Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of Proposed Rule Change Relating to CBOE Rules Governing Doing Business With the Public, 54952-54956 [E7-19079]

Download as PDF rwilkins on PROD1PC63 with NOTICES 54952 Federal Register / Vol. 72, No. 187 / Thursday, September 27, 2007 / Notices Kingdom of Lesotho Republic of Liberia Republic of Madagascar Republic of Malawi Republic of Mali Republic of Mauritius Islamic Republic of Mauritania Republic of Mozambique Republic of Namibia Republic of Niger Federal Republic of Nigeria Republic of Rwanda Sao Tome & Principe Republic of Senegal Republic of Seychelles Republic of Sierra Leone Republic of South Africa Kingdom of Swaziland United Republic of Tanzania Republic of Uganda Republic of Zambia The following sub-Saharan African countries were not designated as beneficiary sub-Saharan African countries in 2007: Central African Republic Federal Islamic Republic of Comoros Republic of Cote d’Ivoire Republic of Equatorial Guinea State of Eritrea Somalia Republic of Togo Republic of Sudan Republic of Zimbabwe Requirements for Submissions: In order to facilitate the prompt processing of submissions, USTR strongly urges and prefers electronic (e-mail) submissions to FR0720.eop.gov in response to this notice. In the event that an e-mail submission is impossible, submissions should be made by facsimile. Persons making submissions by e-mail should use the following subject line: ‘‘2007 AGOA Annual Country Review.’’ Documents should be submitted as WordPerfect, MSWord, or text (.TXT) files. Supporting documentation submitted as spreadsheets are acceptable as Quattro Pro or Excel. For any document containing business confidential information submitted electronically, the file name of the business confidential version should begin with the characters ‘‘BC-’’ and the file name of the public version should begin with the characters ‘‘P-’’. The ‘‘P-’’ or ‘‘BC-’’ should be followed by the name of the submitter. Persons who make submissions by e-mail should not provide separate cover letters; information that might appear in a cover letter should be included in the submission itself. Similarly, to the extent possible, any attachments to the submission should be included in the same file as the submission itself, and not as separate files. VerDate Aug<31>2005 16:40 Sep 26, 2007 Jkt 211001 Written comments will be placed in a file open to public inspection pursuant to 15 CFR 2003.5, except confidential business information exempt from public inspection in accordance with 15 CFR 2003.6. Confidential business information submitted in accordance with 15 CFR 2003.6 must be clearly marked ‘‘BUSINESS CONFIDENTIAL’’ at the top of each page, including any cover letter or cover page, and must be accompanied by a nonconfidential summary of the confidential information. All public documents and nonconfidential summaries shall be available for public inspection in the USTR Reading Room. The USTR Reading Room is open to the public, by appointment only, Monday through Friday, from 10 a.m. to 12 noon and 1 p.m. to 4 p.m. An appointment to review the file may be made by calling (202) 395–6186. Appointments must be scheduled at least 48 hours in advance. Carmen Suro-Bredie, Chairman, Trade Policy Staff Committee. [FR Doc. E7–19054 Filed 9–26–07; 8:45 am] BILLING CODE 3110–W7–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56492; File No. SR–CBOE– 2007–106] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of Proposed Rule Change Relating to CBOE Rules Governing Doing Business With the Public September 21, 2007. 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 September 5, 2007, Chicago Board Options Exchange, Incorporated (‘‘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 substantially prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is proposing to amend certain rules that govern an Exchange 1 15 2 17 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00064 Fmt 4703 Sfmt 4703 member’s conduct in doing business with the public. Specifically, the proposed rule change would require member organizations to integrate the responsibility for supervision of a member organization’s public customer options business into its overall supervisory and compliance program. In addition, the Exchange proposes to amend certain rules to strengthen member organizations’ supervisory procedures and internal controls as they relate to a member’s public customer options business. The text of the proposed rule change is available at CBOE, the Commission’s Public Reference Room and https:// www.cboe.org/legal. 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 a. Integration of Options Supervision The purpose of the proposed rule change is to create a supervisory structure for options that is similar to that required by New York Stock Exchange (‘‘NYSE’’) and National Association of Securities Dealers (‘‘NASD’’) rules.3 The proposed rule change would eliminate the requirement that member organizations qualified to do a public customer business in options must designate a single person to act as Senior Registered Options Principal (‘‘SROP’’) for the member organization and that each such member organization designate a specific individual as a Compliance Registered Options Principal (‘‘CROP’’). Instead member organizations would be 3 See NYSE Rule 342 and NASD Rule 3010. On July 26, 2007, the Commission approved a proposed rule change filed by NASD to amend NASD’s Certificate of Incorporation to reflect its name change to Financial Industry Regulatory Authority Inc., or FINRA, in connection with the consolidation of the member firm regulatory functions of NASD and NYSE Regulation, Inc. See Securities Exchange Act Release No. 56146 (July 26, 2007). E:\FR\FM\27SEN1.SGM 27SEN1 rwilkins on PROD1PC63 with NOTICES Federal Register / Vol. 72, No. 187 / Thursday, September 27, 2007 / Notices required to integrate the SROP and CROP functions into their overall supervisory and compliance programs. The SROP concept was first introduced by CBOE during the early years of the development of the listed options market. Previously, under CBOE rules, member organizations were required to designate one or more persons qualified as Registered Options Principals (‘‘ROPs’’) having supervisory responsibilities in respect of the member organization’s options business. As the number of ROPs at larger member organizations began to increase, CBOE imposed an additional requirement that member organizations designate one of their ROPs as the SROP. This was intended to eliminate confusion as to where the compliance and supervisory responsibilities lay by centralizing in a single supervisory officer overall responsibility for the supervision of a member organization’s options activities.4 Subsequently, following the recommendation of the Commission’s Options Study, CBOE and other options exchanges required member organizations to designate a CROP to be responsible for the member organization’s overall compliance program in respect of its options activities.5 The CROP may be the same person who is designated as SROP. Since the SROP and CROP requirements were first imposed, the supervisory function in respect of the options activities of most securities firms has been integrated into the matrix of supervisory and compliance functions in respect of the firms’ other securities activities. This not only reflects the maturity of the options market, but also recognizes the ways in which the uses of options themselves have become more integrated with other securities in the implementation of particular strategies. Thus, the current requirement for a separately designated senior supervisor in respect of all aspects of a member organization’s options activities, rather than clarifying the allocation of supervisory responsibilities within the member organization, may have just the opposite effect by failing to take into account the way in which these responsibilities are actually assigned. In addition, by permitting supervision of a member organization’s options activities to be handled in the same manner as the supervision of its other securities activities as well as its futures activities, the proposed rule change will ensure 4 Report of the Special Study of the Options Market (‘‘Options Study’’), note 11 p. 316 (December 22, 1978). 