Self-Regulatory Organizations; Order Approving Proposed Rule Change and Amendment No. 1 and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 3 by the Chicago Stock Exchange, Inc. Relating to the Demutualization of the Chicago Stock Exchange, Inc., 7531-7541 [E5-588]
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Federal Register / Vol. 70, No. 29 / Monday, February 14, 2005 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51149, File No. SR–CHX–
2004–26]
Self-Regulatory Organizations; Order
Approving Proposed Rule Change and
Amendment No. 1 and Notice of Filing
and Order Granting Accelerated
Approval to Amendment No. 3 by the
Chicago Stock Exchange, Inc. Relating
to the Demutualization of the Chicago
Stock Exchange, Inc.
February 8, 2005.
I. Introduction
On November 24, 2004, the Chicago
Stock Exchange, Inc. (‘‘CHX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’),1 and Rule 19b–4
thereunder,2 a proposed rule change to
effect the demutualization of CHX. CHX
filed Amendment No. 1 to the proposal
on December 15, 2004.3 CHX filed
Amendment Nos. 2 and 3 to the
proposal on January 28, 2005.4
The proposed rule change and
Amendment No. 1 were published for
comment in the Federal Register on
December 28, 2004.5 The Commission
received no comment letters regarding
the proposal and Amendment No. 1.
This order approves the proposed rule
change, as amended. In addition, the
Commission is publishing notice to
solicit comments on, and is
simultaneously approving, on an
accelerated basis, Amendment No. 3.
II. Description of Proposed Rule Change
Currently, CHX is a non-stock, notfor-profit Delaware corporation. CHX
proposes to demutualize by reorganizing
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 In Amendment No. 1, CHX revises several
references in the original proposal to reflect the
November 2004 vote of CHX’s members to approve
the demutualization.
4 Amendment No. 3 replaced and superseded
Amendment No. 2 in its entirety. In Amendment
No. 3, CHX revises the proposal to: (1) Indicate that
the staff of CHX will present to the Board of
Directors of CHX Holdings for its approval a
proposed new Bylaws provision stating that CHX
Holdings will take such action as is necessary to
insure that its officers, directors, and employees
consent to the applicability of Article III, Section 3,
and Article III, Section 5 of the CHX Holdings
Bylaws with respect to CHX-related activities; (2)
confirm CHX’s continuing participation in various
national market system plans following the
demutualization; (3) correct a typographical error in
the numbering of the articles of the CHX Bylaws;
and (4) clarify language regarding the admission of
persons to membership.
5 See Securities Exchange Act Release No. 50892
(December 20, 2004), 69 FR 77796.
2 17
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as a Delaware for-profit stock
corporation that will be a subsidiary of
a new Delaware for-profit stock holding
company, CHX Holdings, Inc. (‘‘CHX
Holdings’’).6 CHX will continue to
operate as a national securities exchange
registered under Section 6 of the Act 7
and will continue to have self-regulatory
responsibilities over its members. CHX
will have its own Board of Directors that
will manage CHX’s business and affairs.
On the effective date of the
demutualization, each person or entity
that owns a membership in CHX will
receive 1,000 shares of common stock of
CHX Holdings for each membership that
the person or entity owns. All of the
issued and outstanding stock of CHX
Holdings (450,000 shares of common
stock) initially will be owned by the
persons or entities that owned
memberships in the Exchange.8
Following the demutualization, persons
and entities who have been qualified for
membership under Articles 1, 2, or 3 of
the Exchange’s current rules and, as a
result, have access to the Exchange’s
trading floor and other facilities
(‘‘qualified trading members’’) will
separately receive CHX trading permits
entitling them to maintain their trading
access to CHX.
Shares of CHX Holdings common
stock and CHX trading permits will not
be tied together. As a result, following
the demutualization, former CHX
members will be able to sell the shares
of CHX Holdings common stock they
receive in exchange for their CHX
memberships, subject to the applicable
restrictions described below, while
retaining the ability to trade and operate
on CHX pursuant to their CHX trading
permits. Any other person who satisfies
the regulatory requirements set forth in
CHX’s rules also will be able to obtain
a CHX trading permit without regard to
whether such person is a shareholder of
CHX Holdings. Persons who hold
trading permits in the demutualized
6 To accomplish the demutualization, CHX
proposes to establish two new Delaware stock forprofit corporations: CHX Holdings, a direct and
wholly-owned subsidiary of CHX; and CHX Merger
Sub, Inc. (‘‘CHX Merger Sub’’), a direct and whollyowned subsidiary of CHX Holdings. Pursuant to an
agreement and plan of merger, CHX Merger Sub
will merge with and into CHX, with CHX surviving
the merger as a Delaware for-profit stock
corporation that is a direct and wholly-owned
subsidiary of CHX Holdings.
7 15 U.S.C. 78f. The proposed rule change, as
amended, includes: (1) CHX’s revised rules; (2)
CHX’s revised Certificate of Incorporation; (3)
CHX’s revised Bylaws; (4) the Certificate of
Incorporation for CHX Holdings; and (5) the Bylaws
of CHX Holdings.
8 CHX Holdings will have an additional 300,000
shares of authorized, but not issued, common stock
and 25,000 shares of authorized, but not issued,
preferred stock. See CHX Holdings Certificate of
Incorporation, Article Fourth.
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7531
Exchange will be called ‘‘participants’’
or ‘‘participant firms.’’
CHX’s proposal included the CHX
Holdings Certificate of Incorporation
and Bylaws; proposed changes to the
CHX Certificate of Incorporation and
Bylaws that reflect the proposed
changes in its corporate form; proposed
governance changes that will, among
other things, reduce the size of the CHX
Board and make certain changes relating
to CHX committees. In addition, CHX
proposed changes to its membership
rule that are necessary to implement the
proposed trading permit structure.9
Specifically, CHX proposed to replace
references to ‘‘members,’’ ‘‘member
organizations,’’ and ‘‘member firms’’
with references to ‘‘participants’’ and
‘‘participant firms.’’ CHX also proposed
to delete references to sales of
memberships and consolidate the
current separate articles relating to
members into a single article regarding
participant firms. In its filing, CHX
represented that it was not proposing to
change its existing operational and
trading structure.
A. Corporate Structure
1. CHX Holdings
CHX Holdings will be the parent
company and sole shareholder of CHX.
As sole shareholder of CHX, CHX
Holdings will have the right to elect the
Board of Directors of CHX and collect
dividends, subject to certain provisions
in the CHX rules that reflect regulatory
requirements under the federal
securities laws. The Certificate of
Incorporation and the Bylaws of CHX
Holdings will govern the activities of
CHX Holdings.
(a) CHX Holdings Board of Directors.
The business and affairs of CHX
Holdings will be managed by its Board
of Directors (‘‘CHX Holdings Board’’).
The CHX Holdings Board will consist of
between 10 and 16 persons, as
determined by the CHX Holdings Board,
including the Chief Executive Officer
(‘‘CEO’’) of CHX Holdings.10 Initially,
the CHX Holdings Board will have 14
directors, who will be selected by the
Chairman, Vice Chairman, and CEO of
CHX from among the persons currently
9 CHX also proposed to delete the following rules
relating to events that have occurred or to programs
that CHX no longer offers: Article IB, ‘‘E-Session
Trading Privileges;’’ Article XI, Rules 11,
‘‘Mandatory Year 2000 Testing,’’ and 12,
‘‘Mandatory Decimal Pricing Testing;’’ and Article
XIII, Rule 4, ‘‘Advertisements, Market Sales
Literature Relating to Options and Communications
to Customers.’’
10 See CHX Holdings Certificate of Incorporation,
Article Sixth, Sections (b) and (c), and CHX
Holdings Bylaws, Article II, Section 2.
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serving on the Exchange’s Board of
Governors.11
The CHX Holdings Board will elect its
Chairman from among the directors on
the CHX Holdings Board.12 The
Chairman of the CHX Holdings Board
may serve as the CEO of CHX Holdings
but may hold no other office in CHX
Holdings.13 The Chairman of the CHX
Holdings Board will nominate the Vice
Chairman of the CHX Holdings Board,
and the CHX Holdings Board will elect
the Vice Chairman by majority vote.14
The Vice Chairman may hold no other
office in CHX Holdings.15 Neither the
Chairman nor the Vice Chairman of
CHX Holdings will be subject to any
limit on the number of terms that he or
she may serve.
Each year, the Nominating and
Governance Committee of CHX
Holdings will nominate directors for the
class of directors standing for election at
the CHX Holdings annual meeting of
shareholders.16 Each CHX Holdings
shareholder will be entitled to one vote
for each share of stock he or she owns,
absent a provision in the CHX Holdings
Certificate of Incorporation fixing or
denying voting rights.17 At each annual
meeting of the shareholders of CHX
Holdings at which a quorum is present,
the individuals receiving a plurality of
the votes cast will be elected directors
of CHX Holdings.18
(b) Committees of CHX Holdings. CHX
Holdings will have an Executive
Committee, a Nominating and
Governance Committee, an Audit
Committee, a Compensation Committee,
and any other committees that the CHX
Holdings Board establishes.19 The CHX
Holdings Board will appoint the CHX
Holdings Nominating and Governance
Committee, which will consist of six
directors.20 The Chairman and Vice
Chairman of the CHX Holdings Board
will appoint the Executive, Audit, and
Compensation Committees of CHX
Holdings, subject to the approval of the
11 See CHX Holdings Certificate of Incorporation,
Article Sixth, Section (g).
12 See CHX Holdings Bylaws, Article II, Section
4.
13 See CHX Holdings Bylaws, Article II, Section
4.
14 See CHX Holdings Bylaws, Article II, Section
5.
15 See CHX Holdings Bylaws, Article II, Section
5.
16 See CHX Holdings Bylaws, Article II, Section
3.
17 See CHX Holdings Bylaws, Article IV, Section
11.
18 See CHX Holdings Bylaws, Article IV, Section
9.
19 See CHX Holdings Bylaws, Article V, Section
1.
20 See CHX Holdings Bylaws, Article II, Section
3.
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CHX Holdings Board.21 The Vice
Chairman of CHX Holdings will appoint
the members of other standing and
special committees, subject to the
approval of the CHX Holdings Board.22
Each committee will have the authority
and responsibilities determined by the
CHX Holdings Board.23
(c) Officers of CHX Holdings. The
officers of CHX Holdings will be the
CEO of CHX Holdings, one or more Vice
Presidents, a Secretary, a Treasurer, and
such other officers, including a
President, as the CHX Holdings Board or
the CEO of CHX Holdings determine.24
The CHX Holdings Board will appoint
the CEO of CHX Holdings, who will
manage the business affairs of CHX
Holdings.25 The officers of CHX
Holdings will have the responsibilities
and authority set out in the CHX
Holdings Bylaws or given to them by the
CEO of CHX Holdings. As an initial
matter, the CEO of CHX will act as the
CEO of CHX Holdings and will appoint
as officers of CHX Holdings such
officers of CHX as he believes are
necessary to carry out the business of
CHX Holdings.
(d) Shareholder Restrictions. The
Certificate of Incorporation of CHX
Holdings places certain restrictions on
the ability to transfer, own, and vote the
stock of CHX Holdings.
(i) Restrictions on voting. The
Certificate of Incorporation of CHX
Holdings generally prohibits any
Person, either alone or together with its
Related Persons,26 from (a) voting or
giving a proxy or consent with respect
to shares representing more than 20% of
21 See
CHX Holdings Bylaws, Article V, Section
2.
22 See CHX Holdings Bylaws, Article II, Section
5, and CHX Holdings Bylaws, Article V, Section 2.
23 See CHX Holdings Bylaws, Article V, Section
3.
24 See CHX Holdings Bylaws, Article VI, Section
1.
25 See CHX Holdings Bylaws, Article VI, Section
4.
26 Article Fifth of the CHX Holdings Certificate of
Incorporation defines a ‘‘Person’’ to mean ‘‘an
individual, partnership (general or limited), joint
stock company, corporation, limited liability
company, trust or unincorporated organization, or
any governmental entity or agency or political
subdivision thereof.’’ A ‘‘Related Person’’ means
‘‘(A) with respect to any Person, all ‘affiliates’ and
‘associates’ of such Person (as such terms are
defined in Rule 12b–2 under the Securities
Exchange Act of 1934, as amended); (B) with
respect to any Person that holds a permit issued by
the Chicago Stock Exchange, Inc. to trade securities
on the Chicago Stock Exchange (a ‘Participant’), any
broker or dealer with which a Participant is
associated; and (C) any two or more Persons that
have any agreement, arrangement or understanding
(whether or not in writing) to act together for the
purpose of acquiring, voting, holding or disposing
of shares of the capital stock of the Corporation.’’
See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (a).
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Frm 00065
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the voting power of the then-issued and
outstanding capital stock of CHX
Holdings; or (b) entering into any
agreement, plan, or arrangement that
would result in the shares of CHX
Holdings subject to that agreement,
plan, or arrangement not being voted on
a matter, or any proxy relating thereto
being withheld, where the effect of that
agreement, plan, or arrangement would
be to enable any Person, alone or
together with its Related Persons,
possessing the right to vote or causing
the vote of more than 20% of the voting
power of the then-issued and
outstanding capital stock of CHX
Holdings.27
The CHX Holdings Board may waive
the voting limitation by approving an
amendment to the CHX Holdings
Bylaws. Before approving a waiver, the
CHX Holdings Board must determine
that, among other things, the waiver of
the voting limitation will not impair the
ability of CHX to carry out its functions
and responsibilities under the Act and
will not impair the Commission’s ability
to enforce the Act.28 In addition, the
CHX Holdings Board also must
determine that a Person and any Related
Persons that would vote more than 20%
of the outstanding stock of CHX
Holdings is not subject to an applicable
‘‘statutory disqualification’’ (within the
meaning of Section 3(a)(39) of the
Act).29 Finally, any amendment to the
CHX Holdings Bylaws that would
permit a Person to vote more than 20%
of the outstanding stock of CHX
Holdings must be filed with and
approved by the Commission.30
(ii) Restrictions on ownership. The
CHX Holdings Certificate of
Incorporation generally prohibits any
Person, alone or together with its
Related Persons, from owning, of record
or beneficially, shares constituting more
than 40% of any class of capital stock
of CHX Holdings.31 The CHX Holdings
Board may waive the ownership
limitation by approving an amendment
to the CHX Holdings Bylaws. Before
approving the ownership waiver, the
CHX Holdings Board must determine
that, among other things, the waiver of
the ownership limitation would not
impair the ability of CHX to carry out
its functions and responsibilities under
27 See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (b)(ii)(C).
28 See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (b)(iii)(B).
29 15 U.S.C. 78c(a)(39).
30 See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (b)(iii)(B) and paragraph
(b)(iv).
31 See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (b)(ii)(A). See also CHX
Holdings Certificate of Incorporation, Article Fifth,
paragraph (b)(iii)(A).
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the Act and would not impair the
Commission’s ability to enforce the
Act.32 In addition, the CHX Holdings
Board also must determine that a Person
and any Related Persons that would
own more than 40% of the outstanding
stock of CHX Holdings is not subject to
an applicable ‘‘statutory
disqualification’’ (within the meaning of
Section 3(a)(39) of the Act).33 Finally,
any amendment to the CHX Holdings
Bylaws that would permit a Person to
own more than 40% of the outstanding
stock of CHX Holdings must be filed
with and approved by the
Commission.34
The CHX Holdings Certificate of
Incorporation places further restrictions
on those shareholders of CHX Holdings
that also hold CHX trading permits.
Specifically, CHX Participants and their
Related Persons may not own, of record
or beneficially, shares constituting more
than 20% of any capital stock of CHX
Holdings.35 The CHX Holdings Board
may not waive this restriction.
(iii) Other shareholder requirements.
