
[Federal Register Volume 79, Number 30 (Thursday, February 13, 2014)]
[Notices]
[Pages 8771-8775]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-03132]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71513; File No. SR-CBOE-2013-100]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change Relating 
to CBSX Trading Permit Holder Eligibility

February 7, 2014.

I. Introduction

    On October 23, 2013, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to add Rule 50.4A to the rules of 
the CBOE Stock Exchange, LLC (``CBSX'').\3\ The proposed rule change 
was published for comment in the Federal Register on November 12, 
2013.\4\ The Commission received four comment letters on the 
proposal.\5\ CBOE responded to the comments on December 20, 2013.\6\ On 
December 20, 2013, the Commission extended the time period for 
Commission action to February 10, 2014.\7\ This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ CBSX is a stock execution facility of CBOE.
    \4\ See Securities Exchange Act Release No. 70806 (November 5, 
2013), 78 FR 67424 (``Notice'').
    \5\ See letter from Chris Concannon, Executive Vice President, 
Virtu Financial BD, LLC, to Elizabeth M. Murphy, Secretary, 
Commission, dated November 11, 2013 (``Virtu Letter''); letter from 
Martin H. Kaplan, Gusrae Kaplan Nusbaum PLLC, to Kevin M. O'Neill, 
Deputy Secretary, Commission, dated November 18, 2013 (``Gusrae 
Kaplan Nusbaum Letter''); letter from James Ongena, General Counsel, 
Chicago Stock Exchange, Inc., to Elizabeth M. Murphy, Secretary, 
Commission, dated December 3, 2013 (``CHX Letter''); and letter from 
Mary Ann Burns, Chief Operating Officer, Futures Industry 
Association, to Elizabeth M. Murphy, Secretary, Commission, dated 
December 3, 2013 (``FIA Letter'').
    \6\ See letter from Corinne Klott, Attorney, CBOE, to Elizabeth 
M. Murphy, Secretary, Commission, dated December 20, 2013 (``CBOE 
Letter'').
    \7\ See Securities Exchange Act Release No. 71152, 78 FR 79035 
(December 27, 2013).
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II. Description of the Proposal

