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SECURITIES AND EXCHANGE COMMISSION
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In the Matter of the Application of
TOWER TRADING, L.P. For Review of Final Action Taken by the CHICAGO BOARD OPTIONS EXCHANGE, INC.
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OPINION OF THE COMMISSION
National securities exchange terminated member firm's appointment as a Designated Primary Market-Maker and reallocated its option classes to others on concluding that member had failed to meet minimum performance standards. Held, association's action set aside because fairness of proceeding was impaired when presiding officer served as witness and member was denied a meaningful opportunity to examine evidence used against it.
APPEARANCES:
Andrew D. Spiwak, for Chicago Board Options Exchange, Inc.
Appeal filed: November 2, 2000
Last brief received: March 6, 2001
I.
Tower Trading, L.P. ("Tower"), a member of the Chicago Board Options Exchange, Inc. ("CBOE"), and formerly a Designated Primary Market-Maker ("DPM"), appeals from CBOE final action. Under CBOE rules, a DPM is deemed a market-maker, but with greater affirmative obligations. As a DPM, Tower operated as a market maker, a floorbroker, and in place of the order book official in appointed options classes, and was responsible for assuring the accuracy of disseminated market quotations. 1 CBOE likens a DPM's performance "to that of a specialist on other national securities exchanges."�2
After notice and a hearing, CBOE 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. To the extent that we make findings, we base them on an independent review of the record.
II.
CBOE, through its Modified Trading System Appointments Committee (the "Committee"), has authority to appoint a CBOE member as a DPM. 3 Because DPMs serve the important function of maintaining fair and orderly markets in their assigned option classes, the Committee does not automatically appoint members as DPMs, but rather, selectively grants this "privilege." 4 Tower received approval in 1992 to act as a DPM.
Pursuant to rules directed at ensuring that CBOE members fulfill performance standards, CBOE periodically distributes an evaluation survey to member firms involved in the execution of orders. 5 The survey asks these members to rate the performance of each DPM and market maker trading crowd with respect to quality of markets, competition within the crowd, multiple listings competition, ethical standards, and administration. 6 The evaluation results from the December 1999 survey placed Tower withinthe bottom ten percent of all surveyed members, triggering a presumption under CBOE rules that Tower had failed to meet minimum performance standards. 7
In February 2000, the Committee met with Tower to determine whether to take remedial action based, at least in part, on Tower's poor survey evaluation. The Committee informed Tower that it would review and evaluate Tower's performance as soon as possible after April 30, 2000, to determine whether Tower's performance had improved. The Committee cautioned Tower that, if its performance remained unsatisfactory, the Committee would conduct a proceeding to determine whether to terminate Tower's DPM appointment.
In May 2000, CBOE conducted a second evaluation survey. In this survey, Tower's ranking slipped from 68th (its December 1999 rank) to last place among all 73 DPMs and trading crowds on CBOE's trading floor. Consistent with the Committee's admonition to Tower in the February 2000 meeting, the Committee elected to hold a formal hearing. CBOE Rule 8.60(e), as then in effect, provided in relevant part:
The Committee may elect to hold a hearing with a trading crowd or one or more members of a trading crowd who have presumptively failed to meet minimum performance standards. In such event, such member or members will be so notified in writing with a statement of the reasons for and the potential consequences of that presumption, and afforded an opportunity to make a presentation of relevant information in rebuttal.... A verbatim record of proceedings shall be kept. Members may be represented by counsel, however, formal rules of evidence shall not apply. A presumption of failure to meet minimum performance standards by a trading crowd under subpart (b) of this rule or otherwise may form the basis for Committee action against any and all members of the trading crowd.�8
The Committee conducted its hearing on June 28, 2000. The Committee solicited testimony from two witnesses: 1) RaymondDempsey, the vice chairman of CBOE's floor officials committee; and 2) Ross Kaminsky, chairman of the Committee. Kaminsky, who also presided at the hearing, was ostensibly offered as a witness in order to afford Tower an opportunity to cross-examine someone about documents that the Committee had introduced into the record.
