[Federal Register Volume 74, Number 127 (Monday, July 6, 2009)]
[Notices]
[Pages 32015-32021]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-15775]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60177; File No. SR-CBOE-2009-037]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change, as Modified by 
Amendment Nos. 1 and 2 Thereto, To Amend Its Minor Rule Violation Plan

June 25, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 4, 2009, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') 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 
Exchange. The Exchange filed Amendment No. 1 to the proposed rule 
change on June 17, 2009.\3\ Subsequently, on June 23, 2009, the 
Exchange filed Amendment No. 2.\4\ 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.
    \3\ Amendment No. 1 is a partial amendment that makes four non-
substantive, technical changes to the rule text submitted as Exhibit 
5 to SR-CBOE-2009-037.
    \4\ Amendment No. 2 is a partial amendment that makes 
corrections to the description of the changes submitted in Amendment 
No. 1.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Chicago Board Options Exchange, Incorporated (``CBOE'' or 
``Exchange'') proposes to amend CBOE Rule 17.50--Imposition of Fines 
for Minor Rule Violations to (i) increase and strengthen the sanctions 
imposed under CBOE's Minor Rule Violation Plan; (ii) incorporate 
additional violations into CBOE's Minor Rule Violation Plan; (iii) 
delete obsolete or duplicative sections of the rule; and (iv) make 
various non-substantive technical changes to the rule. The text of the 
proposed rule change is available on the Exchange's

[[Page 32016]]

Web site (http://www.cboe.com/Legal), at the Exchange's Office of the 
Secretary, 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 those statements may be examined at 
the places specified in Item IV below and is set forth in sections (A), 
(B), and (C) below.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    CBOE has recently conducted a comprehensive review of its Minor 
Rule Violation Plan. As a result of this review, CBOE is proposing to 
(i) increase and strengthen the sanctions imposed for various 
violations; (ii) incorporate additional violations into the Exchange's 
Minor Rule Violation Plan; (iii) delete obsolete or duplicative 
sections of the rule; and (iv) make various non-substantive changes to 
the rule.
    The Exchange believes that increasing the fine levels specified and 
lengthening the surveillance period from a twelve month period to a 
rolling twenty-four month period will serve as an effective deterrent 
to future violative conduct. Where the Exchange is proposing to 
increase the look-back period to twenty-four months, the Exchange will 
consider any violations that resulted in formal disciplinary action 
within the previous twenty-four months for purposes of calculating the 
summary fine. Similarly, where the Exchange is proposing to incorporate 
new violations into its Minor Rule Violation Plan, the Exchange will 
consider violations resulting in formal disciplinary action within the 
previous twenty-four month period when determining whether previous 
violations have occurred for purposes of calculating a summary fine. 
CBOE believes that the proposed changes will allow for consistency 
throughout Rule 17.50. CBOE is also proposing to delete obsolete or 
duplicative provisions from its Minor Rule Violation Program to 
diminish any confusion in the application of the Rule.
    CBOE is proposing to incorporate additional violations into its 
Minor Rule Violation Plan. These violations include (i) exercise 
limits; (ii) trading in restricted classes; (iii) Linkage violations 
(including order protection violations and locked or crossed 
violations); (iv) Market-Maker quoting obligations; (v) failure to 
report position and account information; and failure to designate and 
identify to the Exchange a person or persons responsible for 
implementing and monitoring the Anti-Money Laundering (``AML'') 
compliance program. CBOE believes that these violations are suitable 
for incorporation into the Minor Rule Violation Plan because these 
violations are generally technical in nature. Further, CBOE will be 
able to carry out its regulatory responsibility more quickly and 
efficiently by incorporating these violations into its Minor Rule 
Violation Plan. As with all of the violations incorporated into CBOE's 
Minor Rule Violation Plan, CBOE retains the ability to refer any 
violation to its Business Conduct Committee under Rule 17.50 should the 
circumstances warrant such referral.
    CBOE is specifically proposing the following modifications to Rule 
17.50:

