April 11, 2001
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
RE: Securities Exchange Act Release No. 43860 (File Number S7-03-01)
Dear Mr. Katz:
The Chicago Board Options Exchange, Incorporated ("CBOE" or "Exchange") is pleased to submit its comments on the proposed Rule 19b-6 under the Securities Exchange Act of 1934 ("Exchange Act"). The Securities and Exchange Commission ("SEC" or "Commission") published the proposal for public comment in the Federal Register on February 5, 2001.1 The stated purpose of the proposal is to expedite the review by the SEC of self-regulatory organization ("SRO") rule filings and to allow SROs to more quickly introduce changes to their markets. This is an extremely important objective in today's markets where SROs, including the Exchange, face increasing competition from alternative trading systems, securities dealers, foreign markets and futures markets, all of which are subject to far less regulation.
CBOE commends the Commission for recognizing the need of SROs to be able to implement rule changes without a protracted review process by the Commission. CBOE, however, believes that the proposal would not accomplish the Commission's stated goal, and is not materially better than the current rule filing review process. The proposal may not expedite the handling of an SRO's most important rule filings, would increase the already substantial regulatory burden on SROs and would create unnecessary legal uncertainty to the SRO rule review process, as further explained below. As a whole, the costs in complying with the new requirements of the proposal may outweigh the benefits.
The current rule filing review process under Rule 19b-4 is unnecessarily burdensome and restrains the competitiveness of U.S. markets. Aside from a few changes in limited areas,2 the process has remained unchanged for the last 25 years. It reflects a 1970's perspective when the SROs were virtually the sole markets and SEC review of rule changes was perceived as necessary to provide oversight of entities performing utility-like functions. The securities markets have changed dramatically since the 1975 Act Amendments to the Exchange Act. SROs no longer are the only market competitors, but are the only entities subject to the rule filing process.3 This outdated process imposes a heavy competitive burden on SROs. The process allows for arbitrary and often lengthy delays in the publication of SRO rule changes, results in extensive SEC staff review of SRO rule changes, and substitutes governmental judgment for marketplace judgment when an SRO wants to change any of its rules. Slightly over a year ago, CBOE analyzed the handling of its proposed rule changes and found that for two-years' worth of "regular way" filings the average time from submission to the SEC to approval was 135 days (almost half of which was attributable to SEC delay in publishing the filing for comment).4 For many of our most important filings from a competitive point of view, the delays were even longer. In addition to our comments on the proposed Rule 19b-6, CBOE would like to stress that the Commission needs to expedite the process of handling "regular way" filings, which usually involve proposals that affect our competitive position in a significant manner. The Commission can achieve this without the need for any formal rulemaking.
In order to achieve the Commission's stated goal of expediting the SRO rule review process, the CBOE believes the process can be simplified and streamlined by revising the SEC's proposal as follows:
II. DESCRIPTION OF PROPOSAL
Proposed new Rule 19b-6 would replace the current Rule 19b-4, while retaining certain provisions of Rule 19b-4. In addition, new Form 19b-6 would replace the current Form 19b-4. Generally, proposed Rule 19b-6 would:
A trading rule that would make fundamental structural changes to the market, and that would significantly affect the protection of investors or the public interest, or that would impose a significant burden on competition, however, would not qualify for the immediate effectiveness treatment.
Although the proposal appears to provide some regulatory relief to SROs, it contains many detailed requirements and conditions that make it burdensome and practically impossible for SROs to take advantage of the intended benefits. In order for a proposed rule change to be deemed "filed" with the SEC, an SRO must, among other things, submit a properly completed Form 19b-6, a clear statement of the basis and purpose of the rule change, including the impact on competition, and a detailed certification by a senior officer as to the accuracy and completeness of the statements on the form (relating to fourteen separate areas).7 Furthermore, new Form 19b-6 will impose significant and unnecessary requirements on SROs merely to submit a proposed rule change. Some of the items that would be required by the new form include:
Failure to include any of the required information might result in the proposed rule change being deemed not properly filed.
