Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Granting Approval to Proposed Rule Change as Amended By Amendment Nos. 1, 2, and 3 Thereto Relating to an Interpretation of Paragraph (b) of Article Fifth of Its Certificate of Incorporation and an Amendment to Rule 3.16(b), 30981-30986 [E5-2717]
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Federal Register / Vol. 70, No. 103 / Tuesday, May 31, 2005 / Notices
accordance with the Act and will
include all costs of doing business
incurred by the Service Companies,
including a reasonable return on capital
which will reflect a capitalization of the
Service Companies of no more than ten
percent equity, and all associated taxes.
Applicant’s state that each Service
Company will maintain an accounting
system for accumulating all costs on a
project, activity or other appropriate
basis. Expenses for the department will
include salaries and wages of
employees, materials, and supplies and
all other expenses attributable to the
department. Labor costs will be loaded
for fringe benefits and payroll taxes.
Time records of hours worked by all
Service Company employees, including
all officers of the company (i.e., Chief
Executive Officer, President and Vice
Presidents) will be kept by project and
activity.
Each client company will take agreed
upon services and such additional,
general, or special services as the client
company may request and which the
particular Service Company concludes
it is able to perform. No amendment,
alteration or rescission of an activity or
project shall release a client company
from liability for all costs already
incurred by, or contracted for, the
applicable Service Company pursuant to
the project or activity regardless of
whether the services associated with the
costs have been completed.
Applicants state that each of the
Service Companies’ accounting and cost
allocation methods and procedures have
been structured so as to comply with the
‘‘Uniform System of Accounts for
Mutual Service Companies’’ established
by the Commission for holding
company systems. Moreover, each of the
Service Companies will file the annual
report required by the Commission
pursuant to rule 94 under the Act.
Applicants represent that no change
in the organization of a Service
Company, the type and character of the
companies to be serviced, the methods
of allocating cost to associate companies
or the scope or character of the services
to be rendered subject to section 13 of
the Act, or any rule, regulation, or order
thereunder, shall be made until the
Service Company shall first have given
the Commission notice of the proposed
change not less than 60 days prior to the
proposed effectiveness. If, upon the
receipt of a notice, the Commission
shall notify the Service Company within
the 60 day period that a question exists
as to whether the proposed change is
consistent with the provisions of section
13 of the Act, or of any rule, regulation,
or order thereunder, then the proposed
change shall not become effective unless
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16:14 May 27, 2005
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and until the Service Company shall
have filed with the Commission an
appropriate declaration regarding the
proposed change and the Commission
shall have permitted the declaration to
become effective.
D. Reservation of Jurisdiction Over the
Use of KCS and KUS as Separate
Service Companies Pending Dissolution
of KUS
Applicants state that in 1998, as a
condition of the NYPSC’s approval of
the formation of KeySpan as utility
holding company, the NYPSC required
KeySpan to form KCS and KUS in order
to provide the services noted above.
Applicants now request that the
Commission continue to reserve
jurisdiction over the use of KCS and
KUS as separate service companies
pending and subject to approval by the
NYPSC, upon KeySpan’s petition, to
eliminate the need to utilize KUS as a
separate service company. KeySpan
proposes to petition the NYPSC to allow
Applicants to eliminate the need to
utilize KUS as a separate service
company. The petition will generally
request authorization to utilize KCS as
the single service company that would
provide to the entire KeySpan system
both corporate administrative services
as well as gas marketing, gas supply, gas
and electric distribution planning, meter
repair operations, and all other services
currently being provided by KUS and
KCS. Key Span proposes to file this
NYPSC petition on or before December
31, 2005 and anticipates that the NYPSC
will act on this petition on or before
December 31, 2006.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5–2725 Filed 5–27–05; 8:45 am]
BILLING CODE 8010–01–P
PO 00000
30981
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51733; File No. SR–CBOE–
2005–19]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Order Granting Approval
to Proposed Rule Change as Amended
By Amendment Nos. 1, 2, and 3
Thereto Relating to an Interpretation of
Paragraph (b) of Article Fifth of Its
Certificate of Incorporation and an
Amendment to Rule 3.16(b)
May 24, 2005.
I. Introduction
On March 7, 2005, the Chicago Board
Options Exchange, Incorporated
(‘‘CBOE’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) a
proposed rule change pursuant to
Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 1 and Rule 19b–4 thereunder,2 to
adopt an interpretation of paragraph (b)
of Article Fifth of the Certificate of
Incorporation of the CBOE (‘‘Article
Fifth(b)’’) pertaining to the right of the
1,402 Full Members of the Board of
Trade of the City of Chicago, Inc.
(‘‘CBOT’’) to become members of the
CBOE without having to purchase a
CBOE membership. On March 28, 2005,
the Exchange submitted Amendment
No. 1 to the proposed rule change.3 The
proposed rule change, as amended, was
published for notice and comment in
the Federal Register on April 7, 2005.4
The Commission received three
comment letters in response to the
proposal as published in the Federal
Register.5 On April 20, 2005, the CBOE
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Due to a motion to reconsider the Commission’s
approval of SR–CBOE–2004–16, which was
pending at the time the notice was published for
comment in the Federal Register, Amendment No.
1 removed certain language from the text of CBOE
Rule 3.16(b) that was included with the original
filing to reflect the stay of effectiveness of the text
added by SR–CBOE–2004–16 pending a final
Commission determination of the motion to
reconsider. Amendment No. 1 also added Exhibit
3d to the filing, consisting of an opinion letter from
the CBOE’s special Delaware counsel pertaining to
the proposed rule change.
4 See Securities Exchange Act Release No. 51463
(Mar. 31, 2005), 70 FR 17732 (Apr. 7, 2005).
5 See Letter from Marshall Spiegel and Donald
Cleven to Jonathan G. Katz, Secretary, Commission,
dated April 28, 2005 (‘‘Spiegel & Cleven April 28th
Letter’’); Letter from Thomas A. Bond, Norman
Friedland, Gary P. Lahey, Anthony Arciero, and
Marshall Spiegel to Jonathan G. Katz, Secretary,
Commission, dated April 27, 2005 (‘‘Joint Letter’’);
and Letter from Marshall Spiegel to William
Brodsky, Chairman, CBOE, dated April 26, 2005
(this letter was also provided to the Commission as
2 17
Continued
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Federal Register / Vol. 70, No. 103 / Tuesday, May 31, 2005 / Notices
filed Amendment No. 2 to the proposed
rule change.6 The CBOE submitted a
response to the comment letters on May
6, 2005.7 On May 12, 2005, the CBOE
filed Amendment No. 3 to the proposed
rule change.8 Subsequently, the
Commission received four comment
letters.9 This order approves the
proposed rule change as amended.10
II. Description of the Proposed Rule
Change
A. Background
As compensation for the time and
money that the CBOT had expended in
the development of the CBOE, a member
of the CBOT is entitled to become a
member of the CBOE without having to
acquire a separate CBOE membership.
This entitlement is established by
Article Fifth(b), which provides, in
relevant part:
[E]very present and future member of the
[CBOT] who applies for membership in the
an exhibit to the Spiegel & Cleven April 28th Letter;
while the Commission has separately considered
this letter as a comment to the proposed rule
change, the Commission notes that the substantive
arguments set forth in this letter are also reflected
in the April 28th Letter).