Exercise Limit Violations

    CBOE is proposing to modify its Minor Rule Violation Plan to 
incorporate exercise limit violations. Specifically, CBOE is proposing 
to modify Rule 17(g)(1) to add exercise limits to the section that 
currently addresses position limits. The fine levels for exercise limit 
violations will match the fine levels for position limits. In 
particular, a first offense will be subject to a $500 fine. A second 
offense will be subject to a $1,000 fine and a third offense will be 
subject to a $2,500 fine. A fourth offense and any subsequent offenses 
will be subject to a $5,000 fine. The number of offenses will be 
calculated on a rolling twenty-four month period.
    CBOE believes these changes will serve as an effective deterrent to 
future violative conduct. CBOE notes that this proposal is consistent 
with the minor rule violation plans in place at the NYSE AMEX LLC 
(``AMEX'') and NYSE Arca, Inc. (``ARCA'').\5\ As with other violations 
covered under the Exchange's Minor Rule Violation Plan, any egregious 
activity may be referred to the Exchange's Business Conduct Committee.
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    \5\ See AMEX Rule 590 Section (g) of Part 1 and ARCA Rule 
10.12(k)(i)(21).
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Failure To File FOCUS Reports in a Timely Manner

    CBOE is proposing to make a technical change to clarify that FOCUS 
Reports that are received by the Exchange more than ninety days late 
will be referred to the Exchange's Business Conduct Committee. The 
existing schedule does not clearly reflect how a FOCUS Report that is 
received on the ninetieth day would be handled for purposes of 
assessing a summary fine. Therefore, CBOE is proposing to change the 
reference to ``90+'' days in the sanction schedule to ``91+'' days.

Late Submission of Trading Data

    CBOE is proposing to modify its Minor Rule Violation Plan as it 
applies to the failure to respond in a timely manner to a request for 
automated submission of trading data (``Blue Sheets'') as set forth in 
Rule 17(g)(3). First, CBOE is proposing to increase the look-back 
period from twelve months to twenty-four months. CBOE is also proposing 
to delete the provision that enabled the Exchange to issue a summary 
fine based on the number of days Blue Sheets were submitted late. With 
the increased ease of automation for the purpose of submitting trading 
information in the securities industry, CBOE believes that this 
breakdown is no longer necessary. Therefore, CBOE is proposing to 
modify Rule 17.50(g)(3) to enable the Exchange to issue a summary fine 
when the Exchange does not receive a response to a Blue Sheet request 
within ten (10) days. In conjunction with these changes, CBOE is 
proposing to assess a $2,500 fine for a first offense. Any subsequent 
offenses within a rolling twenty-four (24) month period would be 
subject to a $5,000 fine or referral to the Exchange's Business Conduct 
Committee. CBOE believes these changes will serve as an effective 
deterrent to future violative conduct.

Failure To Book and Display Limit Orders That Would Improve the 
Disseminated Quote

    The Securities and Exchange Commission approved a CBOE filing in 
November 2005 \6\ removing the agency function from Designated Primary 
Market-Makers (``DPM''). Upon removal of this function, CBOE 
established PAR Officials who have since been required to comply with 
the limit order display obligations as set forth in Rule 7.12. CBOE 
Rule 7.12 defines a PAR Official as ``an Exchange employee or 
independent contractor whom the Exchange may designate as being 
responsible for (i) operating the PAR workstation in a DPM trading 
crowd

[[Page 32017]]

with respect to the classes of options assigned to him/her; (ii) when 
applicable, maintaining the book with respect to the classes of options 
assigned to him/her; and (iii) effecting proper executions of orders 
placed with him/her.'' Pursuant to Rule 7.12, PAR Officials may not 
maintain any affiliation with a member that is authorized to act as a 
Market-Maker. As the obligation to display limit orders is now a 
function of CBOE Staff (or a designated independent contractor), CBOE 
is proposing to delete this violation type from Rule 17.50(g)(5).
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    \6\ See Securities Exchange Act Release No. 34-52798 (November 
18, 2005), 70 FR 71344 (November 28, 2005) (SR-CBOE-2005-46).
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    CBOE is also proposing several technical changes to this provision. 
First, the Exchange is proposing to modify the rule references in the 
bullets relating to book priority and due diligence. These provisions 
inappropriately reference ``Rules 6.45'' and ``Rules 6.73.'' CBOE is 
proposing to modify these references to reflect ``Rule 6.45'' and 
``Rule 6.73.'' In addition, CBOE is proposing to modify the fine 
schedule in a manner that is consistent with the form of other fine 
schedules under the Exchange's Minor Rule Violation Plan. In 
particular, CBOE is proposing to replace the existing reference to 
``Subsequent Offenses'' with a reference to ``4th and 5th Offenses.'' 
The fine allocated to fourth and fifth offenses for violations of this 
provision would range from $3,500 to $5,000. CBOE is also proposing to 
replace the note referencing the disposition of 6th and subsequent 
offenses with a separate entry for ``Subsequent Offenses.'' Any 
violations falling under the ``Subsequent Offenses'' category would be 
referred to the Exchange's Business Conduct Committee. As with other 
violations covered under the Exchange's Minor Rule Violation Plan, any 
egregious activity may be referred to the Exchange's Business Conduct 
Committee.

