Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Chapter 17 of the Cboe Options Rules, 18878-18892 [2019-08912]
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Federal Register / Vol. 84, No. 85 / Thursday, May 2, 2019 / Notices
competitive product(s), applicable
statutory and regulatory requirements
include 39 U.S.C. 3632, 39 U.S.C. 3633,
39 U.S.C. 3642, 39 CFR part 3015, and
39 CFR part 3020, subpart B. Comment
deadline(s) for each request appear in
section II.
II. Docketed Proceeding(s)
1. Docket No(s).: CP2019–144; Filing
Title: Notice of United States Postal
Service of Filing a Functionally
Equivalent Global Reseller Expedited
Package 2 Negotiated Service Agreement
and Application for Non-Public
Treatment of Materials Filed Under
Seal; Filing Acceptance Date: April 25,
2019; Filing Authority: 39 CFR 3015.5;
Public Representative: Christopher C.
Mohr; Comments Due: May 3, 2019.
This Notice will be published in the
Federal Register.
Ruth Ann Abrams,
Acting Secretary.
[FR Doc. 2019–08872 Filed 5–1–19; 8:45 am]
BILLING CODE 7710–FW–P
POSTAL REGULATORY COMMISSION
[Docket No. CP2019–145]
New Postal Product
Postal Regulatory Commission.
Notice.
AGENCY:
ACTION:
The Commission is noticing a
recent Postal Service filing for the
Commission’s consideration concerning
a negotiated service agreement. This
notice informs the public of the filing,
invites public comment, and takes other
administrative steps.
DATES: Comments are due: May 6, 2019.
ADDRESSES: Submit comments
electronically via the Commission’s
Filing Online system at https://
www.prc.gov. Those who cannot submit
comments electronically should contact
the person identified in the FOR FURTHER
INFORMATION CONTACT section by
telephone for advice on filing
alternatives.
FOR FURTHER INFORMATION CONTACT:
David A. Trissell, General Counsel, at
202–789–6820.
SUPPLEMENTARY INFORMATION:
SUMMARY:
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Table of Contents
I. Introduction
II. Docketed Proceeding(s)
I. Introduction
The Commission gives notice that the
Postal Service filed request(s) for the
Commission to consider matters related
to negotiated service agreement(s). The
request(s) may propose the addition or
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removal of a negotiated service
agreement from the market dominant or
the competitive product list, or the
modification of an existing product
currently appearing on the market
dominant or the competitive product
list.
Section II identifies the docket
number(s) associated with each Postal
Service request, the title of each Postal
Service request, the request’s acceptance
date, and the authority cited by the
Postal Service for each request. For each
request, the Commission appoints an
officer of the Commission to represent
the interests of the general public in the
proceeding, pursuant to 39 U.S.C. 505
(Public Representative). Section II also
establishes comment deadline(s)
pertaining to each request.
The public portions of the Postal
Service’s request(s) can be accessed via
the Commission’s website (https://
www.prc.gov). Non-public portions of
the Postal Service’s request(s), if any,
can be accessed through compliance
with the requirements of 39 CFR
3007.301.1
The Commission invites comments on
whether the Postal Service’s request(s)
in the captioned docket(s) are consistent
with the policies of title 39. For
request(s) that the Postal Service states
concern market dominant product(s),
applicable statutory and regulatory
requirements include 39 U.S.C. 3622, 39
U.S.C. 3642, 39 CFR part 3010, and 39
CFR part 3020, subpart B. For request(s)
that the Postal Service states concern
competitive product(s), applicable
statutory and regulatory requirements
include 39 U.S.C. 3632, 39 U.S.C. 3633,
39 U.S.C. 3642, 39 CFR part 3015, and
39 CFR part 3020, subpart B. Comment
deadline(s) for each request appear in
section II.
II. Docketed Proceeding(s)
1. Docket No(s).: CP2019–145; Filing
Title: Notice of the United States Postal
Service of Filing a Functionally
Equivalent Global Plus 1E Negotiated
Service Agreement and Application for
Non-Public Treatment of Materials Filed
Under Seal; Filing Acceptance Date:
April 26, 2019; Filing Authority: 39 CFR
3015.5; Public Representative: Kenneth
R. Moeller; Comments Due: May 6,
2019.
1 See Docket No. RM2018–3, Order Adopting
Final Rules Relating to Non-Public Information,
June 27, 2018, Attachment A at 19–22 (Order No.
4679).
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This Notice will be published in the
Federal Register.
Stacy L. Ruble,
Secretary.
[FR Doc. 2019–08981 Filed 5–1–19; 8:45 am]
BILLING CODE 7710–FW–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–85727; File No. SR–CBOE–
2019–025]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Chapter 17 of
the Cboe Options Rules
April 26, 2019.
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 April 17,
2019, Cboe Exchange, Inc. (‘‘Cboe
Options’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Exchange filed the proposal as a
‘‘non-controversial’’ proposed rule
change pursuant to Section
19(b)(3)(A)(iii) of the Act 3 and Rule
19b–4(f)(6) thereunder.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to amend
Chapter 17 of the Cboe Options Rules.
The text of the proposed rule change is
provided in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegalRegulatory
Home.aspx), 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, the
Exchange included statements
concerning the purpose of and basis for
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
2 17
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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
Exchange 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
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1. Purpose
The Exchange is proposing to update
processes and related rules concerning
investigative and disciplinary matters
involving Exchange Trading Permit
Holders (‘‘TPHs’’) 5 and persons
associated with Trading Permit Holders
(‘‘associated persons’’).6 Specifically,
the Exchange is updating its rules and
processes related to (1) complaints and
investigations; (2) expedited
proceedings; (3) the issuance of charges
(and answers thereto); (4) hearings
(including decisions made pursuant to a
hearing and the review of decisions); (5)
summary proceedings; (6) settlements;
(7) judgment and sanctions; (8) service
of notice; (9) reporting to the Central
Registration Depository; and (10)
imposition of fines for minor rule
5 Pursuant to the Tenth Amended and Restated
Bylaws of the Exchange ‘‘Trading Permit Holder’’
means any individual, corporation, partnership,
limited liability company or other entity authorized
by the Rules that holds a Trading Permit. If a
Trading Permit Holder is an individual, the Trading
Permit Holder may also be referred to as an
‘‘individual Trading Permit Holder.’’ If a Trading
Permit Holder is not an individual, the Trading
Permit Holder may also be referred to as a ‘‘TPH
organization.’’ A Trading Permit Holder is a
‘‘member’’ solely for purposes of the Securities and
Exchange Act of 1934 (the ‘‘Act’’); however, one’s
status as a Trading Permit Holder does not confer
on that Person any ownership interest in the
Exchange.
Pursuant to Cboe Options Rule 1.1(hhh), the term
‘‘Trading Permit’’ means a license issued by the
Exchange that grants the holder or the holder’s
nominee the right to access one or more of the
facilities of the Exchange for the purpose of
effecting transactions in securities traded on the
Exchange without the services of another person
acting as broker, and otherwise to access the
facilities of the Exchange for purposes of trading or
reporting transactions or transmitting orders or
quotations in securities traded on the Exchange, or
to engage in other activities that, under the Rules,
may only be engaged in by Trading Permit Holders,
provided that the holder or the holder’s nominee,
as applicable, satisfies any applicable qualification
requirements to exercise those rights.
6 Pursuant to Cboe Options Rule 1.1(qq), the
‘‘associated person’’ or ‘‘person associated with a
Trading Permit Holder’’ means any partner, officer,
director, or branch manager of a Trading Permit
Holder (or any person occupying a similar status or
performing similar functions), any person directly
or indirectly controlling, controlled by, or under
common control with a Trading Permit Holder, or
any employee of a Trading Permit Holder.
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violations. The Exchange is making
these updates in an effort to adopt new
roles for the Exchange’s Business
Conduct Committee (‘‘BCC’’) 7 and Chief
Regulatory Officer (‘‘CRO’’) 8 and to
increase efficiency and fairness in the
Exchange’s disciplinary process. The
Exchange proposes updates to Chapter
17 to reflect the new roles of the CRO
and the Hearing Panel in the
disciplinary process, which are
consistent with that of the Exchange’s
affiliate exchanges: Cboe BZX Exchange,
Inc. (‘‘Cboe BZX’’); 9 Cboe BYX
Exchange, Inc. (‘‘Cboe BYX’’); 10 Cboe
EDGX Exchange, Inc. (‘‘Cboe EDGX’’); 11
and Cboe EDGA Exchange, Inc. (‘‘Cboe
EDGA’’) 12 (collectively, and hereinafter,
referred to as the ‘‘Affiliated
Exchanges’’).13 The Exchange also
proposes additional changes to reflect
certain other language and provisions of
the Affiliated Exchanges, particularly
regarding ex parte communications 14
and impartiality of Hearing Panel
members.15 In addition, the Exchange is
making technical and conforming
updates to its minor rule violation
rules.16 The updates reflecting the rules
of the Affiliated Exchanges contain
some nuance. The most notable
difference that will remain at this time
between Exchange rules and the rules of
the Affiliated Exchanges is that BCC
members will be selected by the
Chairperson of the BCC to comprise
Hearing Panels, whereas the Chief
Executive Officer (‘‘CEO’’) appoints
members of the Hearing Panels on the
7 The BCC has decision-making authority
concerning possible violations within the
disciplinary jurisdiction of the Exchange. The BCC
is comprised of one or more TPHs or associated
persons, one or more public representatives, and
may also include other individuals affiliated with
the securities, futures or derivatives industry, all as
appointed by the Exchange’s Nominating and
Governance Committee with the approval of the
Exchange’s Board of Directors.
8 The CRO has general supervisory authority over
the Exchange’s regulatory operations, including the
responsibility for overseeing its surveillance,
examination, and enforcement functions and for
administering any regulatory services agreements
with another self-regulatory organization to which
the Exchange is a party.
9 See Rules of Cboe BZX Exchange, Inc.,
specifically Rules 8.2, 8.3, 8.4, 8.6, 8.7, and 8.8.
10 See Rules of Cboe BYX Exchange, Inc.,
specifically Rules 8.2, 8.3, 8.4, 8.6, 8.7, and 8.8.
11 See Rules of Cboe EDGA Exchange, Inc.,
specifically Rules 8.2, 8.3, 8.4, 8.6, 8.7, and 8.8.
12 See Rules of Cboe EDGX Exchange, Inc.,
specifically Rules 8.2, 8.3, 8.4, 8.6, 8.7, and 8.8.
13 The rules under Chapter 8 of each of the
Affiliated Exchanges are the same in number, form
and substance. Therefore, the Exchange refers
singularly to the corresponding rule of the
‘‘Affiliated Exchanges’’ throughout this proposed
rule filing.
14 See the Affiliated Exchanges’ Rule 8.16.
15 See the Affiliated Exchanges’ Rule 8.6.
16 See the Affiliated Exchanges’ Rule 8.15.
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Affiliated Exchanges. Moreover, the
Exchange proposes timing and tolling of
certain periods in connection with
various stages of the proceedings under
Chapter 17 that are different from the
timing in the Affiliated Exchanges’
corresponding rules. The Exchange also
proposes updates to certain aspects of
the review process intended to
streamline the overall disciplinary
process. Finally, the Exchange is
updating certain rules to correct minor
errors or update obsolete/outdated
language as needed.
Current Exchange Rules and
Adjudicatory Process
The Exchange rules currently divided
responsibility for the adjudication of its
rules into two categories: (1) Rules for
which the BCC and BCC Hearing Panels
are responsible for adjudicating formal
disciplinary proceedings; and (2) rules
under which fines may be assessed in
lieu of formal disciplinary action. With
respect to violations that are adjudicated
by the BCC and Hearing Panels, Rule
17.4(b) requires the BCC to direct
Regulatory staff (‘‘Staff’’) 17 to prepare a
statement of charges whenever it
appears that there is probable cause for
finding a violation within the
disciplinary jurisdiction of the
Exchange has occurred and formal
disciplinary action is warranted.
Alternatively, in lieu of conducting a
formal disciplinary proceeding, Rule
17.50 (Imposition of Fines for Minor
Rule Violations) provides for
disposition of specific violations
through assessment of fines.18
Current Rule 17.2 Complaint and
Investigation
Staff investigates and examines
possible violations within the
disciplinary jurisdiction of the
Exchange (‘‘violations’’) whenever Staff
determines in its sole discretion that
there is reasonable basis for it to do so.19
TPHs and associated persons are
required to cooperate with Staff
inquiries and to furnish information
17 See Cboe Options Rule 17.2 Interpretation and
Policy .05. References to ‘‘Regulatory staff’’ mean
the Exchange’s employees in the Regulatory
Division, and, as applicable, may also mean
employees of the Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) who are performing
regulatory services to the Exchange in accordance
with the regulatory services agreement entered into
between the Exchange and FINRA.
18 None of the fines assessed in lieu of formal
disciplinary action exceed $5000. Under Rule
17.50(f), the Exchange may refer matters covered
under Rule 17.50 for formal disciplinary action
whenever it determines that any violation is
intentional, egregious or otherwise not minor in
nature.
19 See Cboe Options Rule 17.2(a).
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requested in connection with
investigations and examinations.20
Staff have [sic] the sole discretion to
determine whether to request the BCC
authorize the issuance of a statement of
charges.21 When Staff finds that a
violation has occurred and formal
regulatory action is warranted, Staff
submits a written report (‘‘report’’) of
the investigation to the BCC.22 When
Staff finds that a violation has occurred
but non-formal disciplinary action is
warranted (e.g. cautionary letters) Staff
may, in its sole discretion, impose nonformal disciplinary action without
submitting a report to the BCC.23 If Staff
finds that there are not reasonable
grounds to determine a violation has
been committed Staff may, in its sole
discretion, close the investigation
without submitting a report to the
BCC.24
Prior to submitting a report to the
BCC, Staff must notify the subject of the
report (‘‘Subject’’) of the nature of the
alleged violations.25 Unless the BCC
decides expeditious action is required,
the Subject has 15 days to submit a
written statement to the BCC concerning
why no disciplinary action should be
taken.26 The Subject may request access
to documents in the investigative file,
furnished by the Subject or the Subject’s
agents, to assist the Subject in preparing
such a written statement.27 The Subject
may also submit a videotaped response
in lieu of a written statement, the length
and format of which is decided by the
Exchange.28
Current Rule 17.3 Expedited Proceeding
When the Subject receives notice of
the report, the Subject may seek to
dispose of the matter through a letter of
consent.29 The Subject submits notice to
Staff electing to proceed in an expedited
manner.30 The Subject and Staff may
then negotiate a letter of consent
outlining stipulations and findings
regarding the violation(s) and the
sanctions therefore.31 Disposing of the
matter via letter of consent occurs only
if the Subject and Staff agree on the
terms and it is signed by the Subject.32
At any time, the Subject or Staff may
20 See
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21 See
Cboe Options Rule 17.2(b).
Cboe Options Rule 17.2(c).
terminate the negotiations.33 Following
termination of the negotiations, the
Subject has 15 days to submit a written
statement to the BCC, pursuant to Rule
17.2, concerning why no disciplinary
action should be taken.34 The BCC may
accept or reject the letter of consent.35
If the BCC accepts the letter, it may
adopt the letter as its decision.36 If the
BCC rejects the letter, the matter
proceeds as if the letter had not been
submitted. The BCC’s decision to accept
or reject the letter is final.37
Current Rule 17.4 Charges
When it appears to the BCC from the
Staff’s report pursuant to Rule 17.2(c)
that no probable cause exists for finding
a violation occurred or if the BCC
otherwise determines that no further
action is warranted, the BCC issues a
written statement setting out its reasons
for that finding.38 When the BCC
determines probable cause exists for
finding a violation occurred and further
proceedings are warranted, the BCC
directs Staff to prepare a statement of
charges against the Subject (thereafter a
‘‘Respondent’’) specifying the acts for
which the Respondent is charged and
setting forth the specific violations.39 A
Respondent may request access to the
investigative file within 60 calendar
days of receiving notice of a statement
of charges.40 The Staff, however, may
protect the identity of a Complainant in
providing such documents.
Additionally, ex parte communications
are prohibited between a TPH or person
associated with a TPH and members of
the BCC or Board (and vice versa)
concerning the merits of any matter
pending under Chapter 17.41
Current Rule 17.5 Answer
The Respondent has 15 days after
service of the statement of charges to file
a written answer to the statement of
charges (‘‘Answer’’).42 The Answer
specifically admits or denies any
allegation contained in the statement of
charges and may be accompanied by
supporting documentation.43
Current Rule 17.6 Hearing
Subject to Rule 17.7 regarding
summary proceedings (described
22 Id.
33 Id.
23 Id.
34 Id.
24 Id.
25 See
below), hearings on charges are held
before one or more members of the
BCC.44 The person or persons
conducting the hearing exercise [sic] the
authority of the BCC and are [sic]
referred to as the ‘‘Panel.’’ 45 The
Exchange and the Respondent are
parties to the hearing.46 Where a TPH
organization (as opposed to a TPH who
is an individual or an associated person)
is a party, it is represented by one of its
TPHs (including nominees).47 The
parties are given at least 15 days’ notice
of the time and place of the hearing.48
Not less than five days in advance of the
hearing date, the parties must furnish
copies of all documentary evidence they
wish to present at the hearing and a list
of witnesses they intend to present at
the hearing.49 If the time and nature of
the proceedings permit, the parties meet
in a pre-hearing conference in order to
clarify and simplify issues, and
otherwise expedite the proceeding, At
the pre-hearing conference, the parties
must attempt to reach agreement
respecting authenticity of documents,
facts not in dispute, and any other items
in order to expedite the hearing. At the
request of any party, the Panel or Panel
Chairperson hears and decides the prehearing issues not resolved among the
parties. Generally, interlocutory Board
review of any decision made by the
Panel prior to hearing completion is
prohibited, and permitted only if the
Panel agrees to such review after
determining that the issue is a
controlling issue of rule or policy and
that immediate Board review would
materially advance the ultimate
resolution of the case. The Panel has the
authority to regulate the conduct of the
hearing and shall determine all
questions concerning the admissibility
of evidence.50 Persons who are not
parties to the hearing may intervene as
a party, provided that person can
demonstrate an interest in the subject of
the hearing to the satisfaction of the
Panel.51
Current Rule 17.7 Summary Proceedings
Notwithstanding Rule 17.6 regarding
hearings (described above), the BCC
may make a determination without a
hearing and impose a penalty as to
violations which the Respondent has
admitted or failed to Answer or which
otherwise do not appear to be in
35 Id.
Cboe Options Rule 17.2(d).
36 Id.
44 See
26 Id.
37 Id.
45 Id.
27 Id.
38 See
46 Id.
39 See
47 Id.
28 See
Cboe Options Interpretation and Policy .02
to Rule 17.2.
29 See Cboe Options Rule 17.3.
30 Id.
31 Id.
32 Id.
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Cboe Options Rule 17.4(a).
Cboe Options Rule 17.4(b).
40 See Cboe Options Rule 17.4(c).
41 See Cboe Options Rule 17.4(d) and
Interpretations and Policies .01–.03 to Rule 17.4.
42 See Cboe Options Rule 17.5.
43 Id.
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48 See
Cboe Options Rule 17.6(a).
Cboe Options Rule 17.6(b).
49 Id.
50 See
Cboe Options Rule 17.6(c).
Cboe Options Interpretation and Policy .01
to Rule 17.6.
51 See
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dispute.52 The Respondent is served
with notice of summary determination,
after which the Respondent may notify
the BCC that they [sic] would like a
hearing on one or more of the charges.53
A Respondent’s failure to notify the BCC
that they [sic] desire a hearing
constitutes an admission of the
violations and an acceptance of the
penalty.54
Current Rule 17.8 Offers of Settlement
The Respondent may submit an offer
of settlement (‘‘offer’’) to the BCC up to
120 days following service of the
statement of charges.55 If the BCC
accepts the offer, it issues a decision
consistent with the terms of the offer.56
If the BCC rejects the offer, it notifies the
Respondent and the matter proceeds as
if the offer had not been made.57 The
Respondent may submit a written
statement in support of an offer.58 In
addition, the Respondent is notified if
Staff will not recommend acceptance of
an offer, and the Respondent may then
appear before the BCC to make an oral
statement in support of the offer.59 If the
BCC rejects an offer that the Staff
supports the Respondent may also
appear before the BCC to make an oral
statement concerning why the BCC
should consider changing its decision.60
Subject to certain conditions, the
Respondent is limited to two offers in
connection with a statement of
charges.61 The BCC, in its discretion,
may permit the Respondent to submit
an additional offer during the applicable
time period, provided the stipulation of
facts and sanction contained in the offer
are consistent with what is deemed
acceptable by the BCC.62
Further, there are certain situations
where the 120-day period during which
the Respondent may submit an offer
may be reduced and/or extended. If the
Respondent elects to proceed in an
expedited manner pursuant to Rule 17.3
and is unable to reach a consent
agreement with Staff, then any period in
excess of 30 days from when the
Respondent elected to proceed in an
expedited manner to the end of consent
negotiations (by either Staff or the
Respondent’s declaration) is deducted
52 See
Cboe Options Rule 17.7.
53 Id.
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54 Id.
55 See
Cboe Options Rule 17.8(a).
56 Id.
57 Id.
58 See
Cboe Options Rule 17.8(b).
59 Id.
60 Id.
61 See Cboe Options Interpretation and Policy
.01(a) to Rule 17.8.
62 See Cboe Options Interpretation and Policy
.01(c) to Rule 17.8.