5 Id. at p. 335. VerDate Aug<31>2005 16:40 Sep 26, 2007 Jkt 211001 that supervisory responsibility over each segment of the member organization’s business is assigned to the best qualified persons in the member organization, thereby enhancing the overall quality of supervision. The same holds true for the compliance function. For example, most member organizations have designated one person to have supervisory responsibility over the application of margin requirements and other matters pertaining to the extension of credit. The proposed rule change would enable a member organization to include within the scope of such a person’s duties the supervision over the proper margining of options accounts, thereby assuring that the most qualified person is charged with this responsibility and at the same time eliminating any uncertainty that might now exist as to whether this responsibility lies with the senior credit supervisor or with the SROP. Similarly, the proposed rule change would allow a member organization to specifically designate one or more individuals as being responsible for approving a ROP’s acceptance of discretionary accounts 6 and exceptions to a member organization’s suitability standards for trading uncovered short options.7 The proposed rule changes would allow member organizations the flexibility to assign such responsibilities, which formerly rested with the SROP and/or CROP, to more than one ROP qualified individual where the member organization believes it advantageous to do so to enhance its supervisory or compliance structure. Typically, a member organization may wish to divide these functions on the basis of geographic region or functional considerations. Rule 9.2 would be amended to clarify the qualification requirements of individuals designated as ROPs.8 Rule 9.3 would be amended to specify the registration requirements of individuals who accept orders from non-broker-dealer customers.9 The proposed rule change would call for options discretionary accounts, the acceptance of which must be approved by a ROP qualified individual (other than the ROP who accepted the account), to be supervised in the same manner as the supervision of other securities accounts that are handled on a discretionary basis. The proposed rule change would eliminate the requirement that discretionary options orders be 6 See proposed Rule 9.10(a). proposed Rule 9.7(f)(3). 8 See proposed Rules 9.2.01 and 9.2.02. 9 See proposed Rule 9.3.01. 7 See PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 54953 approved on the day of entry by a ROP (with one exception as described below). This requirement predates the Options Study and is not consistent with the use of supervisory tools in computerized format or exception reports generated after the close of a trading day. No similar requirement exists for supervision of other securities accounts that are handled on a discretionary basis.10 Discretionary orders must be reviewed in accordance with a member organization’s written supervisory procedures. The proposed rule change would ensure that supervisory responsibilities are assigned to specific ROP-qualified individuals, thereby enhancing the quality of supervision. Exchange Rule 9.10 would be revised by adding, as Interpretation and Policy .01, a requirement that any member organization that does not utilize computerized surveillance tools for the frequent and appropriate review of discretionary account activity must establish and implement procedures to require ROP qualified individuals who have been designated to review discretionary accounts to approve and initial each discretionary order on the day entered. The Exchange believes that any member organization that does not utilize computerized surveillance tools to monitor discretionary account activity should continue to be required to perform the daily manual review of discretionary orders. Under the proposed rule change, options discretionary accounts will continue to receive frequent appropriate supervisory review by designated ROPqualified individuals. Additionally, member organizations will continue to be required to designate ROP-qualified individuals to review and approve the acceptance of options discretionary accounts in order to determine whether the ROP accepting the account had a reasonable basis for believing that the customer was able to understand and bear the risks of the proposed strategies or transactions. This requirement provides an additional level of supervisory audit over options discretionary accounts that does not exist for other securities discretionary accounts. In addition, the proposed rule change would require that each member organization submit to the Exchange a written report by April 1 of each year, that details the member organization’s supervision and compliance effort, including its options compliance program, during the preceding year and reports on the adequacy of the member 10 See, E:\FR\FM\27SEN1.SGM e.g., NYSE Rule 408. 27SEN1 54954 Federal Register / Vol. 72, No. 187 / Thursday, September 27, 2007 / Notices rwilkins on PROD1PC63 with NOTICES organization’s ongoing compliance processes and procedures.11 Proposed Rule 9.8(h) would require that each member organization submit, by April 1st of each year, a copy of the Rule 9.8(g) annual report to one or more of its control persons or, if the member organization has no control person, to the audit committee of its board of directors or its equivalent committee or group.12 Proposed Rule 9.8(g) would provide that a member organization that specifically includes its options compliance program in a report that complies with substantially similar requirements of the NYSE and NASD will be deemed to have satisfied the requirements of Rules 9.8(g) and 9.8(h). Additionally, where appropriate, the proposed rule change would delete references to SROP and CROP in Rules 3.6A and 26.10.13 Although the proposed rule change would eliminate entirely the positions and titles of the SROP and CROP, member organizations would still be required to designate a single general partner or executive officer to assume overall authority and responsibility for internal supervision, control of the member organization and compliance with securities laws and regulations.14 Member organizations would also be required to designate specific qualified individuals as having supervisory or compliance responsibilities over each aspect of the member organization’s options activities and to set forth the names and titles of these individuals in their written supervisory procedures.15 This is consistent with the integration of options supervision into the overall supervisory and compliance structure of a member organization. In connection with the approval of these proposed rule changes, the Exchange intends to review member organizations’ written supervisory and compliance procedures in the course of the Exchange’s routine examination of member organizations to ensure that supervisory and compliance responsibilities are adequately defined. The Exchange believes that the proposed rule changes recognize that options are no longer in their infancy, have become more integrated with other securities in the implementation of particular strategies, and thus should 11 See proposed Rule 9.8(g), which is modeled after NYSE Rule 342.30. 12 Proposed Rule 9.8(h) is modeled after NYSE Rule 354. 13 The Exchange notes that a separate proposed rule change currently pending at the Commission (SR–CBOE–2007–30) proposes to delete references to the CROP in Rule 9.21, among other things. 14 See proposed Rule 9.8(a). 