[Federal Register Volume 65, Number 250 (Thursday, December 28, 2000)]
[Notices]
[Pages 82413-82418]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-33118]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-43756; File No. SR-CBOE-98-46]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving and Notice of Filing and Order Granting
Accelerated Approval of Amendment Nos. 1, 2, 3, 4, 5, 6, and 7 to the
Proposed Rule Change Relating to the Evaluation of Trading Crowd
Performance
December 20, 2000.
I. Introduction
On October 23, 1998, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 196-4
thereunder,\2\ a proposed rule change to amend CBOE Rule 8.60,
Evaluation of Trading Crowd Performance, to provide limited remedial
actions for Designated Primary Market Makers (``DPMs''), market makers,
and other members and trading crowds (collectively referred to as
``Market Participants'') who have failed to satisfy their market
responsibilities. The proposed rule change was published for comment in
the Federal Register on December 10,
[[Page 82414]]
1998.\3\ By letter dated March 12, 1999, the Exchange filed Amendment
No. 1 to the proposal.\4\ On April 12, 1999, CBOE filed Amendment No. 2
to the proposal.\5\ On June 17, 1999, CBOE filed Amendment No. 3 to the
proposal.\6\ On October 23, 2000, CBOE filed Amendment No. 4 to the
proposal.\7\ On November 13, 2000, the Commission received a faxed copy
of CBOE's Amendment No. 5 to the proposal.\8\ On December 4, 2000, CBOE
filed Amendment No. 6 to the proposal.\9\ On December 19, 2000, the
CBOE filed Amendment No. 7 to the proposal.\10\ The Commission received
one comment regarding the proposal.\11\ The Commission is approving the
proposed rule change, as amended, and publishing this notice to solicit
comments on Amendment Nos. 1, 2, 3, 4, 5, 6, and 7. The Commission is
also approving Amendment Nos. 1, 2, 3, 4, 5, 6, and 7 on an accelerated
basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 40737 (December 2,
1998), 63 FR 68321.
\4\ See letter from Debora E. Barnes, Senior Attorney, Legal
Department, Office of Enforcement, CBOE, to Marc McKayle, Attorney,
Division of Market Regulation (``Division''), Commission, dated
March 12, 1999 (``Amendment No. 1''). In Amendment No. 1, CBOE
responded to a comment letter. The substance of CBOE's response to
the comment letter is discussed in greater detail below.
\5\ See letter from Andrew D. Spiwak, Managing Director, Legal
Department, Office of Enforcement, CBOE, to Marc McKayle, Attorney,
Division, Commission, dated April 8, 1999 (``Amendment No. 2''). In
Amendment No. 2, CBOE clarified that there is no automatic stay of
an action during the appeal of a remedial sanction, but that a
Market Participant could request a stay of action during an appeal.
CBOE also indicated that the primary difference between the
sanctions that presently exist under the Rule and the limited
remedial actions introduced by this proposal is the severity of the
sanctions. The Exchange also clarified that pursuant to CBOE Rule
19.1, Interpretations and Policies .01, a Market Participant would
be considered aggrieved in an economic sense if sanctioned under the
proposed revisions to CBOE Rule 8.60, and thus entitled to appeal
any action taken by a Market Performance Committee under the rule.
The Exchange also noted that, pursuant to CBOE Rule 19.5, any
decision of the Appeals Committee is subject to review by the
Exchange's Board of Directors. The Exchange also explained that
limited remedial actions taken under the proposal by the appropriate
Market Performance Committee would not constitute a disciplinary
action, and thus Exchange reporting requirements under Rule 19d-1(e)
of the Act, 17 CFR 240.19d-1(e), would not be triggered. Finally,
the Exchange assured the Commission that the three Market
Performance Committees have exclusive, non-overlapping jurisdiction,
and thus Market Participants would not face duplicative sanctions
stemming from one course of conduct.
\6\ See letter from Andrew D. Spiwak, Managing Director, Legal
Department, Office of Enforcement, CBOE, to Marc McKayle, Attorney,
Division, Commission, dated June 16, 1999 9``Amendment No. 3''). In
Amendment No. 3, CBOE amended the Rule to restrict a member's
ability to participate in the Rapid Opening System (``ROS'') as a
limited remedial sanction. CBOE also deleted language from the rule
text that would have given the appropriate Market Performance
Committee discretion to ``take any other limited remedial action.''
