Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving Proposed Rule Change Relating to Supervision, 13365-13366 [2014-05031]

Download as PDF Federal Register / Vol. 79, No. 46 / Monday, March 10, 2014 / Notices to 90 days as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or as to which the self-regulatory organization consents, the Commission shall either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved. The 45th day for this filing is March 15, 2014. The Commission is extending the 45day time period for Commission action on the proposed rule change. The Commission finds that it is appropriate to designate a longer period to take action on the proposed rule change so that it has sufficient time to consider FINRA’s proposal and the comment letters it has received regarding this proposal. Accordingly, the Commission, pursuant to Section 19(b)(2) of the Act,6 designates April 28, 2014, as the date by which the Commission shall either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change (File No. SR–FINRA–2014–003). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.7 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–05085 Filed 3–7–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71644; File No. SR–CBOE– 2013–126] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving Proposed Rule Change Relating to Supervision March 4, 2014. emcdonald on DSK67QTVN1PROD with NOTICES I. Introduction On December 18, 2013, Chicago Board Options Exchange, Incorporated (the ‘‘Exchange’’ or ‘‘CBOE’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b-4 thereunder,2 a proposed rule change to require each Trading Permit 6 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(31). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 7 17 VerDate Mar<15>2010 18:00 Mar 07, 2014 Jkt 232001 Holder (‘‘TPH’’) 3 to establish and maintain a system of supervision and written supervisory procedures. The proposed rule change was published for comment in the Federal Register on January 2, 2014.4 The Commission received no comments on the proposal. The text of the proposed rule change is available at the Exchange’s Office of the Secretary, on the Exchange’s Web site at https:// www.cboe.com/AboutCBOE/ CBOELegalRegulatoryHome.aspx, and at the Commission’s Public Reference Room. This order approves the proposed rule change. II. Description of the Proposal The Exchange believes that it does not currently have a comprehensive rule that directly addresses the obligation of every TPH to properly supervise its business and employees. The only supervision obligations that are expressly codified in CBOE’s Rules are in Rule 4.2 (Adherence to Law) and Rule 9.8 (Supervision of Accounts). While the former requires a TPH to supervise persons associated with the TPH, it does not expressly require the establishment and maintenance of a system of supervision or written procedures covering each line of business. The latter, a component of Chapter 9 of the CBOE Rulebook (Doing Business with the Public), does provide explicit supervisory obligations, however, it is applicable only to TPHs conducting non-TPH customer business in options. CBOE proposes to adopt CBOE Rule 4.24, which would require every TPH to establish and maintain a system of supervision and written supervisory procedures for each of their business activities and the activities of their associated persons. In particular, the proposed rule would require TPHs to: (1) Establish, maintain, and enforce written supervisory procedures; (2) inspect every office or location of the TPH at least once every three calendar years; and (3) conduct an annual review and submit to the Exchange on an annual basis a written report on the TPH’s supervision and compliance efforts during the preceding year. The proposed rule would mirror many of the requirements in CBOE Rule 9.8, such as requiring TPHs to: (1) 3 Article 1, Section 1.1(f) of the Exchange’s Bylaws defines ‘‘Trading Permit Holder’’ to mean ‘‘any individual, corporation, partnership, limited liability company or other entity authorized by the Rules that holds a Trading Permit.’’ The proposed rule would also apply to CBOE Stock Exchange (‘‘CBSX’’) Trading Permit Holders. CBSX is CBOE’s stock trading facility. 4 See Exchange Act Release No. 71190 (Nov.14, 2013), 79 FR 169 (Jan. 2, 2014). PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 13365 Establish, maintain, and enforce written supervisory procedures; (2) conduct office inspections; and (3) conduct an annual review and submit to the Exchange an annual written report on the TPH’s supervision and compliance efforts during the preceding year. The proposed rule would not, however, be limited to supervision of activities related only to TPHs conducting nonTPH customer business in options. CBOE believes that the proposed rule would impose a more definitive supervision requirement on TPHs than is currently contained in the Exchange’s rules, and would cover all business activities of a TPH.5 In particular, the proposed rule would clearly place responsibility on TPHs to establish and maintain a formal plan of supervision that covers each of their business activities and associated persons. Consequently, the Exchange believes the proposed rule would clarify: (1) The responsibility of the TPH for the acts of its associated persons; and (2) the requirement of each TPH to supervise those associated persons for which it is responsible. In addition, CBOE believes that the proposed rule would provide greater utility for enforcing TPH obligations for all its business areas such as proprietary trading. III. Discussion and Commission Findings After careful review of the proposal, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder that are applicable to a national securities exchange.6 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.7 The Commission ‘‘has long emphasized that the responsibility of broker-dealers to supervise their 5 The Exchange modeled its proposed rule after rules of other self-regulatory organizations, e.g., PHLX Rule 748, NASD Rule 3010, FINRA Rule 3130, NYSE Amex Rule 320, NYSE Rule 342, and NYSE Arca Options Rule 11.18. 6 In approving the proposal, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 7 15 U.S.C. 78f(b)(5). E:\FR\FM\10MRN1.SGM 10MRN1 13366 Federal Register / Vol. 79, No. 46 / Monday, March 10, 2014 / Notices emcdonald on DSK67QTVN1PROD with NOTICES employees is a critical component of the federal regulatory scheme.’’ 