    The Exchange proposes to adopt Rule 50.4A regarding eligibility for 
CBSX Trading Permit Holders. Proposed Rule 50.4A provides that a CBSX 
Trading Permit Holder (``TPH'') may become or remain a CBSX TPH only if 
it is a member of a national securities association.\8\ All CBSX TPHs 
would have six months from the approval of the rule filing to become a 
member of a national securities association. The proposed rule also 
provides that CBSX will terminate, upon written notice, the TPH status 
of any CBSX TPH that fails to meet this requirement.
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    \8\ Currently, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') is the only registered national securities association. 
CBOE states that this proposal furthers compliance with Undertaking 
O of the June 11, 2013 Order Instituting Administrative and Cease-
and-Desist Proceedings involving CBOE and C2 Options Exchange, Inc., 
which requires CBOE to enhance its regulation of CBSX-only TPHs. 
CBOE notes that this proposed rule change is only one component of 
its efforts to enhance its regulation of all CBSX TPHs, including 
CBSX-only TPHs. CBOE notes that although there will technically no 
longer be any CBSX-only TPHs if the proposed rule change is 
approved, the Exchange still believes that the proposal will enhance 
the general regulatory oversight of CBSX TPHs, including those 
former CBSX-only TPHs.
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    CBOE states that it conducts surveillance of trading on CBSX and 
examines the securities-related operations of TPHs for compliance with 
CBSX Rules and the federal securities laws, rules and regulations. CBSX 
TPHs may submit orders to other trading venues as customers through 
executing broker-dealers, which are ultimately executed on those other 
trading venues (``away trading activity''). Because away trading 
activity does not occur on CBSX's market, CBOE states that it does not 
have access to all necessary order and trade information for this 
trading activity, as it does for trading activity done directly on 
CBSX, from which it can directly conduct systematic surveillance 
reviews.
    The Exchange notes that, although other national securities 
exchanges require their members to be members of another national 
securities exchange or a national securities association,\9\ the other 
national securities exchanges may not have direct access to the order 
and transaction information related to the away trading activity of 
their members, as is the case with CBOE, and thus may not be in a 
position to review the away trading activity for potential violations 
of federal securities laws, rules and regulations.\10\ The Exchange 
states that requiring a CBSX TPH to be a member of a national 
securities association (i.e. FINRA), but not providing it the option of 
becoming a member of another national securities exchange, is 
appropriate to ensure that the CBSX TPH's away trading activity is 
subject to appropriate regulatory review. According to the Exchange, 
FINRA rules currently require each FINRA member to submit order data 
for trading activity on all venues (including away trading activity) to 
FINRA on a regular basis.\11\ The Exchange explains that this order 
data audit trail provides FINRA the necessary information related to 
each member's away trading activity to review for and detect possible 
violations of the federal securities laws, rules and regulations. This, 
in turn, would allow FINRA to detect possible violations of federal 
securities laws, rules, and regulations, and take appropriate 
regulatory and disciplinary action against a CBSX TPH as one of its 
regulators, or otherwise refer such matter to CBOE for review and 
consideration of disciplinary action.
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    \9\ See, e.g., BATS Exchange, Inc. Rule 2.3, BATS Y-Exchange, 
Inc. Rule 2.3, EDGA Exchange, Inc. Rule 2.3(a), EDGX Exchange, Inc. 
Rule 2.3(a), NASDAQ Stock Market LLC Rule 1002(e), and New York 
Stock Exchange LLC Rule 2.
    \10\ The Exchange notes that it may obtain an audit trail of 
this ``away activity'' from which it will be able to conduct direct 
systematic surveillance reviews once the National Market System 
consolidated audit trail is finalized and implemented.
    \11\ See, e.g., FINRA Rules 7440 and 7450.
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    Proposed Rule 50.4A requires CBSX TPHs to become a member of FINRA 
within six months of the date of approval of this rule change.\12\ CBOE 
will announce the date by which CBSX TPHs must comply with this new 
requirement (the ``Compliance Date'') in a Regulatory Circular.\13\ The 
Exchange notes that if it determines that there are extenuating 
circumstances which result in a CBSX TPH not being able to comply by 
the Compliance Date, the Exchange may permit the CBSX TPH to retain its 
TPH status beyond the Compliance Date for such period of time as the 
Exchange deems reasonably necessary to enable the CBSX TPH to become a 
member of FINRA.\14\
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    \12\ As of December 20, 2013, 38 CBSX TPHs would be affected by 
this eligibility requirement (i.e., are not already members of 
FINRA).
    \13\ The Exchange will also issue periodic written reminders to 
all CBSX TPHs affected by this requirement that the CBSX TPH must 
become a FINRA member by the Compliance Date.
    \14\ The Exchange notes that the ability to extend certain time 
limits where extenuating circumstances exist is consistent with and 
similar to other Exchange rules. See e.g., CBOE Rule 3.19 and CBOE 
Rule 3.30.

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[[Page 8772]]

III. Discussion of Comment Letters, CBOE's Response, and Commission 
Findings

    After careful review and for the reasons discussed below, the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Act, including Section 6 of the Act,\15\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.\16\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\17\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, and, in 
general, to protect investors and the public interest, and not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. In addition, the Commission finds that the 
proposal is consistent with Section 6(b)(2) of the Act,\18\ which 
requires that the rules of a national securities exchange provide that 
any registered broker or dealer may become a member of such exchange. 
The Commission also finds that the proposed rule change is consistent 
with Section 6(b)(8) of the Act,\19\ which requires that the rules of a 
national securities exchange not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act.
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    \15\ 15 U.S.C. 78f.
    \16\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ 15 U.S.C. 78f(b)(2).
    \19\ 15 U.S.C. 78f(b)(8).
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    The Commission received four comment letters on the proposed rule 
change.\20\ All four commenters object to the proposed rule change, 
argue that it is inconsistent with the Act, and recommend that CBOE 
either enter into a regulatory services agreement or a Rule 17d-2 \21\ 
plan with FINRA. In response, CBOE states that none of the comments 
provide a basis for disapproval of the proposal and reiterates its 
position that the proposal meets the standards for approval under the 
Act.\22\ The comments, CBOE's response, and the Commission's findings 
are discussed in detail below.
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    \20\ See supra, note 5.
    \21\ 17 CFR 240.17d-2.
    \22\ See CBOE Letter.
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A. Statutory Requirements for Exchange Membership