CBOE also indicated that any additional comparable limited remedial
sanctions would be added to the rule by a proposed rule change filed
with the Commission pursuant to section 19(b)(3)(A) of the Act, 15
U.S.C. 78s(b)(3)(A).
\7\ See letter from Andrew D. Spiwak, Managing Director, Legal
Department, Office of Enforcement, CBOE, to Elizabeth King,
Associate Director, Division, Commission, dated October 17, 2000
(``Amendment No. 4''). In Amendment No. 4, CBOE reorganized the text
of the rule language and consolidated all remedial actions and
hearing procedures into paragraphs (c) and (d), respectively, of
proposed CBOE Rule 8.60. In addition, CBOE added language to specify
that the rule pertained to DPMs, market makers, and other members
(individually or collectively as trading crowds) and not solely
market markers. The CBOE also amended the rule to refer to the
``market responsibilities'' of market participants instead of
``performance standards.'' The Exchange also revised the rule text
to indicate that the appropriate Market Performance Committee can
find that a Market Participant has failed to satisfy its market
responsibilities if the Market Participant is ranked one or more
standard deviations from the mean score of all trading crowds in a
periodic examination. Finally, Amendment No. 4 amends CBOE Rule
8.60(f) to specify that, for Committee action taken under proposed
CBOE Rule 8.60(c)(1) through (4), Market Participants may directly
appeal the action to the Board of Directors as under the current
Rule, and amends CBOE Rule 8.60(g) to specify that Committee actions
taken under proposed CBOE Rule 8.60(c)(5) through (11) may be
appealed in accordance with Chapter XIX of the Exchange Rules.
\8\ See letter from Andrew D. Spiwak, Managing Director, Legal
Department, Office of Enforcement, OBOE, to Nancy Sanow, Assistant
Director, Division, Commission, dated November 13, 2000 (``Amendment
No. 5''). Amendment No. 5 was replaced in its entirely by Amendment
No. 6.
\9\ See letter from Andrew D. Spiwak, Managing Director, Legal
Department, Office of Enforcement, CBOE, to Nancy Sanow, Assistant
Director, Division, Commission, dated November 27, 2000 (``Amendment
No. 6''). In Amendment No. 6, in addition to technical changes, CBOE
Rule 8.60(d) was amended to clarify that the Committee may take any
action listed in CBOE Rule 8.60(c) after a formal hearing, and may
take any action listed in CBOE Rule 8.60(c)(5) through (11) after an
informal hearing. In addition, a conforming change was made in CBOE
Rule 8.60(f) to clarify that a Market Participant may appeal any
Committee action taken after a formal hearing directly to the Board
of Directors. This provision supersedes the change in Amendment No.
4 to CBOE Rule 8.60(f) that specified that Market Participants may
appeal Committee action taken under CBOE Rule 8.60(c)(1) through (4)
directly to the Board of Directors.
\10\ See letter from Andrew D. Spiwak, Managing Director, Legal
Department, Office of Enforcement, CBOE, to Nancy Sanow, Assistant
Director, Division, Commission, dated December 12, 2000 (``Amendment
No. 7''). In Amendment No. 7, proposed CBOE Rule 8.60(g) was amended
to clarify that Committee actions taken after an informal meeting in
accordance with CBOE Rule 8.60(c)(5) through (11) may be appealed in
accordance with Chapter XIX of the Exchange Rules. The amended rule
language clarifies the provision set forth in Amendment No. 4.
\11\ See letter from James Gelbort to Robert L.D. Colby, Deputy
Director, Division, Commission, dated December 28, 1998 (``Gelbort
Letter'').
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II. Description of the Proposal
The Exchange proposes to modify CBOE Rule 8.60 to clarify and
improve the market performance evaluation of Market Participants on the
Exchange. The proposed rule change should provide the appropriate
Market Performance Committee (``Committee'')\12\ greater procedural
flexibility in addressing the performance of Market Participants, while
clarifying the due process safeguards that apply to the exercise of the
Committee's authority.