6 In Amendment No. 2, the CBOE modified the
text of CBOE Rule 3.16(b) to include the language
added by SR–CBOE–2004–16. That language had
been removed from the proposed rule change by
Amendment No. 1 to account for a pending motion
to reconsider the Commission’s approval of SR–
CBOE–2004–16. On April 18, 2005, the Commission
denied the motion for reconsideration. See
Securities Exchange Act Release No. 51568 (Apr.
18, 2005), 70 FR 20953 (Apr. 22, 2005) (order
denying motion for reconsideration). Accordingly,
the CBOE submitted Amendment No. 2 to the filing
to incorporate the text of CBOE Rule 3.16(b) as
currently in effect, including the language added to
the Rule by SR–CBOE–2004–16. As such, this is a
technical amendment and is not subject to notice
and comment.
7 See Letter from Joanne Moffic-Silver, Executive
Vice President and General Counsel, CBOE, to
Jonathan G. Katz, Secretary, Commission, dated
May 6, 2005.
8 In Amendment No. 3, the CBOE filed with the
Commission a copy of the letter sent from Marshall
Spiegel to William Brodsky, Chairman of the CBOE,
dated April 26, 2005. This letter also was attached
as an appendix to the Spiegel & Cleven April 28th
Letter. See Spiegel & Cleven April 28th Letter,
supra note 5. As such, the amendment providing
the Commission with the Spiegel & Cleven April
28th Letter is a technical amendment and is not
subject to notice and comment.
9 See Letter from Marshall Spiegel and Donald
Cleven to Jonathan G. Katz, Secretary, Commission,
dated May 20, 2005 (‘‘Spiegel & Cleven May 20th
Letter’’); Letter from Marshall Spiegel to Jonathan
G. Katz, Secretary, Commission, dated May 20, 2005
(‘‘Spiegel May 20th Letter’’); Letter from Joanne
Moffic-Silver to Jonathan G. Katz, Secretary,
Commission, dated May 20, 2005; and Letter from
Charles R. Mills to Jonathan G. Katz, Secretary,
Commission, dated May 18, 2005 (letter sent on
behalf of Marshall Spiegel) (‘‘Mills Letter’’).
10 There is no basis to support any implication in
the Mills Letter that the Commission provided any
assurance to the CBOE, prior to its actions today,
that it would approve the proposed rule change or
that any such approval would occur by a certain
date.
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[CBOE] and who otherwise qualifies shall, so
long as he remains a member of [the CBOT],
be entitled to be a member of the [CBOE]
notwithstanding any limitation on the
number of members and without the
necessity of acquiring such membership for
consideration or value from the [CBOE]
(‘‘Exercise Rights’’).
Agreement, the CBOE and the CBOT
agreed on an interpretation of the term
‘‘member of the [CBOT]’’ as used in
Article Fifth(b) once these Exercise
Right Privileges are issued.
Article Fifth(b) also explicitly states
that no amendment may be made to it
without the approval of at least 80% of
those CBOT members who have
‘‘exercised’’ their right to be CBOE
members and 80% of all other CBOE
members.
In 1993, the Commission approved
the CBOE’s proposed interpretation of
the meaning of the term ‘‘member of the
[CBOT]’’ as used in Article Fifth(b).11
This interpretation, proposed by the
CBOE and agreed upon by the CBOE
and the CBOT, is embodied in an
agreement dated September 1, 1992
(‘‘1992 Agreement’’) and is reflected in
CBOE Rule 3.16(b) (‘‘Special Provisions
Regarding Chicago Board of Trade
Exerciser Memberships’’). CBOE Rule
3.16(b) states that ‘‘for the purpose of
entitlement to membership on the
[CBOE] in accordance with * * *
[Article Fifth(b)] * * * the term
‘member of the [CBOT],’ as used in
Article Fifth(b), is interpreted to mean
an individual who is either an ‘Eligible
CBOT Full Member’ or an ‘Eligible
CBOT Full Member Delegate,’ as those
terms are defined in the [1992
Agreement] * * *.’’ 12
In 2005, the Commission approved
the CBOE’s subsequent amendment of
CBOE Rule 3.16(b) to reflect a further
interpretation of the term ‘‘member of
the [CBOT]’’ embodied in an agreement
dated September 17, 2003 between the
CBOE and the CBOT (‘‘2003
Agreement’’).13 This interpretation was
intended to clarify which individuals
will be entitled to the Exercise Right
upon distribution by the CBOT of a
separately transferable interest
(‘‘Exercise Right Privilege’’) representing
the Exercise Right component of a
CBOT membership. In the 2003
The CBOE is again proposing an
interpretation of the term ‘‘member of
the [CBOT]’’ as used in Article Fifth(b)
and reflected in CBOE Rule 3.16. The
CBOE believes that this interpretation is
necessary to address the effect on the
Exercise Right of the restructuring of the
CBOT from a mutual to a demutualized
entity, as well as the expansion of
electronic trading on the CBOT and the
CBOE.
The interpretation of the Exercise
Right that is the subject of this proposed
rule change is embodied in an
agreement dated August 7, 2001
between the CBOE and the CBOT
(‘‘2001 Agreement’’), as modified by a
Letter Agreement among CBOE, CBOT,
and CBOT Holdings, Inc. dated October
7, 2004 (‘‘October 2004 Letter
Agreement’’), which together represent
the agreement of the parties concerning
the nature and scope of the Exercise
Right following the restructuring of the
CBOT and in light of the expansion of
the CBOT’s electronic trading system.
The 2001 Agreement, as modified by the
October 2004 Letter Agreement,
incorporates the CBOE’s interpretation
concerning the operation of Article
Fifth(b) in light of these changed
circumstances at the CBOT. In a
February 14, 2005 Letter Agreement
among CBOE, CBOT, and CBOT
Holdings, Inc., (‘‘February 2005 Letter
Agreement’’) the parties confirmed the
CBOT restructuring for purposes of the
2001 Agreement and the CBOE’s
interpretation of Article Fifth(b).
The CBOE’s proposed rule change
seeks to revise CBOE Rule 3.16(b),
which reflects an interpretation of the
term ‘‘member of the [CBOT]’’ used in
Article Fifth(b), to incorporate the
definitions of ‘‘Eligible CBOE Full
Member’’ and ‘‘Eligible CBOT Full
Member Delegate’’ found in the 2001
Agreement, as modified by the October
2004 Letter Agreement and the February
2005 Letter Agreement (‘‘2001
Agreement, as amended’’). As noted in
the 2001 Agreement, as amended, the
CBOT’s restructuring divided the
previous single interest of a CBOT
member into Class B, Series B–1
memberships in CBOT (representing the
trading rights of full members) and
shares of Class A common stock of
CBOT Holdings, Inc. (representing the
11 See Securities Exchange Act Release No. 32430
(June 8, 1993), 58 FR 32969 (June 14, 1993).
12 In the 1992 Agreement, an ‘‘Eligible CBOT Full
Member’’ is defined as an individual who at the
time is the holder of one of 1,402 existing CBOT
full memberships (‘‘CBOT Full Memberships’’), and
who is in possession of all trading rights and
privileges of such CBOT Full Memberships. An
‘‘Eligible CBOT Full Member Delegate’’ is defined
as the individual to whom a CBOT Full
Membership is delegated (i.e., leased) and who is
in possession of all trading rights and privileges
appurtenant to such CBOT Full Membership.
13 See Securities Exchange Act Release Nos.
51252 (Feb. 25, 2005), 70 FR 10442 (Mar. 3, 2005)
(order setting aside earlier order issued by delegated
authority for File No. SR–CBOE–2004–16); and
51568 (Apr. 18, 2005), 70 FR 20953 (Apr. 22, 2005)
(order denying motion for reconsideration).