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from the 120-day period.63 If the
Respondent requests access to the
investigative file pursuant to Rule 17.4,
the 120-day period is tolled during the
number of days in excess of 30 days that
it takes Staff to provide access to the
investigative file.64
Finally, at the end of the 120-day
period, or after the BCC rejects the
Respondent’s second offer a hearing is
scheduled and the hearing proceeds in
accordance with the provisions of Rule
17.6.65
The BCC, in part, appropriately
disciplines TPHs and associated persons
for violations by expulsion, suspension,
limitation of activities, fine, censure,
suspension of Trading Permits, or any
other fitting sanction.74 Under this Rule,
the BCC considers several factors when
determining sanctions including, but
not limited to, deterrence, remediation,
precedent and the appropriateness of
disgorgement and/or restitution.75
Current Rule 17.9 Decision
Current Rule 17.12 Service of Notice
Following a hearing, the Panel issues
a decision (the ‘‘decision’’) determining
whether the Respondent has committed
a violation.66 The decision must also
include sanctions in cases where
sanctions have been imposed. In
instances in which the Panel is not
composed of at least a majority of the
BCC, a majority of the BCC
automatically reviews the decision. The
majority may affirm, reverse, or modify
the decision or remand the matter for
additional findings or supplemental
proceedings.67
Current Rule 17.10 Review
The Respondent and/or the
Regulatory Division has 15 days after
service of the decision to petition for
review of the decision by filing a copy
of the petition with the Secretary of the
Exchange and with all other parties.68
Parties other than the petitioner may
submit written responses to the
petition.69 The Board or a committee of
the Board, whose decisions must be
ratified by the Board, conducts the
review.70 The Board may affirm, reverse
or modify a decision of the BCC and the
decision of the Board is final.71 In
addition, the Board may review a
decision on its own motion.72 Finally,
the Exchange’s Regulatory Oversight
and Compliance Committee may apply
to the Board to have the BCC’s decision
not to initiate charges that were
recommended by Staff, reviewed by the
Board.73
63 See Cboe Options Interpretation and Policy
.01(b) to Rule 17.8.
64 See Cboe Options Interpretation and Policy
.01(d) to Rule 17.8.
65 See Cboe Options Interpretation and Policy .02
to Rule 17.8.
66 See Cboe Options Rule 17.9.
67 Id.
68 See Cboe Options Rule 17.10(a)(1).
69 See Cboe Options Rule 17.10(a)(2).
70 See Cboe Options Rule 17.10(b).
71 Id.
72 See Cboe Options Rule 17.10(c).
73 See Cboe Options Rule 17.10(d).
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Current Rule 17.11 Judgment and
Sanction
Service of charges, notices and other
documents upon the Respondent are
made personally, by leaving the same at
the Respondent’s place of business or by
deposit in the US post office via
registered or certified mail addressed to
the Respondent at the Respondent’s
address as it appears on the books and
records of the Exchange.76
Current Rule 17.14 Reporting the
Central Registration Depository
The Exchange reports the issuance of
a statement of charges and significant
changes to the status of disciplinary
proceedings to the Central Registration
Depository (‘‘CRD’’).77
Current Rule 17.50 Imposition of Fines
for Minor Rule Violations
In lieu of commencing disciplinary
proceedings, the Exchange may impose
fines, not to exceed $5000, on TPHs and
associated persons for specified Rule
violations.78 Any person against whom
a fine is imposed pursuant to Rule 17.50
may contest the fine by filing an
Answer, pursuant to Rule 17.5, at which
point the matter is subject to review by
the BCC.79 The Answer may request a
hearing if desired. Review and hearing
related to violations outlined in Rule
17.50 are handled in the same fashion
as any other matter for which a
statement of charges has been issued.80
However, subject to certain conditions,
the BCC may impose certain forum fees
for review and hearing if the BCC
determines that the conduct serving as
the basis of the action under review is
in violation of Exchange Rules.81 The
Exchange lists the rules as to which the
Exchange may impose fines within Rule
17.50 itself and in regulatory circulars
74 See
Cboe Options Rule 17.11(a).
Cboe Options Interpretation and Policy .01
to Rule 17.11.
76 See Cboe Options Rule 17.12.
77 See Cboe Options Rule 17.14.
78 See Cboe Options Rule 17.50(a).
79 See Cboe Options Rule 17.50(c)(1).
80 Id.
81 See Cboe Options Rule 17.50(c)(2).
75 See
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and notices.82 Nothing in Rule 17.50
requires the Exchange to impose a fine
pursuant to Rule 17.50 with respect to
the violation of any rule listed.83 For a
violation that the Exchange determines
is minor in nature and falls within the
scope of the minor rule plan, it may
proceed under Rule 17.50.84 A number
of listed rules within Rule 17.50
indicate that violations above a
specified threshold or a specified
number of repeat violations will result
in referral to the BCC.85
Proposed Updates to Exchange Rules
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As mentioned above, the current
application of the rules provides for the
BCC to determine whether to initiate
charges in a regulatory matter and to
determine appropriate sanctions for rule
violations. Under the proposed change
to Rule 17.4, the CRO will replace the
BCC and accordingly, the CRO will have
the authority to initiate charges. Under
the proposed changes to Rule 17.11, the
CRO or a Hearing Panel, as applicable,
may impose disciplinary sanctions. The
Exchange proposes corresponding
changes elsewhere in Chapter 17 to
reflect the CRO’s authority to initiate
charges and impose disciplinary
sanctions. These changes harmonize the
CRO’s authority under Chapter 17 with
the CRO’s authority under
corresponding Chapter 8 of the
Affiliated Exchanges. The Exchange
believes that this transfer of authority to
the CRO maintains the independence of
the regulatory functions of the Exchange
as the CRO supervises the regulatory
functions of the Exchange, separate from
that of its business interest, reporting
directly to the Regulatory Oversight
Committee of the Board of Directors
(‘‘ROC’’).
The Exchange recommends additional
changes, including amendments to:
(1) Increase the amount of time the
Subject of a regulatory report has to
submit a written statement (from 15
days to 25).
(2) Increase the amount of time a
Respondent has to file an Answer (from
15 days to 25). This changed is based on
the Rules of the New York Stock
Exchange (‘‘NYSE’’),86 the Financial
Industry Regulatory Authority
(‘‘FINRA’’),87 and NASDAQ PHLX, LLC
(‘‘PHLX’’).88
82 See
Cboe Options Rule 17.50(f).
83 Id.
84 Id.
85 See
Cboe Options Rule 17.50(g)(2)–(5), (7), (9)–
(19).
86 See NYSE Rule 9215.
87 See FINRA Rule 9215.
88 See PHLX Rule 9215.
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(3) Update Interpretation and Policy
.02 to Rule 17.2 by specifying standards
for videotaped responses.
(4) Relocate provisions related to ex
parte communications currently
contained in Rule 17.4 (Charges) to Rule
17.15 (Ex Parte Communications). This
change is consistent with the ex parte
provisions under the Affiliated
Exchanges’ Rule 8.16.
(5) Update Rule 17.6 (Hearing) to:
a. Specify that hearings on charges
shall be held before a Hearing Panel
comprised of three or five members of
the BCC;
b. Specify impartiality requirements
for members of the Hearing Panel and
procedures for removal of members of
the Hearing Panel on the grounds of bias
or conflict of interest. This is based on
the Affiliated Exchanges’ Rule 8.6(b) as
well as FINRA Rule 9233(a);
c. Increase the amount of time prior
to a hearing date the parties to a hearing
must furnish documentary evidence
(from 5 days to 10); and
d. Specify that the CRO has the
authority to direct that a hearing be
scheduled at any time after the period
to submit an answer to Charges
pursuant to Rule 17.5 has elapsed.
(6) Update Rule 17.8 (Settlement) to:
a. Eliminate the 120-day period
during which a Respondent may submit
an offer of settlement (and make
corresponding changes reflecting the
removal of this time period). This
removal comports with the Affiliated
Exchanges’ Rule 8.8;
b. Specify that offers of settlement
will be considered by the CRO for
acceptance or rejection (as opposed to
the BCC).This is a harmonizing change
reflecting that of the Affiliated
Exchanges’ Rule 8.8(b);
c. Specify that the CRO has the
discretion to grant a Respondent more
than two written offers of settlement.
This is a harmonizing change reflecting
that of the Affiliated Exchanges’ Rule
8.8(c); and
d. Specify that a Hearing Panel will
grant the parties leave to present an
offer of settlement to the CRO.
(7) Remove the requirement that a
majority of the BCC automatically
review decisions of a Hearing Panel.
This is a harmonizing change reflecting
that of the Affiliated Exchanges’ Rule
8.9.
(8) Remove the provision that the
Board may review the decision not to
initiate charges upon application by the
Regulatory Oversight and Compliance
Committee.
(9) Specify that if service of notice
pursuant to Chapter 17 is made by
registered or certified mail, three days
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shall be added to the prescribed period
for response.
(10) Add Rule 17.15 for ex parte
communications.
(11) Update the rules related to Minor
Rule Violations to reflect changes
elsewhere in Chapter 17 and to remove
any required referral to the BCC for
repeat violations.
(12) Update certain other outdated
language within Chapter 17.
Detailed descriptions of the changes
to specific Rules within Chapter 17 are
outlined below.
Updates to Rule 17.2 Complaint and
Investigation
The Exchange replaces references to
the BCC with references to the CRO
within Rule 17.2, which conforms to the
Affiliated Exchanges’ Rule 8.2. Under
updated Rule 17.2(c), Staff will request
the CRO to authorize the issuance of a
statement of charges when Staff finds
there are reasonable grounds to believe
a violation has been committed and
formal regulatory action is required.
Additionally, the proposed change
requires the Staff to submit a written
report to the CRO of each investigation
instituted as a result of a complaint,
along with the current requirement that
Staff submit reports where Staff finds
reasonable grounds that a violation has
occurred and formal regulatory action is
warranted. The Exchange notes that
under the Affiliated Exchange’s current
rules, Staff are to submit written reports
to the CRO when an investigation has
been initiated as a result of a complaint,
as well as when an investigation results
in a finding that there are reasonable
grounds to believe that a violation has
been committed. The Exchange notes
that, unlike the Affiliated Exchanges,
Staff maintains the authority to impose
non-formal disciplinary action or
determine to close an investigation
without the submission of a report to
the CRO.89 The Exchange also notes
that, as it does today, Staff will retain
information and/or summaries regarding
an action or an investigation closed in
this manner. Such information and/or
summaries are [sic] available to the CRO
upon request and included in regulatory
updates to the CRO when necessary.
Under updated Rule 17.2(d), except
when the CRO determines that
expeditious action is required, the
Subject may submit a written statement
to the CRO concerning why no
89 See Securities Exchange Act Release No. 71371
(January 23, 2014), 79 FR 4779 (January 29, 2014)
(Notice of Filing and Immediate Effectiveness of
Proposed Rule To Amend CBOE’s Rules To
Enhance the Independence and Integrity of the
Regulatory Functions of the Exchange) (SR–CBOE–
2014–001).
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disciplinary action should be taken. In
addition, the Exchange proposes to
extend the time period the Subject has
to submit a written statement from 15
days, the period currently provided for
in the Affiliated Exchanges’ Rule 8.2(d),
from the date of the notice to 25 days.
The Exchange further proposes to
specify that this 25-day period to submit
a written statement to the CRO will toll
while a request for access to the
investigative file pursuant to Rule
17.2(d) is pending. The Exchange also
proposes to update Rule 17.2(d) to
eliminate any gender-specific pronouns
(i.e. ‘‘he’’, ‘‘him’’, or ‘‘his).90 Finally, the
Exchange makes corresponding updates
to Interpretation and Policy .02 to Rule
17.2 to reflect the aforementioned
changes to Rule 17.2(d) and to set forth
standards for videotaped responses.
Such responses are consistent with
current Securities and Exchange
Commission (‘‘Commission’’)
enforcement guidelines, specifically the
requirements that videotaped responses
are limited to 12 minutes or less.91 The
Exchange additionally proposes that a
written transcript accompany a
videotaped response. The submission of
videotaped responses falls within the
proposed 25-day submission period
and, when applicable, proposed tolling
period.
Purpose of Updates to Rule 17.2
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The Exchange believes the CRO is
best suited to review reports from Staff
and responses to alleged violations from
Subjects. The CRO has general
supervisory authority over the
Exchange’s regulatory operations,
including the responsibility for
overseeing surveillance, examination,
and enforcement functions and for
administering any regulatory services
agreements with another self-regulatory
organization to which the Exchange is a
party. The Exchange notes that the CRO
functions to serve the regulatory
functions of the Exchange, separate from
that of its business interest, reporting
directly to the ROC. Therefore, the
Exchange believes that allowing the
CRO to authorize the issuance of
charges maintains the autonomy and
independence of the Exchange’s
regulatory functions, as well as helps to
ensure that decisions regarding the
90 The Exchange is also updating Rules 17.5, 17.6,
17.7, 17.8, 17.12, and 17.50 to eliminate genderspecific pronouns. Additionally, in instances in
which the Exchange harmonizes its rule language
with that of the Affiliated Exchanges, the Exchange
eliminates gender-specific pronouns.
91 See Securities and Exchange Commission
Division of Enforcement, Enforcement Manual
(Nov. 28, 2017), available at: https://www.sec.gov/
divisions/enforce/enforcementmanual.pdf.
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resolution of investigations are made
without regard to the actual or
perceived business interests of the
Exchange or any of TPHs. As a result,
the submission of written reports to the
CRO will help expedite the disciplinary
process while still providing TPH and
associated persons with a fair and
efficient process. The Exchange also
notes that the added submission of
written reports where an investigation
has been instituted as a result of a
complaint serves to make the
Exchange’s complaint process
consistent with that of the Affiliated
Exchanges. The Exchange believes that
keeping the Staff’s authority in place to
find reasonable grounds that formal
regulatory action is or is not warranted
and to impose the appropriate nonformal or closing actions where
warranted without providing a formal
report to the CRO will continue to
support the independence and integrity
of the regulatory functions of the
Exchange, as Staff, like the CRO,
functions independently from the
business interests of the Exchange.92
Additionally, the Exchange believes
that due to the increased complexity of
Exchange trading activity (and the
resulting regulatory investigations and
examinations) that increasing the time
period from 15 days to 25 days is
reasonable. The additional time will
enhance the regulatory process by
allowing subjects to prepare more
comprehensive and effective written
statements.93 The Exchange notes that
the Subject’s access to ‘‘other materials’’
includes any non-privileged exculpatory
documents that the Exchange may have
in the investigative file. Finally, tolling
that same period while Staff prepares an
investigative file when requested by the
Subject is necessary in the interest of
fairness. The Exchange notes that Staff
is often able to provide an investigative
file in one week or less and that the
Exchange makes every effort to provide
such files promptly upon request.
However, to the extent an investigative
file is voluminous or otherwise
complicated to provide, were that
period not tolled, the Subject could be
left with insufficient time to prepare an
effective written statement following
receipt of the investigative file. Though
the rules of the Affiliated Exchanges do
not provide for tolling of this time
period, the Exchange notes that its
92 See
supra note 88 [sic].
Exchange notes that under current Rule
17.13 time limits imposed under Chapter 17 may
be extended. Where the exchange is extending
certain time limits within this filing, it also does so
to reduce the number of extension requests
processed by Staff and thereby enhance the
efficiency of the regulatory process.
93 The
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18883
current Interpretation and Policy .01(d)
to Rule 17.8 (discussed below) already
allows for tolling to extent it takes Staff
more than 30 calendar days (in the
context of a total 120-day time period)
to produce documents to a Respondent.
Therefore, as proposed, tolling is not
novel within the Exchange’s
disciplinary process. The Exchange
believes that the proposed 25 day time
period should be completely tolled
while Regulatory staff prepares an
investigative file for review in order to
provide sufficient time for a Subject to
compose a response. The Exchange also
notes that this will limit the need for the
Exchange to provide extensions when
the Subject requests more time to
respond. Finally, the Exchange notes
that the addition of a time limit of
videotaped responses, consistent with
current Commission enforcement
guidelines, 94 and the accompaniment
by a written transcript serves the
interest of expediency.
Updates to Rule 17.3 Expedited
Proceeding
The Exchange proposes to replace
references to the BCC with references to
the CRO within Rule 17.3, thus making
the CRO’s role consistent with that of
corresponding Rule 8.3 of the Affiliated
Exchanges. The Exchange also proposes
to update certain verbiage as needed
resulting from those replacements. The
Exchange makes corresponding updates
to reflect changes to the 17.2(d)
processes referenced in Rule 17.3.
Under updated Rule 17.3, if Staff and
the Subject are able to agree on the
terms of a letter of consent, Staff will
submit the letter to the CRO for
consideration. If the CRO accepts the
letter of consent, the Exchange shall
adopt the letter of consent as its
decision and no further action shall be
taken against the Subject respecting the
matters that are the subject of the letter
of consent, which is consistent with the
practices set forth in the Affiliated
Exchanges’ Rule 8.3. If the CRO rejects
the letter of consent, the matter shall
proceed as though the letter of consent
had not been submitted. The CRO’s
decisions regarding letters of consent
are final. The Exchange also makes nonsubstantive, clarifying additions
qualifying the letter as the ‘‘letter of
consent’’ throughout this rule.
Purpose of Updates to Rule 17.3
The CRO replaces the BCC as the
deciding body related to expedited
proceedings. The Exchange believes the
CRO is best suited to review letters of
consent and determine whether to reject
94 See
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or accept such letters. The CRO is better
suited to resolve procedural matters like
expedited proceedings and the approval
or disapproval of letters of consent
because the CRO has greater subject
matter and procedural expertise based
on his role in directly overseeing the
regulatory programs and processes on a
day to day basis. Additionally, the
Exchange notes that the CRO is required
to report periodically to the ROC on all
regulatory matters and issues, thus,
keeping the ROC apprised of, and
allowing for its review of expedited
proceedings. As a result, the Exchange
believes that this proposed rule change
further supports and provides for the
autonomy and independence of the
Exchanges’ regulatory functions.
Updates to Rule 17.4 Charges
The Exchange proposes to replace
references to the BCC with references to
the CRO within Rule 17.4(a) and 17.4(b),
which conforms to the Affiliated
Exchanges’ references within their
corresponding Rule 8.4. The Exchange
also proposes to add clarification that a
determination not to initiate charges
pursuant to Rule 17.4(a) only occurs in
those cases where a Subject has been
provided notice of violations pursuant
to Rule 17.2(d). Under updated Rule
17.4(a), in those cases where notice has
been provide pursuant to Rule 17.2(d)
and when it appears to the CRO from
the report of Regulatory staff that no
probable cause exists for finding that a
violation occurred or if the CRO
otherwise determines that no further
action is warranted, the CRO shall direct
Staff to prepare and issue a statement to
the Subject (and Complainant if any)
outlining the reasons for such finding.
The proposed language stating that the
CRO shall direct Staff to prepare and
issue the written statement related to
such a determination is a clarifying
addition to Rule 17.4(a) that is intended
to add detail regarding the process
through which such a statement is
issued.
Similarly, under updated Rule
17.4(b), whenever it shall appear to the
CRO that there is probable cause for
finding a violation occurred and further
proceedings are warranted, the CRO
shall direct Staff to prepare and issue a
statement of charges against the
Respondent. The proposed addition of
the term ‘‘and issue’’ clarifies Staff’s
responsibilities under the Rule, serves
to mirror the Staff’s responsibilities for
an issuance pursuant to 17.4(a), and
modifies the Rule to be substantially
similar to the Affiliated Exchanges’ Rule
8.4(b).
The Exchange also modifies the
requirement in Rule 17.4(c) that a
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Respondent request access to
documents within 60 calendar days
after receiving service of charges, to 25
days after receiving such notice. This
change serves to harmonize a
Respondent’s time to request documents
with their [sic] time to file a written
answer under proposed Rule 17.5
(described below), and the tolling of
such period while access to the
investigative file is pending. Lastly, the
Exchange proposes to relocate Rule
17.4(d) and its Interpretations and
Policies .01–.03 (along with the
amendments proposed, as described
below), which concern ex parte
communications, to proposed additional
Rule 17.15. This change is in line with
the Affiliated Exchanges’ Rule 8.16 that
specifically covers ex parte
communications for disciplinary
procedures.
Purpose of Updates to Rule 17.4
The Exchange believes the CRO is
best suited to determine whether to
initiate charges after reviewing a Staff
report. Allowing the CRO to initiate
charges (or elect not to initiate charges)
will significantly expedite the
disciplinary process, as well as serve to
conform this rule to the Affiliated
Exchanges’ Rule 8.4. Specifically, Staff
and Subjects will not have to wait until
the BCC meets to learn whether a
regulatory matter will result in charges
and the matter can move on to answer,
hearing, settlement, and/or summary
disposition. In the CRO’s capacity as
supervisor of the Exchange’s regulatory
operations, the CRO maintains the
subject matter and procedural expertise
that is necessary to review and consider
regulatory issues and the accompanying
facts and circumstances in
consideration of issuing charges. For
example, the CRO is best suited to
determine when a pattern or practice of
violative conduct exists, where certain
conduct might have been willful in
nature or whether other aggravating (or
mitigating) circumstances exist
(considerations that may be important
in considering charges). As stated, the
Exchange believes that under the
current practice of Rule 17.4(a) and (b),
by having the CRO direct Staff to
prepare and issue subsequent
statements after the CRO’s review is
clarifying and in line with such current
practices with the BCC. Additionally,
the Exchange believes that allowing a
Respondent 25 days from receiving
service of charges to request access to
documents serves to harmonize this
process with the proposed time for
which a Respondent may file an answer
under Rule 17.5, and the proposed
tolling requirements thereunder.
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Updates to Rule 17.5 Answer
Under updated Rule 17.5, the
Exchange extends the time period the
Respondent has to submit an Answer
from 15 days after the service of charges,
which is currently provided for under
the Affiliated Exchanges’ corresponding
Rule 8.5, to 25 days.95 The Exchange
proposes to specify that this 25-day
period to submit an Answer will toll,
like that of proposed 17.2(d), while a
request for access to the investigative
file pursuant to Rule 17.4(c) is pending.
Purpose of Updates to Rule 17.5
The Exchange believes that due to the
increased complexity of Exchange
trading activity (and the resulting
regulatory investigations and
examinations) that increasing the time
period from 15 to 25 days is reasonable.
The additional time will allow
Respondents to prepare more
comprehensive and effective Answers.
Finally, similar to the proposal to toll
the time period in the context of a
written response to a notification of
pending allegations from Staff, the
Exchange believes that tolling the time
period for an Answer pursuant to Rule
17.5 while Staff prepares investigative
file for the Respondent’s review is
necessary in the interest of fairness. For
the same reasons described above, were
that period not tolled, the Respondent
could be left with insufficient time to
prepare an effective Answer following
receipt of the investigative file and
limits the Exchange having to grant an
extension. The Exchange again notes
that Staff can often provide an
investigative file in one week or less and
that the Exchange makes every effort to
provide such files promptly upon
request.
Updates to Rule 17.6 Hearing
Under updated Rule 17.6(a), the
Exchange proposes that hearings on the
charges be held by a panel of either
three or five members of the BCC
selected by the Chairperson of the BCC.