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\12\ The appropriate Committee refers to the Market Performance
Committee, the Index Market Performance Committee or the Modified
Trading System Appointments Committee.
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The purpose of CBOE Rule 8.60 is to provide the appropriate
Committee with a means to work with Market Participants to improve
market quality and competition. The market performance evaluation
process is designed to assist the appropriate Committee in working with
Market Participants to improve their market performance. Currently,
under CBOE Rule 8.60, the Committee must hold a formal hearing to
impose serious sanctions such as: (1) Suspension, termination, or
restriction of registration of a market maker; (2) suspension,
termination or restriction of an appointment to one or more option
classes; (3) restriction of appointments to additional option classes;
(4) relocation of option classes; and (5) prohibiting a member from
trading at a particular trading station. However, under the current
Rule, the appropriate Committee does not have explicit authority to
take limited remedial actions. Under the proposed rule change, the
Committee would be able to take certain limited remedial actions after
an informal meeting with Market Participants who have been identified
through the evaluation process.
The proposal would amend CBOE Rule 8.60(a) to indicate that the
Committee in evaluating whether a Market Participant is satisfactorily
meeting its market responsibilities may consider: (1) Quality of
markets; (2) extent of competition in the crowd; (3) due diligence in
representing orders as agent; (4) adherence to ethical standards; (5)
carrying out administrative responsibilities; and (6) such other
matters as the Exchange may deem relevant.\13\ Under the proposal, in
addition to the survey, the Committee may also consider any other
relevant information including, but not limited to, statistical
measures of performance and such other factors and data as the
Committee may determine to be pertinent to the evaluation of Market
[[Page 82415]]
Participants. CBOE Rule 8.60(a) is also being amended to clarify that
the Rule pertains to DPMs (both market-making and agency
responsibilities), market makers, and other members (individually or
collectively as trading crowds).
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\13\ The factors that may be considered under current CBOE Rule
8.60(a) are: (1) Quality of markets; (2) competition among market-
makers; (3) observance of ethical standards; and (4) administrative
factors.
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Under the proposal, CBOE Rule 8.60(b) would be amended to indicate
that the Committee may find that a Market Participant has failed to
satisfy its market responsibilities, if the evaluation of the Market
Participant results in a ranking that is one or more standard
deviations from the mean score of all Market Participants within the
Committee's jurisdiction, or if such a finding may reasonably be
supported by any other relevant information known to the Committee.
Currently, under CBOE Rule 8.60(b), the Committee must presume a
failure to meet minimum performance standards exists for all members of
a trading crowd, if the trading crowd is ranked in the bottom 10% of
trading crowds in the aggregate results of the Crowd Evaluation
Questionnaire.
Under the proposal, the rule language in current CBOE Rule 8.60(a)
listing the sanctions for a market-maker's failure to meet minimum
performance standards would be moved to paragraph (c) of the proposed
rule. In addition to the more serious sanctions that are currently
listed in the Rule, the proposal would amend CBOE Rule 8.60(c), to
clarify that the Committee has the authority to take limited remedial
actions if a Market Participant fails to satisfy its market
responsibilities. Thus, under the proposed CBOE Rule 8.60(c) the
Committee may take one or more of the following actions, if it finds
that a Market Participant has failed to satisfy its market
responsibilities:
(1) Suspension, termination, or restriction of registration of a
Market Participant (which may also include the termination of a DPM
appointment);
(2) Suspension, termination or restriction of an appointment to one
or more option classes or other securities;
(3) Relocation or reallocation of option classes or other
securities to other trading crowds;
(4) Prohibiting a Market Participant from trading at a particular
trading station;
(5) Requiring the Market Participant to submit a business plan to
the Committee detailing those steps that the Market Participant intends
to take to improve its performance;
(6) Requiring that one or more Market Participants in a crowd
execute 100% of their opening transactions in that crowd in person;
(7) Restricting the ability of Market Participants to participate
in the Exchange's Retail Automatic Execution System (``RAES'');
(8) Restricting the eligibility of a crowd to be allocated new
option classes or other securities;
(9) Requiring that one or more Market Participants attend a meeting
or series of meetings as the Committee shall require for the purpose of
education or improving their performance as Market Participants;
(10) Requiring that all bookable orders be booked if not executed
immediately upon presentation in the crowd; and
(11) Restricting the ability of Market Participants to participate
in ROS.
