Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to the Registered Representative Fee and an Options Regulatory Fee, 63744-63747 [E8-25502]

Download as PDF 63744 Federal Register / Vol. 73, No. 208 / Monday, October 27, 2008 / Notices 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 the filing also will be available for inspection and copying at the principal office of the BSE. 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–BSE–2008–47 and should be submitted on or before November 17, 2008. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.17 Florence E. Harmon, Acting Secretary. [FR Doc. E8–25536 Filed 10–24–08; 8:45 am] BILLING CODE 8011–01–P 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 Chicago Board Options Exchange, Incorporated (‘‘CBOE’’ or ‘‘Exchange’’) proposes to amend its Fees Schedule to eliminate registered representative fees and institute a new transaction-based ‘‘Options Regulatory Fee.’’ The text of the proposed rule change is available on the Exchange’s Web site (http:// www.cboe.org/legal), at the Exchange’s Office of the Secretary and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, 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, the Proposed Rule Change 1. Purpose SECURITIES AND EXCHANGE COMMISSION [Release No. 34–58817; File No. SR–CBOE– 2008–105] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to the Registered Representative Fee and an Options Regulatory Fee mstockstill on PROD1PC66 with NOTICES October 20, 2008. 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 October 14, 2008, the Chicago Board Options Exchange, Incorporated filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by CBOE. The Commission is publishing this notice to solicit 17 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Aug<31>2005 17:13 Oct 24, 2008 Jkt 217001 Background Registered representative fees (‘‘RR Fees’’) as well as other regulatory fees collected by the Exchange are intended to cover a portion of the cost of the Exchange’s regulatory programs.3 The Exchange has assessed RR Fees since 1990. Each CBOE member firm that registers a financial advisor (or registered representative), Registered Options Principal or Financial/ Operations Principal is assessed RR Fees based on the action associated with the registration. There are annual fees as well as initial, transfer and termination fees.4 Today all options exchanges, regardless of size, charge similar registered representative fees. Some member firms have raised concerns that the current self-regulatory organization (‘‘SRO’’) regulatory fee structure, in which every options 3 In addition to RR Fees, CBOE derives revenue associated with its regulatory programs from Designated Examining Authority (‘‘DEA’’) Fees and Communication Review Fees. These fees are discussed further below. 4 See Section 12(A) of the CBOE Fees Schedule and CBOE Rule 2.22. PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 exchange charges similar fees to their member firms, does not appear justified. Each RR Fee is a fixed amount of money a member firm pays to the Exchange for each registered representative within the firm. The Exchange believes that RR Fees are no longer the most equitable manner to assess regulatory fees because today there are more Internet and discount brokerage firms with few registered representatives that pay little in RR Fees and fewer traditional brokerage firms with many registered representatives. The regulatory effort the Exchange expends to review the transactions of each type of firm is not commensurate with the number of registered representatives that each firm employs. In addition, due to the manner in which RR Fees are charged, it is possible for a member firm to restructure its business to avoid paying these fees altogether. A firm can avoid RR Fees by terminating its CBOE membership and sending its business to the Exchange through another member firm, even an affiliated firm that has many fewer registered representatives. If member firms terminated their memberships to avoid RR Fees, the Exchange would suffer the loss of a major source of funding for its regulatory programs. The Exchange notes that one member firm has already terminated its membership to avoid RR Fees. The Exchange believes other firms will do the same unless the Exchange changes it regulatory fee structure. Options Regulatory Fee In order to address the concerns raised by member firms and to avoid the possibility of losing significant regulatory fee revenue, the Exchange proposes to eliminate RR Fees and replace them with a transaction-based ‘‘Options Regulatory Fee’’ (‘‘ORF’’). The ORF would be $.0045 per contract and would be assessed by the Exchange to each member for all options transactions executed by the member that are cleared by The Options Clearing Corporation (‘‘OCC’’) in the customer range (i.e., that clear in the customer account of the member’s clearing firm at OCC), excluding P/A Orders as defined in the Options Intermarket Linkage Plan (‘‘Linkage’’). The ORF would be imposed upon all such transactions executed by a member, even if such transactions do not take place on the Exchange.5 The ORF would be collected 5 The ORF would apply to all ‘‘B’’, ‘‘C’’, and ‘‘W’’ account origin code orders executed by a member on the Exchange. CBOE order origin codes are defined in CBOE Regulatory Circular RG08–105. Exchange rules require each member to record the appropriate account origin code on all orders at the E:\FR\FM\27OCN1.SGM 27OCN1 Federal Register / Vol. 73, No. 208 / Monday, October 27, 2008 / Notices mstockstill on PROD1PC66 with NOTICES indirectly from members through their clearing firms by OCC on behalf of the Exchange. The ORF would become effective on January 1, 2009, at which time RR Fees would be eliminated. The ORF is designed to recover a portion of the costs to the Exchange of the supervision and regulation of its members, including performing routine surveillances, investigations, examinations, financial monitoring, and policy, rulemaking, interpretive, and enforcement activities. The Exchange has set the ORF at a rate that it anticipates will approximately replace the amount of revenue that would be lost from the elimination of RR Fees. The ORF would not be charged for member options transactions because members incur the costs of owning memberships and through their memberships are charged transaction fees, dues and other fees that are not applicable to non-members.6 The dues and fees paid by members go into the general funds of the