Dempsey testified about certain disputed transactions involving Tower. Although Tower's counsel asked Dempsey whether he and his firm participated in the survey evaluations of Tower, Kaminsky sustained Committee counsel's objection to this line of questioning on the ground that, "in order to maintain its integrity," the survey was anonymous. Likewise, the Committee denied Tower's post-hearing request for an opportunity to review the survey questionnaires. 9
Kaminsky, as a witness, read into the record comments about Tower that questioned its performance and indicated that Tower had failed to execute an order. Kaminsky represented that these comments had been gleaned from the survey questionnaires. Kaminsky further testified that the Committee had "gotten feedback as to the situation at Tower" from floor brokers when the brokers had spoken to the Committee in the "Committee room" and also when Committee members spoke to brokers on the trading floor. 10 Kaminsky identified neither the floor brokers providing feedback nor the Committee members to whom this information was provided. Kaminsky also testified about his own observations "standing on the floor by Tower's trading post," as well as what the Committee had "heard anecdotally" about Tower's operations.
The Committee concluded that Tower had in fact (and not just presumptively) failed to meet minimum performance standards. This conclusion was based on many observations, including that Tower had twice been sanctioned for net capital violations, had incurred material financial, operational, and personnel changes, had incurred material operational deficiencies, and had conducted its business in an unprofessional manner. The Committee found that Tower had failed to fulfill performance standards relating to, among other things, quality of markets, observance of ethical standards, administrative standards, administrative factors, adherence to CBOE rules, policies, and Committee guidelines, and promoting CBOE as the marketplace of choice. It terminated Tower's DPM appointment and directed CBOE's Allocation Committee to reallocate to others the options classes that had been allocated to Tower.
Tower appealed the Committee's decision to the CBOE Board of Directors (the "Board"). By written decision dated October 4, 2000, a panel of the Board affirmed the Committee's July 24, 2000 decision. 11 The panel's decision subsequently was ratified and adopted by the Board's Executive Committee.
III.
Before addressing the merits of Tower's appeal, in light of our decision in Pacific Stock Exchange's Options Floor Post�X-17,�12 we must first determine whether we have jurisdiction under Section 19(d) of the Securities Exchange Act of 1934 13 to review CBOE's decision to terminate Tower's DPM appointment. Neither Tower nor CBOE questions our jurisdiction here. Indeed, CBOE filed with the Commission a notice of final action pursuant to Section 19(d)(1) of the Exchange Act 14 that specified that CBOE had terminated in "a final Exchange Action" Tower's DPM appointment. Our independent consideration of the Exchange Act and relevant precedent thereunder leads us to conclude that this matter is reviewable under Section 19(d). 15
Pursuant to Exchange Act Section 19(d), we may upon application by an aggrieved person or our own motion review any self-regulatory organization ("SRO") "action that involves a final disciplinary sanction imposed on a member or that prohibits or limits any person in respect to access to services offered by [the SRO]...." 16 Section 19(d) was enacted as part of the Securities Acts Amendments of 1975 (the "1975 Amendments"). 17 Prior to that time, the Commission did not have authority to review disciplinary or other actions of exchanges. 18
The genesis for the 1975 Amendments was a Securities Industry Study Report (the "Industry Report"), issued by the Senate Subcommittee on Securities. 19 Stressing that it was "important that self-regulatory agencies, no less than federal administrative agencies, have clearly prescribed procedures that meet constitutional requirements of fairness," the Industry Report recommended that the Commission be granted authority to review exchange actions. 20 The Industry Report expected that review of SRO actions would have "a wholesome, constructive effect upon the regulatory agencies (and self-regulatory agencies) by requiring them to articulate the reasons for their decisions in a manner that makes possible a reasoned analysis of the merits."�21 As we have observed previously, Congress intended the resulting Commission review provision, Section 19(d), "to encompass all final quasi-adjudicatory actions [by SROs] affecting members and non-members." 22 Such reviewable actions include SRO decisions to require"members to cease doing business entirely or in specified ways�.�.�.�with respect to a particular security." 23
A. Disciplinary Action
In approving rules authorizing SRO initiatives to evaluate and improve market maker performance, including the reallocation of securities, "we historically have taken the position that the reallocation of a specialist's or a market maker's security due to inadequate performance does not constitute a disciplinary sanction." 24 Instead, we have "interpreted the term 'disciplinary' to refer to action responding to an alleged violation of an Exchange rule or Commission statute or rule, or action 'in which a punishment or sanction is sought or intended'." 25 In this case, the Committee's termination of Tower's DPM appointment was based upon poor performance, not violations of the securities laws, or Commission or CBOE rules. Moreover, the termination was a remedial action, not punishment or a sanction. 26 Accordingly, we conclude that CBOE's action was not disciplinary and is not reviewable by us on that basis.
