Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving a Proposed Rule Change and Amendment No. 1 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendments No. 2 and 4 Thereto Relating to the Removal of Agency Responsibilities From Designated Primary Market-Makers and the Establishment of PAR Officials, 71344-71347 [E5-6559]

Download as PDF 71344 Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Notices to the purpose of the Act or the administration of the Exchange. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange believes the proposed rule change, as amended, will impose no 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 by the Exchange on this proposal, as amended. 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 the proposed rule change, as amended, or B. Institute proceedings to determine whether the proposed rule change should be disapproved. Internet Web site (https://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. 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–Amex–2005–114 and should be submitted on or before December 19, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.9 Jonathan G. Katz, Secretary. [FR Doc. E5–6537 Filed 11–25–05; 8:45 am] thereunder,2 a proposed rule change to amend its rules relating to Designated Primary Market-Makers (‘‘DPMs’’) to eliminate the DPM’s responsibility to act as agent in the options in which it is registered as the DPM on the Exchange. Instead, the Exchange has proposed to designate a CBOE employee or independent contractor (‘‘PAR Official’’) to be responsible for assuming the responsibility for handling certain orders currently undertaken by the DPMs in their allocated options classes, including the operation of the PAR workstation. The Exchange filed Amendment No. 1 with the Commission on July 1, 2005.3 The amended proposal was published for comment in the Federal Register on July 19, 2005.4 The Commission received one comment letter regarding the proposal.5 The Exchange filed Amendment No. 2 with the Commission on October 6, 2005.6 The Exchange filed Amendment No. 3 with the Commission on November 17, 2005, and withdrew Amendment No. 3 on November 18, 2005. The Exchange filed Amendment No. 4 with the Commission on November 18, 2005.7 This order approves the proposed rule change, as amended. In addition, the Commission seeks comment from interested persons on Amendments No. 2 and 4. BILLING CODE 8010–01–P II. Description of Proposed Rule 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. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–Amex–2005–114 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–9303. All submissions should refer to File Number SR–Amex–2005–114. 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 VerDate Aug<31>2005 15:28 Nov 25, 2005 Jkt 208001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–52798; File No. SR–CBOE– 2005–46] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving a Proposed Rule Change and Amendment No. 1 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendments No. 2 and 4 Thereto Relating to the Removal of Agency Responsibilities From Designated Primary MarketMakers and the Establishment of PAR Officials November 18, 2005. I. Introduction On June 10, 2005, the Chicago Board Options Exchange, Incorporated (‘‘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 9 17 1 15 PO 00000 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). Frm 00083 Fmt 4703 Sfmt 4703 Under its current rules, a DPM is defined as a ‘‘member organization that is approved by the Exchange to function in allocated securities as a MarketMaker * * *, as a Floor Broker * * *, and as an Order Book Official * * *.8 CBOE Rule 8.85 further sets out the DPM’s obligations regarding agency transactions. According to the CBOE, its uniform practice has been to require DPMs to act as Floor Brokers for the classes of options assigned to them. Accordingly, all DPMs on CBOE presently act as both agent and principal 2 17 CFR 240.19b–4. No. 1 replaced and superceded the original rule filing in its entirety. 4 See Securities Exchange Act Release No. 52017 (July 12, 2005), 70 FR 41453 (‘‘Notice’’). 5 See e-mail from Margaret Wiermanski, Chief Operations and Compliance Officer, CTC, LLC, dated July 29, 2005 (‘‘CTC Letter’’). 6 See Partial Amendment, submitted by James Flynn, Assistant Secretary, CBOE (‘‘Amendment No. 2’’). In Amendment No. 2, CBOE proposed an additional change to CBOE Rule 6.8 to conform the text of this rule with the proposal. 7 See Partial Amendment, submitted by James Flynn, Assistant Secretary, CBOE (‘‘Amendment No. 4’’). In Amendment No. 4, CBOE proposed additional changes to CBOE Rules 6.45, 6.45A, 6.45B, 8.94, and 17.50 to conform the text of these rules with the proposal. 8 See CBOE Rule 8.80. 3 Amendment E:\FR\FM\28NON1.SGM 28NON1 Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Notices in their allocated options on the Exchange. The CBOE has now determined to eliminate a DPM’s agency duties, including the responsibilities associated with operating the PAR workstation. Specifically, CBOE has proposed to amend its rules to remove a DPM’s obligation to act as an agent or Floor Broker in its allocated securities on the Exchange. In a DPM’s place, the Exchange has proposed to designate a PAR Official who will be responsible for handling certain orders in the same manner as they were formerly handled by the DPM. In particular, the PAR Official will operate the PAR workstation, maintain the public customer limit order book for its assigned non-Hybrid option classes, execute orders that are sent to the PAR workstation or that are placed on the limit order book, display eligible limit orders, and undertake the obligations related to handling certain Linkage Orders.9 The Exchange has proposed to amend its definition of ‘‘Principal Acting as Agent (‘P/A’) Order’’ to remove the requirement that a Market-Maker act as an agent for the unexecuted customer order related to the P/A Order.10 The CBOE proposed this change to conform to its proposal to remove the DPM’s agency responsibilities. The proposed rule change also assigned certain obligations to the PAR Officials related to the handling of Linkage Orders, including using a DPM’s account to route P/A Orders, Principal Orders on behalf of orders in the custody of