In addition, the Exchange updates Rule
17.6(a) to clarify that where a TPH
organization is a party to the hearing, it
shall be represented by one of its
nominees, who is properly authorized
by a TPH organization pursuant to Rule
3.8 (Nominees).96 The Exchange also
proposes language within 17.6(a) that
states BCC Counsel may assist the
Hearing Panel in preparing its written
95 This change is based on the rules of NYSE,
FINRA and PHLX. See supra notes 86–88.
96 See Cboe Options Rule 1.1(pp). The term
‘‘nominee’’ means an individual who is authorized
by a TPH organization, in accordance with Rule 3.8,
to represent such TPH organization in all matters
relating to the Exchange.
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recommendations or judgments, a
practice already in place within the
hearing process.
Importantly, the Exchange proposes to
add subparagraphs (a)(1) through (a)(3)
to Rule 17.6 which requires that Hearing
Panel members must function
impartially and independently of the
involved Exchange staff members,
provides a recusal process for Hearing
Panel members, as well as a process in
which a Respondent may motion for
removal of Hearing Panel members who
may have bias or a conflict of interest.
Proposed subparagraph (a)(1) provides
that Hearing Members are expected to
function impartially and independently
of the staff members who prepared and
prosecuted the charges. This language is
based on language in the Affiliated
Exchange’s Rule 8.6. Proposed
subparagraph (a)(1) then states that if a
Hearing Panel member determines they
[sic] have a conflict of interest or bias
or other circumstances exists where
their [sic] fairness might be reasonably
questioned, then such Hearing Panel
member should withdraw from the
matter and the Chairperson of the BCC
may then appoint a replacement. This
provision is based on FINRA Rule
9233(a).97 Proposed subparagraphs
(a)(2) and (a)(3), like that of the
Affiliated Exchanges, provide for the
process in which a Respondent may
motion for disqualification of a Hearing
Panel member on the grounds of bias or
conflict of interest, along with the
procedure for ruling upon such motions
for disqualification. The Exchange
incorporates additional language that
the Hearing Panel member subject to a
Respondent’s motion for removal is
excluded from rulings on such motion.
Subparagraphs (a)(2) and (a)(3) are
consistent with that of the Affiliated
Exchanges’ Rule 8.6(b), and differ only
where necessary to conform to the
Exchange’s existing Rule 17.6 text or to
account for details or descriptions
included in the Exchange’s rules but not
in the applicable rules of the Affiliated
Exchanges.
Under updated prehearing procedures
in Rule 17.6(b), parties to a hearing must
furnish copies of all documentary
evidence to be presented at the hearing
and a list of witnesses ten business days
(as opposed to five business days under
current Rule 17.6(b)) in advance of the
97 The Exchange notes that its Rule language
differs from that of FINRA’s where necessary to
maintain terminology particular to its Rules and
disciplinary procedures. The Exchange also notes
that in this subparagraph it incorporates language
specifying that members of the Hearing Panel are
expected to function impartially, which is unlike
the FINRA rule, but rather mirrors the Affiliated
Exchanges’ rule language.
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scheduled hearing date. The Exchange
also proposes to modify the notice of the
time and place of the hearing given to
the Parties to 15 business days from 15
calendar days to conform to the
Affiliated Exchanges’ corresponding
rule.
The Exchange proposed to add
Interpretation and Policy .03 to Rule
17.6 that states, ‘‘Subject to Rule 17.7,
the CRO shall have the authority to
direct that a hearing be scheduled at any
time, after the period to answer
pursuant to Rule 17.5 has elapsed.’’
The Exchange also updates Rule 17.6
throughout to reference the panel
selected for the Hearing as the ‘‘Hearing
Panel’’, which comports with the
terminology in the Affiliated Exchanges’
corresponding Rule 8.6.98
Purpose of Updates to Rule 17.6
The Exchange believes the updates to
Rule 17.6 will expedite and provide
greater clarity around the Exchange’s
hearing process. Under the updated
Rule 17.6, the BCC still serves as the
pool from which hearing panelists are
selected, however, the Hearing Panel is
limited to either three or five members
selected by the BCC Chairperson. This
update will clarify the selection process
and prevent interlocutory issues that
may arise in having an even number of
members on a Hearing Panel.
Furthermore, limiting the size of the
Hearing Panel helps to streamline the
hearing process while still providing a
sufficient number of panelists to
adjudicate the hearing effectively. The
Exchange notes that it expects that most
Hearing Panels will be comprised of
three members, but that five members
may be necessary at times to hear
particularly complex matters. Clarifying
that where a TPH organization is a party
to the hearing it shall be represented by
one of its nominees ensures that an
authorized person consistent with
existing Rule 3.8 represents a TPH
organization.
The Exchange believes that proposed
Rule 17.6(a)(1) through (a)(3) providing
for Hearing Panel member impartiality
and recusal and removal processes serve
in the interest of fairness to the
Respondent. Allowing a Respondent to
move for disqualification of any member
of the Hearing Panel selected by the
BCC Chairperson based upon bias or
conflict of interest and providing for a
ruling process on motions for
disqualification conforms to the
Affiliated Exchanges’ Rule 8.6. As
stated, the Exchange proposes to
98 The Exchange also updates references to the
Hearing Panel within Rules 17.9, 17.10, 17.11 and
17.50.
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maintain language necessary to account
for different text and procedures
between the Exchange’s rules and those
of the Affiliated Exchanges. Notably, the
proposed language incorporates that a
motion shall be filed with the BCC
Chairperson. This is a logistical
difference that accounts for the BCC’s
role in the Exchange’s process, which is
not present within the Affiliated
Exchanges’ processes. Like that of the
Affiliated Exchanges, the Hearing Panel
will hear such motions. The Exchange
explicitly adds that a Hearing Panel
member subject to a Respondent’s
motion for disqualification is excluded
from ruling on such motions, a bestpractice currently in place. The
Exchange also proposes moving the
provision stating that counsel may assist
the Hearing Panel in preparing its
written recommendations, currently
found within the Affiliated Exchange’s
corresponding impartiality provision, to
Rule 17.6(a). The Exchange believes that
this serves to codify a practice already
in place; specifying that BCC Counsel
assists the Hearing Panel throughout the
hearing, not only during impartiality
rulings. The Exchange also believes that
adding substantially similar language to
that of FINRA Rule 9233(a), which
provides that a Hearing Panel member
shall recuse themselves [sic] when they
determine they have a conflict of
interest, bias, or other circumstance
which might call into question their
fairness, is an additional safeguard to
protect the integrity of the hearing
process and the interests of the
Respondent.
Requiring that the parties provide
documentary evidence and witness lists
ten business days in advance of a
scheduled hearing will give all parties
more time to review materials that will
be presented at hearing. This extended
time period is necessary given the
increased complexity of modern trading
activity on the Exchange and the
resulting complexity of disciplinary
matters. Additionally, incorporating that
the parties receive 15 business days’
notice (as opposed to the current 15
days’ notice) harmonizes the business
day timing requirements throughout
paragraph (b) and ensures that the
parties have ample time from the notice
of the scheduled hearing to furnish
copies of documentary evidence.
Furthermore, vesting authority in the
CRO to direct the scheduling of hearings
is a necessary update given that the
Exchange proposes to remove the time
limit under which Respondents must
submit offers of settlement under
updated Rule 17.8. Under current rules,
the end of the settlement period
functions as the primary trigger for the
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scheduling of a hearing (hearings are
scheduled when the settlement period
ends and the parties have not reached
settlement). Under updated Rule 17.6,
the CRO can direct the scheduling of a
hearing when the CRO believes the
nature of matter at hand requires a
hearing, when the Respondent has
exhausted his offers of settlement, or
when the CRO believes that good faith
settlement negotiations have ended. As
stated above, the CRO is required to
meet regularly with the ROC to report
on regulatory performance and status of
regulatory matters, including caseloads
and aging. The Exchange thus believes
the CRO’s requirement to report to the
ROC will ensure continued timeliness
in the processing of a regulatory matter.
Interpretation and Policy .03 to Rule
17.6 will also greatly expedite the
hearing process where the prospective
parties agree a hearing is required.
khammond on DSKBBV9HB2PROD with NOTICES
Updated Rule 17.7 Summary
Proceedings
The Exchange proposes to replace
references to the BCC with references to
the CRO within Rule 17.7. Under
updated Rule 17.7, analogous with the
Affiliated Exchanges’ Rule 8.7, the CRO
may make a determination without a
hearing and may impose a penalty as to
violations which the Respondent has
admitted or has failed to answer or
which otherwise do not appear to be in
dispute. Under updated Rule 17.7, the
Respondent may notify the CRO if they
desire a hearing on any of the charges
not previously admitted or upon the
penalty, and that the Respondent’s
failure to notify the CRO constitutes an
admission of the violations and
acceptance of the penalty determined by
the CRO. The Exchange also amends the
10 day period in which the Respondent
may notify the CRO that the Respondent
desires a hearing to 10 business days,
which is consistent with the Affiliated
Exchanges’ corresponding rule.
Purpose of Updates to Rule 17.7
The Exchange proposes to replace the
BCC with the CRO as the body that will
make determinations related to
summary proceedings, thus
harmonizing the determining body with
that of corresponding Rule 8.7 of the
Affiliated Exchanges. The Exchange
believes the CRO is best suited to
address uncontested charges against
Respondents and impose penalties
related to those charges. The CRO is
better suited to resolve matters like
summary proceedings because the CRO
has greater familiarity with Exchange
rules and subject matter/procedural
expertise. The Exchange notes that the
principal considerations in determining
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sanctions outlined in Rule 17.11
Interpretation and Policy .01 are not
changing and accordingly the
considerations weighed by the CRO will
be the same as those currently weighed
by the BCC. Additionally, the Exchange
notes that the Board may on its own
initiative order review of a
determination of summary proceedings
pursuant to 17.10(c). The proposed
change from 10 days to 10 business days
from the date of service for a
Respondent to notify the CRO that the
Respondent desires a hearing is
consistent with the corresponding time
period in Rule 8.7 of the Affiliated
Exchanges.
Updates to Rule 17.8 Offers of
Settlement
The Exchange replaces references to
the BCC with references to the CRO
within Rule 17.8, consistent with the
proposed replacements throughout
Chapter 17. Under updated Rule 17.8(a),
the Respondent submits an offer of
settlement to the CRO and the CRO
determines whether to accept or reject
an offer. The CRO issues a decision
accepting an offer and imposes
sanctions consistent with the offer.
Under updated Rule 17.8(b), where Staff
will not recommend acceptance of an
offer to the CRO, the Respondent may
appear before the CRO to make an oral
statement concerning why the offer
should be accepted. If the CRO rejects
an offer Staff supports, the Respondent
can appear before the CRO to make an
oral statement concerning why the CRO
should reconsider acceptance of the
offer.
The Exchange also removes the 120day period following service of a
statement of charges during which a
Respondent may submit an offer under
updated Rule 17.8(a) and specifies that
offers can be made at any time following
the date of service of a statement of
charges upon the Respondent in
accordance with 17.12 (Service of
Notice). Removal of the 120-day time
period is consistent with current Rule
8.8 of the Affiliated Exchanges. The
Exchange also specifies within updated
Interpretation and Policy .01 to Rule
17.8 that the Respondent may submit a
maximum of two offers to the CRO
unless the CRO orders otherwise. As a
result of these changes, the Exchange
proposes to remove Interpretations and
Policies .01 (b)–(d) and .02 to Rule 17.8
in their entirety as they relate
specifically to the 120-period and/or the
number of offers that may be submitted
to the BCC.
The Exchange adds new
Interpretation and Policy .02 to Rule
17.8 to specify that if an offer is
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submitted subsequent to a hearing being
scheduled, the Hearing Panel shall grant
the parties leave from the hearing so the
offer can be presented to the CRO for
consideration.
Purpose of Updates to Rule 17.8
The Exchange believes the CRO is
best suited to determine whether to
accept an offer of settlement from a
Respondent, even after the hearing
procedures have commenced. The
Exchange believes the CRO has greater
familiarity with the Securities Exchange
Act of 1934 (the ‘‘Act’’) and Exchange
rules, and what constitutes a fair and
reasonable offer related to violations of
such. The Exchange also notes that
allowing the CRO to determine offers of
settlement mirrors the Affiliated
Exchanges’ corresponding rules.
Further, allowing the CRO to accept or
reject offers of settlement will
significantly expedite the settlement
process while ensuring that the
independence and integrity of the
regulatory process is maintained, as the
CRO’s regulatory decision-making
responsibilities are entirely separate
from those responsible for the
Exchange’s business interests.
Specifically, the CRO can facilitate more
expedient and independent review of
offers. A Respondent will not have to
wait until a regularly scheduled BCC
meeting to determine whether their [sic]
offer has been accepted or rejected nor
will they have to wait until the BCC
meets to make oral statements in
support of their offers.
The Exchange also believes that
removing the 120-day period during
which a Respondent may submit an
offer and allowing offers to be submitted
at any time following the date of service
of a statement of charges upon the
Respondent pursuant to Rule 17.12 will
improve the settlement process and
allow matters to be more efficiently
resolved when all parties agree that a
matter can be settled without further
disciplinary proceedings. The Exchange
believes there is no need to prevent
settlement negotiations during any
period where they are proceeding in
good faith. As mentioned above, this
will align the Exchange’s Rule with that
of the Affiliated Exchanges’ Rule 8.8,
which does not prohibit settlement
offers at a particular point in time after
a statement of charges. Further, under
updated Rule 17.6, the CRO has
authority to schedule a hearing in the
event settlement negotiations have
broken down.
Moreover, the Exchange believes it is
appropriate for the CRO to exercise
discretion to allow a Respondent to
submit more than two offers of
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settlement. The Exchange notes that a
Respondent will be allowed to submit at
least two offers (assuming that the offers
are made in the course of good-faith
negotiations). This change conforms to
the same discretion given to the CRO
under the Affiliated Exchanges’
corresponding Rule 8.8. The maximum
allowance of two offers remains in
place, like that of the Affiliated
Exchanges’ rule, in order to prevent
abuses, such as delay tactics, of the
disciplinary procedures. However, the
Exchange believes the CRO may
consider additional offers of settlement
if the CRO feels good faith negotiations
continue with a Respondent and
accordingly additional offers are
appropriate. Additionally, the Exchange
notes that the CRO is best suited to
accept or reject offers of settlement. The
CRO’s capacity as supervisor of
investigative matters provides the CRO
case-by-case subject matter expertise.
The Exchange also notes that the CRO
may take into account the principle
considerations under Rule 17.11 in
weighing whether or not acceptance or
rejection of an offer is appropriate. As
a result, the Exchange believes that the
CRO is the most appropriate
determining body for reviewing
settlement offers and that review of
offers of settlement by the BCC or other
determinative body is not necessary (the
Exchange notes that, unlike the
Affiliated Exchanges, its current Rule
17.10(c) (Review on Motion of the
Board) does not provide that the Board
may review on its own initiative order
an offer of settlement). Maintaining
acceptance and rejection of such offers
with the CRO provides for consistent
practice throughout the proceedings, as
well as regulatory independence and
integrity.
khammond on DSKBBV9HB2PROD with NOTICES
Updates to Rule 17.9 Decision
The Exchange removes the
requirement that decisions of a Hearing
Panel be subject to automatic review
when the Hearing Panel is not
comprised of a majority of the BCC. The
Exchange also adds a cross reference to
Rule 17.11 (Judgment and Sanction) and
incorporates the requirement that the
contents of a decision where sanctions
are imposed include language that is
substantially similar to the requirements
under the Act.
Purpose of Updates to Rule 17.9
Updated Rule 17.9 corresponds to the
update in Rule 17.6 limiting the size of
a hearing panel to either three or five
members of the BCC. Due to the size
limitation in updated Rule 17.6, most
Hearing Panels following the operative
date of this filing would not be
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comprised of a majority of the BCC.99
Removing this stage of review will
further streamline the hearing process
by putting the ultimate decision making
power squarely on the shoulders of the
Hearing Panel. The Exchange believes
this is appropriate as the Hearing Panel
members are the individuals that
participate in the hearing, hear all of the
evidence firsthand, and are able to
consummate a verdict based on that
firsthand knowledge. The Exchange also
notes that removing this review process
will not unfairly prejudice any party to
a hearing as the parties may petition for
removal of a Hearing Panel member for
impartiality under proposed Rule 17.8
and for a review of the decision by the
Board or a Board Committee, whose
decision is ratified by the Board, under
Rule 17.10. As such, updated Rule 17.9
eliminates an unnecessary redundancy
in the Exchange’s disciplinary process.
Finally, the Exchange believes the crossreference to its existing sanctions rule,
Rule 17.11, and the additional
instruction regarding the contents of a
decision where a sanction is imposed is
appropriate in order to provide clarity
regarding statements of sanctions within
a decision.
Updates to Rule 17.10 Review
The Exchange proposes to replace
references to the BCC with references to
the Hearing Panel where applicable
within Rule 17.10. Additionally, the
Exchange proposes to make a clarifying
change to harmonize the language
referring to the decision with Rule 17.9
and proposes to remove Rule 17.10(d),
which currently provides that the ROC
may apply for the Board to review a
decision not to initiate charges.
Purpose of Updates to Rule 17.10
Updates to reference the Hearing
Panel in lieu of the BCC in Rule 17.10
reflect updates elsewhere in Chapter 17.
The Exchange also proposes to delete
Rule 17.10(d). Specifically the Exchange
updates 17.10(b) to reflect that decisions
under review will be decisions of a
Hearing Panel. Furthermore, a Hearing
Panel (and not the full BCC) will have
heard a matter under review. The
Exchange changes the qualification of
‘‘any’’ decision to ‘‘the’’ decision, which
is in line with language referring to
‘‘the’’ decision throughout Rule 17.9.
The Exchange removes Rule 17.10(d) as
there is no longer the need for a special
provision for review of BCC
determinations not to initiate charges
pursuant to Rule 17.4(a). As stated, the
Exchange believes the CRO is best
99 The BCC is typically composed of 10–12
members.
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18887
suited to determine whether to initiate
charges under Rule 17.4, rather than the
BCC, as the CRO directly oversees all
regulatory activities, including general
reports on the status of regulatory
matters. Unlike the BCC, the CRO
reports and responds directly to the
ROC, keeping the ROC apprised of the
status of regulatory matters, including
reports regarding open investigations
and disciplinary matters, and decisions
regarding such matters. Because there is
a direct line of reporting between the
CRO and the ROC, and the ROC may
direct the CRO to take certain regulatory
actions where they [sic] see fit, the
Exchange believes that the ROC’s
application to the Board to review the
CRO’s decision not to initiate charges is
not essential to the disciplinary process.
As a result, the Exchange believes
removing the ROC’s application of
review to the Board of such decisions
provides for a more efficient,
streamlined disciplinary process.
Furthermore, the Exchange believes that
this change is in line with maintaining
enhanced autonomy and independence
of the Exchange’s regulatory functions.
Updates to Rule 17.11 Judgment and
Sanction
Under updated Rule 17.11, the
Exchange replaces references to the BCC
with references to the ‘‘Hearing Panel or
the CRO, as applicable’’.
Purpose of Updates to Rule 17.11
Updated Rule 17.11 reflects the new
roles of the CRO and Hearing Panels.
Specifically, the CRO will issue
sanctions that result from summary
proceedings outlined in Rule 17.7. The
Hearing Panel will issue sanctions that
result from decisions outlined in Rule
17.9. As mentioned above, the principal
considerations for determining
sanctions outlined in Interpretation and
Policy .01 to Rule 17.11 have not
changed. The Hearing Panel or the CRO,
as applicable, weigh [sic] the same
considerations in determining sanctions
under updated Rule 17.11 as the BCC
weighs under current Rule 17.11.100 The
Exchange notes that the CRO would also
weigh the principal considerations
under 17.11 in determining whether to
accept or reject a letter of consent under
Rule 17.3 or offer under Rule 17.8.
Additionally, the Exchange believes that
in the CRO’s capacity as supervisor of
the Exchange’s regulatory operations,
the CRO possesses the subject matter
expertise, as well as the accompanying
100 The Exchange notes that the Board also weighs
these considerations when determining sanctions,
and that Staff considers similar factors in
determining whether formal, non-formal, or no
further regulatory action in warranted.
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facts and circumstances, including
knowledge of a TPHs’ or associated
persons’ disciplinary history, to
consider and determine appropriate
sanctions. The CRO’s capacity as
supervisor of the Exchange’s regulatory
operations also ensures that regulatory
independence is provided for during the
judgment and sanction process under
Rule 17.11.
Updates to Rule 17.12 Service of Notice
Updated Rule 17.12 specifies that
service of charges, notices or other
documents, may continue to be made
upon a Respondent by registered or
certified mail but if this method of
service is used, that three days shall be
added to the prescribed period for
response.
Purpose of Updates to Rule 17.12
The Exchange updates Rule 17.12 to
provide clarity in the Rule and in the
interest of fairness to Respondents.
Many of the time periods outlined in
Chapter 17 begin upon service of notice,
charges or other documentation (i.e. the
proposed 25 days to submit an Answer
to charges under Rule 17.5 or the 15
days to petition for review of a decision
under rule 17.10). Updated Rule 17.12
provides three additional days when
calculating the time for response to the
extent service is made by registered or
certified mail. Updated Rule 17.12
ensures that a Respondent is not
penalized any time to respond to
notices, charges or other documentation
while such documentation is in transit.
The Exchange notes that this update is
not based on corresponding rules of the
Affiliated Exchanges, but is rather based
on FINRA Rule 9138(c).
khammond on DSKBBV9HB2PROD with NOTICES
Updates to Rule 17.14 Reporting to the
Central Registration Depository
The Exchange removes a reference to
the National Association of Securities
Dealers, Inc. (‘‘NASD’’) within Rule
17.14. The Exchange also updates
references to the BCC with references to
the Hearing Panel or the CRO where
applicable.
Purpose of Updates to Rule 17.14
On July 30, 2007, The National
Association of Security [sic] Dealers,
Inc., The New York Stock Exchange,
LLC (‘‘NYSE’’) and NYSE Regulation,
Inc. consolidated their member firm
regulation operations into a combined
organization FINRA. After the
consolidation, FINRA became operator
of the CRD. Rather than update the
reference to FINRA, however, the
Exchange proposes to simply remove
the reference to NASD as the CRD
system is widely known as such in the
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industry and the description of its
operator is no longer necessary.
