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Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto by the Chicago Board Options Exchange, Inc. Relating to Marketing and Administrative Fees

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Start Preamble July 31, 2001.

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 June 18, 2001, the Chicago Board Options Exchange, Inc. (“CBOE”) filed with the Securities and Exchange Commission the proposed rule change as described in Items, I, II, and III below, which Items the CBOE has prepared. The CBOE submitted Amendment No. 1 to the proposed rule change on July 20, 2001. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

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

The CBOE proposes to deduct a one-time supplemental administrative charge from fiscal year 2000 interest payments to the marketing fee accounts of Designated Primary Market Makers (“DPMs”) to offset some of the administrative costs that the CBOE incurred in fiscal year 2000 in paying interest and issuing rebates on marketing fee account balances.Start Printed Page 41282

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 CBOE included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The CBOE has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.

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

In August 2000, the CBOE instituted a marketing fee program that imposed a $.40 per contract marketing fee on various options transactions executed on the CBOE. Under the plan, the proceeds from the fee were to be used by the appropriate DPM for marketing its services and attracting order flow to the CBOE.[3] The funds have been placed in separate accounts for each DPM according to the class of options involved in each transaction in which the fee was imposed. The fees collected in a particular class of option are applied only to the marketing expenses applicable to that class of option.

At times, some accounts have taken in more money than the DPMs have chosen to spend for marketing. The CBOE has implemented a one-time rebate of excess funds to the DPMs and market makers who contributed the funds. The CBOE intends periodically to refund account balances of $50 or more to those who contributed the fees.[4]

In collecting these fees over the course of the program, the CBOE found that the proceeds from the fee are typically received into separate DPM accounts and kept there for at least several days before the DPM uses them. At the request of the association representing the CBOE's DPMs, the CBOE has credited the accounts with interest earned retroactive to the start of the program, based on the average daily balance of each DPM account. According to the CBOE, the calculation and administration of interest payments and rebates requires it to make substantial expenditures on an ongoing basis. Therefore, effective July 1, 2001, the CBOE has imposed a prospective monthly $10,000 administrative fee to fund the implementation of these steps and to offset the overall costs related to its marketing fee program. The CBOE intends to reduce the aggregate interest payments to members by each member's pro rata share of the $10,000 per month administrative fee. According to the CBOE, this procedure will ensure that the fee is assessed to the various DPM accounts fairly, based on the relative size of each DPM account.[5]

The CBOE states that it has already incurred costs in excess of $10,000 per month in fiscal year 2000 to establish the payment of interest and issuance of rebates under the marketing fee program. In order to offset some of these costs, the CBOE proposes in this rule change proposal to offset the interest to be credited to the DPM accounts for fiscal year 2000 account balances by deducting an additional one-time supplemental administrative charge of $120,000.[6] As with the prospective administrative fee, the charge will be divided among the accounts of the various DPM trading stations trading equity options (currently numbering approximately 68) on a pro-rata basis according to the size of the accounts.

The CBOE believes that the proposed rule change is consistent with section 6(b) of the Act [7] and furthers the objectives of section 6(b)(4) of the Act [8] in that it is designed to provide for the equitable allocation of reasonable dues, fees, and other changes among CBOE members.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others

The CBOE neither solicited nor received comments with respect to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Within 35 days of the publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will:

A. By order approve the proposed rule change, or

B. Institute proceedings to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at the principal office of the CBOE. All submissions should refer to SR-CBOE-2001-35 and should be submitted by August 22, 2001.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[9]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


3.  Securities Exchange Act Release No. 43112 (August 3, 2000) 65 FR 49040 (August 10, 2000) (File No. SR-CBOE-2000-28).

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6.  The CBOE arrived at the $120,000 figure by taking the $10,000 per month prospective administrative fee that became effective upon the filing of SR-CBOE-2001-25 and multiplying it by the twelve months of fiscal year 2000. See letter from Christopher R. Hill, Attorney, CBOE, to Nancy Sanow, Assistant Director, Commission, dated July 19, 2001.

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[FR Doc. 01-19701 Filed 8-6-01; 8:45 am]