Failure To Submit Trade Data on Trade Date

    CBOE is proposing to increase the look-back period in Exchange Rule 
17.50(g)(7) from twelve months to twenty-four months. CBOE believes 
that the increased look-back period will serve as a deterrent to 
repetitive conduct.

Violations of Exercise and Exercise Advice Rules for American-Style, 
Cash-Settled Index Options

    CBOE is proposing to increase the look-back period in Exchange Rule 
17.50(g)(9) from twelve months to twenty-four months. CBOE is also 
proposing to establish a fixed sanction level for each offense. Under 
this proposal, the sanction levels for first and second offenses will 
increase from a Letter of Caution to $500 and $1,000 respectively. The 
Exchange is proposing to implement a $2,500 fine for a third offense. 
Any subsequent violations would either incur a $5,000 fine or be 
referred to the Business Conduct Committee for review. In addition, 
CBOE is proposing to eliminate the reference to fifth and sixth 
offenses. CBOE believes that the increased look-back period as well as 
the modified sanction levels will serve as an effective deterrent to 
future violative conduct. CBOE is also proposing a technical change to 
update the references to the numbered offenses to conform to other 
references within Exchange Rule 17.50.

Communications to the Exchange or the Clearing Corporation

    CBOE is proposing to increase the look-back period in Exchange Rule 
17.50(g)(10) from twelve months to twenty-four months. CBOE believes 
that the increased look-back period will serve as a deterrent to 
repetitive conduct.
    CBOE is also proposing a technical change to Exchange Rule 
17.50(g)(10) to correct the language in the reference to the third 
offense. This section currently references the ``3nd Offense.'' CBOE is 
proposing to correct this language to provide ``3rd Offense.''

Trading in Restricted Classes

    Exchange Rule 5.4 provides, with limited exceptions, that CBOE ``* 
* * may prohibit any opening purchase or sale transactions in series of 
options * * * previously opened...to the extent it deems such action 
necessary or appropriate.'' CBOE is proposing to incorporate violations 
related to trading in restricted classes into the Minor Rule Violation 
Plan under Exchange Rule 17.50(g)(11). CBOE believes that these 
violations may be handled more efficiently through the summary fine 
process, particularly where the activity is the result of a technical 
or inadvertent error.
    CBOE is proposing to implement a fine of $500 for the first 
violation in a rolling twenty-four month period. A second violation 
within the same period would be allocated a $2,500 fine and a third 
violation would be allocated a $5,000 fine. Any subsequent violations 
within a rolling twenty-four month period would be referred to the 
Exchange's Business Conduct Committee. The Exchange believes that these 
violations should be subject to the escalating fine schedule as 
proposed because this fine schedule will serve as a deterrent to future 
violative conduct. Firms are strongly encouraged to implement systems 
that will automatically prohibit opening transactions in restricted 
classes. As with other violations, any egregious activity or activity 
that is believed to be manipulative may be referred to CBOE's Business 
Conduct Committee.