Exchange, a portion of which is used to help pay the costs of regulation. Thus, the Exchange believes members are already paying their fair share of the costs of regulation.7 Moreover, because the ORF would replace RR Fees, which relate to a member’s customer business, the Exchange believes it is appropriate to charge the ORF only to transactions that clear as customer at the OCC. The Exchange expects that member firms will pass-through the ORF to their customers in the same manner that firms pass-through to their customers the fees charged by SROs to help the SROs meet their obligation under Section 31 of the Exchange Act. The Exchange believes that revenue generated from the ORF, when combined with all of the Exchange’s other regulatory fees, will be less than or equal to the Exchange’s regulatory costs. The total amount of regulatory fees collected by the Exchange is significantly less than the regulatory costs incurred by the Exchange on an annual basis. In general, on a year over year basis, regulatory fee revenue (not time of entry in order to allow the Exchange to properly prioritize and route orders and assess transaction fees pursuant to the rules of the Exchange and report resulting transactions to the OCC. The Exchange represents that it has surveillances in place to verify that members mark orders with the correct account origin code. 6 For example, non-broker-dealer customers generally are not charged transaction fees to trade equity options on the Exchange. 7 If the Exchange changes its method of funding regulation or if circumstances otherwise change in the future, the Exchange may decide to impose the ORF or a separate regulatory fee on members if the Exchange deems it advisable. VerDate Aug<31>2005 17:13 Oct 24, 2008 Jkt 217001 including regulatory fine revenue) only covers about 65% of the Exchange’s regulatory costs. RR Fees make up the largest part of the Exchange’s total regulatory fee revenue. The Exchange collects other regulatory revenues from DEA Fees,8 and Communication Review Fees.9 The Exchange notes that its regulatory responsibilities with respect to member compliance with options sales practice rules have been allocated to FINRA under a 17d–2 agreement. The ORF is not designed to cover the cost of options sales practice regulation. The Exchange would monitor the amount of revenue collected from the ORF to ensure that it, in combination with its other regulatory fees and fines, does not exceed regulatory costs. The Exchange expects to monitor regulatory costs and revenues at a minimum on an annual basis. If the Exchange determines regulatory revenues exceed regulatory costs, the Exchange would adjust the ORF by submitting a fee change filing to the Commission. The Exchange would notify members of adjustments to the ORF via regulatory circular. The Exchange believes the proposed ORF is equitably allocated because it would be charged to all members on all their customer options business (as defined above). The Exchange believes the proposed ORF is reasonable because it will raise revenue related to the amount of customer options business conducted by members, and thus the amount of Exchange regulatory services those members will require, instead of how many registered persons a particular member firm employs.10 The Exchange believes it is reasonable and appropriate for the Exchange to charge the ORF for options transactions regardless of the exchange on which the transactions occur. The Exchange has a statutory obligation to enforce 8 The Exchange assesses the DEA Fee to each firm for which the SEC has designated the Exchange to be the DEA pursuant to SEC Rule 17d–1. The DEA Fee is intended to reimburse the Exchange for its costs associated with examining member firms and is generally the same throughout the SRO community. Currently the rate is set at $0.40 per $1,000.00 of gross revenue for the firm. See Section 12(C) of the CBOE Fees Schedule. 9 Although the Financial Industry Regulatory Authority (‘‘FINRA’’) is the SRO that reviews most securities industry advertisements and other communications, a number of firms still prefer to have CBOE review their materials. These requests are charged at $150 per regular occurrence (unless it involves extended review, such as a book) and $1,000 for an expedited, two-day turnaround. See Section 12(E) of the CBOE Fees Schedule. 10 The Exchange expects that implementation of the proposed ORF will result generally in many traditional brokerage firms paying less regulatory fees while Internet and discount brokerage firms will pay more. PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 63745 compliance by its members and their associated persons with the Exchange Act and the rules of the Exchange and to surveil for other manipulative conduct by market participants (including non-members) trading on the Exchange. The Exchange cannot effectively surveil for such conduct without looking at and evaluating activity across all options markets. Many of the Exchange’s market surveillance programs require the Exchange to look at and evaluate activity across all options markets, such as surveillance for position limit violations, manipulation, insider trading, frontrunning, contrary exercise advice violations and locked/crossed markets in connection with the Linkage.11 Also, CBOE and the other options exchanges are required to populate a consolidated options audit trail (‘‘COATS’’) system in order to surveil member activities across markets.12 In addition to its own surveillance programs, the Exchange works with other SROs and exchanges on intermarket surveillance related issues.13 Through its participation in the Intermarket Surveillance Group (‘‘ISG’’) the Exchange shares information and coordinates inquiries and investigations with other exchanges designed to address potential intermarket 11 The Exchange and other options SROs are parties to a 17d–2 agreement allocating among the SROs regulatory responsibilities relating to compliance by their common members with rules for expiring exercise declarations (formerly known as contrary exercise advices). See Securities Exchange Act Release No. 56941 (December 11, 2007), 72 FR 71723 (December 18, 2007). See also Securities Exchange Act Release No. 57649 (April 11, 2008), 73 FR 20976 (April 17, 2008) (approving an amendment which sought to add The Nasdaq Stock Market, LLC as a participant to such agreement). The Exchange and other options SROs have recently filed with the Commission an amendment to this agreement to include the allocation of examination responsibility with respect to options position limits. The Exchange retains significant regulatory responsibilities under this agreement. The Exchange notes within the last year it brought charges against members in two separate cases relating to member activity on CBOE as well as on another exchange. One case involved a contrary exercise advice violation and the other a position limit violation. 