[Federal Register Volume 69, Number 245 (Wednesday, December 22, 2004)]
[Notices]
[Pages 76803-76804]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-27968]


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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.
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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 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:
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    \3\ The 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).
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    (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

[[Page 76804]]

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\
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    \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).
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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

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an E-mail to <a href="/cdn-cgi/l/email-protection#047671686129676b6969616a7077447761672a636b72"><span class="__cf_email__" data-cfemail="bfcdcad3da92dcd0d2d2dad1cbccffccdadc91d8d0c9">[email protected]</span></a>. Please include 
File Number SR-CBOE-2004-66 on the subject line.

Paper Comments

    <bullet> 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\
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    \7\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-27968 Filed 12-21-04; 8:45 am]
BILLING CODE 8010-01-M


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