Violations of the Order Protection Rule

    Exchange Rule 6.83(d) provides, with limited exceptions, that 
``members may not engage in a pattern or practice of trading through 
better prices available on other exchanges.'' CBOE is proposing to 
incorporate violations of the trade through provision into CBOE Rule 
17.50(g)(12). CBOE is proposing to adopt ranges for the sanction levels 
to be imposed according to the degree of the violation(s). 
Specifically, the fine for a first offense would range between $500 to 
$1,000. A second offense would be assessed a fine between $1,000 to 
$2,000 and a third offense would include a fine ranging between $2,500 
to $5,000. In addition to the fine for a third offense, CBOE is 
proposing to also conduct a Staff Interview, a non-disciplinary 
regulatory action, to discuss the violations with the member and the 
member's plan for complying with the requirement in the future. Any 
subsequent violations will be assessed a $5,000 fine or will be 
referred to the Exchange's Business Conduct Committee. CBOE will 
maintain internal guidelines that will dictate the degree of conduct 
for which a specific sanction will be imposed. CBOE believes that these 
violations may be handled more efficiently under its Minor Rule 
Violation Plan, particularly where the violation is the result of a 
technical problem or inadvertent error. As with other violations, any 
egregious activity may be referred to CBOE's Business Conduct 
Committee.
    CBOE notes that this provision is consistent with the minor rule 
violation plans in place at the AMEX, ARCA and the Boston Options 
Exchange Group LLC (``BOX'').\7\
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    \7\ See AMEX Rule 590 Section (g) of Part 1, BOX Rule Chapter X 
Section 2(j) and ARCA Rule 10.12(k)(i)(29).
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Locked or Crossed Market Violations

    Exchange Rule 6.84 requires Market-Makers to unlock or uncross a 
locked or crossed market. A Market-Maker that fails to unlock or 
uncross a locked or crossed market within a reasonable amount of time 
is deemed to be in violation of Exchange Rule 6.84. CBOE is proposing 
to incorporate violations of Exchange Rule 6.84 into CBOE's Minor

[[Page 32018]]

Rule Violation Plan under Exchange Rule 17.50(g)(13). CBOE is proposing 
to adopt ranges for the sanction levels to be imposed according to the 
degree of the violation(s). Specifically, the fine for a first offense 
would range between $500 and $1,000. A second offense would be assessed 
a fine between $1,000 to $2,000 and a third offense would include a 
fine ranging between $2,500 and $5,000. In addition to the fine for a 
third offense, CBOE is proposing to also conduct a Staff Interview, a 
non-disciplinary regulatory action, to discuss the violations with the 
member and the member's plan for complying with the requirement in the 
future. Any subsequent violations will be assessed a $5,000 fine or 
will be referred to the Exchange's Business Conduct Committee. CBOE 
will maintain internal guidelines that will dictate what specific 
sanction will be imposed for a particular violation. CBOE believes that 
these violations may be handled more efficiently under its Minor Rule 
Violation Plan, particularly where the violation is the result of a 
systematic or inadvertent error. As with other violations, any 
egregious activity may be referred to CBOE's Business Conduct 
Committee.
    CBOE notes that this provision is consistent with the minor rule 
violation plans in place at the AMEX, BOX and ARCA.\8\
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    \8\ See AMEX Rule 590 Section (g) of Part 1, BOX Rule Chapter X 
Section 2(g) and ARCA Rule 10.12(k)(i)(35).
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Failure To Meet Market-Maker Obligations

