Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change as Modified by Amendment No. 1 Relating to CBOE Rules Governing Doing Business With the Public, 72804-72808 [E7-24790]

Download as PDF 72804 Federal Register / Vol. 72, No. 245 / Friday, December 21, 2007 / Notices 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 offices 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–2007–132 and should be submitted on or before January 11, 2008. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.6 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–24801 Filed 12–20–07; 8:45 am] BILLING CODE 8011–01–P [Release No. 34–56971; File No. SR–CBOE– 2007–106] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change as Modified by Amendment No. 1 Relating to CBOE Rules Governing Doing Business With the Public mstockstill on PROD1PC66 with NOTICES December 14, 2007. I. Introduction Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 on September 5, 2007, Chicago Board Options Exchange, Incorporated (‘‘CBOE’’ or the ‘‘Exchange’’), filed with the Securities and Exchange Commission (the ‘‘Commission’’) a proposed rule change relating to the Exchange’s rules governing doing business with the public. On September 21, 2007, the Commission issued a release noticing the proposed rule change, which was published for CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. VerDate Aug<31>2005 18:37 Dec 20, 2007 Jkt 214001 II. Description of the CBOE Proposal The Exchange proposes 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. A. Integration of Options Supervision SECURITIES AND EXCHANGE COMMISSION 6 17 comment in the Federal Register on September 27, 2007.3 The comment period expired on October 18, 2007. The Commission received one comment letter in response to the proposed rule change.4 On November 13, 2007, CBOE filed Amendment No. 1 to amend the proposed rule change and respond to the comment letter.5 This order provides notice of the proposed rule change, as modified by Amendment No. 1, and approves the proposed rule change as amended on an accelerated basis. 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.6 The proposed rule change would eliminate the requirement that member organizations qualified to 3 See Securities Exchange Act Release No. 56492 (Sept. 21, 2007), 72 FR 54952 (Sept. 27, 2007). 4 See Letter to Nancy Morris, Secretary, Commission, from Melissa MacGregor, Vice President and Assistant General Counsel, Securities Industry and Financial Markets Association (Oct. 16, 2007) (‘‘SIFMA Letter’’). 5 Amendment No. 1 proposes revisions to CBOE Rule 9.2.02 to clarify the review of the acceptance of an options discretionary account must be performed by a Series 4 Registered Options Principal (‘‘ROP’’) and to CBOE Rule 9.21 to replace references to a Compliance Registered Options Principal (‘‘CROP’’) with references to a ROP. In addition, Amendment No. 1 responds to the SIFMA Letter. 6 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 FINRA rulebook currently consists of both NASD Rules and certain NYSE Rules that FINRA has incorporated. See FINRA Rules, http:// www.finra.org/RulesRegulation/FINRARules/ index.htm (last visited Dec. 10, 2007). PO 00000 Frm 00140 Fmt 4703 Sfmt 4703 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 CROP. Instead, member organizations would be 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 ROPs having supervisory responsibilities in respect to 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.7 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 to its options activities.8 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 to the options activities of most securities firms has been integrated into the matrix of supervisory and compliance functions in respect to the firms’ other securities activities. According to CBOE, 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 to 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 7 Report of the Special Study of the Options Market (‘‘Options Study’’), p. 316, n. 11 (December 22, 1978). 8 Id. at p. 335. E:\FR\FM\21DEN1.SGM 21DEN1 mstockstill on PROD1PC66 with NOTICES Federal Register / Vol. 72, No. 245 / Friday, December 21, 2007 / Notices responsibilities are actually assigned. In addition, according to CBOE, 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 ensures 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 9 and exceptions to a member organization’s suitability standards for trading uncovered short options.10 The proposed rule change 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. The proposed amendment to Rule 9.2 would clarify the qualification requirements for individuals designated as ROPs.11 The proposed amendment to Rule 9.3 would specify the registration requirements for individuals who accept orders from non-broker-dealer customers.12 The proposed rule change would require options discretionary accounts, the acceptance of which must be 9 See proposed Rule 9.10(a). proposed Rule 9.7(f)(3). 11 See proposed Rules 9.2.01 and 9.2.02. 12 See proposed Rule 9.3.01. 