The CHX Holdings has several
provisions in its Certificate of
Incorporation that will enable it to
enforce the ownership and voting
restrictions. Specifically, if a
shareholder purports to sell, transfer,
assign, or pledge any shares to any
Person in a transaction that would
violate the ownership restrictions
described above, CHX Holdings will
record on its books the transfer of only
the number of shares that would not
violate these restrictions and will treat
the remaining shares as owned by the
purported transferor for all purposes,
including, without limitation, voting,
payment of dividends, and
distributions.36 In addition, if any
shareholder purports to vote, or to grant
any proxy or enter into any agreement
relating to the voting of shares that
would violate the voting restrictions
described above, CHX Holdings will not
honor such vote, proxy, or agreement,
and any shares subject to that
arrangement will not be entitled to be
voted to the extent of the violation.37
Finally, if any shareholder purports to
sell, transfer, assign, pledge, or vote any
shares in a transaction that would
32 See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (b)(iii)(C).
33 15 U.S.C. 78c(a)(39).
34 See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (b)(iii)(B) and paragraph
(b)(iv).
35 See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (b)(ii)(B).
36 See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (d).
37 See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (d).
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violate the voting and ownership
concentration limits, CHX Holdings will
have the right to redeem such shares at
a price equal to the par value of the
shares, upon the approval of the CHX
Holdings Board.38
A shareholder that alone or together
with its Related Persons owns, of record
or beneficially, five percent or more of
the then outstanding shares of the
capital stock of CHX Holdings, must
immediately give the CHX Holdings
Board written notice of such
ownership.39
Shareholders may dispose of shares of
CHX Holdings only in minimum lots of
1,000 shares.40
(e) Self-Regulatory Function and
Oversight. The CHX Holdings Bylaws
contain various provisions designed to
protect the independence of the selfregulatory function of CHX and to
clarify the Commission’s oversight
responsibilities. For example, pursuant
to the CHX Holdings Bylaws, CHX
Holdings must give due regard to the
preservation of the independence of the
self-regulatory function of CHX and to
its obligations to investors and the
general public. In addition, CHX
Holdings is specifically prohibited from
taking any actions that would interfere
with the effectuation of any decisions by
the Board of Directors of CHX (‘‘CHX
Board’’) relating to CHX’s regulatory
functions, including disciplinary
matters or the structure of the market it
regulates, or that would interfere with
CHX’s ability to carry out its
responsibilities under the Act.41 The
CHX Holdings Bylaws contain a specific
requirement that all books and records
of CHX, and the information contained
therein, that reflect confidential
information pertaining to the selfregulatory function of CHX, which
comes into the possession of CHX
Holdings must be retained in confidence
by CHX Holdings and its Board, officers,
employees, and agents, and must not be
used for any non-regulatory purposes.42
The CHX Holdings Bylaws also
provide that, to the extent they are
related to the activities of CHX, the
books, records, premises, officers,
directors, agents, and employees of CHX
Holdings are deemed to be the books,
records, premises, officers, directors,
agents, and employees of CHX for the
38 See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (e).
39 See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (c)(i).
40 See CHX Holdings Bylaws, Article IX, Section
2.
41 See CHX Holdings Bylaws, Article III, Section
1.
42 See CHX Holdings Bylaws, Article III, Section
2.
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Sfmt 4703
7533
purposes of, and subject to oversight
pursuant to, the Act.43
With regard to the Commission’s
ability to oversee the activities of CHX,
the CHX Holdings Bylaws provide that
the officers, directors, employees, and
agents of CHX Holdings, by virtue of
their acceptance of such position, are
deemed to agree to cooperate with the
Commission and CHX in respect of the
Commission’s oversight responsibilities
regarding CHX and the self-regulatory
functions and responsibilities of CHX.44
In addition, the CHX Holdings Bylaws
provide that CHX Holdings and its
officers, directors, employees, and
agents, by virtue of their acceptance of
such position, will be deemed to
irrevocably submit to the jurisdiction of
the U.S. federal courts, the Commission,
and CHX, for the purpose of any suit,
action, or proceeding pursuant to the
U.S. federal securities laws and the
rules and regulations thereunder, arising
out of, or relating to, the activities of
CHX.45 Further, CHX Holdings and its
officers, directors, employees, and
agents, by virtue of their acceptance of
such position, are deemed to waive, and
agree not to assert by way of motion, as
a defense or otherwise in any such suit,
action, or proceeding, any claims that it
or they are not personally subject to the
jurisdiction of the U.S. federal courts,
the Commission, or CHX; that the suit,
action, or proceeding is in an
inconvenient forum; that the venue of
the suit, action, or proceeding is
improper; or that the subject matter
thereof may not be enforced in or by
such courts or agency.46
Finally, the CHX Holdings Certificate
of Incorporation and the CHX Holdings
Bylaws provide that, before any
amendment or repeal of a provision in
the Certificate of Incorporation or the
43 See CHX Holdings Bylaws, Article III, Section
3. The Commission notes that the staff of CHX has
indicated that it will present to the CHX Holdings
Board for its approval a proposed new CHX
Holdings Bylaws provision confirming that CHX
Holdings will take such action as is necessary to
ensure that its officers, directors, and employees
consent to the applicability of Article III, Section 3,
and Article III, Section 5 of the CHX Holdings
Bylaws with respect to CHX-related activities. See
Amendment No. 3, supra note 4.
44 See CHX Holdings Bylaws, Article III, Section
4.
45 See CHX Holdings Bylaws, Article III, Section
5. The Commission notes that the staff of CHX has
indicated that it will present to the CHX Holdings
Board for its approval a proposed new CHX
Holdings Bylaws provision stating that CHX
Holdings will take such action as is necessary to
ensure that its officers, directors, and employees
consent to the applicability of Article III, Section 3,
and Article III, Section 5 of the CHX Holdings
Bylaws with respect to CHX-related activities. See
Amendment No. 3, supra note 4.
46 See CHX Holdings Bylaws, Article III, Section
5.
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Bylaws, respectively, will be effective, it
must be submitted to the CHX Board
and if the CHX Board determines that
the amendment or repeal of the
provision must be filed with the
Commission before it may be effective,
the amendment or repeal of the
provision will not be effective until it is
filed with, or filed with and approved
by the Commission, as the case may
be.47
2. CHX
Following the demutualization, CHX
will become a Delaware for-profit stock
corporation that will be wholly-owned
by CHX Holdings. CHX, however, will
continue to be the entity registered as a
national securities exchange under
Section 6 of the Act 48 and, accordingly,
CHX will continue to be a selfregulatory organization (‘‘SRO’’).
(a) Governing Documents and CHX
Rules. The CHX Certificate of
Incorporation, CHX Bylaws, and CHX
rules will govern the activities of CHX.
CHX’s rules and Bylaws are proposed to
reflect, among other things, CHX’s status
as wholly-owned subsidiary of CHX
Holdings, its management by the CHX
Board and its designated officers, and its
self-regulatory responsibilities pursuant
to CHX’s registration under Section 6 of
the Act.
(b) Board of Directors. The CHX Board
will consist of between 10 and 16
persons, as determined by the CHX
Board, including the CEO of CHX.49
Initially, the CHX Board will have 14
directors, whom the Chairman, Vice
Chairman, and CEO of CHX will select
from among the persons currently
serving on the Exchange’s Board of
Governors. The directors will be divided
into three classes, which will be as
nearly equal in number as the total
number of directors then constituting
the entire CHX Board permits, and will
serve staggered three-year terms with
the term of office of one class expiring
each year.50
The CHX Board will be comprised of
the CEO of CHX, persons who qualify as
‘‘Participant Directors,’’ and persons
who qualify as ‘‘Public Directors.’’ 51
47 See CHX Holdings Certificate of Incorporation,
Article Thirteenth, and CHX Bylaws, Article VIII.
48 15 U.S.C. 78f.
49 See CHX Certificate of Incorporation, Article
Fifth, paragraph (b), and CHX Bylaws, Article II,
Section 2(a). CHX’s current Board of Governors
consists of 24 governors.
50 See CHX Certificate of Incorporation, Article
Fifth, paragraph (d), and CHX Bylaws, Article II,
Section 2(c).
51 See CHX Certificate of Incorporation, Article
Fifth, paragraph (c), and CHX Bylaws, Article II,
Section 2(b). CHX’s Bylaws define a ‘‘Public
Director’’ as a director who (i) is not a participant
or an officer, managing member, partner or
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15:28 Feb 11, 2005
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One-half of the number of CHX directors
comprising the entire CHX Board must
be Public Directors, and the remaining
directors, other than the CEO of CHX,
will be Participant Directors.52 The CHX
Board’s initial directors will include the
CEO of CHX, seven Public Directors,
and six Participant Directors.
The CHX Board will elect its
Chairman from among the CEO of CHX
and the Public Directors.53 The
Chairman of the CHX Board may serve
as the CEO of CHX but may hold no
other office in CHX.54 The Participant
Directors will elect the Vice Chairman
of the CHX Board, who may not hold
any other office in CHX, from among the
Participant Directors.55
(c) Nomination and Election of
Directors. After the formation of the
initial CHX Board, the CHX Nominating
and Governance Committee, which will
be comprised of three Public Directors
and three Participant Directors
appointed by the CHX Board, will
nominate directors for each director
position standing for election at the
annual meeting of shareholders that
year.56 Because CHX Participants will
not be shareholders of CHX, they are not
entitled to directly elect members of the
CHX Board. CHX Holdings, as the sole
shareholder of CHX, will have the sole
right and the obligation to vote for the
directors of the CHX Board. However, to
ensure that CHX Participants are
afforded fair representation as required
under Section 6(b)(3) of the Act, CHX
has proposed a procedure whereby CHX
Participants will be involved in the
selection of Participant Director
nominees.57
employee of an entity that is a participant, (ii) is
not an employee of CHX, CHX Holdings or any of
their affiliates, (iii) is not a broker or dealer or an
officer or employee of a broker or dealer, or (iv)
does not have any other material business
relationship with CHX, CHX Holdings, or any of
their affiliates or any broker or dealer. See CHX
Bylaws, Article II, Section 2(b). A ‘‘Participant
Director’’ is a director who is a CHX participant or
an officer, managing member, or partner of an entity
that is a CHX participant. A ‘‘participant’’ is any
individual, corporation, partnership, or other entity
that holds a permit issued by CHX to trade
securities on CHX. See CHX Bylaws, Article II,
Section 2(b). See also CHX Rules, Article I, Rule1(l).
The definition of ‘‘Public Director’’ will replace the
definitions of ‘‘non-industry governor’’ and ‘‘public
governor’’ set out in the Exchange’s current
governing documents.
52 See CHX Certificate of Incorporation, Article
Fifth, paragraph (c), and CHX Bylaws, Article II,
Section 2(b).
53 See CHX Bylaws, Article II, Section 4(a).
54 See CHX Bylaws, Article II, Section 4(a).
55 See CHX Bylaws, Article II, Section 5(a).
56 See CHX Bylaws, Article II, Section 3. In
addition, the CHX Nominating and Governance
Committee will periodically review the
organization and governance structure of CHX. See
CHX Rules, Article IV, Rule 11.
57 After the Commission approves the proposal,
CHX Holdings will enter into a voting agreement
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Specifically, the CHX Nominating and
Governance Committee will hold two
open meetings with CHX participants
for the purpose of receiving
recommendations of candidates for
election to the Participant Director
positions. The CHX Nominating and
Governance Committee’s initial
candidates for nomination will be
announced to CHX participants, who
will then have the opportunity to
identify additional candidates for
nomination by submitting a petition
signed by at least ten participants. If no
petitions are submitted within the time
frame prescribed by the CHX Bylaws,
the CHX Nominating and Governance
Committee will nominate the candidates
it initially identified. If one or more
valid petitions are submitted, the
participants will vote on the entire
group of potential candidates, and the
individuals receiving the largest number
of votes will be the persons approved by
the participants as Participant Director
nominees. Each participant will have
one vote per trading permit with respect
to each Participant Director position
that is to be filled.58
(d) Committees. The CHX Board will
have the following standing committees:
(1) An Executive Committee; (2) a
Nominating and Governance
Committee; (3) an Audit Committee; (4)
a Compensation Committee; (5) a
Regulatory Oversight Committee
(‘‘ROC’’); (6) a Finance Committee; and
(7) a Judiciary Committee.59
As noted above, the CHX Nominating
and Governance Committee will be
appointed by the CHX Board. The
Chairman and Vice Chairman of the
CHX Board will appoint CHX’s
Executive, Audit, Finance, and
Compensation Committees, subject to
the approval of the CHX Board. CHX’s
Executive, Compensation, and Audit
Committees will have a majority of
Public Directors.60 The Executive
Committee will have the powers that the
with CHX confirming its obligation to vote for the
directors nominated through the process set out in
the CHX Bylaws.
58 No participant or participant firm is allowed to
hold more trading permits than are necessary to the
conduct of business on the Exchange. All trading
permits must be held by an active participant or
must be held by an active participant firm, where
the participant firm has assigned an active
participant as its nominee. See CHX Rules, Article
II, Rule 2(e).
59 See CHX Bylaws, Article IV, Section 1.
Information about the composition and
responsibilities of the Exchange’s committees
appears in Article IV of the Exchange’s rules.
60 See CHX Rules, Article IV, Rules 2, 8, and 9.
The proposal revises CHX’s current rules governing
its Audit and Compensation Committees by
providing that a majority, not just 50%, of the
members of the Audit and Compensation
Committees must be Public Directors.
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CHX Board delegates to it and, between
meetings of the CHX Board, will have
the rights, powers, authority, duties, and
obligations of the CHX Board not
otherwise delegated to another
committee, except the authority to
propose amendments to the CHX
Certificate of Incorporation, adopt an
agreement of merger or consolidation,
recommend to shareholders the sale,
lease or exchange of all or substantially
all or of the property and assets of CHX,
or recommend to the shareholders a
dissolution of CHX or the revocation of
a dissolution.61
The revised description of the role of
the CHX Audit Committee indicates
that, among other things, the Audit
Committee has ‘‘direct responsibility
and authority to engage and oversee the
work of the independent public
accountant retained to audit the
Exchange’s financial statements
* * *.’’ 62
The Vice Chairman of the CHX Board
will appoint CHX’s ROC, subject to the
approval of the Public Directors of the
CHX Board. Five of the seven members
of the ROC will be Public Directors.63 In
its filing, CHX represented that it
believed that the composition,
responsibilities, and appointment
mechanism associated with the ROC
were consistent with the requirements
set out in the Commission’s September
30, 2003, settlement order with CHX.64
The CEO of CHX will continue to
appoint CHX’s Judiciary Committee.65
The Vice Chairman of the CHX Board
will appoint other committees,
including the newly-formed Participant
Advisory Committee of CHX, subject to
the approval of the CHX Board.66 The
CHX Participant Advisory Committee,
which will be comprised entirely of
CHX participants, will recommend rules
for adoption by the CHX Board and
advise the CHX management regarding
enhancements to the Exchange’s trading
61 See CHX Rules, Article IV, Rule 2. The
proposal also deletes the requirements that
members of the Executive Committee be chosen (a)
with a view to providing representation to the
various geographical areas in which there are
member organizations that support the Exchange;
and (b) with a view to having persons on the
committee who are interested in and knowledgeable
about the Exchange’s business operations and the
securities industry as a whole.
62 See CHX Rules, Article IV, Rule 9.
63 See CHX Rules, Article IV, Rule 4.
64 See In the Matter of the Chicago Stock
Exchange, Securities Exchange Act Release No.
48566 (September 30, 2003) (Admin. Proc. File No.
3–11282) (Order Instituting Public Administrative
Proceedings Pursuant to Sections 19(h) and 21C of
the Securities Exchange Act of 1934, Making
Findings, and Imposing a Censure, a Cease-andDesist Order and Other Relief) (‘‘CHX Settlement
Order’’).
