[Federal Register Volume 66, Number 43 (Monday, March 5, 2001)]
[Notices]
[Pages 13358-13360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-5246]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44005; File No. SR-CBOE-00-60]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. To Change Its 
Membership Application Posting Process and Clarify Its Membership Rules

February 26, 2001.

I. Introduction

    On November 22, 2000, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange''), filed with the Securities and Exchange 
Commission (``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule to change its membership application 
posting process and to make some clarifying revisions to its membership 
rules. The Commission issued a release seeking comment on the proposed 
rule change \3\ which was published in the Federal Register on January 
18, 2001. No comments were received on the proposal. On January 12, 
2001, CBOE filed Amendment No. 1 to the proposed rule change.\4\ This 
order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 43827 (January 9, 
2001), 66 FR 4874.
    \4\ In Amendment No. 1, CBOE made minor technical changes to the 
rule text that do not need to be published for comment. See letter 
from Arthur B. Reinstein, Associate General Counsel, CBOE, to Sapna 
Patel, Attorney, Division of Market Regulation (``Division''), 
Commission (January 11, 2001) (``Amendment No. 1'').
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II. Description of the Proposed Rule Change

    The Exchange propose to change its membership application posting 
process and make some clarifying revisions to its membership rules.
    Under CBOE Rule 3.9(e), a posting must be included in the Exchange 
Bulletin and on the Exchange Bulletin Board with respect to any 
application for membership, any application from a current member to 
change membership capacity statuses, and any application to change 
Clearing Members (unless the posting requirement is waived under 
certain specified circumstances in accordance with the provisions of 
the rule). CBOE Rule 3.9(e) also provides that the posting period on 
the Exchange Bulletin Board be no less than ten days, and that the 
Exchange's Membership Committee shall determine the required posting 
period for each of these types of

[[Page 13359]]