Proposed Rule 19b-6 also creates legal uncertainty for SROs by providing that where a proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Exchange Act, no inference may be made regarding whether the proposed rule change is in the public interest, including any impact on competition. Finally, the category of trading rules eligible for immediate effectiveness is too limited and conditional. These and other deficiencies that counteract the effectiveness of the proposal are described below.
III. SPECIFIC COMMENTS ON PROPOSED RULE 19b-6
A. Uncertainty as to When Is a Proposed Rule Change Properly Filed
As discussed above, a rule change would not be considered "properly filed" unless all of the requirements of Rule 19b-6 and new Form 19b-6 are met. If the SEC staff determines that a filing was not properly filed, the staff would return the filing to the SRO. Proposed Rule 19b-6 gives the SEC staff excessive discretion to determine whether a filing meets all of the specified requirements. Some of the requirements are subjective in nature, such as the requirement to submit a "clear and accurate statement of the authority for, and basis and purpose of, [the] rule change, including the impact on competition." What standards will the staff use in deciding whether a statement is "clear" and "accurate"? Will the staff develop uniform standards internally of what is "clear" and "accurate" so that all the staff members will be applying the same standards in reviewing rule proposals from the various SROs? The proposed rule does not address how an SRO aggrieved by the staff's decision that a filing was not properly filed (and thus returning the filing to the SRO) would be able to seek redress from that decision. Would the Commission be prepared to decide on appeal whether an SRO's statement regarding the purpose of a rule change was clear and accurate?
In addition, the conditions attached to a proposal being "properly filed" leaves the proposal open to legal challenge by any party opposing it. A commenter could allege that a Form 19b-6 submission was not "properly filed" because it either failed to include one of the numerous items required by the form or did not fulfill one of the subjective standards of Rule 19b-6. For example, an adverse party might claim that a Form 19b-6 was not properly filed because one of the cites in the form did not conform to Federal Register format or the SRO did not identify a prior SEC order regarding the rule proposed to be changed. This condition would create an enormous amount of legal uncertainty for an SRO and cause SROs to spend a tremendous amount of additional staff and legal time on every proposed rule change beyond what is spent currently.
CBOE recommends that every SRO rule filing be deemed filed when submitted to the SEC. If a filing is severely incomplete, the staff could reject it and return the filing to the SRO promptly. If not returned, the filing would be submitted to the Federal Register within 10 days.8 We expect that the staff would need to reject filings a very small percentage of the time if the severely incomplete standard is used. Consequently, the SEC should amend Rule 19b-6 to state that a proposed rule change is deemed filed on the date received by the Commission, and omit the remainder of proposed Rule 19b-6(f)(1) as well as paragraph D of Form 19b-6.9
B. New Form 19b-6
Form 19b-6 contains numerous unnecessary, vague and overwhelming information requirements that will increase the rule filing burden on SROs exponentially. For example, Exhibit 1 requires filing of, among other things, any transcript of comments on the proposed rule change made at any public meeting or a summary thereof if the transcript is not available, and any correspondence (including comment letters and e-mails) prepared or received by the SRO. How should an SRO comply with this requirement to the extent the information is privileged or confidential internal business information? How could an SRO know whether it should include remarks made by an SRO official on a panel at an industry conference? Would an SRO have to submit every internal e-mail regarding the proposed rule change? As worded, it appears proposed Form 19b-4 would require submission of every such e-mail. Similarly, the form requires the SRO to "describe the anticipated effect of the proposed rule change on each applicable provision of the federal securities laws and applicable rules of the [SRO]" and to "set forth the file numbers, release numbers, the Federal Register cites [and dates] . . . for prior filings relating to the affected rule and disclose any prior Commission order or release impacting the proposed rule change [emphasis added]."10 A single failure to provide the required information or a failure to provide a single cite in the proper format could deem the filing to be not properly filed, which is an extremely harsh result. Moreover, the form is replete with requirements that are virtually impossible to fulfill.11
In effect, the new form would require an SRO to conduct a comprehensive review of the federal securities laws, its own rules, prior filings relating to the proposed rule, and prior SEC action impacting the proposed rule. As anyone who has conducted legal research knows, these would be extremely time-consuming tasks requiring judgment by the researcher (regarding whether a prior filing related to the proposed rule change or whether a Commission order impacts the proposed rule) with no guarantee that all the prior filings or SEC's releases have been captured and thoroughly reviewed. Again, this subjective standard could cause an SRO's rule filing to be deemed not properly filed.
