Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Chicago Board Options Exchange, Inc., Relating to Expedited Proceedings and Offers of Settlement

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34987; File No. SR-CBOE-94-35]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Chicago Board Options Exchange, Inc., Relating to

Expedited Proceedings and Offers of Settlement

November 18, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on October

12, 1994, the Chicago Board Options Exchange, Inc. (``CBOE'' or

``Exchange'') filed with the Securities and Exchange Commission

(``SEC'' or ``Commission'') the proposed rule change as described in

Items 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.

I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The CBOE proposes to amend CBOE Rules 17.3, ``Expedited

Proceeding,'' and 17.8 ``Offers of Settlement,'' to (1) specify that

the subject of an Exchange investigation must notify the CBOE staff in

writing within 15 days of the date of notification under paragraph (d),

``Notice, Statement and Access,'' of CBOE Rule 17.2, ``Complaint and

Investigation'' that he elects to proceed in an expedited manner

pursuant to CBOE Rule 17.3; (2) reduce the time period during which

settlement offers may be submitted by a subject in an Exchange

disciplinary matter who seeks to resolve the matter through expedited

proceedings pursuant to CBOE Rule 17.3; and (3) allow either the

subject or the Exchange staff to end the negotiations for a letter of

consent at any point during the negotiations.\1\ If either the CBOE

staff or the subject ends the negotiations, the subject will have 15

days to submit a written statement to the BCC pursuant to CBOE Rule

17.2(d) indicating why no disciplinary action should be taken; the CBOE

staff may then bring the matter to the BCC for appropriate action. If

the subject and the CBOE staff are able to agree upon a letter of

consent, the CBOE staff will submit the letter to the BCC.

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\1\CBOE Rule 17.2(c), ``Report,'' requires the CBOE staff to

submit a written report of its investigation to the Exchange's

Business Conduct Committee (``BCC'') in every case where an

investigation results in a finding that there are reasonable grounds

to believe that a violation of the Act or the CBOE's rules has been

committed. CBOE Rule 17.2(d), `'Notice, Statement and Access,''

requires the CBOE staff to notify the subject of the report of the

general nature of the allegations and of the specific provisions of

the Act or of the CBOE's rules that appear to have been violated.

Under CBOE Rule 17.3, the subject of a report written pursuant to

CBOE Rule 17.2 may to seek to dispose of the matter through a letter

of consent.

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In addition, the CBOE proposes to amend CBOE Rule 17.8,

Interpretation and Policy .01, to provide that if the respondent and

the CBOE staff are unable to reach agreement on a letter of consent

under CBOE Rule 17.3 then the number of days over 30 between the time

when the CBOE staff receives notice of the respondent's election to

proceed in an expedited manner under CBOE Rule 17.3 and the date when

either party ends the consent negotiations shall be deducted from the

120-day period specific in CBOE Rule 17.8 (a), ``Submission of Offer,''

which provides a 120-day period within which a respondent may submit a

settlement offer to the BCC. Regardless of the amount of time spent in

unsuccessful consent negotiations, the respondent will have no less

than 14 days to submit a settlement offer to the BCC pursuant to CBOE

Rule 17.8(a).

The text of the proposal 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 statement 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

Background

Pursuant to CBOE Rule 17.2(d), prior to the time that the CBOE

staff submits an investigative report to the Exchange's BCC concerning

possible disciplinary violations, the staff if required to provide a

notice to the subject of the report which sets forth the general nature

of the allegations made in the report and the specific rules that

appear to have been violated (a ``Notification Letter''). CBOE Rule

17.2(d) provides further than, except when the BCC determines that

expeditious action is required, the subject of an investigative report

shall have 15 days from the date of the Notification Letter in which to

submit a written statement to the BCC concerning why no disciplinary

action should be taken against a subject (a ``Notification Response'').

In accordance with CBOE Rule 17.4, ``Charges,'' the CBOE staff then

submits the investigative report and the Notification Response to the

BCC, and if the BCC determines that probable cause exists for finding a

disciplinary violations, a statement of charges is issued against the

subject.