The Exchange has indicated that it may in the future add comparable
limited remedial sanctions to the Rule by filing a proposed rule change
with the Commission pursuant to 19(b)(3)(A) of the Act.\14\ CBOE Rule
8.60(c) is also being amended to delete language pertaining to the
distribution of a crowd evaluation questionnaire on a six-month
periodic basis. Under the proposal, the Exchange will conduct market
performance evaluations twice a year as it deems necessary, but
generally on a six-month periodic basis.\15\
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\14\ 15 U.S.C. 78s(b)(3)(A).
\15\ Telephone conversation between with Andrew D. Spiwak,
Managing Director, Legal Department, Office of Enforcement, CBOE, to
Marc McKayle, Special Counsel, Division, Commission, on November 1,
2000.
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The proposed rule change would amend CBOE Rule 8.60(d) to include
the Rule's formal hearing and informal meeting procedures. Under the
proposal, before taking any remedial action, the Committee would be
required to give written notice to the Market Participant to indicate
that the Committee is considering taking action and the basis for the
action, and that the Market Participant is entitled to an opportunity
to appear before the Committee (or a panel thereof). If the Committee
contemplates taking any of the actions listed in proposed CBOE Rule
8.60(c)(1) through (4), a formal hearing with a verbatim record would
be required, although the Committee would have the authority to take
any action listed in CBOE Rule 8.60(c) after a formal hearing. If the
Committee contemplates taking any of the actions listed in proposed
CBOE Rule 8.60(c)(5) through (11) that will not be imposed for a period
longer than one year, an informal meeting without the requirement of a
verbatim record would be permitted. In addition, under proposed CBOE
Rule 8.60(d), a Market Participant receiving written notice of
potential Committee action would be required to appear at the formal
hearing or informal meeting, as applicable, and could also submit a
written statement to the Committee in addition to an appearance. At
such a hearing or meeting, the formal rules of evidence would not apply
and the Committee would decide all questions of procedure and
admissibility of evidence. If after the hearing or meeting the
Committee determined that the Market Participant failed to satisfy its
market responsibilities, the Committee would give written notice to all
affected Market Participants reflecting the sanction ordered, the
length of the sanction, and the basis for the Committee's findings and
conclusions.
The proposed rule change would also amend CBOE Rule 8.60(e) to
provide the Committee with the authority to impose any sanction under
CBOE Rule 8.60(c) if the Market Participant failed to appear before or
meet with the Committee pursuant to proposed CBOE Rule 8.60(d) and did
not have a reasonable justification or excuse. CBOE Rule 8.60(e) would
also be amended to indicate that a Market Participant's unexcused
absence before the Committee could result in a referral to the Business
Conduct Committee.
The proposal also amends CBOE Rules 8.60(f) and (g) to specify the
process for taking appeals from a Committee action. Under proposed CBOE
Rule 8.60(f), consistent with the current Rule, Committee actions taken
after a formal hearing may be appealed directly to the Board of
Directors. Proposed CBOE Rule 8.60(g) specifies any action taken by the
Committee after an informal meeting in accordance with CBOE Rule
8.60(c)(5) through (11) may be appealed pursuant to Chapter XIX of the
Exchange Rules. CBOE believes that Chapter XIX appeals would be
procedurally duplicative for Committee actions taken after a formal
hearing where a verbatim record is kept.\16\
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\16\ Telephone conversation between with Andrew D. Spiwak,
Managing Director, Legal Department, Office of Enforcement, CBOE, to
Marc McKayle, Special Counsel, Division, Commission on November 1,
2000.
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Finally, the proposal amends Interpretation and Policy .01 under
CBOE Rule 8.60 to provide the Committee discretion in defining whether
a market maker is a member of a trading crowd.
