
[Federal Register Volume 79, Number 1 (Thursday, January 2, 2014)]
[Notices]
[Pages 169-173]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-31366]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71190; File No. SR-CBOE-2013-126]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Relating to 
Supervision

December 26, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on December 18, 2013, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been substantially 
prepared by the Exchange. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to adopt a rule requiring each Trading Permit Holder 
(``TPH'') to establish and maintain a system of supervision and written 
supervisory procedures. The text of the proposed rule change is 
available on the Exchange's Web site at http://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 the proposed rule change and 
discussed any comments it received on the

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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
    Effective and comprehensive compliance policies and procedures and 
supervisory systems are critical to investor protection and market 
integrity; therefore, the Exchange proposes to adopt Rule 4.24 that 
would require its TPHs to establish and maintain a system to supervise 
each of their business activities and the activities of their 
associated persons.\3\ As more fully described below, the proposed rule 
would also require TPHs to: (1) establish, maintain, and enforce 
written supervisory procedures; (2) inspect every office or location of 
the TPH at least once every three calendar years; and (3) conduct an 
annual review and submit to the Exchange on an annual basis a written 
report on the TPH's supervision and compliance efforts during the 
preceding year.
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    \3\ Article 1, Section 1.1(f) of the Exchange's Bylaws defines 
``Trading Permit Holder'' to mean ``any individual, corporation, 
partnership, limited liability company or other entity authorized by 
the Rules that holds a Trading Permit.'' The proposed rule would 
also apply to CBOE Stock Exchange (``CBSX'') Trading Permit Holders. 
CBSX is CBOE's stock trading facility.
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    The Exchange does not currently have a comprehensive rule that 
directly addresses the obligation of every TPH to properly supervise 
its business and employees. The proposed rule would impose a more 
definitive supervision requirement on TPHs than is currently contained 
in the Exchange's rules, and would cover all business activities of a 
TPH.\4\
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    \4\ The proposed rule is modeled after similar rules of other 
self-regulatory organizations (``SROs''), i.e., PHLX Rule 748, NASD 
Rule 3010, FINRA Rule 3130, NYSE Amex Rule 320, NYSE Rule 342, and 
NYSE Arca Rule 11.18.
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    Currently, the only supervision obligations that are expressly 
codified in CBOE Rules are found in Rule 4.2--Adherence to Law and Rule 
9.8--Supervision of Accounts. Rule 4.2 reads as follows:

    No Trading Permit Holder shall engage in conduct in violation of 
the Securities Exchange Act of 1934, as amended, rules or 
regulations thereunder, the Bylaws or the Rules of the Exchange, or 
the Rules of the Clearing Corporation insofar as they relate to the 
reporting or clearance of any Exchange transaction, or any written 
interpretation thereof. Every Trading Permit Holder shall so 
supervise persons associated with the Trading Permit Holder as to 
assure compliance therewith.