Proposed Rule 17.15 Ex Parte
Communications
The Exchange proposes to relocate
17.4(d) and its Interpretations and
Policies .01 through .03, which concern
ex parte communications, to proposed
additional Rule 17.15. This conforms to
the Affiliates Exchanges’ Rule 8.16,
which prohibits ex parte
communications on the merits of a
proceeding. The Exchange has made
changes to its current ex parte rule
language to be substantially similar to
that of the Affiliated Exchanges’ ex parte
rule. Where possible, the Exchange has
mirrored its Affiliated Exchanges’ Rule
8.16 in substance and form. This
includes: The addition of Exchange staff
among those persons prohibited in
making ex parte communications; the
definition of members of the Hearing
Panel, BCC, Board or committee of the
Board who participate in a decision
with respect to that proceeding as
‘‘Adjudicators’’; the addition of a
procedure for which an Adjudicator
must place any prohibited ex parte
communications into the record; the
authority for the Board or committee of
the Board to take necessary action if an
ex parte communication arises; and,
importantly, the application of the
prohibition of ex parte communications
beginning with the initiation of an
investigation under Rule 17.2(a) or
when a person has knowledge that an
investigation will be initiated. The
proposed change to the Exchange’s ex
parte communication rule is based on
the Affiliated Exchanges’ existing Rule
8.16. The Exchange notes that the
language of the proposed rule and the
Affiliated Exchanges’ rule may differ to
extent necessary to conform to the
Exchanges’ existing ex parte rule text or
to account for details or descriptions
included in the Exchange’s rules but not
in the applicable rules of the Affiliated
Exchanges. The Exchange proposes to
maintain its provision applicable to the
definition of ex parte communications,
as well as its provisions for actions that
will not be considered violations of the
ex parte rules.
Purpose of Proposed Rule 17.15
Where possible, the Exchange has
substantively mirrored its proposed
Rule 17.15 to the Affiliated Exchange’s
Rule 8.16. The Exchange believes that
this proposed change provides
consistency in the disciplinary
procedures across the multiple
exchanges. Specifically, the Exchange
believes that proposed Rule 17.15(d),
which comports with the Affiliated
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Exchanges’ Rule 8.16(d) and provides
that prohibition on ex parte
communications begins upon the
initiation of an investigation, serves to
protect the interests of fairness for all
Subjects and Respondents, as well as for
the Exchange. The Exchange also
believes this same purpose is served by
expanding the prohibition of ex parte
communications to Exchange staff
during matters pending.
As stated, the Exchanges’ [sic]
proposed Rule 17.15 differs from the
Affiliated Exchanges’ Rule 8.16 to the
extent necessary to conform to the
existing ex parte rule text or to account
for details or descriptions included in
the Exchange’s rules but not in the
Affiliated Exchanges rules. For example,
the Exchange has kept it existing
provisions that define ex parte
communications and actions that
constitute non-violations of the rule.
While the Affiliated Exchanges use the
term ‘‘Respondent’’, the Exchange uses
‘‘Trading Permit Holder’’ and ‘‘person
associated with a Trading Permit
Holder’’ because such terminology
encompasses Respondents as well as
Subjects of investigations or
examinations who would be subject to
ex parte communication restrictions.
The Exchange notes that it has proposed
to add reference to a member of a
Hearing Panel as a party with whom ex
parte communications are prohibited
even though this appears duplicative
because a Hearing Panel is comprised of
members of the BCC. The Exchange
believes that inclusion of the Hearing
Panel and the BCC ensures that BCC
members who may ultimately serve on
a Hearing Panel for a matter are subject
to the ex parte rules from the initiation
of an investigation of that matter.
Additionally, the Exchange notes that it
proposes to maintain its provision for
the definition of ex parte
communication (proposed subparagraph
(e)) and provisions stating in what
circumstances a violation of ex parte
communications is not deemed to have
occurred (proposed subparagraphs (f)
and (g)). The Exchange believes that
maintaining these portions of its ex
parte rules will continue to provide
clarity for all parties regarding what
constitutes an ex parte communication,
what circumstances are not deemed a
violation of the ex parte rules, and what
steps a party must take in order to avoid
violation of such rules.
Updates to Rule 17.50 Imposition of
Fines for Minor Rule Violations
The Exchange proposes to replace
references to the BCC with references to
a Hearing Panel within Rule 17.50.
Within the list of violations outlined in
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Rule 17.50(g), the Exchange removes
references to matters referred to the BCC
at specified thresholds after a specified
number of repeat violations (i.e.,
‘‘subsequent offenses’’). References of
referrals to the BCC have been removed
from Rules 17.50(g)(2)–(5), (7), (9)–(19).
Given the proposed removal of referrals
to the BCC, the Exchange accordingly
proposes to incorporate ‘‘subsequent’’
offenses under the fine schedules that
that [sic] correspond to the last
monetary range listed. The Exchange
also proposes to change language within
Rule 17.50(c)(2) to reflect findings of a
person’s rule violations. The Exchange
amends Interpretation and Policy .01 to
Rule 17.50 to incorporate the CRO in
lieu of the BCC, where applicable. It
also deletes the term ‘‘together’’ from
the phrase ‘‘aggregated together’’ in
paragraphs 1 and 2, as this term is
superfluous within this context, and
changes ‘‘than’’ to ‘‘that’’ in paragraph 1
to correct an existing grammatical error.
The Exchange also updates the heading
to the fine schedule under Rule
17.50(g)(7) and (g)(9) to reflect the term
‘‘violations’’, as opposed to
‘‘infractions’’, as this is more consistent
with the terminology used throughout
Rule 17.50.
Purpose of Updates to Rule 17.50
In the interest of increasing efficiency
surrounding the Exchange’s disciplinary
process, a Hearing Panel, as opposed to
the full BCC, reviews contested fines
levied under updated Rule 17.50 and
determines the manner of the review. As
stated above, the Exchange believes a
Hearing Panel is most appropriately
situated to review fines due to a Hearing
Panel’s direct and in-depth involvement
in the hearing process. Further, the
changes reflect updates to Rule 17.6 in
that when a person against whom a fine
is imposed pursuant to Rule 17.50(g)
requests a hearing, a Hearing Panel will
hear and decide such matter. The
Exchange also modifies language to
reflect that the Exchange makes findings
that a person has committed acts in
violation of its rules, rather than
findings of guilt.
The Exchange believes that removing
any of the referenced referrals to the
BCC outlined in Rule 17.50(g) is
consistent with CRO’s authority to
initiate charges under updated Rule
17.4. The Exchange also notes that
removal of referenced referrals to the
BCC comports with the Affiliated
Exchanges’ corresponding rules
imposing fines for minor violations,
including Rule 8.15 and Rule 25.3,
which do not reference referrals to their
Hearing Panels. Specifically, the
Exchange believes that a Respondent
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will continue to receive appropriate
discipline for repetitive or aggregate
offenses because, pursuant to Rule
17.50(a) and (f), the Exchange has the
discretion to impose a fine in lieu of
commencing a disciplinary proceeding
for a violation that is minor in nature.
These provisions will continue to limit
any risk that a repeat offender of minor
violations continue [sic] to pay fines
under Rule 17.50, and rather, is
disciplined via sanctions that are more
appropriate. Under current Chapter 17
rules, addressing 17.50(g) rule violation
through formal disciplinary proceedings
requires Staff to investigate the matter
and then, if necessary, refer the matter
to the BCC with a recommendation to
initiate charges. This recommendation
includes a report indicating why formal
disciplinary action is necessary (repeat
violations, not minor, egregious, etc.).
Under updated Rule 17.4, however, the
CRO directs the initiation of charges
thus eliminating the need for this
referral process. As the CRO receives
reports from Staff pursuant to Rule
17.2(c), as well as general reports
regarding the status of regulatory
matters, the CRO has on-going
knowledge of non-formal regulatory
actions and minor rule violations. The
CRO works directly with Staff to
address those violations covered under
Rule 17.50(g). Accordingly, the CRO is
in the best possible position to
determine whether to impose a fine or
initiate formal disciplinary proceedings.
Transition Process
The Exchange intends to announce
the operative date of the updates to
Chapter 17 at least 30 days in advance
via a regulatory notice. To facilitate an
orderly transition from the current rules
to the new rules, the Exchange proposes
to apply the current rules to all matters
where a subject has received notice of
a statement of charges pursuant to Rule
17.2(d) prior to the operative date. In
terms of Rule 17.50, any fine that [sic]
imposed prior to the operative date that
is contested will continue under the
existing rules. As a consequence of this
transition process, the Exchange will
retain the existing processes during the
transition period until such time that
there are no longer any matters
proceeding under the current rules.
To facilitate this transition process,
the Exchange will retain a transitional
Chapter 17 that will contain the
Exchange’s rules, as they are at the time
this proposal is filed with the
Commission. This transitional Chapter
17 will apply only to matters initiated
prior to the operational date of the
changes proposed herein and it will be
posted to the Exchange’s public rules
PO 00000
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18889
website. When the transition is
complete and there are no longer any
TPHs or associated persons subject to
current Chapter 17, the Exchange will
remove the transitional Chapter 17 from
its public rules website.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the Act
and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.101 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 102 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, 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.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 103 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
The Exchange also believes that the
proposed rule is consistent with Section
6(b)(6) of the Act,104 which requires the
rules of an exchange provide that its
members be appropriately disciplined
for violations of the Act as well as the
rules and regulations thereunder, or the
rules of the Exchange, by expulsion,
suspension, limitation of activities,
functions, and operations, fine, censure,
being suspended or barred from being
associated with a member, or any other
fitting sanction.
In addition, the Exchange believes
that the proposed rule change furthers
the objectives of Section 6(b)(7) of the
Act,105 in that it provides fair
procedures for the disciplining of
Trading Permit Holders and persons
associated with Trading Permit Holders,
the denial of Trading Permit Holder
status to any person seeking a Trading
Permit therein, the barring of any person
from becoming associated with a
Trading Permit Holder thereof, and the
prohibition or limitation by the
Exchange of any person with respect to
101 15
102 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
103 Id.
104 15
105 15
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U.S.C. 78f(b)(7).
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access to services offered by the
Exchange or a Trading Permit Holder
thereof.
Updates to the Role of the CRO, Hearing
Panel and BCC
Specifically, the Exchange believes
that updating and reducing the BCC’s
role in disciplinary matters to reflect
that of the Affiliated Exchanges’ rules is
consistent with Sections 6(b)(5) and
6(b)(6) of the Act.106 The Exchange
believes that replacing the BCC with
groups and processes like those of the
Affiliated Exchanges will continue to
provide TPHs and associated persons
with a fair investigative and
adjudicatory process. As stated, the
functions currently handled collectively
by the BCC will be split between the
Exchange’s CRO and a Hearing Panel,
comprised of BCC members and
selected by the BCC Chairperson,
creating greater autonomy between the
charging and adjudicatory aspects of the
regulatory process. The Exchange
believes that the CRO is best suited to
manage certain responsibilities related
to complaint and investigation,
expedited proceedings, charges,
summary proceedings and judgment
and sanctions. The Exchange notes that
the CRO has general supervisory
responsibility over the Exchange’s
regulatory operations, including the
responsibility for overseeing its
surveillance, examination, and
enforcement functions and for
administering any regulatory services
agreements with another self-regulatory
organization to which the Exchange is a
party. Further, as stated above, the CRO
regularly meets with the ROC. As such,
the Board will remain apprised of any
regulatory decisions made by the CRO.
The BCC via a Hearing Panel (selected
from BCC members) will continue to
manage the hearing process, as well as
decisions and sanctions arising out of
the hearing process, independently from
the CRO and the Exchange’s regulatory
program. The Exchange also believes the
proposed changes will collectively
enhance the independence and
impartiality of the overall regulatory
process, which serves to protect
investors and the public interest, protect
customers, issuers, brokers, or dealers
from unfair discrimination, and ensure
that TPHs and associated persons are
appropriately disciplined. First, the
Exchange notes that the CRO reports
directly to the ROC, remaining
independent from business-side
interests of the Exchange. Second, the
Exchange notes its incorporation of Rule
17.6(a)(1) which, as proposed, requires
106 15
U.S.C. 78f(b)(5) and (6).
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that Hearing Panel members function
impartially and allow [sic] for their
removal if a conflict of interest arises.
As a result, the Exchange believes these
changes enhance the independence and
impartiality of the overall regulatory
process.
As stated above, where a proposed
change to the rules regarding the BCC’s
role is based on an existing rule of the
Affiliated Exchanges, the language of
the Exchange’s rules may differ from the
Affiliated Exchanges’ rules to the extent
necessary to conform with existing
Exchange rule text or to account for
details or descriptions included in the
Exchange’s rules but not in the
applicable rules of the Affiliated
Exchanges. For example, the Exchange
proposes to maintain a process where
the BCC Chairperson selects Hearing
Panel members from a pool of BCC
members, whereas the CEO selects
Hearing Panel members on the
Affiliated Exchanges. The Exchange has
thus maintained differences in its rules
that account for or relate to this process.
Where possible, the Exchange has
substantively mirrored the CRO’s role
and the Hearing Panel’s role within
Affiliated Exchange rules, because
consistency across the rules will
increase the understanding of the
Exchange’s disciplinary process for
TPHs that are also participants on the
Affiliated Exchanges, as well as result in
greater uniformity, less burdensome and
more efficient regulatory processes, and
appropriate, non-discriminatory
discipline. As such, the proposed rule
changes will foster cooperation and
coordination with persons engaged in
facilitating transactions in securities and
would remove impediments to and
perfect the mechanism of a free and
open market and a national market
system. The Exchange also believes that
the proposed amendments will
contribute to the protection of investors
and the public interest, as well as
provide appropriate discipline and fair
procedures for such discipline, by
streamlining the disciplinary process
through the CRO, who is best suited to
address regulatory matters without any
conflicting business interests given the
nature of the CRO’s position.
Other Updates Based on the Affiliated
Exchanges’ Rules
The proposed amendments to update
the Exchange as the adopting body for
letters of consent as its decision under
Rule 17.3, the ten business days from
the receipt of summary determination
that a Respondent may notify the CRO
that the Respondent desires a hearing
under Rule 17.7, the 15 business days’
notice of the time and place of a hearing
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under Rule 17.6, the CRO’s discretion to
allow for more than two offers of
settlement under Rule 17.8, and the
removal of the referral to the hearing
body under the fine schedule for minor
rule violations in Rule 17.50 are
substantially identical to the relevant
language and/or provisions within the
corresponding rules of the Affiliated
Exchanges. The Exchange believes that
these updates provide consistency
between its rules and that of the
Affiliated Exchanges, aligns certain
aspects of the disciplinary processes,
which protects investors and the public
interest by making it easier for
participants across the Exchange and its
Affiliated Exchanges to understand the
disciplinary processes. Particularly
regarding the removal of referrals to the
BCC under Rule 17.50, the Exchange
believes this change is not only
consistent with the Affiliated
Exchanges’ minor rule violation
schedules but maintains fairness and
protection of investors. As stated, Rule
17.50 states that the Exchange may
impose a fine when a rule is minor in
nature but is never required to do so,
regardless of the number of offenses by
a participant. This discretion, paired
with the fact that the CRO has in-depth
understanding of regulatory issues and
takes deference to the principle
considerations under Rule 17.11 when
determining if fines are the appropriate
disciplinary mechanism, will serve to
ensure that the Exchange provides
appropriate discipline and fair
procedures to do so.
The Exchange notes that in some
instances the rule change does not
completely mirror its rules with that of
the Affiliated Exchanges or proposes
additional language/provisions to that of
the Affiliated Exchange’s existing rule
language/provisions. The Exchange
notes that although in these instances it
has chosen to maintain its existing
provisions or modify language of the
Affiliated Exchanges’ rules, it still
provides for fair disciplinary procedures
or the most appropriate discipline for
violations to continue to protect
investors and the public interest. For
instance, the Exchange incorporates the
Affiliated Exchange’s formal reports
regarding complaints into Rule 17.2(c),
but maintains that Staff submit a written
report when it finds that formal
regulatory action is warranted, as well
as the Staff’s authority to find that nonformal regulatory action is warranted
and to impose non-formal regulatory
action, or to close a matter, without
submission of a report. The Exchange
believes that maintaining Staff’s
discretion in this manner continues to
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provide for the autonomy and
independence of the Exchanges’
regulatory functions, which enhances
the fairness of its disciplinary
procedures and appropriate discipline
and thereby enhancing protection of
investors and the public interest.107 The
Exchange copies the description of
counsel’s role (and refers specifically to
BCC Counsel as a clarification), not into
its impartiality provisions like that of
the Affiliated Exchanges, but into its
general provision for parties to a
hearing. The Exchange believes this is a
clarifying change as the BCC Counsel
assists the Hearing Panel throughout the
hearing process. The Exchange also
adds language to make explicit that the
Hearing Panel member who is the
subject of the motion is excluded from
the ruling on such motion, and adds a
provision for recusal of a Hearing Panel
member when they determine that they
have a conflict or bias. The Exchange
believes that such additional language
enhances the procedural fairness of the
current impartiality rules copied from
the Affiliated Exchanges, thereby
protecting investors and the public
interest. Additionally, the Exchange
incorporates the Affiliated Exchange’s
ex parte rules, while maintaining its
provisions defining ex parte
communications and ‘‘no violations’’ of
the ex parte rules. The Exchange
believes these provisions will continue
to provide better understanding for all
parties regarding ex parte
communications, thereby protecting
investors and the public interest and
ensuring fair disciplinary proceedings
throughout.
Additional Proposed Changes
The Exchange believes that extending
the time periods associated with
submitting a written response to
allegations of rule violations, submitting
an Answer in response to formal
charges, and extending the time period
prior to a hearing parties are required to
submit documentary evidence is
consistent with the protection of
investors. The proposed time extensions
are also consistent in providing fair
procedures for disciplining TPHs and
persons associated with TPHs, as well
as ensuring that the Exchange
administers appropriate discipline. The
Exchange believes that due to the
increased complexity of Exchange
trading activity and the regulatory
investigations and examinations
surrounding such activity, extending the
time period from 15 days to 25 days for
107 Additionally, the CRO directly oversees and
manages Staff, therefore, the CRO will maintain
general supervision over this process.
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a Subject’s response to a notification of
alleged violations and for a
Respondent’s answer to charges, as well
as extending time for parties to furnish
evidence prior to a hearing from five to
10 business days, serves to protect
investors by allowing more time for
these parties to respond during various
phases of the proceedings. The
additional time will also serve to ensure
fair procedures, that the Exchange
administers appropriate discipline by
allowing subjects to prepare more
comprehensive and effective written
statements in their defense, and better
Subject and/or Respondent cooperation
with the Exchange. As stated, this
changed is based on the Rules of
NYSE,108 FINRA,109 and PHLX.110
Further, the Exchange believes tolling
the applicable periods while a Subject
or a Respondent’s request for access to
the investigative file similarly serves to
protect investors and ensure fair
disciplinary procedures and the
administration of appropriate
discipline. As with the extension of
time periods, the Exchange believes
tolling those same periods while access
to relevant information in the
investigative file is pending will provide
TPHs and associated persons with
adequate time to craft reasoned and
complete responses to regulatory
inquires. As a result, this serves to foster
cooperation and coordination with
persons engaged in regulating securities,
protect investors by serving in the
interest of fairness to Subjects and
Respondents, and provide for
appropriate discipline for violations of
the Act and Exchange rules. Any delay
to the regulatory process caused by
extending the applicable time periods is
mitigated by the increased efficiency
resulting from the other rule updates
and the fact that Staff no longer needs
to process extensive extension requests
under Rule 17.13.
The Exchange believes that the
proposed removal of automatic review
of a Hearing Panel’s decision by the
majority of the BCC and of the Board’s
review of a decision not to initiate
charges will streamline the various
stages of the proceedings under Chapter
17, while ensuring that the decision as
a result of a hearing and the decision
not to initiate charges is determined by
the persons best suited to make such
decisions. The Exchange believes the
Hearing Panel members are best suited
to make a final hearing decision as those
individuals participate directly in the
hearing, hear all of the evidence
108 See
supra note 86.
supra note 87.
110 See supra note 88.
109 See
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18891
firsthand, and are able to consummate a
verdict based on that firsthand
knowledge. The Exchange also believes
that proposed Rule 17.6(a)(1)–(a)(3)
guarantees impartiality of Hearing Panel
members. As a result, the decision by
the Hearing Panel of either three or five
members will be the best-informed and
most impartial decision, thus
eliminating need for review by a
majority of the BCC while providing
adequate procedural protections.
Likewise, the Exchange believes the
CRO is best suited to determine whether
to initiate charges when recommended
by Staff, as the CRO directly oversees all
regulatory activities and receives
periodic updates regarding investigative
matters. Unlike the current role of the
BCC, the CRO reports and responds
directly to the ROC. The Exchange
believes that because the CRO provides
regular reports as to the status of
regulatory matters and decisions
pertaining to such matters to the ROC
and, in turn, because the ROC may
direct the CRO to take certain regulatory
action if they deem necessary, the ROC’s
application to the Board for review of
the CRO’s decision not to initiate
charges is not essential to the
disciplinary process. Rather, the
Exchange believes that removing the
ROC’s application for Board review of
such decisions will provide for a more
efficient, streamlined disciplinary
process, while ensuring a fair process
through the CRO and the direct
reporting line between the CRO and the
ROC. As a result, the Exchange believes
that removing these review processes
will not unfairly prejudice any party
during these proceedings, which will
protect investors throughout the
disciplinary process and allow the
Exchange to determine the most
appropriate sanctions. Removing these
processes will eliminate unnecessary
redundancies in the disciplinary
process, which will also protect
investors and foster cooperation and
coordination with persons engaged in
regulating securities.
The Exchange also believes that
certain changes and updates to its
disciplinary rules serve specifically in
the interest of fairness and expediency.
For example, the proposed videotaped
responses protect investors by allowing
Subjects to respond more easily to
notice of an initiated investigation,
especially in such a globalized,
technology-centric industry. Similarly,
changes such as allowing the Hearing
Panel the discretion to grant leave to the
parties to a hearing in order to present
an offer of settlement also protects
investors and public interest, while
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compliance and processes and
enhancing the quality of the regulatory
processes. The Exchange believes the
proposed rule changes reduce the
burdens within the disciplinary process
equally on all market participants.
reducing the burden that once a hearing
is scheduled the parties may no longer
present offers of settlement to the CRO.
