Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Chicago Board Options Exchange, Inc., Relating to Amendments to the Minor Rule Violation Fine Plan

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35014; File No. SR-CBOE-94-46]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

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

Amendments to the Minor Rule Violation Fine Plan

November 28, 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 November

21, 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

CBOE Rule 17.50, ``Imposition of Fines for Minor Rule Violations,''

authorizes the Exchange to impose a fine of up to $5,000 for minor

violations of certain CBOE rules in lieu of commencing a disciplinary

proceeding. The CBOE proposes to amend CBOE Rule 17.50 to extend the

``lookback period'' for determining certain sanctions, clarify appeal

procedures, and limit the number of times a member may request

verification of certain fines. Specifically, the Exchange proposes to

amend CBOE Rule 17.50 to: (1) extend from nine to 18 months the

``lookback period'' for failure to submit accurate trade information

pursuant to CBOE Rule 6.51, ``Reporting Duties;'' and (2) create an 18-

month ``lookback period'' for failure to submit trade information to

the price reporter pursuant to CBOE Rule 6.51.

The CBOE also proposes to amend CBOE Rule 17.50(g)(6) to provide

that the maximum fine authorized under the Exchange's trading and

decorum policies may be imposed for a first or second offense if

warranted under the circumstances in the view of the Floor Officials

Committee. In addition, the CBOE proposes to amend Interpretation and

Policy .03 to Exchange Rule 17.50 to impose a cap on the number of

transactions during a particular month for which a member fined more

than twice in a 18-month period for failure to submit accurate trade

information or failure to submit trade information to the price

reporter may request verification of the fine. Under the amended

interpretation, a member fined more than twice in an 18-month period

may request verification of the greater of 50 transactions during a

month or 10% of the number of transactions deemed not to be in

compliance with CBOE Rule 6.51.

Moreover, the CBOE proposes to amend CBOE Rule 17.50 to (1) clarify

the appeal procedures for fines imposed for trading conduct and decorum

violations; (2) allow waiver of the forum fee for appeals of fines

imposed pursuant to CBOE Rule 17.50 if a fine is reduced on appeal; and

(3) make the procedures applicable to requests by the Exchange's Board

of Directors (``Board'') for review by the Board of determinations

rendered under CBOE Rule 17.50 consistent with the procedures

applicable to similar Board requests for review under CBOE Rule 19.5,

``Review.'' Finally, the proposal makes certain nonsubstantive

editorial changes to clarify CBOE Rule 17.50.

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 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

CBOE Rule 17.50 authorizes the Exchange to impose a fine, not to

exceed $5,000, for minor violations of certain CBOE rules in lieu of

commencing a disciplinary proceeding. The purpose of the proposal is to

revise CBOE Rule 17.50 to (1) extend from nine to 18 months the

``lookback period'' for failure to submit accurate trade information;

(2) establish an 18-month ``lookback period'' for failure to submit

trade information to the price reporter; (3) impose a cap on the number

of transactions during a particular month for which a member fined more

than twice in an 18-month period for failure to submit accurate trade

information or failure to submit trade information to the price

reporter may request verification; (4) clarify the appeal procedures

for fines imposed for trading conduct and decorum violations; (5) allow

waiver of the forum fee for appeals of fines imposed pursuant to CBOE

Rule 17.50 if a fine is reduced on appeal; and (6) make the procedures

applicable to requests by the Exchange's Board for review by the Board

of determinations rendered under CBOE Rule 17.50 consistent with the

procedures applicable to similar Board requests for review under CBOE

Rule 19.5. In addition, the proposal makes certain editorial changes to

clarify CBOE Rule 17.50 without affecting its substance.

Currently, CBOE Rule 17.50(g)(4) provides for a nine month

``lookback period'' for failure to submit accurate trade information.

