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

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