    Two commenters \23\ argue that the proposed rule change violates 
Section 6(b)(2) of the Act \24\ because the proposal would impose 
requirements for exchange membership beyond those contained in the Act. 
Section 6(b)(2) of the Act provides that ``[a]n exchange shall not be 
registered as a national securities exchange unless the Commission 
determines that . . . subject to the provisions of subsection (c) of 
this section, the rules of the exchange provide that any registered 
broker or dealer . . . may become a member of such exchange. . .'' \25\ 
The two commenters state that the proposal violates Section 6(b)(2) 
because it effectively denies or excludes certain registered broker-
dealers from membership (TPH status) with CBSX.\26\ One of the 
commenters asserts that CBOE incorrectly interprets Section 6(b)(2) as 
permitting it to exclude certain registered broker-dealers based on 
their affiliation with certain other self-regulatory organizations 
(``SROs'').\27\ The other commenter points to Section 6(c) of the 
Act,\28\ which provides specific reasons for which a registered broker-
dealer may be prohibited from becoming a member of an exchange, as 
further evidence that the proposal is in violation of Section 6(b)(2) 
of the Act.\29\ The commenter notes that none of the bases in Section 
6(c) permit an exchange to deny membership to a broker-dealer solely on 
the basis of not being a member of a national securities 
association.\30\
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    \23\ See Virtu Letter and FIA Letter.
    \24\ 15 U.S.C. 78f(b)(2).
    \25\ Section 6(c) of the Act provides bases for denial of 
membership in a national securities exchange, including failure to 
register as a broker-dealer, statutory disqualification, or failure 
to meet the standards of financial responsibility or operational 
capacity, or a showing that the party has or that there is a 
reasonable likelihood that they may engage in acts or practices 
inconsistent with just and equitable principles of trade.
    \26\ See Virtu Letter, at 2; FIA Letter, at 3-4.
    \27\ See Virtu Letter, at 2.
    \28\ 15 U.S.C. 78f(c).
    \29\ See FIA Letter, at 3-4.
    \30\ Id.
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    In response, CBOE states that it is incorrect to infer from these 
statutory provisions that any registered broker-dealer meeting the 
general requirements of Section 6(b)(2) and that does not fall within 
the categories enumerated in Section 6(c) is always entitled to 
membership.\31\ CBOE notes that the rules of national securities 
exchanges virtually always provide bases for denial of membership in 
addition to those enumerated in Section 6(c) of the Act.\32\ CBOE also 
notes that other national securities exchanges have membership with 
another national securities exchange or national securities association 
as a condition for membership.\33\
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    \31\ See CBOE Letter, at 3.
    \32\ Id.
    \33\ See CBOE Letter, at 3-4. CBOE also noted that former NYSE 
Rule 2(b) required membership in FINRA as a condition precedent to 
becoming or remaining a member organization. Id., at 4.
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    The Commission believes that the proposed rule change is consistent 
with Section 6(b)(2) and Section 6(c) of the Act. While Section 6(c) 
specifies certain bases upon which a national securities exchange can 
deny membership to, among other entities, a broker or a dealer, Section 
6(c) is not intended to provide an exclusive list of reasons a national 
securities exchange can deny membership to a party. National securities 
exchanges may have requirements for exchange membership beyond those 
contained in the Act so long as they are consistent with the Act.\34\ 
For example, the Commission has approved the rules of several national 
securities exchanges that require membership with another SRO as a 
condition of membership.\35\ The Commission believes that CBOE's 
proposal requiring CBSX TPHs to be members of FINRA, another SRO, is 
consistent with Section 6(b)(2) and Section 6(c) of the Act.
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    \34\ See e.g. CHX Article 3; Rules of BATS Exchange, Chapter II; 
Nasdaq Stock Market Rule 1000 series.
    \35\ See supra, note 9.
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B. Discrimination Among CBOE Members