8 Effective and comprehensive supervisory policies and procedures, among other things, are critical to a firm’s ability to surveil for misconduct. Accordingly, the Commission believes the proposed rule change would help TPHs prevent fraudulent and manipulative acts and practices and improve investor protection by requiring TPHs to clearly delineate their supervisory obligations. In particular, the Commission believes that compelling every TPH to establish and maintain written supervisory procedures regarding each of their business activities and associated persons would provide TPHs and their supervisory personnel with a clearer understanding of their supervisory responsibilities to help them carry out those responsibilities. In addition, the Commission believes that requiring TPHs to inspect all of their offices or locations at least once every three calendar years would strengthen TPHs’ ability to carry out their compliance and surveillance functions. Similarly, the Commission believes that requiring TPHs to conduct an annual review and submit to the Exchange on an annual basis a written report on the TPH’s supervision and compliance efforts during the preceding year would help foster a culture of compliance within each TPH by promoting a dialogue throughout the TPH of its compliance efforts and procedures. By requiring written supervisory procedures and inspections that are reasonably designed to prevent and detect violations of applicable securities laws and regulations, as well as Exchange rules, the proposed rule would help to ensure that TPHs have the necessary processes in place to identify potential rule violations or inappropriate activity. Consequently, the Commission believes that the Exchange’s proposal would foster an environment within each TPH that is more likely to help decrease the likelihood of fraudulent and manipulative acts and practices and increase investor protection. Accordingly, the Commission believes that the proposed rule change is consistent with the Act. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,9 that the 8 Commission, Division of Market Regulation (now known as Division of Trading and Markets), Staff Legal Bulletin No. 17: Remote Office Supervision (Mar. 19, 2004). 9 15 U.S.C. 78s(b)(2). VerDate Mar<15>2010 18:00 Mar 07, 2014 Jkt 232001 proposed rule change (SR–CBOE–2013– 126) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.10 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–05031 Filed 3–7–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71646; File No. SR–OCC– 2014–03] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change to Comply With Recently Adopted Commodity Futures Trading Commission Requirements for Derivatives Clearing Organizations That Accept Deposits of Futures Customer Funds March 4, 2014. 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 February 19, 2014, The Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change described in Items I and II below, which Items have been prepared primarily by OCC. OCC filed the proposed rule change pursuant to Section 19(b)(3)(A) 3 of the Act and Rule 19b–4(f)(4)(ii) 4 thereunder, so that the proposal was effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the rule change from interested parties. I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change This proposed rule change by OCC would amend OCC’s By-Laws and Rules to allow OCC to comply with recently adopted Commodity Futures Trading Commission (‘‘CFTC’’) requirements for derivatives clearing organizations (‘‘DCOs’’), such as OCC, that accept deposits of futures customer funds from futures commission merchants (‘‘FCMs’’). 10 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–4(f)(4)(ii). 1 15 PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, OCC 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. OCC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of these statements. (A) Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose OCC is proposing to modify its rules to allow it to comply with new CFTC requirements imposed on depositories that accept deposits of futures customer funds from FCMs. Recent amendments to CFTC Regulation § 1.20 5 require that FCMs only deposit futures customer funds with depositories that agree to grant the CFTC’s Division of Swap Dealer and Intermediary Oversight (‘‘DSIO’’) and the CFTC’s Division of Clearing and Risk, as well as representatives of the FCM’s designated self-regulatory organization, certain access and examination rights (‘‘CFTC Access and Examination Rights’’).6 OCC, as a CFTC-registered DCO, functions as a depository with respect to any futures customer funds deposited by clearing members that are FCMs. Consequently, for these FCM clearing members to continue to use OCC as their DCO, OCC must agree to comply with the CFTC Access and Examination Rights. Pursuant to CFTC Regulation § 1.20(d)(1),7 OCC and the clearing member may make this agreement either by providing a written acknowledgment 5 17 CFR 1.20. Regulation § 1.20(d)(3) (17 CFR 1.20(d)(3)) also provides that FCMs may only deposit futures customer funds with depositories that agree to provide the director of the DSIO with ‘‘direct, readonly electronic access to transaction and account balance information’’ for the futures customer accounts. Based on discussions with staff from the CFTC’s Division of Clearing and Risk on December 16, 2013 and subsequently confirmed via email, it is OCC’s understanding that, as a DCO that serves as a depository with respect to deposits of futures customer funds by its clearing members that are FCMs, it will not be required to provide this direct electronic access, because the CFTC did not intend for the requirement set forth in § 1.20(d)(3) to apply to a DCO that has submitted to the CFTC rules that provide for the segregation of customer funds in accordance with all relevant provisions of the Commodity Exchange Act and the rules and orders promulgated thereunder. Consequently, OCC is not including this direct electronic access requirement among the other CFTC Access and Examination Rights addressed in this Rule Change. 7 17 CFR 1.20(d)(1). 6 CFTC E:\FR\FM\10MRN1.SGM 10MRN1