We recommend that the SEC abandon proposed Form 19b-6 (and all its instructions) and instead use a simplified Form 19b-4. The simplified form would retain Exhibit 1 of the current Form 19b-4, and items 5 and 6 from the text of the Form 19b-4, but discard the duplication inherent in filing the rest of the text of Form 19b-4. This would simplify the preparation of the rule filing while retaining the requirement that the SRO adequately explain the proposed rule change.
C. Certification Requirement
As part of the new Form 19b-6 a senior officer of the SRO would be required to submit a certification attesting to compliance with 14 different requirements. For example, the certification must state that, among other things, "[t]he filing does not violate, and is fully consistent with, the federal securities laws," "[t]he Notice provides a clear and accurate statement of the proposed rule change's impact on competition," "[t]he Notice describes thoroughly the impact of the proposed rule change on various segments of the [SRO]," "[t]he proposed rule change is not inconsistent with the existing rules of the [SRO], and the Notice describes how the proposed rule change relates to these rules," and "[t]he Notice identifies prior Commission orders or releases impacting the proposed rule change." This amount of detailed certification (which, as discussed above, contains vague standards) from a senior officer of an SRO is completely unrealistic and unworkable. In contrast, under a recent CFTC proposal to streamline the SRO rule review process, a futures exchange would need to simply certify that the rule complies with the Commodity Exchange Act and regulations thereunder.12
Aside from the impracticability of an SRO official certifying to the 14 required elements, the Commission's detailed certification approach also creates legal uncertainty. What would be the liability of the individual signing the certification in the event the SEC staff determines that the filing did not identify a Commission order impacting the proposed rule change or the filing was not fully consistent with the federal securities laws? We recommend that the SEC amend its proposal to require a simple certification that the SRO official has reviewed the proposed rule change, without the detailed requirements. Moreover, the SEC should reiterate that the simple certification does not subject the SRO official to liability if the SEC or courts later determine that the filing was inconsistent with the securities laws or rules thereunder.
D. 10-Day Notice Requirement
Proposed Rule 19b-6(a) requires the Commission to issue a release relating to a proposed rule change within 10 business days of filing with the Commission (or within such longer period as to which the SRO consents in writing). CBOE strongly supports prompt notice of SRO filings and commends the Commission for its willingness to commit to publish rule changes within a short time frame. However, CBOE recommends that notice of the filings should be required to be issued within ten calendar days.13 While the 10-day requirement would be very helpful in setting firm deadlines for publishing filings, it will be meaningless if the Commission does not adhere to the 10-day requirement.14 There should be some mechanism to ensure that the Commission adheres to the 10-day notice of filings requirement.
It is particularly important that the Commission adhere to the ten-day requirement for rules not subject to immediate effectiveness. These "regular way" filings often include the rule changes that are most important to CBOE, yet the only real change to the processing of these filings contained in the proposing release is the 10-day notice requirement. The prompt approval of these filings is essential to allow the Exchange to effectively compete with other U.S. securities markets, foreign markets, and futures markets. We recommend that the Commission and its staff make a real commitment to process these filings as quickly as possible without second-guessing the judgment made by an SRO in proposing a rule change. It is important for the SEC: (1) to provide some mechanism whereby an SRO filing automatically would go to the Federal Register by the tenth business day unless the SRO otherwise consents or the filing is so materially deficient that the Commission rejects it,15and (2) present all of the staff's comments on an SRO filing promptly to the SRO.