    Two commenters assert that the proposal violates Section 6(b)(5) 
\36\ by discriminating against CBSX TPHs.\37\ Section 6(b)(5) provides, 
among other things, that the rules of an exchange must not be designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers. One commenter states that the proposal results in certain CBOE 
members that are not FINRA members being denied access to CBSX (CBOE's 
exchange facility for equities), while other CBOE members that are not 
FINRA members will continue to have access to the CBOE options 
facility, thus effectively discriminating against members that trade 
equities.\38\ The other commenter shares the same concern and states 
that this disparate treatment is impermissible under the Act.\39\
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    \36\ 15 U.S.C. 78f(b)(5).
    \37\ See Virtu Letter; CHX Letter.
    \38\ See Virtu Letter, at 2.
    \39\ See CHX Letter, at 3.

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[[Page 8773]]

    CBOE responds to these concerns by stating that Section 6(b)(5) 
requires only that exchange rules be designed not to permit unfair 
discrimination and that CBOE may impose ``requirements on a subgroup of 
members who elect to avail themselves of specified exchange services or 
who conduct specified types of business,'' while not imposing such 
requirements ``on other members who choose not to use such services or 
conduct such types of business, or otherwise where such additional 
requirements would serve a valid regulatory purpose.'' \40\ The 
Exchange argues that the proposed rule is justified by the need for 
greater regulatory oversight of the away trading activity of CBSX TPHs. 
Because away trading activity does not occur on the CBSX market, CBOE 
states that it does not have access to all the necessary order and 
trade information for this trading activity with which to directly 
conduct systematic surveillance reviews relating to this trading 
activity.\41\ CBOE believes that because FINRA's rules require each 
FINRA member to submit order data for its trading activity on all 
trading venues on a regular basis, FINRA has greater access to off-
exchange trading activity conducted by its members than do national 
securities exchanges.\42\ Therefore, CBOE believes that its proposal to 
require FINRA membership of CBSX TPHs is reasonably designed to enhance 
regulatory oversight of CBSX TPHs so it does not unfairly discriminate 
among CBOE TPHs, but rather imposes a reasonable additional obligation 
on those CBOE TPHs who choose to be CBSX TPHs as well.\43\
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    \40\ See CBOE Letter, at 6.
    \41\ Id.
    \42\ Id., at 6-7. CBOE also explains that, as a member of the 
Intermarket Surveillance Group, CBOE receives an equity audit trail 
of all equity market orders and trade information for away trading 
activity, but that the audit trail does not provide the necessary 
granular level of detail to denote when a CBSX TPH is executing a 
trade as a customer through another broker-dealer on an away market. 
CBOE states that without such granular information, the Exchange is 
limited in the reviews it can conduct of this activity. Id., at 6, 
note 22.
    \43\ Id., at 7.
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    The Commission believes that the proposal is consistent with 
Section 6(b)(5) of the Act. The Commission believes that the proposal 
does not unfairly discriminate against CBSX TPHs. As CBOE stated, 
Section 6(b)(5) does not prevent an exchange from imposing additional 
requirements on a subgroup of members who elect to avail themselves of 
specified exchange services or who conduct certain types of business. 
Here, CBOE's proposal to require CBSX TPHs to be members of FINRA while 
not requiring CBOE TPHs to be members of FINRA is not unfairly 
discriminatory because it will apply equally to all CBSX TPHs and 
enhance the regulatory oversight of CBSX TPHs' trading activity.