Agencies

[Federal Register Volume 79, Number 46 (Monday, March 10, 2014)]
[Notices]
[Pages 13365-13366]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-05031]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71644; File No. SR-CBOE-2013-126]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving Proposed Rule Change Relating to 
Supervision

March 4, 2014.

I. Introduction

    On December 18, 2013, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to require each Trading Permit 
Holder (``TPH'') \3\ to establish and maintain a system of supervision 
and written supervisory procedures.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Article 1, Section 1.1(f) of the Exchange's Bylaws defines 
``Trading Permit Holder'' to mean ``any individual, corporation, 
partnership, limited liability company or other entity authorized by 
the Rules that holds a Trading Permit.'' The proposed rule would 
also apply to CBOE Stock Exchange (``CBSX'') Trading Permit Holders. 
CBSX is CBOE's stock trading facility.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in the Federal 
Register on January 2, 2014.\4\ The Commission received no comments on 
the proposal. The text of the proposed rule change is available at the 
Exchange's Office of the Secretary, on the Exchange's Web site at 
https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx, and at the 
Commission's Public Reference Room.
---------------------------------------------------------------------------

    \4\ See Exchange Act Release No. 71190 (Nov.14, 2013), 79 FR 169 
(Jan. 2, 2014).
---------------------------------------------------------------------------

    This order approves the proposed rule change.

