule 6.25 and Rule 14.6 were adopted at the infancy of the
Exchange in a very different environment than exists now. The adoption
of these rules was a simple method to ensure that floor brokers
provided good service to their customers. Rule 6.25 was intended to
prevent the larger member firm organizations from dominating the floor
brokerage business, thus limiting competition. A rule that prohibits a
floor broker from employing the services of a member organization
employing more than one floor broker, however, could severely limit
that brokers ability to handle his order flow in an efficient and
timely manner, particularly at those posts without an independent floor
broker. The Exchange believes, therefore, that this rule might actually
hinder the efficient representation of customer orders on the floor and
that floor broker organizations should be given the opportunity to
develop such relationships as they feel can best enable them to service
their customers. According to the CBOE, deletion of Rules 6.25 and 14.6
would remove the Exchange from the business of making business
determinations for the floor brokers about what type of relations can
best meet their needs and allow them to best service their customers.
Rule 14.6
Rule 14.6, Collection of Floor Brokerage, requires a member who
acts as a floor broker for another member to collect and retain the
entire brokerage
[[Page 65099]]
and prohibits the collecting broker from dividing the brokerage with
any other person. Rule 14.6, however, does permit the brokerage earned
by a nominee of, or a broker whose membership is registered for, a
member organization to be paid to the member organization. In this
event, the member's compensation from the member organization must be
commensurate with the brokerage so contributed and other services
rendered.
The deletion of Rule 14.6 would permit a floor broker who is absent
from the trading crowd when the related trade occurs (``absent floor
broker'') to collect and retain the brokerage commission for an order
executed by another floor broker (``executing floor broker'') on behalf
of the absent floor broker. Currently, the limitations of Rule 14.6
create a practical problem when a floor broker must leave a trading
crowd to attend to other business or personal matters. In these
situations, the floor broker often will give his orders to another
floor broker to execute on his behalf in order to ensure the customer
does not miss out on a market opportunity in his absence. However, the
customer of the absent floor broker ordinarily will not have a
relationship with the executing broker and will not expect to receive a
bill from the executing broker. Under the proposed rule change, the
absent floor broker would be entitled to bill the customer for the
trade executed by the executing floor broker with the bill for all the
other trades executed by the absent floor broker on behalf of that
customer. The proposal, therefore, would reduce the chance of customer
confusion and would also reduce administrative burdens for the floor
brokers.
The Exchange believes it is proper for the floor brokers to make
any business arrangements among themselves which they believe to be
appropriate and which would lead to the efficient conduct of business.
In light of the potential customer confusion and the administrative
burdens, the Exchange does not believe the restriction against
collecting brokerage for a trade executed on one's behalf serves a
useful regulatory purpose in situations where a floor broker must leave
a trading crowd for personal reasons or to attend to other business.
Regardless of who is being paid the brokerage commission for the
trade, however, the floor broker who actually executes the trade would
have to have his or her acronym placed on the trade ticket and would be
responsible for using due diligence in the handling of the order and in
fulfilling all the other responsibilities of a floor broker in the
representation of the order pursuant to Exchange rules. The Exchange
believes that because the executing floor broker will be held
responsible under Exchange rules for handling the order, the order will
be treated with proper care by the executing floor broker regardless of
who is paid for the trade. In addition, the Exchange believes that
floor brokers will have a financial incentive to execute the orders
either because of a reciprocal relationship of passing along orders or
through a sharing of the brokerage commission.
By eliminating outdated restrictions on the conduct of floor
brokerage on the floor, the proposed rule change should help to provide
floor brokers with the flexibility to develop relationships which
should provide for the most efficient conduct of customer business on
the floor and at the same time should avoid customer confusion by
eliminating additional bills for brokerage services. The proposed rule
change, therefore, is consistent with and furthers the objectives of
Section 6(b)(5) of the Act, in that it is designed to perfect the
mechanisms of a free and open market and to protect investors and the
public interest.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b)(5) of the Act in that it is designed to prevent
fraudulent and manipulative acts and practices and to perfect the
mechanism of a free and open market.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve the 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
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 inspection and copying at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
Copies of such filing will also be available for inspection and
copying at the principal office of the Exchange. All submissions should
refer to File No. SR-CBOE-96-63 and should be submitted by December 31,
1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-31333 Filed 12-9-96; 8:45 am]
BILLING CODE 8010-01-M