Federal Register / Vol. 69, No. 245 / Wednesday, December 22, 2004 / Notices 76803

11 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3The proposed rule is substantially similar to 

NASD Rule 2370. See Securities Exchange Act 

Release No. 48424 (August 29, 2003), 68 FR 52806 

(September 5, 2003). NASD Rule 2370 was 

amended in Securities Exchange Act Release No. 

49269 (February 18, 2004), 69 FR 8718 (February 25 

2004).

For the Commission by the Division of 

Market Regulation, pursuant to delegated 

authority.11

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. 04–27970 Filed 12–21–04; 8:45 am] 

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50874; File No. SR–CBOE–

2004–66] 

Self-Regulatory Organizations; Notice 

of Filing and Immediate Effectiveness 

of Proposed Rule Change by Chicago 

Board Options Exchange, Incorporated 

Relating to Borrowing and Lending by 

Registered Persons 

December 16, 2004. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on October 

18, 2004, the Chicago Board Options 

Exchange, Incorporated (‘‘CBOE’’ or 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items, I, II, and 

III below, which Items have been 

prepared by the CBOE. 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 proposes to adopt a new rule 

restricting registered persons of 

members or member organizations from 

borrowing from or lending to their 

customers, except pursuant to the 

conditions specified in the rule. The 

text of the proposed rule change 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, 

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 I above. CBOE 

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 

1. Purpose 

The purpose of the proposed rule 

change is to adopt a rule that prohibits 

registered persons of CBOE members or 

members organizations from borrowing 

money from or lending money to a 

customer unless each of the following 

applies: (1) The members or member 

organization has written procedures 

allowing such borrowing or lending 

arrangements; and (2) the borrowing or 

lending arrangement fall within one of 

five permissible types of lending 

arrangements.3 In certain of these cases, 

the member or member organization 

must also pre-approve the loan in 

writing. The five types of permissible 

lending arrangements are:

(i) The customer is a member of the 

registered person’s immediate family (as 

defined in the proposed rule); 

(ii) The customer is a financial 

institution regularly engaged in the 

business of providing credit, financing, 

or loans, or other entity or person that 

regularly arranges or extends credit in 

the ordinary course of business; 

(iii) The customer and the registered 

person are both registered persons of the 

same member organization; 

(iv) The lending arrangement is based 

on a personal relationship outside of the 

broker-customer relationship; or 

(v) The lending arrangement is based 

on a business relationship outside of the 

broker-customer relationship.

CBOE believes that the solicitation of 

loans from customers by registered 

persons is an area of legitimate CBOE 

interest because of the potential for 

misconduct. CBOE has brought 

disciplinary action against registered 

persons who have violated just and 

equitable principles of trade by taking 

unfair advantage of their customers by 

inducing them to lend money in 

disregard of the customers’ best 

interests, or by borrowing funds from, 

but not repaying, customers. The 

potential for misconduct also exists 

when a registered person lends money 

to a customer. 

The proposed rule change establishes 

a regulatory framework that would give 

members and member organizations 

greater control over, and mores specific 

supervisory responsibilities for, lending 

arrangements between registered 

persons and their customers. Members 

and member organizations could choose 

to permit their registered persons to 

borrow from or lend to customers 

constituent with the requirements of the 

rule or, as was the case before the 

proposal of this new rule, prohibit the 

practice in whole or in part. If members 

or member organizations choose to 

permit their registered persons to engage 

in lending arrangements with 

customers, the proposed rule change 

would require members and member 

organizations to have written 

procedures allowing the borrowing and 

lending of money between registered 

persons and customers or the member or 

member organization. As stated above, 

members and member organizations 

would be permitted to approve loans 

only if the loan falls within one of the 

five types of permissible lending 

arrangements set forth in the rule. 

The proposed rule would require 

members and member organizations to 

pre-approve in writing three out of five 

types of lending arrangements permitted 

by the rule. It would exempt from the 

rule’s notice and approval requirements 

lending arrangements involving a 

registered person and his/her customer 

that is: (1) A member of his/her 

immediate family (as defined in the 

proposed rule); or (2) a financial 

institution regularly engaged in the 

business of providing credit, financing, 

or loans (or other entity or person that 

regularly arranges or extends credit in 

the ordinary course of business), 

provided the loan has been made on 

commercial terms that the customer 

generally makes available to members of 

the general public similarly situated as 

to need, purpose, and creditworthiness. 

The Exchange believes the requirement 

in the proposed rule that certain types 

of lending and borrowing arrangements 

must be pre-approved by the member or 

member organization would enhance 

members’ and member organizations’

ability to supervise such lending and 

borrowing activities of registered 

personnel. 

