The Securities and Exchange Commission has approved rule changes by the Chicago Board of Options Exchange (CBOE) to conform their supervision rules to those of the NASD and New York Stock Exchange.
CBOE is eliminating the requirement that member organizations designate a single person to act as a Senior Registered Option Principal (SROP) for the organization and a Compliance Registered Options Principal (CROP) (the same individual was permitted to serve in both capacities) for those members qualified to do a public customer business in options.
This rule change will permit member organizations to assign such responsibilities, which formerly rested with the SROP/or CROP, more than one Registered Option Principal (ROP)-qualified individual who may have supervisory responsibility over segments of the members public customer business – e.g., an individual in charge of compliance with all margin rules would also supervise margin compliance by option accounts.
Member organizations would still be required to designate a single general partner or executive officer to assume overall authority and responsibility for internal supervision, control of the member organization and compliance with securities laws and regulations, i.e., chief compliance officer.
The rule change will also eliminate the requirement that discretionary options orders be approved on the day of entry by a ROP, where the member uses supervisory tools in computerized format or exception reports generated after the close of a trading day. For member organizations not utilizing computer surveillance tools, a ROP would still be required to approve and initial each discretionary order on the day entered.
Each member organization would be required to submit, to the CBOE and the members audit committee, a written report by April of each year detailing the member organization’s supervision and compliance efforts, including its options compliance programs, during the preceding year and report on the adequacy of the member organization’s ongoing compliance processes and procedures. This could be the same report submitted under NYSE Rule 342.30 or NASD Rule 3013. In addition, the member firm’s Chief Executive Officer would have to make the same certifications as to the firm’s supervisory policies and processes, his review thereof and meetings with the Chief Compliance Officer as are now required under NYSE Rule 342.30 and NASD Rule 3013.
Member firms must have written policies and procedures to supervise sales managers and other supervisory personnel who service customer options accounts. Supervisory reviews of producing sales managers must be conducted by a ROP who is either senior to, or otherwise “independent of,” the producing manager under review.
Member organizations will be required to develop and maintain adequate controls over each of their business activities and such controls must include the establishment of procedures to independently verify and test the supervisory systems and procedures for those business activities. The rules will also require member organizations to inspect each supervisory branch at least annually and each non-supervisory branch office at least once every three years, with the inspection conducted by persons independent of the direct supervision or control of the branch office.
Other rule changes will require that before a customer options order is executed, the account name or designation be placed on the memorandum for each transaction and limit approval of account name or designated changes to a ROP; and will permit member organizations to exercise time and price discretion on orders for a definite number of options contracts in a specified option and amount limited to the day the discretionary authorization is granted or in the case of institutional customers, to exercise price and quantity discretion on institutional orders that are good until cancelled and on a non-held basis.