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Self-Regulatory Organizations; Order Approving Proposed Rule Change and Amendment Nos. 1 and 2 Thereto by the Chicago Board Options Exchange, Inc. to Make Certain Changes Pertaining to the Enforcement of Trading Conduct and Decorum Policies

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Start Preamble November 13, 2002.

On July 15, 2002, the Chicago Board Options Exchange, Inc. (“CBOE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) [1] and rule 19b-4 thereunder,[2] a proposed rule change relating to the enforcement of trading conduct and decorum policies. On August 30, 2002, CBOE submitted Amendment No. 1 to the proposed rule change.[3] On September 17, 2002, CBOE submitted Amendment No. 2 to the proposed rule change.[4] The proposed rule change, as amended, was published for comment in the Federal Register on October 11, 2002.[5] The Commission received no comments on the amended proposal. This order approves the proposed rule change, as amended.

The Exchange proposes to amend CBOE rule 6.20(c) (Admission to and Conduct on the Trading Floor—Fines Imposed by Floor Officials) to authorize two Floor Officials, in consultation with a designated senior executive officer of the Exchange, to summarily exclude a member or person associated with a member from the Exchange premises for not longer than the remainder of the trading day for any violation of the Exchange's trading conduct and decorum policies that is classified as a Class A offense, except for those Class A offenses specified by Exchange Regulatory Circulars [6] as not qualifying the offender for summary exclusion. The proposed rule will enable an excluded member or associated person to request reinstatement to the Trading Floor from Floor Officials after a sufficient “cooling off period” has elapsed.

Class A offenses are the most serious offenses regarding trading conduct and decorum policies, including but not limited to, violations such as physical violence (e.g., shoving or fighting), unbusinesslike conduct,[7] harassment, failure to abide by a floor official determination, or property damage. Most Class A offenses affect the safety or security of personnel and/or property on the Exchange in ways that may be ameliorated by temporarily excluding the offender from Exchange premises. The Exchange also proposes that members be summarily excluded from Exchange premises for enabling or assisting a suspended member or associated person to gain improper access to the floor, and failing to supervise a visitor. As specified in the proposed Regulatory Circular, the Exchange proposes to distinguish three Class A offenses as not qualifying the offender for summary exclusion. These are (1) Failure to Attend Exchange Mandated Educational Training; (2) Effecting or Attempting to Effect a Transaction with No Public Outcry; and (3) Violation of CBOE Rule 8.51 (Firm Quote). According to the Exchange, it did not classify these offenses as qualifying for summary expulsion because it believes that, unlike the other Class A offenses, they do not raise Start Printed Page 70276significant issues of safety or security at the Exchange.

The Exchange also proposes to amend CBOE rule 17.50(g)(6) (Imposition of Fines for Minor Rules Violations—Violations of Trading Conduct and Decorum Policies) to reflect the incorporation into the fine policies of specified higher fine levels for “subsequent” offenses. For example, the amended provision would enable the imposition of the fine authorized for a Class A “subsequent” offense to be imposed for a first, second or third Class A offense, if such is deemed warranted under the circumstances in the view of two Floor Officials.[8] Generally, however, the two Floor Officials will impose fines based upon the number of the offense that has occurred within a rolling 12-month period, except for Firm Quote violations, which will have a 24-month look back period.

Finally, the Exchange proposes to include in the proposed Regulatory Circular the fines that may be imposed under CBOE rule 17.50 for violations of CBOE rule 6.20.[9] Any person against whom a fine is imposed pursuant to CBOE rule 17.50(g) may contest that fine before the applicable CBOE Committee.[10]

The Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange [11] and, in particular, the requirements of section 6 of the Act [12] and the rules and regulations thereunder. Specifically, the Commission finds that the proposed rule change is consistent with sections 6(b)(5) [13] and 6(b)(7) [14] of the Act because the proposed rule change should protect investors and the public interest by enhancing the effectiveness and fairness of the Exchange's disciplinary procedures.

In particular, the Commission believes having the authority to temporarily exclude disruptive or potentially dangerous rule violators from the Exchange premises should assist the Exchange in defusing volatile situations, safeguarding trading floor personnel and facilities, and minimizing disruptions to the maintenance of fair and orderly markets. The Commission also believes the new Regulatory Circular sets forth appropriate fine levels for violations of Trading and Decorum Policies, which should deter violations of the Exchange's rules.

It is therefore ordered, pursuant to section 19(b)(2) of the Act,[15] that the proposed rule change (SR-CBOE-2002-39), as amended, is approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[16]

Start Signature

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See form 19b-4 received on August 30, 2002 (“Amendment No. 1”).

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4.  See letter from Christopher R. Hill, Attorney II, Legal Division, CBOE, to Nancy Sanow, Division of Market Regulation (“Division”), Commission, dated September 16, 2002 (“Amendment No. 2”).

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5.  See Securities Exchange Act Release No. 46600 (October 4, 2002), 67 FR 63480.

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6.  Currently, only the proposed Regulatory Circular specifies which Class A offenses do, and which Class A offenses do not qualify the offender for summary exclusion. CBOE will file any additional Regulatory Circulars that specify which Class A offenses do or do not qualify the offender for summary exclusion with the Commission as a proposed rule change. Telephone call between Christopher R. Hill, Attorney II, Legal Division, CBOE, and Jennifer Lewis, Attorney, Division, Commission, on November 13, 2002.

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7.  In general, “unbusinesslike conduct” is conduct, other than harassment, that disrupts trading. Telephone call between Christopher R. Hill, Attorney II, Legal Division, CBOE, and Jennifer Lewis, Attorney, Division, Commission, on September 30, 2002.

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8.  The amended provision would also enable the imposition of the fine authorized for a Class B “subsequent” offense to be imposed for a first or second Class B offense, if such is deemed warranted under the circumstances in the view of two Floor Officials.

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9.  The proposed Regulatory Circular will supersede and replace current CBOE Regulatory Circular RG 98-123. The proposed Regulatory Circular does not include three types of offenses that were set forth in Regulatory Circular RG 98-123: Disruptive Announcements of Stock Prints, Failure to Abide by Floor Official Request for Information; and Book Priority Determinations. According to the Exchange, these offenses are either no longer necessary or covered by other rules.

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10.  See paragraph (4) of the proposed Regulatory Circular.

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11.  In approving this proposed rule change, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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[FR Doc. 02-29540 Filed 11-20-02; 8:45 am]

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