E. Non-Controversial Filings
The proposal would amend the requirements for "non-controversial" filings to be effective on filing by eliminating the five-day pre-review period by the staff and removing the requirement that such filings not be effective for 30 days. CBOE strongly supports the removal of these requirements because they are unnecessary and add meaningless delay to minor rule changes. We have concern, however, with the requirement in proposed Rule 19b-6(b) that such a rule filing (and other filings eligible for immediate effectiveness) can take effect upon filing only if properly designated by the SRO. The use of the word "properly" introduces a condition not found in the Exchange Act. Section 19(b)(3) of the Exchange Act allows a filing to be filed for immediate effectiveness only if designated by SRO as fulfilling one of the acceptable criteria for immediate effectiveness. The introduction of the word "properly" undercuts the statute and subjects all Section 19(b)(3)(A) filings to legal uncertainty.
F. Definition of Trading Rule Is Too Limiting
The Commission's proposal to allow a newly defined category of rules called "trading rules" to be eligible for immediate effectiveness holds much promise. SROs are severely limited in implementing competitive initiatives by the delay and uncertainty involved in submitting trading rules for SEC review. We see no valid public policy reason for allowing an ATS (which is a non-registered exchange) to change immediately a trading rule affecting its subscribers while preventing a registered exchange from doing the same for trading rules affecting its members. In addition, an exchange can lose its competitive advantage in developing new market systems or procedures if its competitors have notice of the innovation well in advance of SEC approval; thus, providing the competitor time to prepare and submit copycat filings. Allowing trading rules to become effective upon filing could remove much of this delay. CBOE commends the Commission for considering this approach. Unfortunately, the SEC's proposal contains many limitations and conditions on the use of this new provision that would degrade its utility. First, proposed Rule 19b-6(b)(6) allows a rule change establishing or changing a trading rule to take effect upon filing if the trading rule does not make fundamental structural changes to the market and does not significantly affect the protection of investors and the public interest, or impose a significant burden on competition. These criteria, however, are the standards the SEC should use in deciding whether to abrogate a 19(b)(3)(A) filing, not whether the SRO can choose to file a trading rule for immediate effectiveness in the first place. Inserting these criteria into the eligibility for filing under Rule 19b-6(b)(6) would cause an SRO to have to guess whether the SEC would allege that a filing was not properly filed because it was a major structural change. An SRO would be reluctant to submit many trading rules for immediate effectiveness under this level of uncertainty.
We recommend that the Commission amend proposed Rule 19b-6(b)(6) to remove all the conditional language after the opening words "Establishing or changing a trading rule ..." SROs should be relied upon to exercise their judgment and discretion to determine when a trading rule change was important or contentious enough for the SRO to forgo filing the change for immediate effectiveness and instead use the regular way rule filing process. A SRO would have nothing to gain from submitting a rule making fundamental structural changes for immediate effectiveness when it was likely the proposal would be abrogated by the SEC, but much to lose from the disruption caused by abrogation.
Second, CBOE believes the definition of trading rule in proposed Rule 19b-6(g)(1) is too limited in scope. It excludes rules that clearly relate to trading, such as position limits, market surveillance, and handling of customer orders. There is no reason why these categories of trading rules should be subject to a full review but other trading rules are not. In addition, the parenthetical excluding customer orders, including limit orders, from the order priority rules included in the definition of trading rule undercuts the coverage of the new definition. Almost all rules regarding the priority of orders, bids and offers involve customer orders. Consequently, CBOE recommends the Commission remove the parenthetical and include position limits, market surveillance, and all order handling in the trading rule definition.16
Third, CBOE recommends that the SEC consider whether a greater category of new products could be subject to the trading rule treatment. Currently, Rule 19b-4 allows the listing and trading of new derivative securities to be accomplished without a proposed rule change if the SRO's procedures and listing standards for the product class have been approved previously by the Commission or have taken effect pursuant to Section 19(b)(3)(A). CBOE suggests that proposals to trade new product classes be deemed trading rules and be eligible for immediate effectiveness. Certain new products would still warrant a Section 19(b)(2) process (e.g., a proposal by an exchange to commence trading options altogether), but this would be easily recognizable to an SRO and, if not, the SEC would have the authority to require it through abrogation.