12 COATS effectively enhances intermarket options surveillance by enabling the options exchanges to reconstruct markets promptly, effectively surveil them and enforce order handling, firm quote, trade reporting and other rules. 13 Recently the Exchange, at the direction of the SEC, led a sweep examination of member firms relating to compliance with Regulation SHO that involved reviewing data with respect to members of other exchanges and coordinating such reviews with other exchanges. As a result of this examination, the Exchange has been assisting FINRA with a Regulation SHO review of a firm for which the Exchange is not the DEA. E:\FR\FM\27OCN1.SGM 27OCN1 63746 Federal Register / Vol. 73, No. 208 / Monday, October 27, 2008 / Notices mstockstill on PROD1PC66 with NOTICES manipulation and trading abuses.14 The Exchange’s participation in ISG helps it to satisfy the Exchange Act requirement that it have coordinated surveillance with markets on which security futures are traded and markets on which any security underlying security futures are traded to detect manipulation and insider trading.15 The Exchange believes that charging the ORF across markets will avoid having members direct their trades to other markets in order to avoid the fee and to thereby avoid paying for their fair share of regulation. If the ORF did not apply to activity across markets, then members would send their orders to the least cost, least regulated exchange. Other exchanges would, of course, be free to impose a similar fee on their member’s activity, including the activity of those members on CBOE. Finally, there is established precedent for an SRO charging a fee across markets, namely, FINRA’s Trading Activity Fee.16 While the Exchange does not have all of the same regulatory responsibilities as FINRA, the Exchange believes (as described above) that its broad regulatory responsibilities with respect to its members’ activities, irrespective of where their transactions take place, supports a regulatory fee applicable to transactions on other markets. Unlike the TAF, the ORF would apply only to a member’s customer options transactions. Related Rule Text Changes: In addition to being set forth in Section 12 of the CBOE Fees Schedule, DEA Fees and RR Fees are also set forth in CBOE Rules 2.22(a) and (b), respectively. The Exchange proposes to delete paragraph (b) from Rule 2.22 to reflect the elimination of RR Fees. The Exchange proposes to delete paragraph (a) from Rule 2.22 relating to DEA Fees because the Exchange does not believe it is necessary for those fees to be set forth in the rule since they are included on the CBOE Fees Schedule. Also, as a housekeeping matter, the Exchange proposes to delete Interpretation and Policy .01 to Rule 2.22 because it relates to charges imposed for services rendered by Order Book Officials (‘‘OBOs’’) and the Exchange no longer employs OBOs. 14 ISG is an industry organization formed in 1983 to coordinate intermarket surveillance among the SROs by cooperatively sharing regulatory information pursuant to a written agreement between the parties. The goal of the ISG’s information sharing is to coordinate regulatory efforts to address potential intermarket trading abuses and manipulations. 15 See Exchange Act Section 6(h)(3)(I). 16 See Securities Exchange Act Release No. 47946 (May 30, 2003), 68 FR 34021 (June 6, 2003). VerDate Aug<31>2005 17:13 Oct 24, 2008 Jkt 217001 2. Statutory Basis The Exchange believes the proposed rule change is consistent with Section 6(b) of the Securities Exchange Act of 1934 (‘‘Act’’),17 in general, and furthers the objectives of Section 6(b)(4) 18 of the Act in particular, in that it is designed to provide for the equitable allocation of reasonable dues, fees, and other charges among its members and other persons using its facilities. The Exchange believes that the ORF is objectively allocated to CBOE members because it would be charged to all members on all their transactions that clear as customer at the OCC. Moreover, the Exchange believes the ORF ensures fairness by assessing higher fees to those member firms that require more Exchange regulatory services based on the amount of customer options business they conduct. The Exchange believes the initial level of the fee is reasonable because it relates to the recovery of the costs of supervising and regulating members and it is expected to equal the Exchange’s revenue from RR Fees for 2007. The Exchange notes that the Commission has addressed the funding of an SRO’s regulatory operations in the Concept Release Concerning Self-Regulation 19 and the release on the Fair Administration and Governance of SelfRegulatory Organizations.20 In the Concept Release, the Commission states that: ‘‘Given the inherent tension between an SRO’s role as a business and as a regulator, there undoubtedly is a temptation for an SRO to fund the business side of its operations at the expense of regulation.’’ 21 In order to address this potential conflict, the Commission proposed in the Governance Release rules that would require an SRO to direct monies collected from regulatory fees, fines, or penalties exclusively to fund the regulatory operations and other programs of the SRO related to its regulatory responsibilities.22 The Exchange has designed the ORF to generate revenues that, when combined with all of the Exchange’s other regulatory fees, will be less than or equal to the Exchange’s regulatory costs, which is consistent with the Commission’s view that regulatory fees 17 15 U.S.C. 78f(b). U.S.C. 78f(b)(4). 19 See Securities Exchange Act Release No. 50700 (November 18, 2004), 69 FR 71256 (December 8, 2004) (‘‘Concept Release’’). 20 See Securities Exchange Act Release No. 50699 (November 18, 2004), 69 FR 71126 (December 8, 2004) (‘‘Governance Release’’). 21 Concept Release at 71268. 22 Governance Release at 71142. 