10 See VerDate Aug<31>2005 18:37 Dec 20, 2007 Jkt 214001 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). According to CBOE, 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.13 Discretionary orders must be reviewed in accordance with a member organization’s written supervisory procedures. According to CBOE, the proposed rule change would ensure that supervisory responsibilities are assigned to specific ROP-qualified individuals, thereby enhancing the quality of supervision. The proposed rule change would revise Exchange Rule 9.10 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 would continue to receive frequent appropriate supervisory review by designated ROPqualified individuals. Additionally, member organizations would continue to be required to designate ROPqualified 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. According to CBOE, this requirement would provide an additional level of supervisory audit over options discretionary accounts that does not 13 See, PO 00000 e.g., NYSE Rule 408. Frm 00141 Fmt 4703 Sfmt 4703 72805 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 organization’s ongoing compliance processes and procedures.14 Proposed Rule 9.8(h) would require that each member organization submit, by April 1 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.15 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 NYSE and NASD rules 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 Exchange Rules 3.6A and 26.10.16 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.17 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.18 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 the proposed rule change, the Exchange intends to review member organizations’ written supervisory and compliance procedures 14 See proposed Rule 9.8(g), which is modeled after NYSE Rule 342.30. 15 Proposed Rule 9.8(h) is modeled after NYSE Rule 354. 16 For example, the proposed rule change, as amended, replaces references to CROP in Rule 9.21 with references to ROP. 17 See proposed Rule 9.8(a). 18 See proposed Rule 9.8.01. E:\FR\FM\21DEN1.SGM 21DEN1 72806 Federal Register / Vol. 72, No. 245 / Friday, December 21, 2007 / Notices 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 change recognizes 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 does 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. mstockstill on PROD1PC66 with NOTICES 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 2004.19 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. The proposed revisions to Exchange Rule 9.8(a)(3) 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).20 This requirement applies 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 19 See Securities Exchange Act Release No. 49882 (June 17, 2004), 69 FR 35108 (June 23, 2004) (SR– NYSE–2002–36) (Approval Order), and Securities Exchange Act Release No. 49883 (June 17, 2004), 69 FR 35092 (June 23, 2004) (SR–NASD–2002–162) (Approval Order). 20 Proposed Rule 9.8(a)(3) is modeled after NYSE Rule 342.19. VerDate Aug<31>2005 18:37 Dec 20, 2007 Jkt 214001 manager under review.21 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. 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 would be required to 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. Proposed paragraph (a)(3)(iv) of Rule 9.8 would provide that a member organization that complies with requirements of NYSE or NASD rules 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 further would 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 are 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 21 An ‘‘otherwise independent’’ person is 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 twelvemonth 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. PO 00000 Frm 00142 Fmt 4703 Sfmt 4703 identified. The Exchange believes proposed Rule 9.8(c)(i) would enhance the quality of member organizations’ supervision.22 Proposed paragraph (c)(ii) of Rule 9.8 would provide that a member organization that complies with requirements of NYSE or NASD rules that are substantially similar to the requirements 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, proposed 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.23 The proposed rule further would 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 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.24 Proposed paragraph (d)(3) of Rule 9.8 would provide that a member organization that complies with requirements of NYSE or NASD rules that are substantially similar to the requirements in Rules 9.8(d), (e) and (f) 22 Proposed Rule 9.8(c)(i) is modeled after NYSE Rule 342.23. 23 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). 24 Proposed Rules 9.8(e) and (f) are modeled after NYSE Rules 342.25 and 342.26. E:\FR\FM\21DEN1.SGM 21DEN1 mstockstill on PROD1PC66 with NOTICES Federal Register / Vol. 72, No. 245 / Friday, December 21, 2007 / Notices 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 Chief Compliance Officer (‘‘CCO’’).25 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) further would require the CEO to attest that 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).26 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 helps ensure that members that hold mail for customers who are away from their usual addresses, do so only pursuant to the customer’s written 25 The proposed rule change would revise Rule 3.6A(b) to add Chief Compliance Officer as a new associated person status under Chapter 9 of Exchange Rules. 26 Proposed Rule 9.8(g)(5) is modeled after NASD Rule 3013 and NYSE Rule 342.30(e). VerDate Aug<31>2005 18:37 Dec 20, 2007 Jkt 214001 instructions and for a specified, relatively short period of time.27 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 is 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.28 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 29 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.30 III. Summary of Comment Received and CBOE Response The Commission received one comment on the proposal which 27 Proposed Rule 9.8(b)(2) is modeled after NASD Rule 3110(i). 28 Proposed Rule 9.8(b)(3) is modeled after NASD Rule 3110(j). 29 ‘‘Institutional account’’ is defined in proposed 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.’’ 