The Exchange believes that the
proposed change providing that a
Hearing Panel be comprised of three or
five BCC members protects investors
and ensures procedural fairness because
it will safeguard against interlocutory
decisions and also allow for more (five)
Hearing Panel members when necessary
to hear complex matters. The Exchange
also believes that the proposed changes
to the service of notice provision that
adds three days when calculating the
time for response to the extent service
is made by registered or certified mail
protects investors and provides
adequate procedural protections by
ensuring that a Respondent is not
penalized in responding to notices,
charges or other documentation while
such documentation is in transit.
Additionally, the Exchange updates
language throughout Chapter 17 and
makes other clarifying changes. For
example, incorporating that the CRO
direct Staff to prepare and issue
statements of charges or decisions not to
initiate charges [sic]; a practice
currently in place between the Staff and
the BCC. Also, for example,
incorporating that a decision containing
sanctions shall include a statement of
the sanctions imposed and the reasons
therefor will enable better
understanding for all parties of
sanctions and why such sanctions are
imposed. Such updates and
clarifications will serve to reduce
confusion and provide a better
understanding to TPHs, associated
persons, and the Exchange staff of the
regulatory processes.
Finally, the Exchange believes that its
proposed transition plan would allow
for a more orderly and less burdensome
transition for the Exchange’s TPHs. The
proposed application of current rules to
all matters where a subject has received
notice of a statement of charges
pursuant to Rule 17.2(d) prior to the
operative date provides a clear
demarcation between matters that
would proceed under the new rules and
those that would be completed under
the current rules.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not:
A. Significantly affect the protection
of investors or the public interest;
B. impose any significant burden on
competition; and
C. become operative for 30 days from
the date on which it was filed, or such
shorter time as the Commission may
designate, it has become effective
pursuant to Section 19(b)(3)(A) of the
Act 111 and Rule 19b–4(f)(6) 112
thereunder. At any time within 60 days
of the filing of the proposed rule change,
the Commission summarily may
temporarily suspend 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. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule changes will result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, as amended.
The proposed rule changes are not
intended to address competitive issues,
but rather, are concerned with
facilitating less burdensome regulatory
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2019–025 on the subject line.
111 15
112 17
PO 00000
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
Frm 00130
Fmt 4703
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All submissions should refer to File
Number SR–CBOE–2019–025. This file
number should be included on the
subject line if email 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 website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 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.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CBOE–2019–025, and
should be submitted on or before May
23, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.113
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–08912 Filed 5–1–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–85728; File No. SR–ISE–
2019–12]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Delete the Exchange’s
Current Registration, Qualification and
Continuing Education Rules
April 26, 2019.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
113 17
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CFR 200.30–3(a)(12).
02MYN1
]]>Agencies
[Federal Register Volume 84, Number 85 (Thursday, May 2, 2019)]
[Notices]
[Pages 18878-18892]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08912]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85727; File No. SR-CBOE-2019-025]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Chapter 17 of the Cboe Options Rules
April 26, 2019.
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 April 17, 2019, Cboe Exchange, Inc. (``Cboe Options'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Exchange filed the proposal as a ``non-controversial'' proposed rule
change pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule
19b-4(f)(6) thereunder.\4\ 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend Chapter 17 of the Cboe Options Rules. The text of the proposed
rule change is provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), 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, the Exchange included statements
concerning the purpose of and basis for
[[Page 18879]]
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 Exchange 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
The Exchange is proposing to update processes and related rules
concerning investigative and disciplinary matters involving Exchange
Trading Permit Holders (``TPHs'') \5\ and persons associated with
Trading Permit Holders (``associated persons'').\6\ Specifically, the
Exchange is updating its rules and processes related to (1) complaints
and investigations; (2) expedited proceedings; (3) the issuance of
charges (and answers thereto); (4) hearings (including decisions made
pursuant to a hearing and the review of decisions); (5) summary
proceedings; (6) settlements; (7) judgment and sanctions; (8) service
of notice; (9) reporting to the Central Registration Depository; and
(10) imposition of fines for minor rule violations. The Exchange is
making these updates in an effort to adopt new roles for the Exchange's
Business Conduct Committee (``BCC'') \7\ and Chief Regulatory Officer
(``CRO'') \8\ and to increase efficiency and fairness in the Exchange's
disciplinary process. The Exchange proposes updates to Chapter 17 to
reflect the new roles of the CRO and the Hearing Panel in the
disciplinary process, which are consistent with that of the Exchange's
affiliate exchanges: Cboe BZX Exchange, Inc. (``Cboe BZX''); \9\ Cboe
BYX Exchange, Inc. (``Cboe BYX''); \10\ Cboe EDGX Exchange, Inc.
(``Cboe EDGX''); \11\ and Cboe EDGA Exchange, Inc. (``Cboe EDGA'') \12\
(collectively, and hereinafter, referred to as the ``Affiliated
Exchanges'').\13\ The Exchange also proposes additional changes to
reflect certain other language and provisions of the Affiliated
Exchanges, particularly regarding ex parte communications \14\ and
impartiality of Hearing Panel members.\15\ In addition, the Exchange is
making technical and conforming updates to its minor rule violation
rules.\16\ The updates reflecting the rules of the Affiliated Exchanges
contain some nuance. The most notable difference that will remain at
this time between Exchange rules and the rules of the Affiliated
Exchanges is that BCC members will be selected by the Chairperson of
the BCC to comprise Hearing Panels, whereas the Chief Executive Officer
(``CEO'') appoints members of the Hearing Panels on the Affiliated
Exchanges. Moreover, the Exchange proposes timing and tolling of
certain periods in connection with various stages of the proceedings
under Chapter 17 that are different from the timing in the Affiliated
Exchanges' corresponding rules. The Exchange also proposes updates to
certain aspects of the review process intended to streamline the
overall disciplinary process. Finally, the Exchange is updating certain
rules to correct minor errors or update obsolete/outdated language as
needed.
---------------------------------------------------------------------------
\5\ Pursuant to the Tenth Amended and Restated Bylaws of the
Exchange ``Trading Permit Holder'' means any individual,
corporation, partnership, limited liability company or other entity
authorized by the Rules that holds a Trading Permit. If a Trading
Permit Holder is an individual, the Trading Permit Holder may also
be referred to as an ``individual Trading Permit Holder.'' If a
Trading Permit Holder is not an individual, the Trading Permit
Holder may also be referred to as a ``TPH organization.'' A Trading
Permit Holder is a ``member'' solely for purposes of the Securities
and Exchange Act of 1934 (the ``Act''); however, one's status as a
Trading Permit Holder does not confer on that Person any ownership
interest in the Exchange.
Pursuant to Cboe Options Rule 1.1(hhh), the term ``Trading
Permit'' means a license issued by the Exchange that grants the
holder or the holder's nominee the right to access one or more of
the facilities of the Exchange for the purpose of effecting
transactions in securities traded on the Exchange without the
services of another person acting as broker, and otherwise to access
the facilities of the Exchange for purposes of trading or reporting
transactions or transmitting orders or quotations in securities
traded on the Exchange, or to engage in other activities that, under
the Rules, may only be engaged in by Trading Permit Holders,
provided that the holder or the holder's nominee, as applicable,
satisfies any applicable qualification requirements to exercise
those rights.
\6\ Pursuant to Cboe Options Rule 1.1(qq), the ``associated
person'' or ``person associated with a Trading Permit Holder'' means
any partner, officer, director, or branch manager of a Trading
Permit Holder (or any person occupying a similar status or
performing similar functions), any person directly or indirectly
controlling, controlled by, or under common control with a Trading
Permit Holder, or any employee of a Trading Permit Holder.
\7\ The BCC has decision-making authority concerning possible
violations within the disciplinary jurisdiction of the Exchange. The
BCC is comprised of one or more TPHs or associated persons, one or
more public representatives, and may also include other individuals
affiliated with the securities, futures or derivatives industry, all
as appointed by the Exchange's Nominating and Governance Committee
with the approval of the Exchange's Board of Directors.
\8\ The CRO has general supervisory authority over the
Exchange's regulatory operations, including the responsibility for
overseeing its surveillance, examination, and enforcement functions
and for administering any regulatory services agreements with
another self-regulatory organization to which the Exchange is a
party.
\9\ See Rules of Cboe BZX Exchange, Inc., specifically Rules
8.2, 8.3, 8.4, 8.6, 8.7, and 8.8.
\10\ See Rules of Cboe BYX Exchange, Inc., specifically Rules
8.2, 8.3, 8.4, 8.6, 8.7, and 8.8.
\11\ See Rules of Cboe EDGA Exchange, Inc., specifically Rules
8.2, 8.3, 8.4, 8.6, 8.7, and 8.8.
\12\ See Rules of Cboe EDGX Exchange, Inc., specifically Rules
8.2, 8.3, 8.4, 8.6, 8.7, and 8.8.
\13\ The rules under Chapter 8 of each of the Affiliated
Exchanges are the same in number, form and substance. Therefore, the
Exchange refers singularly to the corresponding rule of the
``Affiliated Exchanges'' throughout this proposed rule filing.
\14\ See the Affiliated Exchanges' Rule 8.16.
\15\ See the Affiliated Exchanges' Rule 8.6.
\16\ See the Affiliated Exchanges' Rule 8.15.
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Current Exchange Rules and Adjudicatory Process
The Exchange rules currently divided responsibility for the
adjudication of its rules into two categories: (1) Rules for which the
BCC and BCC Hearing Panels are responsible for adjudicating formal
disciplinary proceedings; and (2) rules under which fines may be
assessed in lieu of formal disciplinary action. With respect to
violations that are adjudicated by the BCC and Hearing Panels, Rule
17.4(b) requires the BCC to direct Regulatory staff (``Staff'') \17\ to
prepare a statement of charges whenever it appears that there is
probable cause for finding a violation within the disciplinary
jurisdiction of the Exchange has occurred and formal disciplinary
action is warranted. Alternatively, in lieu of conducting a formal
disciplinary proceeding, Rule 17.50 (Imposition of Fines for Minor Rule
Violations) provides for disposition of specific violations through
assessment of fines.\18\
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\17\ See Cboe Options Rule 17.2 Interpretation and Policy .05.
References to ``Regulatory staff'' mean the Exchange's employees in
the Regulatory Division, and, as applicable, may also mean employees
of the Financial Industry Regulatory Authority, Inc. (``FINRA'') who
are performing regulatory services to the Exchange in accordance
with the regulatory services agreement entered into between the
Exchange and FINRA.
\18\ None of the fines assessed in lieu of formal disciplinary
action exceed $5000. Under Rule 17.50(f), the Exchange may refer
matters covered under Rule 17.50 for formal disciplinary action
whenever it determines that any violation is intentional, egregious
or otherwise not minor in nature.
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Current Rule 17.2 Complaint and Investigation
Staff investigates and examines possible violations within the
disciplinary jurisdiction of the Exchange (``violations'') whenever
Staff determines in its sole discretion that there is reasonable basis
for it to do so.\19\ TPHs and associated persons are required to
cooperate with Staff inquiries and to furnish information
[[Page 18880]]
requested in connection with investigations and examinations.\20\
---------------------------------------------------------------------------
\19\ See Cboe Options Rule 17.2(a).
\20\ See Cboe Options Rule 17.2(b).
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Staff have [sic] the sole discretion to determine whether to
request the BCC authorize the issuance of a statement of charges.\21\
When Staff finds that a violation has occurred and formal regulatory
action is warranted, Staff submits a written report (``report'') of the
investigation to the BCC.\22\ When Staff finds that a violation has
occurred but non-formal disciplinary action is warranted (e.g.
cautionary letters) Staff may, in its sole discretion, impose non-
formal disciplinary action without submitting a report to the BCC.\23\
If Staff finds that there are not reasonable grounds to determine a
violation has been committed Staff may, in its sole discretion, close
the investigation without submitting a report to the BCC.\24\
---------------------------------------------------------------------------
\21\ See Cboe Options Rule 17.2(c).
\22\ Id.
\23\ Id.
\24\ Id.
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Prior to submitting a report to the BCC, Staff must notify the
subject of the report (``Subject'') of the nature of the alleged
violations.\25\ Unless the BCC decides expeditious action is required,
the Subject has 15 days to submit a written statement to the BCC
concerning why no disciplinary action should be taken.\26\ The Subject
may request access to documents in the investigative file, furnished by
the Subject or the Subject's agents, to assist the Subject in preparing
such a written statement.\27\ The Subject may also submit a videotaped
response in lieu of a written statement, the length and format of which
is decided by the Exchange.\28\
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\25\ See Cboe Options Rule 17.2(d).
\26\ Id.
\27\ Id.
\28\ See Cboe Options Interpretation and Policy .02 to Rule
17.2.
---------------------------------------------------------------------------
Current Rule 17.3 Expedited Proceeding
When the Subject receives notice of the report, the Subject may
seek to dispose of the matter through a letter of consent.\29\ The
Subject submits notice to Staff electing to proceed in an expedited
manner.\30\ The Subject and Staff may then negotiate a letter of
consent outlining stipulations and findings regarding the violation(s)
and the sanctions therefore.\31\ Disposing of the matter via letter of
consent occurs only if the Subject and Staff agree on the terms and it
is signed by the Subject.\32\ At any time, the Subject or Staff may
terminate the negotiations.\33\ Following termination of the
negotiations, the Subject has 15 days to submit a written statement to
the BCC, pursuant to Rule 17.2, concerning why no disciplinary action
should be taken.\34\ The BCC may accept or reject the letter of
consent.\35\ If the BCC accepts the letter, it may adopt the letter as
its decision.\36\ If the BCC rejects the letter, the matter proceeds as
if the letter had not been submitted. The BCC's decision to accept or
reject the letter is final.\37\
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\29\ See Cboe Options Rule 17.3.
\30\ Id.
\31\ Id.
\32\ Id.
\33\ Id.
\34\ Id.
\35\ Id.
\36\ Id.
\37\ Id.
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Current Rule 17.4 Charges
When it appears to the BCC from the Staff's report pursuant to Rule
17.2(c) that no probable cause exists for finding a violation occurred
or if the BCC otherwise determines that no further action is warranted,
the BCC issues a written statement setting out its reasons for that
finding.\38\ When the BCC determines probable cause exists for finding
a violation occurred and further proceedings are warranted, the BCC
directs Staff to prepare a statement of charges against the Subject
(thereafter a ``Respondent'') specifying the acts for which the
Respondent is charged and setting forth the specific violations.\39\ A
Respondent may request access to the investigative file within 60
calendar days of receiving notice of a statement of charges.\40\ The
Staff, however, may protect the identity of a Complainant in providing
such documents. Additionally, ex parte communications are prohibited
between a TPH or person associated with a TPH and members of the BCC or
Board (and vice versa) concerning the merits of any matter pending
under Chapter 17.\41\
---------------------------------------------------------------------------
\38\ See Cboe Options Rule 17.4(a).
\39\ See Cboe Options Rule 17.4(b).
\40\ See Cboe Options Rule 17.4(c).
\41\ See Cboe Options Rule 17.4(d) and Interpretations and
Policies .01-.03 to Rule 17.4.
---------------------------------------------------------------------------
Current Rule 17.5 Answer
The Respondent has 15 days after service of the statement of
charges to file a written answer to the statement of charges
(``Answer'').\42\ The Answer specifically admits or denies any
allegation contained in the statement of charges and may be accompanied
by supporting documentation.\43\
---------------------------------------------------------------------------
\42\ See Cboe Options Rule 17.5.
\43\ Id.
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Current Rule 17.6 Hearing
Subject to Rule 17.7 regarding summary proceedings (described
below), hearings on charges are held before one or more members of the
BCC.\44\ The person or persons conducting the hearing exercise [sic]
the authority of the BCC and are [sic] referred to as the ``Panel.''
\45\ The Exchange and the Respondent are parties to the hearing.\46\
Where a TPH organization (as opposed to a TPH who is an individual or
an associated person) is a party, it is represented by one of its TPHs
(including nominees).\47\ The parties are given at least 15 days'
notice of the time and place of the hearing.\48\ Not less than five
days in advance of the hearing date, the parties must furnish copies of
all documentary evidence they wish to present at the hearing and a list
of witnesses they intend to present at the hearing.\49\ If the time and
nature of the proceedings permit, the parties meet in a pre-hearing
conference in order to clarify and simplify issues, and otherwise
expedite the proceeding, At the pre-hearing conference, the parties
must attempt to reach agreement respecting authenticity of documents,
facts not in dispute, and any other items in order to expedite the
hearing. At the request of any party, the Panel or Panel Chairperson
hears and decides the pre-hearing issues not resolved among the
parties. Generally, interlocutory Board review of any decision made by
the Panel prior to hearing completion is prohibited, and permitted only
if the Panel agrees to such review after determining that the issue is
a controlling issue of rule or policy and that immediate Board review
would materially advance the ultimate resolution of the case. The Panel
has the authority to regulate the conduct of the hearing and shall
determine all questions concerning the admissibility of evidence.\50\
Persons who are not parties to the hearing may intervene as a party,
provided that person can demonstrate an interest in the subject of the
hearing to the satisfaction of the Panel.\51\
---------------------------------------------------------------------------
\44\ See Cboe Options Rule 17.6(a).
\45\ Id.
\46\ Id.
\47\ Id.
\48\ See Cboe Options Rule 17.6(b).
\49\ Id.
\50\ See Cboe Options Rule 17.6(c).
\51\ See Cboe Options Interpretation and Policy .01 to Rule
17.6.
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Current Rule 17.7 Summary Proceedings
Notwithstanding Rule 17.6 regarding hearings (described above), the
BCC may make a determination without a hearing and impose a penalty as
to violations which the Respondent has admitted or failed to Answer or
which otherwise do not appear to be in
[[Page 18881]]
dispute.\52\ The Respondent is served with notice of summary
determination, after which the Respondent may notify the BCC that they
[sic] would like a hearing on one or more of the charges.\53\ A
Respondent's failure to notify the BCC that they [sic] desire a hearing
constitutes an admission of the violations and an acceptance of the
penalty.\54\
---------------------------------------------------------------------------
\52\ See Cboe Options Rule 17.7.
\53\ Id.
\54\ Id.
---------------------------------------------------------------------------
Current Rule 17.8 Offers of Settlement
The Respondent may submit an offer of settlement (``offer'') to the
BCC up to 120 days following service of the statement of charges.\55\
If the BCC accepts the offer, it issues a decision consistent with the
terms of the offer.\56\ If the BCC rejects the offer, it notifies the
Respondent and the matter proceeds as if the offer had not been
made.\57\ The Respondent may submit a written statement in support of
an offer.\58\ In addition, the Respondent is notified if Staff will not
recommend acceptance of an offer, and the Respondent may then appear
before the BCC to make an oral statement in support of the offer.\59\
If the BCC rejects an offer that the Staff supports the Respondent may
also appear before the BCC to make an oral statement concerning why the
BCC should consider changing its decision.\60\
---------------------------------------------------------------------------
\55\ See Cboe Options Rule 17.8(a).
\56\ Id.
\57\ Id.
\58\ See Cboe Options Rule 17.8(b).
\59\ Id.
\60\ Id.
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Subject to certain conditions, the Respondent is limited to two
offers in connection with a statement of charges.\61\ The BCC, in its
discretion, may permit the Respondent to submit an additional offer
during the applicable time period, provided the stipulation of facts
and sanction contained in the offer are consistent with what is deemed
acceptable by the BCC.\62\
---------------------------------------------------------------------------
\61\ See Cboe Options Interpretation and Policy .01(a) to Rule
17.8.
\62\ See Cboe Options Interpretation and Policy .01(c) to Rule
17.8.
---------------------------------------------------------------------------
Further, there are certain situations where the 120-day period
during which the Respondent may submit an offer may be reduced and/or
extended. If the Respondent elects to proceed in an expedited manner
pursuant to Rule 17.3 and is unable to reach a consent agreement with
Staff, then any period in excess of 30 days from when the Respondent
elected to proceed in an expedited manner to the end of consent
negotiations (by either Staff or the Respondent's declaration) is
deducted from the 120-day period.\63\ If the Respondent requests access
to the investigative file pursuant to Rule 17.4, the 120-day period is
tolled during the number of days in excess of 30 days that it takes
Staff to provide access to the investigative file.\64\
---------------------------------------------------------------------------
\63\ See Cboe Options Interpretation and Policy .01(b) to Rule
17.8.
\64\ See Cboe Options Interpretation and Policy .01(d) to Rule
17.8.
---------------------------------------------------------------------------
Finally, at the end of the 120-day period, or after the BCC rejects
the Respondent's second offer a hearing is scheduled and the hearing
proceeds in accordance with the provisions of Rule 17.6.\65\
---------------------------------------------------------------------------
\65\ See Cboe Options Interpretation and Policy .02 to Rule
17.8.
---------------------------------------------------------------------------
Current Rule 17.9 Decision
Following a hearing, the Panel issues a decision (the ``decision'')
determining whether the Respondent has committed a violation.\66\ The
decision must also include sanctions in cases where sanctions have been
imposed. In instances in which the Panel is not composed of at least a
majority of the BCC, a majority of the BCC automatically reviews the
decision. The majority may affirm, reverse, or modify the decision or
remand the matter for additional findings or supplemental
proceedings.\67\
---------------------------------------------------------------------------
\66\ See Cboe Options Rule 17.9.
\67\ Id.
---------------------------------------------------------------------------
Current Rule 17.10 Review
The Respondent and/or the Regulatory Division has 15 days after
service of the decision to petition for review of the decision by
filing a copy of the petition with the Secretary of the Exchange and
with all other parties.\68\ Parties other than the petitioner may
submit written responses to the petition.\69\ The Board or a committee
of the Board, whose decisions must be ratified by the Board, conducts
the review.\70\ The Board may affirm, reverse or modify a decision of
the BCC and the decision of the Board is final.\71\ In addition, the
Board may review a decision on its own motion.\72\ Finally, the
Exchange's Regulatory Oversight and Compliance Committee may apply to
the Board to have the BCC's decision not to initiate charges that were
recommended by Staff, reviewed by the Board.\73\
---------------------------------------------------------------------------
\68\ See Cboe Options Rule 17.10(a)(1).