the PAR Official that are for the account of a broker-dealer, and Satisfaction Orders to other participants in the Linkage Plan. In addition, PAR Officials would have the obligation to handle all Linkage Orders or portions of Linkage Orders received by the Exchange that are not automatically executed, and to use the DPM’s account to fill a Satisfaction Order that results from a Trade-Through that is effected on the Exchange by a PAR Official. The proposed rule change also requires DPMs to provide prior written instructions to the PAR Officials 9 See infra note 10. proposed rule change would amend CBOE Rule 6.80(12) to provide that ‘‘Linkage Order’’ means an Immediate or Cancel Order routed through the Linkage as permitted under the Plan for the Purpose of Creating and Operating an Intermarket Option Linkage (‘‘Linkage Plan’’). Amended Rule 6.80(12) would change the definition of ‘‘Principal Acting as Agent (‘P/A’) Order’’ to be ‘‘an order for the principal account of a Market-Maker (or equivalent entity on another Participant Exchange that is authorized to represent Customer orders) reflecting the terms of a related unexecuted Customer order.’’ 10 The VerDate Aug<31>2005 15:28 Nov 25, 2005 Jkt 208001 regarding routing Linkage Orders and handling responses to Linkage Orders. The CBOE has proposed measures designed to ensure the independence of PAR Officials from Exchange members. Specifically, the PAR Official would be required to be an Exchange employee or independent contractor whose compensation would be determined, and paid, solely by CBOE. Further, the PAR Official would be prohibited from having an affiliation with any CBOE member that acts as a Market-Maker on the Exchange. Because the DPM would no longer be operating the PAR workstation, CBOE proposed to amend its Rule 8.51, which defines when a DPM’s firm quote obligation attaches for orders received over PAR. Interpretation and Policy .10 to CBOE Rule 8.51 currently provides that, in the case of orders received at a PAR workstation in a DPM trading crowd, the DPM’s firm quote obligation attaches at the time the order is received on the PAR workstation. CBOE has proposed to clarify that firm quote obligations attach to all responsible brokers or dealers in the trading crowd, which may include the DPM, at such time as when the PAR Official announces the order to the crowd. The Exchange has proposed this clarification in light of the fact that DPMs will no longer represent orders as Floor Broker from the instant such orders are received on the PAR workstation. In Amendment No. 2, the Exchange has proposed to amend subsection (d)(vi) of Rule 6.8 (RAES Operations) to indicate that: (1) DPMs no longer would be responsible for handling or representing orders that are routed to a CBOE PAR workstation or to the Exchange’s ‘‘Live Ammo’’ functionality, and (2) to the extent that a PAR Official would be taking such responsibilities, the PAR Official will be required to use his or her best efforts to attempt to ensure that members receive an allocation of any incoming orders for up to their disseminated size. In Amendment No. 4, the Exchange has proposed to amend CBOE Rule 8.93 (e-DPM Obligations) to exclude from the e-DPM’s obligations the proposed obligation of DPMs to allow a PAR Official to use the DPM’s account to send and respond to linkage orders.11 The Exchange represents that PAR Officials will use only DPM accounts, not e-DPM accounts, to generate linkage orders and responses as required by proposed CBOE Rule 7.12(e).12 The 11 See Proposed CBOE Rule 8.85(a)(xiv). conversation between James Flynn, Assistant Secretary, CBOE, and Tim Fox, Special Counsel, and Nathan Saunders, Special Counsel, 12 Telephone PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 71345 Exchange also has proposed conforming changes to CBOE Rules 6.45 (Priority of Bids and Offers—Allocation of Trades), 6.45A (Priority and Allocation of Equity Option Trades on the CBOE Hybrid System), 6.45B (Priority and Allocation of Trades in Index Options and Options on ETFs on the CBOE Hybrid System), 8.93, and 17.50 (Imposition of Fines for Minor Rule Violations) to reflect (1) that customer orders currently represented by DPMs would be represented by PAR Officials under the proposal and (2) the proposed removal of DPMs’ agency obligations under CBOE Rule 8.85(b). The text of the changes proposed in Amendments No. 2 and 4 is available on CBOE’s Web site (https://www.cboe.org/ legal/), at CBOE’s office of the secretary, and at the Commission’s Public Reference Room. III. Summary of Comments The Commission received one comment letter on the proposed rule change.13 The commenter, a member firm of the Exchange, endorsed the proposed rule filing and agreed with its purpose and intent. However, the commenter suggested that the proposal be initially approved on a three-month pilot basis to provide the Exchange, its members, and its participants with ‘‘some working experience’’ before the rule is permanently approved. The commenter wrote that certain ‘‘basic operational considerations’’ related to the implementation of the proposed rule change are still unknown—for example, the mechanics of how Linkage Orders will be booked into the DPM’s account by the PAR Official, and how the new procedures would affect CBOE’s membership rules and compliance by CBOE with the consolidated options audit trail system (‘‘COATS’’) regulations. The commenter suggested that a pilot period would make any required modification to the rules administratively easier to accomplish. The CBOE responded to the commenter’s concerns related to the implementation and operation of the PAR Official program.14 The CBOE emphasized the long-term goals of the PAR Official program were promoted by this filing because it would ‘‘eliminat[e] the risks associated with a DPM acting as both principal and agent * * *.’’ The CBOE suggested that a pilot program could ‘‘frustrate these efforts’’ and create ‘‘uncertainty’’ regarding the status of the DPM program. The Exchange also Division of Market Regulation (‘‘Division’’), Commission, on November 17, 2005. 13 See CTC Letter, supra note 5. 