Upon the issuance of a statement of charges against a subject, the

subject is referred to as a respondent under the Exchange's rules.\2\

Pursuant to CBOE Rule 17.8(a), a respondent has 120 calendar days from

the date of service of a statement of charges in which to submit

settlement offers to the BCC. However, the 120-day settlement period

does not include the number of days in excess of seven calendar days

that it takes the Exchange's staff to comply with a respondent's

request for access to documents which is made properly pursuant to CBOE

Rule 17.4(c), ``Access to Documents.''\3\ In addition, with one

exception, a respondent is only entitled to submit a maximum of two

settlement offers to the BCC during the 120-day settlement period.\4\

Upon the expiration of the 120-day settlement period, or earlier if the

BCC rejects a respondent's second settlement offer prior to the

expiration of such period, a hearing is scheduled with respect to the

charges.\5\

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\2\See CBOE Rule 17.4(b), ``Initiation of Charges.''

\3\See CBOE Rule 17.8, Interpretation and Policy .01(c). CBOE

Rule 17.4(c) provides that within 60 calendar days after a statement

of charges has been served upon a respondent, the respondent may

make a written request for access to all documents concerning the

case that are in the Exchange's investigative file except for CBOE

staff investigation and examination reports and materials prepared

by the CBOE staff in connection with such reports or in anticipation

of a disciplinary hearing. However, in providing such documents the

CBOE staff may protect the identity of a complainant.

\4\See CBOE Rule 17.8, Interpretation and Policy .01(a) and (b).

The BCC, at its discretion, may permit a respondent to submit a

third settlement offer during the 120-day settlement period if the

pertinent details of the offer are consistent with parameters and

criteria deemed acceptable by the BCC.

\5\See CBOE Rule 17.8, Interpretation and Policy .02.

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Notwithstanding the foregoing, CBOE Rule 17.3 sets forth an

expedited proceeding process pursuant to which a subject may seek to

resolve a disciplinary matter through a letter of consent with the

Exchange prior to the issuance of a statement of charges against the

subject. CBOE Rule 17.3 requires that a letter of consent contain a

description of the facts, violation, and sanction and must be agreed

upon by the Exchange staff and by the respondent. In addition, CBOE

Rule 17.3 requires that all such letters of consent be accepted by the

BCC. If the Exchange staff and the subject are unable to agree upon a

letter of consent or if they agree upon a letter of consent and the

letter is rejected by the BCC, CBOE Rule 17.3 provides that the matter

shall proceed as if no letter of consent had been submitted to the BCC

(i.e, the BCC may decide to authorize the issuance of a statement of

charges against the subject; the subject is then entitled to submit

settlement offers to the BCC pursuant to CBOE Rule 17.8 during the 120-

day settlement period).

Therefore, under the Exchange's current rules, a subject who

unsuccessfully attempts to resolve a disciplinary matter through

expedited proceedings is permitted to take advantage of the entire 120-

day settlement period, no matter how long the subject may have spent in

the expedited proceeding process. As a result, as noted by the Exchange

and by the Division of Market Regulation (``Division'') of the

Commission in connection with the Division's inspection of the

Exchange's surveillance, investigative, and enforcement programs which

took place last year, it is possible for a respondent to utilize the

expedited proceeding process as a means of circumventing the 120-day

settlement period limit and accordingly as a means of simply delaying

the resolution of the case.\6\

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\6\See Letter from Brandon Becker, Director, Division,

Commission, to Charles Henry, President, CBOE, dated October 20,

1993, and Letter from Charles Henry, President, CBOE, to Brandon

Becker, Director, Division, Commission, dated January 14, 1994.