III. Comments
The Commission received one comment letter on the proposal.\17\ The
commenter inquired: (1) Whether the proposed restriction of RAES
participation as a limited remedial
[[Page 82416]]
sanction would supercede the remedial actions in CBOE Rule 8.16; \18\
(2) whether appealing parties must be aggrieved in an economic sense
when appealing pursuant to Chapter XIX of the Exchange Rules; and (3)
whether inequitable results would occur because of overlapping
jurisdications of the Market Performance Committees.\19\ In Amendment
No. 1, the Exchange stated that the proposed limited remedial sanction
restricting RAES participation would not supersede remedial actions
under CBOE Rule 8.16. The Exchange explained that CBOE Rule 8.16 and
CBOE Rule 8.60, as proposed, are not facially inconsistent with each
other and may co-exist within the CBOE regulatory framework because
action may be taken under one rule without implicating the other. The
Exchange also explained its view that, despite the separate and
distinct jurisdictions of the three Market Performance Committees, a
Market Participant could not be sanctioned by more than one Committee
for a single course of conduct. The Exchange also clarified that if a
Market Participant received a limited remedial sanction under the
proposal, it would be considered to have been aggrieved in an economic
sense, and thus the sanction would be appealable pursuant to Chapter
XIX of the Exchange Rules.\20\
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\17\ See Gelbort Letter, supra note 11.
\18\ CBOE Rule 8.16 pertains to RAES eligibility in option
classes other than the Dow Jones Industrial Index (``DJX'').
\19\ Two other issues raised by the commenter were rendered moot
by subsequent amendments.
\20\ As originally filed, the proposal allowed any Committee
action to be appealed under Chapter XIX of CBOE Rules. Under
Amendment No. 6, Chapter XIX procedures would be available when the
Committee imposed a limited remedial sanction after an informal
meeting, while sanctions imposed after a formal hearing may be
directly appealed to the Board of Directors.
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IV. Discussion
The Commission finds that the proposed rule change is consistent
with the Act \21\ and, in particular, with section 6(b) of the Act.\22\
Specifically, the Commission believes that the proposal is consistent
with the sections 6(b)(5), (b)(6), and (b)(7) of the Act.\23\ Section
6(b)(5) of the Act \24\ requires that rules of an exchange be designed
to promote just and equitable principles of trade, perfect the
mechanism of a free and open market, prevent fraudulent and
manipulative acts, and, in general, protect investors and the public
interest. Section 6(b)(6) of the Act \25\ requires an exchange to
provide rules to appropriately discipline its members for violation of
the provisions of the Act, the rules or regulations thereunder, or the
rules of the exchange, by expulsion, suspension, limitation of
activities, functions, and operations, fine, censure, being suspended
or barred from being associated with a member, or any other fitting
sanction. Section 6(b)(7) of the Act \26\ requires the rules of an
exchange generally to provide a fair procedure for the disciplining of
members.
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\21\ In approving this rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\22\ 15 U.S.C. 78f(b).
\23\ 15 U.S.C. 78f(b)(5), (b)(6), and (b)(7).
\24\ 15 U.S.C. 78f(b)(5).
\25\ 15 U.S.C. 78f(b)(6).
\26\ 15 U.S.C. 78f(b)(7).
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The Commission finds that proposed CBOE Rule 8.60(a) is consistent
with Section 6(b)(5) \27\ because it is designed to help the Exchange
maintain market quality and integrity by providing the appropriate
Market Performance Committee with a means to identify Market
Participants that fail to satisfy their market responsibilities. The
proposed rule change amends CBOE Rule 8.60(a) to enumerate, and add,
factors that the Committee may consider in evaluating whether a Market
Participant satisfactorily meets its market responsibilities. The
proposed rule change also amends CBOE Rule 8.60(a) to specify that the
Rule pertains to DPMs, market makers, and other members (individually
or collectively as trading crowds). The Commission believes that the
ability of the Committee to evaluate the market performance of Market
Participants should be enhanced by the addition of new factors and
clarification of existing factors to be contained in the survey of
members that is a part of the market performance evaluation. The
proposal should also provide the Committee and Market Participants with
appropriate guidance on how the Exchange evaluates the market
performance of its members. The Commission notes that CBOE Rule 8.60(a)
is also being amended to enable the Committee to consider any other
relevant information that the Committee determines is pertinent to the
evaluation of Market Participants. In such instances, where non-
enumerated factors have been included in a Market Participant's
evaluation, the Exchange has represented that the factors beyond those
explicitly mentioned in the Rule's text would be detailed in the
written notice of a Market Participant's potential failure to satisfy
its market responsibilities, as required by CBOE Rule 8.60(d).\28\
Further, the Commission notes that in order to provide appropriate
guidance in the future, the Exchange should inform Market Participants
of any additional factors determined to be pertinent in evaluating
whether a Market Participant has satisfied its market responsibilities.