Finally, we recognize that some firms may have concerns about their timely ability to implement system changes engendered by changes in the trading rules of an SRO, although this has not been the experience of CBOE with respect to changes to its trading rules. The need to provide members with time to effectuate system changes should be a decision left to the judgment of the SRO in consultation with the member firms that are represented on those Exchange committees which propose rule changes. The SEC rule filing review process should not be employed as a delaying mechanism to provide a system implementation period.
G. Serious Limitations on Use of Filing for Immediate Effectiveness
The Commission places two serious limitations that will greatly inhibit an SRO's use of the Section 19(b)(3)(A) process. First, proposed Rule 19b-6(h) proposes a novel and, we believe, unsupportable assertion that where a proposed rule change has become effective pursuant to the immediately effective filing process, no inference can be made regarding whether the proposed rule change is in the public interest, including whether it has an impact on competition. CBOE believes that this assertion is invalid and contradicts the rationale for having a rule filing process. The SEC has to review every filing it receives, including those submitted for immediate effectiveness. The Commission's failure to abrogate a filing connotes that the agency has determined that the filing does not violate the Exchange Act, including the provision in Section 6(b) that exchange rules do not impose any unfair burden on competition. Otherwise, why provide a notice and comment period for Section 19(b)(3)(A) filings and up to sixty days for Commission abrogation if the Commission does not expect to review these filings?17
The Commission appears to be attempting to assert that the exemption from antitrust laws accorded to SRO activity reviewed by the Commission is not available for Section 19(b)(3)(A) filings. In other words, SROs that choose to use the Section 19(b)(3)(A) process have to relinquish legal protection that has attached heretofore to all SRO filings. Such a draconian impact would not only discourage SROs from ever using the Section 19(b)(3)(A) process, but is clearly contrary to existing law. The Supreme Court cases involving implied repeal of the antitrust laws demonstrate that implied repeal with respect to SRO conduct occurs when the SEC is provided with regulatory authority over that conduct, and actively exercises its authority.18 It is unquestionably the case that the Commission has regulatory authority over SRO rules--whether submitted under Section 19(b)(3)(A) or otherwise--and actively exercises that authority. Indeed, as explained in a recent case involving implied repeal, the 1975 Act Amendments to the Exchange Act require SROs to submit all proposed rule changes to the Commission for approval, explicitly mandate that the SEC consider competition in its decision-making in these areas, and authorize the SEC to abrogate SRO rules when necessary.19 Given the SEC's active oversight of SRO rules, the antitrust laws must be deemed to be impliedly repealed with respect to all SRO rule changes approved, or not abrogated, by the Commission. See NASD, 422 U.S. at 726-28 (implied repeal when SEC has oversight and actively regulates only by disapproving SRO rules). Subsection (h) of proposed Rule 19b-6 should be deleted.20
Second, the Commission states that any substantive change to a Section 19(b)(3)(A) filing will restart the sixty-day abrogation period. This could inhibit SROs from using the Section 19(b)(3)(A) process because potential adjustments to the rule change based on experience after implementation would restart the abrogation period, with the attendant legal uncertainty as to the final status of the proposal. In addition, this proposal could enable the SEC staff to treat amendments as a means to lengthen the abrogation period. Instead, we recommend that the SEC limit re-commencement of the abrogation period to major substantive changes to a proposal.