15 See proposed Rule 9.8.01. VerDate Aug<31>2005 16:40 Sep 26, 2007 Jkt 211001 not continue to be regulated as though they are a new and experimental product. The Exchange believes that the proposed rule change is appropriate and would not materially alter the supervisory operations of member organizations. The Exchange believes the supervisory and compliance structure in place for non-options products at most member organizations is not materially different from the structure in place for options. b. Supervisory Procedures and Internal Controls The Exchange also proposes to amend certain rules to strengthen member and member organizations’ supervisory procedures and internal controls as they relate to a member’s public customer options business. The proposed rule changes described below are modeled after NYSE and NASD rules approved by the Commission in 2004.16 The Exchange believes the following proposal to strengthen member supervisory procedures and internal controls is appropriate and consistent with the preceding proposal to integrate options and non-options sales practice supervision and compliance functions. Exchange Rule 9.8(a)(3) would be revised to require the development and implementation of written policies and procedures reasonably designed to supervise sales managers and other supervisory personnel who service customer options accounts (i.e., who act in the capacity of a registered representative).17 This requirement would apply to branch office managers, sales managers, regional/district sales managers, or any person performing a similar supervisory function. Such policies and procedures are expected to encompass all options sales-related activities. Proposed Rule 9.8(a)(3)(i) would require that supervisory reviews of producing sales managers be conducted by a qualified ROP who is either senior to, or otherwise ‘‘independent of’’, the producing manager under review.18 This provision 16 See Securities Exchange Act Release No. 49882 (June 17, 2004), 69 FR 35108 (June 23, 2004) (SR– NYSE–2002–36), and Securities Exchange Act Release No. 49883 (June 17, 2004), 69 FR 35092 (June 23, 2004) (SR–NASD–2002–162). 17 Proposed Rule 9.8(a)(3) is modeled after NYSE Rule 342.19. 18 An ‘‘otherwise independent’’ person would be defined in proposed Rule 9.8(a)(3)(i) as one who: may not report either directly or indirectly to the producing manager under review; must be situated in an office other than the office of the producing manager; must not otherwise have supervisory responsibility over the activity being reviewed; and must alternate such review responsibility with another qualified person every two years or less. Further, if a person designated to review a producing manager receives an override or other PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 is intended to ensure that all options sales activity of a producing manager is monitored for compliance with applicable regulatory requirements by persons who do not have a personal interest in such activity. Proposed Rule 9.8(a)(3)(ii) would provide a limited exception for members so limited in size and resources that there is no qualified person senior to, or otherwise independent of, the producing manager to conduct the review. In this case, the reviews may be conducted by a qualified ROP to the extent practicable. Under proposed Rule 9.8(a)(3)(iii), a member relying on the limited size and resources exception must document the factors used to determine that compliance with each of the ‘‘senior’’ or ‘‘otherwise independent’’ standards of Rule 9.8(a)(3)(i) is not possible, and that the required supervisory systems and procedures in place with respect to any producing manager comply with the provisions of Rule 9.8(a)(3)(i) to the extent practicable. Paragraph (a)(3)(iv) of Rule 9.8 would provide that a member organization that complies with requirements of the NYSE or the NASD that are substantially similar to the requirements in Rules 9.8(a)(3)(i), (a)(3)(ii) and (a)(3)(iii) will be deemed to have met such requirements. Proposed Rule 9.8(c)(i) would require member organizations to develop and maintain adequate controls over each of their business activities. The proposed rule would further require that such controls include the establishment of procedures to independently verify and test the supervisory systems and procedures for those business activities. Member organizations would be required to include in the annual report prepared pursuant to Rule 9.8(g) a review of the member organization’s efforts in this regard, including a summary of the tests conducted and significant exceptions identified. The Exchange believes proposed Rule 9.8(c)(i) would enhance the quality of member organizations’ supervision.19 Paragraph (c)(ii) of Rule 9.8 would provide that a member organization that complies with requirements of the NYSE or the NASD that are substantially similar to the requirements income derived from that producing manager’s customer activity that represents more than 10% of the designated person’s gross income derived from the member organization over the course of a rolling twelve-month period, the member organization must establish alternative senior or otherwise independent supervision of that producing manager to be conducted by a qualified ROP other than the designated person receiving the income. 19 Proposed Rule 9.8(c)(i) is modeled after NYSE Rule 342.23. E:\FR\FM\27SEN1.SGM 27SEN1 Federal Register / Vol. 72, No. 187 / Thursday, September 27, 2007 / Notices rwilkins on PROD1PC63 with NOTICES in Rule 9.8(c)(i) will be deemed to have met such requirements. Proposed Rule 9.8(d) would establish requirements for branch office inspections similar to the requirements of NYSE Rule 342.24. Specifically, Rule 9.8(d) would require a member organization to inspect each supervisory branch office at least annually and each non-supervisory branch office at least once every three years.20 The proposed rule would further require that persons who conduct a member organization’s annual branch office inspection must be independent of the direct supervision or control of the branch office (i.e., not the branch office manager, or any person who directly or indirectly reports to such manager, or any person to whom such manager directly reports). The Exchange believes that requiring branch office inspections to be conducted by someone who has no significant financial interest in the success of a branch office should lead to more objective and vigorous inspections. Under proposed Rule 9.8(e), any member organization seeking an exemption, pursuant to Rule 9.8(d)(1)(ii), from the annual branch office inspection requirement would be required to submit to the Exchange written policies and procedures for systematic risk-based surveillance of its branch offices, as defined in Rule 9.8(e). Proposed Rule 9.8(f) would require that annual branch office inspection programs include, at a minimum, testing and verification of specified internal controls.21 Paragraph (d)(3) of Rule 9.8 would provide that a member organization that complies with requirements of the NYSE or the NASD that are substantially similar to the requirements in Rules 9.8(d), (e) and (f) will be deemed to have met such requirements. In conjunction with the proposed changes to Rules 9.8(d), (e) and (f), the Exchange proposes to amend Rule 9.6 to define ‘‘branch office’’ in a way that is substantially similar to the definition of branch office in NYSE Rule 342.10. Proposed Rule 9.8(g)(4) would require a member organization to designate a 20 Proposed Rules 9.8(d)(1)(i) and (ii) would provide members with two exceptions from the annual branch office inspection requirement: A member may demonstrate to the satisfaction of the Exchange that other arrangements may satisfy the Rule’s requirements for a particular branch office, or based upon a member organization’s written policies and procedures providing for a systematic risk-based surveillance system, the member organization submits a proposal to the Exchange and receives, in writing, an exemption from this requirement pursuant to Rule 9.8(e). 