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\27\ 15 U.S.C. 78f(b)(5).
\28\Telephone conversation between with Andrew D. Spiwak,
Managing Director, Legal Department, Office of Enforcement, CBOE, to
Marc McKayle, Special Counsel, Division, Commission on November 1,
2000.
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The Commission finds that proposed CBOE Rule 8.60(b) is consistent
with the Act,\29\ including section 6(b)(6),\30\ because the Rule is
part of the scheme that provides the Exchange with a means to
appropriately discipline its members. The proposed rule change would
amend CBOE rule 8.60(b) to indicate that the Committee may determine
that a Market Participant has failed to satisfy its market
responsibilities if the Market Participant evaluation results in a
ranking that is one or more standard deviations from the mean score of
all Market participants within the Committee's jurisdiction, or if such
a finding may reasonably be supported by any other relevant information
known to the Committee. The Commission believes that it is reasonable
for the Committee to find that a Market Participant has failed to
satisfy its market responsibilities if the Market Participant
evaluation results in a ranking that is one or more standard deviations
below the mean score of all Market Participants within the Committee's
jurisdiction. Moreover, this evaluation should provide an objective
measure as to whether Market Participants have failed to satisfy their
market responsibilities.
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\29\ 15 U.S.C. 78s(b)(3)(A).
\30\ 15 U.S.C. 78f(b)(6).
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The Exchange has represented that each Committee has exclusive
jurisdiction over discrete market performance issues, and that such
specialization provides the separate Committees added competence to
review certain market performance matters. The Commission believes that
the structure of the Exchange's market performance evaluation should
permit the appropriate Committee to properly evaluate whether
satisfactory market performance has been achieved by Market
Participants based on the factors set forth in revised CBOE Rule
8.60(a). As indicated above, the Commission considers it essential that
a Market Price Participant be fully cognizant of the factors that may
bear upon the Committee's evaluation, particularly if that evaluation
could result in remedial action by the Committee. Thus, the Commission
expects that the Exchange
[[Page 82417]]
will fully apprise Market Participants of any other relevant
information known to the Committee that influences a Committee finding
that a Market Participant has failed to meet his market responsibility.
The Commission also finds that proposed CBOE Rule 8.60(c) is
consistent with the Act, particularly Section 6(b)(6).\31\ CBOE Rule
8.60(c) will be amended to include the more serious sanctions found in
current CBOE Rule 8.60(a), and to clarify that the Committee also has
the authority to take limited remedial actions if a Market Participant
fails to satisfy its market responsibilities. The Commission believes
that the proposed rule change should enhance the flexibility of the
Exchange's market performance evaluation. Presently, the Exchange does
not have an express mechanism to address market performance matters
that may warrant remedial action, but are not serious enough to warrant
suspension, termination, or restriction of a market-maker's
registration under the current Rule. The proposed rule change should
permit the CBOE to implement appropriate, limited remedial sanctions
that will permit the Committee to take corrective measures to enhance
the performance of Market Participants before more serious sanctions,
such as suspension or termination, are warranted. The Commission
believes that the proposal should improve the manner in which the
Exchange assesses and responds to the quality of market performance by
the Market Participant, which in turn should help the Exchange provide
a more competitive, efficient and fair market. Specifically, the
Commission finds that CBOE Rule 8.60(c) is consistent with Section
6(b)(6) of the Act \32\ because it provides the Exchange with a means
to appropriately discipline its members for violating the rules of the
exchange by imposing sanctions such as suspension, limitation of
activities, functions, and operations, or other fitting sanctions.
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\31\ 15 U.S.C. 78f(b)(6).
\32\ 15 U.S.C. 78f(b)(6).