II. Description of the Proposal

    The Exchange believes that it does not currently have a 
comprehensive rule that directly addresses the obligation of every TPH 
to properly supervise its business and employees. The only supervision 
obligations that are expressly codified in CBOE's Rules are in Rule 4.2 
(Adherence to Law) and Rule 9.8 (Supervision of Accounts). While the 
former requires a TPH to supervise persons associated with the TPH, it 
does not expressly require the establishment and maintenance of a 
system of supervision or written procedures covering each line of 
business. The latter, a component of Chapter 9 of the CBOE Rulebook 
(Doing Business with the Public), does provide explicit supervisory 
obligations, however, it is applicable only to TPHs conducting non-TPH 
customer business in options.
    CBOE proposes to adopt CBOE Rule 4.24, which would require every 
TPH to establish and maintain a system of supervision and written 
supervisory procedures for each of their business activities and the 
activities of their associated persons. In particular, the proposed 
rule would require TPHs to: (1) Establish, maintain, and enforce 
written supervisory procedures; (2) inspect every office or location of 
the TPH at least once every three calendar years; and (3) conduct an 
annual review and submit to the Exchange on an annual basis a written 
report on the TPH's supervision and compliance efforts during the 
preceding year.
    The proposed rule would mirror many of the requirements in CBOE 
Rule 9.8, such as requiring TPHs to: (1) Establish, maintain, and 
enforce written supervisory procedures; (2) conduct office inspections; 
and (3) conduct an annual review and submit to the Exchange an annual 
written report on the TPH's supervision and compliance efforts during 
the preceding year. The proposed rule would not, however, be limited to 
supervision of activities related only to TPHs conducting non-TPH 
customer business in options.
    CBOE believes that the proposed rule would impose a more definitive 
supervision requirement on TPHs than is currently contained in the 
Exchange's rules, and would cover all business activities of a TPH.\5\ 
In particular, the proposed rule would clearly place responsibility on 
TPHs to establish and maintain a formal plan of supervision that covers 
each of their business activities and associated persons. Consequently, 
the Exchange believes the proposed rule would clarify: (1) The 
responsibility of the TPH for the acts of its associated persons; and 
(2) the requirement of each TPH to supervise those associated persons 
for which it is responsible. In addition, CBOE believes that the 
proposed rule would provide greater utility for enforcing TPH 
obligations for all its business areas such as proprietary trading.
---------------------------------------------------------------------------

    \5\ The Exchange modeled its proposed rule after rules of other 
self-regulatory organizations, e.g., PHLX Rule 748, NASD Rule 3010, 
FINRA Rule 3130, NYSE Amex Rule 320, NYSE Rule 342, and NYSE Arca 
Options Rule 11.18.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review of the proposal, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder that are applicable to a national 
securities exchange.\6\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act, 
which requires, among other things, that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.\7\
---------------------------------------------------------------------------

    \6\ In approving the proposal, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission ``has long emphasized that the responsibility of 
broker-dealers to supervise their

[[Page 13366]]

employees is a critical component of the federal regulatory scheme.'' 
\8\ Effective and comprehensive supervisory policies and procedures, 
among other things, are critical to a firm's ability to surveil for 
misconduct.
---------------------------------------------------------------------------

    \8\ Commission, Division of Market Regulation (now known as 
Division of Trading and Markets), Staff Legal Bulletin No. 17: 
Remote Office Supervision (Mar. 19, 2004).
---------------------------------------------------------------------------

    Accordingly, the Commission believes the proposed rule change would 
help TPHs prevent fraudulent and manipulative acts and practices and 
improve investor protection by requiring TPHs to clearly delineate 
their supervisory obligations.
    In particular, the Commission believes that compelling every TPH to 
establish and maintain written supervisory procedures regarding each of 
their business activities and associated persons would provide TPHs and 
their supervisory personnel with a clearer understanding of their 
supervisory responsibilities to help them carry out those 
responsibilities. In addition, the Commission believes that requiring 
TPHs to inspect all of their offices or locations at least once every 
three calendar years would strengthen TPHs' ability to carry out their 
compliance and surveillance functions. Similarly, the Commission 
believes that requiring TPHs to conduct an annual review and submit to 
the Exchange on an annual basis a written report on the TPH's 
supervision and compliance efforts during the preceding year would help 
foster a culture of compliance within each TPH by promoting a dialogue 
throughout the TPH of its compliance efforts and procedures.
    By requiring written supervisory procedures and inspections that 
are reasonably designed to prevent and detect violations of applicable 
securities laws and regulations, as well as Exchange rules, the 
proposed rule would help to ensure that TPHs have the necessary 
processes in place to identify potential rule violations or 
inappropriate activity. Consequently, the Commission believes that the 
Exchange's proposal would foster an environment within each TPH that is 
more likely to help decrease the likelihood of fraudulent and 
manipulative acts and practices and increase investor protection.
    Accordingly, the Commission believes that the proposed rule change 
is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-CBOE-2013-126) be, and hereby 
is, approved.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-05031 Filed 3-7-14; 8:45 am]
BILLING CODE 8011-01-P
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