[Federal Register Volume 60, Number 32 (Thursday, February 16, 1995)]
[Notices]
[Pages 9067-9069]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3844]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35350; File No. SR-CBOE-94-35]


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

February 9, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ the Chicago Board Options 
Exchange, Inc. (``CBOE'' or ``Exchange'') submitted to the Securities 
and Exchange Commission (``SEC'' or ``Commission'') a proposal 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 CBOE Rule 17.2(d), ``Notice, Statement 
and Access,'' 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.\3\

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1994).
    \3\CBOE Rule 17.2(c), ``Report,'' requires the CBOE staff to 
submit a written report of an 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) 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, and the subject has 15 days from the 
date of the notification to submit a written statement to the BCC 
concerning why no disciplinary action should be taken. Under CBOE 
Rule 17.3, the subject of a report written pursuant to CBOE Rule 
17.2 may seek to dispose of the matter through a letter of consent 
prior to the issue of a statement of charges. [[Page 9068]] 
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    The proposal was published for comment in the Federal Register in 
Securities Exchange Act Release No. 34987 (November 18, 1994), 59 FR 
60858 (November 28, 1994). No comments were received on the proposed 
rule change.
    CBOE Rule 17.3 establishes an expedited process under which the 
subject of an Exchange investigation 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.\4\ Under CBOE 
Rule 17.3, a letter of consent must contain a description of the facts, 
violation, and sanction, and must be agreed upon by the Exchange staff, 
the subject of the investigation, and 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, 
the matter proceeds 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).

    \4\Under CBOE Rule 17.4(b), ``Initiation of Charges,'' when it 
appears to the BCC from the report of the exchange staff that there 
is probable cause for finding a violation within the disciplinary 
jurisdiction of the Exchange and that further proceedings are 
warranted, the BCC directs the Exchange staff to prepare a statement 
of charges against the person or organization alleged to have 
committed a violation (the ``respondent'') specifying the acts in 
which the Respondent is charged to have engaged and setting forth 
the specific provisions of the Act, as amended, and the rules and 
regulations promulgated thereunder, constitutional provisions, by-
laws, rules, interpretations or resolutions of which such acts are 
in violation. Under CBOE Rule 17.8, at any time during the 120-day 
period following the date of service of a statement of charges, a 
respondent may submit a written offer of settlement to the BCC. The 
offer of settlement must contain a proposed stipulation of facts and 
consent to a specified sanction.
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    The CBOE proposes to amend CBOE Rule 17.3 to (1) require that any 
subject who desires to resolve a disciplinary matter through the 
expedited proceedings using a letter of consent to submit a written 
notice of this fact to the Exchange staff within 15 days from the date 
of service of a notification letter; and (2) permit either the Exchange 
staff or the subject of an investigation to declare an end to the 
negotiations regarding a letter of consent at any point in the 
negotiations by providing written notice to the other party.\5\ 
Thereafter, the subject will have 15 days to submit a notification 
response pursuant to CBOE Rule 17.2(d) and the Exchange staff will then 
be permitted to bring the matter to the BCC. The CBOE states that these 
new procedures will establish a start and end date for expedited 
proceedings so that the number of days a subject spends in the 
expedited process can be calculated and deducted accordingly from the 
120-day settlement period, as proposed under CBOE Rule 17.8.

    \5\The CBOE states that it will terminate the negotiations for a 
letter of consent if, among other things, it appears to the Exchange 
that the subject is not negotiating in good faith. Telephone 
conversation between Arthur Reinstein, Attorney, CBOE, and Yvonne 
Fraticelli, Staff Attorney, Options Branch, Division of Market 
Regulation, Commission, on February 8, 1995.
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    The proposed amendments to CBOE Rule 17.8, Interpretation and 
Policy .01 would reduce the time period during which settlement offers 
may be submitted to the BCC 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 proceedings. 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 under CBOE Rule 17.8. Regardless of the 
amount of time spent in unsuccessful 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 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 the proposal, the number of days between the time that 
the expedited process is deemed to end and the time that a subject is 
served with a statement of charges will not be deducted from the 120-
day settlement period applicable to the subject.
    Finally, the CBOE proposes to make certain editorial changes to 
clarify CBOE Rules 17.3 and 17.8 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 the proposed changes will minimize opportunities 
for delay and thereby help to preserve evidence and the memories of 
witnesses.
    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, the requirements of Section 6(b)(5)\6\ that the rules of an 
exchange be designed to prevent fraudulent and manipulative acts and 
practices and to protect investors and the public interest. In 
addition, the Commission finds that the Exchange's proposal is 
consistent with the requirement of Section 6(b)(1) of the Act that an 
exchange have the capacity to enforce compliance by its members with 
the Act and the rules and regulations thereunder and the rules of the 
exchange. The Commission also believes that the proposal is consistent 
with Section 6(b)(7) of the Act because it provides a fair procedure 
for disciplining members.