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Proposal

In response to this concern, the CBOE proposes to amend CBOE Rule

17.8 to reduce the time period during which settlement offers may be

submitted by a subject who seeks to resolve a disciplinary matter

through expedited proceedings, is unable to reach an agreement with

Exchange staff, and consumes over 30 days in the expedited proceeding

process. Specifically, under the proposal, the number of days in excess

of 30 days that a subject spends in the expedited proceeding will be

deducted from the 120-day settlement period applicable to the subject;

provided, however, that in no event will a subject's settlement period

under CBOE Rule 17.8 ever be less than 14 days.\7\

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\7\The proposed amendment will also amend all of the references

to the 120-day settlement period which are contained currently in

CBOE Rule 17.8 to acknowledge that this settlement period will be

shorter in situations where the mechanism described for limiting the

120-day settlement period becomes applicable.

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The mechanism for limiting settlement periods will apply only to a

subject who attempts to resolve a disciplinary matter through expedited

proceedings and is unable to reach an agreement with CBOE staff upon a

letter of consent. It will not apply to a subject who attempts to

resolve a disciplinary matter through expedited proceedings and who

reaches an agreement with CBOE staff upon a letter of consent, but

finds that the agreed-upon letter of consent is not accepted by the

BCC. In addition, under this mechanism, in no event will the number of

days between the time that the expedited proceedings process is deemed

to end (as described below) and the time that a subject is served with

a statement of charges be deducted from the 120-day settlement period

applicable to the subject.

The proposed amendment will also refine the procedures that are

applicable to expedited proceedings under CBOE Rule 17.3 in two ways.

First, the proposed amendment will impose a new requirement that any

subject desiring to attempt to resolve a disciplinary matter through

expedited proceedings submit a written notice of this fact to the

Exchange staff within 15 days from the date of service upon the subject

of a Notification Letter. Second, the proposed amendment will permit

either the Exchange staff or the subject to declare an end to the

negotiations regarding a letter of consent and thus an end to the

expedited proceeding process at any point in the consent negotiations

by delivering a written declaration to this effect to the other party.

After the declaration is delivered, the subject will have 15 days to

submit a Notification Response and the Exchange staff will then be

permitted to bring the matter to the BCC. Currently, there is no

provision in the CBOE's rules setting forth when a subject is deemed to

enter the expedited proceeding process or when the expedited proceeding

process is deemed to end, and these new procedures will establish a

start and end date for when a subject is deemed to be in the expedited

proceeding process so that the number of days that the subject spends

in the expedited proceeding process can be calculated for the purposes

of CBOE Rule 17.8.

Finally, the proposal makes certain editorial changes to clarify

CBOE Rules 17.8 and 17.3 without affecting their substance.

The CBOE believes that the proposal will enhance the efficiency and

effectiveness of the Exchange's disciplinary process. Specifically, the

Exchange believes that by limiting the settlement period applicable to

those subjects who consume over 30 days in the expedited proceeding

process but cannot reach an agreement with the Exchange staff upon a

letter of consent, the proposed changes will minimize opportunities for

delay and thereby help to preserve evidence and the memories of

witnesses.

Basis

The CBOE believes that the proposal is consistent with section 6(b)

of the Act, in general, and further the objectives of section 6(b)(1)

and 6(b)(6), in particular, in that it promotes appropriate

disciplinary processes and enables the Exchange to efficiently enforce

compliance with its rules and federal securities laws.

(B) Self-Regulatory Organization's Statement on Burden on Competition

The CBOE 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 solicited or received with respect to the

proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for

Commission Action

Within 35 days after 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 reason for so finding or (ii) as to

which the self-regulatory organization consents, the Commission will:

(a) By order approve such 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, 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 Section, 450 Fifth Street, NW.,

Washington, DC. Copies of such filing will also be available for

inspection and copying at the principal office of the above-mentioned

self-regulatory organization. All submissions should refer to the file

number in the caption above and should be submitted by December 19,

1994.

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) (1993).

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Jonathan G. Katz,

Secretary.

[FR Doc. 94-29214 Filed 11-25-94; 8:45 am]

BILLING CODE 8010-01-M