applications in conformity with this minimum time period. The posting 
period for each of these application categories is fourteen days. The 
posting must set forth the name of the applicant and the application 
request. Its purpose is to provide members with an opportunity to 
submit information concerning an applicant that may bear on the 
applicant's qualifications and fitness for membership under the 
Exchange's rules. Under CBOE Rule 3.9(h), an application may not be 
approved until any applicable posting requirement has been satisfied.
    The Exchange represents that two factors have caused it to propose 
changing its membership application posting process. First, the 
Exchange represents that it receives no submissions from members in 
response to the postings for the vast majority of applicants that are 
posted to the membership on the Exchange's Bulletin Board as part of 
the posting process. Second, the Exchange represents that it has a less 
extensive and shorter application process for current members that are 
applying to change membership capacity statuses and for member 
applicants that have been a member at any time during the last six 
months. In addition, the Exchange represents that it is able to process 
these applications well before the expiration of the posting period in 
most cases. According to the Exchange, the vast majority of these 
applicants are required to wait for a period of time following the 
completion of the processing of their applications for their new 
membership capacities to become effective. The Exchange believes that 
this results in inefficiency in the conduct of business on the 
Exchange, as well as inconvenience to these applicants.
    The Exchange therefore proposes to change its membership 
application posting process to eliminate this inefficiency and 
inconvenience, while at the same time preserving the ability of members 
to submit information concerning the qualifications and fitness for 
membership of applicants. Specifically, the Exchange proposes to amend 
CBOE Rule 3.9(e) to eliminate the posting period for current members 
that are applying to change membership capacity statuses and for member 
applicants that have been a member during the last six months. 
Additionally, the Exchange intends to notify its membership via 
circular that the Membership Department will accept submissions 
concerning any current or former member at any time (in contrast to the 
current limited formal submission period during the posting period) and 
that these submissions will be retained in the member's membership 
file.\5\ Subsequently, if a current or former member submits any 
membership application and there is a submission for that current or 
former member in the membership file at the time of submission of the 
application, the submission concerning that current or former member 
will be reviewed and considered in the same manner that occurs under 
the posting process.
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    \5\ The CBOE indicated that the circular will be detailed and 
widely disseminated. The circular will be attached to the back of 
the CBOE rule book and made readily available to the public. 
Telephone conversation between Arthur B. Reinstein, Associate 
General Counsel, CBOE, and Sapna C. Patel, Attorney, Division, 
Commission (January 5, 2001).
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    Further, the Exchange proposes to retain the posting period 
requirement for new membership applicants (i.e., those membership 
applicants that have never been a member or that have not been a member 
during the last six months). The Exchange represents that the posting 
period generally does not result in a delay in processing these 
applications because they are subject to a more extensive and longer 
application process that takes more than fourteen days (during which 
there is adequate time to complete a fourteen day posting). In 
addition, the Exchange proposes to retain the posting period for an 
application to change Clearing Members (which in the vast majority of 
cases is waived pursuant to the current provision of CBOE Rule 3.9(e), 
which provides for the waiver of this posting period if the Clearing 
Member(s) that will no longer be guaranteeing the member's Exchange 
transactions consents to such a waiver).
    The Exchange also proposes to make the following clarifying changes 
to its membership rules. The Exchange proposes to revise CBOE Rule 
3.9(f) to clarify those categories of membership applicants for which 
the Exchange does not conduct a background investigation due to the 
fact that the applicant is a current member, the applicant was recently 
a member, or the Exchange recently conducted a background investigation 
concerning the applicant. Specifically, the Exchange proposes to revise 
CBOE Rule 3.9(f) to clarify that the Membership Department is not 
required under CBOE Rule 3.9(f) to investigate the following categories 
of applicants: (i) Any associated person applicant who is a current 
member, (ii) any member applicant that was a member during the last six 
months before the date of receipt of that applicant's membership 
application by the Membership Department, and (iii) any member or 
associated person applicant that was investigated by the Membership 
Department during the last six months before the date of receipt of 
that applicant's application by the Membership Department. In addition, 
the Exchange proposes to revise CBOE Rule 3.9(f) to clarify that the 
Membership Department retains the discretion to investigate any 
applicant that is not required to be investigated under CBOE Rule 
3.9(f) if the Membership Department determines that a background 
investigation is warranted under the circumstances.
    Further, the Exchange proposes to revise Rule 3.13(c) to clarify 
that the payment for the purchase of a membership by a certified or 
cashier's check must be in the amount of the purchase price and to 
permit payment via a wire transfer.
    The Exchange also proposes to clarify the provisions of CBOE Rule 
3.14(c)(iv). CBOE Rule 3.14(c)(iv) sets forth one of the four 
circumstances pursuant to which a membership may be transferred without 
going through the normal auction process for the purchase and sale of 
Exchange memberships. Specifically, CBOE Rule 3.14(c)(iv) provides that 
the owner of a transferable membership may request the transfer of the 
membership to an individual or organization which is a partner or 
shareholder of the transferor as part or all of a distribution of the 
transferor.\6\ The Exchange proposes to revise CBOE Rule 3.14(c)(iv) to 
clarify that the transferee must have at least a fifty percent interest 
in the transferor. Without this provision, a person could avoid the 
normal membership auction process by becoming a nominal partner or 
shareholder in a member organization and then having the member 
organization transfer the membership to that partner or shareholder. 
Further, the Exchange proposes to revise CBOE Rule 3.14(c)(iv) to 
delete the word ``liquidation'' because of confusion between a 
liquidation distribution and a non-liquidation distribution (given that 
an entity can have partial liquidation in which it does not distribute 
all of its assets and continues in operation following the partial 
liquidation). Because the Exchange has interpreted Rule 3.14(c)(iv) to 
permit membership transfers in connection with partial liquidation 
distributions, and because the Exchange believes there is no meaningful 
distinction in this context between a partial liquidation distribution 
and a regular distribution, the Exchange proposes to delete the

[[Page 13360]]