\69\ See Cboe Options Rule 17.10(a)(2).
\70\ See Cboe Options Rule 17.10(b).
\71\ Id.
\72\ See Cboe Options Rule 17.10(c).
\73\ See Cboe Options Rule 17.10(d).
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Current Rule 17.11 Judgment and Sanction
The BCC, in part, appropriately disciplines TPHs and associated
persons for violations by expulsion, suspension, limitation of
activities, fine, censure, suspension of Trading Permits, or any other
fitting sanction.\74\ Under this Rule, the BCC considers several
factors when determining sanctions including, but not limited to,
deterrence, remediation, precedent and the appropriateness of
disgorgement and/or restitution.\75\
---------------------------------------------------------------------------
\74\ See Cboe Options Rule 17.11(a).
\75\ See Cboe Options Interpretation and Policy .01 to Rule
17.11.
---------------------------------------------------------------------------
Current Rule 17.12 Service of Notice
Service of charges, notices and other documents upon the Respondent
are made personally, by leaving the same at the Respondent's place of
business or by deposit in the US post office via registered or
certified mail addressed to the Respondent at the Respondent's address
as it appears on the books and records of the Exchange.\76\
---------------------------------------------------------------------------
\76\ See Cboe Options Rule 17.12.
---------------------------------------------------------------------------
Current Rule 17.14 Reporting the Central Registration Depository
The Exchange reports the issuance of a statement of charges and
significant changes to the status of disciplinary proceedings to the
Central Registration Depository (``CRD'').\77\
---------------------------------------------------------------------------
\77\ See Cboe Options Rule 17.14.
---------------------------------------------------------------------------
Current Rule 17.50 Imposition of Fines for Minor Rule Violations
In lieu of commencing disciplinary proceedings, the Exchange may
impose fines, not to exceed $5000, on TPHs and associated persons for
specified Rule violations.\78\ Any person against whom a fine is
imposed pursuant to Rule 17.50 may contest the fine by filing an
Answer, pursuant to Rule 17.5, at which point the matter is subject to
review by the BCC.\79\ The Answer may request a hearing if desired.
Review and hearing related to violations outlined in Rule 17.50 are
handled in the same fashion as any other matter for which a statement
of charges has been issued.\80\ However, subject to certain conditions,
the BCC may impose certain forum fees for review and hearing if the BCC
determines that the conduct serving as the basis of the action under
review is in violation of Exchange Rules.\81\ The Exchange lists the
rules as to which the Exchange may impose fines within Rule 17.50
itself and in regulatory circulars
[[Page 18882]]
and notices.\82\ Nothing in Rule 17.50 requires the Exchange to impose
a fine pursuant to Rule 17.50 with respect to the violation of any rule
listed.\83\ For a violation that the Exchange determines is minor in
nature and falls within the scope of the minor rule plan, it may
proceed under Rule 17.50.\84\ A number of listed rules within Rule
17.50 indicate that violations above a specified threshold or a
specified number of repeat violations will result in referral to the
BCC.\85\
---------------------------------------------------------------------------
\78\ See Cboe Options Rule 17.50(a).
\79\ See Cboe Options Rule 17.50(c)(1).
\80\ Id.
\81\ See Cboe Options Rule 17.50(c)(2).
\82\ See Cboe Options Rule 17.50(f).
\83\ Id.
\84\ Id.
\85\ See Cboe Options Rule 17.50(g)(2)-(5), (7), (9)-(19).
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Proposed Updates to Exchange Rules
As mentioned above, the current application of the rules provides
for the BCC to determine whether to initiate charges in a regulatory
matter and to determine appropriate sanctions for rule violations.
Under the proposed change to Rule 17.4, the CRO will replace the BCC
and accordingly, the CRO will have the authority to initiate charges.
Under the proposed changes to Rule 17.11, the CRO or a Hearing Panel,
as applicable, may impose disciplinary sanctions. The Exchange proposes
corresponding changes elsewhere in Chapter 17 to reflect the CRO's
authority to initiate charges and impose disciplinary sanctions. These
changes harmonize the CRO's authority under Chapter 17 with the CRO's
authority under corresponding Chapter 8 of the Affiliated Exchanges.
The Exchange believes that this transfer of authority to the CRO
maintains the independence of the regulatory functions of the Exchange
as the CRO supervises the regulatory functions of the Exchange,
separate from that of its business interest, reporting directly to the
Regulatory Oversight Committee of the Board of Directors (``ROC'').
The Exchange recommends additional changes, including amendments
to:
(1) Increase the amount of time the Subject of a regulatory report
has to submit a written statement (from 15 days to 25).
(2) Increase the amount of time a Respondent has to file an Answer
(from 15 days to 25). This changed is based on the Rules of the New
York Stock Exchange (``NYSE''),\86\ the Financial Industry Regulatory
Authority (``FINRA''),\87\ and NASDAQ PHLX, LLC (``PHLX'').\88\
---------------------------------------------------------------------------
\86\ See NYSE Rule 9215.
\87\ See FINRA Rule 9215.
\88\ See PHLX Rule 9215.
---------------------------------------------------------------------------
(3) Update Interpretation and Policy .02 to Rule 17.2 by specifying
standards for videotaped responses.
(4) Relocate provisions related to ex parte communications
currently contained in Rule 17.4 (Charges) to Rule 17.15 (Ex Parte
Communications). This change is consistent with the ex parte provisions
under the Affiliated Exchanges' Rule 8.16.
(5) Update Rule 17.6 (Hearing) to:
a. Specify that hearings on charges shall be held before a Hearing
Panel comprised of three or five members of the BCC;
b. Specify impartiality requirements for members of the Hearing
Panel and procedures for removal of members of the Hearing Panel on the
grounds of bias or conflict of interest. This is based on the
Affiliated Exchanges' Rule 8.6(b) as well as FINRA Rule 9233(a);
c. Increase the amount of time prior to a hearing date the parties
to a hearing must furnish documentary evidence (from 5 days to 10); and
d. Specify that the CRO has the authority to direct that a hearing
be scheduled at any time after the period to submit an answer to
Charges pursuant to Rule 17.5 has elapsed.
(6) Update Rule 17.8 (Settlement) to:
a. Eliminate the 120-day period during which a Respondent may
submit an offer of settlement (and make corresponding changes
reflecting the removal of this time period). This removal comports with
the Affiliated Exchanges' Rule 8.8;
b. Specify that offers of settlement will be considered by the CRO
for acceptance or rejection (as opposed to the BCC).This is a
harmonizing change reflecting that of the Affiliated Exchanges' Rule
8.8(b);
c. Specify that the CRO has the discretion to grant a Respondent
more than two written offers of settlement. This is a harmonizing
change reflecting that of the Affiliated Exchanges' Rule 8.8(c); and
d. Specify that a Hearing Panel will grant the parties leave to
present an offer of settlement to the CRO.
(7) Remove the requirement that a majority of the BCC automatically
review decisions of a Hearing Panel. This is a harmonizing change
reflecting that of the Affiliated Exchanges' Rule 8.9.
(8) Remove the provision that the Board may review the decision not
to initiate charges upon application by the Regulatory Oversight and
Compliance Committee.
(9) Specify that if service of notice pursuant to Chapter 17 is
made by registered or certified mail, three days shall be added to the
prescribed period for response.
(10) Add Rule 17.15 for ex parte communications.
(11) Update the rules related to Minor Rule Violations to reflect
changes elsewhere in Chapter 17 and to remove any required referral to
the BCC for repeat violations.
(12) Update certain other outdated language within Chapter 17.
Detailed descriptions of the changes to specific Rules within
Chapter 17 are outlined below.
Updates to Rule 17.2 Complaint and Investigation
The Exchange replaces references to the BCC with references to the
CRO within Rule 17.2, which conforms to the Affiliated Exchanges' Rule
8.2. Under updated Rule 17.2(c), Staff will request the CRO to
authorize the issuance of a statement of charges when Staff finds there
are reasonable grounds to believe a violation has been committed and
formal regulatory action is required. Additionally, the proposed change
requires the Staff to submit a written report to the CRO of each
investigation instituted as a result of a complaint, along with the
current requirement that Staff submit reports where Staff finds
reasonable grounds that a violation has occurred and formal regulatory
action is warranted. The Exchange notes that under the Affiliated
Exchange's current rules, Staff are to submit written reports to the
CRO when an investigation has been initiated as a result of a
complaint, as well as when an investigation results in a finding that
there are reasonable grounds to believe that a violation has been
committed. The Exchange notes that, unlike the Affiliated Exchanges,
Staff maintains the authority to impose non-formal disciplinary action
or determine to close an investigation without the submission of a
report to the CRO.\89\ The Exchange also notes that, as it does today,
Staff will retain information and/or summaries regarding an action or
an investigation closed in this manner. Such information and/or
summaries are [sic] available to the CRO upon request and included in
regulatory updates to the CRO when necessary.
---------------------------------------------------------------------------
\89\ See Securities Exchange Act Release No. 71371 (January 23,
2014), 79 FR 4779 (January 29, 2014) (Notice of Filing and Immediate
Effectiveness of Proposed Rule To Amend CBOE's Rules To Enhance the
Independence and Integrity of the Regulatory Functions of the
Exchange) (SR-CBOE-2014-001).
---------------------------------------------------------------------------
Under updated Rule 17.2(d), except when the CRO determines that
expeditious action is required, the Subject may submit a written
statement to the CRO concerning why no
[[Page 18883]]
disciplinary action should be taken. In addition, the Exchange proposes
to extend the time period the Subject has to submit a written statement
from 15 days, the period currently provided for in the Affiliated
Exchanges' Rule 8.2(d), from the date of the notice to 25 days. The
Exchange further proposes to specify that this 25-day period to submit
a written statement to the CRO will toll while a request for access to
the investigative file pursuant to Rule 17.2(d) is pending. The
Exchange also proposes to update Rule 17.2(d) to eliminate any gender-
specific pronouns (i.e. ``he'', ``him'', or ``his).\90\ Finally, the
Exchange makes corresponding updates to Interpretation and Policy .02
to Rule 17.2 to reflect the aforementioned changes to Rule 17.2(d) and
to set forth standards for videotaped responses. Such responses are
consistent with current Securities and Exchange Commission
(``Commission'') enforcement guidelines, specifically the requirements
that videotaped responses are limited to 12 minutes or less.\91\ The
Exchange additionally proposes that a written transcript accompany a
videotaped response. The submission of videotaped responses falls
within the proposed 25-day submission period and, when applicable,
proposed tolling period.
---------------------------------------------------------------------------
\90\ The Exchange is also updating Rules 17.5, 17.6, 17.7, 17.8,
17.12, and 17.50 to eliminate gender-specific pronouns.
Additionally, in instances in which the Exchange harmonizes its rule
language with that of the Affiliated Exchanges, the Exchange
eliminates gender-specific pronouns.
\91\ See Securities and Exchange Commission Division of
Enforcement, Enforcement Manual (Nov. 28, 2017), available at:
https://www.sec.gov/divisions/enforce/enforcementmanual.pdf.
---------------------------------------------------------------------------
Purpose of Updates to Rule 17.2
The Exchange believes the CRO is best suited to review reports from
Staff and responses to alleged violations from Subjects. The CRO has
general supervisory authority over the Exchange's regulatory
operations, including the responsibility for overseeing surveillance,
examination, and enforcement functions and for administering any
regulatory services agreements with another self-regulatory
organization to which the Exchange is a party. The Exchange notes that
the CRO functions to serve the regulatory functions of the Exchange,
separate from that of its business interest, reporting directly to the
ROC. Therefore, the Exchange believes that allowing the CRO to
authorize the issuance of charges maintains the autonomy and
independence of the Exchange's regulatory functions, as well as helps
to ensure that decisions regarding the resolution of investigations are
made without regard to the actual or perceived business interests of
the Exchange or any of TPHs. As a result, the submission of written
reports to the CRO will help expedite the disciplinary process while
still providing TPH and associated persons with a fair and efficient
process. The Exchange also notes that the added submission of written
reports where an investigation has been instituted as a result of a
complaint serves to make the Exchange's complaint process consistent
with that of the Affiliated Exchanges. The Exchange believes that
keeping the Staff's authority in place to find reasonable grounds that
formal regulatory action is or is not warranted and to impose the
appropriate non-formal or closing actions where warranted without
providing a formal report to the CRO will continue to support the
independence and integrity of the regulatory functions of the Exchange,
as Staff, like the CRO, functions independently from the business
interests of the Exchange.\92\
---------------------------------------------------------------------------
\92\ See supra note 88 [sic].
---------------------------------------------------------------------------
Additionally, the Exchange believes that due to the increased
complexity of Exchange trading activity (and the resulting regulatory
investigations and examinations) that increasing the time period from
15 days to 25 days is reasonable. The additional time will enhance the
regulatory process by allowing subjects to prepare more comprehensive
and effective written statements.\93\ The Exchange notes that the
Subject's access to ``other materials'' includes any non-privileged
exculpatory documents that the Exchange may have in the investigative
file. Finally, tolling that same period while Staff prepares an
investigative file when requested by the Subject is necessary in the
interest of fairness. The Exchange notes that Staff is often able to
provide an investigative file in one week or less and that the Exchange
makes every effort to provide such files promptly upon request.
However, to the extent an investigative file is voluminous or otherwise
complicated to provide, were that period not tolled, the Subject could
be left with insufficient time to prepare an effective written
statement following receipt of the investigative file. Though the rules
of the Affiliated Exchanges do not provide for tolling of this time
period, the Exchange notes that its current Interpretation and Policy
.01(d) to Rule 17.8 (discussed below) already allows for tolling to
extent it takes Staff more than 30 calendar days (in the context of a
total 120-day time period) to produce documents to a Respondent.
Therefore, as proposed, tolling is not novel within the Exchange's
disciplinary process. The Exchange believes that the proposed 25 day
time period should be completely tolled while Regulatory staff prepares
an investigative file for review in order to provide sufficient time
for a Subject to compose a response. The Exchange also notes that this
will limit the need for the Exchange to provide extensions when the
Subject requests more time to respond. Finally, the Exchange notes that
the addition of a time limit of videotaped responses, consistent with
current Commission enforcement guidelines, \94\ and the accompaniment
by a written transcript serves the interest of expediency.
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\93\ The Exchange notes that under current Rule 17.13 time
limits imposed under Chapter 17 may be extended. Where the exchange
is extending certain time limits within this filing, it also does so
to reduce the number of extension requests processed by Staff and
thereby enhance the efficiency of the regulatory process.
\94\ See supra note 91.
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Updates to Rule 17.3 Expedited Proceeding
The Exchange proposes to replace references to the BCC with
references to the CRO within Rule 17.3, thus making the CRO's role
consistent with that of corresponding Rule 8.3 of the Affiliated
Exchanges. The Exchange also proposes to update certain verbiage as
needed resulting from those replacements. The Exchange makes
corresponding updates to reflect changes to the 17.2(d) processes
referenced in Rule 17.3. Under updated Rule 17.3, if Staff and the
Subject are able to agree on the terms of a letter of consent, Staff
will submit the letter to the CRO for consideration. If the CRO accepts
the letter of consent, the Exchange shall adopt the letter of consent
as its decision and no further action shall be taken against the
Subject respecting the matters that are the subject of the letter of
consent, which is consistent with the practices set forth in the
Affiliated Exchanges' Rule 8.3. If the CRO rejects the letter of
consent, the matter shall proceed as though the letter of consent had
not been submitted. The CRO's decisions regarding letters of consent
are final. The Exchange also makes non-substantive, clarifying
additions qualifying the letter as the ``letter of consent'' throughout
this rule.
Purpose of Updates to Rule 17.3
The CRO replaces the BCC as the deciding body related to expedited
proceedings. The Exchange believes the CRO is best suited to review
letters of consent and determine whether to reject
[[Page 18884]]
or accept such letters. The CRO is better suited to resolve procedural
matters like expedited proceedings and the approval or disapproval of
letters of consent because the CRO has greater subject matter and
procedural expertise based on his role in directly overseeing the
regulatory programs and processes on a day to day basis. Additionally,
the Exchange notes that the CRO is required to report periodically to
the ROC on all regulatory matters and issues, thus, keeping the ROC
apprised of, and allowing for its review of expedited proceedings. As a
result, the Exchange believes that this proposed rule change further
supports and provides for the autonomy and independence of the
Exchanges' regulatory functions.
Updates to Rule 17.4 Charges
The Exchange proposes to replace references to the BCC with
references to the CRO within Rule 17.4(a) and 17.4(b), which conforms
to the Affiliated Exchanges' references within their corresponding Rule
8.4. The Exchange also proposes to add clarification that a
determination not to initiate charges pursuant to Rule 17.4(a) only
occurs in those cases where a Subject has been provided notice of
violations pursuant to Rule 17.2(d). Under updated Rule 17.4(a), in
those cases where notice has been provide pursuant to Rule 17.2(d) and
when it appears to the CRO from the report of Regulatory staff that no
probable cause exists for finding that a violation occurred or if the
CRO otherwise determines that no further action is warranted, the CRO
shall direct Staff to prepare and issue a statement to the Subject (and
Complainant if any) outlining the reasons for such finding. The
proposed language stating that the CRO shall direct Staff to prepare
and issue the written statement related to such a determination is a
clarifying addition to Rule 17.4(a) that is intended to add detail
regarding the process through which such a statement is issued.
Similarly, under updated Rule 17.4(b), whenever it shall appear to
the CRO that there is probable cause for finding a violation occurred
and further proceedings are warranted, the CRO shall direct Staff to
prepare and issue a statement of charges against the Respondent. The
proposed addition of the term ``and issue'' clarifies Staff's
responsibilities under the Rule, serves to mirror the Staff's
responsibilities for an issuance pursuant to 17.4(a), and modifies the
Rule to be substantially similar to the Affiliated Exchanges' Rule
8.4(b).
The Exchange also modifies the requirement in Rule 17.4(c) that a
Respondent request access to documents within 60 calendar days after
receiving service of charges, to 25 days after receiving such notice.
This change serves to harmonize a Respondent's time to request
documents with their [sic] time to file a written answer under proposed
Rule 17.5 (described below), and the tolling of such period while
access to the investigative file is pending. Lastly, the Exchange
proposes to relocate Rule 17.4(d) and its Interpretations and Policies
.01-.03 (along with the amendments proposed, as described below), which
concern ex parte communications, to proposed additional Rule 17.15.
This change is in line with the Affiliated Exchanges' Rule 8.16 that
specifically covers ex parte communications for disciplinary
procedures.
Purpose of Updates to Rule 17.4
The Exchange believes the CRO is best suited to determine whether
to initiate charges after reviewing a Staff report. Allowing the CRO to
initiate charges (or elect not to initiate charges) will significantly
expedite the disciplinary process, as well as serve to conform this
rule to the Affiliated Exchanges' Rule 8.4. Specifically, Staff and
Subjects will not have to wait until the BCC meets to learn whether a
regulatory matter will result in charges and the matter can move on to
answer, hearing, settlement, and/or summary disposition. In the CRO's
capacity as supervisor of the Exchange's regulatory operations, the CRO
maintains the subject matter and procedural expertise that is necessary
to review and consider regulatory issues and the accompanying facts and
circumstances in consideration of issuing charges. For example, the CRO
is best suited to determine when a pattern or practice of violative
conduct exists, where certain conduct might have been willful in nature
or whether other aggravating (or mitigating) circumstances exist
(considerations that may be important in considering charges). As
stated, the Exchange believes that under the current practice of Rule
17.4(a) and (b), by having the CRO direct Staff to prepare and issue
subsequent statements after the CRO's review is clarifying and in line
with such current practices with the BCC. Additionally, the Exchange
believes that allowing a Respondent 25 days from receiving service of
charges to request access to documents serves to harmonize this process
with the proposed time for which a Respondent may file an answer under
Rule 17.5, and the proposed tolling requirements thereunder.
Updates to Rule 17.5 Answer
Under updated Rule 17.5, the Exchange extends the time period the
Respondent has to submit an Answer from 15 days after the service of
charges, which is currently provided for under the Affiliated
Exchanges' corresponding Rule 8.5, to 25 days.\95\ The Exchange
proposes to specify that this 25-day period to submit an Answer will
toll, like that of proposed 17.2(d), while a request for access to the
investigative file pursuant to Rule 17.4(c) is pending.
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\95\ This change is based on the rules of NYSE, FINRA and PHLX.
See supra notes 86-88.
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Purpose of Updates to Rule 17.5
The Exchange believes that due to the increased complexity of
Exchange trading activity (and the resulting regulatory investigations
and examinations) that increasing the time period from 15 to 25 days is
reasonable. The additional time will allow Respondents to prepare more
comprehensive and effective Answers. Finally, similar to the proposal
to toll the time period in the context of a written response to a
notification of pending allegations from Staff, the Exchange believes
that tolling the time period for an Answer pursuant to Rule 17.5 while
Staff prepares investigative file for the Respondent's review is
necessary in the interest of fairness. For the same reasons described
above, were that period not tolled, the Respondent could be left with
insufficient time to prepare an effective Answer following receipt of
the investigative file and limits the Exchange having to grant an
extension. The Exchange again notes that Staff can often provide an
investigative file in one week or less and that the Exchange makes
every effort to provide such files promptly upon request.
Updates to Rule 17.6 Hearing
Under updated Rule 17.6(a), the Exchange proposes that hearings on
the charges be held by a panel of either three or five members of the
BCC selected by the Chairperson of the BCC. In addition, the Exchange
updates Rule 17.6(a) to clarify that where a TPH organization is a
party to the hearing, it shall be represented by one of its nominees,
who is properly authorized by a TPH organization pursuant to Rule 3.8
(Nominees).\96\ The Exchange also proposes language within 17.6(a) that
states BCC Counsel may assist the Hearing Panel in preparing its
written
[[Page 18885]]
recommendations or judgments, a practice already in place within the
hearing process.
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\96\ See Cboe Options Rule 1.1(pp). The term ``nominee'' means
an individual who is authorized by a TPH organization, in accordance
with Rule 3.8, to represent such TPH organization in all matters
relating to the Exchange.
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Importantly, the Exchange proposes to add subparagraphs (a)(1)
through (a)(3) to Rule 17.6 which requires that Hearing Panel members
must function impartially and independently of the involved Exchange
staff members, provides a recusal process for Hearing Panel members, as
well as a process in which a Respondent may motion for removal of
Hearing Panel members who may have bias or a conflict of interest.