14 See E-mail from James Flynn, Attorney II, CBOE to Jonathan G. Katz, Secretary, Commission, dated September 1, 2005. E:\FR\FM\28NON1.SGM 28NON1 71346 Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Notices represented that it believed a better mechanism to resolve the complications that arise as a result of the proposed rule change would be for the CBOE to address the problems promptly, either through additional rule filing(s), systems enhancements, or operation modifications. In addition, the CBOE pointed out that the proposal already provides a three-month period following approval for the CBOE and its members to fully implement the PAR Official program in all DPM trading stations, which the CBOE believes should allow it to address any implementation issues that may arise as a result of the proposed rule change. IV. Discussion After careful review, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.15 In particular, the Commission believes that the proposal is consistent with the requirements of Section 6(b)(5) of the Act,16 which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, 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. With this proposal, CBOE seeks to eliminate the conflicts of interest that currently exist for their DPMs. Specifically, DPMs today trade for their own accounts as Market-Makers and act as agents for certain orders in their allocated options. CBOE has proposed to eliminate the DPM’s obligation and permission to act as agent.17 The Commission believes that eliminating a DPM’s obligation and permission to act as agent will promote just and equitable principles of trade and protect investors and the public interest.18 15 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 16 15 U.S.C. 78f(b)(5). 17 The Commission notes that CBOE Rule 8.85(b), as amended, will no longer permit a DPM to act as an agent for customer orders. However, to the extent that a DPM nevertheless undertakes to represent a customer’s order in violation of CBOE Rule 8.85(b), the DPM will assume all the duties and liabilities of an agent to a principal during the course of such representation. See Section 1 of the Restatement, 2d of Agency. 18 In addition, CBOE Rule 4.18, Prevention of the Misuse of Material, Nonpublic Information, will have the effect of mitigating conflicts of interest that might arise when an affiliate of the DPM acts as VerDate Aug<31>2005 15:28 Nov 25, 2005 Jkt 208001 CBOE has proposed that orders that currently are represented by DPMs as agent be handled by Exchange employees known as PAR Officials and would require that their compensation be determined and paid exclusively by the Exchange. CBOE has also proposed to prohibit affiliations between PAR Officials and CBOE Market-Makers to ensure the PAR Officials are independent from Exchange MarketMakers’ interests. The restrictions will mitigate potential conflicts of interest. Pursuant to the proposed rule change, PAR Officials will undertake comparable responsibilities currently held by DPMs with respect to customer orders. For example, the PAR Official must use due diligence to execute the orders placed in his or her custody at the best prices available to him or her under the CBOE rules. In addition, PAR Officials will assume the obligations related to displaying public customer orders that improve CBOE’s disseminated quote by maintaining Autobook, the Exchange’s automated limit order display facility, and keeping it active. Accordingly, the Commission believes that the CBOE’s proposal should ensure that customers’ orders continue to be represented and handled in a timely fashion on the Exchange. The PAR Officials would assume responsibilities related to Linkage Orders. Specifically, a PAR Official would use a DPM’s account to route P/ A Orders, Principal Orders on behalf of orders in the custody of the PAR Official that are for the account of a brokerdealer, and Satisfaction Orders to other participants in the Linkage Plan based on prior written instructions provided by the DPM to the PAR Official.19 The written instructions provided by the DPM will also include direction as to agent for a customer order in one of the DPM’s assigned options classes. CBOE Rule 4.18 requires that every member ‘‘shall establish, maintain and enforce written policies and procedures reasonably designed * * * to prevent the misuse * * * of material, nonpublic information by persons associated with such member.’’ The Exchange represented that this requirement will have the effect of restricting the sharing of material, nonpublic information between the DPM and any affiliate of the DPM who acts as agent for a customer order. Telephone conversation between James Flynn, Assistant Secretary, CBOE, and Kelly Riley, Assistant Director, and Nathan Saunders, Special Counsel, Division, Commission, on October 21, 2005. 19 The Commission today is also granting the CBOE a conditional exemption from the requirement in Rule 608(c) of Regulation NMS promulgated under the Act that the CBOE comply with and enforce compliance by its members with certain provisions of the Linkage Plan to facilitate the establishment of PAR Officials and their handling of Linkage Orders. See Letter from Robert L.D. Colby, Acting Director, Division of Market Regulation to Joanne Moffic-Silver, General Counsel, CBOE, dated November 18, 2005. PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 how the PAR Official should handle responses to Linkage Orders routed to other Linkage Participants that are not responded to in a timely manner.20 The PAR Official will also use the DPM’s account to fill any Satisfaction Order that results from a Trade-Through that is effected on the Exchange by PAR Officials. Finally, the PAR Official will handle all Linkage Orders or portions of Linkage Orders received by the Exchange that are not automatically executed. The Commission believes that the proposed rules governing the handling of Linkage Orders by the PAR Official and the use of the DPMs’ accounts for routing Linkage Orders is consistent with the promotion of a national market system because, among other things, it will allow P/A Orders that reflect the terms of CBOE customer orders to be generated by CBOE and routed to other Linkage Participant markets, which will allow a CBOE customer order to receive possible execution at a price better than the price disseminated by CBOE. Pursuant to Section 19(b)(2) of the Act,21 the Commission finds good cause for approving Amendments No. 2 and 4 prior to the thirtieth