Document ID: SEC-2014-0590-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2014-04-10T04:00Z

[Federal Register Volume 79, Number 69 (Thursday, April 10, 2014)]
[Notices]
[Pages 19950-19953]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-07994]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71880; File No. SR-CBOE-2014-036]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the End of Trading on CBSX

April 4, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the '' Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that, on April 1, 2014, Chicago Board Options Exchange, 
Incorporated (the ``Exchange'' or ``CBOE'') filed with the Securities 
and Exchange Commission (the ``Commission'') the proposed rule change 
as described in Items I and II below, which Items have been prepared by 
the Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend Rule 51.2 to permit CBOE to end trading on 
the CBOE Stock Exchange, LLC (``CBSX'') as of the close of business on 
April 30, 2014 (the ``Closing Date''). The text of the proposed rule 
change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

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 Exchange 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
    CBSX, of which CBOE is a partial owner, is regulated as a stock 
trading facility of the Exchange under Section 3(a)(2) of the Exchange 
Act.\3\ Section 9.15 of the Third Amended and Restated Operating 
Agreement of CBOE Stock Exchange, LLC, dated as of December 30, 2011 
between CBOE and the other owners (``Non-CBOE Owners'') of CBSX 
(``Operating Agreement''), requires the prior affirmative vote of 
CBOE,\4\ as well as the affirmative vote by each of the CBSX Board and 
a Super Majority of the Owners of CBSX,\5\ prior to CBSX: (i) 
Materially changing CBSX's business model; or (ii) changing the status 
of or registration of CBSX as a facility of CBOE. Each of CBOE, the 
Board, and a Super Majority of Owners has affirmatively approved the 
ending of CBSX trading operations and ceasing to operate CBSX as a 
facility of the Exchange. This rule filing is not proposing any change 
to the ownership structure of CBSX. The proposed rule change is 
intended to further the Exchange's strategic goal to focus its 
resources on other business opportunities while fulfilling its 
regulatory obligations under the Exchange Act. CBSX's Trading Permit

[[Page 19951]]