C. Cost

    Three commenters argue that the proposed rule change imposes a 
substantial cost on CBSX TPHs by requiring dual membership with 
FINRA.\44\ One commenter believes that the proposal will make it 
prohibitively expensive for some CBSX TPHs to continue to hold CBSX 
trading permits or become members of other exchanges, thereby imposing 
a burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act in violation of Section 6(b)(8).\45\ The 
commenter argues that CBSX TPHs that are proprietary trading firms that 
do not carry public customer accounts would be required to bear the 
same costs of FINRA membership as CBSX TPHs that carry public customer 
accounts.\46\ The commenter further states that the ``burdens on 
competition are not appropriate because [s]ection 17(d) of the Act 
provides the mechanism through which an SRO could share certain 
regulatory responsibilities with other SROs . . .'' \47\ Another 
commenter criticizes the proposal stating that dual FINRA membership 
places a large burden on members including, but not limited to, an 
additional layer of regulatory costs and being subject to compliance 
with FINRA rules, which have no relevance to proprietary traders who do 
not have public customers.\48\
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    \44\ See Gusrae Nusbaum Kaplan Letter, CHX Letter, and FIA 
Letter.
    \45\ See CHX Letter, at 2-3.
    \46\ Id., at 3.
    \47\ Id.
    \48\ See Gusrae Nusbaum Kaplan Letter, at 2.
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    A third commenter points out that ``undertaking FINRA membership is 
a significant, time-consuming and expensive exercise.'' \49\ The 
commenter explains that FINRA membership would require firms (1) to 
review and analyze the applicability of a vast array of rules and 
interpretations from FINRA, the majority of which are designed for 
firms that transact customer business; (2) to amend filings with other 
exchanges, incurring additional unnecessary filing costs; (3) to 
maintain blanket fidelity bond coverage, which the commenter states is 
typically designed to insure a firm against intentional fraudulent and 
dishonest acts involving customer funds or customer accounts, while the 
firms affected by the proposed rule change do not transact customer 
business; (4) to incur the costs of reporting to FINRA's order audit 
trail system; and (5) to require their associated persons to pass 
additional exams, since certain exams (such as the Series 56) are not 
recognized by FINRA.\50\ The commenter states that if this proposed 
rule goes into effect, CBSX would be the only exchange requiring FINRA 
membership for member firms that do not transact customer business and 
therefore would position CBSX as an outlier and subject to possible 
regulatory arbitrage, which could increase market fragmentation.\51\
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    \49\ See FIA Letter, at 4.
    \50\ Id., at 4-5.
    \51\ Id., at 6.
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    In response to these concerns, CBOE states that any CBSX TPH that 
finds it burdensome to become a FINRA member can resign its CBSX 
membership and become a member of a national securities exchange that 
does not require membership with FINRA.\52\ CBOE states, ``[t]here are 
any number of national securities exchanges that would provide the 
alternative, so the Proposal imposes no burden on competition that a 
CBSX TPH cannot easily eliminate if it chooses.'' \53\ CBOE also states 
that if a CBSX TPH cannot comply with the proposal by the Compliance 
Date due to extenuating circumstances, CBOE may permit the CBSX TPH to 
retain its status as a TPH for a time CBOE deems reasonably necessary 
for the CBSX TPH to become a member of FINRA.\54\ Regarding dual 
registration, CBOE notes that other national securities exchanges 
require membership in another SRO.\55\ Further, according to the 
Exchange, CBSX TPHs that do not conduct a public customer business 
would be subject only to those FINRA rules that were applicable to 
their business.\56\ CBOE also notes that if associated persons of CBSX 
TPHs are currently licensed in a registration category that FINRA does 
not recognize, FINRA's rules permit FINRA to waive its licensing 
requirements and accept other standards for qualifying for 
registration.\57\
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    \52\ See CBOE Letter, at 9.
    \53\ Id.
    \54\ Id., at 10.
    \55\ Id., at 9.
    \56\ Id., at 11.
    \57\ See CBOE Letter, at 11.
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    The Commission believes that the proposal is consistent with 
Section 6(b)(8) of the Act and does not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act. As CBOE stated, any firm that determines not to become a 
FINRA member can join another national securities exchange

[[Page 8774]]

that does not require FINRA membership. The Commission, as noted above, 
has approved the membership rules of several exchanges that require 
membership with another SRO as a condition of membership.\58\
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    \58\ See supra, note 9.
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D. Section 15(b)(8) of the Act and Rule 15b9-1 Thereunder

