Document ID: SEC-2006-0329-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Board Options Exchange, Inc.
Posted Date: 2006-03-13T05:00Z

[Federal Register: March 13, 2006 (Volume 71, Number 48)]
[Notices]               
[Page 12755-12758]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13mr06-92]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53431; File No. SR-CBOE-2004-65]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Notice of Filing of Proposed Rule Change and Amendments Nos. 1 
and 2 Thereto Relating to Restrictions on Arbitrators Serving on CBOE's 
Arbitration Committee

March 7, 2006.
    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 October 14, 2004, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by CBOE. On 
December 13, 2005 and February 15, 2006, CBOE filed Amendments Nos. 1 
and 2, respectively, to the proposed rule change.\3\ 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 replaces the original filing in its 
entirety. Amendment No. 2 replaces the rule text in the original 
filing and Amendment No. 1 in their entirety. Also, Amendment No. 2 
supplements the ``Purpose'' section of Amendment No. 1 with 
additional explanation as to the bases for certain proposed rule 
amendments.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Exchange rules relating to 
arbitrations. Below is the text of the proposed rule change. Proposed 
new language is in italics; proposed deletions are in brackets.
* * * * *

Chapter XVIII

Rule 18.10--Designation of Number of Arbitrators

    Rule 18.10. (a)-(b) No change.
    (c) Arbitrator Restrictions. The following restrictions shall apply 
to persons who serve on the Arbitration Committee.
    (i) No member of the Arbitration Committee shall represent a party 
as counsel in any dispute, claim or controversy submitted for CBOE 
arbitration (``CBOE Arbitration'') while that member is serving on the 
Arbitration Committee and for a period of six months after the date on 
which that member ceases being a member of the Arbitration Committee 
and,
    (ii) if a Committee member is appointed as an arbitrator in a 
pending CBOE Arbitration (``Pending CBOE Arbitration'') and 
subsequently ceases being a member of the Committee, but continues to 
serve as an arbitrator in the Pending CBOE Arbitration, that person 
cannot represent a party as counsel in a separate CBOE Arbitration 
until he or she has ceased serving as an arbitrator in the Pending CBOE 
Arbitration.
* * * * *

Rule 18.13--Disclosures Required of Arbitrators

    Rule 18.13. (a)-(c) No Change.
    (d) Removal by the Director.
    (1) The Director of Arbitration may remove an arbitrator based on 
information that is required to be disclosed pursuant to this Rule.
    (2) After [Prior to] the beginning of (A) the first pre-hearing 
conference or (B) the first hearing session, whichever is earlier, the 
Director of Arbitration may remove an arbitrator based on information 
not known to the parties when the arbitrator was selected. [disclosed 
pursuant to this section. The Director of Arbitration shall also inform 
the parties of any information disclosed pursuant to this section, if 
the arbitrator who disclosed the information is not removed.]
    (3) The Director of Arbitration will grant a party's request to 
disqualify an arbitrator if it is reasonable to infer, based on 
information known at the time of the request, that the arbitrator is

[[Page 12756]]

biased, lacks impartiality, or has an interest in the outcome of the 
arbitration. The interest or bias must be direct, definite, and capable 
of reasonable demonstration, rather than remote or speculative.
    (4) The Director of Arbitration shall inform the parties to an 
arbitration proceeding of any information disclosed to the Director of 
Arbitration under this Rule unless either the arbitrator who disclosed 
the information withdraws voluntarily as soon as the arbitrator learns 
of any interest, relationship, or circumstances described in paragraph 
(a) that might preclude the arbitrator from rendering an objective and 
impartial determination in the proceeding, or the Director of 
Arbitration removes the arbitrator.
* * * * *