Holders (``TPHs'') will continue to be able to execute transactions in 
stocks on other stock-trading venues.
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    \3\ In 2007, the Commission approved the establishment of CBSX 
as a facility of the Exchange. See Securities Exchange Act Release 
No. 55389 (March 2, 2007), 72 FR 10575 (March 8, 2007).
    \4\ CBOE's prior affirmative vote is required so that CBOE will 
have the opportunity to determine, in advance of action taken by the 
CBSX Board of Directors (``Board'') or the Non-CBOE Owners, whether 
a proposed action, transaction, or aspect of an action or 
transaction requiring a Super Majority of the Owners (as defined 
below) would interfere with the performance of CBOE's regulatory 
functions, its responsibilities under the Exchange Act or as 
specifically required by the SEC (``Regulatory Requirements'').
    \5\ Section 2.1(a)(26) of the Operating Agreement generally 
defines ``Super Majority of the Owners'' to mean, subject to the 
prior affirmative vote of CBOE as to its Regulatory Requirements, 
the affirmative vote of both: (i) All of the Owners of the Series A 
voting shares at the time (currently CBOE), and (ii) Owners of 
Series B voting shares representing at least a 20% interest in CBSX. 
While not material to a Super Majority, the Exchange notes that CBSX 
also has Series C non-voting restricted shares for Management 
Owners.
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    Within seven days of filing the proposed rule change, the Exchange 
will inform all CBSX TPHs by Regulatory Circular that CBSX will end 
trading operations as of the close of business on the Closing Date. The 
Regulatory Circular will also inform all TPHs that the Exchange will 
terminate the TPH status of any remaining CBSX TPHs on August 7, 
2014,\6\ although CBSX TPHs may voluntarily terminate their TPH status 
prior to that date.\7\ Once the proposed rule change is operative, CBSX 
will no longer accept new TPH applications or further consider any 
pending TPH applications.
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    \6\ All CBSX TPHs are required to become members of a national 
securities association (i.e., the Financial Industry Regulatory 
Authority (FINRA)) on or before August 7, 2014. See Securities 
Exchange Act Release No. 71513 (February 7, 2014), 79 FR 8771 
(February 13, 2014) (SR-CBOE-2013-100) (order approving proposed 
rule change relating to CBSX TPH eligibility).
    \7\ As of April 1, 2014, there are seven CBSX TPHs that are not 
members of another SRO (as defined below) (``CBSX-only TPHs''). None 
of the CBSX-only TPHs effect trades, nor have they effected trades 
in recent months, on CBSX.
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    CBOE will continue to act as designated examining authority 
(``DEA'') for each CBSX TPH, for which CBOE is DEA, until the 
Securities and Exchange Commission (the ``Commission'') selects another 
self-regulatory organization (``SRO'') to perform that function or 
until August 7, 2014, whichever occurs first.\8\ Moreover, all CBOE 
rules applicable to CBSX (``CBSX Rules'') \9\ will remain in effect 
after the Closing Date, so that CBOE will retain disciplinary 
jurisdiction over all CBSX TPHs and persons associated with CBSX TPHs 
with respect to all matters that occurred on or before the Closing 
Date, pursuant to CBOE Rules 17.1 and 50.2.\10\ CBOE Rule 17.1 
generally provides that a TPH or a person associated with a TPH shall 
continue to be subject to the disciplinary jurisdiction of the Exchange 
following such person's termination as a TPH or person associated with 
a TPH with respect to matters that occurred prior to such termination 
or with respect to the failure to honor an arbitration award pursuant 
to Chapter XVIII of CBOE Rules; provided that written notice of the 
commencement of an inquiry into such matter is given by the Exchange to 
such former TPH or former person associated with a TPH within one year 
of termination of TPH or person associated with a TPH status. Such 
notice requirement does not apply to a TPH or person associated with a 
TPH who at any time after a termination subjects himself to the 
disciplinary jurisdiction of the Exchange by becoming a TPH or person 
associated with a TPH. CBOE Rule 50.2 (and CBSX Appendix A) 
incorporates by reference the application of CBOE Rule 17.1 to CBSX 
TPHs and persons associated with CBSX TPHs.
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    \8\ The Exchange also represents that it will move to amend or 
cancel its participation in any existing Exchange Act Rule 17d-2 
Plans for Allocation of Regulatory Responsibilities regarding CBSX 
as appropriate in connection with the conclusion of all open matters 
relating to the Exchange's regulation of CBSX.
    \9\ See CBOE Rules Chapter L-LIV (including Appendix A).
    \10\ Because all CBSX Rules will remain in effect after the 
close of business on the Closing Date, CBOE Rule 50.6, which limits 
the liability of CBSX under the same terms and conditions as CBOE 
Rules 2.24, 6.7 and 6.7A limits the liability of CBOE, will also 
remain in effect.
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    CBSX, CBOE and each of the Non-CBOE Owners will each continue to be 
required to maintain books and records as required under the Operating 
Agreement.\11\ Also, pursuant to Section 5.7 of the Operating 
Agreement, CBSX, and to the extent that it relates to CBSX, each Owner, 
agrees to comply with the federal securities laws and the rules and 
regulations thereunder; to cooperate with the Commission and CBOE 
pursuant to their regulatory authority and the provisions of the 
Operating Agreement; and to engage in conduct that fosters and does not 
interfere with the CBSX's and CBOE's ability to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \11\ Section 6.15(a) of the Operating Agreement states that CBOE 
and each of the Non-CBOE Owners acknowledge that to the extent the 
following are related to the CBSX trading platform for securities 
other than options, the books, records, premises, officers, 
directors, agents and employees of each of the Non-CBOE Owners shall 
be deemed to be the books, records, premises, officers, directors, 
agents, and employees of CBOE for the purpose of and subject to 
oversight pursuant to the Exchange Act. Section 6.15(b) provides 
that the books, records, premises, officers, directors, agents, and 
employees of CBSX, to the extent related to its activities as a 
stock trading facility of CBOE, shall be deemed to be the books, 
records, premises, officers, directors, agents, and employees of 
CBOE for the purpose of and subject to oversight pursuant to the 
Exchange Act. Section 6.15(c) provides that CBSX and its Owners and 
their respective officers, directors, agents, and employees 
irrevocably submit to the jurisdiction of the U.S. federal courts, 
the Commission, and CBOE for the purposes of any suit, action or 
proceeding pursuant to U.S. federal securities laws or the rules or 
regulations thereunder, commenced or initiated by the SEC arising 
out of, or relating to, CBSX in its capacity as a stock trading 
facility of CBOE (and shall be deemed to agree that CBSX may serve 
as the U.S. agent for purposes of service of process in such suit, 
action or proceeding), and waive, and agree not to assert by way of 
motion, as a defense or otherwise in any such suit, action or 
proceeding, any claims that they are not personally subject to the 
jurisdiction of the Commission, that the suit, action or proceeding 
is an inconvenient forum or that the venue of the suit, action or 
proceeding is improper, or that the subject matter thereof may not 
be enforced in or by such courts or agency. Section 6.15(c) further 
provides that for so long as CBSX is a facility of CBOE and to the 
extent related to CBSX's activities as a stock trading facility, the 
provisions of paragraph (c) shall not apply to CBOE and its 
respective officers, directors, agents and employees. Finally, 
Section 6.15(d) provides that, with respect to Section 6.15, CBSX 
and each of its Owners shall take such action as is necessary, 
unless otherwise provided for by law, written statement of policy, 
individual contract or otherwise, to ensure that their officers, 
directors, agents, and employees consent in writing to the 
applicability of this provision with respect to CBSX-related 
activities.
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    The Exchange represents that it will retain its status as SRO to 
the CBSX facility under Section 1.7 of the Operating Agreement for as 
long as CBSX is a facility under the Exchange Act. The Exchange further 
represents that there will be adequate funding to carry out regulatory 
obligations related to CBSX until it ceases to be a facility of CBOE. 
Lastly, under the proposed rule change, CBOE will not be able to begin 
trading in securities other than options without first filing a 
proposed rule change with the Commission pursuant to Rule 19b-4 under 
the Exchange Act.\12\
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    \12\ 17 CFR 240.19b-4.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Exchange Act and the rules and regulations thereunder applicable to 
the Exchange and, in particular, the requirements of Section 6(b) of 
the Exchange Act.\13\ Specifically, the Exchange believes the proposed 
rule change is consistent with the Section 6(b)(5) \14\ requirements 
that the rules of an exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. Additionally, the Exchange 
believes the proposed rule change is consistent with