    While it requires a TPH to supervise persons associated with the 
TPH, Rule 4.2 does not expressly require a system of supervision, or 
written procedures covering each line of business to be established and 
maintained The proposed rule would clearly place responsibility on TPHs 
to establish and maintain a formal plan of supervision that covers each 
of its business activities and associated persons.
    CBOE Rule 9.8, a component of Chapter 9--Doing Business with the 
Public, is applicable only to TPHs conducting non-TPH customer business 
in options. The proposed rule would mirror many of the requirements in 
Rule 9.8, in that Rule 9.8 requires TPHs to: (1) establish, maintain, 
and enforce written supervisory procedures; (2) conduct office 
inspections; and (3) conduct an annual review and submit to the 
Exchange an annual written report on the TPH's supervision and 
compliance efforts during the preceding year. However, the proposed 
rule would not be limited to supervision of activities related only to 
TPHs conducting non-TPH customer business in options. Therefore, the 
proposed rule would provide greater utility for enforcing TPH 
obligations for other business areas such as proprietary trading.
    The Exchange believes the proposed rule would clarify: (1) the 
responsibility of the TPH for the acts of its associated persons; and 
(2) the requirement of each TPH to supervise those associated persons 
for which it is responsible. Proposed Rule 4.24(a) would generally 
establish each TPH's responsibility for the supervision and control of 
the TPH. The proposed rule would also require that each associated 
person, in addition to each office, location, department, business 
activity, trading system, and internal surveillance system of a TPH, be 
under the supervision and control of an appropriately qualified 
supervisor as described in proposed Rule 4.24(c).\5\
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    \5\ Proposed Rule 4.24(a) is modeled after PHLX Rule 748(a), 
NYSE MKT Rule 320(b), NYSE Rule 342(a), NYSE Arca Rule 11.18(b) and 
NASD Rule 3010(a).
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    Proposed Rule 4.24(b) would provide for the designation of a 
general partner or principal executive officer to assume overall 
authority and responsibility for the supervisory system of the TPH. 
This designee would then be responsible for: (1) Delegating to 
qualified principals responsibility and authority for supervision and 
control of each office, location, department, business activity, 
trading system, and internal surveillance system, as well as providing 
for appropriate written procedures of supervision and control; and (2) 
establishing a separate system of follow-up and review to determine 
that the delegated responsibility and authority is properly 
exercised.\6\
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    \6\ Proposed Rule 4.24(b) is modeled after PHLX Rule 748(b), 
NYSE MKT Rule 320(c), NYSE Rule 342(b) and NASD Rule 3010(a).
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    Proposed Rules 4.24(c) and (d) would provide for the qualifications 
of supervisors and the standards of supervision, respectively. Under 
proposed paragraph (c), TPHs would have to make reasonable efforts to 
determine that those persons with supervisory control, as described in 
proposed Rules 4.24(a) and (b), are qualified by virtue of experience 
or training to carry out their assigned responsibilities. This 
paragraph would also require supervisors to meet the Exchange's 
qualification requirements for supervisors, including completion of the 
appropriate examinations.\7\ For example, CBOE Rule 3.6A--Qualification 
and Registration of Trading Permit Holders and Associated Persons sets 
forth required examinations for associated persons engaged in the 
securities business of a TPH. Proposed paragraph (d) would require that 
any person with supervisory control, as described in proposed Rules 
4.24(a) and (b), reasonably discharge his or her duties and obligations 
in connection with such supervision and control in order to prevent and 
detect violations of applicable securities laws and regulations and 
applicable Exchange rules.\8\
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    \7\ Proposed Rule 4.24(c) is modeled after NASD Rule 3010(a)(6) 
and PHLX Rule 748(c).
    \8\ Proposed Rule 4.24(d) is modeled after PHLX Rule 748(d), 
NYSE MKT Rule 320(b) and NYSE Rule 342(a).
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    Proposed Rule 4.24(e) would require each TPH to establish, 
maintain, and enforce written supervisory procedures, and a system for 
applying such procedures, to supervise each of its business activities 
and the activities of its associated persons that are reasonably 
designed to achieve compliance with applicable securities laws and 
regulations as well as applicable Exchange rules. The proposed rule 
would also require that the written supervisory procedures be amended 
as changes occur to a TPH's personnel or supervisory procedures and 
within a reasonable time after changes occur in applicable securities 
laws and regulations and the rules of the Exchange. Additionally, the 
proposed

[[Page 171]]