21 Proposed Rules 9.8(e) and (f) are modeled after NYSE Rule 342.25 and 342.26. VerDate Aug<31>2005 16:40 Sep 26, 2007 Jkt 211001 Chief Compliance Officer (CCO).22 Proposed Rule 9.8(g)(5) would require each member organization’s chief executive officer (CEO), or equivalent, to certify annually that the member organization has in place processes to: (1) Establish and maintain policies and procedures reasonably designed to achieve compliance with applicable Exchange rules and federal securities laws and regulations; (2) modify such policies and procedures as business, regulatory, and legislative changes and events dictate; and (3) test the effectiveness of such policies and procedures on a periodic basis, the timing of which is reasonably designed to ensure continuing compliance with Exchange rules and federal securities laws and regulations. Proposed Rule 9.8(g)(5) would further require that the CEO attest the CEO has conducted one or more meetings with the CCO in the preceding 12 months to discuss the compliance processes in proposed Rule 9.8(g)(5)(i), that the CEO has consulted with the CCO and other officers to the extent necessary to attest to the statements in the certification, and the compliance processes are evidenced in a report, reviewed by the CEO, CCO, and such other officers as the member organization deems necessary to make the certification, that is provided to the member organization’s board of directors and audit committee (if such committee exists).23 Under proposed Rule 9.8(b)(2), a member, upon a customer’s written instructions, may hold mail for a customer who will not be at his or her usual address for no longer than two months if the customer is on vacation or traveling, or three months if the customer is going abroad. This provision would help ensure that members that hold mail for customers who are away from their usual addresses, do so only pursuant to the customer’s written instructions and for a specified, relatively short period of time.24 Proposed Rule 9.8(b)(3) would require that, before a customer options order is executed, the account name or designation must be placed upon the memorandum for each transaction. In addition, only a qualified ROP may approve any changes in account names or designations. The ROP also must document the essential facts relied upon 22 Rule 3.6A(b) would be revised to add Chief Compliance Officer as a new associated person status under Chapter 9 of Exchange Rules. 23 Proposed Rule 9.8(g)(5) is modeled after NASD Rule 3013 and NYSE Rule 342.30(e). 24 Proposed Rule 9.8(b)(2) is modeled after NASD Rule 3110(i). PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 54955 in approving the changes and maintain the record in a central location. A member would be required to preserve any account designation change documentation for a period of not less than three years, with the documentation preserved for the first two years in an easily accessible place, as the term ‘‘easily accessible place’’ is used in SEC Rule 17a–4. The Exchange believes the proposed rule would help to protect account name and designation information from possible fraudulent activity.25 Rule 9.10(d) allows member organizations to exercise time and price discretion on orders for the purchase or sale of a definite number of options contracts in a specified security. The Exchange proposes to amend Rule 9.10(d) to limit the duration of this discretionary authority to the day it is granted, absent written authorization to the contrary. In addition, the proposed rule would require any exercise of time and price discretion to be reflected on the customer order ticket. The proposed one-day limitation would not apply to time and price discretion exercised for orders effected with or for an institutional account 26 pursuant to valid Good-Till-Cancelled instructions issued on a ‘‘not held’’ basis. The Exchange believes that investors will receive greater protection by clarifying the time such discretionary orders remain pending.27 2. Statutory Basis The proposed rule change would integrate the supervision and compliance functions relating to member organizations’ public customer options activities into the overall supervisory structure of a member organization, thereby eliminating any uncertainty over where supervisory responsibility lies. The proposed rule change would also foster the strengthening of members’ and member organizations’ internal controls and supervisory systems. As such, the proposed rule changes are consistent with and further the objectives of 25 Proposed Rule 9.8(b)(3) is modeled after NASD Rule 3110(j). 26 ‘‘Institutional account’’ would be defined in Rule 9.10(d) as ‘‘the account of: (i) A bank, savings and loan association, insurance company, or registered investment company; (ii) an investment adviser registered either with the Securities and Exchange Commission under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or any agency or office performing like functions); or (iii) any other entity (whether a natural person, corporation, partnership, trust or otherwise) with total assets of at least $50 million.’’ 27 Proposed Rule 9.10(d) is modeled after NASD Rule 2510(d)(1). E:\FR\FM\27SEN1.SGM 27SEN1 54956 Federal Register / Vol. 72, No. 187 / Thursday, September 27, 2007 / Notices Section 6(b)(5) of the Act,28 in that they are designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts and practices, to remove impediments to and perfect the mechanisms of a free and open market and a national market system, and in general, to protect investors and the public interest. 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 not necessary or appropriate in furtherance of 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 change. 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: 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–CBOE–2007–106. 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, 100 F Street, NE., Washington, DC 20549 on official business days between the hours of 10 a.m. and 3 p.m. 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–2007–106 and should be submitted on or before October 18, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.29 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–19079 Filed 9–26–07; 8:45 am] BILLING CODE 8010–01–P Electronic Comments rwilkins on PROD1PC63 with NOTICES • 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–2007–106 on the subject line. VerDate Aug<31>2005 16:40 Sep 26, 2007 29 17 Jkt 211001 Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Granting Approval of a Proposed Rule Change as Modified by Amendment No. 1 Thereto Amending Its Obvious Error Rule for Equity Options September 20, 2007. I. Introduction On February 21, 2007, 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 CBOE Rule 6.25, Nullification and Adjustment of Equity Options Transactions, to revise its obvious error provision related to ‘‘no bid series’’ and to make a non-substantive change by adding a cross-reference within the text of Rule 6.25. On July 2, 2007, the CBOE submitted Amendment No. 1 to the proposed rule change. The proposed rule change, as amended, was published for comment in the Federal Register on August 9, 2007.3 The Commission received no comment letters on the proposal. This order approves the proposed rule change as modified by Amendment No. 1. II. Description of the Proposed Rule Change The Exchange proposes to amend Rule 6.25 by modifying the nullification provisions for ‘‘no bid series’’ options.4 Currently, Rule 6.25 provides that electronic transactions in series that are quoted no bid are subject to nullification if at least one strike price below (for calls) or above (for puts) in the same options class was quoted no bid at the time of execution. Under the proposed revision to Rule 6.25, electronic transactions in a series quoted no bid on the Exchange could be nullified if: (i) The bid in that series immediately preceding the execution was, and for five (5) seconds prior to the U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Securities Exchange Act Release No. 56190 (August 2, 2007), 72 FR 44892. 4 The proposed rule change also would add a cross-reference to paragraph (a)(5) to the introductory language of Rule 6.25. According to the CBOE, this proposed change is non-substantive because the text of Rule 6.25(a)(5) currently provides that the provision is not applicable to trades executed in open outcry. 2 17 • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, U.S.C. 78f(b)(5). [Release No. 34–56487; File No. SR–CBOE– 2007–04] 1 15 Paper Comments 28 15 SECURITIES AND EXCHANGE COMMISSION PO 00000 CFR 200.30–3(a)(12). Frm 00068 Fmt 4703 Sfmt 4703 E:\FR\FM\27SEN1.SGM 27SEN1