day after their publication in the Federal Register. In Amendment No. 2, CBOE has proposed an additional change to CBOE Rule 6.8(d)(vi). The additional change provides that DPMs no longer would be responsible for handling or representing RAES orders that are routed to the PAR workstation or to the Exchange’s ‘‘Live Ammo’’ functionality when CBOE’s disseminated quote is a manual quote (and thus is not eligible for automatic execution against the RAES order). This responsibility will belong to the PAR Official following implementation of the proposed rule change. In Amendment No. 4, CBOE has proposed additional conforming changes to CBOE Rules 6.45, 6.45A, 6.45B, 8.93, and 17.50 in order to render these rules consistent with the proposal as set forth in the Notice published in the Federal Register on July 19, 2005. The Commission finds good cause to accelerate approval of the amended proposal because the changes proposed in Amendments No. 2 and 4 are consistent with the Exchange’s broader proposal to remove a DPM’s responsibility to act as agent for orders received on the PAR workstation and instead to assign this responsibility to the PAR Official. 20 CBOE Rule 6.81(d)(1) specifically addresses the situations in which a CBOE member does not receive a response to a P Order or P/A Order within 20 seconds of sending the order. 21 15 U.S.C. 78s(b)(2). E:\FR\FM\28NON1.SGM 28NON1 Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Notices V. Solicitation of Comments Concerning Amendments No. 2 and 4 Interested persons are invited to submit written data, views, and arguments concerning Amendments No. 2 and 4, including whether they are consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–CBOE–2005–46 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549–9303. All submissions should refer to File Number SR–CBOE–2005–46. 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 (https://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. Copies of such 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–2005–46 and should be submitted on or before December 19, 2005. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,22 that the proposed rule change (File No. SR– CBOE–2005–46), as amended, is approved, and that Amendments No. 2 and 4 thereto are approved on an accelerated basis. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.23 Jonathan G. Katz, Secretary. [FR Doc. E5–6559 Filed 11–25–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–52808; File No. SR–NFA– 2005–01] Self-Regulatory Organizations; National Futures Association; Notice of Filing and Immediate Effectiveness of Proposed Amendments to the Interpretive Notice to NFA Compliance Rule 2–9: Enhanced Supervisory Requirements. November 18, 2005. Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’),1 and Rule 19b–7 under the Exchange Act,2 notice is hereby given that on September 19, 2005, National Futures Association (‘‘NFA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change described in Items I, II, and III below, which Items have been prepared by NFA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. NFA also submitted the proposed rule change to the Commodity Futures Trading Commission (‘‘CFTC’’) on September 19, 2005 for approval. The CFTC has not yet given such approval. I. Self-Regulatory Organization’s Description of the Proposed Rule Change Section 15A(k) of the Exchange Act 3 makes NFA a national securities association for the limited purpose of regulating the activities of Members who are registered as brokers or dealers in security futures products under Section 15(b)(11) of the Exchange Act.4 NFA’s Interpretive Notice entitled VI. Conclusion For the foregoing reasons, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder. VerDate Aug<31>2005 15:28 Nov 25, 2005 Jkt 208001 22 15 U.S.C. 78s(b)(2). 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(7). 2 17 CFR 240.19b–7. 3 15 U.S.C. 78o–3(k). 4 15 U.S.C. 78o(b)(11). 23 CFR PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 71347 ‘‘Compliance Rule 2–9: Enhanced Supervisory Requirements’’ (‘‘Notice’’) applies to all Members who meet the criteria and could apply to Members registered under Section 15(b)(11). The Notice requires a Member to adopt certain enhanced supervisory procedures (‘‘Requirements’’) if its sales force includes a specified number of associated persons (‘‘APs’’) who have worked at Disciplined Firms. NFA’s Special Committee to Study Customer Protection Issues recently recommended changes to the Notice to resolve some emergent loopholes in the Requirements and further prevent abusive sales practices. The Board’s changes: • Automatically reimpose the Requirements on any firm that, having already completed a term under the Requirements, becomes subject to an NFA or CFTC enforcement action alleging sales practice abuses; • Change the current obligation under the Requirements so that a firm may petition to have the Requirements lifted or modified after two years rather than automatically terminating; • Add a provision designed to address issues related to firms avoiding the Requirements by making sham changes to entities and personnel when they become subject to the Requirements; • Include listed principals who have previously worked for Disciplined Firms in the population used to calculate whether a Member firm has triggered an obligation to operate under the Requirements; and • Exclude APs who worked at Disciplined Firms for less than sixty days more than five years ago from having to be counted for purposes of calculating whether a Member who hires such an individual is required to adopt the Requirements. Below is the text of the proposed amendments to the Notice. Proposed new language is in italics; proposed deletions are in [brackets]. * * * * * Interpretive Notice Compliance Rule 2–9: Enhanced Supervisory Requirements Over the years, NFA’s Board of Directors has adopted strict and effective rules to prohibit deceptive sales practices, and those rules have been vigorously enforced by NFA’s Business Conduct Committees. The Board notes, however, that by their very nature, enforcement actions occur after the customer abuse has taken place. The Board recognizes that NFA’s goal must be not only to punish such deception of customers through enforcement actions E:\FR\FM\28NON1.SGM 28NON1