65 See CHX Rules, Article IV, Rule 7.
66 See CHX Bylaws, Article IV, Section 2.
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facilities and other matters that affect
participants.67 According to CHX, the
Participant Advisory Committee is
designed to provide participants with a
formal opportunity to share their
concerns and ideas with the CHX
management.
Each committee will have the
authority and responsibilities prescribed
for it in the CHX Bylaws or rules or by
the CHX Board.68
(e) Management. The officers of CHX
will be the CEO, one or more Vice
Presidents, a Secretary, and a Treasurer,
and such other officers, including a
President, as the CHX Board or the CEO
may determine.69 The CEO of CHX will
be responsible to the CHX Board for the
management of its business affairs.70
(f) Self-Regulatory Function and
Oversight. As noted above, following the
demutualization CHX will continue to
be registered as a national securities
exchange under Section 6 of the Act and
thus will continue to be an SRO.71 As
an SRO, CHX will be obligated to carry
out its statutory responsibilities,
including enforcing compliance by CHX
participants and participant firms with
the provisions of the federal securities
laws and the applicable rules of CHX.
Further, CHX will retain the
responsibility to administer and enforce
the rules that govern CHX’s and its
members’ activities. In addition, CHX
will continue to be required to file with
the Commission, pursuant to Section
19(b) of the Act 72 and Rule 19b–4
thereunder,73 any changes to its rules
and governing documents.
Like the Bylaws of CHX Holdings, the
Bylaws of CHX contain specific
provisions relating to the self-regulatory
function of CHX.74 For example, the
CHX Bylaws require the CHX Board to
consider applicable requirements under
Section 6(b) of the Act in connection
with the management of the Exchange.75
In addition, meetings of the CHX Board
and of its committees that pertain to the
self-regulatory function of CHX or to the
structure of the market CHX regulates
must be closed to persons who are not
CHX Rules, Article IV, Rule 10.
CHX Bylaws, Article IV, Section 3.
69 See CHX Bylaws, Article V, Section 1.
70 See CHX Bylaws, Article V, Section 4.
71 See 15 U.S.C. 78c(a)(26).
72 15 U.S.C. 78s(b).
73 17 CFR 240.19b–4.
74 See CHX Bylaws, Article X, Section 1.
75 See CHX Bylaws, Article X, Section 1. Section
6(b) of the Act requires, among other things, that the
Exchange’s rules be designed to protect investors
and the public interest. It also requires that the
Exchange be so organized that it has the capacity
to carry out the purposes of the Act and to enforce
compliance by its members with the Act, the rules
and regulations thereunder, and the rules of the
Exchange.
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68 See
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7535
members of the CHX Board or CHX
officers, staff, counsel, or other
specifically identified persons.76
Further, the CHX books and records
reflecting confidential information
relating to the self-regulatory function of
CHX must be kept confidential and
must not be used for non-regulatory
purposes, and the books and records of
CHX must be maintained in the U.S.77
The CHX Bylaws also provide that
any revenues received by CHX from
regulatory fees or penalties must be
applied to fund the legal and regulatory
operations of CHX and may not be used
to pay dividends.78
(g) Restrictions on ownership.
Although there are no percentage-based
restrictions on the ownership of CHX,
the CHX Certificate of Incorporation
confirms that CHX Holdings is the sole
shareholder of CHX.79 Any changes to
this provision of the CHX Certificate of
Incorporation cannot take effect until
they are filed with and approved by the
Commission pursuant to Section 19(b)
of the Act.80
(h) National Market System Plans.
CHX currently is a participant in
various national market system
(‘‘NMS’’) plans, including the
Consolidated Tape Association Plan, the
Consolidated Quotation System Plan,
the Intermarket Trading System Plan,
and the Reporting Plan for NasdaqListed Securities Traded on Exchanges
on an Unlisted Trading Privileges Basis
(‘‘Nasdaq UTP’’) Plan.81 These plans are
joint industry plans entered into by
SROs for the purpose of addressing last
sale reporting, quotation reporting, and
intermarket equities trading. Following
the completion of the demutualization,
CHX, in its continuing role as the SRO,
will continue to serve as the voting
member of these NMS plans, and a
representative of CHX will continue to
serve as CHX’s representative with
respect to dealing with these plans.82
B. Trading Permits
Following CHX’s demutualization,
persons and firms who have been
qualified for membership under Articles
1, 2, or 3 of the Exchange’s current rules
and, as a result, have access to the
Exchange’s trading floor and other
76 See
CHX Bylaws, Article X, Section 2.
CHX Bylaws, Article X, Sections 3 and 4.
78 See CHX Bylaws, Article X, Section 5.
Regulatory penalties that are intended to benefit
customers, by, for example, providing restitution,
must be provided to those customers and CHX will
not be use them for any purpose.
79 See CHX Certificate of Incorporation, Article
Fourth.
80 15 U.S.C. 78s(b).
81 See Amendment No. 3, supra note 4.
82 See Amendment No. 3, supra note 4.
77 See
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facilities will receive trading permits
entitling them to maintain their trading
access to CHX. Each trading permit will
constitute a revocable license allowing
the holder of the permit to access CHX
trading facilities in the same manner as
previously authorized for CHX’s
qualified trading members.83 According
to CHX, the demutualization and the
implementation of the use of trading
permits will not change current CHX
member access to the Exchange or their
ability to execute transactions.
Persons holding trading permits of
CHX will be ‘‘members’’ of CHX for
purposes of the Act and will be
characterized as ‘‘participants’’ in CHX
subject to CHX’s regulatory
jurisdiction.84 Trading permit holders
will not have any ownership interest in
CHX or in CHX Holdings by virtue of
their trading permits.
Following the demutualization, CHX
will require persons seeking trading
permits to complete appropriate
application materials and registration
forms, satisfy regulatory requirements,
and pay processing charges and
application fees. This process will be
substantially similar to the current
membership application process.85 An
individual participant may obtain only
one trading permit, and a participant
firm may obtain multiple trading
permits and may assign a nominee to
each trading permit. Each person
transacting business on the Exchange
will require a trading permit. For
example, a CHX specialist firm with 50
co-specialists would need to obtain 50
trading permits and register each cospecialist as a nominee. No participant
or participant firm will be allowed to
hold more trading permits than are
necessary to conduct business on the
Exchange, and all trading permits must
be held by an active participant or an
active participant firm, where the
participant firm has assigned an active
participant as its nominee.86
Once issued, a CHX trading permit
will be effective for one year following
its issuance date and will renew
automatically for an additional one-year
term on each anniversary of the
issuance date, unless the trading permit
holder provides the Exchange with 60
days’ prior written notice of the trading
permit holder’s waiver of renewal. If the
participant waives the right to renew the
permit, it will expire at the end of the
then-current term.87 A trading permit
CHX Rules, Article II, Rule 2.
CHX Rules, Article I, Rule 1(l) (definition
of ‘‘Participant’’).
85 See CHX Rules, Articles II and III.
86 See CHX Rules, Article II, Rule 2(e).
87 See CHX Rules, Article II, Rules 3(d) and 7.
generally may not be sold, leased, or
otherwise transferred, although a
participant firm may transfer its trading
permit from the name of one nominee
employee to the name of another
nominee employee, with the approval of
CHX.88 CHX will have the ability to
suspend or revoke a trading permit for
the same reasons that it is currently
entitled to suspend or revoke a
membership and/or sell a seat.89
Currently, CHX rules permit a person
(referred to as an ‘‘approved lessor’’) to
purchase a membership solely for the
purpose of providing a financing
mechanism for another person seeking
access to CHX.90 Following
demutualization, no person will be
permitted to operate as an approved
lessor or otherwise lease trading access
to the Exchange.
There will be nominal processing
charges and application fees relating to
the issuance of trading permits. In
addition, all participants and
participant firms will be subject to an
annual trading permit fee of $6,000 per
year, payable monthly, for each trading
permit. This fee is identical to CHX’s
current fee for membership dues. These
fees appear in the schedule of
Participant Fees and Credits.
C. Other Provisions in the Certificate of
Incorporation and Bylaws
1. Shareholder Ownership
The Bylaws for CHX Holdings and
CHX contain provisions relating to
issues associated with shareholder
ownership, including provisions
relating to the timing and conduct of
meetings, record dates, quorum
requirements, proxies, and other
matters.91 According to CHX, these
provisions were designed to reflect
current corporate practices and are
identical for CHX Holdings and CHX.
2. Updated provisions of the CHX
Certificate of Incorporation and Bylaws
The Exchange proposes to make
several changes to CHX’s Bylaws and
Certificate of Incorporation to
modernize CHX’s governing documents.
Among other things, these changes
streamline the description of CHX’s
corporate purpose; confirm that the
CHX Board has the authority to set the
CHX Board’s compensation; set out
specific provisions relating to the
authority of Exchange officers to enter
into contracts, sign checks, and handle
the funds of the Exchange; and provide
83 See
84 See
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CHX Rules, Article II, Rule 6.
generally, CHX Rules, Articles VII and XII.
90 See CHX Rules, Article IA.
91 See CHX Holdings Bylaws, Article IV, and CHX
Bylaws, Article III.
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89 See
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that the Exchange will advance
expenses, in appropriate circumstances,
to directors, officers, and committee
members of CHX who are named as
defendants in certain actions relating to
Exchange business.92
D. Description of Amendment No. 3
In Amendment No. 3, CHX proposes
to revise the proposal to: (1) Confirm
CHX’s continuing participation in
various NMS plans following the
demutualization; (2) correct a
typographical error in the numbering of
the articles of the CHX Bylaws; (3)
indicate that the staff of CHX will
present to the CHX Holdings Board for
its approval a proposed new CHX
Holdings Bylaws provision stating that
CHX Holdings will take such action as
is necessary to insure that its officers,
directors, and employees consent to the
applicability of Article III, Section 3,
and Article III, Section 5 of the CHX
Holdings Bylaws with respect to CHXrelated activities; 93 and (4) revise
language regarding the admission of
new participants.
III. Discussion
After careful review, the Commission
finds that the proposed rule change, as
amended, is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a national securities exchange.94 In
92 See CHX Certificate of Incorporation, Article
Third (corporate purpose); CHX Bylaws Article II,
Section 15 (CHX Board compensation), Article IX
(contracts, loans, checks, and deposits), and Article
VI (indemnification and advancing of expenses).
93 Article III, Section 3 of the CHX Holdings
Bylaws provides that, to the extent they are related
to the activities of CHX, the books, records,
premises, officers, directors, agents, and employees
of CHX Holdings will be deemed to be the books,
records, premises, officers, directors, agents, and
employees of CHX for the purposes of, and subject
to oversight pursuant to, the Act. In addition,
Article III, Section 5 of the CHX Holdings Bylaws
provides that CHX Holdings and its officers,
directors, employees, and agents, by virtue of their
acceptance of such position, shall be deemed
irrevocably to submit to the jurisdiction of the U.S.
federal courts, the Commission, and CHX, for the
purposes of any suit, action, or proceeding pursuant
to the U.S. federal securities laws and the rules and
regulations thereunder, arising out of, or relating to,
the activities of CHX. Article III, Section 5, also
states that CHX Holdings and its officers, directors,
employees, and agents, by virtue of their acceptance
of such position, are deemed to waive, and agree
not to assert by way of motion, as a defense or
otherwise in any such suit, action, or proceeding,
any claims that it or they are not personally subject
to the jurisdiction of the U.S. federal courts, the
Commission, or CHX; that the suit, action, or
proceeding is in an inconvenient forum; that the
venue of the suit, action, or proceeding is improper;
or that the subject matter thereof may not be
enforced in or by such courts or agency.
94 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
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particular, the Commission finds that
the proposed rule change, as amended,
is consistent with Section 6(b)(1) of the
Act,95 which requires a national
securities exchange to be so organized
and have the capacity to carry out the
purposes of the Act and to enforce
compliance by its members and persons
associated with its members with the
provisions of the Act. The Commission
also finds that the proposed rule change,
as amended, is consistent with Section
6(b)(3) of the Act,96 which requires that
the rules of a national securities
exchange assure the fair representation
of its members in the selection of its
directors and administration of its
affairs, and provide that one or more
directors shall be representative of
issuers and investors and not be
associated with a member of the
exchange, broker, or dealer. Further, the
Commission finds that the proposed
rule change, as amended, is consistent
with Section 6(b)(5) of the Act,97 in that
it is designed, among other things, to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
A. CHX Holdings as Sole Shareholder
Following completion of the
demutualization, CHX Holdings will be
the sole shareholder of CHX. Section
19(b) of the Act 98 and Rule 19b–4
thereunder 99 require an SRO to file
proposed rule changes with the
Commission. Although CHX Holdings is
not an SRO, certain provisions of its
Certificate of Incorporation and Bylaws
may be rules of an exchange 100 if they
are the stated policies, practices, or
interpretations, as defined in Rule 19b–
4 of the Act, of CHX. Any proposed rule
or any proposed change in, addition to,
or deletion from, the rules of an
exchange must be filed with the
Commission pursuant to Section 19(b)
of the Act and Rule 19b–4 thereunder.
Accordingly, CHX has filed the CHX
95 15
U.S.C. 78f(b)(1).
U.S.C. 78f(b)(3).
97 15 U.S.C. 78f(b)(5).
98 15 U.S.C. 78s(b).
99 17 CFR 240.19b–4.
100 Section 3(a)(27) of the Act defines the rules of
an exchange to be the constitution, articles of
incorporation, bylaws, and rules, or instruments
corresponding to the foregoing, of an exchange, and
such stated policies, practices, or interpretations of
such exchange as the Commission, by rule, may
determine to be necessary or appropriate in the
public interest or for the protection of investors to
be deemed to be rules of such exchange. 15 U.S.C.
78c(a)(27).
96 15
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Holdings Certificate of Incorporation
and CHX Holdings Bylaws with the
Commission. If CHX Holdings decides
to change its Certificate of Incorporation
or Bylaws, it must submit such changes
to the CHX Board so that it can
determine if the changes must be filed
with, and approved by, the Commission.
The Commission believes that these
provisions will assist CHX in fulfilling
its self-regulatory obligations and in
administrating and complying with the
requirements under the Act.
B. Changes in Control of CHX
The Commission believes that the
restrictions in the CHX Holdings
Certificate of Incorporation on direct
and indirect changes in control of CHX
Holdings are sufficient to enable CHX to
carry out its self-regulatory
responsibilities and to enable the
Commission to fulfill its responsibilities
under the Act.101
Specifically, as proposed, CHX will be
wholly-owned subsidiary of CHX
Holdings, i.e., CHX Holdings will own
all of the shares of CHX. The CHX
Certificate of Incorporation identifies
this ownership structure.102 Any
changes to the CHX Certificate of
Incorporation, including any change to
the provision that identifies CHX
shareholders, must be filed with, and
approved by, the Commission pursuant
to Section 19(b) of the Act.103
In addition, the CHX Holdings
Certificate of Incorporation imposes
limitations on direct and indirect
changes in control of CHX Holdings
through voting and ownership
limitations placed on the capital stock
of CHX Holdings (whether common or
preferred stock) and allows CHX
Holdings to monitor potential changes
in control through a notification
requirement once a threshold
percentage of ownership of capital stock
is reached.104 Specifically, the CHX
101 The Commission notes that it is in the process
of reviewing issues related to new ownership
structures of SROs and has proposed rules relating
to the ownership of SROs, including limiting the
restrictions on ownership and voting to members of
an SRO or a facility of an SRO. See Securities
Exchange Act Release No. 50699 (November 18,
2004), 69 FR 71126 (December 8, 2004) (‘‘Proposed
Rulemaking’’). See also Securities Exchange Act
Release No. 51019 (January 11, 2005), 70 FR 2829
(January 18, 2005) (extending the comment period
for the Proposed Rulemaking until March 8, 2005).