CBOE also believes that, the proposed 

rule change would also enhance the 

Exchange’s ability to monitor loans 

between registered persons and their 

customers. Currently, under controlling 

Commission decisions, to bring a 

disciplinary action against a registered 

person who has entered into an 

unethical lending arrangement with a 

customer, CBOE generally must prove 

that the arrangement is inconsistent 

with just and equitable principles of 

trade under CBOE Rule 4.1 because the 

registered person has acted in bad faith 

76804 Federal Register / Vol. 69, No. 245 / Wednesday, December 22, 2004 / Notices 

4 15 U.S.C. 78s(b)(3)(A).

5 17 CFR 240.19b–4(f)(6).

6 15 U.S.C. 78s(b)(3)(C).

7 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

or unethically. This can be difficult to 

prove in cases in which the customer is 

unable or unavailable to testify, or 

refuses to testify because he or she is 

relying on the registered person for 

financial advice. The proposed rule 

change would better enable CBOE to 

monitor and bring disciplinary actions 

in cases involving such loans.

The Exchange notes that the 

safeguards provided under the proposed 

rule, including bringing disciplinary 

actions for violations of the rule, are in 

addition to the general powers that 

CBOE has to bring a disciplinary action 

against a registered person who has 

entered into an unethical lending 

arrangement with a customer under 

CBOE Rule 4.1. It is also important to 

note that this proposal does not change 

the application of Regulation T to 

lending activities by associated persons. 

Specifically, the definition of ‘‘creditor’’

under Regulation T extends to 

associated persons of broker-dealers and 

therefore, certain loans to customers by 

associated persons may require 

compliance with the provisions of 

Regulation T. 

2. Statutory Basis 

CBOE believes the proposed rule 

change is consistent with Section 6(b) of 

the Act, in general, and furthers the 

objectives of Section 6(b)(5) of the Act, 

which requires, among other things, that 

CBOE’s rules be designed to prevent 

fraudulent and manipulative acts and 

practices, promote just and equitable 

principles of trade, and protect investors 

and the public interest. CBOE believes 

the proposed rule change is designed to 

accomplish these ends by establishing a 

regulatory framework that will give 

members greater control over lending 

arrangements by permitting members to 

permit such arrangements only if they 

fall within one of five types of 

permissible arrangements, or, as was the 

case before the proposal of this new 

rule, prohibit such arrangements 

altogether. Members that permit such 

arrangements would be required to keep 

written procedures. These procedures 

would enable both members and CBOE 

to proscribe certain customer-broker 

loans and monitor those that have been 

approved. 

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 purposes of the Act. 

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 

CBOE has stated that the foregoing 

proposed rule change has become 

effective pursuant to Section 19(b)(3)(A) 

of the Act 4 and Rule 19b–4(f)(6) 

thereunder 5 because the proposed rule 

change: (1) Does not significantly affect 

the protection of investors or the public 

interest; (2) does not impose any 

significant burden on competition; and 

(3) does not become operative for 30 

days from the date of filing, or such 

shorter time that the Commission may 

designate if consistent with the 

protection of investors and the public 

interest. At any time within 60 days of 

the filing of the proposed rule change, 

the Commission may summarily 

abrogate such rule change if it appears 

to the Commission that such action is 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in the furtherance of the 

purposes of the Act.6

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. 

Comments may be submitted by any of 

the following methods:

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/sro.shtml); or 

• Send an E-mail to rulecomments@sec.gov. Please include File 

Number SR–CBOE–2004–66 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

450 Fifth Street, NW., Washington, DC 

20549–0609. 

All submissions should refer to File 

Number SR–CBOE–2004–66. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/

rules/sro.shtml). 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 

Section, 450 Fifth Street, NW., 

Washington, DC 20549. Copies of such 

filing also will be available for 

inspection and copying at the principal 

office of CBOE. All comments received 

will be posted without charge; the 

Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. 

All submissions should refer to File 

Number SR–CBOE–2004–66 and should 

be submitted on or before January 12, 

2005.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.7

J. Lynn Taylor, 

Assistant Secretary.

[FR Doc. 04–27968 Filed 12–21–04; 8:45 am] 

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50865; File No. SR–CHX–

2004–03] 

Self-Regulatory Organizations; Notice 

of Filing of Proposed Rule Change by 

the Chicago Stock Exchange, 

Incorporated Relating to Manual 

Execution of Orders and Amendment 

No. 1 Thereto 

December 16, 2004. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice hereby is given that on February 

11, 2004, the Chicago Stock Exchange, 

Incorporated (‘‘CHX’’ or ‘‘Exchange’’) 

filed with the Securities and Exchange 

Commission (the ‘‘Commission’’) the 

proposed rule change as described in 

Items I, II and III below, which Items 

have been prepared by the selfVerDate jul<14>2003 19:42 Dec 21, 2004 Jkt 205001 PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 E:\FR\FM\22DEN1.SGM 22DEN1