
[Federal Register Volume 79, Number 46 (Monday, March 10, 2014)]
[Notices]
[Pages 13365-13366]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-05031]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71644; File No. SR-CBOE-2013-126]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving Proposed Rule Change Relating to 
Supervision

March 4, 2014.

I. Introduction

    On December 18, 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 require each Trading Permit 
Holder (``TPH'') \3\ to establish and maintain a system of supervision 
and written supervisory procedures.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \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 proposed rule change was published for comment in the Federal 
Register on January 2, 2014.\4\ The Commission received no comments on 
the proposal. The text of the proposed rule change is available at the 
Exchange's Office of the Secretary, on the Exchange's Web site at 
http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx, and at the 
Commission's Public Reference Room.
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    \4\ See Exchange Act Release No. 71190 (Nov.14, 2013), 79 FR 169 
(Jan. 2, 2014).
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    This order approves the proposed rule change.

II. Description of the Proposal

    The Exchange believes that it does not currently have a 
comprehensive rule that directly addresses the obligation of every TPH 
to properly supervise its business and employees. The only supervision 
obligations that are expressly codified in CBOE's Rules are in Rule 4.2 
(Adherence to Law) and Rule 9.8 (Supervision of Accounts). While the 
former requires a TPH to supervise persons associated with the TPH, it 
does not expressly require the establishment and maintenance of a 
system of supervision or written procedures covering each line of 
business. The latter, a component of Chapter 9 of the CBOE Rulebook 
(Doing Business with the Public), does provide explicit supervisory 
obligations, however, it is applicable only to TPHs conducting non-TPH 
customer business in options.
    CBOE proposes to adopt CBOE Rule 4.24, which would require every 
TPH to establish and maintain a system of supervision and written 
supervisory procedures for each of their business activities and the 
activities of their associated persons. In particular, the proposed 
rule would 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.
    The proposed rule would mirror many of the requirements in CBOE 
Rule 9.8, such as requiring 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. The proposed rule would not, however, be limited to 
supervision of activities related only to TPHs conducting non-TPH 
customer business in options.
    CBOE believes that 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.\5\ 
In particular, the proposed rule would clearly place responsibility on 
TPHs to establish and maintain a formal plan of supervision that covers 
each of their business activities and associated persons. Consequently, 
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. In addition, CBOE believes that the 
proposed rule would provide greater utility for enforcing TPH 
obligations for all its business areas such as proprietary trading.
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    \5\ The Exchange modeled its proposed rule after rules of other 
self-regulatory organizations, e.g., PHLX Rule 748, NASD Rule 3010, 
FINRA Rule 3130, NYSE Amex Rule 320, NYSE Rule 342, and NYSE Arca 
Options Rule 11.18.
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III. Discussion and Commission Findings

    After careful review of the proposal, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder that are applicable to a national 
securities exchange.\6\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act, 
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, 
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.\7\
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    \6\ In approving the proposal, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
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    The Commission ``has long emphasized that the responsibility of 
broker-dealers to supervise their

[[Page 13366]]

employees is a critical component of the federal regulatory scheme.'' 
\8\ Effective and comprehensive supervisory policies and procedures, 
among other things, are critical to a firm's ability to surveil for 
misconduct.
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    \8\ Commission, Division of Market Regulation (now known as 
Division of Trading and Markets), Staff Legal Bulletin No. 17: 
Remote Office Supervision (Mar. 19, 2004).
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    Accordingly, the Commission believes the proposed rule change would 
help TPHs prevent fraudulent and manipulative acts and practices and 
improve investor protection by requiring TPHs to clearly delineate 
their supervisory obligations.
    In particular, the Commission believes that compelling every TPH to 
establish and maintain written supervisory procedures regarding each of 
their business activities and associated persons would provide TPHs and 
their supervisory personnel with a clearer understanding of their 
supervisory responsibilities to help them carry out those 
responsibilities. In addition, the Commission believes that requiring 
TPHs to inspect all of their offices or locations at least once every 
three calendar years would strengthen TPHs' ability to carry out their 
compliance and surveillance functions. Similarly, the Commission 
believes that requiring TPHs to 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 would help 
foster a culture of compliance within each TPH by promoting a dialogue 
throughout the TPH of its compliance efforts and procedures.
    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. Consequently, the Commission believes that the 
Exchange's proposal would foster an environment within each TPH that is 
more likely to help decrease the likelihood of fraudulent and 
manipulative acts and practices and increase investor protection.
    Accordingly, the Commission believes that the proposed rule change 
is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-CBOE-2013-126) be, and hereby 
is, approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-05031 Filed 3-7-14; 8:45 am]
BILLING CODE 8011-01-P