B. Prohibition or Limitation on Access to Services
The Committee's termination of Tower's DPM appointment can be reviewed by the Commission if it is determined to be a prohibition or limitation on access to services. In Post X-17 we concluded that, under the circumstances of that case, we lacked jurisdiction to review the appeal of an alleged denial of access.�27 The Post X-17 decision involved the Pacific Stock Exchange ("Pacific"), which had set up its trading floor so that options were grouped for trading at various post locations. 28 Although market makers were free to trade any options and to move throughout the trading floor, Pacific, in order to ensure market liquidity, assigned each market maker to a particular post and required that a percentage of its transactions be executed in that post's allocated options.�29
Pacific conducted periodic evaluations of trading crowds at each post to determine whether the crowds were fulfilling expected performance standards. 30 Pacific used an evaluation questionnaire, 31 and any trading crowd rated in the bottom ten percent of all trading crowds was deemed presumptively to have failed to meet minimum performance standards. 32
Following poor performance evaluations for the trading crowd located at Post X-17, Pacific reallocated the options from that postto other posts throughout the exchange. 33 On appeal by the trading crowd, we held that we lacked jurisdiction to review Pacific's decision because the reallocation was neither a disciplinary proceeding nor a limitation or prohibition of access to services offered by Pacific. 34 This latter conclusion was expressly premised on the finding that Pacific's system allowed for the market makers constituting the Post X-17 trading crowd "to continue to trade the reallocated securities at their new post positions." 35
Although there are similarities between Post X-17 and this case, a comparison of the facts highlights important distinguishing factors. First, Post X-17 involved the reallocation of options from the post of a trading crowd, not the termination of DPM status. Second, the status of Post X-17 trading crowd members did not change as a result of the reallocation. On the contrary, each member in the Post X-17 trading crowd was able to continue to trade, in the same status, securities formerly allocated to Post X-17, albeit at different locations and subject to different transaction percentage requirements. In this case, while Tower remains a member of CBOE, its termination as a DPM means that Tower no longer serves as a specialist in the securities formerly allocated to it. Thus, CBOE's decision effectively required Tower "to cease doing business�.�.�. in specified ways�.�.�.�with respect to�.�.�. particular securit[ies]." 36 Moreover, as a result, Tower no longer obtains the substantial benefit that flows from serving as a DPM, namely, the right of participation granted by CBOE only to DPMs.
"A DPM's right to participate as principal in a transaction is generally governed by the principles of time and price priority set forth in CBOE Rule 6.45 and applicable in general to all bids and offers made on the Exchange." 37 However, the right of participation grants each DPM a "participation entitlement in transactions that occur in a DPM's allocated security (when the DPM's previously established principal bid (offer) was equal to thehighest bid (lowest offer) in the trading crowd)." 38 This entitlement guarantees that the DPM will participate, at a minimum, in thirty percent (and as high as fifty percent) of all transactions at the DPM's previously established principal bid or offer. 39 This guaranteed right of participation was established and serves the primary purpose of enticing CBOE members to become DPMs and assume the additional obligations imposed on a DPM. 40
Unlike the situation in Post X-17, Tower was ordered to cease all DPM activity with respect to the securities for which it was so designated. Tower lost its guaranteed transaction participation as a result of the termination of its DPM appointment. CBOE's action amounted to a final, quasi-adjudicatory SRO action, and Tower's loss of its guaranteed participation fundamentally altered its access to services offered by CBOE. We conclude, therefore, that jurisdiction exists under Exchange Act Section 19(d) to review CBOE's decision.
IV.
Having determined that we have jurisdiction to review CBOE's action, Exchange Act Section 19(f) governs our review. In particular, if we find that the specific grounds on which CBOE based its action exist in fact, that CBOE's action is in accordance with its rules, and that CBOE's rules are and were applied in a manner consistent with the purposes of the Exchange Act, then we must dismiss the appeal.�41 Absent such a finding, or if we find that the limitation of access imposes any unnecessary or inappropriate burden on competition, we are required to set aside CBOE's action. 42
Tower raises a panoply of procedural and substantive arguments to support its request that we set aside CBOE's action. Tower's overarching theme is that it was denied a fair hearing. It claims that the Committee lacked impartiality and that Tower was denied the right to confront and cross-examine witnesses. As discussed below, we agree that the hearing was not fair.