Agencies

[Federal Register Volume 72, Number 187 (Thursday, September 27, 2007)]
[Notices]
[Pages 54952-54956]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-19079]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56492; File No. SR-CBOE-2007-106]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change Relating to CBOE 
Rules Governing Doing Business With the Public

September 21, 2007.
    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 September 5, 2007, Chicago Board Options Exchange, Incorporated 
(``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 substantially prepared 
by the Exchange. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Exchange is proposing to amend certain rules that govern an 
Exchange member's conduct in doing business with the public. 
Specifically, the proposed rule change would require member 
organizations to integrate the responsibility for supervision of a 
member organization's public customer options business into its overall 
supervisory and compliance program. In addition, the Exchange proposes 
to amend certain rules to strengthen member organizations' supervisory 
procedures and internal controls as they relate to a member's public 
customer options business. The text of the proposed rule change is 
available at CBOE, the Commission's Public Reference Room and https://
www.cboe.org/legal.

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
a. Integration of Options Supervision
    The purpose of the proposed rule change is to create a supervisory 
structure for options that is similar to that required by New York 
Stock Exchange (``NYSE'') and National Association of Securities 
Dealers (``NASD'') rules.\3\ The proposed rule change would eliminate 
the requirement that member organizations qualified to do a public 
customer business in options must designate a single person to act as 
Senior Registered Options Principal (``SROP'') for the member 
organization and that each such member organization designate a 
specific individual as a Compliance Registered Options Principal 
(``CROP''). Instead member organizations would be

[[Page 54953]]

required to integrate the SROP and CROP functions into their overall 
supervisory and compliance programs.
---------------------------------------------------------------------------

    \3\ See NYSE Rule 342 and NASD Rule 3010. On July 26, 2007, the 
Commission approved a proposed rule change filed by NASD to amend 
NASD's Certificate of Incorporation to reflect its name change to 
Financial Industry Regulatory Authority Inc., or FINRA, in 
connection with the consolidation of the member firm regulatory 
functions of NASD and NYSE Regulation, Inc. See Securities Exchange 
Act Release No. 56146 (July 26, 2007).
---------------------------------------------------------------------------

    The SROP concept was first introduced by CBOE during the early 
years of the development of the listed options market. Previously, 
under CBOE rules, member organizations were required to designate one 
or more persons qualified as Registered Options Principals (``ROPs'') 
having supervisory responsibilities in respect of the member 
organization's options business. As the number of ROPs at larger member 
organizations began to increase, CBOE imposed an additional requirement 
that member organizations designate one of their ROPs as the SROP. This 
was intended to eliminate confusion as to where the compliance and 
supervisory responsibilities lay by centralizing in a single 
supervisory officer overall responsibility for the supervision of a 
member organization's options activities.\4\ Subsequently, following 
the recommendation of the Commission's Options Study, CBOE and other 
options exchanges required member organizations to designate a CROP to 
be responsible for the member organization's overall compliance program 
in respect of its options activities.\5\ The CROP may be the same 
person who is designated as SROP.
---------------------------------------------------------------------------

    \4\ Report of the Special Study of the Options Market (``Options 
Study''), note 11 p. 316 (December 22, 1978).
    \5\ Id. at p. 335.
---------------------------------------------------------------------------

    Since the SROP and CROP requirements were first imposed, the 
supervisory function in respect of the options activities of most 
securities firms has been integrated into the matrix of supervisory and 
compliance functions in respect of the firms' other securities 
activities. This not only reflects the maturity of the options market, 
but also recognizes the ways in which the uses of options themselves 
have become more integrated with other securities in the implementation 
of particular strategies. Thus, the current requirement for a 
separately designated senior supervisor in respect of all aspects of a 
member organization's options activities, rather than clarifying the 
allocation of supervisory responsibilities within the member 
organization, may have just the opposite effect by failing to take into 
account the way in which these responsibilities are actually assigned. 
In addition, by permitting supervision of a member organization's 
options activities to be handled in the same manner as the supervision 
of its other securities activities as well as its futures activities, 
the proposed rule change will ensure that supervisory responsibility 
over each segment of the member organization's business is assigned to 
the best qualified persons in the member organization, thereby 
enhancing the overall quality of supervision. The same holds true for 
the compliance function.
    For example, most member organizations have designated one person 
to have supervisory responsibility over the application of margin 
requirements and other matters pertaining to the extension of credit. 
The proposed rule change would enable a member organization to include 
within the scope of such a person's duties the supervision over the 
proper margining of options accounts, thereby assuring that the most 
qualified person is charged with this responsibility and at the same 
time eliminating any uncertainty that might now exist as to whether 
this responsibility lies with the senior credit supervisor or with the 
SROP.
    Similarly, the proposed rule change would allow a member 
organization to specifically designate one or more individuals as being 
responsible for approving a ROP's acceptance of discretionary accounts 
\6\ and exceptions to a member organization's suitability standards for 
trading uncovered short options.\7\ The proposed rule changes would 
allow member organizations the flexibility to assign such 
responsibilities, which formerly rested with the SROP and/or CROP, to 
more than one ROP qualified individual where the member organization 
believes it advantageous to do so to enhance its supervisory or 
compliance structure. Typically, a member organization may wish to 
divide these functions on the basis of geographic region or functional 
considerations. Rule 9.2 would be amended to clarify the qualification 
requirements of individuals designated as ROPs.\8\ Rule 9.3 would be 
amended to specify the registration requirements of individuals who 
accept orders from non-broker-dealer customers.\9\
---------------------------------------------------------------------------