102 See CHX Certificate of Incorporation, Article
Fourth.
103 15 U.S.C. 78s(b).
104 The CHX Holdings Certificate of Incorporation
requires that any person, either alone or together
with its affiliates or associates or any other person,
who at any time owns five percent or more of then
outstanding shares of capital stock and who has the
right to vote in the election of the CHX Holdings
Board, shall, immediately upon so owning five
percent or more of the then outstanding shares of
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7537
Holdings Certificate of Incorporation
prohibits any Person, either alone or
together with its Related Persons, from
voting or giving a proxy or consent with
respect to shares representing more than
20% of the voting power of the issued
and outstanding shares of CHX
Holdings.105 Furthermore, the CHX
Holdings Certificate of Incorporation
limits the right of any Person, either
alone or together with its Related
Persons, to enter into any agreement
with respect to the withholding of any
vote or proxy where the effect of the
agreement would be to enable any
person or group to obtain more than
20% of the outstanding voting power.106
The CHX Holdings Certificate of
Incorporation also restricts the ability of
any Person, either alone or together with
its Related Persons, from owning,
directly or indirectly, shares
constituting more than 40% of the
outstanding shares of capital stock of
CHX Holdings.107
If any shareholder votes, sells,
transfers, assigns, or pledges any shares
in violation of the voting and ownership
limitations, CHX Holdings will treat
those shares as owned by the transferor
for all purposes, including, without
limitation, voting, payment of
dividends, and distributions.108 In
addition, if any shareholder votes, sells,
transfers, assigns, or pledges any shares
in violation of the voting and ownership
limitations, CHX Holdings has the right
to redeem those shares at a price equal
to the par value thereof, upon the
approval of the CHX Holdings Board.109
The CHX Holdings Board has the
authority to waive these voting and
ownership limitations by adopting an
amendment to the CHX Holdings
Bylaws. The CHX Holdings Board must
determine that the waiver of a voting or
ownership requirement will not impair
CHX’s ability to carry out its selfregulatory functions and will not impair
the Commission’s ability to enforce the
Act. In addition, the CHX Holdings
Board must determine that the person to
whom it is giving either a voting or
such stock, give the CHX Holdings Board a written
notice of such ownership and update that notice
promptly after an ownership change of a specified
percentage. See CHX Holdings Certificate of
Incorporation, Article Fifth, paragraph (c).
105 See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (b)(ii)(C). See note 26,
supra, for the definitions of ‘‘Person’’ and ‘‘Related
Person.’’
106 See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (b)(ii)(C).
107 See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (b)(ii)(A).
108 See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (d).
109 See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (e).
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ownership waiver is not subject to any
applicable ‘‘statutory disqualification’’
(within the meaning of Section 3(a)(39)
of the Act 110). Finally, the CHX
Holdings Board must submit any
amendment to the CHX Holdings
Bylaws to the CHX Board, and if the
CHX Board determines that the
proposed change to the CHX Holdings
Bylaws must be filed with the
Commission, then the CHX Holdings
Bylaw change will not be effective until
it is filed with, or filed with and
approved by the Commission, as the
case may be.111 The Commission
believes that any such amendment to
the CHX Holdings Bylaws would be a
proposed rule change that would need
to be filed with the Commission
pursuant to Section 19(b) of the Act.112
The proposed rule change would
present the Commission with an
opportunity to determine what
additional measures, if any, might be
necessary to provide sufficient
regulatory jurisdiction over the
proposed controlling person.
CHX has also proposed to require
CHX Holdings shareholders that own, of
record or beneficially, five percent or
more of the then outstanding shares to
give the CHX Holdings Board written
notice of such ownership. This notice
should enable CHX Holdings to monitor
the ownership of its stock to ensure that
no limitation is reached.113
The CHX Holdings Certificate of
Incorporation also provides that no
Person, either alone or together with its
Related Persons, who is a trading permit
holder of CHX may own, directly or
indirectly, shares constituting more than
20% of any class of capital stock of CHX
Holdings.114 The Commission finds that
the limitation on ownership of shares of
CHX Holdings by CHX trading permit
holders is consistent with the Act.
Under the member-owned exchange
110 15
U.S.C. 78c(a)(39).
CHX Holdings Bylaws, Article VIII. A
similar requirement applies to changes to the CHX
Holdings Certificate of Incorporation. See CHX
Holdings Certificate of Incorporation, Article
Thirteenth.
112 15 U.S.C. 78s(b).
113 The Commission believes that CHX Holdings
should disclose periodically, or otherwise make
available upon request, information regarding the
number of outstanding shares of its capital stock,
so that persons that own stock of CHX Holdings can
determine whether they are reaching or have
reached any of the thresholds that restrict that
person’s ability to vote or own the shares or require
that person to provide written notice under the
Article Fifth, paragraph (c) of the CHX Holdings
Certificate of Incorporation.
114 See CHX Holdings Certificate of Incorporation,
Article Fifth, paragraph (b)(ii)(B). Unlike the 40%
ownership and 20% voting limitations discussed
above, the CHX Holdings Board may not waive the
20% ownership limitation applicable to CHX
trading permit holders.
111 See
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model, a member who trades securities
through the facilities of an exchange can
have an ownership interest in the
exchange. A regulatory concern can
arise if a member’s interest becomes so
large as to cast doubt on whether the
exchange can fairly and objectively
exercise its self-regulatory
responsibilities with respect to that
member. For example, a member that
directly or indirectly controls an
exchange might be tempted to exercise
that controlling influence by directing
the exchange to refrain from diligently
monitoring the member’s conduct or
from punishing any conduct that
violates the rules of the exchange or the
federal securities laws. An exchange
also might be reluctant to diligently
monitor and conduct surveillance of
trading conduct and to enforce its rules
and the federal securities laws against a
member that the exchange relies on for
a large source of capital. The
Commission believes that the proposed
limitation would help mitigate the
conflicts of interest that could occur if
a member were to control a significant
stake in the Exchange through
ownership in shares in the Exchange’s
parent company and are necessary and
appropriate to help ensure that the
Exchange can effectively carry out its
statutory obligations under Section 6(b)
of the Act.115
C. Regulatory Jurisdiction Over CHX
Holdings
The Commission believes that the
terms of CHX Holdings Bylaws provide
the Commission with sufficient
regulatory jurisdiction over the
controlling parties of the Exchange to
carry out its oversight responsibilities
under the Act. The CHX Holdings
Bylaws provide that, to the extent that
they are related to the activities of CHX,
the books, records, premises, officers,
directors, agents, and employees of CHX
Holdings are deemed to be the books,
records, premises, officers, directors,
agents, and employees of CHX for
purposes of and subject to oversight
pursuant to the Act.116 This provision
would enable the Commission to
exercise its authority under Section
U.S.C. 78f(b).
CHX Holdings Bylaws, Article III, Section
3. As noted above, the staff of CHX has indicated
that it will present to the CHX Holdings Board for
its approval a proposed new CHX Holdings Bylaws
provision stating that CHX Holdings will take such
action as is necessary to ensure that its officers,
directors, and employees consent to the
applicability of Article III, Section 3, and Article III,
Section 5 of the CHX Holdings Bylaws with respect
to CHX-related activities. See Amendment No. 3,
supra note 4.
PO 00000
115 15
116 See
Frm 00071
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19(h)(4) of the Act 117 with respect to
officers and directors of CHX Holdings,
because all such officers and directors,
to the extent that they are acting on
matters related to CHX activities, would
be deemed to be officers and directors
of CHX. Furthermore, the books and
records of CHX Holdings, to the extent
that they are related to the activities of
CHX, are subject to the Commission’s
examination authority under Section
17(b)(1) of the Act,118 as these records
would be deemed to be the records of
CHX itself.
In addition, pursuant to the CHX
Holdings Bylaws, CHX Holdings
officers, directors, employees, and
agents, by virtue of their acceptance of
such position, are deemed to irrevocably
submit to the jurisdiction of the U.S.
federal courts, the Commission, and
CHX for the purposes of any suit, action,
or proceeding pursuant to the U.S.
federal securities laws and the rules and
regulations thereunder, arising out of, or
relating to, the activities of the
Exchange.119 Moreover, CHX Holdings
and such officers, directors, employees,
and agents, by virtue of their acceptance
of any such position, are deemed to
waive and agree not to assert by way of
motion as a defense or otherwise in any
such suit, action, or proceeding any
claims that it or they are not personally
subject to the jurisdiction of the U.S.
federal courts, the Commission, or CHX,
that the suit, action, or proceeding is an
inconvenient forum, or that the venue of
the suit, action, or proceeding is
improper, or that the subject matter of
that suit, action, or proceeding may not
be enforced in or by such courts or
agency.120 Finally, the CHX Holdings
Bylaws provide that the officers,
directors, employees, and agents of CHX
Holdings, by virtue of their acceptance
117 15 U.S.C. 78s(h)(4). Section 19(h)(4) authorizes
the Commission, by order, to remove from office or
censure any officer or director of a national
securities exchange if it finds, after notice and an
opportunity for hearing, that such officer or
director: (1) Has willfully violated any provision of
the Act or the rules and regulations thereunder, or
the rules of a national securities exchange; (2)
willfully abused his or her authority; or (3) without
reasonable justification or excuse, has failed to
enforce compliance with any such provision by a
member or person associated with a member of the
national securities exchange.
118 15 U.S.C. 78q(b)(1).
119 See CHX Holdings Bylaws, Article III, Section
5. As noted above, the staff of CHX has indicated
that it will present to the CHX Holdings Board for
its approval a proposed new CHX Holdings Bylaws
provision stating that CHX Holdings will take such
action as is necessary to ensure that its officers,
directors, and employees consent to the
applicability of Article III, Section 3, and Article III,
Section 5 of the CHX Holdings Bylaws with respect
to CHX-related activities. See Amendment No. 3,
supra note 4.
120 See CHX Holdings Bylaws, Article III, Section
5.
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of such position, are deemed to agree to
cooperate with the Commission and
CHX in respect of the Commission’s
oversight responsibilities regarding CHX
and the self-regulatory functions and
responsibilities of CHX.121
The Commission also notes that, even
in the absence of these provisions of the
CHX Holdings Bylaws, Section 20(a) of
the Act 122 provides that any person
with a controlling interest in CHX
would be jointly and severally liable
with and to the same extent that CHX
is liable under any provision of the Act,
unless the controlling person acted in
good faith and did not directly or
indirectly induce the act or acts
constituting the violation or cause of
action. In addition, Section 20(e) of the
Act 123 creates aiding and abetting
liability for any person who knowingly
provides substantial assistance to
another person in violation of any
provision of the Act or rule thereunder,
and Section 21C of the Act 124
authorizes the Commission to enter a
cease-and-desist order against any
person who has been ‘‘a cause of’’ a
violation of any provision of the Act
through an act or omission that the
person knew or should have known
would contribute to the violation. The
Commission believes that, taken
together, these provisions grant the
Commission sufficient jurisdictional
authority over the controlling persons of
CHX. Moreover, CHX is required to
enforce compliance with these
provisions because they are ‘‘rules of the
exchange’’ within the meaning of
Section 3(a)(27) of the Act.125 A failure
on the part of CHX to enforce its rules
could result in suspension or revocation
of CHX’s registration under Section
19(h)(1) of the Act.126
D. Self-Regulatory Function of CHX
Following the demutualization, the
rules and bylaws of CHX will reflect its
status as a wholly-owned subsidiary of
CHX Holdings, under management of
the CHX Board and its designated
officers and with self-regulatory
obligations pursuant to CHX’s
registration as a national securities
exchange under Section 6 of the Act.
As the sole shareholder of CHX, the
Commission believes that CHX
Holdings’ activities with respect to its
ownership of CHX must be consistent
with CHX’s obligations under the Act.
Under the CHX Holdings Bylaws, the
121 See
CHX Holdings Board and the officers,
employees, and agents of CHX Holdings
must give due regard to the preservation
of the independence of the selfregulatory function of CHX and to its
obligations to investors and the general
public and not take any actions that
would interfere with the effectuation of
any decisions by the CHX Board relating
to its regulatory functions or the
structure of the market it regulates or
which would interfere with the ability
of CHX to carry out its responsibilities
under the Act.127 In addition, all books
and records of CHX reflecting
confidential information pertaining to
its self-regulatory function (including
but not limited to disciplinary matters,
trading data, trading practices, and audit
information) which come into the
possession of CHX Holdings, and the
information contained therein, must be
retained in confidence by CHX Holdings
and its directors, officers, employees,
and agents and must not be used for any
non-regulatory purposes.128 The
Commission believes that these
provisions, which are designed to
acknowledge the need to maintain the
independence of the self-regulatory role
of CHX following the demutualization
and protect from improper use
information pertaining to its selfregulatory function, are appropriate.
Further, the Commission notes that
the CHX Bylaws expressly require that
the CHX Board consider applicable
requirements for registration as a
national securities exchange under
Section 6(b) of the Act,129 including the
requirement that the rules of the
Exchange be designed to protect
investors and the public interest and the
requirement that the Exchange be so
organized and have the capacity to carry
out the purposes of the Act and to
enforce compliance by its members and
persons associated with members with
the provisions of the Act, the rules and
regulations thereunder and with the
rules of the Exchange.130 In the
Commission’s view, this provision
should serve to remind the CHX Board
that it must consider the interests of the
Exchange’s constituents and the
requirements of the Act when taking
action on behalf of the Exchange.
E. Fair Representation
Section 6(b)(3) of the Act 131 requires
that the rules of an exchange assure fair
representation of its members in the
CHX Holdings Bylaws, Article III, Section
127 See
CHX Holdings Bylaws, Article III, Section
128 See
4.
CHX Holdings Bylaws, Article III, Section
1.
122 15
U.S.C. 78t(a).
U.S.C. 78t(e).
124 15 U.S.C. 78u–3.
125 15 U.S.C. 78c(a)(27).
126 15 U.S.C. 78s(h)(1).
2.
123 15
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129 15
U.S.C. 78f(b).
CHX Bylaws, Article X, Section 1.
131 15 U.S.C. 78f(b)(3).
130 See
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7539
selection of its directors and
administration of its affairs and provide
that one or more directors be
representative of issuers and investors
and not be associated with a member of
the exchange or with a broker or dealer.
In addition, Section 6(b)(1) of the Act 132
requires that an exchange be so
organized and have the capacity to be
able to carry out the purposes of the Act.
CHX has proposed to amend the size
and composition of its Board.
Specifically, the CHX Board will have
no less than ten and no more than 16
directors. At least 50% of the total
number of directors on the CHX Board
must be Public Directors and the
remaining directors will be Participant
Directors and the CEO.
Because CHX’s participants will not
be shareholders of CHX, they will not
directly elect members of the CHX
Board. As the sole shareholder of CHX,
CHX Holdings will have the sole right
and obligation to vote for the director
nominees nominated by the CHX
Nominating and Governance
Committee.133 The CHX Bylaws,
however, establish a procedure that will
allow participants to be involved in the
selection of candidates to fill Participant
Director positions on the CHX Board.134
Each participant will have one vote per
trading permit with respect to each
Participant Director position to be
filled.135
Under the procedures for selecting
Participant Director candidates,136 the
CHX Nominating and Governance
Committee, which will have three
Participant Directors and three Public
Directors, will hold two open meetings
with CHX participants for the purpose
of receiving recommendations of
candidates for election to the position of
Participant Director. The CHX
Nominating and Governance
Committee’s initial candidates for
nomination will be announced to CHX
participants, who will then have the
opportunity to identify additional
candidates for nomination by
submitting a petition signed by at least
ten participants. If no petitions are
132 15
U.S.C. 78f(b)(1).
approval of the demutualization, CHX
Holdings will enter into a voting agreement with
CHX confirming its obligation to vote for the
directors nominated through the process set out in
the CHX Bylaws.