rule would require TPHs to maintain a record of the name, title, 
registration status and location of all supervisory personnel required 
by the proposed rule, the dates for which supervisory designations were 
or are effective, and the responsibilities of the supervisory personnel 
as these relate to the types of business the TPH engages in, and 
applicable securities laws and regulations, including applicable 
Exchange rules. TPHs would be required to preserve such record for a 
period of not less than three years, the first two in an easily 
accessible place. Lastly, the proposed rule would require a copy of the 
written supervisory procedures to be kept and maintained at each 
location where supervisory activities are conducted on behalf of the 
TPH.\9\
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    \9\ Proposed Rule 4.24(e) is modeled after PHLX Rule 748(h) and 
NASD Rule 3010(b)(1), (3) and (4).
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    Proposed Rule 4.24(f) would require that each TPH perform 
inspections of every office or location of the TPH at least once every 
three calendar years. An inspection could not be conducted by any 
person within that office or location who has supervisory 
responsibilities or by any individual who is directly or indirectly 
supervised by such person(s). This provision is intended to help ensure 
that all activity of an office or location is monitored for compliance 
with applicable regulatory requirements by persons who do not have a 
personal interest in such activity. The proposed rule would require the 
examination schedule and an explanation of the factors considered in 
determining the frequency of the examinations in the cycle to be set 
forth in the TPH's written supervisory procedures. When establishing 
the inspection cycle, the TPH would be required to consider the nature 
and complexity of the securities activities for which the office or 
location is responsible, the volume of business done, and the number of 
associated persons at each office or location. For each inspection, the 
TPH would be required to retain a written record of the dates upon 
which each inspection is conducted, the participants involved, and the 
results thereof.\10\
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    \10\ Proposed Rule 4.24(f) is modeled after PHLX Rule 748(g) and 
NASD Rules 3010(c)(1)(B) and (c)(3).
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    As noted above, effective and comprehensive compliance policies and 
procedures and supervisory systems are key to investor protection and 
market integrity. Therefore, it is essential that TPHs put adequate 
emphasis on the importance of compliance throughout the firm. To 
promote regular discussion and review of its supervisory system, 
proposed Rule 4.24(g) would require each TPH to conduct an annual 
review and submit to the Exchange on an annual basis a written report 
on the TPH's supervisory system.
    Paragraph (g)(1) of proposed Rule 4.24 would require that each TPH 
conduct annual meetings or interviews with all associated persons to 
discuss compliance matters relevant to their activities. The TPH would 
be required to maintain a written record of the dates the meetings or 
interviews were held, who was present at each meeting or interview, and 
the results thereof.\11\
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    \11\ Proposed Rule 4.24(g)(1) is modeled after PHLX Rule 
748(e)(1).
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    Proposed Rule 4.24(g)(2) would require TPHs to prepare a written 
report on the firm's supervision and compliance efforts during the 
preceding year and on the adequacy of the firm's ongoing compliance 
processes and procedures. TPHs would be required to submit such report 
to the Exchange by April 1 of each year. The proposed Rule would 
require that the report include four elements: (1) a tabulation of 
customer complaints (including arbitrations and civil actions) and 
internal investigations, if any; (2) identification and analysis of 
significant compliance problems, plans for future systems or procedures 
to prevent and detect violations and problems, and an assessment of the 
preceding year's efforts of this nature; (3) discussion of the 
preceding year's compliance efforts, new procedures, educational 
programs, etc. in the areas of antifraud and trading practices, books 
and records, finance and operations, supervision, internal controls, 
and anti-money laundering; and (4) a certification signed by the TPH's 
Chief Executive Officer (``CEO'') or equivalent officer.\12\
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    \12\ Proposed Rule 4.24(g)(2) is modeled after CBOE Rule 
9.8(g)(1)-(5).
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    The certification signed by the TPH's CEO (or equivalent officer) 
would be required to include four components, the last three of which 
would be intended to foster regular and significant interaction between 
senior management and the Chief Compliance Officer (``CCO'') regarding 
the TPH's comprehensive compliance program:
    The first component relates to requirements found in paragraph (e) 
of the proposed rule.\13\ Specifically, the CEO (or equivalent officer) 
would be required to certify that the TPH has in place processes to: 
(1) establish and maintain policies and procedures reasonably designed 
to achieve compliance with applicable Exchange rules and federal 
securities laws and regulations; (2) modify such policies and 
procedures as business, regulatory and legislative changes and events 
dictate; and (3) test the effectiveness of such policies and procedures 
on a periodic basis.\14\
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    \13\ See Proposed Rule 4.24(g)(2)(D)(i).
    \14\ Proposed Rule 4.24(g)(2)(D)(i) is modeled after FINRA Rule 
3130(c)(1) and CBOE Rule 9.8(g)(5)(i).
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    The second component would require the CEO (or equivalent officer) 
to certify that he or she conducted one or more meetings with the 
firm's CCO during the preceding 12 months in which they discussed and 
reviewed the matters described in the certification, including the 
TPH's prior compliance efforts.\15\ The CEO (or equivalent officer) and 
CCO would also be required to identify and address any significant 
compliance problems or plans for emerging business areas.\16\
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    \15\ See Proposed Rule 4.24(g)(2)(D)(ii).
    \16\ Proposed Rule 4.24(g)(2)(D)(ii) is modeled after FINRA Rule 
3130(c)(2) and CBOE Rule 9.8(g)(5)(ii).
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    The third component of the certification would require the CEO (or 
equivalent officer) to certify that he or she reviewed a report 
evidencing the processes covered in the first component of the 
certification.\17\ This report would also be reviewed by the CCO and 
such other officers as the TPH deems necessary in order for the CEO to 
make the required certification. Further, the CEO would be required to 
certify that the report was submitted to the TPH's board of directors 
or audit committee by April 1st of each year. If a TPH does not utilize 
these types of governing bodies in the conduct of its business, the TPH 
would be required to have the report reviewed by any governing body or 
committee that serves a similar function in lieu of a board of 
directors or audit committee.\18\
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    \17\ See Proposed Rule 4.24(g)(2)(D)(iii).
    \18\ Proposed Rule 4.24(g)(2)(D)(iii) is modeled after FINRA 
Rule 3130(c)(3) and CBOE Rule 9.8(g)(5)(iii).
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    The fourth component of the certification \19\ would require the 
CEO (or equivalent officer) to certify that he or she consulted with 
the CCO and other officers referenced in proposed Rule 
4.24(g)(2)(D)(iii) and other such employees, outside consultants, 
lawyers and accountants, to the extent he or she deems appropriate, in 
order to attest to the statements made in the certification.\20\
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    \19\ See Proposed Rule 4.24(g)(2)(D)(iv).
    \20\ Proposed Rule 4.24(g)(2)(D)(iv) is modeled after FINRA Rule 
3130(c)(4) and CBOE Rule 9.8(g)(5)(iv).
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    Finally, proposed paragraph (g)(3) would deem any TPH to have met 
the requirements of proposed Rules 4.24(g)(1) and (2) if the TPH 
specifically includes its options compliance