    One commenter \59\ argues that the proposal conflicts with Section 
15(b)(8) of the Act \60\ and Rule 15b9-1 thereunder.\61\ Section 
15(b)(8) of the Act prohibits a registered broker or dealer from 
effecting a transaction in a security unless the broker or dealer is a 
member of a national securities association or effects transactions in 
securities solely on a national securities exchange of which it is a 
member. Rule 15b9-1(a) exempts a broker or dealer from becoming a 
member of a national securities association if it: (1) Is a member of a 
national securities exchange; (2) carries no customer accounts; and (3) 
has annual gross income of no more than $1,000 that is derived from 
securities transactions otherwise than on an exchange of which it is a 
member.\62\ The commenter believes that the proposed rule change 
conflicts with these provisions because it would require all CBSX 
TPHs--even those that would qualify for the Rule 15b9-1 exemption--to 
become members of a national securities association.\63\ The commenter 
states this directly contradicts Rule 15b9-1, which recognizes that 
certain broker-dealers should not be required to become members of a 
national securities association.\64\
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    \59\ See CHX Letter, at 2.
    \60\ 15 U.S.C. 78o(b)(8).
    \61\ 17 CFR 240.15b9-1.
    \62\ Rule 15b9-1(b) states that the gross income limitation in 
(a) does not apply to income derived from transactions (1) for the 
dealer's own account with or through another registered broker or 
dealer or (2) through the Intermarket Trading System.
    \63\ See CHX Letter, at 2.
    \64\ Id.
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    In its response, CBOE states that neither Section 15(b)(8) nor Rule 
15b9-1 preclude CBOE from adopting a more restrictive rule concerning 
when a member must become a member of a national securities 
association.\65\ In fact, CBOE claims that exchanges often impose 
requirements on their members that are stricter than those specifically 
enumerated in the Exchange Act and Commission rules.\66\ CBOE believes 
that Rule 15b9-1 ``has no application if the requirement to become a 
member of a national securities association is required not by Section 
15(b)(8) of the [Act], but by some other authority, such as an exchange 
rule.'' \67\
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    \65\ See CBOE Letter, at 5.
    \66\ Id.
    \67\ Id.
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    The Commission does not believe that the proposed rule change 
conflicts with Section 15(b)(8) or Rule 15b9-1. As CBOE stated, 
national securities exchanges may impose requirements on their members 
that are more stringent than those imposed by the Act or by Commission 
rules. Therefore, the requirement imposed by proposed Rule 50.4A that 
CBSX TPHs become members of FINRA, although more restrictive than 
Section 15(b)(8), is consistent with the Act and not in violation of 
Section 15(b)(8) or Rule 15b9-1.