30 Proposed Rule 9.10(d) is modeled after NASD Rule 2510(d)(1). PO 00000 Frm 00143 Fmt 4703 Sfmt 4703 72807 generally supported the proposed rule change while raising issues with respect to certain aspects of the proposed rule change. First, the commenter requested that CBOE clarify how the proposed rule change would affect compliance with CBOE Rule 9.21, which requires CROP approval for options-related communications with the public.31 Second, the commenter suggested that CBOE allow a Branch Office Manager with a Series 8 or Series 9/10 license to approve discretionary options accounts, instead of requiring approval by a Series 4 Registered Options Principal.32 Third, the commenter urged NYSE, American Stock Exchange and FINRA to adopt changes similar to those included in the CBOE proposal and questioned the compatibility of the proposed changes with other self-regulatory organizations’ rules unless similar changes are adopted.33 In Amendment No. 1, CBOE responded to the issues raised by the commenter.34 With respect to the first issue regarding CROP approval under CBOE Rule 9.21, CBOE proposed to amend the rule to permit a ROP designated by the member or member organization’s written supervisory procedures to perform such functions. With respect to the second issue regarding discretionary options accounts, CBOE proposed to amend proposed Rule 9.2.02 to clarify that the review of the acceptance of a options discretionary account must be performed by a Series 4 qualified ROP. However, members would be free to assign the function of accepting options discretionary accounts to individuals who are Series 9/10 qualified ROPs. With respect to the third issue dealing with rules of other self-regulatory organizations, CBOE stated that comments concerning changes to rules administered by other self-regulatory organizations were outside the scope of the proposed rule change. IV. Discussion and Commission Findings 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.35 In particular, the Commission finds the 31 See SIFMA Letter. id. 33 See id. 34 The text of Amendment No. 1 is available at CBOE, the Commission’s Public Reference Room and http://www.cboe.org/legal. 35 In approving this rule change, as amended, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 32 See E:\FR\FM\21DEN1.SGM 21DEN1 72808 Federal Register / Vol. 72, No. 245 / Friday, December 21, 2007 / Notices proposed rule change, as amended, 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. In addition, the proposed rule change would foster the strengthening of members’ and member organizations’ internal controls and supervisory systems. As such, the Commission finds the proposal to be consistent with and further the objectives of section 6(b)(5) of the Act,36 in that it is designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts and practices, and in general, to protect investors and the public interest. The Commission also finds good cause for approving Amendment No. 1 to the proposed rule change prior to the 30th day after its publication in the Federal Register. Amendment No. 1 clarifies the operation of the proposed rule change in response to a comment. Amendment No. 1 does not contain major modifications and these modifications would not appreciably affect the protection to investors provided by the proposed rule change as published in the Federal Register. The Commission finds that it is in the public interest to approve the proposed rule change as soon as possible to expedite its implementation. Accordingly, the Commission believes good cause exists, consistent with sections 6(b)(5) and 19(b) of the Act to approve Amendment No. 1 to the proposed rule change on an accelerated basis. V. Solicitation of Comments Concerning Amendment No. 1 Interested persons are invited to submit written data, views, and arguments concerning Amendment No. 1, including whether Amendment No. 1 is consistent with the Act. Comments may be submitted by any of the following methods: mstockstill on PROD1PC66 with NOTICES Electronic Comments • Use the Commission’s Internet comment form http://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. 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 (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference 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 January 11, 2008. VI. Conclusion It is therefore ordered, pursuant to section 19(b)(2) of the Act,37 that the proposed rule change (SR–CBOE–2007– 106), as amended by Amendment No. 1, be, and hereby is, approved on an accelerated basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.38 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–24790 Filed 12–20–07; 8:45 am] BILLING CODE 8011–01–P Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 37 15 36 15 U.S.C. 78f(b)(5). VerDate Aug<31>2005 18:37 Dec 20, 2007 38 17 Jkt 214001 PO 00000 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). Frm 00144 Fmt 4703 Sfmt 4703 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56973; File No. SR–ISE– 2007–109] Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating to Rule 2213, Market Maker Trading Licenses December 17, 2007. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on November 14, 2007, the International Securities Exchange, LLC (‘‘ISE’’ or ‘‘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 ISE. On December 13, 2007, the Exchange filed Amendment No. 1 to the proposed rule change. The Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment No. 1, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The ISE is proposing to amend its Rule 2213, ‘‘Market Maker Trading Licenses,’’ to eliminate the limitation that a foreign exchange options primary market maker (‘‘FXPMM’’) in the Exchange’s foreign currency options (‘‘FX options’’) cannot make a market in more than four (4) currency pairs. The text of the proposed rule change is available on the Exchange’s Web site (http://www.iseoptions.com), at the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the ISE included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The ISE has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. 1 15 2 17 E:\FR\FM\21DEN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 21DEN1