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B. CBOE’s Current Proposal
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Federal Register / Vol. 70, No. 103 / Tuesday, May 31, 2005 / Notices
ownership rights of full members).14
Accordingly, the interpretation
embodied in the 2001 Agreement, as
amended, clarifies that, following the
CBOT’s restructuring, the Exercise Right
remains available to persons who
continue to hold all of the interests into
which their CBOT full memberships
were divided in the restructuring.
III. Discussion and Commission
Findings
Section 19(b) of the Exchange Act
requires the Commission to approve the
CBOE’s proposed rule change if it finds
that the proposed rule change is
consistent with the requirements of the
Exchange Act and the rules and
regulations thereunder applicable to the
CBOE.15 The Commission has carefully
reviewed the proposed rule change, the
comment letters received and the
attachments thereto, and the CBOE’s
response to the comments, and finds
that the proposed rule change is
consistent with the requirements of Act,
and in particular Section 6 of the
Exchange Act,16 and the rules and
regulations applicable to a national
securities exchange.17 More specifically,
the Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Exchange Act,18 which
requires, among other things, that the
rules of an exchange be designed to
promote just and equitable principles of
trade, because it interprets the CBOE’s
rules fairly and reasonably with respect
14 As specified in the 2001 Agreement, as
amended, an individual is deemed to be an
‘‘Eligible CBOT Full Member’’ if the individual: (1)
Is the owner of the requisite number of Class A
Common Stock of CBOT Holdings, Inc., the
requisite number of Series B–1 memberships of the
CBOT, and the Exercise Right Privilege; (2) has not
delegated any of the rights or privileges appurtenant
to such ownership; and (3) meets applicable
membership and eligibility requirements of the
CBOT. An individual is deemed to be a ‘‘Eligible
CBOT Full Member Delegate’’ if the individual: (1)
Is in possession of the requisite number of Class A
Common Stock of CBOT Holdings, Inc., the
requisite number of Series B–1 memberships of the
CBOT, and the Exercise Right Privilege; (2) holds
one or more of the items listed in (1) by means of
delegation rather than ownership; and (3) meets
applicable membership and eligibility requirements
of the CBOT.
15 15 U.S.C. 78s(b). Section 19(b) requires the
Commission to approve a proposed rule change or
institute proceedings to determine whether the
proposed rule change should be disapproved
‘‘[w]ithin thirty-five days of the date of publication
of notice of the filing of a proposed rule change
* * *, or within such longer period as the
Commission may designate up to ninety days of
such date * * * or as to which the self-regulatory
organization consents.’’ Id. On May 18, 2005, the
CBOE consented to an extension of time until June
10, 2005, for the Commission to consider this filing.
16 15 U.S.C. 78f.
17 In approving this rule, the Commission has
considered the impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
18 15 U.S.C. 78f(b)(5).
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16:14 May 27, 2005
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to the eligibility of a CBOT full member
to become a member of the CBOE
following the CBOT’s restructuring. In
addition, the Commission finds that the
proposed rule change is consistent with
Section 6(c)(3)(A) of the Exchange Act,19
which permits, among other things, an
exchange to examine and verify the
qualifications of an applicant to become
a member, in accordance with the
procedures established by exchange
rules, because it clarifies how the
CBOE’s rules regarding eligibility for
membership pursuant to the Exercise
Right in Article Fifth(b) apply following
the CBOT’s restructuring.
The Commission is approving the
proposed rule change filed by the CBOE,
which interprets the CBOE’s rules. The
Commission is not approving the 2001
Agreement, as amended. Further, in
approving this proposal, the
Commission is relying on the CBOE’s
representation that its interpretation is
appropriate under Delaware state law,
and CBOE’s opinion of counsel 20 that it
is within the general authority of the
CBOE’s Board of Directors to interpret
Article Fifth(b) when questions arise as
to its application under certain
circumstances, so long as the
interpretation adopted by the
Exchange’s Board of Directors is made
in good faith, consistent with the terms
of the governing documents themselves,
and not for inequitable purposes.
The commenters assert that the
CBOT’s reorganization extinguished the
Exercise Right as it pertains to Article
Fifth(b) and CBOE Rule 3.16(b) because
the CBOT is no longer a membership
corporation.21 The Commission notes
that the CBOE explains that following
the CBOT’s restructuring, ‘‘the CBOT
maintains its existence as a Delaware
non-stock, membership corporation and
continues to be owned by its members,
who have the same trading rights on the
futures exchange operated by CBOT as
they had prior to the restructuring.’’ 22
Thus, the CBOE concludes that CBOT
‘‘full’’ memberships continue to
represent under CBOT’s rules the
trading rights of full members of the
CBOT as they existed prior to the
restructuring. The Commission believes
that the commenters’ assertion that the
U.S.C. 78f(c)(3)(A).
Letter from Wendell Fenton, Richards,
Layton & Finger, to Joanne Moffic-Silver, General
Counsel and Corporate Secretary, CBOE, dated
March 28, 2005. The Commission has not
independently evaluated the CBOE’s interpretation
under Delaware state law.
21 See supra notes 5 and 9 (citing the comment
letters).
22 Letter from Joanne Moffic-Silver, Executive
Vice President and General Counsel, CBOE, to
Jonathan G. Katz, Secretary, Commission, dated
May 6, 2005, at 2.
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19 15
30983
Exercise Right has been extinguished by
the CBOT’s restructuring constitutes one
possible interpretation of Article
Fifth(b); the CBOE is not required to
draw the same conclusion as the
commenters regarding how to interpret
Article Fifth(b) following the CBOT’s
restructuring in order for the
Commission to find that the CBOE’s
proposed rule change is consistent with
the Exchange Act.
A. The Commission Finds CBOE’s
Determination That the Proposal Is an
Interpretation of Article Fifth(b) To Be
Consistent With the Exchange Act
As noted above, the Commission
received three comment letters on the
CBOE’s proposed rule change from
several members of the CBOE. The
commenters assert that the Commission
should not approve the CBOE’s
proposed rule change because the
proposed rule change does not
constitute an interpretation of Article
Fifth(b) as the CBOE claims, but rather
constitutes an amendment to Article
Fifth(b), which is subject to an 80% vote
of CBOE membership pursuant to the
Articles of Incorporation.23 The Spiegel
& Cleven April 28th Letter references
the CBOT demutualization that took
effect on April 22, 2005 and concludes
that the CBOT’s ‘‘extinguishment of
memberships renders the exercise right
for a ‘member of [CBOT]’ set forth in
Article Fifth(b) of the CBOE Articles of
Incorporation nugatory—i.e., Article
Fifth(b) no longer confers an exercise
right on any person since there are no
longer are any members of the
CBOT.’’ 24 In the Joint Letter, the
commenters contend that the proposed
rule change ‘‘substantively amends’’
Article Fifth(b) in that it ‘‘change[s] the
words’’ of Article Fifth(b).25 In
particular, the commenters contend that
the CBOT’s demutualization effectively
extinguished the exercise right such that
‘‘any action by the [CBOE] Board to
amend Article Fifth(b) to create a new
exercise right for CBOT stockholders
contravenes [Article Fifth(b)’s]
requirements of a 80% vote of the
membership.’’ 26 Accordingly, the
commenters argue that the CBOE’s
Board of Directors acted beyond its
powers and inconsistently with the
CBOE’s Certificate of Incorporation by
20 See
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23 See Spiegel & Cleven April 28th Letter, supra
note 5, at 5; and Joint Letter, supra note 5, at 2. By
its terms, Article Fifth(b) may be amended only
with the approval of 80% of CBOE’s members
admitted by exercise, and 80% of CBOE’s members
admitted other than by exercise, each voting as a
separate class.