18 15 PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 be used for regulatory purposes and not to support the Exchange’s business side. B. Self-Regulatory Organization’s Statement on Burden on Competition CBOE does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the 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 The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 23 and subparagraph (f)(2) of Rule 19b–4 24 thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–CBOE–2008–105 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–CBOE–2008–105. 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 23 15 24 17 E:\FR\FM\27OCN1.SGM U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(2). 27OCN1 Federal Register / Vol. 73, No. 208 / Monday, October 27, 2008 / Notices 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 publicly available. All submissions should refer to File Number SR–CBOE–2008–105 and should be submitted on or before November 17, 2008. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.25 Florence E. Harmon, Acting Secretary. [FR Doc. E8–25502 Filed 10–24–08; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–58823; File No. SR–CBOE– 2007–30] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Granting Approval of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating to Amendments to Rule 9.21 (Communications to Customers) mstockstill on PROD1PC66 with NOTICES October 21, 2008. On March 19, 2007, the Chicago Board Options Exchange, Incorporated (‘‘CBOE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1, and Rule 19b–4 thereunder.2 CBOE filed Amendment 25 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Aug<31>2005 17:13 Oct 24, 2008 Jkt 217001 No. 1 to the proposed rule change on June 9, 2008.3 Notice of the proposal, as modified by Amendment No. 1, was published for comment in the Federal Register on July 17, 2008.4 The Commission received one comment letter regarding the proposed rule change 5 and a response to comments from CBOE.6 This order approves the proposed rule change. I. Description of the Proposed Rule Change On December 23, 2002, the Commission published final rules that exempt standardized options, as defined in Rule 9b–1 7 under the Exchange Act, that are issued by a registered clearing agency and traded on a registered national securities exchange or on a registered national securities association, from all provisions of the Securities Act (other than the anti-fraud provisions) and the registration requirements of the Exchange Act.8 Because the Securities Act of 1933 (‘‘Securities Act’’) 9 and the rules thereunder (other than the anti-fraud provisions) are no longer applicable to such standardized options, CBOE proposed to remove elements of the Securities Act that are embedded in CBOE Rule 9.21 (‘‘Communications to Customers’’). In particular, CBOE proposed to remove all references to a ‘‘prospectus’’ from Rule 9.21. Prospectuses are no longer required for such standardized options, and the Options Clearing Corporation has, in fact, ceased publication of a prospectus.10 In addition, the proposed amendments expand the types of communications governed by Rule 9.21 to include independently prepared reprints and other communications between a member or member organization and a customer, exempt certain options communications from 3 Amendment No. 1 replaces the original filing in its entirety. 4 See Securities Exchange Act Release No. 58138 (Jul. 10, 2008) 73 FR 40886 (Jul. 17, 2008) (SR– CBOE–2007–30) (notice). 5 See Letter from Melissa MacGregor, Vice President and Assistant General Counsel, Securities Industry and Financial Markets Association (‘‘SIFMA’’), dated July 31, 2008. 6 See Letter from Lawrence J. Bresnahan, Vice President, CBOE, dated September 30, 2008. 7 17 CFR 240.9b–1. 8 See ‘‘Exemption for Standardized Options From Provisions of the Securities Act of 1933 and From the Registration Requirements of the Securities Exchange Act of 1934; Final Rule,’’ Securities Act Release No. 8171 and Exchange Act Release No. 47082 (Dec. 23, 2002), 68 FR 188 (Jan. 2, 2003). 9 15 U.S.C. 77a et seq. 10 The options disclosure document (‘‘ODD’’) prepared in accordance with Rule 9b–1 under the Exchange Act is not deemed to be a prospectus. 17 CFR 230.135b. See, e.g., Securities Act Release No. 8049 (Dec. 21, 2001), 67 FR 228 (Jan. 2, 2002). PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 63747 the pre-approval requirement by a Registered Options Principal (‘‘ROP’’) and update and reorganize Rule 9.21. The proposed amendments are similar to amendments filed with the Commission by the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’).11 A. Deletion of Certain Provisions As noted above, CBOE Rule 9.21 contains a number of references to a prospectus and other Securities Act requirements. The Exchange proposed to delete the following from Rule 9.21: (1) Rule 9.21(a)(iv), which references the Securities Act definition of prospectus, (2) Rule 9.21(d), which incorporates Securities Act principles in that it prohibits written material concerning options from being furnished to any person who has not previously or contemporaneously received the ODD, (3) Rule 9.21(e)(ii), which defines the term ‘‘Educational Material,’’ 12 (4) Interpretation and Policy .02A of Rule 9.21, which outlines what is permitted in an ‘‘Advertisement,’’ 13 and (5) Interpretation and Policy .03 of Rule 9.21, which concerns educational material.14 B. Redesignation of Rule 9.21(a) to Proposed Rule 9.21(d) and Related Amendments Rule 9.21(a) currently contains an outline of the ‘‘General Rule’’ for options communications. CBOE proposed to redesignate paragraph (a) as paragraph (d), and to incorporate limitations on the use of options communications contained in Interpretations and Policies .01 of Rule 9.21 into proposed Rule 9.21(d). In addition, proposed Rule 9.21(d)(iii) would amend Rule 9.21(a)(iii) by clarifying the types of cautionary statements and caveats that are prohibited. Also, as previously noted, CBOE proposed to delete Rule 9.21(a)(iv). C. Proposed Amendments to Rule 9.21(b) CBOE proposed to amend Rule 9.21(b) to include the types of communications 11 See Securities Exchange Act Release No. 57720 (Apr. 25, 2008) 73 FR 24332 (May 2, 2008), Exchange Act Release No. 58738 (approval order) (Oct. 6, 2008) 73 FR 60371 (Oct. 10, 2008) (SR– FINRA–2008–13). 12 This paragraph essentially incorporates language of Securities Act Rule 134a. While this amendment would eliminate the separate educational material category, as discussed below the Exchange also proposed to revise the definition of Sales Literature to include educational material. 13 This paragraph essentially incorporates language of Securities Act Rule 134. 14 See note 12, supra. E:\FR\FM\27OCN1.SGM 27OCN1