A. Impartiality
The Committee held a hearing as required by CBOE Rule 8.60(e). Kaminsky, as chairman of the Committee, presided at and ruled on objections made during the hearing. 43 At the same time, Kaminsky served as a hearing witness.
Although the Committee attempted to limit the scope of Kaminsky's appearance as a witness to "solely in his capacity as the chairman of the Committee," such word play is meaningless. It is clear from the transcript that Kaminsky testified as a fact
witness. 44 Kaminsky repeatedly referred to information about Tower considered by the Committee but not in the record. Thisincluded written comments from the evaluation surveys, verbal comments made by brokers to the Committee and/or Kaminsky, a "report" purportedly evidencing Tower's poor performance, "anecdotal" stories "heard" by the Committee, and Kaminsky's personal observations.
Exchange Act Section 6(b)(7) mandates that CBOE's rules "provide a fair procedure" for, among other things, the prohibition or limitation by the exchange of any person with respect to access to services. 45 We recognize that established precedent holds that an SRO "may combine investigatory, prosecutorial, and quasi-judicial functions without violating due process." 46 "Compliance with fundamental requirements of fairness, however, demands that adequate precautions be taken against the possibilities for prejudice that may inhere in such an administrative structure."�47 Thus, we have previously held that it was, "at the least, undesirable" for an SRO official who performed the investigatory and prosecutorial functions "to participate in the actual decision on the merits, especially where there are disputed questions of fact." 48
In the normal course, the credibility of witness testimony, grounded in large part on anecdotal evidence and hearsay, would be carefully weighed by an adjudicator. In this case, however, it is not reasonable to believe that the Committee could or would weigh the credibility of its own chairman's testimony, or operate outside of his influence, when the same Committee, in its deliberations whether to terminate Tower's DPM appointment, not only includedKaminsky as a participant, but relied on him as the presiding member. 49
The necessity of an organization to separate prosecutorial and adjudicatory functions in order to ensure fairness is a well-recognized principle. 50 Notably, case law and procedural rulesbinding on the judiciary require such separation. 51 A proceeding before an administrative tribunal, while less formalistic than a judicial proceeding, nonetheless, to ensure fairness, must be conducted by an adjudicator who is not a witness in the proceeding.
We find that Kaminsky's dual role as witness and judge rendered the hearing unfair.�52 As a result, CBOE Rule 8.60(e) was not applied in a manner consistent with the purposes of the Exchange Act.
B. Tower Could Not Meaningfully Confront and Cross-
examine Witnesses
Tower asserts that CBOE violated its rules by terminating Tower's DPM appointment without affording Tower the opportunity to confront and cross-examine witnesses. Specifically, Tower challenges the Committee's reliance on confidential evaluation surveys, arguing that it was precluded both from cross-examining survey respondents and from inspecting the questionnaires. 53
The survey questionnaires rating Tower's performance were not introduced into the record at the hearing, but were made available to the Committee. Specifically, in making its decision, the Committee relied upon comments about Tower and its performance thatbrokers had written on the questionnaires. 54 Kaminsky read some of the broker comments into the record as part of his testimony, but expressly declined to submit into the record copies of the actual written comments "due to confidentiality kinds of issues." 55
Tower asserts that the Committee's refusal to disclose to Tower the identity of the survey participants denied Tower the right toconfront and cross-examine witnesses. Tower further asserts that the Committee made it impossible for Tower to confront and cross-examine witnesses by refusing to allow Tower to examine the questionnaires to determine whether comments read by Kaminsky into the record were accurate, representative, or from multiple sources.
CBOE counters that, unless it preserves the confidentiality of the survey forms and the identity of the survey participants, the results would be worthless. CBOE stresses that floor brokers would not be candid in their assessment of DPMs, with whom they must interact on a daily basis, if their identities were revealed or could be gleaned from respondents' review of the actual questionnaires.
Where the Committee itself does not know the identity of the survey participants, we perceive no unfairness in keeping this information from a DPM as well. Here, however, fairness required that material made available to the Committee considering whether to terminate a member's DPM status also should have been made available to Tower, the respondent DPM. 56 Thus, when the Committee reviewed the questionnaires and relied upon the survey results, including anonymous comments, to justify its action to terminate Tower's DPM appointment, yet refused to provide Tower an opportunity to examine the questionnaires, CBOE denied Tower an opportunity to confront the evidence and engage in meaningful cross-examination.�57 As a result, CBOE Rule 8.60(e) was not applied in a manner consistent with the purposes of the Exchange Act.