Rule 18.14--Disqualification or Other Disability of Arbitrators

    Rule 18.14(a). Disqualification by Director of Arbitration Due to 
Conflict of Interest or Bias. After the appointment of an arbitrator 
and prior to the beginning of (A) the first pre-hearing conference or 
(B) the first hearing session, whichever is earlier, if the Director of 
Arbitration or a party objects, pursuant to Rule 18.12(b), to the 
continued service of an arbitrator, the Director shall determine if the 
arbitrator should be disqualified. If the Director of Arbitration 
determines that an arbitrator should be disqualified then the Director 
of Arbitration will notify both parties of the decision. The parties 
will have 5 days to retain the arbitrator, notwithstanding the Director 
of Arbitration's decision to disqualify the arbitrator. The parties 
must agree to retain the arbitrator unanimously and convey their 
decision to the Director of Arbitration in writing not later than 5 
days after the Director of Arbitration's notice to disqualify.
    (b) Removal by Director. After the beginning of (A) the first pre-
hearing conference or (B) the first hearing session, whichever is 
earlier, the Director of Arbitration may remove an arbitrator from an 
arbitration panel based on information that is required to be disclosed 
pursuant to Rule 18.13 and that was not previously disclosed.
    (c) Standards for Deciding Challenges for Cause. The Director of 
Arbitration will grant a party's request to disqualify an arbitrator if 
it is reasonable to infer, based on information known at the time of 
the request, that the arbitrator is biased, lacks impartiality, or has 
an interest in the outcome of the arbitration. The interest or bias 
must be direct, definite, and capable of reasonable demonstration, 
rather than remote or speculative.
    (d) Vacancies. In the event that any arbitrator, after the 
[commencement] beginning of the first hearing session and prior to the 
rendition of the award, should resign, die, withdraw, be disqualified 
or otherwise be unable to perform as an arbitrator, the remaining 
arbitrator(s) may continue with the hearing and determination of the 
controversy, unless such continuation is objected to by any party 
within five (5) days of notification of such resignation, death, 
withdrawal, disqualification, or other inability. Upon objection, the 
Director of Arbitration shall appoint a new member to the panel to fill 
any vacancy. The Director of Arbitration shall inform the parties as 
soon as possible of the name and employment history of the replacement 
arbitrator pursuant to Rule 18.11, as well as any other information 
disclosed pursuant to Rule 18.13. A party may make further inquiry of 
the Director of Arbitration concerning the replacement arbitrator's 
background and within the time remaining prior to the next scheduled 
hearing session or the five (5) day period provided under Rule 18.12, 
whichever is shorter, may exercise its right to challenge the 
replacement arbitrator as provided in Rule 18.12.
* * * * *

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

    In its filing with the Commission, CBOE included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. CBOE has prepared summaries, set forth in sections A, B, 
and C below, of the most significant aspects of such statements.

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

1. Purpose
    This proposed rule change would amend CBOE Rules 18.10, 18.13 and 
18.14 relating to arbitrators who serve as members of the CBOE 
Arbitration Committee (``Committee'') and the removal of arbitrators.
    Proposed Changes to CBOE Rule 18.10. The Exchange is proposing to 
amend CBOE Rule 18.10 to codify its unwritten policy that restricts 
members of the Committee from representing parties as counsel \4\ in 
any arbitration dispute, claim or controversy that has been submitted 
to CBOE for resolution (``CBOE Arbitration''). This restriction would 
extend for six months after the date on which a Committee member ceases 
being a member of the Committee. Moreover, if a member of the Committee 
is an appointed arbitrator in a pending CBOE Arbitration (``Pending 
Arbitration'') when that person ceases to be a member of the Committee, 
that Committee member cannot represent a party as counsel in any other 
CBOE Arbitration until the Pending Arbitration is closed, regardless of 
whether six months have passed since the date on which the former 
member ceased being a Committee member.
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    \4\ CBOE Rule 18.17 provides: ``All parties shall have the right 
to representation by counsel at any stage of the proceedings.'' 
Since persons who are eligible to act as ``counsel'' in CBOE 
arbitration proceedings are not limited to licensed attorneys, the 
proposed rule change would apply to any person acting as ``counsel'' 
in a CBOE arbitration proceeding whether the person is a licensed 
attorney or not.
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    Under CBOE rules, any CBOE Arbitration between parties who are 
members or persons associated with a member shall be resolved by an 
arbitration panel that consists of three members of the Committee.\5\ 
The Committee is maintained primarily as a means for managing a pool of 
qualified industry arbitrators that is composed of a cross-section of 
Exchange members and/or former members or associated persons of members 
or other individuals who are knowledgeable about the securities 
industry.\6\ All Committee members are appointed in accordance with 
Exchange governance rules and guidelines.\7\
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    \5\ See CBOE Rule 18.2(a). Rule 18.2(a) specifically provides 
that the arbitration panel appointed to resolve member-to-member 
arbitrations shall consist of ``not less than three members of the 
Arbitration Committee.'' However, as a matter of practice, 
arbitration panels typically consist only of three members of the 
Arbitration Committee.
    \6\ Unlike other Exchange committees, the Arbitration Committee 
does not meet as a whole except for training or to administer the 
annual Committee orientation. For a CBOE Arbitration involving 
customers or non-Exchange members and a member(s), CBOE rules 
require that the dispute be resolved by an arbitration panel that 
consists of no less than three arbitrators, the majority of which 
consists of arbitrators who are not from the securities industry 
(``Public Arbitrators''). (See CBOE Rule 18.10). In non-member CBOE 
Arbitrations, members of the Arbitration Committee may be appointed 
as industry arbitrators.
    \7\ See CBOE Rule 18.10.
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    The Exchange has long adhered to an unwritten policy that prohibits 
a Committee member who is an attorney from representing a party in a 
CBOE Arbitration while that person is serving on the Committee. This 
policy is