Proposed subparagraph (a)(1) provides that Hearing Members are expected
to function impartially and independently of the staff members who
prepared and prosecuted the charges. This language is based on language
in the Affiliated Exchange's Rule 8.6. Proposed subparagraph (a)(1)
then states that if a Hearing Panel member determines they [sic] have a
conflict of interest or bias or other circumstances exists where their
[sic] fairness might be reasonably questioned, then such Hearing Panel
member should withdraw from the matter and the Chairperson of the BCC
may then appoint a replacement. This provision is based on FINRA Rule
9233(a).\97\ Proposed subparagraphs (a)(2) and (a)(3), like that of the
Affiliated Exchanges, provide for the process in which a Respondent may
motion for disqualification of a Hearing Panel member on the grounds of
bias or conflict of interest, along with the procedure for ruling upon
such motions for disqualification. The Exchange incorporates additional
language that the Hearing Panel member subject to a Respondent's motion
for removal is excluded from rulings on such motion. Subparagraphs
(a)(2) and (a)(3) are consistent with that of the Affiliated Exchanges'
Rule 8.6(b), and differ only where necessary to conform to the
Exchange's existing Rule 17.6 text or to account for details or
descriptions included in the Exchange's rules but not in the applicable
rules of the Affiliated Exchanges.
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\97\ The Exchange notes that its Rule language differs from that
of FINRA's where necessary to maintain terminology particular to its
Rules and disciplinary procedures. The Exchange also notes that in
this subparagraph it incorporates language specifying that members
of the Hearing Panel are expected to function impartially, which is
unlike the FINRA rule, but rather mirrors the Affiliated Exchanges'
rule language.
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Under updated prehearing procedures in Rule 17.6(b), parties to a
hearing must furnish copies of all documentary evidence to be presented
at the hearing and a list of witnesses ten business days (as opposed to
five business days under current Rule 17.6(b)) in advance of the
scheduled hearing date. The Exchange also proposes to modify the notice
of the time and place of the hearing given to the Parties to 15
business days from 15 calendar days to conform to the Affiliated
Exchanges' corresponding rule.
The Exchange proposed to add Interpretation and Policy .03 to Rule
17.6 that states, ``Subject to Rule 17.7, the CRO shall have the
authority to direct that a hearing be scheduled at any time, after the
period to answer pursuant to Rule 17.5 has elapsed.''
The Exchange also updates Rule 17.6 throughout to reference the
panel selected for the Hearing as the ``Hearing Panel'', which comports
with the terminology in the Affiliated Exchanges' corresponding Rule
8.6.\98\
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\98\ The Exchange also updates references to the Hearing Panel
within Rules 17.9, 17.10, 17.11 and 17.50.
---------------------------------------------------------------------------
Purpose of Updates to Rule 17.6
The Exchange believes the updates to Rule 17.6 will expedite and
provide greater clarity around the Exchange's hearing process. Under
the updated Rule 17.6, the BCC still serves as the pool from which
hearing panelists are selected, however, the Hearing Panel is limited
to either three or five members selected by the BCC Chairperson. This
update will clarify the selection process and prevent interlocutory
issues that may arise in having an even number of members on a Hearing
Panel. Furthermore, limiting the size of the Hearing Panel helps to
streamline the hearing process while still providing a sufficient
number of panelists to adjudicate the hearing effectively. The Exchange
notes that it expects that most Hearing Panels will be comprised of
three members, but that five members may be necessary at times to hear
particularly complex matters. Clarifying that where a TPH organization
is a party to the hearing it shall be represented by one of its
nominees ensures that an authorized person consistent with existing
Rule 3.8 represents a TPH organization.
The Exchange believes that proposed Rule 17.6(a)(1) through (a)(3)
providing for Hearing Panel member impartiality and recusal and removal
processes serve in the interest of fairness to the Respondent. Allowing
a Respondent to move for disqualification of any member of the Hearing
Panel selected by the BCC Chairperson based upon bias or conflict of
interest and providing for a ruling process on motions for
disqualification conforms to the Affiliated Exchanges' Rule 8.6. As
stated, the Exchange proposes to maintain language necessary to account
for different text and procedures between the Exchange's rules and
those of the Affiliated Exchanges. Notably, the proposed language
incorporates that a motion shall be filed with the BCC Chairperson.
This is a logistical difference that accounts for the BCC's role in the
Exchange's process, which is not present within the Affiliated
Exchanges' processes. Like that of the Affiliated Exchanges, the
Hearing Panel will hear such motions. The Exchange explicitly adds that
a Hearing Panel member subject to a Respondent's motion for
disqualification is excluded from ruling on such motions, a best-
practice currently in place. The Exchange also proposes moving the
provision stating that counsel may assist the Hearing Panel in
preparing its written recommendations, currently found within the
Affiliated Exchange's corresponding impartiality provision, to Rule
17.6(a). The Exchange believes that this serves to codify a practice
already in place; specifying that BCC Counsel assists the Hearing Panel
throughout the hearing, not only during impartiality rulings. The
Exchange also believes that adding substantially similar language to
that of FINRA Rule 9233(a), which provides that a Hearing Panel member
shall recuse themselves [sic] when they determine they have a conflict
of interest, bias, or other circumstance which might call into question
their fairness, is an additional safeguard to protect the integrity of
the hearing process and the interests of the Respondent.
Requiring that the parties provide documentary evidence and witness
lists ten business days in advance of a scheduled hearing will give all
parties more time to review materials that will be presented at
hearing. This extended time period is necessary given the increased
complexity of modern trading activity on the Exchange and the resulting
complexity of disciplinary matters. Additionally, incorporating that
the parties receive 15 business days' notice (as opposed to the current
15 days' notice) harmonizes the business day timing requirements
throughout paragraph (b) and ensures that the parties have ample time
from the notice of the scheduled hearing to furnish copies of
documentary evidence.
Furthermore, vesting authority in the CRO to direct the scheduling
of hearings is a necessary update given that the Exchange proposes to
remove the time limit under which Respondents must submit offers of
settlement under updated Rule 17.8. Under current rules, the end of the
settlement period functions as the primary trigger for the
[[Page 18886]]
scheduling of a hearing (hearings are scheduled when the settlement
period ends and the parties have not reached settlement). Under updated
Rule 17.6, the CRO can direct the scheduling of a hearing when the CRO
believes the nature of matter at hand requires a hearing, when the
Respondent has exhausted his offers of settlement, or when the CRO
believes that good faith settlement negotiations have ended. As stated
above, the CRO is required to meet regularly with the ROC to report on
regulatory performance and status of regulatory matters, including
caseloads and aging. The Exchange thus believes the CRO's requirement
to report to the ROC will ensure continued timeliness in the processing
of a regulatory matter. Interpretation and Policy .03 to Rule 17.6 will
also greatly expedite the hearing process where the prospective parties
agree a hearing is required.
Updated Rule 17.7 Summary Proceedings
The Exchange proposes to replace references to the BCC with
references to the CRO within Rule 17.7. Under updated Rule 17.7,
analogous with the Affiliated Exchanges' Rule 8.7, the CRO may make a
determination without a hearing and may impose a penalty as to
violations which the Respondent has admitted or has failed to answer or
which otherwise do not appear to be in dispute. Under updated Rule
17.7, the Respondent may notify the CRO if they desire a hearing on any
of the charges not previously admitted or upon the penalty, and that
the Respondent's failure to notify the CRO constitutes an admission of
the violations and acceptance of the penalty determined by the CRO. The
Exchange also amends the 10 day period in which the Respondent may
notify the CRO that the Respondent desires a hearing to 10 business
days, which is consistent with the Affiliated Exchanges' corresponding
rule.
Purpose of Updates to Rule 17.7
The Exchange proposes to replace the BCC with the CRO as the body
that will make determinations related to summary proceedings, thus
harmonizing the determining body with that of corresponding Rule 8.7 of
the Affiliated Exchanges. The Exchange believes the CRO is best suited
to address uncontested charges against Respondents and impose penalties
related to those charges. The CRO is better suited to resolve matters
like summary proceedings because the CRO has greater familiarity with
Exchange rules and subject matter/procedural expertise. The Exchange
notes that the principal considerations in determining sanctions
outlined in Rule 17.11 Interpretation and Policy .01 are not changing
and accordingly the considerations weighed by the CRO will be the same
as those currently weighed by the BCC. Additionally, the Exchange notes
that the Board may on its own initiative order review of a
determination of summary proceedings pursuant to 17.10(c). The proposed
change from 10 days to 10 business days from the date of service for a
Respondent to notify the CRO that the Respondent desires a hearing is
consistent with the corresponding time period in Rule 8.7 of the
Affiliated Exchanges.
Updates to Rule 17.8 Offers of Settlement
The Exchange replaces references to the BCC with references to the
CRO within Rule 17.8, consistent with the proposed replacements
throughout Chapter 17. Under updated Rule 17.8(a), the Respondent
submits an offer of settlement to the CRO and the CRO determines
whether to accept or reject an offer. The CRO issues a decision
accepting an offer and imposes sanctions consistent with the offer.
Under updated Rule 17.8(b), where Staff will not recommend acceptance
of an offer to the CRO, the Respondent may appear before the CRO to
make an oral statement concerning why the offer should be accepted. If
the CRO rejects an offer Staff supports, the Respondent can appear
before the CRO to make an oral statement concerning why the CRO should
reconsider acceptance of the offer.
The Exchange also removes the 120-day period following service of a
statement of charges during which a Respondent may submit an offer
under updated Rule 17.8(a) and specifies that offers can be made at any
time following the date of service of a statement of charges upon the
Respondent in accordance with 17.12 (Service of Notice). Removal of the
120-day time period is consistent with current Rule 8.8 of the
Affiliated Exchanges. The Exchange also specifies within updated
Interpretation and Policy .01 to Rule 17.8 that the Respondent may
submit a maximum of two offers to the CRO unless the CRO orders
otherwise. As a result of these changes, the Exchange proposes to
remove Interpretations and Policies .01 (b)-(d) and .02 to Rule 17.8 in
their entirety as they relate specifically to the 120-period and/or the
number of offers that may be submitted to the BCC.
The Exchange adds new Interpretation and Policy .02 to Rule 17.8 to
specify that if an offer is submitted subsequent to a hearing being
scheduled, the Hearing Panel shall grant the parties leave from the
hearing so the offer can be presented to the CRO for consideration.
Purpose of Updates to Rule 17.8
The Exchange believes the CRO is best suited to determine whether
to accept an offer of settlement from a Respondent, even after the
hearing procedures have commenced. The Exchange believes the CRO has
greater familiarity with the Securities Exchange Act of 1934 (the
``Act'') and Exchange rules, and what constitutes a fair and reasonable
offer related to violations of such. The Exchange also notes that
allowing the CRO to determine offers of settlement mirrors the
Affiliated Exchanges' corresponding rules. Further, allowing the CRO to
accept or reject offers of settlement will significantly expedite the
settlement process while ensuring that the independence and integrity
of the regulatory process is maintained, as the CRO's regulatory
decision-making responsibilities are entirely separate from those
responsible for the Exchange's business interests. Specifically, the
CRO can facilitate more expedient and independent review of offers. A
Respondent will not have to wait until a regularly scheduled BCC
meeting to determine whether their [sic] offer has been accepted or
rejected nor will they have to wait until the BCC meets to make oral
statements in support of their offers.
The Exchange also believes that removing the 120-day period during
which a Respondent may submit an offer and allowing offers to be
submitted at any time following the date of service of a statement of
charges upon the Respondent pursuant to Rule 17.12 will improve the
settlement process and allow matters to be more efficiently resolved
when all parties agree that a matter can be settled without further
disciplinary proceedings. The Exchange believes there is no need to
prevent settlement negotiations during any period where they are
proceeding in good faith. As mentioned above, this will align the
Exchange's Rule with that of the Affiliated Exchanges' Rule 8.8, which
does not prohibit settlement offers at a particular point in time after
a statement of charges. Further, under updated Rule 17.6, the CRO has
authority to schedule a hearing in the event settlement negotiations
have broken down.
Moreover, the Exchange believes it is appropriate for the CRO to
exercise discretion to allow a Respondent to submit more than two
offers of
[[Page 18887]]
settlement. The Exchange notes that a Respondent will be allowed to
submit at least two offers (assuming that the offers are made in the
course of good-faith negotiations). This change conforms to the same
discretion given to the CRO under the Affiliated Exchanges'
corresponding Rule 8.8. The maximum allowance of two offers remains in
place, like that of the Affiliated Exchanges' rule, in order to prevent
abuses, such as delay tactics, of the disciplinary procedures. However,
the Exchange believes the CRO may consider additional offers of
settlement if the CRO feels good faith negotiations continue with a
Respondent and accordingly additional offers are appropriate.
Additionally, the Exchange notes that the CRO is best suited to accept
or reject offers of settlement. The CRO's capacity as supervisor of
investigative matters provides the CRO case-by-case subject matter
expertise. The Exchange also notes that the CRO may take into account
the principle considerations under Rule 17.11 in weighing whether or
not acceptance or rejection of an offer is appropriate. As a result,
the Exchange believes that the CRO is the most appropriate determining
body for reviewing settlement offers and that review of offers of
settlement by the BCC or other determinative body is not necessary (the
Exchange notes that, unlike the Affiliated Exchanges, its current Rule
17.10(c) (Review on Motion of the Board) does not provide that the
Board may review on its own initiative order an offer of settlement).
Maintaining acceptance and rejection of such offers with the CRO
provides for consistent practice throughout the proceedings, as well as
regulatory independence and integrity.
Updates to Rule 17.9 Decision
The Exchange removes the requirement that decisions of a Hearing
Panel be subject to automatic review when the Hearing Panel is not
comprised of a majority of the BCC. The Exchange also adds a cross
reference to Rule 17.11 (Judgment and Sanction) and incorporates the
requirement that the contents of a decision where sanctions are imposed
include language that is substantially similar to the requirements
under the Act.
Purpose of Updates to Rule 17.9
Updated Rule 17.9 corresponds to the update in Rule 17.6 limiting
the size of a hearing panel to either three or five members of the BCC.
Due to the size limitation in updated Rule 17.6, most Hearing Panels
following the operative date of this filing would not be comprised of a
majority of the BCC.\99\ Removing this stage of review will further
streamline the hearing process by putting the ultimate decision making
power squarely on the shoulders of the Hearing Panel. The Exchange
believes this is appropriate as the Hearing Panel members are the
individuals that participate in the hearing, hear all of the evidence
firsthand, and are able to consummate a verdict based on that firsthand
knowledge. The Exchange also notes that removing this review process
will not unfairly prejudice any party to a hearing as the parties may
petition for removal of a Hearing Panel member for impartiality under
proposed Rule 17.8 and for a review of the decision by the Board or a
Board Committee, whose decision is ratified by the Board, under Rule
17.10. As such, updated Rule 17.9 eliminates an unnecessary redundancy
in the Exchange's disciplinary process. Finally, the Exchange believes
the cross-reference to its existing sanctions rule, Rule 17.11, and the
additional instruction regarding the contents of a decision where a
sanction is imposed is appropriate in order to provide clarity
regarding statements of sanctions within a decision.
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\99\ The BCC is typically composed of 10-12 members.
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Updates to Rule 17.10 Review
The Exchange proposes to replace references to the BCC with
references to the Hearing Panel where applicable within Rule 17.10.
Additionally, the Exchange proposes to make a clarifying change to
harmonize the language referring to the decision with Rule 17.9 and
proposes to remove Rule 17.10(d), which currently provides that the ROC
may apply for the Board to review a decision not to initiate charges.
Purpose of Updates to Rule 17.10
Updates to reference the Hearing Panel in lieu of the BCC in Rule
17.10 reflect updates elsewhere in Chapter 17. The Exchange also
proposes to delete Rule 17.10(d). Specifically the Exchange updates
17.10(b) to reflect that decisions under review will be decisions of a
Hearing Panel. Furthermore, a Hearing Panel (and not the full BCC) will
have heard a matter under review. The Exchange changes the
qualification of ``any'' decision to ``the'' decision, which is in line
with language referring to ``the'' decision throughout Rule 17.9. The
Exchange removes Rule 17.10(d) as there is no longer the need for a
special provision for review of BCC determinations not to initiate
charges pursuant to Rule 17.4(a). As stated, the Exchange believes the
CRO is best suited to determine whether to initiate charges under Rule
17.4, rather than the BCC, as the CRO directly oversees all regulatory
activities, including general reports on the status of regulatory
matters. Unlike the BCC, the CRO reports and responds directly to the
ROC, keeping the ROC apprised of the status of regulatory matters,
including reports regarding open investigations and disciplinary
matters, and decisions regarding such matters. Because there is a
direct line of reporting between the CRO and the ROC, and the ROC may
direct the CRO to take certain regulatory actions where they [sic] see
fit, the Exchange believes that the ROC's application to the Board to
review the CRO's decision not to initiate charges is not essential to
the disciplinary process. As a result, the Exchange believes removing
the ROC's application of review to the Board of such decisions provides
for a more efficient, streamlined disciplinary process. Furthermore,
the Exchange believes that this change is in line with maintaining
enhanced autonomy and independence of the Exchange's regulatory
functions.
Updates to Rule 17.11 Judgment and Sanction
Under updated Rule 17.11, the Exchange replaces references to the
BCC with references to the ``Hearing Panel or the CRO, as applicable''.
Purpose of Updates to Rule 17.11
Updated Rule 17.11 reflects the new roles of the CRO and Hearing
Panels. Specifically, the CRO will issue sanctions that result from
summary proceedings outlined in Rule 17.7. The Hearing Panel will issue
sanctions that result from decisions outlined in Rule 17.9. As
mentioned above, the principal considerations for determining sanctions
outlined in Interpretation and Policy .01 to Rule 17.11 have not
changed. The Hearing Panel or the CRO, as applicable, weigh [sic] the
same considerations in determining sanctions under updated Rule 17.11
as the BCC weighs under current Rule 17.11.\100\ The Exchange notes
that the CRO would also weigh the principal considerations under 17.11
in determining whether to accept or reject a letter of consent under
Rule 17.3 or offer under Rule 17.8. Additionally, the Exchange believes
that in the CRO's capacity as supervisor of the Exchange's regulatory
operations, the CRO possesses the subject matter expertise, as well as
the accompanying
[[Page 18888]]
facts and circumstances, including knowledge of a TPHs' or associated
persons' disciplinary history, to consider and determine appropriate
sanctions. The CRO's capacity as supervisor of the Exchange's
regulatory operations also ensures that regulatory independence is
provided for during the judgment and sanction process under Rule 17.11.
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\100\ The Exchange notes that the Board also weighs these
considerations when determining sanctions, and that Staff considers
similar factors in determining whether formal, non-formal, or no
further regulatory action in warranted.
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Updates to Rule 17.12 Service of Notice
Updated Rule 17.12 specifies that service of charges, notices or
other documents, may continue to be made upon a Respondent by
registered or certified mail but if this method of service is used,
that three days shall be added to the prescribed period for response.
Purpose of Updates to Rule 17.12
The Exchange updates Rule 17.12 to provide clarity in the Rule and
in the interest of fairness to Respondents. Many of the time periods
outlined in Chapter 17 begin upon service of notice, charges or other
documentation (i.e. the proposed 25 days to submit an Answer to charges
under Rule 17.5 or the 15 days to petition for review of a decision
under rule 17.10). Updated Rule 17.12 provides three additional days
when calculating the time for response to the extent service is made by
registered or certified mail. Updated Rule 17.12 ensures that a
Respondent is not penalized any time to respond to notices, charges or
other documentation while such documentation is in transit. The
Exchange notes that this update is not based on corresponding rules of
the Affiliated Exchanges, but is rather based on FINRA Rule 9138(c).
Updates to Rule 17.14 Reporting to the Central Registration Depository
The Exchange removes a reference to the National Association of
Securities Dealers, Inc. (``NASD'') within Rule 17.14. The Exchange
also updates references to the BCC with references to the Hearing Panel
or the CRO where applicable.
Purpose of Updates to Rule 17.14
On July 30, 2007, The National Association of Security [sic]
Dealers, Inc., The New York Stock Exchange, LLC (``NYSE'') and NYSE
Regulation, Inc. consolidated their member firm regulation operations
into a combined organization FINRA. After the consolidation, FINRA
became operator of the CRD. Rather than update the reference to FINRA,
however, the Exchange proposes to simply remove the reference to NASD
as the CRD system is widely known as such in the industry and the
description of its operator is no longer necessary.
Proposed Rule 17.15 Ex Parte Communications
The Exchange proposes to relocate 17.4(d) and its Interpretations
and Policies .01 through .03, which concern ex parte communications, to
proposed additional Rule 17.15. This conforms to the Affiliates
Exchanges' Rule 8.16, which prohibits ex parte communications on the
merits of a proceeding. The Exchange has made changes to its current ex
parte rule language to be substantially similar to that of the
Affiliated Exchanges' ex parte rule. Where possible, the Exchange has
mirrored its Affiliated Exchanges' Rule 8.16 in substance and form.
This includes: The addition of Exchange staff among those persons
prohibited in making ex parte communications; the definition of members
of the Hearing Panel, BCC, Board or committee of the Board who
participate in a decision with respect to that proceeding as
``Adjudicators''; the addition of a procedure for which an Adjudicator
must place any prohibited ex parte communications into the record; the
authority for the Board or committee of the Board to take necessary
action if an ex parte communication arises; and, importantly, the
application of the prohibition of ex parte communications beginning
with the initiation of an investigation under Rule 17.2(a) or when a
person has knowledge that an investigation will be initiated. The
proposed change to the Exchange's ex parte communication rule is based
on the Affiliated Exchanges' existing Rule 8.16. The Exchange notes
that the language of the proposed rule and the Affiliated Exchanges'
rule may differ to extent necessary to conform to the Exchanges'
existing ex parte rule text or to account for details or descriptions
included in the Exchange's rules but not in the applicable rules of the
Affiliated Exchanges. The Exchange proposes to maintain its provision
applicable to the definition of ex parte communications, as well as its
provisions for actions that will not be considered violations of the ex
parte rules.