V.
Due to the procedural deficiencies in the Committee's conduct of the hearing, we conclude that CBOE did not apply its rules in amanner consistent with the purposes of the Exchange Act. Accordingly, we are constrained to set aside CBOE's action terminating Tower's DPM appointment. Because we conclude that the hearing procedure employed by CBOE was unfair, we do not address any of Tower's other contentions. 58
An appropriate order will issue. 59
By the Commission (Chairman DONALDSON and Commissioners GLASSMAN, GOLDSCHMID and ATKINS); Commissioner CAMPOS not participating.
Jonathan G. Katz
Secretary
Admin. Proc. File No. 3-10359
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In the Matter of the Application of
TOWER TRADING, L.P. For Review of Final Action Taken by the CHICAGO BOARD OPTIONS EXCHANGE, INC.
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ORDER SETTING ASIDE FINAL ACTION
On the basis of the Commission's opinion issued this day, it is,
ORDERED, that the final action taken by the Chicago Board Options Exchange, Inc. against Tower Trading, L.P. ("Tower"), terminating Tower's appointment as a Designated Primary Market-Maker be, and it hereby is, set aside.
By the Commission.
Jonathan G. Katz
Secretary
1 See former CBOE Rule 8.80(c) (1999). See current CBOE Rules 8.80 through 8.91 (2000). The CBOE Rules involved in this proceeding were amended in 2000. Where relevant, we distinguish between the then-applicable former CBOE Rule and its current version.
2 See former CBOE Rule 8.80 (1999).
3 The Committee is composed of eleven members, the vice-chairman of CBOE, the chairman of the market performance committee, and nine individuals elected by the CBOE membership. See former CBOE Rule 8.80(b) (1999).
4 See former CBOE Rule 8.80 (1999). See current CBOE Rules 8.80 through 8.91 (2000).
5 See former CBOE Rule 8.60 (1997).
6 See id.
7 See former CBOE Rule 8.60(b) (1997) (The appropriate CBOE committee "shall presume a failure to meet minimum performance standards as to all members of a trading crowd if the trading crowd is rated in the bottom 10% of trading crowds" based on the results of a periodic questionnaire.).
8 See former CBOE Rule 8.60(e) (1997). These provisions are substantially incorporated into current CBOE Rule 8.60(d)(2000).
9 In denying this request, Kaminsky, on behalf of the Committee, informed Tower that it would not be permitted access to the evaluations in order to "preserve the confidentiality of the surveys, and in accordance with exchange policy...."
10 Kaminsky indicated that the Committee received this feedback "over the past months" preceding the hearing.
11 Pursuant to CBOE's review process, in order to avoid "unduly and inappropriately" burdening the Board, a de novo review of the Committee's decision is not conducted. Rather, the Board "will affirm the [Committee's] decision unless the [Committee] is found to have acted without basis, clearly erroneously, or arbitrarily and capriciously." Order Approving CBOE Proposed Rule Change, Securities Exchange Act Rel. No. 24008 (Jan. 16, 1987), 37 SEC Docket 882, 883.
12 51 S.E.C. 261 (1992).
13 15 U.S.C. § 78s(d).
14 15 U.S.C. § 78s(d)(1). Section 19(d)(1) provides that, if a self regulatory organization ("SRO") "prohibits or limits any person in respect to access to services offered" by that SRO, it must promptly file a notice of such action with the Commission.
15 See Commission Rule of Practice 421(b), 17 C.F.R. §�201.421(b) ("The Commission may at any time prior to issuance of its decision raise or consider any matter that it deems material, whether or not raised by the parties."). Cf., e.g., Andrus v. Charlestone Stone Prods. Co., 436 U.S. 604, 607 n.6 (1978) ("Although the question of the District Court's subject-matter jurisdiction was not raised in this Court or apparently in either court below, we have an obligation to consider the question sua sponte.").
16 15 U.S.C. § 78s(d). See also Post X-17, 51 S.E.C. at 264. Exchange Act Section 19(d) also provides for review of denial of membership or participation in an SRO to any applicant. As in Post X-17, neither of these bases is applicable in this case. See id. at 264 n.11.