24 Spiegel & Cleven April 28th Letter, supra note
5, at 1–2.
25 Joint Letter, supra note 5, at 2.
26 Id. at 6.
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Federal Register / Vol. 70, No. 103 / Tuesday, May 31, 2005 / Notices
failing to obtain the requisite approval
of CBOE members with respect to the
proposed rule change.27
The CBOE filed the current proposed
rule change to adopt an interpretation of
Article Fifth(b) by amending CBOE Rule
3.16. National securities exchanges are
required under Section 6(b)(1) of the
Exchange Act 28 to comply with their
own rules. The Commission has
reviewed the record in this matter and
believes that the CBOE provides a
sufficient basis on which the
Commission can find that, as a federal
matter under the Exchange Act, the
CBOE complied with its own Certificate
of Incorporation in determining that the
proposed rule change is an
interpretation of, not an amendment to,
Article Fifth(b). The Commission is
persuaded by the CBOE’s analysis of the
difference between ‘‘interpretations’’
and ‘‘amendments,’’ and the letter of
counsel that concludes that it is within
the general authority of the CBOE’s
Board of Directors to interpret Article
Fifth(b) and that the Board’s
interpretation of Article Fifth(b)
contemplated by the 2001 Agreement, as
amended, does not constitute an
amendment to the CBOE’s Certificate of
Incorporation.29 For these reasons, the
Commission finds the CBOE’s proposed
rule change consistent with the
Exchange Act.
Additionally, the commenters
suggested that the fact that CBOT full
members will not be required to own
100% of the equity of the CBOT should
preclude them from being entitled to the
Exercise Right.30 The CBOE has
determined that there is no requirement
for CBOT full members to own 100% of
the equity of the CBOT in order to
qualify for the Exercise Right, only a
requirement that a CBOT full member
hold whatever equity was issued to that
individual, together with all of the other
interests distributed to the CBOT full
member in the restructuring, for that
individual to be eligible to utilize the
Exercise Right.31 The Commission
27 See Spiegel & Cleven April 28th Letter, supra
note 5, at 6; and Joint Letter, supra note 5, at 2.
28 15 U.S.C. 78f(b)(1).
29 See Letter from Wendell Fenton, Richards,
Layton & Finger, to Joanne Moffic-Silver, General
Counsel and Corporate Secretary, CBOE, dated
March 28, 2005, at 4.
30 See Joint Letter, supra note 5, at 1. Commenters
noted that CBOT members initially will receive
approximately 77% of the CBOT’s equity, which
could be diluted further in the event of an initial
public offering. See id.
31 See Letter from Joanne Moffic-Silver, Executive
Vice President and General Counsel, CBOE, to
Jonathan G. Katz, Secretary, Commission, dated
May 6, 2005, at 3.
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Jkt 205001
believes that this determination is
reasonable.
Finally, commenters contend that the
interpretation in the 2001 Agreement, as
amended, ‘‘materially alters the
respective rights, powers and interests
of the different classes of CBOE equity
holders * * *’’ by creating ‘‘* * * a
whole new group of CBOE equity
interest holders * * *’’ which
‘‘denigrates the rights and interests of
CBOE treasury seat holders, by diluting
their interests and power.’’ 32
Commenters argue that changes to the
Exercise Right are a ‘‘zero sum’’ game,
in that enhancing the rights of CBOT
exercise right holders and CBOE
exercise holders ‘‘can correspondingly
diminish the rights of CBOE treasury
seat holders by, among other things,
diluting their voting power and the
economic value of their seats.’’ 33
Commenters argue that because the
proposed rule change interpreting the
term ‘‘member of the [CBOT]’’ in Article
Fifth(b) alters the rights of the various
and distinct classes of CBOE equity
interest holders, it is an amendment
within the meaning of Section 242 of
the Delaware General Corporation
Law.34
The Commission does not believe that
the commenters’ argument refutes
CBOE’s analysis of why its proposed
rule change is an interpretation to
Article Fifth(b), not an amendment. The
actions identified in Section 242(a) are
changes that a corporation may make to
its certificate of incorporation by
amendment. There is nothing in Section
242 that requires a corporation to amend
its certificate of incorporation if it
makes such changes. If a corporation
does amend its certificate and such
amendment is authorized under Section
242(a), paragraph (b) of Section 242 of
the Delaware General Corporation Law
then sets forth the procedures that a
corporation must follow to effect such
an amendment. Accordingly, the
Commission is persuaded by the
conclusion in the letter of counsel
submitted by the CBOE that ‘‘* * * it is
within the general authority of the
[CBOE] Board to interpret Article
Fifth(b) in good faith when questions
arise as to its application,’’ and that ‘‘the
[CBOE] Board’s determinations in
approving the interpretations of Article
Fifth(b) contemplated by the
Agreements do not constitute
amendments to the [CBOE] Certificate
[of Incorporation] and need not satisfy
the voting requirements of Article
32 Spiegel & Cleven April 28th Letter, supra note
5, at 5–6.
33 Id. at 6.
34 See id.
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Frm 00064
Fmt 4703
Sfmt 4703
Fifth(b) that would apply if the Article
were being amended.’’ 35
B. The Commission Does Not Believe
That the CBOE Unreasonably Relied on
Its Opinion of Outside Counsel
Commenters contend that the opinion
of CBOE’s Delaware counsel is
‘‘logically flawed and consequently
should not allow the CBOE’s Board of
Directors to interpret [Article Fifth(b)] in
the CBOT’s demutualization.’’ 36 As
stated above, the commenters contend
that the CBOT’s demutualization
effectively extinguished the exercise
right such that ‘‘any action by the
[CBOE] Board to amend Article Fifth(b)
to create a new exercise right for CBOT
stockholders contravenes [Article
Fifth(b)’s] requirements of a 80% vote of
the membership.’’ 37 Commenters
further argue that the CBOE Board’s
good faith is ‘‘irrelevant when it acts
without authority * * * [and] in
contravention of the powers exclusively
reposed in the membership by the
Articles with respect to amendments to
the Articles.’’ 38 In addition,
commenters argue, in so far as a
corporation’s board of directors may
delegate certain authority, powers, and
duties of management to a committee of
the corporation, ‘‘that committee can
easily be interpreted to be the
membership in a membership
corporation such as the CBOE * * *’’
such that the authority of the CBOE’s
Board of Directors has been delegated to
the CBOE membership with respect to
interpretations of Article Fifth(b), which
by its terms provides for a vote of the
membership in the case of an
amendment to its terms.39
The CBOE represents that it has been
advised by its Delaware counsel that,
under Delaware state law, it is within
the general authority of CBOE’s Board of
Directors to interpret its governing
documents when questions arise as to
their application in these types of
circumstances, so long as the
interpretation adopted by the
Exchange’s Board of Directors is
consistent with the terms of the
governing documents themselves.40 The
35 Letter from Wendell Fenton, Richards, Layton
& Finger, to Joanne Moffic-Silver, General Counsel
and Corporate Secretary, CBOE, dated March 28,
2005, at 4.