Agencies

[Federal Register Volume 70, Number 227 (Monday, November 28, 2005)]
[Notices]
[Pages 71344-71347]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-6559]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52798; File No. SR-CBOE-2005-46]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change and Amendment No. 
1 Thereto and Notice of Filing and Order Granting Accelerated Approval 
to Amendments No. 2 and 4 Thereto Relating to the Removal of Agency 
Responsibilities From Designated Primary Market-Makers and the 
Establishment of PAR Officials

November 18, 2005.

I. Introduction

    On June 10, 2005, the Chicago Board Options Exchange, Incorporated 
(``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 change to amend its rules relating to 
Designated Primary Market-Makers (``DPMs'') to eliminate the DPM's 
responsibility to act as agent in the options in which it is registered 
as the DPM on the Exchange. Instead, the Exchange has proposed to 
designate a CBOE employee or independent contractor (``PAR Official'') 
to be responsible for assuming the responsibility for handling certain 
orders currently undertaken by the DPMs in their allocated options 
classes, including the operation of the PAR workstation. The Exchange 
filed Amendment No. 1 with the Commission on July 1, 2005.\3\ The 
amended proposal was published for comment in the Federal Register on 
July 19, 2005.\4\ The Commission received one comment letter regarding 
the proposal.\5\ The Exchange filed Amendment No. 2 with the Commission 
on October 6, 2005.\6\ The Exchange filed Amendment No. 3 with the 
Commission on November 17, 2005, and withdrew Amendment No. 3 on 
November 18, 2005. The Exchange filed Amendment No. 4 with the 
Commission on November 18, 2005.\7\ This order approves the proposed 
rule change, as amended. In addition, the Commission seeks comment from 
interested persons on Amendments No. 2 and 4.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superceded the original rule 
filing in its entirety.
    \4\ See Securities Exchange Act Release No. 52017 (July 12, 
2005), 70 FR 41453 (``Notice'').
    \5\ See e-mail from Margaret Wiermanski, Chief Operations and 
Compliance Officer, CTC, LLC, dated July 29, 2005 (``CTC Letter'').
    \6\ See Partial Amendment, submitted by James Flynn, Assistant 
Secretary, CBOE (``Amendment No. 2''). In Amendment No. 2, CBOE 
proposed an additional change to CBOE Rule 6.8 to conform the text 
of this rule with the proposal.
    \7\ See Partial Amendment, submitted by James Flynn, Assistant 
Secretary, CBOE (``Amendment No. 4''). In Amendment No. 4, CBOE 
proposed additional changes to CBOE Rules 6.45, 6.45A, 6.45B, 8.94, 
and 17.50 to conform the text of these rules with the proposal.
---------------------------------------------------------------------------

II. Description of Proposed Rule

    Under its current rules, a DPM is defined as a ``member 
organization that is approved by the Exchange to function in allocated 
securities as a Market-Maker * * *, as a Floor Broker * * *, and as an 
Order Book Official * * *.\8\ CBOE Rule 8.85 further sets out the DPM's 
obligations regarding agency transactions. According to the CBOE, its 
uniform practice has been to require DPMs to act as Floor Brokers for 
the classes of options assigned to them. Accordingly, all DPMs on CBOE 
presently act as both agent and principal

[[Page 71345]]

in their allocated options on the Exchange.
---------------------------------------------------------------------------

    \8\ See CBOE Rule 8.80.
---------------------------------------------------------------------------