17 Pub.L.No. 94-29, § 16, 89 Stat. 97 (1975).
18 For a discussion of the Commission's historical authority to review SRO actions, see generally Notice of Proposed Rules, Exchange Act Rel. No. 19969 (July 21, 1983), 28 SEC Docket 470.
19 S. Rep. No. 93-13 (1973).
20 Industry Report, at 151, 171-80.
21 Id. at 214.
22 William Higgins, Exchange Act Rel. No. 22877 (Feb. 7, 1986), 35 SEC Docket 12, 14 n.22 (citing Senate Comm. on Banking, Housing and Urb. Affs., Report to Accompany S. 249; Securities Acts Amendments of 1975, S. Rep. No. 94-75, at 26 (1975), reprintedin 1975 U.S.C.C.A.N. 179 ("Senate Report")).
23 Senate Report at 24.
24 Post X-17, 51 S.E.C. at 266 (citing the following: Exchange Act Rel. No. 25681 (May 8, 1988), 40 SEC Docket 1525; Exchange Act Rel. No. 25611 (Apr. 22, 1988), 40 SEC Docket 1315; Exchange Act Rel. No. 24008 (Jan. 16, 1987), 37 SEC Docket 882; Exchange Act Rel. No. 15827 (May 15, 1979), 17 SEC Docket 589).
25 Id. at 266 (citations omitted). Cf. Exchange Act Rule 19d-1(c), 17 C.F.R. § 240.19d-1 (Reallocation of securities by exchange due to poor performance is not included within the rule's definition of "final disciplinary action."); see also Exchange Act Section 19(e)(1)(A), 15 U.S.C. § 78s(e)(1)(A) (specifying that in reviewing an SRO disciplinary sanction, the Commission is to determine whether the aggrieved person violated the Exchange Act, the Commission's rules and regulations thereunder, or the SRO's rules).
26 See Order Approving CBOE Proposed Rule Change, Exchange Act Rel. No. 24008 (Jan. 16, 1987), 37 SEC Docket 882 n.5 (In order to remedy deficient trading crowd performance, the Committee "will have the authority to take other related remedial measures in appropriate cases, including restricting a marketmaker's registration and appointments....")(emphasis added).
27 51 S.E.C. at 267. However, we expressly reserved the question "whether any SRO determination to reallocate a security pursuant to a program to evaluate and improve market maker or specialist performance is reviewable by us as a denial or limitation of access to services." Id. at 267.
28 Id. at 262.
29 Id.
30 Id. at 263. In authorizing Pacific's evaluation program, the Commission stated that Pacific's program was "substantially similar to the CBOE program, which ha[d] been in operation for over a year" at the time that the Pacific program was approved. See Order Approving Pacific Proposed Rule Change, Exchange Act Rel. No. 25611 (Apr. 22, 1988), 40 SEC Docket 1315, 1316.
31 The questionnaire was "substantially similar to the questionnaire used by the CBOE in its trading crowd evaluation program." 40 SEC Docket at 1315�n.5.
32 Post X-17, 51 S.E.C. at 263.
33 Id. at 261.
34 Id. at 266-67.
35 Id. at 267.
36 Senate Report at 24.
37 Rule Change Relating to Participation Entitlements of DPMs, Exchange Act Rel. No. 43750 (Dec. 20, 2000), 73 SEC Docket 3819, 3820.
38 Order Approving CBOE Proposed Rule Change, Exchange Act Rel. No. 42190 (Dec. 1, 1999), 71 SEC Docket 503. See former CBOE Rule 8.80(c)(7)(ii) (1999) ("In executing transactions for his own account as a market-maker, the DPM shall have a right to participate pro rata with the trading crowd in trades that take place at the DPM's principal bid or offer."); current CBOE Rule 8.87(b) (2000) (DPM has right to participate).
39 73 SEC Docket, supra, at 3820. An example of a DPM's guaranteed participation is as follows:
Assume there is an order in the book to buy 150 contracts at $3, a price that represents the national best bid. The DPM's previously established principal bid is $3 and there are two market makers in the crowd each bidding at $3. If a floor broker enters the crowd with a market order to sell 300 contracts, the order in the book receives full execution of 150 contracts at $3. Thereafter, because the market makers' bids are at parity with the DPM's previously established principal bid, the DPM is entitled to a participation right of 40% with respect to the remaining 150 contracts of the market order. Therefore, the DPM receives 40% of the remaining 150 contracts at $3, or 60 contracts. The two market makers in the crowd each receive 45 contracts at $3.