134 See CHX Bylaws, Article II, Section 3.
135 As noted above, no participant or participant
firm is allowed to hold more trading permits than
are necessary to the conduct of business on the
Exchange. All trading permits must be held by an
active participant or must be held by an active
participant firm, where the participant firm has
assigned an active participant as its nominee. See
CHX Rules, Article II, Rule 2(e).
136 See CHX Bylaws, Article II, Section 3.
133 Upon
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submitted within the time frame
prescribed by the CHX Bylaws, the CHX
Nominating and Governance Committee
will nominate the candidates it initially
identified. If one or more valid petitions
are submitted, the participants will vote
on the entire group of potential
candidates, and the individuals
receiving the largest number of votes
will be the persons approved by the
participants as Participant Director
nominees. The CHX Nominating and
Governance Committee will nominate
only those persons whose names have
been presented to, and approved by,
CHX’s participants pursuant to the
procedures set forth in the CHX
Bylaws.137 CHX Holdings, as the sole
shareholder of CHX, will have the sole
right and obligation to vote for the
director nominees nominated by the
CHX Nominating and Governance
Committee.138
In addition to their representation on
the CHX Nominating and Governance
Committee, CHX participants will
participate on other committees of CHX.
For example, three of the seven
members of the Committee on Exchange
Procedure will be CHX participants, the
Judiciary Committee will be comprised
of five participants and/or general
partners or officers of participant firms,
and the ROC will include one on-floor
Participant Director and one off-floor
Participant Director. In addition, the
newly-formed Participant Advisory
Committee will have not less than five
members, all of whom will be
participants.139 Among other things, the
Participant Advisory Committee will
recommend rules for adoption by the
CHX Board and advise the CHX
management regarding enhancements to
the Exchange’s trading facilities and
other matters that affect participants.
According to CHX, the Participant
Advisory Committee is designed to
provide participants with a formal
opportunity to share their concerns and
ideas with the CHX management.
Certain committees of the CHX Board
will be comprised of a majority of
Public Directors. Specifically, the
Executive Committee, the Compensation
Committee, and the Audit Committee
will be comprised of a majority of
Public Directors.140 The CHX
Nominating and Governance Committee
will consist of three Public Directors
and three Participant Directors.141 Five
of the seven members of the ROC will
be Public Directors, and the Vice
137 See
CHX Bylaws, Article II, Section 3(b).
note 134, supra.
139 See CHX Rules, Article IV, Rule 10.
140 See CHX Rules, Article IV, Rules 2, 8, and 9.
141 See CHX Bylaws, Article II, Section 3.
Chairman of the CHX Board will
appoint the members of the ROC,
subject to the approval of the Public
Directors of the CHX Board.142 As noted
above, CHX represents that the
composition, responsibilities, and
appointment mechanism associated
with the ROC are consistent with the
requirements set out in the CHX
Settlement Order.143
The Commission finds that the
requirement that at least one-half of the
directors of the CHX Board be Public
Directors is consistent with Sections
6(b)(1) and 6(b)(3) of the Act, which
requires that one or more directors be
representative of issuers and investors.
The Commission also finds that the
requirement that the remaining
directors, other than the CEO of CHX, be
Participant Directors and the manner in
which such directors will be nominated
and elected, together with the
representation of CHX participants on
key committees, satisfies the fair
representation requirements in Section
6(b)(3) of the Act. The Commission
notes, however, that after the
demutualization trading privileges will
be separated from corporate ownership
of CHX and will be available exclusively
through trading permits. Therefore, the
Commission expects that trading
permits will not be issued in a manner
that would undermine or circumvent
the requirement in Section 6(b)(3) of the
Act for fair representation of members.
The Commission also notes that
participants will retain a voice in the
administration of the affairs of CHX
following the demutualization,
including rulemaking and the
disciplinary process, through
participants’ participation on various
CHX committees.
Finally, the Commission notes that it
is in the process of reviewing a range of
governance issues relating to SROs,
including possible steps to strengthen
the framework for the governance of
SROs and ways to improve the
transparency of the governance
procedures of all SROs and has
proposed rules in furtherance of this
goal.144 Depending on the results of the
proposed rules, CHX may be required to
make further changes to strengthen its
governance structure. The Commission
also believes that the CHX Board should
continue to monitor and evaluate its
governance structure and process on an
ongoing basis and propose further
changes as appropriate.
138 See
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PO 00000
142 See
CHX Rules, Article IV, Rule 4.
note 64, supra, and accompanying text.
144 See Proposed Rulemaking, supra note 101.
143 See
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F. Dividends
With the demutualization, the holders
of capital stock of CHX will have the
dividend and other distribution rights of
a shareholder in a Delaware stock
corporation. The CHX Bylaws allow the
CHX Board to declare dividends.145
However, the CHX Bylaws further
provide that any revenues received by
CHX from regulatory fees or regulatory
penalties will be applied to fund the
legal and regulatory operations,
including the surveillance and
enforcement activities, of CHX and will
not be used to pay dividends.146 This
limitation would preclude CHX from
providing dividends derived from
regulatory fees or penalties to the sole
shareholder of CHX, i.e., CHX Holdings.
As a result, CHX Holdings would not be
able to provide dividends derived from
regulatory fees or penalties belonging to
CHX to the shareholders of CHX
Holdings. The Commission finds that
the prohibition on the use of regulatory
fees or penalties to fund dividends is
consistent with Section 6(b)(1) of the
Act because it will ensure that the
regulatory authority of CHX is not used
improperly to benefit CHX Holdings and
its shareholders.
IV. Accelerated Approval of
Amendment No. 3
The Commission finds good cause for
approving Amendment No. 3 to the
proposal prior to the thirtieth day after
date of notice of filing thereof in the
Federal Register. Amendment No. 3
clarifies the proposal by confirming
CHX’s continuing participation in
various NMS plans following the
demutualization and by correcting a
typographical error in the numbering of
the articles of the CHX Bylaws. In
addition, Amendment No. 3 strengthens
the proposal by indicating that the staff
of CHX will present to the Board of
Directors of CHX Holdings for its
approval a proposed new CHX Holdings
Bylaws provision stating that CHX
Holdings will take such action as is
necessary to ensure that its officers,
directors, and employees consent to the
applicability of Article III, Section 3,
and Article III, Section 5 of the CHX
Holdings Bylaws with respect to CHXrelated activities. Finally, Amendment
No. 3 clarifies the language in the CHX’s
rules regarding the admission of
members to be consistent with the
language in the Act. Accordingly, the
Commission finds that it is consistent
145 See
CHX Bylaws, Article XI, Section 2.
purposes of this provision, regulatory
penalties include restitution and disgorgement of
funds intended for customers. See CHX Bylaws,
Article X, Section 5.
146 For
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with Sections 6(b)(5) and 19(b) of the
Act to approve Amendment No. 3 on an
accelerated basis.
V. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning Amendment No.
3, including whether Amendment No. 3
is consistent with the Act. Comments
may be submitted by any of the
following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CHX 2004–26 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
450 Fifth Street, NW., Washington, DC
20549–0609.
All submissions should refer to File
No. SR–CHX–2004–26. This file number
should be included on the subject line
if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule changes between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room, 450 Fifth Street, NW,
Washington, DC 20549. Copies of such
filing will also be available for
inspection and copying at the principal
office of CHX. All comments received
will be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File No. SR–CHX–2004–
26 and should be submitted on or before
March 7, 2005.
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VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,147 that the
proposed rule change (SR–CHX–2004–
26), as amended, is approved, and
Amendment No. 3 is approved on an
accelerated basis.
7541
Dated: February 4, 2005.
Clayton L. Diamond,
Executive Secretary, Shipping Coordinating
Committee, Department of State.
[FR Doc. 05–2806 Filed 2–11–05; 8:45 am]
BILLING CODE 4710–09–P
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.148
DEPARTMENT OF STATE
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–588 Filed 2–11–05; 8:45 am]
Shipping Coordinating Committee;
Notice of Meeting
BILLING CODE 8010–01–P
DEPARTMENT OF STATE
[Public Notice 4966]
Shipping Coordinating Committee;
Notice of Meeting
The Shipping Coordinating
Committee (SHC) will conduct an open
meeting at 1 p.m. on Wednesday, March
16, 2005, in Room 6319 of the United
States Coast Guard Headquarters
Building, 2100 2nd Street, SW.,
Washington, DC 20593–0001. The
primary purpose of the meeting is to
begin preparations for the 48th Session
of the International Maritime
Organization (IMO) Sub-Committee on
Stability and Load Lines and on Fishing
Vessels Safety to be held at IMO
Headquarters in London, England from
September 12th to 16th.
The primary matters to be considered
include:
—Development of explanatory notes for
harmonized SOLAS Chapter II–1;
—Large passenger ship safety;
—Review of the Intact Stability Code;
—Review of the Offshore Supply Vessel
Guidelines;
—Harmonization of damage stability
provisions in other IMO instruments;
—Review of the 2000 HSC Code and
amendments to the DSC Code and the
1994 HSC Code;
—Tonnage measurement of open-top
containerships.
Members of the public may attend
this meeting up to the seating capacity
of the room. Interested persons may
seek information by writing to Mr. Paul
Cojeen, Commandant (G–MSE), U.S.
Coast Guard Headquarters, 2100 Second
Street, SW., Room 1308, Washington,
DC 20593–0001 or by calling (202) 267–
2988.
PO 00000
147 15
148 17
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
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[Public Notice 4964]
The Shipping Coordinating
Committee (SHC) will conduct an open
meeting at 1 p.m. on Friday, February
25, 2005, in Room 2415 of the United
States Coast Guard Headquarters
Building, 2100 2nd Street, SW.,
Washington, DC 20593–0001. The
primary purpose of the meeting is to
prepare for the 13th Session of the
International Maritime Organization
(IMO) Sub-Committee on Flag State
Implementation to be held at IMO
Headquarters in London, England from
March 7th to 11th.
The primary matters to be considered
include:
—Measures to enhance maritime
security;
—Responsibilities of Governments and
measures to encourage flag State
compliance;
—Port State Control (PSC) on seafarer’s
working hours;
—Comprehensive analysis of difficulties
encountered in the implementation of
IMO instruments;
—Regional cooperation on port State
control;
—Reporting procedures on port State
control detentions and analysis and
evaluation of reports;
—Mandatory reports under
International Convention for the
Prevention of Pollution from Ships,
1973, as modified by the Protocol of
1978 (MARPOL 73/78);
—Casualty statistics and investigations;
—Review of the Code for the
investigation of marine casualties and
incidents;
—Development of provisions on transfer
of class;
—Review of the Survey Guidelines
under the Harmonized System of
Survey and Certification (HSSC)—
(resolution A.948(23));
—Development of guidelines for port
State control under the 2004 Ballast
Water Management (BWM)
Convention;
—Development of survey guidelines
required by regulation E–1 of the 2004
BWM Convention;
—Development of guidelines for port
State control for MARPOL Annex VI;
E:\FR\FM\14FEN1.SGM
14FEN1
]]>Agencies
[Federal Register Volume 70, Number 29 (Monday, February 14, 2005)]
[Notices]
[Pages 7531-7541]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-588]
[[Page 7531]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51149, File No. SR-CHX-2004-26]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Amendment No. 1 and Notice of Filing and Order Granting
Accelerated Approval to Amendment No. 3 by the Chicago Stock Exchange,
Inc. Relating to the Demutualization of the Chicago Stock Exchange,
Inc.
February 8, 2005.
I. Introduction
On November 24, 2004, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to effect the demutualization of CHX. CHX filed
Amendment No. 1 to the proposal on December 15, 2004.\3\ CHX filed
Amendment Nos. 2 and 3 to the proposal on January 28, 2005.\4\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, CHX revises several references in the
original proposal to reflect the November 2004 vote of CHX's members
to approve the demutualization.
\4\ Amendment No. 3 replaced and superseded Amendment No. 2 in
its entirety. In Amendment No. 3, CHX revises the proposal to: (1)
Indicate that the staff of CHX will present to the Board of
Directors of CHX Holdings for its approval a proposed new Bylaws
provision stating that CHX Holdings will take such action as is
necessary to insure that its officers, directors, and employees
consent to the applicability of Article III, Section 3, and Article
III, Section 5 of the CHX Holdings Bylaws with respect to CHX-
related activities; (2) confirm CHX's continuing participation in
various national market system plans following the demutualization;
(3) correct a typographical error in the numbering of the articles
of the CHX Bylaws; and (4) clarify language regarding the admission
of persons to membership.
---------------------------------------------------------------------------
The proposed rule change and Amendment No. 1 were published for
comment in the Federal Register on December 28, 2004.\5\ The Commission
received no comment letters regarding the proposal and Amendment No. 1.
This order approves the proposed rule change, as amended. In addition,
the Commission is publishing notice to solicit comments on, and is
simultaneously approving, on an accelerated basis, Amendment No. 3.
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 50892 (December 20,
2004), 69 FR 77796.
---------------------------------------------------------------------------
II. Description of Proposed Rule Change
Currently, CHX is a non-stock, not-for-profit Delaware corporation.
CHX proposes to demutualize by reorganizing as a Delaware for-profit
stock corporation that will be a subsidiary of a new Delaware for-
profit stock holding company, CHX Holdings, Inc. (``CHX Holdings'').\6\
CHX will continue to operate as a national securities exchange
registered under Section 6 of the Act \7\ and will continue to have
self-regulatory responsibilities over its members. CHX will have its
own Board of Directors that will manage CHX's business and affairs.
---------------------------------------------------------------------------
\6\ To accomplish the demutualization, CHX proposes to establish
two new Delaware stock for-profit corporations: CHX Holdings, a
direct and wholly-owned subsidiary of CHX; and CHX Merger Sub, Inc.
(``CHX Merger Sub''), a direct and wholly-owned subsidiary of CHX
Holdings. Pursuant to an agreement and plan of merger, CHX Merger
Sub will merge with and into CHX, with CHX surviving the merger as a
Delaware for-profit stock corporation that is a direct and wholly-
owned subsidiary of CHX Holdings.
\7\ 15 U.S.C. 78f. The proposed rule change, as amended,
includes: (1) CHX's revised rules; (2) CHX's revised Certificate of
Incorporation; (3) CHX's revised Bylaws; (4) the Certificate of
Incorporation for CHX Holdings; and (5) the Bylaws of CHX Holdings.
---------------------------------------------------------------------------
On the effective date of the demutualization, each person or entity
that owns a membership in CHX will receive 1,000 shares of common stock
of CHX Holdings for each membership that the person or entity owns. All
of the issued and outstanding stock of CHX Holdings (450,000 shares of
common stock) initially will be owned by the persons or entities that
owned memberships in the Exchange.\8\ Following the demutualization,
persons and entities who have been qualified for membership under
Articles 1, 2, or 3 of the Exchange's current rules and, as a result,
have access to the Exchange's trading floor and other facilities
(``qualified trading members'') will separately receive CHX trading
permits entitling them to maintain their trading access to CHX.
---------------------------------------------------------------------------
\8\ CHX Holdings will have an additional 300,000 shares of
authorized, but not issued, common stock and 25,000 shares of
authorized, but not issued, preferred stock. See CHX Holdings
Certificate of Incorporation, Article Fourth.
---------------------------------------------------------------------------
Shares of CHX Holdings common stock and CHX trading permits will
not be tied together. As a result, following the demutualization,
former CHX members will be able to sell the shares of CHX Holdings
common stock they receive in exchange for their CHX memberships,
subject to the applicable restrictions described below, while retaining
the ability to trade and operate on CHX pursuant to their CHX trading
permits. Any other person who satisfies the regulatory requirements set
forth in CHX's rules also will be able to obtain a CHX trading permit
without regard to whether such person is a shareholder of CHX Holdings.