H. Miscellaneous Comments
CBOE has suggestions for several other issues raised in the Proposing Release. CBOE agrees with the SEC's suggestion of using abbreviated approval orders when appropriate because it would shorten the time to process the SRO filing and conserve limited SEC staff resources.21 CBOE also agrees that the Commission should permit SROs to file rule changes electronically, with follow-up submission within five business days of a paper copy with manual signature.22
As to other aspects of the proposal on which the CBOE has not yet commented, we have a few suggestions for changes. First, subsection (d) of proposed Rule 19b-6 would cause an interpretation of an existing SRO rule to be deemed a proposed rule change, regardless of whether it is made generally available, if it is approved or ratified by the governing body of the SRO and is not reasonably and fairly implied by that rule. The sweep of this provision is so broad that it potentially could capture disciplinary decisions by an SRO, which we know were not intended to be deemed proposed rule changes. Second, footnote 74 of the Proposing Release states that an SRO could not submit a proposed rule change under Section 19(b)(3)(A) and submit the same language under Section 19(b)(2). We recommend that the Commission reconsider this restriction. There may be times when an SRO wants to implement a trading rule on a trial basis period immediately, but file regular way for permanent approval. An SRO should not be restricted from doing so if the SRO uses the right to do so judiciously so as not to overburden the SEC staff. Third, the CBOE believes the cost/benefit analysis and Paper Work Reduction Act analysis in the proposing release ignore the substantial costs that would be imposed on SROs by proposed Rule 19b-6 and Form 19b-6, as described in this letter.23
IV. OTHER ASPECTS OF THE RULE FILING PROCESS
There are two other aspects of the Proposing Release that concern CBOE. First, the SEC suggests that, as a quid pro quo for expanding the category of rule changes eligible for immediate effectiveness, the Commission will be more prone to use its abrogation authority.24 Although the SEC may feel the need to contemplate abrogation of rule proposals more frequently under the new proposal, CBOE suggests that the SEC not over apply the threat or use of its abrogation authority.25 Otherwise, SROs will be reluctant to file a rule change under Section 19(b)(3)(A) until SEC staff has informally approved it. This would result in the de facto reintroduction of the current regular way review process, with its standard delays and uncertainties, into the Section 19(b)(3)(A) process. In addition, abrogation of a trading rule could be very disruptive to an SRO, especially if the SRO has implemented systems changes to accommodate the rule change. CBOE believes a filing should be abrogated only if the filing clearly violates the Exchange Act or raises important market structure or investor protection issues that warrant a broad public discussion. The Commission should not abrogate a filing merely because the staff is "uncomfortable" with the rule change or receives negative comment letters on the rule change.26
Second, aside from the requirement to publish a filing within 10 business days, there is nothing in the Proposing Release that addresses the processing of regular way rule changes. These changes can be vitally important to the competitiveness of an exchange, yet could still be subject to substantial delay if the current review process is not improved. The most immediate improvement the Commission could adopt would be to adhere to the statutory timeframes in processing SRO rule change proposals by acting on all such proposals within 35 days of publication in ordinary circumstances, which might extend to 90 days with good cause shown or with the consent of the SRO.27 Such a change from current practice by the Commission would be extremely helpful to SROs. We suggest that the staff commit to an SRO rule review process whereby the staff: (1) quickly provide any comments to the SRO; and, (2) approves a filing promptly unless the filing clearly violates the securities laws or raises market structure issues of substantial importance.
In analyzing the problems with the SEC's proposal, it is instructive to reflect on recent regulatory and legislative action toward the CFTC review process of futures exchange rule filings. Proposed Rule 19b-6 is in stark contrast to the deregulatory approach recently adopted by Congress and proposed by the CFTC.28 Except with respect to agricultural commodities, the CFTC would not require its prior approval of a designated contract market's ("DCM") proposed rules. Instead, a DCM could simply file a certification to the CFTC that a proposed rule or rule change complies with the Commodity Exchange Act or CFTC rules on the day preceding the rule's implementation. The only other requirement is to include the text of the rule and a brief explanation of the rule including any substantive opposing views not incorporated into the rule. With respect to certain types of rule changes, a DCM does not even have to file a certification and could place rule changes into effect by simply providing a weekly notice to the CFTC of rule changes made effective during the preceding week.
CBOE believes that the CFTC's proposal evidences a real commitment to provide significant regulatory relief and operational flexibility to DCMs. While the SEC states in the Proposing Release that Rule 19b-6 is intended to allow SROs operating securities markets to be more competitive in today's marketplace, it is obvious that a securities SRO subject to proposed Rule 19b-6 rule review process would be at a huge competitive disadvantage to a DCM. Whereas a DCM is subject to a simple certification process under the CFTC proposal, a securities SRO would be required to file a detailed Form 19b-6 including a detailed certification by a senior officer, would be subject to the uncertainty as to whether a rule proposal is "properly" filed, subject to SEC review and public comment process, and subject to SEC abrogation if a rule change is submitted for immediate effectiveness. With the approval of single stock futures, it is more important now than ever before that securities SROs be permitted to compete fairly with the futures markets, and not be hampered by uneven regulation. Thus, as noted above, in addition to making the changes to the SEC's proposal noted in this letter, the SEC should commit itself to improving the rule change review process by conducting quicker reviews, relying more on SRO judgment, and providing final decisions in a prompt manner.