Purpose of Proposed Rule 17.15
Where possible, the Exchange has substantively mirrored its
proposed Rule 17.15 to the Affiliated Exchange's Rule 8.16. The
Exchange believes that this proposed change provides consistency in the
disciplinary procedures across the multiple exchanges. Specifically,
the Exchange believes that proposed Rule 17.15(d), which comports with
the Affiliated Exchanges' Rule 8.16(d) and provides that prohibition on
ex parte communications begins upon the initiation of an investigation,
serves to protect the interests of fairness for all Subjects and
Respondents, as well as for the Exchange. The Exchange also believes
this same purpose is served by expanding the prohibition of ex parte
communications to Exchange staff during matters pending.
As stated, the Exchanges' [sic] proposed Rule 17.15 differs from
the Affiliated Exchanges' Rule 8.16 to the extent necessary to conform
to the existing ex parte rule text or to account for details or
descriptions included in the Exchange's rules but not in the Affiliated
Exchanges rules. For example, the Exchange has kept it existing
provisions that define ex parte communications and actions that
constitute non-violations of the rule. While the Affiliated Exchanges
use the term ``Respondent'', the Exchange uses ``Trading Permit
Holder'' and ``person associated with a Trading Permit Holder'' because
such terminology encompasses Respondents as well as Subjects of
investigations or examinations who would be subject to ex parte
communication restrictions. The Exchange notes that it has proposed to
add reference to a member of a Hearing Panel as a party with whom ex
parte communications are prohibited even though this appears
duplicative because a Hearing Panel is comprised of members of the BCC.
The Exchange believes that inclusion of the Hearing Panel and the BCC
ensures that BCC members who may ultimately serve on a Hearing Panel
for a matter are subject to the ex parte rules from the initiation of
an investigation of that matter. Additionally, the Exchange notes that
it proposes to maintain its provision for the definition of ex parte
communication (proposed subparagraph (e)) and provisions stating in
what circumstances a violation of ex parte communications is not deemed
to have occurred (proposed subparagraphs (f) and (g)). The Exchange
believes that maintaining these portions of its ex parte rules will
continue to provide clarity for all parties regarding what constitutes
an ex parte communication, what circumstances are not deemed a
violation of the ex parte rules, and what steps a party must take in
order to avoid violation of such rules.
Updates to Rule 17.50 Imposition of Fines for Minor Rule Violations
The Exchange proposes to replace references to the BCC with
references to a Hearing Panel within Rule 17.50. Within the list of
violations outlined in
[[Page 18889]]
Rule 17.50(g), the Exchange removes references to matters referred to
the BCC at specified thresholds after a specified number of repeat
violations (i.e., ``subsequent offenses''). References of referrals to
the BCC have been removed from Rules 17.50(g)(2)-(5), (7), (9)-(19).
Given the proposed removal of referrals to the BCC, the Exchange
accordingly proposes to incorporate ``subsequent'' offenses under the
fine schedules that that [sic] correspond to the last monetary range
listed. The Exchange also proposes to change language within Rule
17.50(c)(2) to reflect findings of a person's rule violations. The
Exchange amends Interpretation and Policy .01 to Rule 17.50 to
incorporate the CRO in lieu of the BCC, where applicable. It also
deletes the term ``together'' from the phrase ``aggregated together''
in paragraphs 1 and 2, as this term is superfluous within this context,
and changes ``than'' to ``that'' in paragraph 1 to correct an existing
grammatical error. The Exchange also updates the heading to the fine
schedule under Rule 17.50(g)(7) and (g)(9) to reflect the term
``violations'', as opposed to ``infractions'', as this is more
consistent with the terminology used throughout Rule 17.50.
Purpose of Updates to Rule 17.50
In the interest of increasing efficiency surrounding the Exchange's
disciplinary process, a Hearing Panel, as opposed to the full BCC,
reviews contested fines levied under updated Rule 17.50 and determines
the manner of the review. As stated above, the Exchange believes a
Hearing Panel is most appropriately situated to review fines due to a
Hearing Panel's direct and in-depth involvement in the hearing process.
Further, the changes reflect updates to Rule 17.6 in that when a person
against whom a fine is imposed pursuant to Rule 17.50(g) requests a
hearing, a Hearing Panel will hear and decide such matter. The Exchange
also modifies language to reflect that the Exchange makes findings that
a person has committed acts in violation of its rules, rather than
findings of guilt.
The Exchange believes that removing any of the referenced referrals
to the BCC outlined in Rule 17.50(g) is consistent with CRO's authority
to initiate charges under updated Rule 17.4. The Exchange also notes
that removal of referenced referrals to the BCC comports with the
Affiliated Exchanges' corresponding rules imposing fines for minor
violations, including Rule 8.15 and Rule 25.3, which do not reference
referrals to their Hearing Panels. Specifically, the Exchange believes
that a Respondent will continue to receive appropriate discipline for
repetitive or aggregate offenses because, pursuant to Rule 17.50(a) and
(f), the Exchange has the discretion to impose a fine in lieu of
commencing a disciplinary proceeding for a violation that is minor in
nature. These provisions will continue to limit any risk that a repeat
offender of minor violations continue [sic] to pay fines under Rule
17.50, and rather, is disciplined via sanctions that are more
appropriate. Under current Chapter 17 rules, addressing 17.50(g) rule
violation through formal disciplinary proceedings requires Staff to
investigate the matter and then, if necessary, refer the matter to the
BCC with a recommendation to initiate charges. This recommendation
includes a report indicating why formal disciplinary action is
necessary (repeat violations, not minor, egregious, etc.). Under
updated Rule 17.4, however, the CRO directs the initiation of charges
thus eliminating the need for this referral process. As the CRO
receives reports from Staff pursuant to Rule 17.2(c), as well as
general reports regarding the status of regulatory matters, the CRO has
on-going knowledge of non-formal regulatory actions and minor rule
violations. The CRO works directly with Staff to address those
violations covered under Rule 17.50(g). Accordingly, the CRO is in the
best possible position to determine whether to impose a fine or
initiate formal disciplinary proceedings.
Transition Process
The Exchange intends to announce the operative date of the updates
to Chapter 17 at least 30 days in advance via a regulatory notice. To
facilitate an orderly transition from the current rules to the new
rules, the Exchange proposes to apply the current rules to all matters
where a subject has received notice of a statement of charges pursuant
to Rule 17.2(d) prior to the operative date. In terms of Rule 17.50,
any fine that [sic] imposed prior to the operative date that is
contested will continue under the existing rules. As a consequence of
this transition process, the Exchange will retain the existing
processes during the transition period until such time that there are
no longer any matters proceeding under the current rules.
To facilitate this transition process, the Exchange will retain a
transitional Chapter 17 that will contain the Exchange's rules, as they
are at the time this proposal is filed with the Commission. This
transitional Chapter 17 will apply only to matters initiated prior to
the operational date of the changes proposed herein and it will be
posted to the Exchange's public rules website. When the transition is
complete and there are no longer any TPHs or associated persons subject
to current Chapter 17, the Exchange will remove the transitional
Chapter 17 from its public rules website.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\101\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \102\ requirements that the
rules of an exchange be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, 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. Additionally, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \103\ requirement that the rules
of an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\101\ 15 U.S.C. 78f(b).
\102\ 15 U.S.C. 78f(b)(5).
\103\ Id.
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The Exchange also believes that the proposed rule is consistent
with Section 6(b)(6) of the Act,\104\ which requires the rules of an
exchange provide that its members be appropriately disciplined for
violations of the Act as well as the rules and regulations thereunder,
or the rules of the Exchange, by expulsion, suspension, limitation of
activities, functions, and operations, fine, censure, being suspended
or barred from being associated with a member, or any other fitting
sanction.
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\104\ 15 U.S.C. 78f(b)(6).
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In addition, the Exchange believes that the proposed rule change
furthers the objectives of Section 6(b)(7) of the Act,\105\ in that it
provides fair procedures for the disciplining of Trading Permit Holders
and persons associated with Trading Permit Holders, the denial of
Trading Permit Holder status to any person seeking a Trading Permit
therein, the barring of any person from becoming associated with a
Trading Permit Holder thereof, and the prohibition or limitation by the
Exchange of any person with respect to
[[Page 18890]]
access to services offered by the Exchange or a Trading Permit Holder
thereof.
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\105\ 15 U.S.C. 78f(b)(7).
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Updates to the Role of the CRO, Hearing Panel and BCC
Specifically, the Exchange believes that updating and reducing the
BCC's role in disciplinary matters to reflect that of the Affiliated
Exchanges' rules is consistent with Sections 6(b)(5) and 6(b)(6) of the
Act.\106\ The Exchange believes that replacing the BCC with groups and
processes like those of the Affiliated Exchanges will continue to
provide TPHs and associated persons with a fair investigative and
adjudicatory process. As stated, the functions currently handled
collectively by the BCC will be split between the Exchange's CRO and a
Hearing Panel, comprised of BCC members and selected by the BCC
Chairperson, creating greater autonomy between the charging and
adjudicatory aspects of the regulatory process. The Exchange believes
that the CRO is best suited to manage certain responsibilities related
to complaint and investigation, expedited proceedings, charges, summary
proceedings and judgment and sanctions. The Exchange notes that the CRO
has general supervisory responsibility over the Exchange's regulatory
operations, including the responsibility for overseeing its
surveillance, examination, and enforcement functions and for
administering any regulatory services agreements with another self-
regulatory organization to which the Exchange is a party. Further, as
stated above, the CRO regularly meets with the ROC. As such, the Board
will remain apprised of any regulatory decisions made by the CRO. The
BCC via a Hearing Panel (selected from BCC members) will continue to
manage the hearing process, as well as decisions and sanctions arising
out of the hearing process, independently from the CRO and the
Exchange's regulatory program. The Exchange also believes the proposed
changes will collectively enhance the independence and impartiality of
the overall regulatory process, which serves to protect investors and
the public interest, protect customers, issuers, brokers, or dealers
from unfair discrimination, and ensure that TPHs and associated persons
are appropriately disciplined. First, the Exchange notes that the CRO
reports directly to the ROC, remaining independent from business-side
interests of the Exchange. Second, the Exchange notes its incorporation
of Rule 17.6(a)(1) which, as proposed, requires that Hearing Panel
members function impartially and allow [sic] for their removal if a
conflict of interest arises. As a result, the Exchange believes these
changes enhance the independence and impartiality of the overall
regulatory process.
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\106\ 15 U.S.C. 78f(b)(5) and (6).
---------------------------------------------------------------------------
As stated above, where a proposed change to the rules regarding the
BCC's role is based on an existing rule of the Affiliated Exchanges,
the language of the Exchange's rules may differ from the Affiliated
Exchanges' rules to the extent necessary to conform with existing
Exchange rule text or to account for details or descriptions included
in the Exchange's rules but not in the applicable rules of the
Affiliated Exchanges. For example, the Exchange proposes to maintain a
process where the BCC Chairperson selects Hearing Panel members from a
pool of BCC members, whereas the CEO selects Hearing Panel members on
the Affiliated Exchanges. The Exchange has thus maintained differences
in its rules that account for or relate to this process. Where
possible, the Exchange has substantively mirrored the CRO's role and
the Hearing Panel's role within Affiliated Exchange rules, because
consistency across the rules will increase the understanding of the
Exchange's disciplinary process for TPHs that are also participants on
the Affiliated Exchanges, as well as result in greater uniformity, less
burdensome and more efficient regulatory processes, and appropriate,
non-discriminatory discipline. As such, the proposed rule changes will
foster cooperation and coordination with persons engaged in
facilitating transactions in securities and would remove impediments to
and perfect the mechanism of a free and open market and a national
market system. The Exchange also believes that the proposed amendments
will contribute to the protection of investors and the public interest,
as well as provide appropriate discipline and fair procedures for such
discipline, by streamlining the disciplinary process through the CRO,
who is best suited to address regulatory matters without any
conflicting business interests given the nature of the CRO's position.
Other Updates Based on the Affiliated Exchanges' Rules
The proposed amendments to update the Exchange as the adopting body
for letters of consent as its decision under Rule 17.3, the ten
business days from the receipt of summary determination that a
Respondent may notify the CRO that the Respondent desires a hearing
under Rule 17.7, the 15 business days' notice of the time and place of
a hearing under Rule 17.6, the CRO's discretion to allow for more than
two offers of settlement under Rule 17.8, and the removal of the
referral to the hearing body under the fine schedule for minor rule
violations in Rule 17.50 are substantially identical to the relevant
language and/or provisions within the corresponding rules of the
Affiliated Exchanges. The Exchange believes that these updates provide
consistency between its rules and that of the Affiliated Exchanges,
aligns certain aspects of the disciplinary processes, which protects
investors and the public interest by making it easier for participants
across the Exchange and its Affiliated Exchanges to understand the
disciplinary processes. Particularly regarding the removal of referrals
to the BCC under Rule 17.50, the Exchange believes this change is not
only consistent with the Affiliated Exchanges' minor rule violation
schedules but maintains fairness and protection of investors. As
stated, Rule 17.50 states that the Exchange may impose a fine when a
rule is minor in nature but is never required to do so, regardless of
the number of offenses by a participant. This discretion, paired with
the fact that the CRO has in-depth understanding of regulatory issues
and takes deference to the principle considerations under Rule 17.11
when determining if fines are the appropriate disciplinary mechanism,
will serve to ensure that the Exchange provides appropriate discipline
and fair procedures to do so.
The Exchange notes that in some instances the rule change does not
completely mirror its rules with that of the Affiliated Exchanges or
proposes additional language/provisions to that of the Affiliated
Exchange's existing rule language/provisions. The Exchange notes that
although in these instances it has chosen to maintain its existing
provisions or modify language of the Affiliated Exchanges' rules, it
still provides for fair disciplinary procedures or the most appropriate
discipline for violations to continue to protect investors and the
public interest. For instance, the Exchange incorporates the Affiliated
Exchange's formal reports regarding complaints into Rule 17.2(c), but
maintains that Staff submit a written report when it finds that formal
regulatory action is warranted, as well as the Staff's authority to
find that non-formal regulatory action is warranted and to impose non-
formal regulatory action, or to close a matter, without submission of a
report. The Exchange believes that maintaining Staff's discretion in
this manner continues to
[[Page 18891]]
provide for the autonomy and independence of the Exchanges' regulatory
functions, which enhances the fairness of its disciplinary procedures
and appropriate discipline and thereby enhancing protection of
investors and the public interest.\107\ The Exchange copies the
description of counsel's role (and refers specifically to BCC Counsel
as a clarification), not into its impartiality provisions like that of
the Affiliated Exchanges, but into its general provision for parties to
a hearing. The Exchange believes this is a clarifying change as the BCC
Counsel assists the Hearing Panel throughout the hearing process. The
Exchange also adds language to make explicit that the Hearing Panel
member who is the subject of the motion is excluded from the ruling on
such motion, and adds a provision for recusal of a Hearing Panel member
when they determine that they have a conflict or bias. The Exchange
believes that such additional language enhances the procedural fairness
of the current impartiality rules copied from the Affiliated Exchanges,
thereby protecting investors and the public interest. Additionally, the
Exchange incorporates the Affiliated Exchange's ex parte rules, while
maintaining its provisions defining ex parte communications and ``no
violations'' of the ex parte rules. The Exchange believes these
provisions will continue to provide better understanding for all
parties regarding ex parte communications, thereby protecting investors
and the public interest and ensuring fair disciplinary proceedings
throughout.
---------------------------------------------------------------------------
\107\ Additionally, the CRO directly oversees and manages Staff,
therefore, the CRO will maintain general supervision over this
process.
---------------------------------------------------------------------------
Additional Proposed Changes
The Exchange believes that extending the time periods associated
with submitting a written response to allegations of rule violations,
submitting an Answer in response to formal charges, and extending the
time period prior to a hearing parties are required to submit
documentary evidence is consistent with the protection of investors.
The proposed time extensions are also consistent in providing fair
procedures for disciplining TPHs and persons associated with TPHs, as
well as ensuring that the Exchange administers appropriate discipline.
The Exchange believes that due to the increased complexity of Exchange
trading activity and the regulatory investigations and examinations
surrounding such activity, extending the time period from 15 days to 25
days for a Subject's response to a notification of alleged violations
and for a Respondent's answer to charges, as well as extending time for
parties to furnish evidence prior to a hearing from five to 10 business
days, serves to protect investors by allowing more time for these
parties to respond during various phases of the proceedings. The
additional time will also serve to ensure fair procedures, that the
Exchange administers appropriate discipline by allowing subjects to
prepare more comprehensive and effective written statements in their
defense, and better Subject and/or Respondent cooperation with the
Exchange. As stated, this changed is based on the Rules of NYSE,\108\
FINRA,\109\ and PHLX.\110\
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\108\ See supra note 86.
\109\ See supra note 87.
\110\ See supra note 88.
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Further, the Exchange believes tolling the applicable periods while
a Subject or a Respondent's request for access to the investigative
file similarly serves to protect investors and ensure fair disciplinary
procedures and the administration of appropriate discipline. As with
the extension of time periods, the Exchange believes tolling those same
periods while access to relevant information in the investigative file
is pending will provide TPHs and associated persons with adequate time
to craft reasoned and complete responses to regulatory inquires. As a
result, this serves to foster cooperation and coordination with persons
engaged in regulating securities, protect investors by serving in the
interest of fairness to Subjects and Respondents, and provide for
appropriate discipline for violations of the Act and Exchange rules.
Any delay to the regulatory process caused by extending the applicable
time periods is mitigated by the increased efficiency resulting from
the other rule updates and the fact that Staff no longer needs to
process extensive extension requests under Rule 17.13.
The Exchange believes that the proposed removal of automatic review
of a Hearing Panel's decision by the majority of the BCC and of the
Board's review of a decision not to initiate charges will streamline
the various stages of the proceedings under Chapter 17, while ensuring
that the decision as a result of a hearing and the decision not to
initiate charges is determined by the persons best suited to make such
decisions. The Exchange believes the Hearing Panel members are best
suited to make a final hearing decision as those individuals
participate directly in the hearing, hear all of the evidence
firsthand, and are able to consummate a verdict based on that firsthand
knowledge. The Exchange also believes that proposed Rule 17.6(a)(1)-
(a)(3) guarantees impartiality of Hearing Panel members. As a result,
the decision by the Hearing Panel of either three or five members will
be the best-informed and most impartial decision, thus eliminating need
for review by a majority of the BCC while providing adequate procedural
protections. Likewise, the Exchange believes the CRO is best suited to
determine whether to initiate charges when recommended by Staff, as the
CRO directly oversees all regulatory activities and receives periodic
updates regarding investigative matters. Unlike the current role of the
BCC, the CRO reports and responds directly to the ROC. The Exchange
believes that because the CRO provides regular reports as to the status
of regulatory matters and decisions pertaining to such matters to the
ROC and, in turn, because the ROC may direct the CRO to take certain
regulatory action if they deem necessary, the ROC's application to the
Board for review of the CRO's decision not to initiate charges is not
essential to the disciplinary process. Rather, the Exchange believes
that removing the ROC's application for Board review of such decisions
will provide for a more efficient, streamlined disciplinary process,
while ensuring a fair process through the CRO and the direct reporting
line between the CRO and the ROC. As a result, the Exchange believes
that removing these review processes will not unfairly prejudice any
party during these proceedings, which will protect investors throughout
the disciplinary process and allow the Exchange to determine the most
appropriate sanctions. Removing these processes will eliminate
unnecessary redundancies in the disciplinary process, which will also
protect investors and foster cooperation and coordination with persons
engaged in regulating securities.
The Exchange also believes that certain changes and updates to its
disciplinary rules serve specifically in the interest of fairness and
expediency. For example, the proposed videotaped responses protect
investors by allowing Subjects to respond more easily to notice of an
initiated investigation, especially in such a globalized, technology-
centric industry. Similarly, changes such as allowing the Hearing Panel
the discretion to grant leave to the parties to a hearing in order to
present an offer of settlement also protects investors and public
interest, while
[[Page 18892]]
reducing the burden that once a hearing is scheduled the parties may no
longer present offers of settlement to the CRO.
The Exchange believes that the proposed change providing that a
Hearing Panel be comprised of three or five BCC members protects
investors and ensures procedural fairness because it will safeguard
against interlocutory decisions and also allow for more (five) Hearing
Panel members when necessary to hear complex matters. The Exchange also
believes that the proposed changes to the service of notice provision
that adds three days when calculating the time for response to the
extent service is made by registered or certified mail protects
investors and provides adequate procedural protections by ensuring that
a Respondent is not penalized in responding to notices, charges or
other documentation while such documentation is in transit.
Additionally, the Exchange updates language throughout Chapter 17 and
makes other clarifying changes. For example, incorporating that the CRO
direct Staff to prepare and issue statements of charges or decisions
not to initiate charges [sic]; a practice currently in place between
the Staff and the BCC. Also, for example, incorporating that a decision
containing sanctions shall include a statement of the sanctions imposed
and the reasons therefor will enable better understanding for all
parties of sanctions and why such sanctions are imposed. Such updates
and clarifications will serve to reduce confusion and provide a better
understanding to TPHs, associated persons, and the Exchange staff of
the regulatory processes.
Finally, the Exchange believes that its proposed transition plan
would allow for a more orderly and less burdensome transition for the
Exchange's TPHs. The proposed application of current rules to all
matters where a subject has received notice of a statement of charges
pursuant to Rule 17.2(d) prior to the operative date provides a clear
demarcation between matters that would proceed under the new rules and
those that would be completed under the current rules.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule changes will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended. The
proposed rule changes are not intended to address competitive issues,
but rather, are concerned with facilitating less burdensome regulatory
compliance and processes and enhancing the quality of the regulatory
processes. The Exchange believes the proposed rule changes reduce the
burdens within the disciplinary process equally on all market
participants.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not:
A. Significantly affect the protection of investors or the public
interest;
B. impose any significant burden on competition; and
C. become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \111\ and
Rule 19b-4(f)(6) \112\ thereunder. At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend 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. If the Commission takes such action, the
Commission will institute proceedings to determine whether the proposed
rule change should be approved or disapproved.
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\111\ 15 U.S.C. 78s(b)(3)(A).
\112\ 17 CFR 240.19b-4(f)(6).
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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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2019-025 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2019-025. This file
number should be included on the subject line if email 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 website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CBOE-2019-025, and should be submitted
on or before May 23, 2019.
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\113\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\113\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-08912 Filed 5-1-19; 8:45 am]
BILLING CODE 8011-01-P