    CBOE Market-Makers are required to meet certain obligations, 
including, but not limited to, the following: (i) Maintaining 
continuous electronic quotes \9\ in an applicable percentage of the 
series in each of a Market-Maker's\10\ appointed classes; (ii) quote 
within the maximum bid/ask differential in each of a Market-Maker's 
appointed classes as set forth in Exchange Rule 8.7(b)(iv); (iii) 
comply with the initial quote volume requirements set forth in Exchange 
Rule 8.7; and (iv) ensure that a trading rotation is initiated promptly 
following the opening of the underlying security (as applicable).\11\
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    \9\ Exchange Rule 1.1(ccc) provides: ``With respect to a Market-
Maker who is obligated to provide continuous electronic quotes on 
the Hybrid Trading System (``Hybrid Market-Maker''), the Hybrid 
Market-Maker shall be deemed to have provided ``continuous 
electronic quotes'' if the Hybrid Market-Maker provides electronic 
two-sided quotes for 99% of the time that the Hybrid Market-Maker is 
required to provide electronic quotes in an appointed option class 
on a given trading day. If a technical failure or limitation of a 
system of the Exchange prevents the Hybrid Market-Maker from 
maintaining, or prevents the Hybrid Market-Maker from communicating 
to the Exchange, timely and accurate electronic quotes in a class, 
the duration of such failure shall not be considered in determining 
whether the Hybrid Market-Maker has satisfied the 99% quoting 
standard with respect to that option class. The Exchange may 
consider other exceptions to this continuous electronic quote 
obligation based on demonstrated legal or regulatory requirements or 
other mitigating circumstances.''
    \10\ Exchange Rule 8.7 requires Market-Makers to continuously 
quote in 60% of the series in their appointed classes for those 
series with a time to expiration of less than nine months. Exchange 
Rule 8.15A requires Lead Market-Makers to provide continuous quotes 
in 90% of the series in their appointed classes. Exchange Rule 8.85 
requires Designated Primary Market-Makers to provide continuous 
quotes in 90% of the series in multiply-listed, appointed classes 
and 100% of the series in singly-listed, appointed classes. Lastly, 
Exchange Rule 8.93 requires Electronic Designated Primary Market-
Makers to provide continuous quotes in 90% of their appointed 
classes (or, alternatively respond to 98% of Request for Quotes if 
such functionality is available in an allocated class).
    \11\ Exchange Rule 8.15A requires Lead Market-Makers to ensure 
that a trading rotation is initiated in accordance with Rule 6.2B in 
100% of the series in their appointed classes. Exchange Rule 8.85 
requires Designated Primary Market-Makers to ensure that a trading 
rotation is initiated in accordance with Rule 6.2B in 100% of the 
series in their appointed classes. Exchange Rule 8.93 requires 
Electronic Designated Primary Market-Makers to ensure that a trading 
rotation is initiated in accordance with Rule 6.2B in 100% of the 
series in their appointed classes.
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    CBOE is proposing to incorporate violations relating to Market-
Maker Obligations into the Exchange's Minor Rule Violation Plan under 
Exchange Rule 17.50(g)(14). CBOE believes that these violations may be 
handled more efficiently under the Minor Rule Violation Plan. CBOE is 
proposing to adopt ranges for the sanction levels to be imposed 
according to the degree of the violation(s). Specifically, CBOE is 
proposing to assess fines ranging from $2,000-$4,000 for a first 
offense and $4,000-$5,000 for a second offense. Any subsequent 
violations will be referred to the Exchange's Business Conduct 
Committee. CBOE will maintain internal guidelines that will dictate the 
sanction that will be imposed for a particular violation (based on the 
degree of the violation). As with other violations, any egregious 
activity may be referred to CBOE's Business Conduct Committee.
    Several other self-regulatory organizations have incorporated fines 
related to quoting obligation violations into a minor rule violation 
plan. For example, Chapter X, Sections 2(c) and 2(d) of the BOX rules 
set forth the fine schedule for violations of required quotation 
parameters and continuous quoting requirements. In addition, the 
International Securities Exchange, LLC (``ISE'') Rule 1614(d)(6) sets 
forth the fine schedule for violations of required quoting parameters. 
AMEX Rule 590 Section (g) of Part 1, ARCA Rule 10.12(k)(i)(39) and ARCA 
Rule 10.12(k)(i)(41) provide fine schedules for various types of 
quoting obligation violations.

Failure to Accurately Report Position and Account Information

    CBOE is proposing to incorporate violations for failing to 
accurately report position and account information in accordance with 
CBOE Rule 4.13 into the Minor Rule Violation Plan. The Exchange 
believes most of these violations are inadvertent and technical in 
nature. Processing routine violations under the Minor Rule Violation 
Plan would decrease the administrative burden of regulatory and 
enforcement staff as well as that of the Business Conduct Committee. In 
addition, staff would be able to more expeditiously process routine 
violations under the Minor Rule Violation Plan.
    CBOE is proposing to assess a $500 fine for a first offense, a 
$1,000 fine for a second offense and a $2,500 fine for a third offense. 
Any subsequent offenses would be assessed a $5,000 fine or would be 
referred to the Business Conduct Committee. The number of offenses will 
be calculated on a rolling twenty-four month period. CBOE believes that 
establishing a rolling twenty-four month period for cumulative 
violations will serve as an effective deterrent to future violative 
conduct. As with other violations covered under the Exchange's Minor 
Rule Violation Plan, any egregious activity may be referred to the 
Exchange's Business Conduct Committee.
    Among other things, CBOE Rule 4.13 requires each member to report 
to the Exchange the account and position information of any customer 
who, acting alone, or in concert with others, on the previous business 
day maintained aggregate long or short positions on the same side of 
the market of 200 or more contracts of any single class of option 
contracts dealt in on the Exchange. Members report this information on 
the Large Option Position Report. CBOE, as a member of the Intermarket 
Surveillance Group (the ``ISG''), as well as certain other self-
regulatory organizations (``SROs'') executed and filed on October 29, 
2007 with the Securities and Exchange Commission, a final version of 
the Agreement pursuant to Section 17(d) of the Securities Exchange Act 
of 1934 (as amended) (the ``Agreement'') \12\ and as amended on