V. CONCLUSION AND RECOMMENDATIONS
CBOE appreciates the opportunity to comment on the Proposing Release and wants to commend the SEC for considering how to simplify and expedite the SRO rule change review process. Certain aspects of the SEC's proposal could help SROs' competitiveness and should be adopted. These include the requirement to publish filings within ten days, removing the delayed effectiveness from certain Section 19(b)(3)(A) filings, abbreviated approval orders, and the concept of allowing trading rules to be filed for immediate effectiveness. Unfortunately, the SEC's proposal also would add many new requirements, delays, and conditions to the process that severely limit the proposal's effectiveness and outweigh its benefits. CBOE believes the adoption of our recommendations will help the SEC accomplish its goal of expediting the SRO review process without sacrificing the SEC's desire to not compromise investor protections. A more streamlined SRO rule review process would enable the SEC to concentrate its limited resources on the handful of filings each year that raise broad public interest issues. Most importantly, it would enhance the competitiveness of SROs as they compete against less regulated entities such as ECNs, off-exchange dealers, stock futures exchanges, and foreign markets. CBOE urges the Commission to make this change in its approach toward the SRO rule review process. The recent commodities legislation and CFTC rulemaking indicate clearly that Congress and other regulators want the government to simplify and speed up the SRO rule change process. The time is now for SEC leadership to do the same.
Edward J. Joyce
cc: Acting Chairman Laura S. Unger
Commissioner Isaac C. Hunt, Jr.
Commissioner Paul R. Carey
Annette L. Nazareth
Robert L. D. Colby
|1||Exchange Act Release No. 43860 (January 19, 2001), 66 FR 8912 (February 5, 2001).|
|2||Rule 19b-5 (Form Pilot), Rule 19b-4(f) (non-controversial filings) and Rule 19b-4(e) (trading of new derivative securities products).|
|3||The Exchange notes that the securities exchanges will be competing directly with futures exchanges in the trading of single stock futures beginning later this year. Consequently, the Exchange believes that it is important that the securities exchanges not be unnecessarily subjected to stricter regulatory oversight than are futures exchanges. The Exchange believes the recent proposal by the Commodity Futures Trading Commission ("CFTC") (as discussed further in Section IV. of this letter) to revise the SRO rule making review process applicable to futures exchanges (65 FR 14262 (March 9, 2001)) provides futures exchanges with a tremendous regulatory advantage over the securities exchanges under both the current 19b-4 regulatory regime and under the proposed 19b-6 regime. While it is true that futures exchanges trading stock futures must file certain proposed rule changes with the SEC pursuant to Rule 19(b)(7), the list is limited and the filing with the SEC does not prevent futures exchange rules from becoming effective upon certification to the CFTC.|
|4||We once also determined that typically these filings are changed very little between filing and amendment. The delay might be justified if the filing was deficient and needed to be amended in a material way but that is not our usual experience.|
|5||Proposed Rule 19b-6(a).|
|6||Proposed Rule 19b-6(b)(6).|
|7||Proposed Rule 19b-6(f).|
|8||This is similar to the instructions contained in current Form 19b-4, which says that a deficient filing can be returned to the SRO before the SEC issues a notice of the filing.|
|9||As discussed elsewhere in this response, the Exchange is proposing that the Commission discard Form 19b-6 altogether. However, if the Commission determines to adopt Form 19b-6, the Exchange recommends at a minimum the Commission should adopt this and the other changes to the form recommended in this letter.|
|10||66 FR at 8924 (Form 19b-6 Notice, Section I, A.1).|
|11||For example, Form 19b-6 would require an SRO to respond to all arguments known to the SRO as to why the proposed rule change is inconsistent with the Act. How could an SRO determine whether it responded to all arguments it "knew" about the rule change?|
|12||See Section IV of this letter for a discussion of the CFTC proposal.|
