UNITED STATES OF AMERICA
In the Matter of the Application of
TOWER TRADING, L.P.
c/o Arne R. Rode, Esquire
1147 W. Ohio Street, #505
Chicago, IL 60622
For Review of Final Action Taken by the
CHICAGO BOARD OPTIONS EXCHANGE, INC.
On March 19, 2003, we issued an opinion setting aside final action taken by the Chicago Board Options Exchange, Inc. ("CBOE") against Tower Trading, L.P. ("Tower"), terminating Tower's appointment as a Designated Primary Market-Maker ("DPM").1
As a DPM, Tower operated as a market maker, a floor broker, and in place of the order book official in appointed options classes and was responsible for assuring the accuracy of disseminated market quotations. After notice and a hearing, CBOE, through its market performance review committee, found that Tower failed to meet minimum performance standards of the exchange. As a result, CBOE terminated Tower's appointment as a DPM and reallocated to others the options classes that had been allocated to Tower. Analyzing CBOE's action under Section 19(f) of the Exchange Act of 1934, we determined that CBOE did not apply its rules in a manner consistent with the purposes of the Exchange Act because the fairness of its proceeding was impaired when the presiding officer served as a witness and when Tower was denied a meaningful opportunity to examine evidence used against it. In light of this finding -- as Section 19(f) directs -- we set aside CBOE's action.
In its Motion for Reconsideration, CBOE requests several "clarifications" regarding the scope of our opinion "so that the Opinion does not inadvertently undermine the legitimacy of procedures mandated by CBOE rules that the Commission has approved." CBOE requests that we clarify the opinion to state thatit is not improper for its market performance committee, or any committee member, to participate both in the investigation and adjudication of market performance issues specifically related to DPMs. As best we can discern its request, CBOE also asks that the opinion be revised to state that a committee member need recuse from participating in an adjudication only if the committee member testified during the proceeding "in the context where the person's credibility would be at issue." CBOE requests that we clarify the opinion to state specifically that a DPM has the right to review only that information that the committee uses or relies upon as justification for action against the DPM. CBOE asserts that, if the opinion is so clarified, it then becomes apparent that we should reverse our determination to set aside CBOE's action and deny Tower's application for review on the basis that adequate grounds for CBOE's final action exist independent of CBOE's procedural errors identified in the clarified opinion.2
With respect to the first clarification that CBOE seeks, our decision to set aside CBOE's action did not suggest that it would be improper for a member of CBOE's market performance committee to be involved in a hearing if that person had been involved in the investigation that led to the hearing. On the contrary, we quoted established precedent holding that a self-regulatory organization, such as CBOE, may combine investigatory, prosecutorial, and quasi-judicial functions without violating due process, and that precedent is applicable to CBOE's market performance review committee. However, as CBOE itself recognizes, there are circumstances where a committee member's recusal is necessary.3
The situation in this proceeding -- the committee chairman's dual service as presiding chairman and fact witness offering both "anecdotal" stories "heard" by the committee and the chairman's personal observations about Tower -- mandated recusal. Simply put, CBOE's concern that the opinion may be read to conflict with the rules under which the committee operates is unfounded -- we see no need for clarification. Moreover, to the extent that CBOE's motion can be read to seek our determination that recusal of a testifying committee member is limited only to the situation "where the person's credibility would be at issue," such qualification is unwarranted.4
Consistent withfundamental requirements of fairness, participation in a hearing as a fact witness requires recusal from further participation in the proceeding as adjudicator.
The further clarification that CBOE seeks also is unwarranted. CBOE urges that, unless the opinion is clarified, it may be read to suggest that a DPM has a general right to broad discovery in connection with market performance proceedings. We disagree with CBOE's reading. Our opinion is limited to the facts that were before us -- that is, committee members presiding over a formal hearing with respect to Tower's DPM status were given completed evaluation survey questionnaires on which they relied in reaching their decision to terminate Tower's DPM appointment and Tower was not permitted to review those questionnaires. In that circumstance, as we specified, fairness required that the questionnaires that were made available to the committee as part of the record it was to consider against Tower also should have been made available to the DPM. No clarification is required.
We see no reason to reconsider our opinion, and no grounds for CBOE's additional claim that we should reverse our order setting aside CBOE's action and dismiss Tower's review proceeding on the basis that there were adequate grounds for CBOE's termination decision that were independent of the procedural errors identified in the opinion. CBOE cites the "well-established principle of appellate review that, even when a hearing body has made material errors in its consideration of a matter, its decision should be affirmed if there was an adequate basis for that decision that was unaffected by those errors." However, the cases cited by CBOE that construe the standard governing appellate review of United States district court decisions are inapposite here. The procedural errors in this case are fundamental to the fairness of this proceeding. Exchange Act Section 19(f) provides the relevant standard for review of self-regulatory organization ("SRO") final actions, and directs us to set aside CBOE's action if, as found inthis case, CBOE did not apply its rules in a manner consistent with the purposes of the Exchange Act.5
Accordingly, it is ORDERED that CBOE's motion for reconsideration be, and it hereby is, denied.
By the Commission.
Jonathan G. Katz
|1||Tower Trading, L.P., Securities Exchange Act Rel. No. 47357, __ SEC Docket ____.|
|2||CBOE claims that a "properly clarified" opinion makes "apparent" that the termination decision was appropriate, "separate and apart from the errors identified in the Opinion."|
|3||See CBOE Regulatory Circular RG96-81 (Sept. 12, 1996) (Standards applicable to committee members include recusal standards in order to avoid even the appearance of a conflict of interest and recusal "is ordinarily appropriate" where any reason "could cause the committee member to be unable to decide the matter fairly and impartially.").|
|4||We note that CBOE cites no precedent in support of its proposedqualification, and provides no rebuttal to the precedent cited in our opinion, Tyler v. Swenson , 427 F.2d 412, 415-16 (8th Cir. 1970) (presiding trial judge is not competent witness; duties as judge are not compatible with duties as witness since judge would have to pass upon competency of his own testimony and, as a witness, might be regarded as partisan and subject to embarrassing conflicts with counsel), and Rule 605 of the Federal Rules of Evidence ("The judge presiding at trial may not testify in that trial as a witness. No objection need be made in order to preserve the point.").|
|5||See Feins v. American Stock Exch., Inc. , 81 F.3d 1215, 1220 (7th Cir. 1996)(Section 19(f) "spells out the standard of [administrative] review to be employed" and provides the "remedy for erroneous decisions"); Exchange Servs., Inc. v. SEC , 797 F.2d 188, 189 n.4 (4th Cir. 1986)(to uphold SRO decision reviewable under Section 19(f) "the Commission must find that: (1) the specific grounds on which the decision is based exist in fact; (2) the decision is in accordance with the rules of the [SRO]; (3) the rules of the [SRO] are and were applied in a manner consistent with the purposes of the Securities Exchange Act; and (4) the decision imposes no burden on competition, not necessary or appropriate in furtherance of the purposes of the Act") (emphasis added).|
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