Agencies

[Federal Register Volume 73, Number 208 (Monday, October 27, 2008)]
[Notices]
[Pages 63744-63747]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-25502]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58817; File No. SR-CBOE-2008-105]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to the Registered Representative Fee and an 
Options Regulatory Fee

October 20, 2008.
    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 October 14, 2008, the Chicago Board Options Exchange, Incorporated 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by CBOE. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Chicago Board Options Exchange, Incorporated (``CBOE'' or 
``Exchange'') proposes to amend its Fees Schedule to eliminate 
registered representative fees and institute a new transaction-based 
``Options Regulatory Fee.'' The text of the proposed rule change is 
available on the Exchange's Web site (http://www.cboe.org/legal), at 
the Exchange's Office of the Secretary and at the Commission's Public 
Reference Room.

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

    In its filing with the Commission, 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, the Proposed Rule Change

1. Purpose
Background
    Registered representative fees (``RR Fees'') as well as other 
regulatory fees collected by the Exchange are intended to cover a 
portion of the cost of the Exchange's regulatory programs.\3\ The 
Exchange has assessed RR Fees since 1990. Each CBOE member firm that 
registers a financial advisor (or registered representative), 
Registered Options Principal or Financial/Operations Principal is 
assessed RR Fees based on the action associated with the registration. 
There are annual fees as well as initial, transfer and termination 
fees.\4\ Today all options exchanges, regardless of size, charge 
similar registered representative fees.
---------------------------------------------------------------------------

    \3\ In addition to RR Fees, CBOE derives revenue associated with 
its regulatory programs from Designated Examining Authority 
(``DEA'') Fees and Communication Review Fees. These fees are 
discussed further below.
    \4\ See Section 12(A) of the CBOE Fees Schedule and CBOE Rule 
2.22.
---------------------------------------------------------------------------