Agencies

[Federal Register Volume 72, Number 245 (Friday, December 21, 2007)]
[Notices]
[Pages 72804-72808]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-24790]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56971; File No. SR-CBOE-2007-106]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of Proposed Rule Change as Modified by Amendment 
No. 1 Relating to CBOE Rules Governing Doing Business With the Public

December 14, 2007.

I. Introduction

    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ on September 5, 2007, 
Chicago Board Options Exchange, Incorporated (``CBOE'' or the 
``Exchange''), filed with the Securities and Exchange Commission (the 
``Commission'') a proposed rule change relating to the Exchange's rules 
governing doing business with the public. On September 21, 2007, the 
Commission issued a release noticing the proposed rule change, which 
was published for comment in the Federal Register on September 27, 
2007.\3\ The comment period expired on October 18, 2007. The Commission 
received one comment letter in response to the proposed rule change.\4\ 
On November 13, 2007, CBOE filed Amendment No. 1 to amend the proposed 
rule change and respond to the comment letter.\5\ This order provides 
notice of the proposed rule change, as modified by Amendment No. 1, and 
approves the proposed rule change as amended on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 56492 (Sept. 21, 
2007), 72 FR 54952 (Sept. 27, 2007).
    \4\ See Letter to Nancy Morris, Secretary, Commission, from 
Melissa MacGregor, Vice President and Assistant General Counsel, 
Securities Industry and Financial Markets Association (Oct. 16, 
2007) (``SIFMA Letter'').
    \5\ Amendment No. 1 proposes revisions to CBOE Rule 9.2.02 to 
clarify the review of the acceptance of an options discretionary 
account must be performed by a Series 4 Registered Options Principal 
(``ROP'') and to CBOE Rule 9.21 to replace references to a 
Compliance Registered Options Principal (``CROP'') with references 
to a ROP. In addition, Amendment No. 1 responds to the SIFMA Letter.
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II. Description of the CBOE Proposal

    The Exchange proposes 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.

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.\6\ 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 CROP. Instead, member organizations would be 
required to integrate the SROP and CROP functions into their overall 
supervisory and compliance programs.
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    \6\ 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 FINRA rulebook currently 
consists of both NASD Rules and certain NYSE Rules that FINRA has 
incorporated. See FINRA Rules, http://www.finra.org/RulesRegulation/
FINRARules/index.htm (last visited Dec. 10, 2007).
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    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 ROPs having supervisory responsibilities 
in respect to 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.\7\ 
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 to its options activities.\8\ The 
CROP may be the same person who is designated as SROP.
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    \7\ Report of the Special Study of the Options Market (``Options 
Study''), p. 316, n. 11 (December 22, 1978).
    \8\ Id. at p. 335.
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    Since the SROP and CROP requirements were first imposed, the 
supervisory function in respect to the options activities of most 
securities firms has been integrated into the matrix of supervisory and 
compliance functions in respect to the firms' other securities 
activities. According to CBOE, 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 to 
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