Id. at 3821.
40 Id. at 3820; 71 SEC Docket, supra, at 503.
41 Section 19(f) of the Exchange Act, 15 U.S.C. § 78s(f). See, e.g., Jacob Adoni, Exchange Act Rel. No. 41813 (Aug. 31, 1999), 70 SEC Docket 1496, 1499.
42 Section 19(f) of the Exchange Act, 15 U.S.C. § 78s(f). See, e.g., Eli Boggs Combs, 52 S.E.C. 737, 739 (1996).
43 Kaminsky also responded to post-hearing requests on behalf of the Committee, and issued the Committee's written decision under his signature as chairman.
44 Dempsey, the only other Committee hearing witness, was also presented to testify in his "capacity solely as a floor official and as vice chairman of that committee." Nonetheless, Dempsey also testified as a fact witness, relating an incident involving Tower and Dempsey's firm that resulted in Dempsey filing a floor officials report with CBOE.
45 15 U.S.C. § 78f(b)(7).
46 Steven P. Sanders, 53 S.E.C. 889, 906 & n.35 (1998) (quoting David A. Gingras, 50 S.E.C. 1286, 1292 (1992); citing Austin Municipal Sec., Inc. v. NASD, 757 F.2d 676, 689 (1985); Stratton Oakmont, Inc., 52 S.E.C. 1170 (1997); Daniel C. Adams, 47 S.E.C. 919, 922 (1983); Richard W. Perkins, 47 S.E.C. 847, 849-50 (1982)).
While the Sanders decision recognizes the general principle that an SRO may combine prosecutorial and adjudicatory functions without offending notions of due process, it also specifically notes that the SRO in that case, the National Association of Securities Dealers, Inc., has modified its procedures such that the members of a hearing panel are not responsible for investigating possible misconduct or instituting disciplinary proceedings. Sanders, 53 S.E.C. at 906, n.35.
47 Scattered Corp., 53 S.E.C. 948, 967 (1998).
48 Sumner B. Cotzin, 45 S.E.C. 575, 581 (1974).
49 Cf. Cinderella Career and Finishing Schools, Inc. v. FTC, 425 F.2d 583 (D.C. Cir. 1970) (Even though FTC chairman's vote in pending appeal was not necessary for a majority, by giving a speech wherein it appeared that he had prejudged an issue in the appeal, chairman should have recused himself because there was no way of measuring the influence of the chairman upon the other commissioners' votes.).
The record is silent whether Kaminsky considered recusing himself from the hearing. We note, however, that recusal was a procedure familiar to the Committee and available to Kaminsky. In fact, the record reflects, without elaboration, that another Committee member "recused himself from the hearing." See CBOE Regulatory Circular RG96-81 (Sept. 12, 1996) (Standards applicable to committee members include recusal standards and recusal "is ordinarily appropriate" where any reason "could cause the committee member to be unable to decide the matter fairly and impartially.").
50 See, e.g., Scattered Corp., 53 S.E.C. at 958 (Where separation of litigation and adjudicatory "functions are not scrupulously observed, courts do not hesitate to stop an agency from proceeding.") (citing Amos Treat & Co. v. SEC, 306 F.2d 260, 265 (D.C. Cir. 1962)); Matter of Krishna Yemmanur, 447 N.W.2d 525, 527 (S.D. 1989) (State medical board that sanctioned doctor based, in part, on testimony from board member, did not deny doctor fair and impartial hearing because witness disqualified himself from the board "so as to participate only in the prosecutorial role, and not the adjudicatory role."); Administrative Procedure Act, 5 U.S.C. § 554(d) (2000) (employee who presides at agency hearing and renders decision shall not be responsible to or subject to the supervision or direction of an employee engaged in the agency's investigative or prosecutorial functions); Commission Rule of Practice 121, 17 C.F.R. § 201.121 (any Commission employee engaged in performance of investigative or prosecutorial functions in a proceeding may not participate or advise in the decision in that proceeding, except as a witness or counsel). See generally, Judith K. Meierhenry, The Due Process Right to an Unbiased Adjudicator in Administrative Proceedings, 36 S.D. L. Rev. 551 (1991) (analyzing four categories of adjudicator bias).