    Some member firms have raised concerns that the current self-
regulatory organization (``SRO'') regulatory fee structure, in which 
every options exchange charges similar fees to their member firms, does 
not appear justified. Each RR Fee is a fixed amount of money a member 
firm pays to the Exchange for each registered representative within the 
firm. The Exchange believes that RR Fees are no longer the most 
equitable manner to assess regulatory fees because today there are more 
Internet and discount brokerage firms with few registered 
representatives that pay little in RR Fees and fewer traditional 
brokerage firms with many registered representatives. The regulatory 
effort the Exchange expends to review the transactions of each type of 
firm is not commensurate with the number of registered representatives 
that each firm employs.
    In addition, due to the manner in which RR Fees are charged, it is 
possible for a member firm to restructure its business to avoid paying 
these fees altogether. A firm can avoid RR Fees by terminating its CBOE 
membership and sending its business to the Exchange through another 
member firm, even an affiliated firm that has many fewer registered 
representatives. If member firms terminated their memberships to avoid 
RR Fees, the Exchange would suffer the loss of a major source of 
funding for its regulatory programs. The Exchange notes that one member 
firm has already terminated its membership to avoid RR Fees. The 
Exchange believes other firms will do the same unless the Exchange 
changes it regulatory fee structure.
Options Regulatory Fee
    In order to address the concerns raised by member firms and to 
avoid the possibility of losing significant regulatory fee revenue, the 
Exchange proposes to eliminate RR Fees and replace them with a 
transaction-based ``Options Regulatory Fee'' (``ORF''). The ORF would 
be $.0045 per contract and would be assessed by the Exchange to each 
member for all options transactions executed by the member that are 
cleared by The Options Clearing Corporation (``OCC'') in the customer 
range (i.e., that clear in the customer account of the member's 
clearing firm at OCC), excluding P/A Orders as defined in the Options 
Intermarket Linkage Plan (``Linkage''). The ORF would be imposed upon 
all such transactions executed by a member, even if such transactions 
do not take place on the Exchange.\5\ The ORF would be collected

[[Page 63745]]