    The CBOE has now determined to eliminate a DPM's agency duties, 
including the responsibilities associated with operating the PAR 
workstation. Specifically, CBOE has proposed to amend its rules to 
remove a DPM's obligation to act as an agent or Floor Broker in its 
allocated securities on the Exchange. In a DPM's place, the Exchange 
has proposed to designate a PAR Official who will be responsible for 
handling certain orders in the same manner as they were formerly 
handled by the DPM. In particular, the PAR Official will operate the 
PAR workstation, maintain the public customer limit order book for its 
assigned non-Hybrid option classes, execute orders that are sent to the 
PAR workstation or that are placed on the limit order book, display 
eligible limit orders, and undertake the obligations related to 
handling certain Linkage Orders.\9\
---------------------------------------------------------------------------

    \9\ See infra note 10.
---------------------------------------------------------------------------

    The Exchange has proposed to amend its definition of ``Principal 
Acting as Agent (`P/A') Order'' to remove the requirement that a 
Market-Maker act as an agent for the unexecuted customer order related 
to the P/A Order.\10\ The CBOE proposed this change to conform to its 
proposal to remove the DPM's agency responsibilities. The proposed rule 
change also assigned certain obligations to the PAR Officials related 
to the handling of Linkage Orders, including using a DPM's account to 
route P/A Orders, Principal Orders on behalf of orders in the custody 
of the PAR Official that are for the account of a broker-dealer, and 
Satisfaction Orders to other participants in the Linkage Plan. In 
addition, PAR Officials would have the obligation to handle all Linkage 
Orders or portions of Linkage Orders received by the Exchange that are 
not automatically executed, and to use the DPM's account to fill a 
Satisfaction Order that results from a Trade-Through that is effected 
on the Exchange by a PAR Official. The proposed rule change also 
requires DPMs to provide prior written instructions to the PAR 
Officials regarding routing Linkage Orders and handling responses to 
Linkage Orders.
---------------------------------------------------------------------------

    \10\ The proposed rule change would amend CBOE Rule 6.80(12) to 
provide that ``Linkage Order'' means an Immediate or Cancel Order 
routed through the Linkage as permitted under the Plan for the 
Purpose of Creating and Operating an Intermarket Option Linkage 
(``Linkage Plan''). Amended Rule 6.80(12) would change the 
definition of ``Principal Acting as Agent (`P/A') Order'' to be ``an 
order for the principal account of a Market-Maker (or equivalent 
entity on another Participant Exchange that is authorized to 
represent Customer orders) reflecting the terms of a related 
unexecuted Customer order.''
---------------------------------------------------------------------------

    The CBOE has proposed measures designed to ensure the independence 
of PAR Officials from Exchange members. Specifically, the PAR Official 
would be required to be an Exchange employee or independent contractor 
whose compensation would be determined, and paid, solely by CBOE. 
Further, the PAR Official would be prohibited from having an 
affiliation with any CBOE member that acts as a Market-Maker on the 
Exchange.
    Because the DPM would no longer be operating the PAR workstation, 
CBOE proposed to amend its Rule 8.51, which defines when a DPM's firm 
quote obligation attaches for orders received over PAR. Interpretation 
and Policy .10 to CBOE Rule 8.51 currently provides that, in the case 
of orders received at a PAR workstation in a DPM trading crowd, the 
DPM's firm quote obligation attaches at the time the order is received 
on the PAR workstation. CBOE has proposed to clarify that firm quote 
obligations attach to all responsible brokers or dealers in the trading 
crowd, which may include the DPM, at such time as when the PAR Official 
announces the order to the crowd. The Exchange has proposed this 
clarification in light of the fact that DPMs will no longer represent 
orders as Floor Broker from the instant such orders are received on the 
PAR workstation.
    In Amendment No. 2, the Exchange has proposed to amend subsection 
(d)(vi) of Rule 6.8 (RAES Operations) to indicate that: (1) DPMs no 
longer would be responsible for handling or representing orders that 
are routed to a CBOE PAR workstation or to the Exchange's ``Live Ammo'' 
functionality, and (2) to the extent that a PAR Official would be 
taking such responsibilities, the PAR Official will be required to use 
his or her best efforts to attempt to ensure that members receive an 
allocation of any incoming orders for up to their disseminated size.
    In Amendment No. 4, the Exchange has proposed to amend CBOE Rule 
8.93 (e-DPM Obligations) to exclude from the e-DPM's obligations the 
proposed obligation of DPMs to allow a PAR Official to use the DPM's 
account to send and respond to linkage orders.\11\ The Exchange 
represents that PAR Officials will use only DPM accounts, not e-DPM 
accounts, to generate linkage orders and responses as required by 
proposed CBOE Rule 7.12(e).\12\ The Exchange also has proposed 
conforming changes to CBOE Rules 6.45 (Priority of Bids and Offers--
Allocation of Trades), 6.45A (Priority and Allocation of Equity Option 
Trades on the CBOE Hybrid System), 6.45B (Priority and Allocation of 
Trades in Index Options and Options on ETFs on the CBOE Hybrid System), 
8.93, and 17.50 (Imposition of Fines for Minor Rule Violations) to 
reflect (1) that customer orders currently represented by DPMs would be 
represented by PAR Officials under the proposal and (2) the proposed 
removal of DPMs' agency obligations under CBOE Rule 8.85(b).
---------------------------------------------------------------------------