    \6\ See proposed Rule 9.10(a).
    \7\ See proposed Rule 9.7(f)(3).
    \8\ See proposed Rules 9.2.01 and 9.2.02.
    \9\ See proposed Rule 9.3.01.
---------------------------------------------------------------------------

    The proposed rule change would call for options discretionary 
accounts, the acceptance of which must be approved by a ROP qualified 
individual (other than the ROP who accepted the account), to be 
supervised in the same manner as the supervision of other securities 
accounts that are handled on a discretionary basis. The proposed rule 
change would eliminate the requirement that discretionary options 
orders be approved on the day of entry by a ROP (with one exception as 
described below). This requirement predates the Options Study and is 
not consistent with the use of supervisory tools in computerized format 
or exception reports generated after the close of a trading day. No 
similar requirement exists for supervision of other securities accounts 
that are handled on a discretionary basis.\10\ Discretionary orders 
must be reviewed in accordance with a member organization's written 
supervisory procedures. The proposed rule change would ensure that 
supervisory responsibilities are assigned to specific ROP-qualified 
individuals, thereby enhancing the quality of supervision.
---------------------------------------------------------------------------

    \10\ See, e.g., NYSE Rule 408.
---------------------------------------------------------------------------

    Exchange Rule 9.10 would be revised by adding, as Interpretation 
and Policy .01, a requirement that any member organization that does 
not utilize computerized surveillance tools for the frequent and 
appropriate review of discretionary account activity must establish and 
implement procedures to require ROP qualified individuals who have been 
designated to review discretionary accounts to approve and initial each 
discretionary order on the day entered. The Exchange believes that any 
member organization that does not utilize computerized surveillance 
tools to monitor discretionary account activity should continue to be 
required to perform the daily manual review of discretionary orders.
    Under the proposed rule change, options discretionary accounts will 
continue to receive frequent appropriate supervisory review by 
designated ROP-qualified individuals. Additionally, member 
organizations will continue to be required to designate ROP-qualified 
individuals to review and approve the acceptance of options 
discretionary accounts in order to determine whether the ROP accepting 
the account had a reasonable basis for believing that the customer was 
able to understand and bear the risks of the proposed strategies or 
transactions. This requirement provides an additional level of 
supervisory audit over options discretionary accounts that does not 
exist for other securities discretionary accounts.
    In addition, the proposed rule change would require that each 
member organization submit to the Exchange a written report by April 1 
of each year, that details the member organization's supervision and 
compliance effort, including its options compliance program, during the 
preceding year and reports on the adequacy of the member

[[Page 54954]]

organization's ongoing compliance processes and procedures.\11\
---------------------------------------------------------------------------

    \11\ See proposed Rule 9.8(g), which is modeled after NYSE Rule 
342.30.
---------------------------------------------------------------------------

    Proposed Rule 9.8(h) would require that each member organization 
submit, by April 1st of each year, a copy of the Rule 9.8(g) annual 
report to one or more of its control persons or, if the member 
organization has no control person, to the audit committee of its board 
of directors or its equivalent committee or group.\12\
---------------------------------------------------------------------------

    \12\ Proposed Rule 9.8(h) is modeled after NYSE Rule 354.
---------------------------------------------------------------------------

    Proposed Rule 9.8(g) would provide that a member organization that 
specifically includes its options compliance program in a report that 
complies with substantially similar requirements of the NYSE and NASD 
will be deemed to have satisfied the requirements of Rules 9.8(g) and 
9.8(h).
    Additionally, where appropriate, the proposed rule change would 
delete references to SROP and CROP in Rules 3.6A and 26.10.\13\
---------------------------------------------------------------------------

    \13\ The Exchange notes that a separate proposed rule change 
currently pending at the Commission (SR-CBOE-2007-30) proposes to 
delete references to the CROP in Rule 9.21, among other things.
---------------------------------------------------------------------------

    Although the proposed rule change would eliminate entirely the 
positions and titles of the SROP and CROP, member organizations would 
still be required to designate a single general partner or executive 
officer to assume overall authority and responsibility for internal 
supervision, control of the member organization and compliance with 
securities laws and regulations.\14\ Member organizations would also be 
required to designate specific qualified individuals as having 
supervisory or compliance responsibilities over each aspect of the 
member organization's options activities and to set forth the names and 
titles of these individuals in their written supervisory 
procedures.\15\ This is consistent with the integration of options 
supervision into the overall supervisory and compliance structure of a 
member organization. In connection with the approval of these proposed 
rule changes, the Exchange intends to review member organizations' 
written supervisory and compliance procedures in the course of the 
Exchange's routine examination of member organizations to ensure that 
supervisory and compliance responsibilities are adequately defined.
---------------------------------------------------------------------------

    \14\ See proposed Rule 9.8(a).
    \15\ See proposed Rule 9.8.01.
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule changes recognize that 
options are no longer in their infancy, have become more integrated 
with other securities in the implementation of particular strategies, 
and thus should not continue to be regulated as though they are a new 
and experimental product. The Exchange believes that the proposed rule 
change is appropriate and would not materially alter the supervisory 
operations of member organizations. The Exchange believes the 
supervisory and compliance structure in place for non-options products 
at most member organizations is not materially different from the 
structure in place for options.
b. Supervisory Procedures and Internal Controls
    The Exchange also proposes to amend certain rules to strengthen 
member and member organizations' supervisory procedures and internal 
controls as they relate to a member's public customer options business. 
The proposed rule changes described below are modeled after NYSE and 
NASD rules approved by the Commission in 2004.\16\ The Exchange 
believes the following proposal to strengthen member supervisory 
procedures and internal controls is appropriate and consistent with the 
preceding proposal to integrate options and non-options sales practice 
supervision and compliance functions.
---------------------------------------------------------------------------