[[Page 12757]]

consistent with the Exchange's belief that, while serving on the 
Arbitration Committee, arbitrators should be committed to the impartial 
resolution of any disputes that come before them and should avoid 
circumstances that could disqualify them from being appointed in future 
arbitrations or give rise to the appearance of partiality. The Exchange 
does not believe that a Committee member should act as an advocate in a 
CBOE Arbitration while serving as a member of the CBOE Arbitration 
Committee. Accordingly, the Exchange feels it would be prudent to 
codify its unwritten policy within the rules governing CBOE 
Arbitrations. Additionally, the Exchange notes that the proposed rule 
text relating to restricting an arbitrator from representing a party as 
counsel in any CBOE Arbitration (proposed Rule 18.10(c)) also would 
extend to restrict an arbitrator from representing a party as counsel 
in any capacity, not just acting as an attorney.
    In addition, the Exchange believes that a sufficient period of time 
should pass after an arbitrator is no longer a member of the Committee 
before that individual may represent a party as counsel in a CBOE 
Arbitration. Without this required separation period, a former 
Committee member conceivably could appear as counsel to a party before 
other members of the Committee in a CBOE arbitration immediately after 
resigning from the Committee. Although CBOE does not believe that 
membership on the Arbitration Committee necessarily creates meaningful 
relationships with other Committee members, such that present Committee 
members could not be impartial in considering a case on which a 
recently retired Committee member serves as counsel, a prescribed 
waiting period is a sensible precaution against the appearance of 
partiality. The Exchange believes that a six-month waiting period would 
be appropriate and would help to eliminate the appearance of partiality 
that could otherwise exist.
    Finally, the rule proposal provides that, if a Committee member is 
appointed as an arbitrator to a pending CBOE Arbitration and 
subsequently ceases to be a member of the Committee, but continues to 
serve as an arbitrator in the pending CBOE Arbitration, that person 
cannot represent a party in a separate CBOE Arbitration as counsel 
until the arbitrator ceases to be appointed as an arbitrator in the 
pending CBOE Arbitration. This provision of the proposed rule would 
address the unlikely, but possible, situation in which an arbitration 
proceeding remains pending more than six months after the date on which 
an appointed arbitrator to that case ceased being a member of the 
Committee.\8\ The Exchange believes that this provision is consistent 
with the purpose of this rule change, which is the avoidance of the 
appearance of partiality on the part of a CBOE Arbitrator.
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    \8\ Proposed CBOE Rule 18.10(c)(ii).
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    The proposed rules supplement existing policies and procedures that 
are in place to screen arbitrators for conflicts, potential conflicts, 
and the appearance of conflicts prior, and subsequent, to appointment. 
Specifically, CBOE policies and procedures require any arbitrator, 
prior to or subsequent to appointment to a CBOE Arbitration, to 
disclose any information that presents a conflict, existing or 
potential, or creates the appearance of a conflict with any party, 
fact, or circumstance related to the case in question.\9\ Arbitrators 
also are required to disclose any new information or circumstances that 
may arise after their appointment that would create a similar conflict 
or potential for conflict. Thus, if a former member of the Arbitration 
Committee were to serve as counsel to a party before a CBOE arbitration 
panel, the appointed arbitrators would be required to disclose any past 
relationships with the former Committee member regardless of how much 
time has passed since that former member resigned from the 
Committee.\10\
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    \9\ See CBOE Rule 18.13.
    \10\ Id.
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    Proposed Changes to CBOE Rules 18.13 and 18.14. The Exchange also 
proposes to adopt new rules governing the process for removing or 
disqualifying arbitrators (1) when the appointed arbitrator has 
conflicts of interest with the parties or subject matter or if there is 
evidence of arbitrator bias or (2) for failing to comply with 
arbitrator disclosure requirements. Specifically, Exchange Rules 18.13 
and 18.14 would be amended to provide greater safeguards against the 
possibility that a CBOE Arbitration could proceed with an appointed 
arbitrator who should, by rule, not be hearing and resolving the 