[[Page 72805]]

responsibilities are actually assigned. In addition, according to CBOE, 
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 ensures 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 
\9\ and exceptions to a member organization's suitability standards for 
trading uncovered short options.\10\ The proposed rule change 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. The proposed amendment to Rule 9.2 would clarify the 
qualification requirements for individuals designated as ROPs.\11\ The 
proposed amendment to Rule 9.3 would specify the registration 
requirements for individuals who accept orders from non-broker-dealer 
customers.\12\
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    \9\ See proposed Rule 9.10(a).
    \10\ See proposed Rule 9.7(f)(3).
    \11\ See proposed Rules 9.2.01 and 9.2.02.
    \12\ See proposed Rule 9.3.01.
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    The proposed rule change would require 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). According to CBOE, 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.\13\ Discretionary orders must be reviewed in accordance with a 
member organization's written supervisory procedures. According to 
CBOE, the proposed rule change would ensure that supervisory 
responsibilities are assigned to specific ROP-qualified individuals, 
thereby enhancing the quality of supervision.
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    \13\ See, e.g., NYSE Rule 408.
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    The proposed rule change would revise Exchange Rule 9.10 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 
would continue to receive frequent appropriate supervisory review by 
designated ROP-qualified individuals. Additionally, member 
organizations would 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. According to CBOE, this requirement would provide 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 organization's 
ongoing compliance processes and procedures.\14\
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    \14\ See proposed Rule 9.8(g), which is modeled after NYSE Rule 
342.30.
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    Proposed Rule 9.8(h) would require that each member organization 
submit, by April 1 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.\15\
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    \15\ Proposed Rule 9.8(h) is modeled after NYSE Rule 354.
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    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 NYSE and NASD rules 
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 Exchange Rules 3.6A and 
26.10.\16\
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    \16\ For example, the proposed rule change, as amended, replaces 
references to CROP in Rule 9.21 with references to ROP.
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    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.\17\ 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.\18\ 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 the proposed 
rule change, the Exchange intends to review member organizations' 
written supervisory and compliance procedures

[[Page 72806]]

in the course of the Exchange's routine examination of member 
organizations to ensure that supervisory and compliance 
responsibilities are adequately defined.
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    \17\ See proposed Rule 9.8(a).
    \18\ See proposed Rule 9.8.01.
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    The Exchange believes that the proposed rule change recognizes 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 does 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.\19\ 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.
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    \19\ See Securities Exchange Act Release No. 49882 (June 17, 
2004), 69 FR 35108 (June 23, 2004) (SR-NYSE-2002-36) (Approval 
Order), and Securities Exchange Act Release No. 49883 (June 17, 
2004), 69 FR 35092 (June 23, 2004) (SR-NASD-2002-162) (Approval 
Order).
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    The proposed revisions to Exchange Rule 9.8(a)(3) 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).\20\ This requirement applies 
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.\21\ 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.
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    \20\ Proposed Rule 9.8(a)(3) is modeled after NYSE Rule 342.19.
    \21\ An ``otherwise independent'' person is 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.
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    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 would be required to 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.
    Proposed paragraph (a)(3)(iv) of Rule 9.8 would provide that a 
member organization that complies with requirements of NYSE or NASD 
rules 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 further would 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 are 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.\22\ Proposed paragraph (c)(ii) of Rule 9.8 
would provide that a member organization that complies with 
requirements of NYSE or NASD rules that are substantially similar to 
the requirements in Rule 9.8(c)(i) will be deemed to have met such 
requirements.
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    \22\ Proposed Rule 9.8(c)(i) is modeled after NYSE Rule 342.23.
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    Proposed Rule 9.8(d) would establish requirements for branch office 
inspections similar to the requirements of NYSE Rule 342.24. 
Specifically, proposed 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.\23\ The 
proposed rule further would 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 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.
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    \23\ 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).
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    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.\24\ Proposed paragraph (d)(3) of Rule 9.8 would provide that 
a member organization that complies with requirements of NYSE or NASD 
rules that are substantially similar to the requirements in Rules 
9.8(d), (e) and (f)