36 Joint Letter, supra note 5, at 5. See also Spiegel
& Cleven April 28th Letter, supra note 5, at 7 (n.
3).
37 Joint Letter, supra note 5, at 6.
38 Id. at 6.
39 Id. at 5–6.
40 See Letter from Wendell Fenton, Richards,
Layton & Finger, to Joanne Moffic-Silver, General
Counsel and Corporate Secretary, CBOE, dated
March 28, 2005 (providing a legal opinion from
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CBOE represents that the interpretations
contained in its proposed rule change
do not constitute amendments to the
governing documents, and thus are not
subject to the procedures that would
apply if they were actually being
amended. Further, the CBOE notes that
no delegation of power or authority was
made to the CBOE membership in the
case of the Board’s power to interpret
the Certificate of Incorporation.41 The
Commission is persuaded by the letter
of CBOE’s outside counsel and does not
agree with the commenters’ contention
that the opinion letter is logically
flawed. Accordingly, as stated above,
the Commission finds that CBOE’s
interpretation of Article Fifth(b) is
consistent with the Exchange Act.
C. The Commission Does Not Agree
With the Commenters’ Assertion of a
Conflict of Interest on the Part of the
CBOE Board With Respect to the
Proposed Rule Change
The Spiegel & Cleven April 28th
Letter argues that the interpretation in
the 2001 Agreement, as amended,
implicates a breach of fiduciary duty on
the part of the CBOE Board of Directors
in that the CBOE Board of Directors
should be considered ‘‘conflicted from
attempting to determine the competing
and conflicting reclassification of rights
and interests among the different classes
of CBOE equity interest holders’’
because its interpretation ‘‘overtly
benefits one class of equity holder over
another even when the favored class by
its own election to demutualize the
CBOT necessarily caused the
extinguishment of any rights they might
have qualified for under Article
Fifth(b).’’ 42 The Joint Letter similarly
argues that the Commission should not
approve the CBOE’s proposed rule
change because the CBOE management
and the CBOE Board of Directors are
conflicted in their decision not to
require a vote of the CBOE membership
with respect to the proposed rule
change.43 The commenters note that the
CBOE has announced that it is exploring
demutualization 44 and assert that the
CBOE’s top management will directly
benefit from fees and other incentives in
any demutualization such that they are
‘‘indifferent as to the number of CBOE
members’’ because any financial
Delaware counsel in connection with SR–CBOE–
2005–19).
41 See Letter from Joanne Moffic-Silver, Executive
Vice President and General Counsel, CBOE, to
Jonathan G. Katz, Secretary, Commission, dated
May 6, 2005, at 7.
42 Spiegel & Cleven April 28th Letter, supra note
5, at 7–8.
43 See Joint Letter, supra note 5, at 4.
44 See id.
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16:14 May 27, 2005
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rewards accompanying a CBOE
demutualization would be independent
of the number of CBOE members.45
The Commission does not believe
there is any support for the commenters’
conclusions about an alleged conflict of
interest on the part of the CBOE Board
of Directors with respect to the current
proposed rule change. The Commission
agrees with the CBOE that the CBOE
Board’s consideration of whether
changes to CBOE’s own corporate
structure may be in CBOE’s and its
members’ best interests does not
support the commenters’ suggestion that
the CBOE’s directors or its management
were conflicted in considering how to
interpret Article Fifth(b).46 Further, the
Commission does not believe that
because there may be conflicting
interests among CBOE members, that
the CBOE Board of Directors is
conflicted.
D. Neither the CBOE’s Offer To
Purchase Exercise Rights Nor the 2001
Agreement, as Amended, Is the Subject
of the Present Filing
The Spiegel & Cleven April 28th
Letter contends that ‘‘the 2001
Agreement, as amended, and the
interpretation it embodies cannot
become effective prior to Commission
approval of it.’’ 47 Moreover, these
commenters argue that the CBOE’s
‘‘Offer to Purchase for Cash Exercise
Right Privileges,’’ through which the
CBOE informed certain CBOT members
of the CBOE’s plans to conduct a
purchase of Exercise Right Privileges for
cash in a tender to be completed around
May 25, 2005, violates Section 19 of the
Exchange Act because it ‘‘effectuates,
relies on and implements’’ the
interpretation in the 2001 Agreement, as
amended, prior to Commission approval
of the applicable rule filing (SR–CBOE–
2005–19).48 The commenters argue that
by employing the definition of CBOT
Full Member contained in the 2001
id.
Letter from Joanne Moffic-Silver, Executive
Vice President and General Counsel, CBOE, to
Jonathan G. Katz, Secretary, Commission, dated
May 6, 2005, at 7. Later comment letters assert that
members of the CBOE who are members because
they exercised their rights as ‘‘members of [the
CBOT]’’ under Article Fifth(b) were on the CBOE’s
board of directors during the time when the CBOE
entered into various agreements with the CBOT
regarding the CBOE’s interpretation of Article
Fifth(b). Without evidence to the contrary, these
commenters do not accept the CBOE’s assertion that
no conflicts existed. See Spiegel & Cleven May 20th
Letter, supra note 9, at 4, and Spiegel May 20th
Letter, supra note 9, at 4–5. The Commission does
not believe that commenters provide any support
for their allegations of a conflict of interest on the
part of certain CBOE board members.
47 Spiegel & Cleven April 28th Letter, supra note
5, at 2.
48 Id. at 3.
PO 00000
45 See
46 See
Frm 00065
Fmt 4703
Sfmt 4703
30985
Agreement, as amended, prior to
Commission approval of the applicable
filing, the CBOE engaged in a ‘‘willful
violation’’ of Section 19 of the Exchange
Act that constitutes a basis for the
Commission not to approve the
proposed rule change.49
The Commission notes that an
agreement between an exchange and a
third party is not, per se, a proposed
rule change that must be filed with the
Commission. Whether or not agreements
proposed by or entered into by the
CBOE are proposed rule changes is a
judgment that, in the first instance,
CBOE must make. To the extent,
however, that any part of an agreement
is a ‘‘policy, practice, or interpretation’’
of CBOE’s rules and that ‘‘policy,
practice, or interpretation’’ has not been
filed with, and under certain
circumstances approved by, the
Commission, it would be a violation of
Section 19(b) of the Exchange Act and
the Commission could take appropriate
action against the CBOE. The CBOE is
not requesting that the Commission
approve its ‘‘Offer to Purchase for Cash
Exercise Right Privileges’’ sent to certain
CBOT members, nor is the CBOE
seeking approval of the 2001
Agreement, as amended. The proposed
rule change solely relates to the CBOE’s
interpretation of Article Fifth(b) as
embodied in the 2001 Agreement, as
amended, and it is the substance of this
interpretation that the Commission
finds consistent with the Exchange
Act.50 The Commission does not believe
it needs to determine whether the CBOE
has complied with Section 19 of the
Exchange Act in taking actions it is not
being asked to approve in order to find
the proposed rule change consistent
with the Exchange Act. The
Commission makes no finding as to the
offer to certain CBOT members.
Additionally, commenters argue that
the provision in the 2001 Agreement
relating to arbitration of certain issues
that may arise under that agreement
constitutes an amendment of Article
Fifth(b) in that decisions ‘‘that should
be made by the CBOE membership in an
[Article Fifth(b)] vote [are] being
49 Id. at 4. See also Spiegel & Cleven May 20th
Letter, supra note 9, at 5–8, and Spiegel May 20th
Letter, supra note 9, at 5–8.