    \6\15 U.S.C. 78f(b)(5) (1988).
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    The Commission believes that the proposal strikes a reasonable 
balance between the Exchange's need to provide prompt, effective and 
meaningful discipline for violations of Exchange rules and the federal 
securities laws and the need to ensure fair procedures for the subjects 
of Exchange investigations to contest CBOE disciplinary proceedings. By 
streamlining the expedited proceedings established in CBOE Rule 17.3 
and limiting the time allowed for the submission of settlement offers 
under CBOE Rule 17.8, the Commission believes that the proposal should 
minimize opportunities for delay, thereby helping to preserve evidence 
and the availability of witnesses. This, in turn, should enhance the 
quality, consistency, and fairness of the Exchange's disciplinary 
proceedings and enable the CBOE to better enforce compliance by its 
members with the Exchange's rules and the federal securities laws.
    The CBOE states that the Exchange's current rules allow the subject 
of an Exchange investigation who unsuccessfully attempts to resolve a 
disciplinary matter through expedited proceedings to take advantage of 
the entire 120-day settlement period provided under CBOE Rule 17.8, so 
that a respondent may utilize the expedited process to circumvent the 
120-day settlement period and delay the resolution of a case. 
Accordingly, the [[Page 9069]] Exchange proposes to amend CBOE Rule 
17.8, Interpretation and Policy .01 to deduct from the 120-day 
settlement period the number of days over 30 days which a subject 
spends in the expedited process unsuccessfully attempting to reach an 
agreement with the Exchange staff.
    The Commission believes that the proposed amendments to CBOE Rule 
17.8 should allow the Exchange's disciplinary proceedings to progress 
promptly without compromising members' rights to ``fair procedures'' in 
CBOE disciplinary proceedings. Specifically, by deducting from the 120-
day settlement period the number of days over 30 spent in unsuccessful 
negotiations under the expedited process, the proposal will prevent the 
subject of an Exchange investigation from using the expedited process 
to delay the resolution of a case while continuing to ensure that the 
subject has adequate time to resolve the matter through a letter of 
consent or settlement. In this context, the proposal will deduct only 
the portion of days above 30 spent in unsuccessful negotiations under 
the expedited process from the 120-day settlement period, thereby 
limiting the total amount of time a subject may spend in attempts to 
resolve a case through either a letter of consent under CBOE Rule 17.3 
or a settlement offer under CBOE Rule 17.8.
    The Commission also believes that it is reasonable to allow the 
CBOE staff, as well as the subject, to terminate negotiations for a 
letter of consent at any time during the negotiations. As noted 
above,\7\ the CBOE has stated that it will terminate the letter of 
consent negotiations if, among other things, it appears to the Exchange 
that a subject is not negotiating in good faith. The Commission 
believes that this provision will help to ensure that disciplinary 
matters are resolved quickly by preventing subjects who do not 
negotiate in good faith from using the letter of consent negotiations 
to delay the resolution of the matter.

    \7\See note 5, supra.
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    At the same time, the Commission believes that the proposal should 
preserve the rights of respondents to submit settlement offers under 
CBOE Rule 17.8. By providing that respondents will have no less than 14 
days following the date of service of the statement of charges to 
submit offers of settlement to the BCC, regardless of the amount of 
time spent in the expedited process, the proposal should provide 
respondents with sufficient time to submit settlement offers under CBOE 
Rule 17.8. Thus, the Commission believes that the proposed amendments 
to CBOE Rule 17.8 will help to safeguard the procedural rights of 
members while preserving the Exchange's ability to administer its 
disciplinary proceedings in a timely and efficient manner.
    The Commission also believes that the proposed amendments to CBOE 
Rule 17.3 are consistent with the Act. Specifically, the Commission 
believes that the proposed amendments will streamline the Exchange's 
expedited proceedings by providing that a subject of an Exchange 
investigation who wishes to dispose of a matter through a letter of 
consent must notify the Exchange staff of his intent within 15 days of 
the receipt of notice under CBOE Rule 17.2(d). In addition, the 
proposal clarifies the requirements for expedited proceedings by 
specifying that the subject and the Exchange staff must agree upon the 
terms of a letter of consent and the letter must be signed by the 
subject. The proposal also allows either party to deliver a written 
notice declaring an end to the negotiations, thereby limiting the 
amount of time that may be spent in unsuccessful negotiations.
    In summary, the Commission believes that the proposed amendments to 
CBOE Rules 17.3 and 17.8 should allow cases to be resolved more quickly 
and efficiently, while continuing to ensure adequate due process for 
subjects of disciplinary matters, consistent with Section 6(b)(7) of 
the Act. Accordingly, the changes should permit Exchange resources to 
be allocated more effectively in pursuing violations of the Exchange's 
rules and the federal securities laws and help to ensure that 
appropriate and fair discipline is imposed for violations. This should 
further the Exchange's mandate to protect investors and the public 
interest.
    Finally, the Commission believes that it is reasonable for the 
Exchange to clarify its rules by making editorial changes to CBOE Rules 
17.3 and 17.8 which do not affect the substance of those rules.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\8\that the proposed rule change (SR-CBOE-94-35) is approved.

    \8\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\

    \9\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-3844 Filed 2-15-95; 8:45 am]
BILLING CODE 8010-01-M