    \16\ See Securities Exchange Act Release No. 49882 (June 17, 
2004), 69 FR 35108 (June 23, 2004) (SR-NYSE-2002-36), and Securities 
Exchange Act Release No. 49883 (June 17, 2004), 69 FR 35092 (June 
23, 2004) (SR-NASD-2002-162).
---------------------------------------------------------------------------

    Exchange Rule 9.8(a)(3) would be revised to require the development 
and implementation of written policies and procedures reasonably 
designed to supervise sales managers and other supervisory personnel 
who service customer options accounts (i.e., who act in the capacity of 
a registered representative).\17\ This requirement would apply to 
branch office managers, sales managers, regional/district sales 
managers, or any person performing a similar supervisory function. Such 
policies and procedures are expected to encompass all options sales-
related activities. Proposed Rule 9.8(a)(3)(i) would require that 
supervisory reviews of producing sales managers be conducted by a 
qualified ROP who is either senior to, or otherwise ``independent of'', 
the producing manager under review.\18\ This provision is intended to 
ensure that all options sales activity of a producing manager is 
monitored for compliance with applicable regulatory requirements by 
persons who do not have a personal interest in such activity.
---------------------------------------------------------------------------

    \17\ Proposed Rule 9.8(a)(3) is modeled after NYSE Rule 342.19.
    \18\ An ``otherwise independent'' person would be defined in 
proposed Rule 9.8(a)(3)(i) as one who: may not report either 
directly or indirectly to the producing manager under review; must 
be situated in an office other than the office of the producing 
manager; must not otherwise have supervisory responsibility over the 
activity being reviewed; and must alternate such review 
responsibility with another qualified person every two years or 
less. Further, if a person designated to review a producing manager 
receives an override or other income derived from that producing 
manager's customer activity that represents more than 10% of the 
designated person's gross income derived from the member 
organization over the course of a rolling twelve-month period, the 
member organization must establish alternative senior or otherwise 
independent supervision of that producing manager to be conducted by 
a qualified ROP other than the designated person receiving the 
income.
---------------------------------------------------------------------------

    Proposed Rule 9.8(a)(3)(ii) would provide a limited exception for 
members so limited in size and resources that there is no qualified 
person senior to, or otherwise independent of, the producing manager to 
conduct the review. In this case, the reviews may be conducted by a 
qualified ROP to the extent practicable. Under proposed Rule 
9.8(a)(3)(iii), a member relying on the limited size and resources 
exception must document the factors used to determine that compliance 
with each of the ``senior'' or ``otherwise independent'' standards of 
Rule 9.8(a)(3)(i) is not possible, and that the required supervisory 
systems and procedures in place with respect to any producing manager 
comply with the provisions of Rule 9.8(a)(3)(i) to the extent 
practicable.
    Paragraph (a)(3)(iv) of Rule 9.8 would provide that a member 
organization that complies with requirements of the NYSE or the NASD 
that are substantially similar to the requirements in Rules 
9.8(a)(3)(i), (a)(3)(ii) and (a)(3)(iii) will be deemed to have met 
such requirements.
    Proposed Rule 9.8(c)(i) would require member organizations to 
develop and maintain adequate controls over each of their business 
activities. The proposed rule would further require that such controls 
include the establishment of procedures to independently verify and 
test the supervisory systems and procedures for those business 
activities. Member organizations would be required to include in the 
annual report prepared pursuant to Rule 9.8(g) a review of the member 
organization's efforts in this regard, including a summary of the tests 
conducted and significant exceptions identified. The Exchange believes 
proposed Rule 9.8(c)(i) would enhance the quality of member 
organizations' supervision.\19\ Paragraph (c)(ii) of Rule 9.8 would 
provide that a member organization that complies with requirements of 
the NYSE or the NASD that are substantially similar to the requirements

[[Page 54955]]

in Rule 9.8(c)(i) will be deemed to have met such requirements.
---------------------------------------------------------------------------

    \19\ Proposed Rule 9.8(c)(i) is modeled after NYSE Rule 342.23.
---------------------------------------------------------------------------

    Proposed Rule 9.8(d) would establish requirements for branch office 
inspections similar to the requirements of NYSE Rule 342.24. 
Specifically, Rule 9.8(d) would require a member organization to 
inspect each supervisory branch office at least annually and each non-
supervisory branch office at least once every three years.\20\ The 
proposed rule would further require that persons who conduct a member 
organization's annual branch office inspection must be independent of 
the direct supervision or control of the branch office (i.e., not the 
branch office manager, or any person who directly or indirectly reports 
to such manager, or any person to whom such manager directly reports). 
The Exchange believes that requiring branch office inspections to be 
conducted by someone who has no significant financial interest in the 
success of a branch office should lead to more objective and vigorous 
inspections.
---------------------------------------------------------------------------

    \20\ Proposed Rules 9.8(d)(1)(i) and (ii) would provide members 
with two exceptions from the annual branch office inspection 
requirement: A member may demonstrate to the satisfaction of the 
Exchange that other arrangements may satisfy the Rule's requirements 
for a particular branch office, or based upon a member 
organization's written policies and procedures providing for a 
systematic risk-based surveillance system, the member organization 
submits a proposal to the Exchange and receives, in writing, an 
exemption from this requirement pursuant to Rule 9.8(e).
---------------------------------------------------------------------------

    Under proposed Rule 9.8(e), any member organization seeking an 
exemption, pursuant to Rule 9.8(d)(1)(ii), from the annual branch 
office inspection requirement would be required to submit to the 
Exchange written policies and procedures for systematic risk-based 
surveillance of its branch offices, as defined in Rule 9.8(e). Proposed 
Rule 9.8(f) would require that annual branch office inspection programs 
include, at a minimum, testing and verification of specified internal 
controls.\21\ Paragraph (d)(3) of Rule 9.8 would provide that a member 
organization that complies with requirements of the NYSE or the NASD 
that are substantially similar to the requirements in Rules 9.8(d), (e) 
and (f) will be deemed to have met such requirements.
---------------------------------------------------------------------------