[[Page 32019]]

April 11, 2008 \13\ and October 9, 2008.\14\ The participants to the 
Agreement incorporated the surveillance and sanctions of large options 
position reporting violations into the Agreement as of November 1, 
2008. As such, the SROs have agreed that their respective rules 
concerning the reporting of large options positions, are common rules. 
As a result, this amendment to the Minor Rule Violation Plan will 
further result in the consistency of the sanctions among the SROs who 
are signatories to the Agreement with respect to regulatory actions 
arising from large option position reporting surveillance.
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    \12\ See Securities Exchange Act Release No. 34-56941 (December 
11, 2007).
    \13\ See Securities Exchange Act Release No. 34-57649 (April 11, 
2008).
    \14\ See Securities Exchange Act Release No. 34-58765 (October 
9, 2008).
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Failure To Provide Prior Capital Withdrawal Notice

    With limited exceptions, Rule 15c3-1(e)(1) under the Act \15\ 
requires brokers or dealers to provide notice to the Commission (in 
Washington, DC and the applicable regional office), the broker or 
dealer's Designated Examining Authority and, as applicable, the 
Commodity Futures Trading Commission at least ``two business days prior 
to any withdrawals, advances or loans if those withdrawals, advances or 
loans on a net basis exceed in the aggregate in any 30 day period, 30 
percent of the broker or dealer's net capital.'' CBOE is proposing to 
incorporate violations of Rule 15c3-1(e)(1) under the Act \16\ into the 
Exchange's Minor Rule Violation Plan under Exchange Rule 17.50(g)(16). 
CBOE believes that these violations may be handled more efficiently 
under the Minor Rule Violation Plan.
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    \15\ 17 CFR 240.15c3-1(e)(1).
    \16\ 17 CFR 240.15c3-1(e)(1)(i).
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    CBOE is proposing to assess a $2,500 fine for a first offense and a 
$5,000 fine for a second offense. Any subsequent offenses would be 
referred to the Business Conduct Committee. The number of offenses 
shall be calculated on a rolling twenty-four month period. CBOE 
believes that establishing a rolling twenty-four month period for 
cumulative violations will serve as an effective deterrent to future 
violative conduct. As with other violations covered under the 
Exchange's Minor Rule Violation Plan, any egregious activity may be 
referred to the Exchange's Business Conduct Committee.

Failure To Provide Post Capital Withdrawal Notice

    With limited exceptions, Rule 15c3-1(e)(1) under the Act\17\ 
requires brokers or dealers to provide notice to the Commission (in 
Washington, DC and the applicable regional office), the broker or 
dealer's Designated Examining Authority and, as applicable, the 
Commodity Futures Trading Commission within ``two business days after 
any withdrawals, advances or loans if those withdrawals, advances or 
loans on a net basis exceed in the aggregate in any 30 calendar day 
period, 20 percent of the broker or dealer's excess net capital.'' CBOE 
is proposing to incorporate violations of Rule 15c3-1(e)(1)(ii) under 
the Act\18\ into the Exchange's Minor Rule Violation Plan under 
Exchange Rule 17.50(g)(17). CBOE believes that these violations may be 
handled more efficiently under the Exchange's Minor Rule Violation 
Plan.
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    \17\ Supra at note 8.
    \18\ 17 CFR 240.15c3-1(e)(1)(ii).
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    CBOE is proposing to assess a $1,000 fine for a first offense and a 
$2,500 fine for a second offense. Any subsequent offenses would be 
referred to the Business Conduct Committee. The number of offenses 
shall be calculated on a rolling twenty-four month period. CBOE 
believes that establishing a rolling twenty-four month period for 
cumulative violations will serve as an effective deterrent to future 
violative conduct. As with other violations covered under the 
Exchange's Minor Rule Violation Plan, any egregious activity may be 
referred to the Exchange's Business Conduct Committee.