    \11\ See Proposed CBOE Rule 8.85(a)(xiv).
    \12\ Telephone conversation between James Flynn, Assistant 
Secretary, CBOE, and Tim Fox, Special Counsel, and Nathan Saunders, 
Special Counsel, Division of Market Regulation (``Division''), 
Commission, on November 17, 2005.
---------------------------------------------------------------------------

    The text of the changes proposed in Amendments No. 2 and 4 is 
available on CBOE's Web site (https://www.cboe.org/legal/), at CBOE's 
office of the secretary, and at the Commission's Public Reference Room.

III. Summary of Comments

    The Commission received one comment letter on the proposed rule 
change.\13\ The commenter, a member firm of the Exchange, endorsed the 
proposed rule filing and agreed with its purpose and intent. However, 
the commenter suggested that the proposal be initially approved on a 
three-month pilot basis to provide the Exchange, its members, and its 
participants with ``some working experience'' before the rule is 
permanently approved. The commenter wrote that certain ``basic 
operational considerations'' related to the implementation of the 
proposed rule change are still unknown--for example, the mechanics of 
how Linkage Orders will be booked into the DPM's account by the PAR 
Official, and how the new procedures would affect CBOE's membership 
rules and compliance by CBOE with the consolidated options audit trail 
system (``COATS'') regulations. The commenter suggested that a pilot 
period would make any required modification to the rules 
administratively easier to accomplish.
---------------------------------------------------------------------------

    \13\ See CTC Letter, supra note 5.
---------------------------------------------------------------------------

    The CBOE responded to the commenter's concerns related to the 
implementation and operation of the PAR Official program.\14\ The CBOE 
emphasized the long-term goals of the PAR Official program were 
promoted by this filing because it would ``eliminat[e] the risks 
associated with a DPM acting as both principal and agent * * *.'' The 
CBOE suggested that a pilot program could ``frustrate these efforts'' 
and create ``uncertainty'' regarding the status of the DPM program. The 
Exchange also

[[Page 71346]]

represented that it believed a better mechanism to resolve the 
complications that arise as a result of the proposed rule change would 
be for the CBOE to address the problems promptly, either through 
additional rule filing(s), systems enhancements, or operation 
modifications. In addition, the CBOE pointed out that the proposal 
already provides a three-month period following approval for the CBOE 
and its members to fully implement the PAR Official program in all DPM 
trading stations, which the CBOE believes should allow it to address 
any implementation issues that may arise as a result of the proposed 
rule change.
---------------------------------------------------------------------------

    \14\ See E-mail from James Flynn, Attorney II, CBOE to Jonathan 
G. Katz, Secretary, Commission, dated September 1, 2005.
---------------------------------------------------------------------------

IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\15\ In particular, the Commission believes that 
the proposal is consistent with the requirements of Section 6(b)(5) of 
the Act,\16\ which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, 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.
---------------------------------------------------------------------------

    \15\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    With this proposal, CBOE seeks to eliminate the conflicts of 
interest that currently exist for their DPMs. Specifically, DPMs today 
trade for their own accounts as Market-Makers and act as agents for 
certain orders in their allocated options. CBOE has proposed to 
eliminate the DPM's obligation and permission to act as agent.\17\ The 
Commission believes that eliminating a DPM's obligation and permission 
to act as agent will promote just and equitable principles of trade and 
protect investors and the public interest.\18\
---------------------------------------------------------------------------

    \17\ The Commission notes that CBOE Rule 8.85(b), as amended, 
will no longer permit a DPM to act as an agent for customer orders. 
However, to the extent that a DPM nevertheless undertakes to 
represent a customer's order in violation of CBOE Rule 8.85(b), the 
DPM will assume all the duties and liabilities of an agent to a 
principal during the course of such representation. See Section 1 of 
the Restatement, 2d of Agency.
    \18\ In addition, CBOE Rule 4.18, Prevention of the Misuse of 
Material, Nonpublic Information, will have the effect of mitigating 
conflicts of interest that might arise when an affiliate of the DPM 
acts as agent for a customer order in one of the DPM's assigned 
options classes. CBOE Rule 4.18 requires that every member ``shall 
establish, maintain and enforce written policies and procedures 
reasonably designed * * * to prevent the misuse * * * of material, 
nonpublic information by persons associated with such member.'' The 
Exchange represented that this requirement will have the effect of 
restricting the sharing of material, nonpublic information between 
the DPM and any affiliate of the DPM who acts as agent for a 
customer order. Telephone conversation between James Flynn, 
Assistant Secretary, CBOE, and Kelly Riley, Assistant Director, and 
Nathan Saunders, Special Counsel, Division, Commission, on October 
21, 2005.
---------------------------------------------------------------------------