arbitration. These amendments would be substantially similar to those 
recently proposed by the NASD.\11\
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    \11\ See Securities Exchange Act Release No. 51856 (June 15, 
2005); 70 FR 36442 (June 23, 2005) (proposing new NASD Code of 
Arbitration Procedure for Customer Disputes (``Proposed Customer 
Code'')); Securities Exchange Act Release No. 51857 (June 15, 2005); 
70 FR 36430 (June 23, 2005) (proposing new NASD Code of Arbitration 
Procedure for Industry Disputes (``Proposed Industry Code'')).
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    Rule 18.13(a)-(c) currently outlines the disclosures that a CBOE 
arbitrator must make that help to assess whether the arbitrator would 
be precluded from rendering an objective and impartial decision in a 
CBOE Arbitration.\12\ Proposed Rules 18.13(d)(1) and 18.13(d)(2) 
provide that the Director of Arbitration may remove an arbitrator based 
on the disclosures made under Rule 18.13(a)-(c) and information not 
known to the parties when the arbitrator was selected. The Exchange 
also proposes to amend Rule 18.13(d), in proposed Rule 18.13(d)(3), to 
clarify that the Director of Arbitration will grant a party's request 
to disqualify an arbitrator if it is reasonable to infer, based on 
information known at the time of the request, that the arbitrator is 
biased, lacks impartiality, or has an interest in the outcome of the 
CBOE Arbitration. Such interest or bias must be direct, definite, and 
capable of reasonable demonstration, rather than being remote or 
speculative. In addition, proposed Rule 18.13(d)(4) would help to 
ensure that parties to a CBOE Arbitration are informed of the 
disclosure of any new information that is required to be disclosed by 
an arbitrator under Rule 18.13 unless either the Director of 
Arbitration removes the arbitrator or the arbitrator withdraws 
voluntarily as soon as the arbitrator learns of any interest, 
relationship, or circumstances described under Rule 18.13(a) that might 
preclude the arbitrator from rendering an objective and impartial 
determination in the CBOE Arbitration. These proposed changes are 
substantially similar to the standards proposed by the NASD.\13\
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    \12\ See CBOE Rule 18.13(a)-(c).
    \13\ See Proposed Customer Code and Proposed Industry Code, 
supra note 11.
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    Also, this proposal would amend CBOE Rule 18.14, which currently 
provides the process by which the Exchange fills vacancies of an 
arbitrator, who for any reason, is unable to perform as an 
arbitrator.\14\ The Exchange proposes to provide within Rule 18.14 a 
more detailed process by which the Director of Arbitration may remove 
or disqualify an arbitrator based on: (1) Conflicts of interest or bias 
involving an arbitrator; (2) challenges for cause; and (3) information 
required to be disclosed pursuant to Rule 18.13 and that was not 
previously disclosed.\15\ These proposed changes are also substantially 
similar to

[[Page 12758]]

proposed NASD arbitration rules governing the same subject matter.\16\
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    \14\ Such reasons include the disqualification, resignation, 
death, disability, or withdrawal of the arbitrator.
    \15\ Proposed Rule 18.14(c) also would provide standards to be 
used in deciding challenges for cause, which standards are identical 
to those provided under proposed Rule 18.13(d).
    \16\ See Proposed Customer Code and Proposed Industry Code, 
supra note 11.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act, in general, and furthers the objectives of 
Section 6(b)(5) in particular, in that it is designed to remove 
impediments to and perfect the mechanism of a free and open market by 
strengthening the integrity of the CBOE Arbitration program.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule amendments will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule amendments.

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

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-CBOE-2004-65 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-CBOE-2004-65. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, 

all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Section, Station 
Place, 100 F Street, NE., Washington, DC 20549. Copies of such filing 
also will be available for inspection and copying at the principal 
office of the CBOE. 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-2004-65 and should be submitted by April 3, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-3513 Filed 3-10-06; 8:45 am]

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