    \21\ Proposed Rules 9.8(e) and (f) are modeled after NYSE Rule 
342.25 and 342.26.
---------------------------------------------------------------------------

    In conjunction with the proposed changes to Rules 9.8(d), (e) and 
(f), the Exchange proposes to amend Rule 9.6 to define ``branch 
office'' in a way that is substantially similar to the definition of 
branch office in NYSE Rule 342.10.
    Proposed Rule 9.8(g)(4) would require a member organization to 
designate a Chief Compliance Officer (CCO).\22\ Proposed Rule 9.8(g)(5) 
would require each member organization's chief executive officer (CEO), 
or equivalent, to certify annually that the member organization has in 
place processes to: (1) Establish and maintain policies and procedures 
reasonably designed to achieve compliance with applicable Exchange 
rules and federal securities laws and regulations; (2) modify such 
policies and procedures as business, regulatory, and legislative 
changes and events dictate; and (3) test the effectiveness of such 
policies and procedures on a periodic basis, the timing of which is 
reasonably designed to ensure continuing compliance with Exchange rules 
and federal securities laws and regulations.
---------------------------------------------------------------------------

    \22\ Rule 3.6A(b) would be revised to add Chief Compliance 
Officer as a new associated person status under Chapter 9 of 
Exchange Rules.
---------------------------------------------------------------------------

    Proposed Rule 9.8(g)(5) would further require that the CEO attest 
the CEO has conducted one or more meetings with the CCO in the 
preceding 12 months to discuss the compliance processes in proposed 
Rule 9.8(g)(5)(i), that the CEO has consulted with the CCO and other 
officers to the extent necessary to attest to the statements in the 
certification, and the compliance processes are evidenced in a report, 
reviewed by the CEO, CCO, and such other officers as the member 
organization deems necessary to make the certification, that is 
provided to the member organization's board of directors and audit 
committee (if such committee exists).\23\
---------------------------------------------------------------------------

    \23\ Proposed Rule 9.8(g)(5) is modeled after NASD Rule 3013 and 
NYSE Rule 342.30(e).
---------------------------------------------------------------------------

    Under proposed Rule 9.8(b)(2), a member, upon a customer's written 
instructions, may hold mail for a customer who will not be at his or 
her usual address for no longer than two months if the customer is on 
vacation or traveling, or three months if the customer is going abroad. 
This provision would help ensure that members that hold mail for 
customers who are away from their usual addresses, do so only pursuant 
to the customer's written instructions and for a specified, relatively 
short period of time.\24\
---------------------------------------------------------------------------

    \24\ Proposed Rule 9.8(b)(2) is modeled after NASD Rule 3110(i).
---------------------------------------------------------------------------

    Proposed Rule 9.8(b)(3) would require that, before a customer 
options order is executed, the account name or designation must be 
placed upon the memorandum for each transaction. In addition, only a 
qualified ROP may approve any changes in account names or designations. 
The ROP also must document the essential facts relied upon in approving 
the changes and maintain the record in a central location. A member 
would be required to preserve any account designation change 
documentation for a period of not less than three years, with the 
documentation preserved for the first two years in an easily accessible 
place, as the term ``easily accessible place'' is used in SEC Rule 17a-
4. The Exchange believes the proposed rule would help to protect 
account name and designation information from possible fraudulent 
activity.\25\
---------------------------------------------------------------------------

    \25\ Proposed Rule 9.8(b)(3) is modeled after NASD Rule 3110(j).
---------------------------------------------------------------------------

    Rule 9.10(d) allows member organizations to exercise time and price 
discretion on orders for the purchase or sale of a definite number of 
options contracts in a specified security. The Exchange proposes to 
amend Rule 9.10(d) to limit the duration of this discretionary 
authority to the day it is granted, absent written authorization to the 
contrary. In addition, the proposed rule would require any exercise of 
time and price discretion to be reflected on the customer order ticket. 
The proposed one-day limitation would not apply to time and price 
discretion exercised for orders effected with or for an institutional 
account \26\ pursuant to valid Good-Till-Cancelled instructions issued 
on a ``not held'' basis. The Exchange believes that investors will 
receive greater protection by clarifying the time such discretionary 
orders remain pending.\27\
---------------------------------------------------------------------------

    \26\ ``Institutional account'' would be defined in Rule 9.10(d) 
as ``the account of: (i) A bank, savings and loan association, 
insurance company, or registered investment company; (ii) an 
investment adviser registered either with the Securities and 
Exchange Commission under Section 203 of the Investment Advisers Act 
of 1940 or with a state securities commission (or any agency or 
office performing like functions); or (iii) any other entity 
(whether a natural person, corporation, partnership, trust or 
otherwise) with total assets of at least $50 million.''
    \27\ Proposed Rule 9.10(d) is modeled after NASD Rule 
2510(d)(1).
---------------------------------------------------------------------------

2. Statutory Basis
    The proposed rule change would integrate the supervision and 
compliance functions relating to member organizations' public customer 
options activities into the overall supervisory structure of a member 
organization, thereby eliminating any uncertainty over where 
supervisory responsibility lies. The proposed rule change would also 
foster the strengthening of members' and member organizations' internal 
controls and supervisory systems. As such, the proposed rule changes 
are consistent with and further the objectives of

[[Page 54956]]

Section 6(b)(5) of the Act,\28\ in that they are designed to promote 
just and equitable principles of trade, to prevent fraudulent and 
manipulative acts and practices, to remove impediments to and perfect 
the mechanisms of a free and open market and a national market system, 
and in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 not necessary or appropriate in furtherance of 
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 change.

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 https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2007-106 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-CBOE-2007-106. 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, 100 F Street, 
NE., Washington, DC 20549 on official business days between the hours 
of 10 a.m. and 3 p.m. 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-2007-106 and should be 
submitted on or before October 18, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
---------------------------------------------------------------------------

    \29\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-19079 Filed 9-26-07; 8:45 am]
BILLING CODE 8010-01-P
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.