51 See, e.g., 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); Fed. R. Evid. 605 ("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.").
52 Cf. Scattered Corp., 53 S.E.C. at 962 (fairness of proceeding impaired where decision-maker had ex parte communications or had taken an adversarial position against one of the parties) (citing Grolier Inc. v. FTC, 615 F.2d 1215, 1220 (9th Cir. 1980); Trans World Airlines, Inc. v. Civil Aeronautics Bd., 254 F.2d 90, 91 (D.C. Cir. 1958)).
53 Tower implicitly argues that, even if survey anonymity is permissible, it should have been allowed to inspect the questionnaires, as the identity of a survey respondent is not disclosed on the questionnaire form.
54 The Committee also relied upon summary numerical compila-tions derived from the surveys. The summaries ranked Tower's performance by comparing its average score in four categories (market quality, crowd competition, multiple listing competition, and ethical standards and administra-tion) with the mean score of the entire trading floor. The summaries indicated that Tower's performance was rated at the bottom of all DPMs and that its average scores were below the trading floor mean scores in every category.
55 Tower argues that neither CBOE's rules relating to the evaluation surveys nor the Commission's order approving those rules provides for keeping confidential any aspect of the questionnaires. CBOE asserts that the Commission, in approving CBOE's rules, sanctioned confidentiality for the surveys.
We have never imposed confidentiality as a requirement of the evaluation program. In 1987, when the Commission approved CBOE's use of evaluation surveys, we did not require that the surveys, or the identities of those completing the surveys, be confidential. Rather, we specifically stated in our approval order that in any formal hearing the "rights of confrontation and rights to counsel will apply." See Order Approving CBOE Proposed Rule Change, Exchange Act Rel. No. 24008 (Jan. 16, 1987), 37 SEC Docket 882. Likewise, the Commission's order approving on a permanent basis CBOE's use of evaluation surveys did not provide for survey confidentiality. See Order Approving Proposed Rule Change Relating to Evaluation of Trading Crowd Performance, Exchange Act Rel. No. 28012 (May 14, 1990), 46 SEC Docket 372.
In our most recent order approving a change to CBOE Rule 8.60, we again approved the use of an evaluation survey, cautioning CBOE that we considered "it essential that a Market Participant be fully cognizant of the factors that may bear upon the Committee's evaluation, particularly if that evaluation could result in remedial action by the Committee." The rule filing on which this order was based did not specify that the surveys would be confidential. See�Order Approving Proposed Rule Change Relating to the Evaluation of Trading Crowd Performance, Exchange Act Rel. No. 43756 (Dec. 20, 2000), 73 SEC Docket 3833, 3836.
56 Cf., e.g., Order Approving New York Stock Exchange Proposed Rule Change, Exchange Act Rel. No. 15827 (May 15, 1979), 17 SEC Docket 589, 591 (in order for specialist to make a defensive presentation in a hearing to review its performance, "any material made available to the [NYSE Committee] during the course of any such proceeding will also be made available to the specialist in a timely fashion"). This opinion should not be read to suggest that conducting surveys on a confidential basis is itself problematic.
57 Cf. id. at 591, n.12 ("Neither the [NYSE Committee] nor an affected specialist (or such person's counsel) would be given access to individual questionnaires or have the right to ascertain the identity of and to examine those floor members whose responses precipitated a [review] proceeding.") (emphasis added).
58 Our decision here is narrow, relating only to the procedure employed by CBOE to conduct its hearing. While we are constrained by Exchange Act Section 19(f) to set aside CBOE's action terminating Tower's DPM appointment, our order should not be read to suggest that CBOE is precluded from terminating Tower's appointment, following a fair hearing process, if such action is warranted. Cf. Eli Boggs Combs, 52 S.E.C. at 739 & n.9 (set aside order is narrow and SRO is not prohibited from exercising disqualification authority). Further, we note that Tower did not seek a stay of CBOE's action pending our resolution of Tower's appeal. We understand that Tower's DPM appointment has been terminated and the options classes previously allocated to Tower have been reallocated. Accordingly, CBOE may be unable to reallocate certain option classes back to Tower.
59 We have considered all of the parties' procedural contentions. We have rejected or sustained these contentions to the extent that they are inconsistent or in accord with the views expressed in this opinion.
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Modified: 03/20/2003