50 The Commission notes that the CBOE
membership approved the proposed purchase offer
initiative in a vote on April 19, 2004, and that the
CBOE represents that it has not yet accepted or paid
for any Exercise Right privileges that may be
tendered pursuant to its ‘‘Offer to Purchase for Cash
Exercise Right Privileges.’’ See Letter from Joanne
Moffic-Silver, Executive Vice President and General
Counsel, CBOE, to Jonathan G. Katz, Secretary,
Commission, dated May 6, 2005, at 8–9.
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decided by an arbitration panel.’’ 51 The
Commission reiterates that it is not
approving the 2001 Agreement.52
IV. Conclusion
The Commission received two
requests for the Commission to extend
the comment period for this proposed
rule change. The reasons for these
requests were for ‘‘additional time to
study and comment on the April 18th
release as it pertains to these rule
filings,’’ 53 and to permit the public time
to submit comments in response to the
CBOE’s May 6, 2005 letter filed in
response to the two earlier comment
letters.54 The proposed rule change was
publicly available on March 7, 2005
when the CBOE filed it. On April 7,
2005, the proposal was published in the
Federal Register along with
Amendment No. 1, which included a
technical amendment and the opinion
letter from CBOE’s Delaware counsel.55
The Commission sees no reason to delay
action on the CBOE’s current proposed
rule change to accommodate
commenters’ review of the
Commission’s order denying
reconsideration of a separate filing. In
addition, the Commission believes that
the public has had sufficient time to
review the substance of the CBOE’s
proposed rule change and provide the
Commission with comments.
For the foregoing reasons, the
Commission finds that the proposed
rule change is consistent with the
Exchange Act and the rules and
regulations thereunder applicable to a
national securities exchange, and in
particular, with Section 6(b)(5) of the
Exchange Act.56
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,57
that the proposed rule change (SR–
CBOE–2005–19), as amended, be, and it
hereby is, approved.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5–2717 Filed 5–27–05; 8:45 am]
BILLING CODE 8010–01–P
51 Joint
Letter, supra note 5, at 1–2.
the CBOE comes to believe that any of the
conditions in the 2001 Agreement, as amended, are
no longer satisfied by the CBOT or CBOT Holdings,
Inc. such that the interpretation the Commission is
today approving is no longer proper, the CBOE
would be required to file with the Commission any
subsequent interpretation of Article Fifth(b).
53 Joint Letter, supra note 5, at 7. See also
Securities Exchange Act Release No. 51568 (Apr.
18, 2005), 70 FR 20953 (Apr. 22, 2005) (order
denying motion for reconsideration of the
Commission’s order approving SR–CBOE–2004–16).
54 See Mills Letter, supra note 9.
55 See supra note 3.
56 15 U.S.C. 78f(b)(5).
57 15 U.S.C. 78s(b)(2).
52 If
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51729; File No. SR–NYSE–
2004–57]
Self-Regulatory Organizations; New
York Stock Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change and
Amendments No. 1 and No. 2 Thereto
Relating to Member Organization
Increases in Arbitration Filing Fees
and Member Organization Surcharges
in Arbitration Claims Filed by
Customers
May 24, 2005.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Exchange Act’’), and Rule 19b–4 2
thereunder, notice is hereby given that
on October 12, 2004 and on April 4,
2005 (Amendment No. 1) and on April
11, 2005 (Amendment No. 2), the New
York Stock Exchange, Inc. (‘‘NYSE’’ or
the ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
For the purposes of Section
19(b)(3)(A)(ii) of the Exchange Act 3 and
Rule 19b–4(f)(2) thereunder,4 NYSE has
designated the proposed rule change as
one establishing or changing a due, fee,
or other charge imposed by the selfregulatory organization on its members,
which renders the proposal effective
upon filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The proposed rule change consists of
amendments to Rule 629 concerning
arbitration filing fees and hearing
deposits, and the imposition of member
organization surcharges pertaining to
arbitration claims. Below is the text of
the proposed rule change to Rule 629.
Proposed new language is in italics;
proposed deletions are in brackets.
Rule 629
Schedule of Fees
*
*
*
*
*
(c)(1) The arbitrators, in their award,
may determine the amount chargeable
to the parties as forum fees and shall
determine who shall pay such forum
fees. Forum fees chargeable to the
PO 00000
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
2 17
Frm 00066
Fmt 4703
Sfmt 4703
parties shall be assessed on a per
hearing session basis and the aggregate
for each hearing session may equal but
shall not exceed the amount of the
largest initial hearing deposit deposited
by any party. [,e] Except that in a case
where claims have been joined
subsequent to filing [in which cases
hearing session], forum fees for any
party other than a customer shall be
computed as provided in paragraph (d),
and forum fees for a customer in
connection with any industry claim
shall be computed as provided in this
paragraph (c)(1). [The arbitrators may
determine in the award that a party
shall reimburse to another party any
non-refundable filing fee it has paid.]
If a customer is assessed forum fees in
connection with an industry claim,
[forum fees assessed against] the
customer’s forum fees shall be based on
the [hearing deposit required under the
industry claims schedule for the] total
amount awarded to industry parties to
be paid by the customer and not based
on the size of the industry claim. The
maximum fee per session for purposes
of calculating any forum fees that may
be assessed against the customer in
connection with an industry claim shall
be:
Amount of award (excluding
interest expenses)
Maximum persession customer fee
amount
$25,001 to $100,000 ............
$100,001 to $500,000 ..........
$500,001 to $5,000,000 .......
Over $5,000,000 ...................
$600
750
1,000
1,500
(c)(2) The arbitrators, in their award,
may determine that a party shall
reimburse to another party any nonrefundable filing fee it has paid; any
such filing fee assessed against a
customer in connection with an industry
claim shall not exceed $500.00.
No fees shall be assessed against a
customer in connection with an
industry claim that is dismissed;
however, in cases where there is also a
customer claim, the customer may be
assessed forum fees based on the
customer claim under the procedure set
out above. Amounts deposited by a
party as hearing deposits shall be
applied against forum fees, if any.
In addition to forum fees, the
arbitrator(s) may determine in the award
the amount of costs incurred pursuant
to Rules 617, 619 and 623 and, unless
applicable law directs otherwise, other
costs and expenses of the parties. The
arbitrator(s) shall determine by whom
such costs shall be borne[.], provided
that the following schedule of hearing
deposits shall be used to calculate any
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]]>Agencies
[Federal Register Volume 70, Number 103 (Tuesday, May 31, 2005)]
[Notices]
[Pages 30981-30986]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-2717]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51733; File No. SR-CBOE-2005-19]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Approval to Proposed Rule Change as
Amended By Amendment Nos. 1, 2, and 3 Thereto Relating to an
Interpretation of Paragraph (b) of Article Fifth of Its Certificate of
Incorporation and an Amendment to Rule 3.16(b)
May 24, 2005.