Persons who hold trading permits in the demutualized Exchange will be
called ``participants'' or ``participant firms.''
CHX's proposal included the CHX Holdings Certificate of
Incorporation and Bylaws; proposed changes to the CHX Certificate of
Incorporation and Bylaws that reflect the proposed changes in its
corporate form; proposed governance changes that will, among other
things, reduce the size of the CHX Board and make certain changes
relating to CHX committees. In addition, CHX proposed changes to its
membership rule that are necessary to implement the proposed trading
permit structure.\9\ Specifically, CHX proposed to replace references
to ``members,'' ``member organizations,'' and ``member firms'' with
references to ``participants'' and ``participant firms.'' CHX also
proposed to delete references to sales of memberships and consolidate
the current separate articles relating to members into a single article
regarding participant firms. In its filing, CHX represented that it was
not proposing to change its existing operational and trading structure.
---------------------------------------------------------------------------
\9\ CHX also proposed to delete the following rules relating to
events that have occurred or to programs that CHX no longer offers:
Article IB, ``E-Session Trading Privileges;'' Article XI, Rules 11,
``Mandatory Year 2000 Testing,'' and 12, ``Mandatory Decimal Pricing
Testing;'' and Article XIII, Rule 4, ``Advertisements, Market Sales
Literature Relating to Options and Communications to Customers.''
---------------------------------------------------------------------------
A. Corporate Structure
1. CHX Holdings
CHX Holdings will be the parent company and sole shareholder of
CHX. As sole shareholder of CHX, CHX Holdings will have the right to
elect the Board of Directors of CHX and collect dividends, subject to
certain provisions in the CHX rules that reflect regulatory
requirements under the federal securities laws. The Certificate of
Incorporation and the Bylaws of CHX Holdings will govern the activities
of CHX Holdings.
(a) CHX Holdings Board of Directors. The business and affairs of
CHX Holdings will be managed by its Board of Directors (``CHX Holdings
Board''). The CHX Holdings Board will consist of between 10 and 16
persons, as determined by the CHX Holdings Board, including the Chief
Executive Officer (``CEO'') of CHX Holdings.\10\ Initially, the CHX
Holdings Board will have 14 directors, who will be selected by the
Chairman, Vice Chairman, and CEO of CHX from among the persons
currently
[[Page 7532]]
serving on the Exchange's Board of Governors.\11\
---------------------------------------------------------------------------
\10\ See CHX Holdings Certificate of Incorporation, Article
Sixth, Sections (b) and (c), and CHX Holdings Bylaws, Article II,
Section 2.
\11\ See CHX Holdings Certificate of Incorporation, Article
Sixth, Section (g).
---------------------------------------------------------------------------
The CHX Holdings Board will elect its Chairman from among the
directors on the CHX Holdings Board.\12\ The Chairman of the CHX
Holdings Board may serve as the CEO of CHX Holdings but may hold no
other office in CHX Holdings.\13\ The Chairman of the CHX Holdings
Board will nominate the Vice Chairman of the CHX Holdings Board, and
the CHX Holdings Board will elect the Vice Chairman by majority
vote.\14\ The Vice Chairman may hold no other office in CHX
Holdings.\15\ Neither the Chairman nor the Vice Chairman of CHX
Holdings will be subject to any limit on the number of terms that he or
she may serve.
---------------------------------------------------------------------------
\12\ See CHX Holdings Bylaws, Article II, Section 4.
\13\ See CHX Holdings Bylaws, Article II, Section 4.
\14\ See CHX Holdings Bylaws, Article II, Section 5.
\15\ See CHX Holdings Bylaws, Article II, Section 5.
---------------------------------------------------------------------------
Each year, the Nominating and Governance Committee of CHX Holdings
will nominate directors for the class of directors standing for
election at the CHX Holdings annual meeting of shareholders.\16\ Each
CHX Holdings shareholder will be entitled to one vote for each share of
stock he or she owns, absent a provision in the CHX Holdings
Certificate of Incorporation fixing or denying voting rights.\17\ At
each annual meeting of the shareholders of CHX Holdings at which a
quorum is present, the individuals receiving a plurality of the votes
cast will be elected directors of CHX Holdings.\18\
---------------------------------------------------------------------------
\16\ See CHX Holdings Bylaws, Article II, Section 3.
\17\ See CHX Holdings Bylaws, Article IV, Section 11.
\18\ See CHX Holdings Bylaws, Article IV, Section 9.
---------------------------------------------------------------------------
(b) Committees of CHX Holdings. CHX Holdings will have an Executive
Committee, a Nominating and Governance Committee, an Audit Committee, a
Compensation Committee, and any other committees that the CHX Holdings
Board establishes.\19\ The CHX Holdings Board will appoint the CHX
Holdings Nominating and Governance Committee, which will consist of six
directors.\20\ The Chairman and Vice Chairman of the CHX Holdings Board
will appoint the Executive, Audit, and Compensation Committees of CHX
Holdings, subject to the approval of the CHX Holdings Board.\21\ The
Vice Chairman of CHX Holdings will appoint the members of other
standing and special committees, subject to the approval of the CHX
Holdings Board.\22\ Each committee will have the authority and
responsibilities determined by the CHX Holdings Board.\23\
---------------------------------------------------------------------------
\19\ See CHX Holdings Bylaws, Article V, Section 1.
\20\ See CHX Holdings Bylaws, Article II, Section 3.
\21\ See CHX Holdings Bylaws, Article V, Section 2.
\22\ See CHX Holdings Bylaws, Article II, Section 5, and CHX
Holdings Bylaws, Article V, Section 2.
\23\ See CHX Holdings Bylaws, Article V, Section 3.
---------------------------------------------------------------------------
(c) Officers of CHX Holdings. The officers of CHX Holdings will be
the CEO of CHX Holdings, one or more Vice Presidents, a Secretary, a
Treasurer, and such other officers, including a President, as the CHX
Holdings Board or the CEO of CHX Holdings determine.\24\ The CHX
Holdings Board will appoint the CEO of CHX Holdings, who will manage
the business affairs of CHX Holdings.\25\ The officers of CHX Holdings
will have the responsibilities and authority set out in the CHX
Holdings Bylaws or given to them by the CEO of CHX Holdings. As an
initial matter, the CEO of CHX will act as the CEO of CHX Holdings and
will appoint as officers of CHX Holdings such officers of CHX as he
believes are necessary to carry out the business of CHX Holdings.
---------------------------------------------------------------------------
\24\ See CHX Holdings Bylaws, Article VI, Section 1.
\25\ See CHX Holdings Bylaws, Article VI, Section 4.
---------------------------------------------------------------------------
(d) Shareholder Restrictions. The Certificate of Incorporation of
CHX Holdings places certain restrictions on the ability to transfer,
own, and vote the stock of CHX Holdings.
(i) Restrictions on voting. The Certificate of Incorporation of CHX
Holdings generally prohibits any Person, either alone or together with
its Related Persons,\26\ from (a) voting or giving a proxy or consent
with respect to shares representing more than 20% of the voting power
of the then-issued and outstanding capital stock of CHX Holdings; or
(b) entering into any agreement, plan, or arrangement that would result
in the shares of CHX Holdings subject to that agreement, plan, or
arrangement not being voted on a matter, or any proxy relating thereto
being withheld, where the effect of that agreement, plan, or
arrangement would be to enable any Person, alone or together with its
Related Persons, possessing the right to vote or causing the vote of
more than 20% of the voting power of the then-issued and outstanding
capital stock of CHX Holdings.\27\
---------------------------------------------------------------------------
\26\ Article Fifth of the CHX Holdings Certificate of
Incorporation defines a ``Person'' to mean ``an individual,
partnership (general or limited), joint stock company, corporation,
limited liability company, trust or unincorporated organization, or
any governmental entity or agency or political subdivision
thereof.'' A ``Related Person'' means ``(A) with respect to any
Person, all `affiliates' and `associates' of such Person (as such
terms are defined in Rule 12b-2 under the Securities Exchange Act of
1934, as amended); (B) with respect to any Person that holds a
permit issued by the Chicago Stock Exchange, Inc. to trade
securities on the Chicago Stock Exchange (a `Participant'), any
broker or dealer with which a Participant is associated; and (C) any
two or more Persons that have any agreement, arrangement or
understanding (whether or not in writing) to act together for the
purpose of acquiring, voting, holding or disposing of shares of the
capital stock of the Corporation.'' See CHX Holdings Certificate of
Incorporation, Article Fifth, paragraph (a).
\27\ See CHX Holdings Certificate of Incorporation, Article
Fifth, paragraph (b)(ii)(C).
---------------------------------------------------------------------------
The CHX Holdings Board may waive the voting limitation by approving
an amendment to the CHX Holdings Bylaws. Before approving a waiver, the
CHX Holdings Board must determine that, among other things, the waiver
of the voting limitation will not impair the ability of CHX to carry
out its functions and responsibilities under the Act and will not
impair the Commission's ability to enforce the Act.\28\ In addition,
the CHX Holdings Board also must determine that a Person and any
Related Persons that would vote more than 20% of the outstanding stock
of CHX Holdings is not subject to an applicable ``statutory
disqualification'' (within the meaning of Section 3(a)(39) of the
Act).\29\ Finally, any amendment to the CHX Holdings Bylaws that would
permit a Person to vote more than 20% of the outstanding stock of CHX
Holdings must be filed with and approved by the Commission.\30\
---------------------------------------------------------------------------
\28\ See CHX Holdings Certificate of Incorporation, Article
Fifth, paragraph (b)(iii)(B).
\29\ 15 U.S.C. 78c(a)(39).
\30\ See CHX Holdings Certificate of Incorporation, Article
Fifth, paragraph (b)(iii)(B) and paragraph (b)(iv).
---------------------------------------------------------------------------
(ii) Restrictions on ownership. The CHX Holdings Certificate of
Incorporation generally prohibits any Person, alone or together with
its Related Persons, from owning, of record or beneficially, shares
constituting more than 40% of any class of capital stock of CHX
Holdings.\31\ The CHX Holdings Board may waive the ownership limitation
by approving an amendment to the CHX Holdings Bylaws. Before approving
the ownership waiver, the CHX Holdings Board must determine that, among
other things, the waiver of the ownership limitation would not impair
the ability of CHX to carry out its functions and responsibilities
under
[[Page 7533]]
the Act and would not impair the Commission's ability to enforce the
Act.\32\ In addition, the CHX Holdings Board also must determine that a
Person and any Related Persons that would own more than 40% of the
outstanding stock of CHX Holdings is not subject to an applicable
``statutory disqualification'' (within the meaning of Section 3(a)(39)
of the Act).\33\ Finally, any amendment to the CHX Holdings Bylaws that
would permit a Person to own more than 40% of the outstanding stock of
CHX Holdings must be filed with and approved by the Commission.\34\
---------------------------------------------------------------------------
\31\ See CHX Holdings Certificate of Incorporation, Article
Fifth, paragraph (b)(ii)(A). See also CHX Holdings Certificate of
Incorporation, Article Fifth, paragraph (b)(iii)(A).
\32\ See CHX Holdings Certificate of Incorporation, Article
Fifth, paragraph (b)(iii)(C).
\33\ 15 U.S.C. 78c(a)(39).
\34\ See CHX Holdings Certificate of Incorporation, Article
Fifth, paragraph (b)(iii)(B) and paragraph (b)(iv).
---------------------------------------------------------------------------
The CHX Holdings Certificate of Incorporation places further
restrictions on those shareholders of CHX Holdings that also hold CHX
trading permits. Specifically, CHX Participants and their Related
Persons may not own, of record or beneficially, shares constituting
more than 20% of any capital stock of CHX Holdings.\35\ The CHX
Holdings Board may not waive this restriction.
---------------------------------------------------------------------------
\35\ See CHX Holdings Certificate of Incorporation, Article
Fifth, paragraph (b)(ii)(B).
---------------------------------------------------------------------------
(iii) Other shareholder requirements. The CHX Holdings has several
provisions in its Certificate of Incorporation that will enable it to
enforce the ownership and voting restrictions. Specifically, if a
shareholder purports to sell, transfer, assign, or pledge any shares to
any Person in a transaction that would violate the ownership
restrictions described above, CHX Holdings will record on its books the
transfer of only the number of shares that would not violate these
restrictions and will treat the remaining shares as owned by the
purported transferor for all purposes, including, without limitation,
voting, payment of dividends, and distributions.\36\ In addition, if
any shareholder purports to vote, or to grant any proxy or enter into
any agreement relating to the voting of shares that would violate the
voting restrictions described above, CHX Holdings will not honor such
vote, proxy, or agreement, and any shares subject to that arrangement
will not be entitled to be voted to the extent of the violation.\37\
Finally, if any shareholder purports to sell, transfer, assign, pledge,
or vote any shares in a transaction that would violate the voting and
ownership concentration limits, CHX Holdings will have the right to
redeem such shares at a price equal to the par value of the shares,
upon the approval of the CHX Holdings Board.\38\
---------------------------------------------------------------------------
\36\ See CHX Holdings Certificate of Incorporation, Article
Fifth, paragraph (d).
\37\ See CHX Holdings Certificate of Incorporation, Article
Fifth, paragraph (d).
\38\ See CHX Holdings Certificate of Incorporation, Article
Fifth, paragraph (e).
---------------------------------------------------------------------------
A shareholder that alone or together with its Related Persons owns,
of record or beneficially, five percent or more of the then outstanding
shares of the capital stock of CHX Holdings, must immediately give the
CHX Holdings Board written notice of such ownership.\39\
---------------------------------------------------------------------------
\39\ See CHX Holdings Certificate of Incorporation, Article
Fifth, paragraph (c)(i).
---------------------------------------------------------------------------
Shareholders may dispose of shares of CHX Holdings only in minimum
lots of 1,000 shares.\40\
---------------------------------------------------------------------------
\40\ See CHX Holdings Bylaws, Article IX, Section 2.
---------------------------------------------------------------------------
(e) Self-Regulatory Function and Oversight. The CHX Holdings Bylaws
contain various provisions designed to protect the independence of the
self-regulatory function of CHX and to clarify the Commission's
oversight responsibilities. For example, pursuant to the CHX Holdings
Bylaws, CHX Holdings must give due regard to the preservation of the
independence of the self-regulatory function of CHX and to its
obligations to investors and the general public. In addition, CHX
Holdings is specifically prohibited from taking any actions that would
interfere with the effectuation of any decisions by the Board of
Directors of CHX (``CHX Board'') relating to CHX's regulatory
functions, including disciplinary matters or the structure of the
market it regulates, or that would interfere with CHX's ability to
carry out its responsibilities under the Act.\41\ The CHX Holdings
Bylaws contain a specific requirement that all books and records of
CHX, and the information contained therein, that reflect confidential
information pertaining to the self-regulatory function of CHX, which
comes into the possession of CHX Holdings must be retained in
confidence by CHX Holdings and its Board, officers, employees, and
agents, and must not be used for any non-regulatory purposes.\42\
---------------------------------------------------------------------------
\41\ See CHX Holdings Bylaws, Article III, Section 1.
\42\ See CHX Holdings Bylaws, Article III, Section 2.
---------------------------------------------------------------------------
The CHX Holdings Bylaws also provide that, to the extent they are
related to the activities of CHX, the books, records, premises,
officers, directors, agents, and employees of CHX Holdings are deemed
to be the books, records, premises, officers, directors, agents, and
employees of CHX for the purposes of, and subject to oversight pursuant
to, the Act.\43\
---------------------------------------------------------------------------
\43\ See CHX Holdings Bylaws, Article III, Section 3. The
Commission notes that the staff of CHX has indicated that it will
present to the CHX Holdings Board for its approval a proposed new
CHX Holdings Bylaws provision confirming that CHX Holdings will take
such action as is necessary to ensure that its officers, directors,
and employees consent to the applicability of Article III, Section
3, and Article III, Section 5 of the CHX Holdings Bylaws with
respect to CHX-related activities. See Amendment No. 3, supra note
4.