Specifically, the sanction schedule applicable with respect to such

violations is graduated so that the sanctions imposed start to increase

with the third violation committed during a nine month period and

continue to increase with each subsequent violation committed during

such nine month period. Under the proposal, the sanction schedule for

failure to submit accurate trade information will retain its current

structure except that the current nine month ``lookback period'' will

be replaced with an eighteen month ``lookback period.''

Similarly, the Exchange proposes to amend CBOE Rule 17.50(g)(5),

which currently contains no ``lookback period'' for failure to submit

trade information to the price reporter, to also provide for an

eighteen month ``lookback period.'' As amended, the structure of the

``lookback period'' for failure to submit trade information to the

price reporter will be the same as the amended ``lookback period'' for

failure to submit accurate trade information.

The Exchange believes that the proposed increased ``lookback

periods'' will help to sanction recidivists more effectively by

increasing the sanctions for repeat violators. In addition, the

Division of Market Regulation (``Division'') of the Commission

recommended to the Exchange in connection with the Division's 1993

inspection of the Exchange's surveillance, investigative, and

enforcement programs that the ``lookback periods'' under CBOE Rule

17.50 be increased,\1\ and the proposed ``lookback period'' increases

are in accordance with the Exchange's response to the Division

concerning the implementation of this recommendation.\2\

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\1\See Letter from Brandon Becker, Director, Division,

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

1993.

\2\See Letter from Charles Henry, President, CBOE, to Brandon

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

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The CBOE also proposed to amend Interpretation and Policy .03 to

CBOE Rule 17.50 to limit the number of transactions during a particular

month for which a member fined more than twice during an 18-month

period under CBOE Rule 17.50(g)(4) or (g)(5) may request verification

of the fine. Currently, there is no limitation on the number of

transactions for which a member may request verification under

Interpretation and Policy .03. Under the proposal, if during an 18-

month period a member receives three or more fines pursuant to CBOE

Rules 17.50(g)(4) or 17.50(g)(5), a limitation would be imposed on the

member's ability to request verification of the fines. Specifically, in

requesting verification of such fines, the maximum number of

transactions during a particular month with respect to which a member

could request verification would be limited to the greater of (1) 50

transactions or (2) 10% of the number of transactions deemed not to be

in compliance with CBOE Rule 17.50(g)(4) or 17.50(g)(5). The proposed

cap would apply separately to fines imposed under CBOE Rules

17.50(g)(4) and 17.50(g)(5).

The CBOE states that in most instances a request for verification

involves the review by the Exchange of the hard copies of a member's

trading tickets in order to determine whether keypunch errors have

occurred in the inputting of the data contained on the tickets. The

majority of the requests involve the review of between 30 and 150

transactions, and the number of transactions with respect to which

review has been requested by a member has ranged in scope from as

little as three transactions to as many as 700 transactions. Since the

end of the third quarter of 1993, contemporaneous with an increase in

trading volume on the Exchange, the number of fines imposed pursuant to

CBOE Rules 17.50(g)(4) and (g)(5) has risen, resulting in a higher

number of requests for verification. Consequently, the Exchange has had

to devote an increasing amount of staff time and resources to handling

these requests.

The Exchange believes that the proposed cap is necessary to reduce

the amount of staff time and resources which are currently devoted to

processing verification requests and to alleviate the current

administrative burden associated with responding to these requests. In

addition, the Exchange believes that the proposed cap strikes an

appropriate balance between not overburdening the Exchange's

surveillance staff with the processing of verification requests and

leaving in place a meaningful and reasonable opportunity for CBOE

members to request verification. Specifically, the Exchange believes

that the proposed cap is reasonable based on its analysis that the cap

will affect a small percentage of the members requesting verification

while at the same time materially reducing the total number of

transactions that will need to be reviewed by the Exchange's

surveillance staff.