[[Page 19952]]

the Section 6(b)(5) \15\ requirement that the rules of an exchange not 
be designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ Id.
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    In particular, the proposed rule change will allow CBOE to focus 
its resources on business opportunities other than stock trading on 
CBSX and to fulfill its regulatory obligations under the Exchange Act. 
Current CBSX TPHs will continue to be able to send stock trades to 
other stock trading venues, which include other national securities 
exchanges, alternative trading systems, and the over-the-counter market 
generally. Under the proposal, in addition to this filing, TPHs will 
receive prior written notice by Regulatory Circular of CBSX's intention 
to cease trading operations so that the TPHs will have time to route 
their future stock transactions to other markets.\16\ Moreover, all 
CBSX TPHs will receive prior notice that CBOE will terminate their TPH 
status in CBSX as of August 7, 2014, unless the TPH voluntarily 
terminates its TPH status prior to such date.\17\ CBOE will remain DEA 
of each CBSX TPH for which it currently performs that function until 
the Commission selects another SRO to perform that function or until 
August 7, 2014, whichever comes first. The proposed rule change is 
therefore consistent with the requirements of Section 6(b)(5) of the 
Exchange Act, that rules of an exchange be designed to facilitate 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and 
in general to protect investors and the public interest.
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    \16\ The Exchange notes that CBSX has already made CBSX TPHs 
aware of its intention to shut down via an Information Circular 
issued in February 2014. See Information Circular IC14-011.
    \17\ See note 6, supra.
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    The Exchange believes further that the proposed rule change 
promotes the protection of investors and the public interest, in that 
it is intended to permit the CBOE to devote its resources more fully to 
other business opportunities, while fulfilling its regulatory 
obligations under the Exchange Act. Moreover, because all CBSX Rules 
will remain in effect after the close of business on the Closing Date, 
CBOE will retain disciplinary jurisdiction over all CBSX TPHs and 
persons associated with CBSX TPHs with respect to all matters that 
occurred through the Closing Date, pursuant to CBOE Rules 17.1 and 
50.2. CBSX, CBOE and each of the Non-CBOE Owners will also each 
continue to be required to maintain books and records as required under 
the Operating Agreement. The Exchange therefore also believes the 
proposed rule change is consistent with Section 6(b)(1) of the Exchange 
Act,\18\ which provides that the Exchange be organized and have the 
capacity to be able to carry out the purposes of the Exchange Act and 
to enforce compliance by the Exchange's TPHs and persons associated 
with its TPHs with the Exchange Act, the rules and regulations 
thereunder, and the rules of the Exchange.
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    \18\ 15 U.S.C. 78f(b)(1).
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    The Exchange is not proposing any change to the ownership structure 
of CBSX via this rule filing, nor to CBOE's obligations to supervise 
trading on CBSX or to supervise CBSX TPHs in general, as long as they 
remain CBSX TPHs. The proposal therefore protects and maintains the 
integrity of the self-regulatory function of CBOE with respect to CBSX 
as a facility of CBOE.

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 that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. The closing of the 
CBSX stock trading facility as of the close of business on the Closing 
Date will result in one fewer stock trading facilities. However, there 
are numerous stock exchanges and trading platforms on which market 
participants may trade equities. CBSX currently has less than 0.1% of 
market share among national stock exchanges. In light of the low 
trading volume on CBSX and the ability of CBSX TPHs to trade equity 
securities on a large number of other trading venues, CBOE does not 
believe that ceasing trading on CBSX will unduly burden competition in 
equities trading.

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 
proposed rule change.

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

    Because the foregoing proposed rule change does not:
    A. Significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Exchange Act 
\19\ and Rule 19b-4(f)(6) \20\ thereunder.\21\ At any time within 60 
days of the filing of the proposed rule change, the Commission 
summarily may temporarily suspend such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act. If the Commission takes such action, the 
Commission will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(6).
    \21\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Commission deems this requirement to have been met.
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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 email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2014-036 on the subject line.

Paper Comments

     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-2014-036. This file 
number should be included on the subject line if email 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

[[Page 19953]]

public in accordance with the provisions of 5 U.S.C. 552, will be 
available for Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE., Washington, DC 20549, on official 
business days between the hours of 10:00 a.m. and 3:00 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-2014-036 and should be submitted on or before May 
1, 2014.
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    \22\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-07994 Filed 4-9-14; 8:45 am]
BILLING CODE 8011-01-P