---------------------------------------------------------------------------
With regard to the Commission's ability to oversee the activities
of CHX, the CHX Holdings Bylaws provide that the officers, directors,
employees, and agents of CHX Holdings, by virtue of their acceptance of
such position, are deemed to agree to cooperate with the Commission and
CHX in respect of the Commission's oversight responsibilities regarding
CHX and the self-regulatory functions and responsibilities of CHX.\44\
In addition, the CHX Holdings Bylaws provide that CHX Holdings and its
officers, directors, employees, and agents, by virtue of their
acceptance of such position, will be deemed to irrevocably submit to
the jurisdiction of the U.S. federal courts, the Commission, and CHX,
for the purpose of any suit, action, or proceeding pursuant to the U.S.
federal securities laws and the rules and regulations thereunder,
arising out of, or relating to, the activities of CHX.\45\ Further, CHX
Holdings and its officers, directors, employees, and agents, by virtue
of their acceptance of such position, are deemed to waive, and agree
not to assert by way of motion, as a defense or otherwise in any such
suit, action, or proceeding, any claims that it or they are not
personally subject to the jurisdiction of the U.S. federal courts, the
Commission, or CHX; that the suit, action, or proceeding is in an
inconvenient forum; that the venue of the suit, action, or proceeding
is improper; or that the subject matter thereof may not be enforced in
or by such courts or agency.\46\
---------------------------------------------------------------------------
\44\ See CHX Holdings Bylaws, Article III, Section 4.
\45\ See CHX Holdings Bylaws, Article III, Section 5. The
Commission notes that the staff of CHX has indicated that it will
present to the CHX Holdings Board for its approval a proposed new
CHX Holdings Bylaws provision stating that CHX Holdings will take
such action as is necessary to ensure that its officers, directors,
and employees consent to the applicability of Article III, Section
3, and Article III, Section 5 of the CHX Holdings Bylaws with
respect to CHX-related activities. See Amendment No. 3, supra note
4.
\46\ See CHX Holdings Bylaws, Article III, Section 5.
---------------------------------------------------------------------------
Finally, the CHX Holdings Certificate of Incorporation and the CHX
Holdings Bylaws provide that, before any amendment or repeal of a
provision in the Certificate of Incorporation or the
[[Page 7534]]
Bylaws, respectively, will be effective, it must be submitted to the
CHX Board and if the CHX Board determines that the amendment or repeal
of the provision must be filed with the Commission before it may be
effective, the amendment or repeal of the provision will not be
effective until it is filed with, or filed with and approved by the
Commission, as the case may be.\47\
---------------------------------------------------------------------------
\47\ See CHX Holdings Certificate of Incorporation, Article
Thirteenth, and CHX Bylaws, Article VIII.
---------------------------------------------------------------------------
2. CHX
Following the demutualization, CHX will become a Delaware for-
profit stock corporation that will be wholly-owned by CHX Holdings.
CHX, however, will continue to be the entity registered as a national
securities exchange under Section 6 of the Act \48\ and, accordingly,
CHX will continue to be a self-regulatory organization (``SRO'').
---------------------------------------------------------------------------
\48\ 15 U.S.C. 78f.
---------------------------------------------------------------------------
(a) Governing Documents and CHX Rules. The CHX Certificate of
Incorporation, CHX Bylaws, and CHX rules will govern the activities of
CHX. CHX's rules and Bylaws are proposed to reflect, among other
things, CHX's status as wholly-owned subsidiary of CHX Holdings, its
management by the CHX Board and its designated officers, and its self-
regulatory responsibilities pursuant to CHX's registration under
Section 6 of the Act.
(b) Board of Directors. The CHX Board will consist of between 10
and 16 persons, as determined by the CHX Board, including the CEO of
CHX.\49\ Initially, the CHX Board will have 14 directors, whom the
Chairman, Vice Chairman, and CEO of CHX will select from among the
persons currently serving on the Exchange's Board of Governors. The
directors will be divided into three classes, which will be as nearly
equal in number as the total number of directors then constituting the
entire CHX Board permits, and will serve staggered three-year terms
with the term of office of one class expiring each year.\50\
---------------------------------------------------------------------------
\49\ See CHX Certificate of Incorporation, Article Fifth,
paragraph (b), and CHX Bylaws, Article II, Section 2(a). CHX's
current Board of Governors consists of 24 governors.
\50\ See CHX Certificate of Incorporation, Article Fifth,
paragraph (d), and CHX Bylaws, Article II, Section 2(c).
---------------------------------------------------------------------------
The CHX Board will be comprised of the CEO of CHX, persons who
qualify as ``Participant Directors,'' and persons who qualify as
``Public Directors.'' \51\ One-half of the number of CHX directors
comprising the entire CHX Board must be Public Directors, and the
remaining directors, other than the CEO of CHX, will be Participant
Directors.\52\ The CHX Board's initial directors will include the CEO
of CHX, seven Public Directors, and six Participant Directors.
---------------------------------------------------------------------------
\51\ See CHX Certificate of Incorporation, Article Fifth,
paragraph (c), and CHX Bylaws, Article II, Section 2(b). CHX's
Bylaws define a ``Public Director'' as a director who (i) is not a
participant or an officer, managing member, partner or employee of
an entity that is a participant, (ii) is not an employee of CHX, CHX
Holdings or any of their affiliates, (iii) is not a broker or dealer
or an officer or employee of a broker or dealer, or (iv) does not
have any other material business relationship with CHX, CHX
Holdings, or any of their affiliates or any broker or dealer. See
CHX Bylaws, Article II, Section 2(b). A ``Participant Director'' is
a director who is a CHX participant or an officer, managing member,
or partner of an entity that is a CHX participant. A ``participant''
is any individual, corporation, partnership, or other entity that
holds a permit issued by CHX to trade securities on CHX. See CHX
Bylaws, Article II, Section 2(b). See also CHX Rules, Article I,
Rule1(l). The definition of ``Public Director'' will replace the
definitions of ``non-industry governor'' and ``public governor'' set
out in the Exchange's current governing documents.
\52\ See CHX Certificate of Incorporation, Article Fifth,
paragraph (c), and CHX Bylaws, Article II, Section 2(b).
---------------------------------------------------------------------------
The CHX Board will elect its Chairman from among the CEO of CHX and
the Public Directors.\53\ The Chairman of the CHX Board may serve as
the CEO of CHX but may hold no other office in CHX.\54\ The Participant
Directors will elect the Vice Chairman of the CHX Board, who may not
hold any other office in CHX, from among the Participant Directors.\55\
---------------------------------------------------------------------------
\53\ See CHX Bylaws, Article II, Section 4(a).
\54\ See CHX Bylaws, Article II, Section 4(a).
\55\ See CHX Bylaws, Article II, Section 5(a).
---------------------------------------------------------------------------
(c) Nomination and Election of Directors. After the formation of
the initial CHX Board, the CHX Nominating and Governance Committee,
which will be comprised of three Public Directors and three Participant
Directors appointed by the CHX Board, will nominate directors for each
director position standing for election at the annual meeting of
shareholders that year.\56\ Because CHX Participants will not be
shareholders of CHX, they are not entitled to directly elect members of
the CHX Board. CHX Holdings, as the sole shareholder of CHX, will have
the sole right and the obligation to vote for the directors of the CHX
Board. However, to ensure that CHX Participants are afforded fair
representation as required under Section 6(b)(3) of the Act, CHX has
proposed a procedure whereby CHX Participants will be involved in the
selection of Participant Director nominees.\57\
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\56\ See CHX Bylaws, Article II, Section 3. In addition, the CHX
Nominating and Governance Committee will periodically review the
organization and governance structure of CHX. See CHX Rules, Article
IV, Rule 11.
\57\ After the Commission approves the proposal, CHX Holdings
will enter into a voting agreement with CHX confirming its
obligation to vote for the directors nominated through the process
set out in the CHX Bylaws.
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Specifically, the CHX Nominating and Governance Committee will hold
two open meetings with CHX participants for the purpose of receiving
recommendations of candidates for election to the Participant Director
positions. The CHX Nominating and Governance Committee's initial
candidates for nomination will be announced to CHX participants, who
will then have the opportunity to identify additional candidates for
nomination by submitting a petition signed by at least ten
participants. If no petitions are submitted within the time frame
prescribed by the CHX Bylaws, the CHX Nominating and Governance
Committee will nominate the candidates it initially identified. If one
or more valid petitions are submitted, the participants will vote on
the entire group of potential candidates, and the individuals receiving
the largest number of votes will be the persons approved by the
participants as Participant Director nominees. Each participant will
have one vote per trading permit with respect to each Participant
Director position that is to be filled.\58\
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\58\ No participant or participant firm is allowed to hold more
trading permits than are necessary to the conduct of business on the
Exchange. All trading permits must be held by an active participant
or must be held by an active participant firm, where the participant
firm has assigned an active participant as its nominee. See CHX
Rules, Article II, Rule 2(e).
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(d) Committees. The CHX Board will have the following standing
committees: (1) An Executive Committee; (2) a Nominating and Governance
Committee; (3) an Audit Committee; (4) a Compensation Committee; (5) a
Regulatory Oversight Committee (``ROC''); (6) a Finance Committee; and
(7) a Judiciary Committee.\59\
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\59\ See CHX Bylaws, Article IV, Section 1. Information about
the composition and responsibilities of the Exchange's committees
appears in Article IV of the Exchange's rules.
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As noted above, the CHX Nominating and Governance Committee will be
appointed by the CHX Board. The Chairman and Vice Chairman of the CHX
Board will appoint CHX's Executive, Audit, Finance, and Compensation
Committees, subject to the approval of the CHX Board. CHX's Executive,
Compensation, and Audit Committees will have a majority of Public
Directors.\60\ The Executive Committee will have the powers that the
[[Page 7535]]
CHX Board delegates to it and, between meetings of the CHX Board, will
have the rights, powers, authority, duties, and obligations of the CHX
Board not otherwise delegated to another committee, except the
authority to propose amendments to the CHX Certificate of
Incorporation, adopt an agreement of merger or consolidation, recommend
to shareholders the sale, lease or exchange of all or substantially all
or of the property and assets of CHX, or recommend to the shareholders
a dissolution of CHX or the revocation of a dissolution.\61\
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\60\ See CHX Rules, Article IV, Rules 2, 8, and 9. The proposal
revises CHX's current rules governing its Audit and Compensation
Committees by providing that a majority, not just 50%, of the
members of the Audit and Compensation Committees must be Public
Directors.
\61\ See CHX Rules, Article IV, Rule 2. The proposal also
deletes the requirements that members of the Executive Committee be
chosen (a) with a view to providing representation to the various
geographical areas in which there are member organizations that
support the Exchange; and (b) with a view to having persons on the
committee who are interested in and knowledgeable about the
Exchange's business operations and the securities industry as a
whole.
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The revised description of the role of the CHX Audit Committee
indicates that, among other things, the Audit Committee has ``direct
responsibility and authority to engage and oversee the work of the
independent public accountant retained to audit the Exchange's
financial statements * * *.'' \62\
---------------------------------------------------------------------------
\62\ See CHX Rules, Article IV, Rule 9.
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The Vice Chairman of the CHX Board will appoint CHX's ROC, subject
to the approval of the Public Directors of the CHX Board. Five of the
seven members of the ROC will be Public Directors.\63\ In its filing,
CHX represented that it believed that the composition,
responsibilities, and appointment mechanism associated with the ROC
were consistent with the requirements set out in the Commission's
September 30, 2003, settlement order with CHX.\64\
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\63\ See CHX Rules, Article IV, Rule 4.
\64\ See In the Matter of the Chicago Stock Exchange, Securities
Exchange Act Release No. 48566 (September 30, 2003) (Admin. Proc.
File No. 3-11282) (Order Instituting Public Administrative
Proceedings Pursuant to Sections 19(h) and 21C of the Securities
Exchange Act of 1934, Making Findings, and Imposing a Censure, a
Cease-and-Desist Order and Other Relief) (``CHX Settlement Order'').
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The CEO of CHX will continue to appoint CHX's Judiciary
Committee.\65\ The Vice Chairman of the CHX Board will appoint other
committees, including the newly-formed Participant Advisory Committee
of CHX, subject to the approval of the CHX Board.\66\ The CHX
Participant Advisory Committee, which will be comprised entirely of CHX
participants, will recommend rules for adoption by the CHX Board and
advise the CHX management regarding enhancements to the Exchange's
trading facilities and other matters that affect participants.\67\
According to CHX, the Participant Advisory Committee is designed to
provide participants with a formal opportunity to share their concerns
and ideas with the CHX management.
---------------------------------------------------------------------------
\65\ See CHX Rules, Article IV, Rule 7.
\66\ See CHX Bylaws, Article IV, Section 2.
\67\ See CHX Rules, Article IV, Rule 10.
---------------------------------------------------------------------------
Each committee will have the authority and responsibilities
prescribed for it in the CHX Bylaws or rules or by the CHX Board.\68\
---------------------------------------------------------------------------
\68\ See CHX Bylaws, Article IV, Section 3.
---------------------------------------------------------------------------
(e) Management. The officers of CHX will be the CEO, one or more
Vice Presidents, a Secretary, and a Treasurer, and such other officers,
including a President, as the CHX Board or the CEO may determine.\69\
The CEO of CHX will be responsible to the CHX Board for the management
of its business affairs.\70\
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\69\ See CHX Bylaws, Article V, Section 1.
\70\ See CHX Bylaws, Article V, Section 4.
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(f) Self-Regulatory Function and Oversight. As noted above,
following the demutualization CHX will continue to be registered as a
national securities exchange under Section 6 of the Act and thus will
continue to be an SRO.\71\ As an SRO, CHX will be obligated to carry
out its statutory responsibilities, including enforcing compliance by
CHX participants and participant firms with the provisions of the
federal securities laws and the applicable rules of CHX. Further, CHX
will retain the responsibility to administer and enforce the rules that
govern CHX's and its members' activities. In addition, CHX will
continue to be required to file with the Commission, pursuant to
Section 19(b) of the Act \72\ and Rule 19b-4 thereunder,\73\ any
changes to its rules and governing documents.
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\71\ See 15 U.S.C. 78c(a)(26).
\72\ 15 U.S.C. 78s(b).
\73\ 17 CFR 240.19b-4.
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Like the Bylaws of CHX Holdings, the Bylaws of CHX contain specific
provisions relating to the self-regulatory function of CHX.\74\ For
example, the CHX Bylaws require the CHX Board to consider applicable
requirements under Section 6(b) of the Act in connection with the
management of the Exchange.\75\ In addition, meetings of the CHX Board
and of its committees that pertain to the self-regulatory function of
CHX or to the structure of the market CHX regulates must be closed to
persons who are not members of the CHX Board or CHX officers, staff,
counsel, or other specifically identified persons.\76\ Further, the CHX
books and records reflecting confidential information relating to the
self-regulatory function of CHX must be kept confidential and must not
be used for non-regulatory purposes, and the books and records of CHX
must be maintained in the U.S.\77\
---------------------------------------------------------------------------
\74\ See CHX Bylaws, Article X, Section 1.
\75\ See CHX Bylaws, Article X, Section 1. Section 6(b) of the
Act requires, among other things, that the Exchange's rules be
designed to protect investors and the public interest. It also
requires that the Exchange be so organized that it has the capacity
to carry out the purposes of the Act and to enforce compliance by
its members with the Act, the rules and regulations thereunder, and
the rules of the Exchange.
\76\ See CHX Bylaws, Article X, Section 2.
\77\ See CHX Bylaws, Article X, Sections 3 and 4.
