[Federal Register Volume 66, Number 39 (Tuesday, February 27, 2001)]
[Notices]
[Pages 12574-12576]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-4755]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43984; File No. SR-CBOE-00-13]


Self Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Amending Procedures 
and Requirements for Trading in Joint Accounts in Equity and Index 
Options

February 20, 2001.
    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 April 3, 2000, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the Exchange. On January 8, 2001, the CBOE filed Amendment No. 1 
with the Commission.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Letter from Timothy Thompson, Assistant General General 
Counsel, Legal Department, CBOE, to Deborah Flynn, Senior Special 
Counsel, Division of Market Regulation (``Division''), Commission, 
dated October 23, 2000 (``Amendment No. 1''). In response to 
comments from Commission staff, the Exchange submitted Amendment No. 
1, which: (i) States that staff at the American Stock Exchange LLC, 
International Securities Exchange LLC, Pacific Exchange, Inc., and 
Philadelphia Stock Exchange, Inc. have informed the CBOE that their 
respective regulatory policies do not include any specific rule or 
regulatory circular that addresses wash sale transactions or that 
prohibits trading between joint accounts with common participants; 
(ii) represents that the proposed rule change makes the CBOE's rules 
and regulatory policies regarding transactions between related 
accounts or entities consistent with those in place at the other 
options exchanges; and (iii) cites three letters that were submitted 
by CBOE members to the Exchange in support of the rule filing.

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[[Page 12575]]

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to amend Interpretation .06 to Exchange Rule 8.9 
and Exchange Regulatory Circulars RG 98-94 and RG 98-95, which set 
forth Exchange procedures and requirements for trading in joint 
accounts in equity and index options, to allow certain transactions 
between joint accounts that have common participants. The text of the 
proposed rule change is set forth below. Deletions are in brackets.

* * * * *

RULE 8.9

    No change.

Interpretations and Policies:

    .01-.05--No change.
    .06--No participant in a joint account shall effect a 
transaction, in person or via order, either for his own account or 
for the joint account, with another member acting on behalf of the 
joint account. [In addition, no joint account participant shall 
cause a transaction to be executed for the joint account with 
another member acting on behalf of another joint account if the 
member knows or, in the exercise of reasonable care under the 
circumstances, the member has reason to know that the two joint 
accounts have one or more common participants.]
* * * * *

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 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
    Section 9(a)(1)(A) of the Exchange Act prohibits any person from 
effecting any transaction in any securities registered on a national 
securities exchange, which involves no change in beneficial ownership, 
for the purpose of creating a false or misleading appearance of active 
trading in any such security.\4\ In the early 1980s, the CBOE adopted a 
regulatory interpretation of this ``wash sale'' rule that prohibited 
trading between related accounts with greater than 10% common 
ownership. The 10% threshold was consistent with the standard used in 
Exchange Rule 4.11 (Position Limits), which states that common control, 
among other factors, will be presumed if an individual or entity has 
greater than 10% ownership. The CBOE's wash sale interpretation is not 
specifically addressed in any existing CBOE rule; rather, it was 
largely communicated to the membership verbally, or in written 
communication regarding non-aggregation of accounts for position limit 
compliance.\5\ Any violation of this prohibition is considered a 
violation of Exchange Rule 4.1 (Just and Equitable Principles of 
Trade).
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    \4\ 15 U.S.C. 78i(a)(1)(A).
    \5\ Members who have been granted non-aggregation pursuant to 
Exchange Rule 4.11.03 are advised in writing that although non-
aggregation has been granted, trading between the subject associated 
accounts is prohibited.
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    The Exchange adopted Interpretation .06 to Exchange Rule 8.9 to 
extend this trading prohibition to market maker joint accounts that 
have common participants. Interpretation .06 to Exchange Rule 8.9 and 
Exchange Regulatory Circulars \6\ state that ``no joint account 
participant shall cause a transaction to be executed for the joint 
account with another member acting on behalf of another joint account 
if the member knows, or in the exercise of reasonable care under the 
circumstances, the member has reason to know that the two joint 
accounts have one or more common participants.'' This language 
expressly imposed a knowledge requirement as an element of the offense 
of effecting a transaction between joint accounts with common 
participants.\7\
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    \6\ The Regulatory Circular governing joint account trading in 
certain index options was approved in Securities Exchange Act 
Release No. 31174 (September 10, 1992), 57 FR 42789 (September 16, 
1992). The Regulatory Circular governing joint account trading in 
equity options was approved in Securities Exchange Act Release No. 
36977 (March 15, 1996), 61 FR 11911 (March 22, 1996.
    \7\ See Securities Exchange Act Release No. 38286 (February 13, 
1997), 62 FR 8287 (February 24, 1997) (SR-CBOE-96-70).
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    The Exchange adopted Interpretation .06 event though it believed 
that, in many instances, the trading in joint accounts with common 
participants is not effected by the same common joint account 
participant. The Exchange also recognized that market makers are not 
always in the position to know whether there are common joint account 
participants because of the frequency in which joint account 
composition may change. Although joint accounts may have common 
participants, common ownership between joint accounts is typically 
widely diverse.
    The CBOE believes that its current interpretation of a wash sale is 
more restrictive than the rules in place at other national securities 
exchanges and the SEC.\8\ The Exchange represents that its current 
interpretation of a wash sale does not promote a level playing field 
for its members vis-a-vis other exchanges' members and thus, places the 
Exchange at a competitive disadvantage. The Exchange states that it has 
also received requests from individual members who provide financial 
backing to other members via joint accounts, and from member 
organizations with affiliated broker/dealer entities, to provide 
exemptions from this regulatory policy.\9\ These members argued that 
such related accounts are structured as separate profit centers and are 
operated by affiliates independently, and separate books and records 
are maintained for these accounts. Moreover, these members stated that 
it is burdensome to monitor their associated accounts to ensure that 
the accounts do not trade together when the common joint account 
participants are not aware of what the other associated account is 
trading. Therefore, the Exchange proposes to alter its long-standing 
regulatory interpretation so that certain transactions effected between 
joint accounts with common participants would be permitted, provided 
that such transactions are effected within Exchange rules.
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    \8\ The Exchange represents that staff at the American Stock 
Exchange LLC, International Securities Exchange LLC, Pacific 
Exchange, Inc., and Philadelphia Stock Exchange, Inc. have informed 
the CBOE that their respective regulatory policies do not include 
any specific rule or regulatory circular that addresses wash sale 
transactions or that prohibits trading between joint accounts with 
common participants. The Exchange also believes that under section 
9(a)(1)(A) of the Exchange Act, only those transactions that involve 
no change in beneficial ownership and that are effected for an 
improper purpose, such as creating a false and misleading appearance 
of market activity, would be considered a violation of the Exchange 
Act. See Amendment No. 1, supra note 3.
    \9\ Letter from Patricia Levy, General Counsel, and Steven 
O'Malley, Compliance & Regulatory Officer, Hull Trading Company, 
LLC, to Mary Bender, Senior Vice President, Division of Regulatory 
Services, CBOE, dated August 13, 1999 (``Hull Letter'') and Letter 
from William J. Shimanek, Kesssler Asher Clearing, to Pat Cerny, 
CBOE, dated April 24, 1996 (``Kessler Letter''). The Exchange notes 
that Kessler Asher Clearing is no longer an effective member of the 
CBOE. See Amendment No. 1, supra note 3. The Exchange also received 
a letter from Fulcrum Investment Group LLC (``Fulcrum'') urging the 
Exchange to liberalize its policy on wash sales. Letter from Michael 
J. Carusillo, Chief Executive Officer, and Barbara McHugh, 
President, Fulcrum Investment Group, LLC, to Pat Cerny, Director, 
Department of Market Regulation, CBOE, dated July 17, 1998 
(``Fulcrum Letter''). This letter is discussed in Section II.C. of 
this Notice.