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The Commission finds that proposed CBOE Rule 8.60(d) is consistent
with section 6(b)(7) of the Act.\33\ Under the proposal, CBOE Rule
8.60(d) will be amended to include all of the Rule's formal hearing and
informal meeting procedures. The Commission believes that the
amendments to CBOE Rule 8.60(d) should clarify the due process
safeguards associated with the Committee's evaluation of a Market
Participant's market performance. Further, the Commission believes that
amended CBOE Rule 8.60(d) should provide Market Participants with
adequate procedural safeguards under the Rule. For instance, before any
action is taken, the Committee would be required to give written notice
to the Market Participant to indicate that the Committee is considering
taking action and the basis for the action, and that the Market
Participant is entitled to an opportunity to appear before the
Committee (or a panel thereof). The Commission believes that Market
Participants are provided with reasonable due process safeguards and
that CBOE Rule 8.60(d), as amended, should provide a fair procedure for
disciplining members, and thus is consistent with Section 6(b)(7) of
the Act.\34\
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\33\ 15 U.S.C. 78f(b)(7).
\34\ 15 U.S.C. 78f(b)(7).
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The Commission also finds that proposed CBOE Rule 8.60(e) is
consistent with Section 6(b)(6) of the Act.\35\ The proposed rule
change amends CBOE Rule 8.60(e) to authorize the Committee to impose
any sanction listed under CBOE Rule 8.60(c) if a Market Participant
fails to appear before the Committee, without reasonable justification
or excuse, as required by proposed CBOE Rule 8.60(d). CBOE Rule 8.60(e)
would also be amended to indicate that a Market Participant's unexcused
absence before the Committee could result in a referral to the Business
Conduct Committee. The Commission believes that CBOE Rule 8.60(e)
provides appropriate discipline for violation of the provisions found
in amended CBOE Rule 8.60(d), and thus is consistent with section
6(b)(6) of the Act.\36\
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\35\ 15 U.S.C. 78f(b)(6).
\36\ 15 U.S.C. 78f(b)(6).
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The Commission finds that proposed CBOE Rules 8.60(f) and (g) are
consistent with Section 6(b)(7) of the Act.\37\ The proposal amends
CBOE Rule 8.60(f) to specify that Market Participants may appeal
Committee action taken after a formal hearing directly to the Board of
Directors. The proposal also amends CBOE Rule 8.60(g) to specify that
after an informal meeting, a Market Participant may appeal a Committee
action imposed under CBOE Rule 8.60(c)(5) through (11) to an Appeals
Committee in accordance with Chapter XIX of the Exchange Rules. The
Commission believes that direct appeals to the Board of Directors for
Committee action taken after a formal hearing with a verbatim record
should provide Market Participants with adequate procedural
protections. The Commission also believes that CBOE Rule 8.60(g), which
allows Market Participants to appeal in accordance with Chapter XIX of
the Exchange Rules any Committee action pursuant to CBOE Rule 8.6(c)(5)
through 11 after an informal meeting, should provide adequate
procedural safeguards. The Commission therefore finds that CBOE Rules
8.60(f) and (g) are consistent with Section 6(b)(7) of the Act because
they provide fair procedures for the disciplining of Exchange
members.\38\
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\37\ 15 U.S.C. 78f(b)(7).
\38\ 15 U.S.C. 78f(b)(7).
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V. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
For the reasons discussed below, the Commission finds good cause
for approving Amendment Nos. 1 through 7 to the proposed rule change
prior to the thirtieth day after the date of publication of notice
thereof in the Federal Register.
In Amendment No. 1, as outlined above, CBOE responded to various
issues raised by a commenter. In Amendment No. 2, CBOE explained and
clarified the procedural impact of the proposal. Specifically,
Amendment Nos. 1 and 2 were of a technical, non-substantive nature, and
did not significantly alter the original proposal, which was subject to
a full notice and comment period. Thus, the Commission finds that
granting accelerated approval to Amendment Nos. 1 and 2 is appropriate
and consistent with section 19(b)(2) of the Act.\39\
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\39\ 15 U.S.C. 78s(b)(2).