Failure To Designate and Identify AML Compliance Contact

    Exchange Rule 4.20 requires each member organization (and each 
member not associated with a member organization) to develop and 
implement a written AML compliance program. This rule requires a member 
or member organization (as applicable) to designate and identify to the 
Exchange a person or persons responsible for implementing and 
monitoring the day-to-day operations and internal controls of the AML 
compliance program. Members and member organizations (as applicable) 
are also required to provide prompt notification to the Exchange 
regarding any change in such designation. CBOE believes that violations 
arising from a member or member organization's failure to provide such 
designation or notification of any change in such designation would be 
handled more efficiently under the Exchange's Minor Rule Violation 
Plan. CBOE is proposing to incorporate violations related to the 
failure to designate and identify the AML compliance program contact 
into the Minor Rule Violation Plan under Exchange Rule 17.50(g)(18).
    CBOE is proposing to assess a $1,000 fine for a first offense and a 
$2,500 fine for a second offense. Any subsequent offenses would be 
referred to the Business Conduct Committee. The number of offenses 
shall be calculated on a rolling twenty-four month period. CBOE 
believes that establishing a rolling twenty-four month period for 
cumulative violations will serve as an effective deterrent to future 
violative conduct. As with other violations covered under the 
Exchange's Minor Rule Violation Plan, any egregious activity may be 
referred to the Exchange's Business Conduct Committee.
    CBOE notes that this provision is consistent with the minor rule 
violation plans in place at the ARCA and the Financial Industry 
Regulatory Authority (``FINRA'').\19\
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    \19\ See ARCA Rule 10.12(k)(iii)(12) and FINRA Rule 9217 (as it 
applies to New York Stock Exchange Rule 445(4)).
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Amendments to Exchange Rule 17.50 Interpretations and Policies

    CBOE is proposing to delete Interpretation and Policy .01(a) from 
Exchange Rule 17.50. Exchange Rule 17.50(g)(1) currently sets forth the 
sanction levels under the Minor Rule Violation Plan for position limit 
violations. Prior to July 2008, Exchange Rule 17.50(g)(1)(a) set forth 
the sanction levels under the Minor Rule Violation Plan for position 
limit violations of non-member customers and Exchange Rule 
17.50(g)(1)(b) set forth the sanction levels for position limit 
violations for all other accounts. The Commission approved a rule 
filing eliminating the distinction between non-member customers and all 
other accounts in Exchange Rules 17.50(g)(1)(a) and 17.50(g)(1)(b) in 
July 2008 and incorporating the sanction levels for position limit 
violations under Exchange Rule 17.50(g)(1).\20\ Interpretation and 
Policy .01(a) specifically references and provides clarification for 
Rule 17.50(g)(1)(a). Since this provision no longer exists, this 
Interpretation and Policy is obsolete. Therefore, CBOE is proposing to 
delete Interpretation and Policy .01(a). As a result of this change, 
CBOE is also proposing to delete the section

[[Page 32020]]

designation of Interpretation and Policy .01(b) as this distinction is 
no longer necessary under Interpretation and Policy .01.
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    \20\ See Securities Exchange Act Release No. 34-58119 (July 8, 
2008), 73 FR 40646 (July 15, 2008) (SR-CBOE-2008-053).
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Violations of Trading Conduct and Decorum Policies