|13||The Exchange notes that if the Commission issues a notice to the Federal Register at the end of ten business days (i.e., two calendar weeks) the notice will not appear in the Federal Register until three weeks or more after the filing was filed by the SRO. This is because a filing typically is not published in the Federal Register until one week after the SEC has submitted the filing to the Federal Register. Whether the Commission adopts a ten business day standard or a ten calendar day standard, the Exchange recommends that, to the extent possible, a properly filed rule proposal should be submitted to the Federal Register as soon as possible after its submission by the SRO.|
|14||However, it should be noted that currently, the Commission consistently bypasses the 35-day statutory time period for approving rule filings after notice as well as the obligation to publish promptly notice of rule changes upon filing by the SRO.|
|15||CBOE recognizes that there may be occasions where a proposed rule change is very extensive and complex, and that the Commission staff might request additional time to review the filing before noticing it. CBOE expects to be sensitive to the staff's need for an extension of time to notice such a filing as long as the large majority of "regular way" filings are noticed within ten business days.|
|16||The Proposing Release also asks if Section 19(b)(3)(A) filings such as trading rules should become effective immediately or be delayed for sixty days. Clearly, any benefit from Section 19(b)(3)(A) treatment would be lost if the operative date is delayed. If it were, then CBOE would be hesitant to use the Section 19(b)(3)(A) process if it resulted in a sixty-day delay.|
|17||In addition, under the SEC's proposed assertion, an SRO would have to guess constantly which filings the SEC will choose to review thoroughly for antitrust coverage. The SEC could decide arbitrarily to review thoroughly certain Section 19(b)(3)(A) filings and not review others.|
|18||United States v. National Association of Securities Dealers, 422 U.S. 694 (1975); Gordon v. New York Stock Exchange, 422 U.S. 659 (1975); and Silver v. New York Stock Exchange, 373 U.S. 431 (1963).|
|19||In Re: Stock Exchanges Options Trading Antitrust Litigation, 99 Civ. 962 (S.D.N.Y., Feb. 19, 2001).|
|20||The trading rules to be provided Section 19(b)(3)(A) treatment are the precise rules that should be approved quickly today, but often are not. Consequently, providing eligibility for immediate effectiveness for these rules but conditioning it upon the relinquishment of antitrust protection essentially leaves the rule filing process as it currently exists because SROs would then choose to file most trading rules under Section 19(b)(2).|
|21||CBOE notes the stark contrast between the proposal for abbreviated approval orders, which would ease the SEC's regulatory burdens, and the requirements of proposed Form 19b-6, which would increase the SROs' regulatory burdens without the benefit of a streamlined process.|
|22||The CBOE also recommends that new filings that are submitted electronically should be made available on the SEC website (to the extent confidential treatment is not sought). This would facilitate public comment by apprising interested parties of proposed SRO rulemaking at the earliest possible time.|
|23||For example, it would cost an SRO substantially more staff resources and legal fees to complete Form 19b-6 than it does current Form 19b-4.|
|24||The SEC states in the Proposing Release that "because these changes to the existing rule filing process would give the SROs greater flexibility, the Commission would be prepared to use its abrogation authority more often than in the past." CBOE fails to see why increased flexibility should cause greater use of the abrogation authority.|
|25||The CBOE suggests that a certification by the SRO that the filing complies with the Exchange Act (akin to what has been proposed by the CFTC) should assure that the SEC will not need to exercise its abrogation authority.|
|26||There will be occasions when comment letters legitimately raise issues that suggest it would be appropriate for the SEC to abrogate a filing. In contrast, a mere objection to a proposed rule change by an aggrieved commenter or a threat of legal challenge by a commenter should not cause abrogation.|
|27||An SRO could agree to extend the period beyond 90 days.|
|28||The CFTC issued a rule making proposal in June 2000. 65 FR 38986 (June 22, 2000). In light of the legislative relief contained in the Commodity Futures Modernization Act of 2000, the CFTC re-issued its proposal on March 2, 2001. 66 FR 14262 (March 9, 2001).|