I. Introduction
On March 7, 2005, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or the ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') a proposed rule change pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'') \1\
and Rule 19b-4 thereunder,\2\ to adopt an interpretation of paragraph
(b) of Article Fifth of the Certificate of Incorporation of the CBOE
(``Article Fifth(b)'') pertaining to the right of the 1,402 Full
Members of the Board of Trade of the City of Chicago, Inc. (``CBOT'')
to become members of the CBOE without having to purchase a CBOE
membership. On March 28, 2005, the Exchange submitted Amendment No. 1
to the proposed rule change.\3\ The proposed rule change, as amended,
was published for notice and comment in the Federal Register on April
7, 2005.\4\ The Commission received three comment letters in response
to the proposal as published in the Federal Register.\5\ On April 20,
2005, the CBOE
[[Page 30982]]
filed Amendment No. 2 to the proposed rule change.\6\ The CBOE
submitted a response to the comment letters on May 6, 2005.\7\ On May
12, 2005, the CBOE filed Amendment No. 3 to the proposed rule
change.\8\ Subsequently, the Commission received four comment
letters.\9\ This order approves the proposed rule change as
amended.\10\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Due to a motion to reconsider the Commission's approval of
SR-CBOE-2004-16, which was pending at the time the notice was
published for comment in the Federal Register, Amendment No. 1
removed certain language from the text of CBOE Rule 3.16(b) that was
included with the original filing to reflect the stay of
effectiveness of the text added by SR-CBOE-2004-16 pending a final
Commission determination of the motion to reconsider. Amendment No.
1 also added Exhibit 3d to the filing, consisting of an opinion
letter from the CBOE's special Delaware counsel pertaining to the
proposed rule change.
\4\ See Securities Exchange Act Release No. 51463 (Mar. 31,
2005), 70 FR 17732 (Apr. 7, 2005).
\5\ See Letter from Marshall Spiegel and Donald Cleven to
Jonathan G. Katz, Secretary, Commission, dated April 28, 2005
(``Spiegel & Cleven April 28th Letter''); Letter from Thomas A.
Bond, Norman Friedland, Gary P. Lahey, Anthony Arciero, and Marshall
Spiegel to Jonathan G. Katz, Secretary, Commission, dated April 27,
2005 (``Joint Letter''); and Letter from Marshall Spiegel to William
Brodsky, Chairman, CBOE, dated April 26, 2005 (this letter was also
provided to the Commission as an exhibit to the Spiegel & Cleven
April 28th Letter; while the Commission has separately considered
this letter as a comment to the proposed rule change, the Commission
notes that the substantive arguments set forth in this letter are
also reflected in the April 28th Letter).
\6\ In Amendment No. 2, the CBOE modified the text of CBOE Rule
3.16(b) to include the language added by SR-CBOE-2004-16. That
language had been removed from the proposed rule change by Amendment
No. 1 to account for a pending motion to reconsider the Commission's
approval of SR-CBOE-2004-16. On April 18, 2005, the Commission
denied the motion for reconsideration. See Securities Exchange Act
Release No. 51568 (Apr. 18, 2005), 70 FR 20953 (Apr. 22, 2005)
(order denying motion for reconsideration). Accordingly, the CBOE
submitted Amendment No. 2 to the filing to incorporate the text of
CBOE Rule 3.16(b) as currently in effect, including the language
added to the Rule by SR-CBOE-2004-16. As such, this is a technical
amendment and is not subject to notice and comment.
\7\ See Letter from Joanne Moffic-Silver, Executive Vice
President and General Counsel, CBOE, to Jonathan G. Katz, Secretary,
Commission, dated May 6, 2005.
\8\ In Amendment No. 3, the CBOE filed with the Commission a
copy of the letter sent from Marshall Spiegel to William Brodsky,
Chairman of the CBOE, dated April 26, 2005. This letter also was
attached as an appendix to the Spiegel & Cleven April 28th Letter.
See Spiegel & Cleven April 28th Letter, supra note 5. As such, the
amendment providing the Commission with the Spiegel & Cleven April
28th Letter is a technical amendment and is not subject to notice
and comment.
\9\ See Letter from Marshall Spiegel and Donald Cleven to
Jonathan G. Katz, Secretary, Commission, dated May 20, 2005
(``Spiegel & Cleven May 20th Letter''); Letter from Marshall Spiegel
to Jonathan G. Katz, Secretary, Commission, dated May 20, 2005
(``Spiegel May 20th Letter''); Letter from Joanne Moffic-Silver to
Jonathan G. Katz, Secretary, Commission, dated May 20, 2005; and
Letter from Charles R. Mills to Jonathan G. Katz, Secretary,
Commission, dated May 18, 2005 (letter sent on behalf of Marshall
Spiegel) (``Mills Letter'').
\10\ There is no basis to support any implication in the Mills
Letter that the Commission provided any assurance to the CBOE, prior
to its actions today, that it would approve the proposed rule change
or that any such approval would occur by a certain date.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
A. Background
As compensation for the time and money that the CBOT had expended
in the development of the CBOE, a member of the CBOT is entitled to
become a member of the CBOE without having to acquire a separate CBOE
membership. This entitlement is established by Article Fifth(b), which
provides, in relevant part:
[E]very present and future member of the [CBOT] who applies for
membership in the [CBOE] and who otherwise qualifies shall, so long
as he remains a member of [the CBOT], be entitled to be a member of
the [CBOE] notwithstanding any limitation on the number of members
and without the necessity of acquiring such membership for
consideration or value from the [CBOE] (``Exercise Rights'').
Article Fifth(b) also explicitly states that no amendment may be
made to it without the approval of at least 80% of those CBOT members
who have ``exercised'' their right to be CBOE members and 80% of all
other CBOE members.
In 1993, the Commission approved the CBOE's proposed interpretation
of the meaning of the term ``member of the [CBOT]'' as used in Article
Fifth(b).\11\ This interpretation, proposed by the CBOE and agreed upon
by the CBOE and the CBOT, is embodied in an agreement dated September
1, 1992 (``1992 Agreement'') and is reflected in CBOE Rule 3.16(b)
(``Special Provisions Regarding Chicago Board of Trade Exerciser
Memberships''). CBOE Rule 3.16(b) states that ``for the purpose of
entitlement to membership on the [CBOE] in accordance with * * *
[Article Fifth(b)] * * * the term `member of the [CBOT],' as used in
Article Fifth(b), is interpreted to mean an individual who is either an
`Eligible CBOT Full Member' or an `Eligible CBOT Full Member Delegate,'
as those terms are defined in the [1992 Agreement] * * *.'' \12\
---------------------------------------------------------------------------
\11\ See Securities Exchange Act Release No. 32430 (June 8,
1993), 58 FR 32969 (June 14, 1993).
\12\ In the 1992 Agreement, an ``Eligible CBOT Full Member'' is
defined as an individual who at the time is the holder of one of
1,402 existing CBOT full memberships (``CBOT Full Memberships''),
and who is in possession of all trading rights and privileges of
such CBOT Full Memberships. An ``Eligible CBOT Full Member
Delegate'' is defined as the individual to whom a CBOT Full
Membership is delegated (i.e., leased) and who is in possession of
all trading rights and privileges appurtenant to such CBOT Full
Membership.
---------------------------------------------------------------------------
In 2005, the Commission approved the CBOE's subsequent amendment of
CBOE Rule 3.16(b) to reflect a further interpretation of the term
``member of the [CBOT]'' embodied in an agreement dated September 17,
2003 between the CBOE and the CBOT (``2003 Agreement'').\13\ This
interpretation was intended to clarify which individuals will be
entitled to the Exercise Right upon distribution by the CBOT of a
separately transferable interest (``Exercise Right Privilege'')
representing the Exercise Right component of a CBOT membership. In the
2003 Agreement, the CBOE and the CBOT agreed on an interpretation of
the term ``member of the [CBOT]'' as used in Article Fifth(b) once
these Exercise Right Privileges are issued.