[[Page 72807]]

will be deemed to have met such requirements.
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    \24\ Proposed Rules 9.8(e) and (f) are modeled after NYSE Rules 
342.25 and 342.26.
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    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'').\25\ 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.
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    \25\ The proposed rule change would revise Rule 3.6A(b) to add 
Chief Compliance Officer as a new associated person status under 
Chapter 9 of Exchange Rules.
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    Proposed Rule 9.8(g)(5) further would require the CEO to attest 
that 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).\26\
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    \26\ Proposed Rule 9.8(g)(5) is modeled after NASD Rule 3013 and 
NYSE Rule 342.30(e).
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    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 helps 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.\27\
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    \27\ Proposed Rule 9.8(b)(2) is modeled after NASD Rule 3110(i).
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    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 is 
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.\28\
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    \28\ Proposed Rule 9.8(b)(3) is modeled after NASD Rule 3110(j).
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    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 \29\ 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.\30\
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    \29\ ``Institutional account'' is defined in proposed 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.''
    \30\ Proposed Rule 9.10(d) is modeled after NASD Rule 
2510(d)(1).
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III. Summary of Comment Received and CBOE Response

    The Commission received one comment on the proposal which generally 
supported the proposed rule change while raising issues with respect to 
certain aspects of the proposed rule change. First, the commenter 
requested that CBOE clarify how the proposed rule change would affect 
compliance with CBOE Rule 9.21, which requires CROP approval for 
options-related communications with the public.\31\ Second, the 
commenter suggested that CBOE allow a Branch Office Manager with a 
Series 8 or Series 9/10 license to approve discretionary options 
accounts, instead of requiring approval by a Series 4 Registered 
Options Principal.\32\ Third, the commenter urged NYSE, American Stock 
Exchange and FINRA to adopt changes similar to those included in the 
CBOE proposal and questioned the compatibility of the proposed changes 
with other self-regulatory organizations' rules unless similar changes 
are adopted.\33\
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    \31\ See SIFMA Letter.
    \32\ See id.
    \33\ See id.
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    In Amendment No. 1, CBOE responded to the issues raised by the 
commenter.\34\ With respect to the first issue regarding CROP approval 
under CBOE Rule 9.21, CBOE proposed to amend the rule to permit a ROP 
designated by the member or member organization's written supervisory 
procedures to perform such functions. With respect to the second issue 
regarding discretionary options accounts, CBOE proposed to amend 
proposed Rule 9.2.02 to clarify that the review of the acceptance of a 
options discretionary account must be performed by a Series 4 qualified 
ROP. However, members would be free to assign the function of accepting 
options discretionary accounts to individuals who are Series 9/10 
qualified ROPs. With respect to the third issue dealing with rules of 
other self-regulatory organizations, CBOE stated that comments 
concerning changes to rules administered by other self-regulatory 
organizations were outside the scope of the proposed rule change.
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    \34\ The text of Amendment No. 1 is available at CBOE, the 
Commission's Public Reference Room and http://www.cboe.org/legal.
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IV. Discussion and Commission Findings

    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.\35\ In particular, the Commission 
finds the

[[Page 72808]]

proposed rule change, as amended, 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. In addition, the proposed rule change 
would foster the strengthening of members' and member organizations' 
internal controls and supervisory systems. As such, the Commission 
finds the proposal to be consistent with and further the objectives of 
section 6(b)(5) of the Act,\36\ in that it is designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts and practices, and in general, to protect investors 
and the public interest.
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    \35\ In approving this rule change, as amended, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \36\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds good cause for approving Amendment No. 1 
to the proposed rule change prior to the 30th day after its publication 
in the Federal Register. Amendment No. 1 clarifies the operation of the 
proposed rule change in response to a comment. Amendment No. 1 does not 
contain major modifications and these modifications would not 
appreciably affect the protection to investors provided by the proposed 
rule change as published in the Federal Register. The Commission finds 
that it is in the public interest to approve the proposed rule change 
as soon as possible to expedite its implementation. Accordingly, the 
Commission believes good cause exists, consistent with sections 6(b)(5) 
and 19(b) of the Act to approve Amendment No. 1 to the proposed rule 
change on an accelerated basis.

V. Solicitation of Comments Concerning Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-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 (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference 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 January 11, 2008.

VI. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\37\ that the proposed rule change (SR-CBOE-2007-106), as amended 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
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    \37\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-24790 Filed 12-20-07; 8:45 am]
BILLING CODE 8011-01-P