    CBOE is proposing to issue a new Regulatory Circular to update and 
replace Regulatory Circular RG09-26. CBOE is proposing to modify the 
Circular to (i) establish a rolling twenty-four month look-back period 
for all offenses; (ii) establish fixed fine levels for Class A and 
Class B Offenses; (iii) change the classification of certain offenses; 
and (iv) remove obsolete or duplicative violations from the list of 
Class A and Class B Offenses. CBOE has attached the proposed changes to 
the revised circular in Exhibit 5.
    CBOE is proposing to increase the look-back period from twelve 
months to twenty-four months for Class A Offenses and Class B Offenses. 
CBOE believes that the increased look-back period will serve as a 
deterrent for future similar conduct.
    CBOE is also proposing to adopt fixed fine levels for trading 
conduct and decorum violations to promote consistency in the 
application of these fines. For Class A Offenses, CBOE will assess a 
fine of $1,000 for the first violation, $2,500 for the second violation 
and $5,000 for the third violation. CBOE is also proposing to remove 
the reference to ``Subsequent Offenses'' for Class A Offenses. CBOE 
believes that any member or member organization that is cited for more 
than three Class A Offenses within a rolling twenty-four month period 
should be referred to the Business Conduct Committee for formal 
disciplinary action. The nature of these violations warrants formal 
disciplinary action where recidivist behavior is involved. For Class B 
Offenses, CBOE is proposing to assess a fine of $250 for a first 
offense, $500 for a second offense, $1,000 for a third offense and 
$2,500 for any subsequent offenses.
    CBOE is proposing to move one violation from a Class B Offense to a 
Class A Offense. Market-Makers are obligated to respond to a request 
for a market by an Order Book Official or PAR Official. Failure to 
respond to such a request has historically been considered a Class B 
Offense. Due to the nature of this violation, CBOE believes that it is 
more appropriate for this violation to be classified as a Class A 
Offense. In addition, CBOE is proposing to remove the qualification 
that a response must be provided to an Order Book Official since the 
obligation to respond to a market is not limited to requests for quotes 
from Order Book Officials. For example, Exchange Rule 8.7(d) sets forth 
the requirements for Market-Makers to respond to a request for quote 
from members, including floor brokers and PAR Officials.
    CBOE is proposing to remove quote width violations from the Class A 
Offense list as CBOE is proposing that this violation be covered under 
Exchange Rule 17.50(g)(14). CBOE is also proposing to delete the Class 
A Offense relating to Violations of Rule 8.51 (Firm Quote) as this 
provision is duplicative. Firm quote violations are generally addressed 
under Exchange Rule 17.50(g)(5).
    CBOE is proposing to clarify that the Class B Offense related to 
smoking applies to the use of any tobacco products in unauthorized 
areas. CBOE does not permit the use of any tobacco products inside the 
Exchange building. Further, the State of Illinois prohibits smoking in 
any public building and within fifteen feet of any public entrance.\21\
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    \21\ See Illinois Public Act 095-0017.
---------------------------------------------------------------------------

    CBOE is proposing to delete a Class A Offense for Enabling/
Assisting a Suspended Member or Associated Person to Gain Improper 
Access to the Floor. CBOE is also proposing to delete a Class B Offense 
for Gaining/Enabling Improper Access to the Floor. CBOE has 
significantly increased its physical security restrictions in recent 
years. Access to the trading floor requires use of a valid badge and a 
fingerprint scan associated with that badge. Further, CBOE believes 
that any attempt to enable improper access compromises the security of 
the Exchange. Such violations are considered very serious in nature and 
should be reviewed by the Business Conduct Committee.
    CBOE is proposing to delete the Class A Offense for Effecting or 
Attempting to Effect a Transaction with No Public Outcry. CBOE no 
longer believes that this conduct is minor in nature. CBOE is also 
proposing to delete the Class B Offenses relating to Improper Use of 
Runners' Aisle, Trading in the Aisle and Impermissible Use of Member 
Phones. CBOE no longer sees these types of violations. CBOE is 
proposing to remove the Class B Offense of a Visitor Badge Returned 
Late or Not Returned. In addition, CBOE is proposing to delete a Class 
B Offense relating to a DPM Failure to Activate or Deactivate RAES. 
Since RAES is no longer available at CBOE, this provision is obsolete.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\22\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\23\ in particular, in that it 
would promote just and equitable principles of trade and protect 
investors and the public interest. The Exchange believes that the 
proposed rule changes will strengthen its ability to carry out its 
oversight responsibilities as a self-regulatory organization and 
reinforce its surveillance and enforcement functions. Additionally, 
this proposed rule change will promote consistency in minor rule 
violations and respective SRO reporting obligations as set forth 
pursuant to Regulation 240.19d-1(c)(2) of the Act.
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    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition 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

    The Exchange neither solicited nor received comments on the 
proposal.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of 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 reasons 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, 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#8bf9fee7eea6e8e4e6e6eee5fff8cbf8eee8a5ece4fd"><span class="__cf_email__" data-cfemail="285a5d444d054b4745454d465c5b685b4d4b064f475e">[email protected]</span></a>. Please include 
File

[[Page 32021]]

Number SR-CBOE-2009-037 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2009-037. 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 Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; 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-2009-037 and should be 
submitted on or before July 27, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12) and 200.30-3(a)(44).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-15775 Filed 7-2-09; 8:45 am]
BILLING CODE 8010-01-P


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