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program within an annual compliance review and written report that 
complies with substantially similar requirements of the Financial 
Industry Regulatory Authority, Inc. or any other SRO.\21\ In that case, 
the TPH would still be required to submit a copy of such written report 
to the Exchange by April 1 of each year.
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    \21\ Proposed Rule 4.24(g)(3) is modeled after CBOE Rule 
9.8(g)(5).
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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.\22\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) of the Act,\23\ which requires 
that the rules of an exchange be designed to, among other things, 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, in general, to protect 
investors and the public interest.
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    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(5).
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    Compliance with applicable Exchange rules and federal securities 
laws is the bedrock of investor protection and market integrity. 
Therefore it is critical that TPHs employ comprehensive and effective 
compliance policies and procedures. The Exchange believes the proposed 
rule change would help promote just and equitable principles of trade 
and protect investors and the public interest by upgrading and 
strengthening the Exchange's rules pertaining to supervisory 
obligations of its TPHs.
    TPHs are on the front line of defense against fraudulent and 
manipulative acts and practices. TPHs are in the unique position to 
identify potential rule violations or other inappropriate activity and 
correct it before intervention by the exchanges or the Commission. The 
Exchange believes a comprehensive supervision rule such as proposed 
Rule 4.24 should help to prevent fraudulent and manipulative acts and 
practices consistent with Section 6(b)(5) of the Act.
    The Exchange believes that the proposed rule change should 
strengthen the Exchange's ability to examine TPHs for compliance with 
supervisory requirements by compelling that written supervisory 
procedures be maintained. Written supervisory procedures should provide 
TPHs and their supervisory personnel with a clear understanding of 
their supervisory responsibilities thus helping to ensure that those 
responsibilities are carried out effectively and efficiently. The 
Exchange also believes the proposal to require inspections of offices 
or other locations of TPHs would help strengthen the ability of TPHs to 
carry out their compliance and surveillance functions. By requiring 
written supervisory procedures and inspections that are reasonably 
designed to prevent and detect violations of applicable securities laws 
and regulations, as well as Exchange rules, the proposed rule would 
help to ensure that TPHs have the necessary processes in place to 
identify potential rule violations or inappropriate activity.
    Furthermore, the Exchange believes the proposed requirements for an 
annual certification and written report would enhance focus on a TPH's 
compliance and supervision systems by promoting a dialogue throughout 
the TPH of its compliance efforts and procedures, thereby decreasing 
the likelihood of fraudulent and manipulative acts and practices and 
increasing investor protection.
    Lastly, the Exchange believes the proposed rule change furthers the 
objectives of Section 6(b)(1) \24\ of the Act, which provides that the 
Exchange must be organized and have the capacity to be able to carry 
out the purposes of the Act and to enforce compliance by the Exchange's 
TPHs and persons associated with its TPHs with the Act, the rules and 
regulations thereunder, and the rules of the Exchange. Requiring 
comprehensive supervision by TPHs and their associated persons of their 
activities should promote the Exchange's ability to enforce compliance 
by TPHs and their associated persons with the Act and the regulations 
thereunder.
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    \24\ 15 U.S.C. 78(f)(b)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes the 
proposed rule change would upgrade and strengthen the Exchange's rules 
pertaining to supervisory obligations of its TPHs. As noted below, the 
proposed rule change is based on similar rules of other SROs.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. by order approve or disapprove such 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2013-126 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2013-126. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the

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public in accordance with the provisions of 5 U.S.C. 552, will be 
available for Web site 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 
the filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-CBOE-2013-126 and should be submitted on or before 
January 23, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
Lynn M. Powalski,
Deputy Secretary.
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    \25\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2013-31366 Filed 12-31-13; 8:45 am]
BILLING CODE 8011-01-P