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The CHX Bylaws also provide that any revenues received by CHX from
regulatory fees or penalties must be applied to fund the legal and
regulatory operations of CHX and may not be used to pay dividends.\78\
---------------------------------------------------------------------------
\78\ See CHX Bylaws, Article X, Section 5. Regulatory penalties
that are intended to benefit customers, by, for example, providing
restitution, must be provided to those customers and CHX will not be
use them for any purpose.
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(g) Restrictions on ownership. Although there are no percentage-
based restrictions on the ownership of CHX, the CHX Certificate of
Incorporation confirms that CHX Holdings is the sole shareholder of
CHX.\79\ Any changes to this provision of the CHX Certificate of
Incorporation cannot take effect until they are filed with and approved
by the Commission pursuant to Section 19(b) of the Act.\80\
---------------------------------------------------------------------------
\79\ See CHX Certificate of Incorporation, Article Fourth.
\80\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------
(h) National Market System Plans. CHX currently is a participant in
various national market system (``NMS'') plans, including the
Consolidated Tape Association Plan, the Consolidated Quotation System
Plan, the Intermarket Trading System Plan, and the Reporting Plan for
Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading
Privileges Basis (``Nasdaq UTP'') Plan.\81\ These plans are joint
industry plans entered into by SROs for the purpose of addressing last
sale reporting, quotation reporting, and intermarket equities trading.
Following the completion of the demutualization, CHX, in its continuing
role as the SRO, will continue to serve as the voting member of these
NMS plans, and a representative of CHX will continue to serve as CHX's
representative with respect to dealing with these plans.\82\
---------------------------------------------------------------------------
\81\ See Amendment No. 3, supra note 4.
\82\ See Amendment No. 3, supra note 4.
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B. Trading Permits
Following CHX's demutualization, persons and firms who have been
qualified for membership under Articles 1, 2, or 3 of the Exchange's
current rules and, as a result, have access to the Exchange's trading
floor and other
[[Page 7536]]
facilities will receive trading permits entitling them to maintain
their trading access to CHX. Each trading permit will constitute a
revocable license allowing the holder of the permit to access CHX
trading facilities in the same manner as previously authorized for
CHX's qualified trading members.\83\ According to CHX, the
demutualization and the implementation of the use of trading permits
will not change current CHX member access to the Exchange or their
ability to execute transactions.
---------------------------------------------------------------------------
\83\ See CHX Rules, Article II, Rule 2.
---------------------------------------------------------------------------
Persons holding trading permits of CHX will be ``members'' of CHX
for purposes of the Act and will be characterized as ``participants''
in CHX subject to CHX's regulatory jurisdiction.\84\ Trading permit
holders will not have any ownership interest in CHX or in CHX Holdings
by virtue of their trading permits.
---------------------------------------------------------------------------
\84\ See CHX Rules, Article I, Rule 1(l) (definition of
``Participant'').
---------------------------------------------------------------------------
Following the demutualization, CHX will require persons seeking
trading permits to complete appropriate application materials and
registration forms, satisfy regulatory requirements, and pay processing
charges and application fees. This process will be substantially
similar to the current membership application process.\85\ An
individual participant may obtain only one trading permit, and a
participant firm may obtain multiple trading permits and may assign a
nominee to each trading permit. Each person transacting business on the
Exchange will require a trading permit. For example, a CHX specialist
firm with 50 co-specialists would need to obtain 50 trading permits and
register each co-specialist as a nominee. No participant or participant
firm will be allowed to hold more trading permits than are necessary to
conduct business on the Exchange, and all trading permits must be held
by an active participant or an active participant firm, where the
participant firm has assigned an active participant as its nominee.\86\
---------------------------------------------------------------------------
\85\ See CHX Rules, Articles II and III.
\86\ See CHX Rules, Article II, Rule 2(e).
---------------------------------------------------------------------------
Once issued, a CHX trading permit will be effective for one year
following its issuance date and will renew automatically for an
additional one-year term on each anniversary of the issuance date,
unless the trading permit holder provides the Exchange with 60 days'
prior written notice of the trading permit holder's waiver of renewal.
If the participant waives the right to renew the permit, it will expire
at the end of the then-current term.\87\ A trading permit generally may
not be sold, leased, or otherwise transferred, although a participant
firm may transfer its trading permit from the name of one nominee
employee to the name of another nominee employee, with the approval of
CHX.\88\ CHX will have the ability to suspend or revoke a trading
permit for the same reasons that it is currently entitled to suspend or
revoke a membership and/or sell a seat.\89\
---------------------------------------------------------------------------
\87\ See CHX Rules, Article II, Rules 3(d) and 7.
\88\ See CHX Rules, Article II, Rule 6.
\89\ See generally, CHX Rules, Articles VII and XII.
---------------------------------------------------------------------------
Currently, CHX rules permit a person (referred to as an ``approved
lessor'') to purchase a membership solely for the purpose of providing
a financing mechanism for another person seeking access to CHX.\90\
Following demutualization, no person will be permitted to operate as an
approved lessor or otherwise lease trading access to the Exchange.
---------------------------------------------------------------------------
\90\ See CHX Rules, Article IA.
---------------------------------------------------------------------------
There will be nominal processing charges and application fees
relating to the issuance of trading permits. In addition, all
participants and participant firms will be subject to an annual trading
permit fee of $6,000 per year, payable monthly, for each trading
permit. This fee is identical to CHX's current fee for membership dues.
These fees appear in the schedule of Participant Fees and Credits.
C. Other Provisions in the Certificate of Incorporation and Bylaws
1. Shareholder Ownership
The Bylaws for CHX Holdings and CHX contain provisions relating to
issues associated with shareholder ownership, including provisions
relating to the timing and conduct of meetings, record dates, quorum
requirements, proxies, and other matters.\91\ According to CHX, these
provisions were designed to reflect current corporate practices and are
identical for CHX Holdings and CHX.
---------------------------------------------------------------------------
\91\ See CHX Holdings Bylaws, Article IV, and CHX Bylaws,
Article III.
---------------------------------------------------------------------------
2. Updated provisions of the CHX Certificate of Incorporation and
Bylaws
The Exchange proposes to make several changes to CHX's Bylaws and
Certificate of Incorporation to modernize CHX's governing documents.
Among other things, these changes streamline the description of CHX's
corporate purpose; confirm that the CHX Board has the authority to set
the CHX Board's compensation; set out specific provisions relating to
the authority of Exchange officers to enter into contracts, sign
checks, and handle the funds of the Exchange; and provide that the
Exchange will advance expenses, in appropriate circumstances, to
directors, officers, and committee members of CHX who are named as
defendants in certain actions relating to Exchange business.\92\
---------------------------------------------------------------------------
\92\ See CHX Certificate of Incorporation, Article Third
(corporate purpose); CHX Bylaws Article II, Section 15 (CHX Board
compensation), Article IX (contracts, loans, checks, and deposits),
and Article VI (indemnification and advancing of expenses).
---------------------------------------------------------------------------
D. Description of Amendment No. 3
In Amendment No. 3, CHX proposes to revise the proposal to: (1)
Confirm CHX's continuing participation in various NMS plans following
the demutualization; (2) correct a typographical error in the numbering
of the articles of the CHX Bylaws; (3) indicate that the staff of CHX
will present to the CHX Holdings Board for its approval a proposed new
CHX Holdings Bylaws provision stating that CHX Holdings will take such
action as is necessary to insure that its officers, directors, and
employees consent to the applicability of Article III, Section 3, and
Article III, Section 5 of the CHX Holdings Bylaws with respect to CHX-
related activities; \93\ and (4) revise language regarding the
admission of new participants.
---------------------------------------------------------------------------
\93\ Article III, Section 3 of the CHX Holdings Bylaws provides
that, to the extent they are related to the activities of CHX, the
books, records, premises, officers, directors, agents, and employees
of CHX Holdings will be deemed to be the books, records, premises,
officers, directors, agents, and employees of CHX for the purposes
of, and subject to oversight pursuant to, the Act. In addition,
Article III, Section 5 of the CHX Holdings Bylaws provides that CHX
Holdings and its officers, directors, employees, and agents, by
virtue of their acceptance of such position, shall be deemed
irrevocably to submit to the jurisdiction of the U.S. federal
courts, the Commission, and CHX, for the purposes of any suit,
action, or proceeding pursuant to the U.S. federal securities laws
and the rules and regulations thereunder, arising out of, or
relating to, the activities of CHX. Article III, Section 5, also
states that CHX Holdings and its officers, directors, employees, and
agents, by virtue of their acceptance of such position, are deemed
to waive, and agree not to assert by way of motion, as a defense or
otherwise in any such suit, action, or proceeding, any claims that
it or they are not personally subject to the jurisdiction of the
U.S. federal courts, the Commission, or CHX; that the suit, action,
or proceeding is in an inconvenient forum; that the venue of the
suit, action, or proceeding is improper; or that the subject matter
thereof may not be enforced in or by such courts or agency.
---------------------------------------------------------------------------
III. Discussion
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\94\ In
[[Page 7537]]
particular, the Commission finds that the proposed rule change, as
amended, is consistent with Section 6(b)(1) of the Act,\95\ which
requires a national securities exchange to be so organized and have the
capacity to carry out the purposes of the Act and to enforce compliance
by its members and persons associated with its members with the
provisions of the Act. The Commission also finds that the proposed rule
change, as amended, is consistent with Section 6(b)(3) of the Act,\96\
which requires that the rules of a national securities exchange assure
the fair representation of its members in the selection of its
directors and administration of its affairs, and provide that one or
more directors shall be representative of issuers and investors and not
be associated with a member of the exchange, broker, or dealer.
Further, the Commission finds that the proposed rule change, as
amended, is consistent with Section 6(b)(5) of the Act,\97\ in that it
is designed, among other things, to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, to protect
investors and the public interest.
---------------------------------------------------------------------------
\94\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\95\ 15 U.S.C. 78f(b)(1).
\96\ 15 U.S.C. 78f(b)(3).
\97\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
A. CHX Holdings as Sole Shareholder
Following completion of the demutualization, CHX Holdings will be
the sole shareholder of CHX. Section 19(b) of the Act \98\ and Rule
19b-4 thereunder \99\ require an SRO to file proposed rule changes with
the Commission. Although CHX Holdings is not an SRO, certain provisions
of its Certificate of Incorporation and Bylaws may be rules of an
exchange \100\ if they are the stated policies, practices, or
interpretations, as defined in Rule 19b-4 of the Act, of CHX. Any
proposed rule or any proposed change in, addition to, or deletion from,
the rules of an exchange must be filed with the Commission pursuant to
Section 19(b) of the Act and Rule 19b-4 thereunder. Accordingly, CHX
has filed the CHX Holdings Certificate of Incorporation and CHX
Holdings Bylaws with the Commission. If CHX Holdings decides to change
its Certificate of Incorporation or Bylaws, it must submit such changes
to the CHX Board so that it can determine if the changes must be filed
with, and approved by, the Commission. The Commission believes that
these provisions will assist CHX in fulfilling its self-regulatory
obligations and in administrating and complying with the requirements
under the Act.
---------------------------------------------------------------------------
\98\ 15 U.S.C. 78s(b).
\99\ 17 CFR 240.19b-4.
\100\ Section 3(a)(27) of the Act defines the rules of an
exchange to be the constitution, articles of incorporation, bylaws,
and rules, or instruments corresponding to the foregoing, of an
exchange, and such stated policies, practices, or interpretations of
such exchange as the Commission, by rule, may determine to be
necessary or appropriate in the public interest or for the
protection of investors to be deemed to be rules of such exchange.
15 U.S.C. 78c(a)(27).
---------------------------------------------------------------------------
B. Changes in Control of CHX
The Commission believes that the restrictions in the CHX Holdings
Certificate of Incorporation on direct and indirect changes in control
of CHX Holdings are sufficient to enable CHX to carry out its self-
regulatory responsibilities and to enable the Commission to fulfill its
responsibilities under the Act.\101\
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\101\ The Commission notes that it is in the process of
reviewing issues related to new ownership structures of SROs and has
proposed rules relating to the ownership of SROs, including limiting
the restrictions on ownership and voting to members of an SRO or a
facility of an SRO. See Securities Exchange Act Release No. 50699
(November 18, 2004), 69 FR 71126 (December 8, 2004) (``Proposed
Rulemaking''). See also Securities Exchange Act Release No. 51019
(January 11, 2005), 70 FR 2829 (January 18, 2005) (extending the
comment period for the Proposed Rulemaking until March 8, 2005).
---------------------------------------------------------------------------
Specifically, as proposed, CHX will be wholly-owned subsidiary of
CHX Holdings, i.e., CHX Holdings will own all of the shares of CHX. The
CHX Certificate of Incorporation identifies this ownership
structure.\102\ Any changes to the CHX Certificate of Incorporation,
including any change to the provision that identifies CHX shareholders,
must be filed with, and approved by, the Commission pursuant to Section
19(b) of the Act.\103\
---------------------------------------------------------------------------
\102\ See CHX Certificate of Incorporation, Article Fourth.
\103\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------
In addition, the CHX Holdings Certificate of Incorporation imposes
limitations on direct and indirect changes in control of CHX Holdings
through voting and ownership limitations placed on the capital stock of
CHX Holdings (whether common or preferred stock) and allows CHX
Holdings to monitor potential changes in control through a notification
requirement once a threshold percentage of ownership of capital stock
is reached.\104\ Specifically, the CHX Holdings Certificate of
Incorporation prohibits any Person, either alone or together with its
Related Persons, from voting or giving a proxy or consent with respect
to shares representing more than 20% of the voting power of the issued
and outstanding shares of CHX Holdings.\105\ Furthermore, the CHX
Holdings Certificate of Incorporation limits the right of any Person,
either alone or together with its Related Persons, to enter into any
agreement with respect to the withholding of any vote or proxy where
the effect of the agreement would be to enable any person or group to
obtain more than 20% of the outstanding voting power.\106\ The CHX
Holdings Certificate of Incorporation also restricts the ability of any
Person, either alone or together with its Related Persons, from owning,
directly or indirectly, shares constituting more than 40% of the
outstanding shares of capital stock of CHX Holdings.\107\
---------------------------------------------------------------------------
\104\ The CHX Holdings Certificate of Incorporation requires
that any person, either alone or together with its affiliates or
associates or any other person, who at any time owns five percent or
more of then outstanding shares of capital stock and who has the
right to vote in the election of the CHX Holdings Board, shall,
immediately upon so owning five percent or more of the then
outstanding shares of such stock, give the CHX Holdings Board a
written notice of such ownership and update that notice promptly
after an ownership change of a specified percentage. See CHX
Holdings Certificate of Incorporation, Article Fifth, paragraph (c).
\105\ See CHX Holdings Certificate of Incorporation, Article
Fifth, paragraph (b)(ii)(C). See note 26, supra, for the definitions
of ``Person'' and ``Related Person.''
\106\ See CHX Holdings Certificate of Incorporation, Article
Fifth, paragraph (b)(ii)(C).
\107\ See CHX Holdings Certificate of Incorporation, Article
Fifth, paragraph (b)(ii)(A).
---------------------------------------------------------------------------
If any shareholder votes, sells, transfers, assigns, or pledges any
shares in violation of the voting and ownership limitations, CHX
Holdings will treat those shares as owned by the transferor for all
purposes, including, without limitation, voting, payment of dividends,
and distributions.\108\ In addition, if any shareholder votes, sells,
transfers, assigns, or pledges any shares in violation of the voting
and ownership limitations, CHX Holdings has the right to redeem those
shares at a price equal to the par value thereof, upon the approval of
the CHX Holdings Board.\109\
---------------------------------------------------------------------------
\108\ See CHX Holdings Certificate of Incorporation, Article
Fifth, paragraph (d).
\109\ See CHX Holdings Certificate of Incorporation, Article
Fifth, paragraph (e).
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