indirectly from members through their clearing firms by OCC on behalf 
of the Exchange.
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    \5\ The ORF would apply to all ``B'', ``C'', and ``W'' account 
origin code orders executed by a member on the Exchange. CBOE order 
origin codes are defined in CBOE Regulatory Circular RG08-105. 
Exchange rules require each member to record the appropriate account 
origin code on all orders at the time of entry in order to allow the 
Exchange to properly prioritize and route orders and assess 
transaction fees pursuant to the rules of the Exchange and report 
resulting transactions to the OCC. The Exchange represents that it 
has surveillances in place to verify that members mark orders with 
the correct account origin code.
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    The ORF would become effective on January 1, 2009, at which time RR 
Fees would be eliminated. The ORF is designed to recover a portion of 
the costs to the Exchange of the supervision and regulation of its 
members, including performing routine surveillances, investigations, 
examinations, financial monitoring, and policy, rulemaking, 
interpretive, and enforcement activities. The Exchange has set the ORF 
at a rate that it anticipates will approximately replace the amount of 
revenue that would be lost from the elimination of RR Fees.
    The ORF would not be charged for member options transactions 
because members incur the costs of owning memberships and through their 
memberships are charged transaction fees, dues and other fees that are 
not applicable to non-members.\6\ The dues and fees paid by members go 
into the general funds of the Exchange, a portion of which is used to 
help pay the costs of regulation. Thus, the Exchange believes members 
are already paying their fair share of the costs of regulation.\7\ 
Moreover, because the ORF would replace RR Fees, which relate to a 
member's customer business, the Exchange believes it is appropriate to 
charge the ORF only to transactions that clear as customer at the OCC.
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    \6\ For example, non-broker-dealer customers generally are not 
charged transaction fees to trade equity options on the Exchange.
    \7\ If the Exchange changes its method of funding regulation or 
if circumstances otherwise change in the future, the Exchange may 
decide to impose the ORF or a separate regulatory fee on members if 
the Exchange deems it advisable.
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    The Exchange expects that member firms will pass-through the ORF to 
their customers in the same manner that firms pass-through to their 
customers the fees charged by SROs to help the SROs meet their 
obligation under Section 31 of the Exchange Act.
    The Exchange believes that revenue generated from the ORF, when 
combined with all of the Exchange's other regulatory fees, will be less 
than or equal to the Exchange's regulatory costs. The total amount of 
regulatory fees collected by the Exchange is significantly less than 
the regulatory costs incurred by the Exchange on an annual basis. In 
general, on a year over year basis, regulatory fee revenue (not 
including regulatory fine revenue) only covers about 65% of the 
Exchange's regulatory costs.
    RR Fees make up the largest part of the Exchange's total regulatory 
fee revenue. The Exchange collects other regulatory revenues from DEA 
Fees,\8\ and Communication Review Fees.\9\ The Exchange notes that its 
regulatory responsibilities with respect to member compliance with 
options sales practice rules have been allocated to FINRA under a 17d-2 
agreement. The ORF is not designed to cover the cost of options sales 
practice regulation.
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    \8\ The Exchange assesses the DEA Fee to each firm for which the 
SEC has designated the Exchange to be the DEA pursuant to SEC Rule 
17d-1. The DEA Fee is intended to reimburse the Exchange for its 
costs associated with examining member firms and is generally the 
same throughout the SRO community. Currently the rate is set at 
$0.40 per $1,000.00 of gross revenue for the firm. See Section 12(C) 
of the CBOE Fees Schedule.
    \9\ Although the Financial Industry Regulatory Authority 
(``FINRA'') is the SRO that reviews most securities industry 
advertisements and other communications, a number of firms still 
prefer to have CBOE review their materials. These requests are 
charged at $150 per regular occurrence (unless it involves extended 
review, such as a book) and $1,000 for an expedited, two-day 
turnaround. See Section 12(E) of the CBOE Fees Schedule.
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    The Exchange would monitor the amount of revenue collected from the 
ORF to ensure that it, in combination with its other regulatory fees 
and fines, does not exceed regulatory costs. The Exchange expects to 
monitor regulatory costs and revenues at a minimum on an annual basis. 
If the Exchange determines regulatory revenues exceed regulatory costs, 
the Exchange would adjust the ORF by submitting a fee change filing to 
the Commission. The Exchange would notify members of adjustments to the 
ORF via regulatory circular.
    The Exchange believes the proposed ORF is equitably allocated 
because it would be charged to all members on all their customer 
options business (as defined above). The Exchange believes the proposed 
ORF is reasonable because it will raise revenue related to the amount 
of customer options business conducted by members, and thus the amount 
of Exchange regulatory services those members will require, instead of 
how many registered persons a particular member firm employs.\10\
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    \10\ The Exchange expects that implementation of the proposed 
ORF will result generally in many traditional brokerage firms paying 
less regulatory fees while Internet and discount brokerage firms 
will pay more.
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    The Exchange believes it is reasonable and appropriate for the 
Exchange to charge the ORF for options transactions regardless of the 
exchange on which the transactions occur. The Exchange has a statutory 
obligation to enforce compliance by its members and their associated 
persons with the Exchange Act and the rules of the Exchange and to 
surveil for other manipulative conduct by market participants 
(including non-members) trading on the Exchange. The Exchange cannot 
effectively surveil for such conduct without looking at and evaluating 
activity across all options markets. Many of the Exchange's market 
surveillance programs require the Exchange to look at and evaluate 
activity across all options markets, such as surveillance for position 
limit violations, manipulation, insider trading, frontrunning, contrary 
exercise advice violations and locked/crossed markets in connection 
with the Linkage.\11\ Also, CBOE and the other options exchanges are 
required to populate a consolidated options audit trail (``COATS'') 
system in order to surveil member activities across markets.\12\
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    \11\ The Exchange and other options SROs are parties to a 17d-2 
agreement allocating among the SROs regulatory responsibilities 
relating to compliance by their common members with rules for 
expiring exercise declarations (formerly known as contrary exercise 
advices). See Securities Exchange Act Release No. 56941 (December 
11, 2007), 72 FR 71723 (December 18, 2007). See also Securities 
Exchange Act Release No. 57649 (April 11, 2008), 73 FR 20976 (April 
17, 2008) (approving an amendment which sought to add The Nasdaq 
Stock Market, LLC as a participant to such agreement). The Exchange 
and other options SROs have recently filed with the Commission an 
amendment to this agreement to include the allocation of examination 
responsibility with respect to options position limits. The Exchange 
retains significant regulatory responsibilities under this 
agreement. The Exchange notes within the last year it brought 
charges against members in two separate cases relating to member 
activity on CBOE as well as on another exchange. One case involved a 
contrary exercise advice violation and the other a position limit 
violation.
    \12\ COATS effectively enhances intermarket options surveillance 
by enabling the options exchanges to reconstruct markets promptly, 
effectively surveil them and enforce order handling, firm quote, 
trade reporting and other rules.
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    In addition to its own surveillance programs, the Exchange works 
with other SROs and exchanges on intermarket surveillance related 
issues.\13\ Through its participation in the Intermarket Surveillance 
Group (``ISG'') the Exchange shares information and coordinates 
inquiries and investigations with other exchanges designed to address 
potential intermarket