E. Satisfaction of Regulatory Obligations

    One commenter \68\ believes that the proposed rule change is an 
admission of CBOE's failure to satisfy its exchange obligations, in 
violation of Section 6(b)(1) of the Act, which requires an exchange to, 
among other things, enforce compliance by its members with provisions 
of the Act and the rules thereunder.\69\ The commenter argues it is not 
appropriate for an exchange to alter its membership requirements in 
order to satisfy its regulatory burden and that if CBOE fails to 
satisfy its regulatory responsibilities, then CBOE's status as an 
exchange and its ability to operate the CBSX must be scrutinized.\70\ 
This commenter and another commenter observe that the issue of CBOE not 
having access to all necessary order and trade information for away 
trading activity is not unique to CBOE, yet other exchanges have been 
able to fulfill their exchange obligations regardless.\71\ 
Specifically, the other commenter argues that other exchanges have not 
shifted the costs associated with surveillance and monitoring to 
certain of its member firms by imposing a burdensome new membership 
requirement at FINRA in order to discharge their regulatory 
obligations.\72\ A third commenter states that the proposal is an 
inefficient attempt by the CBOE to remedy a fundamental break down in 
its regulatory structure, that instead of building up its own 
surveillance and enforcement departments and abilities, the CBOE is 
shifting the burden entirely onto its members and FINRA.\73\ Finally, a 
fourth commenter states that it is concerned with the precedent that 
will be set if the proposal is approved, specifically that an SRO will 
be permitted to adopt rules that will unilaterally shift some of its 
responsibilities to another SRO.\74\
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    \68\ See Virtu Letter, at 1, 3.
    \69\ 15 U.S.C. 78f(b)(1). Section 6(b)(1) of the Act states that 
``[a]n exchange shall not be registered as a national securities 
exchange unless the Commission determines that . . . [s]uch exchange 
is so organized and has the capacity to be able to carry out the 
purposes of this title and to comply, and . . . to enforce 
compliance by its members and persons associated with its members, 
with the provisions of this title, the rules and regulations 
thereunder, and the rules of the exchange.''
    \70\ See Virtu Letter, at 3.
    \71\ Id. and FIA Letter, at 6.
    \72\ See FIA Letter, at 6.
    \73\ See Gusrae Kaplan Nusbaum Letter, at 2.
    \74\ See CHX Letter, at 1.
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    All four commenters suggest that a better resolution would be for 
CBOE to enter into a Rule 17d-2 plan or a regulatory services agreement 
with FINRA in lieu of the proposed rule change.\75\ One commenter 
recommends that CBOE either adopt a rule requiring its members to send 
their trading activity data to FINRA, or that CBOE enter into a 
regulatory services agreement with FINRA allowing FINRA to collect this 
data and surveil it.\76\ The other commenters were in favor of CBOE 
entering into Rule 17d-2 plan.\77\
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    \75\ See Virtu Letter, at 1-2; Gusrae Kaplan Nusbaum Letter, at 
3; CHX Letter, at 3; and FIA Letter, at 6.
    \76\ See Gusrae Kaplan Nusbaum Letter, at 3.
    \77\ See Virtu Letter, at 1-2; CHX Letter, at 3; and FIA Letter, 
at 6.
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    In response, CBOE reiterates that the proposal is designed to 
enhance the regulation of CBSX.\78\ CBOE explains that it does not have 
access to all of the necessary order and trade information for away 
trading activity and that the proposal addresses this limitation on its 
ability to oversee away trading activity.\79\ CBOE further explains 
that entering into a 17d-2 agreement with FINRA is not possible to 
address the away trading activity of CBSX TPHs because a 17d-2 
agreement is available only with respect to broker-dealers that are 
members of each SRO that is a party to the agreement, and by 
definition, the proposal addresses the situation in which CBSX TPHs are 
not FINRA members.\80\ CBOE acknowledges that there may be other ways 
to accomplish its regulatory goal, but that it has determined that its 
proposal is a reasonable method of achieving its regulatory 
objectives.\81\ CBOE also reiterates its position that its proposal is 
consistent with the Exchange Act and notes that this is further 
evidenced by the fact that the Commission has previously approved 
exchange rules requiring members to be members of at least one other 
SRO.\82\
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    \78\ See CBOE Letter, at 7.
    \79\ Id.
    \80\ Id., at 7-8.
    \81\ Id., at 8.
    \82\ Id. CBOE also stated that because other exchanges also 
require their members to be members of at least one other SRO, it is 
evident that its proposal does not reflect that it is in violation 
of Section 6(b)(1). Id., at note 25.

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[[Page 8775]]

    The Commission does not believe that CBOE's proposal, in and of 
itself, provides evidence that CBOE has failed to meet its exchange 
obligations. The Commission also notes that CBOE's proposal in no way 
(1) reduces CBOE's obligations under the Act to meet its regulatory 
responsibilities as an SRO, or (2) shifts any of CBOE's 
responsibilities to FINRA. The Commission agrees with CBOE that a Rule 
17d-2 plan is available as an option only with respect to broker-
dealers that are members of each SRO that is a party to the agreement. 
CBOE has proposed to require CBSX members to be members of FINRA in 
order to enhance regulation of their away trading activity. Whether or 
not there may be other less costly or burdensome ways to enhance 
regulation of away trading activity by CBSX members, the issue before 
the Commission is whether the current proposal is consistent with the 
Exchange Act and the rules and regulations thereunder applicable to 
SROs. If so, the Commission must approve the proposed rule change. The 
Commission believes that the proposal is consistent with the Act. As 
stated above, exchanges may impose membership requirements that are 
more stringent than those contained in the Act. The Commission has 
previously approved rules of other exchanges requiring membership in 
another SRO.

IV. Conclusion

    For all the reasons discussed above, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to national securities 
exchanges. It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\83\ that the proposed rule change (SR-CBOE-2013-100) be, and it is 
hereby approved.
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    \83\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\84\
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    \84\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-03132 Filed 2-12-14; 8:45 am]
BILLING CODE 8011-01-P