word ``liquidation'' to make it easier for members to understand CBOE 
Rule 3.14(c)(iv).
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    \6\ Under CBOE Rule 3.3.01, the transferee could also be a 
limited liability company member if the transferor were a limited 
liability company.
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    Further, the Exchange proposes to clarify the nature of the 
security interest received by the grantee of an Authorization to Sell 
under CBOE Rule 3.14(d)(viii) which allows an owner of a transferable 
membership to voluntarily grant to another member an Authorization to 
Sell the membership. The Exchange represents that the grantee of an 
Authorization to Sell is vested with all of the authority provided for 
under the Exchange's Constitution and Rules relating to the sale of the 
membership. Pursuant to CBOE Rule 3.15(b), the grantee of an 
Authorization to Sell also has the right on the sale of the membership 
to submit claims against the grantor that are related to the grantor's 
Exchange business activities, which will be satisfied out of the 
proceeds of the sale of the membership. CBOE Rule 3.14(d)(viii) 
provides that the grant of an Authorization to Sell a membership 
includes the grant of a security interest in any proceeds from the sale 
of the membership that the grantee of the Authorization to Sell is 
entitled to receive under CBOE Rule 3.15(b). The Exchange proposes to 
revise CBOE Rule 3.14(d)(viii) to clarify that the grant of an 
Authorization to Sell also includes the grant of a security interest in 
the membership to the extent necessary to establish the priority of the 
security interest in the membership sale proceeds that the grantee is 
entitled to receive under CBOE Rule 3.15(b). The Exchange has 
interpreted CBOE Rule 3.14(d)(viii) to provide for a security interest 
in the membership and believes that the grant of a security interest is 
fairly and reasonably implied from the existing language of CBOE Rule 
3.14(d)(viii). The Exchange simply proposes to revise CBOE Rule 
3.14(d)(viii) to make the language of Rule more explicit.
    The Exchange also proposes to revise CBOE Rule 3.24, the Exchange's 
Member Death Benefit Rule,\7\ to make clear that the term ``active 
member'' under that rule only includes individual members and is not 
intended to include associated persons who are not individual members 
pursuant to the Exchange's rules. Specifically, the definition of the 
term ``active member'' in CBOE Rule 3.24(c) would be revised to replace 
the words ``natural person'' in that definition with the words 
``individual member.'' The remainder of definition of ``active member'' 
in CBOE Rule 3.24(c) would not be revised. Thus, as revised, the 
definition of ``active member'' contained in CBOE Rule 3.24(c) would 
state that the term ``active member'' shall mean any individual member 
who is a nominee of a member organization, a Chicago Board of Trade 
exerciser, a lessee of an Exchange membership, or an owner of an 
Exchange membership that is not being leased to a lessee.
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    \7\ CBOE Rule 3.24(b) provides that the following individuals 
are eligible for the Member Death Benefit; (i) Any individual who is 
an active member at the time of his or her death; and (ii) any 
individual who (a) was an active member within ninety days prior to 
the date of his or her death, and (b) was an active member during at 
least 274 out of the 365 days preceding the date of his or her 
termination from active member status.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder application to a national securities 
exchange.\8\ In particular, the Commission believes that the proposal 
is consistent with section 6(b)(5) of the Act,\9\ which requires, among 
other things, that the rules of an exchange be designed to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market, and to protect investors and 
the public interest.
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    \8\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the changes to the Exchange's 
membership application posting process, under CBOE Rule 3.9(e), will 
help the Exchange streamline its application process and avoid 
unnecessary delay while preserving the ability of members to provide 
input. Although the Exchange proposes to amend CBOE Rule 3.9(e) to 
eliminate the requirement that there be a posting period for current 
members that are applying to change membership capacity statuses and 
for member applicants that have been a member during the last six 
months, the Exchange has, at the same time, preserved members' ability 
to submit information concerning the qualifications and fitness for 
membership of applicants. The Exchange will notify its membership via 
circular that its Membership Department will accept submissions 
concerning any current or former member at any time and that these 
submissions will be retained in the member's membership file. These 
submissions will then be reviewed the same as under the Exchange's 
posting process if a current or former member submits a membership 
application.
    In addition, the Commission finds that it is appropriate for the 
Exchange to retain its current posting periods for new membership 
applicants and for applications to change Clearing Members because the 
application process takes more time.
    The Commission believes that clarifying CBOE Rule 3.9(f) on 
background investigations, CBOE Rule 3.13(c) on the purchase of 
memberships, CBOE Rule 3.14(c)(iv) on the sale and transfer of 
memberships, and CBOE Rule 3.24(c) on who is considered an ``active 
member'' under the Member Death Benefit Rule, will provide members with 
better guidance as to the meaning of these rules.
    The Commission therefore finds that the Exchange's proposed rule 
change is consistent with the Act because it is designed to promote 
just and equitable principles of trade and to protect investors and the 
public interest by providing a more efficient membership application 
posting process and by clarifying its membership rules.

IV. Conclusion

    For the foregoing reasons, the Commission finds that CBOE's 
proposal to change its membership application posting process and to 
make some clarifying revisions to its membership rules, as amended, is 
consistent with the requirements of the Act and rules and regulations 
thereunder.
    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-CBOE-00-60), is approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-5246 Filed 3-2-01; 8:45 am]
BILLING CODE 8010-01-M