    CBOE has proposed that orders that currently are represented by 
DPMs as agent be handled by Exchange employees known as PAR Officials 
and would require that their compensation be determined and paid 
exclusively by the Exchange. CBOE has also proposed to prohibit 
affiliations between PAR Officials and CBOE Market-Makers to ensure the 
PAR Officials are independent from Exchange Market-Makers' interests. 
The restrictions will mitigate potential conflicts of interest.
    Pursuant to the proposed rule change, PAR Officials will undertake 
comparable responsibilities currently held by DPMs with respect to 
customer orders. For example, the PAR Official must use due diligence 
to execute the orders placed in his or her custody at the best prices 
available to him or her under the CBOE rules. In addition, PAR 
Officials will assume the obligations related to displaying public 
customer orders that improve CBOE's disseminated quote by maintaining 
Autobook, the Exchange's automated limit order display facility, and 
keeping it active. Accordingly, the Commission believes that the CBOE's 
proposal should ensure that customers' orders continue to be 
represented and handled in a timely fashion on the Exchange.
    The PAR Officials would assume responsibilities related to Linkage 
Orders. Specifically, a PAR Official would use a DPM's account to route 
P/A Orders, Principal Orders on behalf of orders in the custody of the 
PAR Official that are for the account of a broker-dealer, and 
Satisfaction Orders to other participants in the Linkage Plan based on 
prior written instructions provided by the DPM to the PAR Official.\19\ 
The written instructions provided by the DPM will also include 
direction as to how the PAR Official should handle responses to Linkage 
Orders routed to other Linkage Participants that are not responded to 
in a timely manner.\20\ The PAR Official will also use the DPM's 
account to fill any Satisfaction Order that results from a Trade-
Through that is effected on the Exchange by PAR Officials. Finally, the 
PAR Official will handle all Linkage Orders or portions of Linkage 
Orders received by the Exchange that are not automatically executed. 
The Commission believes that the proposed rules governing the handling 
of Linkage Orders by the PAR Official and the use of the DPMs' accounts 
for routing Linkage Orders is consistent with the promotion of a 
national market system because, among other things, it will allow P/A 
Orders that reflect the terms of CBOE customer orders to be generated 
by CBOE and routed to other Linkage Participant markets, which will 
allow a CBOE customer order to receive possible execution at a price 
better than the price disseminated by CBOE.
---------------------------------------------------------------------------

    \19\ The Commission today is also granting the CBOE a 
conditional exemption from the requirement in Rule 608(c) of 
Regulation NMS promulgated under the Act that the CBOE comply with 
and enforce compliance by its members with certain provisions of the 
Linkage Plan to facilitate the establishment of PAR Officials and 
their handling of Linkage Orders. See Letter from Robert L.D. Colby, 
Acting Director, Division of Market Regulation to Joanne Moffic-
Silver, General Counsel, CBOE, dated November 18, 2005.
    \20\ CBOE Rule 6.81(d)(1) specifically addresses the situations 
in which a CBOE member does not receive a response to a P Order or 
P/A Order within 20 seconds of sending the order.
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2) of the Act,\21\ the Commission finds 
good cause for approving Amendments No. 2 and 4 prior to the thirtieth 
day after their publication in the Federal Register. In Amendment No. 
2, CBOE has proposed an additional change to CBOE Rule 6.8(d)(vi). The 
additional change provides that DPMs no longer would be responsible for 
handling or representing RAES orders that are routed to the PAR 
workstation or to the Exchange's ``Live Ammo'' functionality when 
CBOE's disseminated quote is a manual quote (and thus is not eligible 
for automatic execution against the RAES order). This responsibility 
will belong to the PAR Official following implementation of the 
proposed rule change. In Amendment No. 4, CBOE has proposed additional 
conforming changes to CBOE Rules 6.45, 6.45A, 6.45B, 8.93, and 17.50 in 
order to render these rules consistent with the proposal as set forth 
in the Notice published in the Federal Register on July 19, 2005.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    The Commission finds good cause to accelerate approval of the 
amended proposal because the changes proposed in Amendments No. 2 and 4 
are consistent with the Exchange's broader proposal to remove a DPM's 
responsibility to act as agent for orders received on the PAR 
workstation and instead to assign this responsibility to the PAR 
Official.

[[Page 71347]]

V. Solicitation of Comments Concerning Amendments No. 2 and 4

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendments No. 2 and 4, including whether they are 
consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2005-46 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-CBOE-2005-46. 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 (https://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. Copies of such 
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-2005-46 and should be submitted on or before 
December 19, 2005.

VI. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (File No. SR-CBOE-2005-46), as 
amended, is approved, and that Amendments No. 2 and 4 thereto are 
approved on an accelerated basis.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
---------------------------------------------------------------------------

    \23\ CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
 [FR Doc. E5-6559 Filed 11-25-05; 8:45 am]
BILLING CODE 8010-01-P
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.