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[[Page 12576]]

    The proposed rule change would enable common participants to trade 
between related joint accounts that are used as financing vehicles 
without violating Exchange Rule 8.9. The Exchange proposes that the 
following activity be permitted: (1) Trading between different market 
makers or other broker/dealer accounts that are financed by the same 
member where there is no common control over the trading activity in 
those accounts; and (2) trading between independently operated 
subsidiaries (i.e., separate broker/dealers) of the same parent or 
holding company.\10\
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    \10\ The Exchange has represented that it will issue a 
regulatory circular informing members of permitted and prohibited 
trading activity among joint accounts.
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    The Exchange represents that it will continue to prohibit the 
following activity: (1) Market makers trading with their joint account, 
even though their percentage of ownership is less than 100% (for 
instance, market maker ABC finances market maker XYZ via a joint 
account and ABC is a participant in the joint account. Ownership is 50% 
and XYZ makes his own trading decisions. ABC is still prohibited from 
trading directly with the joint account of which he is a member); (2) 
nominees of the same entity trading with each other on behalf of the 
entity; (3) firm traders employed by the same broker/dealer on 
different trading desks trading together, regardless of whether they 
are separate profit centers; and (4) spouses trading together.
    The Exchange represents that under the proposed rule change, 
transactions between related joint accounts that are effected for an 
improper purpose, such as trades executed to create a false and 
misleading appearance of activity, would continue to violate Exchange 
Rule 4.1 (Just and Equitable Principles of Trade). The Exchange states 
that its Department of Market Regulation will continue to monitor 
trading between accounts with common beneficial ownership for trading 
abuses.
2. Statutory Basis
    The Exchange represents that the proposed rule change is consistent 
with section 6(b) of the Act,\11\ in general, and furthers the 
objectives of section 6(b)(5),\12\ in particular, in that it is 
designed to promote just and equitable principles of trade and to 
protect investors and the public interest.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 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 received a letter from Fulcrum urging the Exchange to 
re-evaluate its policy on trading between joint accounts.\13\ Fulcrum 
states that it is appropriate to allow trading between joint accounts 
where control has been successfully refuted. In addition, Fulcrum notes 
that stock exchange interpretations specifically state that a trade 
between a parent and its wholly-owned broker-dealer affiliate results 
in a change in beneficial ownership subject to trade reporting, and 
therefore would not be considered a wash sale. Fulcrum urges the 
Exchange to relax its policy to permit legitimate trading activity 
between joint accounts.
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    \13\ Fulcrum Letter, supra note 9. In addition, the Exchange 
represents that its regulatory staff has had numerous conversations 
with members since the Exchange first considered changing its 
regulatory policy regarding transactions between accounts with 
common ownership.
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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 Exchange 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, as amended, 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 20549-0609. 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 the 
File No. SR-CBOE-00-13 and should be submitted by March 20, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-4755 Filed 2-26-01; 8:45 am]
BILLING CODE 8010-01-M