[Federal Register Volume 63, Number 209 (Thursday, October 29, 1998)]
[Notices]
[Pages 58081-58082]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28852]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40572; File No. SR-CBOE-98-41]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. to Amend Its Minor
Rule Violation Plan With Respect to Exercise of American-Style, Cash-
Settled Index Options
October 19, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on September 23, 1998, the Chicago Board Options
Exchange, Inc. (``CBOE'' or ``Exchange'') filed with the Securities and
Exchange Commission (``Commission'' or ``SEC'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by CBOE. 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
CBOE proposes to amend its minor rule violation plan \3\ to include
a schedule of summary fines for late exercise of cash-settled index
options pursuant to CBOE Rule 11.1, Interpretation .03. The text of the
proposed rule change is available at the Office of the Secretary, CBOE
and at the Commission.
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\3\ Rule 19d-1(c)(2) under the Act authorizes national
securities exchanges to adopt minor rule violation plans for the
summary discipline and abbreviated reporting of minor rule
violations by exchange members and member organizations. See
Exchange Act Release No. 21013 (June 1, 1984), 49 FR 23828 (June 8,
1984) (order amending Rule 19d-1 under the Act).
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, CBOE 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 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
CBOE proposes to amend the summary fine rule to add a schedule of
fines for CBOE members who violate provisions of Exchange Rule 11.1
governing the exercise of American-style, cash-settled index options.
Currently, CBOE trades one American-style, cash-settled index option
contract, Standard & Poor's 100 Index options (``OEX''). Examples of
violations that would be subject to the summary fine are the failure to
submit an exercise advice; the submission of advice and no subsequent
exercise; the submission of an exercise advice after the designated
cut-off time; the submission of an exercise advice for an amount
different than the amount exercised; and the time-stamping of an advice
or exercise instruction memorandum prior to purchasing contracts.
Violations occurring on a single trade date will generally be treated
as one occurrence.\4\
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\4\ For example, of on any given day an individual member
submits an exercise advice late to the Exchange and on the same day
subsequently exercises a larger number of contracts than noted on
the advice, both of these rule infractions (late advice submission
and contract discrepancy) would be treated under the summary fine
program as one violation. On the other hand, if two different market
maker nominees of the same member firm each separately submit late
exercise advices, such independent actions would be treated as two
separate rule violations, even though they occurred on the same day.
Where a matter is referred to the Business Conduct Committee
(``BCC'') for action, instead of being handled under the summary
fine program, the BCC would not be precluded from handling similar
fact patterns differently. Telephone conversation between May
Bender, Senior Vice President, Regulation, CBOE, and Robert Long,
Attorney, Division of Market Regulation, Commission, on September
24, 1998.
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There are three reasons why the Exchange determined to propose this
schedule of summary fines. First, the Exchange believes most violations
are inadvertent. Second, processing routine violations under the
summary fine program would significantly decrease the administrative
burden of regulatory and enforcement staff as well as that of the
BCC.\5\ Third, the membership of the Exchange would be more cognizant
of the severity of penalties imposed and staff would be better able to
expeditiously process routine violations under the summary fine
program. The Exchange believes that the escalating schedule will deter
members from considering fines for these violations as ``the cost of
doing business.''
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\5\ From January 1996 through May 1998, approximately 111
investigative reports were reviewed at the Pre-BCC level and
resulted in the issuance of Letters of Caution. A total of 15
Statement of Charges were authorized and/or settled by the BCC
during the same time period. Five of these violations could have
been resolved via the proposed summary fine program. The remaining
violations either involved significant fines or the dissemination of
news. Under the proposed program, investigative reports will not be
prepared describing violative conduct and presented to the BCC and/
or Pre-BCC. Rather, upon receipt and review of all necessary
documentation, the Letter of Caution or Summary Fine Disciplinary
Notice will be immediately issued to the member.
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The summary fine schedule for Exchange Rule 11.1 violations, to be
imposed on a rolling year look back period, is proposed to be as
follows:
Violations No. 1 and 2--Letter of Caution. However, if the
violation involves 5 contracts or less and no unusual circumstances are
noted, a Letter of Information will be issued. Letters of Information
will not be counted for escalation purposes and a member cannot receive
more than two Letters of Information during the rolling year look back
period.
Violation 3--Summary Fine of $1,000 plus $10 per
contract.*
Violation 4--Summary Fine of $2,000 plus $10 per
contract.*
Violation 5--Summary Fine of $4,000 plus $10 per
contract.*
Violation 6 and Subsequent--Referral to the BCC.
[[Page 58082]]
* Fines in excess of $5,000 will be deferred to the BCC.\6\
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\6\ Any fine imposed in excess of $2,500 will be subject to
reporting on SEC Form BD in addition to the immediate, rather than
periodic, reporting requirement of Section 19(d)(1) of the Act.
Compare Exchange Act Release No. 30280 (January 22, 1992), 57 FR
3452 (noting that fines in excess of $2,500, assessed under New York
Stock Exchange, Inc. Rule 476A, are not considered pursuant to the
NYSE's minor rule violation plan and are thus subject to the current
reporting requirements of Section 19(d)(1) of the Act).
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Some violations of CBOE Rule 11.1 with respect to American-style,
cash-settled index options will not be resolved by summary fine. For
example, violations that occur following the dissemination of
significant news will not be resolved by way of summary fine.
Additionally, violations where mitigating or aggravating circumstances
are evident and it appears that a summary fine is inappropriate will be
forwarded to the BCC.
2. Statutory Basis
The Exchange represents that the proposed rule change is consistent
with Section 6(b)(5) of the Act \7\ in that it is designed to refine
and enhance the Exchange's minor rule violation plan, thereby removing
impediments to a free and open market and protecting investors and the
public interest.
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\7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor 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 published 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, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 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 Room. 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-98-41 and
should be submitted by November 19, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28852 Filed 10-28-98; 8:45 am]
BILLING CODE 8010-01-M