The CBOE also proposes several amendments to revise the procedures

applicable to the appeal and review of fines imposed under CBOE Rule

17.50. First, the Exchange notes that all fines imposed under CBOE Rule

17.50 are appealable to the CBOE's BCC, except for fines imposed for

trading conduct and decorum violations not exceeding $2,500, which are

appealable to the Exchange's Appeals Committee and are governed by CBOE

Chapter 19, ``Hearings and Review.'' The CBOE proposes to amend

Exchange Rule 17.50 to clarify the procedures applicable to appeals

from fines imposed for trading conduct and decorum violations by adding

paragraph (d)(1), which notes that, among other things, a person fined

for such violations may contest the Exchange's determination by filing

a written application with the Secretary of the Exchange pursuant to

CBOE 19.2, ``Submission of Application to Exchange,'' and stating that

a hearing, if requested, will be conducted in accordance with the

provisions of CBOE Rules 19.3, ``Procedure Following Applications for

Hearing,'' and 19.4, ``Hearing.'' Under paragraph (d)(2), the Appeals

Committee may waive the forum fee if the Appeals Committee finds that

the person charged is guilty of one or more of the rule violations

alleged and the sole disciplinary sanction imposed by the Appeals

Committee is a fine which is less than the total fine initially imposed

by the Exchange.

In addition, after a hearing or review in which the BCC determines

that a person is guilty of a rule violation, CBOE Rule 17.50(c)

currently requires the BCC to impose a forum fee of $100 against the

person if the determination was reached without a hearing, or $300 if a

hearing was conducted. The CBOE proposes to amend the rule to provide

the BCC with the discretion to waive the forum fee if the BCC finds

that the person charged is guilty of one or more of the rule violations

alleged and the sole disciplinary sanction imposed by the BCC is a fine

which is less than the total fine initially imposed by the Exchange.

The CBOE believes that this amendment will lead to a more equitable

resolution of certain appeals under CBOE Rule 17.50 in situations where

the BCC believes that a waiver of the forum fee is warranted, for

example, when a fine is reduced on appeal.

The CBOE also proposes to amend CBOE Rule 17.50 to make the

procedures applicable to requests by the Board for review by the Board

of determinations of the BCC and Appeals Committee under CBOE Rule

17.50 consistent with the procedures applicable to requests by the

Board for Board review of other decisions of those committees as

provided in CBOE Rules 17.10(c) and 19.5(a).

Finally, the CBOE proposes a nonsubstantive change to clarify CBOE

Rule 17.50(g)(1), ``Violation of position limit rules,'' by deleting a

potentially confusing reference to CBOE Rule 24.4, ``Position Limits

for Broad-Based Index Options.'' Currently, CBOE Rule 17.50(g)(1),

which applies to violations of all of the Exchange's position limit

rules, only specifically references CBOE Rules 4.11, ``Position

Limits,'' and 24.4(a), and does not specifically reference the other

CBOE rules which determine compliance with CBOE Rule 4.11, the

Exchange's general rule governing position limits.\3\ Although the CBOE

states that this is not technically incorrect--because all position

limit violations, no matter what type of option they relate to, are

violations of CBOE Rule 4.11--the current references are potentially

confusing. Therefore, to eliminate potential confusion, the CBOE

proposes to delete the reference to CBOE Rule 24.4(a), so that CBOE

Rule 17.50(g)(1), as amended, will refer only to CBOE Rule 4.11.

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\3\Other CBOE position limit rules which establish ways to

determine compliance with CBOE Rule 4.11 with respect to particular

types of options include CBOE Rule 24.A, ``Position Limits for

Industry Options,'' CBOE Rule A.7, ``Position Limits';' (Flexible

Exchange Options), CBOE Rule 21.3, ``Position Limits'' (Treasury

Bonds and Notes), and CBOE Rule 23.3, ``Position Limits'' (interest

rate options).

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The CBOE believes that the proposed rule change is consistent with

Section 6(b) of the Act, in general, and furthers the objectives of

Sections 6(b)(1) and 6(b)(7), in particular, in that it enhances the

effectiveness and fairness of the Exchange's disciplinary procedures.

(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, 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. 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 27,

1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\4\

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\4\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-29788 Filed 12-2-94; 8:45 am]

BILLING CODE 8010-01-M