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In Amendment No. 3, CBOE amended Rule 8.60 to restrict a member's
ability to participate in the ROS as a limited remedial sanction. CBOE
also deleted language from the Rule's text that would have given the
appropriate Market Performance Committee discretion to ``take any other
limited remedial action.'' CBOE also indicated that any additional
comparable limited remedial sanctions would be added to the Rule by a
proposed rule change filed with the Commission pursuant to section
19(b)(3)(A) of the Act.\40\ The changes in proposed Amendment No. 3
should help to ensure that Market Participants are fully notified to
the types of limited remedial sanctions that may be imposed under Rule
8.60. Amendment No. 3 also set forth how additional limited remedial
sanctions may be added to Rule 8.60 in future. The Commission finds
that Amendment No. 3 strengthens and clarifies Rule 8.60 from a
procedural perspective. Thus, the Commission finds that granting
[[Page 82418]]
accelerated approval to Amendment No. 3 is appropriate and consistent
with section 19(b)(2) of the Act.\41\
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\40\ 15 U.S.C. 78s(b)(3)(A).
\41\ 15 U.S.C. 78s(b)(2).
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In Amendment No. 4, CBOE reorganized the text of Rule 8.60 and
consolidated all remedial actions and hearing procedures into
paragraphs (c) and (d), respectively, of the Rule, as amended. In
addition, CBOE added language to specify that Rule 8.60 pertained to
DPMs, market makers, and other members (individually or collectively as
trading crowds) and not just market makers. The CBOE also amended the
Rule to refer to the ``market responsibilities'' of market participants
instead of ``performance standards.'' The Exchange also revised the
Rule's text to indicate that the appropriate Market Performance
Committee can find a Market Participant has failed to satisfy its
market responsibilities if the Market Participant is ranked one or more
standard deviations from the mean score of all trading crowds in a
periodic examination. The Commission finds that the proposed changes in
Amendment No. 4 serve to clarify the intent and application of the
proposal. Thus, the Commission finds that granting accelerated approval
to Amendment No. 4 is appropriate and consistent with Section 19(b)(2)
of the Act.\42\
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\42\ 15 U.S.C. 78s(b)(2).
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In Amendment No. 6,\43\ in addition to technical changes, CBOE Rule
8.60(d) was amended to clarify that the Committee may take any action
listed in CBOE Rule 8.60(c) after a formal hearing, and may take any of
the actions listed in CBOE Rule 8.60(c)(5) through (11) after an
informal meeting. In addition, a conforming change was made in CBOE
Rule 8.60(f) to clarify that a Market Participant may appeal any
Committee action taken after a formal hearing directly to the Board of
Directors.\44\ The Commission finds that the proposed changes in
Amendment No. 6 serve to clarify the intent and application of the
proposal. Thus, the Commission finds that granting accelerated approval
to Amendment No. 6 is appropriate and consistent with Section 19(b)(2)
of the Act.\45\
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\43\ Amendment No. 5 was replaced in its entirety by Amendment
No. 6.
\44\ This provision supersedes the change in Amendment No. 4 to
CBOE Rule 8.60(f) that specified that Market Participants may appeal
Committee action taken under CBOE Rule 8.60(c)(1) through (4)
directly to the Board of Directors.
\45\ 15 U.S.C. 78s(b)(2).
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In Amendment No. 7, proposed CBOE Rule 8.60(g) was amended to
clarify that Committee actions taken after an informal meeting in
accordance with CBOE Rule 8.60(c)(5) through (11) may be appealed in
accordance with Chapter XIX of the Exchange Rules. The Commission finds
that the proposed change in Amendment No. 7 serves to clarify the
intent and application of the proposal. Thus, the Commission finds that
the granting accelerated approval to Amendment No. 7 is appropriate and
consistent with section 19(b)(2) of the Act.\46\
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\46\ 15 U.S.C. 78s(b)(2).
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VI. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment Nos. 1, 2, 3, 4, 5, 6, and 7, including
whether the proposed amendments are 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 20549-0609. 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 in the Commission's Public
Reference Room. Copies of such filing will also be available for
inspection and copying at the principal office of the CBOE. All
submissions should refer to File No. SR-CBOE-98-46 and should be
submitted by January 21, 2001.
VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\47\ that the proposed rule change, as amended, (SR-CBOE-98-46) is
approved.
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\47\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\48\
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\48\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-33118 Filed 12-27-00; 8:45 am]
BILLING CODE 8010-01-M