[[Page 63746]]

manipulation and trading abuses.\14\ The Exchange's participation in 
ISG helps it to satisfy the Exchange Act requirement that it have 
coordinated surveillance with markets on which security futures are 
traded and markets on which any security underlying security futures 
are traded to detect manipulation and insider trading.\15\
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    \13\ Recently the Exchange, at the direction of the SEC, led a 
sweep examination of member firms relating to compliance with 
Regulation SHO that involved reviewing data with respect to members 
of other exchanges and coordinating such reviews with other 
exchanges. As a result of this examination, the Exchange has been 
assisting FINRA with a Regulation SHO review of a firm for which the 
Exchange is not the DEA.
    \14\ ISG is an industry organization formed in 1983 to 
coordinate intermarket surveillance among the SROs by cooperatively 
sharing regulatory information pursuant to a written agreement 
between the parties. The goal of the ISG's information sharing is to 
coordinate regulatory efforts to address potential intermarket 
trading abuses and manipulations.
    \15\ See Exchange Act Section 6(h)(3)(I).
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    The Exchange believes that charging the ORF across markets will 
avoid having members direct their trades to other markets in order to 
avoid the fee and to thereby avoid paying for their fair share of 
regulation. If the ORF did not apply to activity across markets, then 
members would send their orders to the least cost, least regulated 
exchange. Other exchanges would, of course, be free to impose a similar 
fee on their member's activity, including the activity of those members 
on CBOE.
    Finally, there is established precedent for an SRO charging a fee 
across markets, namely, FINRA's Trading Activity Fee.\16\ While the 
Exchange does not have all of the same regulatory responsibilities as 
FINRA, the Exchange believes (as described above) that its broad 
regulatory responsibilities with respect to its members' activities, 
irrespective of where their transactions take place, supports a 
regulatory fee applicable to transactions on other markets. Unlike the 
TAF, the ORF would apply only to a member's customer options 
transactions.
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    \16\ See Securities Exchange Act Release No. 47946 (May 30, 
2003), 68 FR 34021 (June 6, 2003).
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    Related Rule Text Changes: In addition to being set forth in 
Section 12 of the CBOE Fees Schedule, DEA Fees and RR Fees are also set 
forth in CBOE Rules 2.22(a) and (b), respectively. The Exchange 
proposes to delete paragraph (b) from Rule 2.22 to reflect the 
elimination of RR Fees. The Exchange proposes to delete paragraph (a) 
from Rule 2.22 relating to DEA Fees because the Exchange does not 
believe it is necessary for those fees to be set forth in the rule 
since they are included on the CBOE Fees Schedule. Also, as a 
housekeeping matter, the Exchange proposes to delete Interpretation and 
Policy .01 to Rule 2.22 because it relates to charges imposed for 
services rendered by Order Book Officials (``OBOs'') and the Exchange 
no longer employs OBOs.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Securities Exchange Act of 1934 (``Act''),\17\ in 
general, and furthers the objectives of Section 6(b)(4) \18\ of the Act 
in particular, in that it is designed to provide for the equitable 
allocation of reasonable dues, fees, and other charges among its 
members and other persons using its facilities. The Exchange believes 
that the ORF is objectively allocated to CBOE members because it would 
be charged to all members on all their transactions that clear as 
customer at the OCC. Moreover, the Exchange believes the ORF ensures 
fairness by assessing higher fees to those member firms that require 
more Exchange regulatory services based on the amount of customer 
options business they conduct.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes the initial level of the fee is reasonable 
because it relates to the recovery of the costs of supervising and 
regulating members and it is expected to equal the Exchange's revenue 
from RR Fees for 2007. The Exchange notes that the Commission has 
addressed the funding of an SRO's regulatory operations in the Concept 
Release Concerning Self-Regulation \19\ and the release on the Fair 
Administration and Governance of Self-Regulatory Organizations.\20\ In 
the Concept Release, the Commission states that: ``Given the inherent 
tension between an SRO's role as a business and as a regulator, there 
undoubtedly is a temptation for an SRO to fund the business side of its 
operations at the expense of regulation.'' \21\ In order to address 
this potential conflict, the Commission proposed in the Governance 
Release rules that would require an SRO to direct monies collected from 
regulatory fees, fines, or penalties exclusively to fund the regulatory 
operations and other programs of the SRO related to its regulatory 
responsibilities.\22\ The Exchange has designed the ORF to generate 
revenues that, when combined with all of the Exchange's other 
regulatory fees, will be less than or equal to the Exchange's 
regulatory costs, which is consistent with the Commission's view that 
regulatory fees be used for regulatory purposes and not to support the 
Exchange's business side.
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    \19\ See Securities Exchange Act Release No. 50700 (November 18, 
2004), 69 FR 71256 (December 8, 2004) (``Concept Release'').
    \20\ See Securities Exchange Act Release No. 50699 (November 18, 
2004), 69 FR 71126 (December 8, 2004) (``Governance Release'').
    \21\ Concept Release at 71268.
    \22\ Governance Release at 71142.
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \23\ and subparagraph (f)(2) of Rule 19b-4 \24\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission may summarily abrogate such rule change if 
it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \23\ 15 U.S.C. 78s(b)(3)(A).
    \24\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2008-105 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, Station Place, 100 F Street, NE., Washington, 
DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2008-105. 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

[[Page 63747]]

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 publicly available. All submissions should refer to 
File Number SR-CBOE-2008-105 and should be submitted on or before 
November 17, 2008.


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-25502 Filed 10-24-08; 8:45 am]
BILLING CODE 8011-01-P