---------------------------------------------------------------------------
\13\ See Securities Exchange Act Release Nos. 51252 (Feb. 25,
2005), 70 FR 10442 (Mar. 3, 2005) (order setting aside earlier order
issued by delegated authority for File No. SR-CBOE-2004-16); and
51568 (Apr. 18, 2005), 70 FR 20953 (Apr. 22, 2005) (order denying
motion for reconsideration).
---------------------------------------------------------------------------
B. CBOE's Current Proposal
The CBOE is again proposing an interpretation of the term ``member
of the [CBOT]'' as used in Article Fifth(b) and reflected in CBOE Rule
3.16. The CBOE believes that this interpretation is necessary to
address the effect on the Exercise Right of the restructuring of the
CBOT from a mutual to a demutualized entity, as well as the expansion
of electronic trading on the CBOT and the CBOE.
The interpretation of the Exercise Right that is the subject of
this proposed rule change is embodied in an agreement dated August 7,
2001 between the CBOE and the CBOT (``2001 Agreement''), as modified by
a Letter Agreement among CBOE, CBOT, and CBOT Holdings, Inc. dated
October 7, 2004 (``October 2004 Letter Agreement''), which together
represent the agreement of the parties concerning the nature and scope
of the Exercise Right following the restructuring of the CBOT and in
light of the expansion of the CBOT's electronic trading system. The
2001 Agreement, as modified by the October 2004 Letter Agreement,
incorporates the CBOE's interpretation concerning the operation of
Article Fifth(b) in light of these changed circumstances at the CBOT.
In a February 14, 2005 Letter Agreement among CBOE, CBOT, and CBOT
Holdings, Inc., (``February 2005 Letter Agreement'') the parties
confirmed the CBOT restructuring for purposes of the 2001 Agreement and
the CBOE's interpretation of Article Fifth(b).
The CBOE's proposed rule change seeks to revise CBOE Rule 3.16(b),
which reflects an interpretation of the term ``member of the [CBOT]''
used in Article Fifth(b), to incorporate the definitions of ``Eligible
CBOE Full Member'' and ``Eligible CBOT Full Member Delegate'' found in
the 2001 Agreement, as modified by the October 2004 Letter Agreement
and the February 2005 Letter Agreement (``2001 Agreement, as
amended''). As noted in the 2001 Agreement, as amended, the CBOT's
restructuring divided the previous single interest of a CBOT member
into Class B, Series B-1 memberships in CBOT (representing the trading
rights of full members) and shares of Class A common stock of CBOT
Holdings, Inc. (representing the
[[Page 30983]]
ownership rights of full members).\14\ Accordingly, the interpretation
embodied in the 2001 Agreement, as amended, clarifies that, following
the CBOT's restructuring, the Exercise Right remains available to
persons who continue to hold all of the interests into which their CBOT
full memberships were divided in the restructuring.
---------------------------------------------------------------------------
\14\ As specified in the 2001 Agreement, as amended, an
individual is deemed to be an ``Eligible CBOT Full Member'' if the
individual: (1) Is the owner of the requisite number of Class A
Common Stock of CBOT Holdings, Inc., the requisite number of Series
B-1 memberships of the CBOT, and the Exercise Right Privilege; (2)
has not delegated any of the rights or privileges appurtenant to
such ownership; and (3) meets applicable membership and eligibility
requirements of the CBOT. An individual is deemed to be a ``Eligible
CBOT Full Member Delegate'' if the individual: (1) Is in possession
of the requisite number of Class A Common Stock of CBOT Holdings,
Inc., the requisite number of Series B-1 memberships of the CBOT,
and the Exercise Right Privilege; (2) holds one or more of the items
listed in (1) by means of delegation rather than ownership; and (3)
meets applicable membership and eligibility requirements of the
CBOT.
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III. Discussion and Commission Findings
Section 19(b) of the Exchange Act requires the Commission to
approve the CBOE's proposed rule change if it finds that the proposed
rule change is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to the CBOE.\15\ The
Commission has carefully reviewed the proposed rule change, the comment
letters received and the attachments thereto, and the CBOE's response
to the comments, and finds that the proposed rule change is consistent
with the requirements of Act, and in particular Section 6 of the
Exchange Act,\16\ and the rules and regulations applicable to a
national securities exchange.\17\ More specifically, the Commission
finds that the proposed rule change is consistent with Section 6(b)(5)
of the Exchange Act,\18\ which requires, among other things, that the
rules of an exchange be designed to promote just and equitable
principles of trade, because it interprets the CBOE's rules fairly and
reasonably with respect to the eligibility of a CBOT full member to
become a member of the CBOE following the CBOT's restructuring. In
addition, the Commission finds that the proposed rule change is
consistent with Section 6(c)(3)(A) of the Exchange Act,\19\ which
permits, among other things, an exchange to examine and verify the
qualifications of an applicant to become a member, in accordance with
the procedures established by exchange rules, because it clarifies how
the CBOE's rules regarding eligibility for membership pursuant to the
Exercise Right in Article Fifth(b) apply following the CBOT's
restructuring.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78s(b). Section 19(b) requires the Commission to
approve a proposed rule change or institute proceedings to determine
whether the proposed rule change should be disapproved ``[w]ithin
thirty-five days of the date of publication of notice of the filing
of a proposed rule change * * *, or within such longer period as the
Commission may designate up to ninety days of such date * * * or as
to which the self-regulatory organization consents.'' Id. On May 18,
2005, the CBOE consented to an extension of time until June 10,
2005, for the Commission to consider this filing.
\16\ 15 U.S.C. 78f.
\17\ In approving this rule, the Commission has considered the
impact on efficiency, competition, and capital formation. See 15
U.S.C. 78c(f).
\18\ 15 U.S.C. 78f(b)(5).
\19\ 15 U.S.C. 78f(c)(3)(A).
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The Commission is approving the proposed rule change filed by the
CBOE, which interprets the CBOE's rules. The Commission is not
approving the 2001 Agreement, as amended. Further, in approving this
proposal, the Commission is relying on the CBOE's representation that
its interpretation is appropriate under Delaware state law, and CBOE's
opinion of counsel \20\ that it is within the general authority of the
CBOE's Board of Directors to interpret Article Fifth(b) when questions
arise as to its application under certain circumstances, so long as the
interpretation adopted by the Exchange's Board of Directors is made in
good faith, consistent with the terms of the governing documents
themselves, and not for inequitable purposes.
---------------------------------------------------------------------------
\20\ See Letter from Wendell Fenton, Richards, Layton & Finger,
to Joanne Moffic-Silver, General Counsel and Corporate Secretary,
CBOE, dated March 28, 2005. The Commission has not independently
evaluated the CBOE's interpretation under Delaware state law.
---------------------------------------------------------------------------
The commenters assert that the CBOT's reorganization extinguished
the Exercise Right as it pertains to Article Fifth(b) and CBOE Rule
3.16(b) because the CBOT is no longer a membership corporation.\21\ The
Commission notes that the CBOE explains that following the CBOT's
restructuring, ``the CBOT maintains its existence as a Delaware non-
stock, membership corporation and continues to be owned by its members,
who have the same trading rights on the futures exchange operated by
CBOT as they had prior to the restructuring.'' \22\ Thus, the CBOE
concludes that CBOT ``full'' memberships continue to represent under
CBOT's rules the trading rights of full members of the CBOT as they
existed prior to the restructuring. The Commission believes that the
commenters' assertion that the Exercise Right has been extinguished by
the CBOT's restructuring constitutes one possible interpretation of
Article Fifth(b); the CBOE is not required to draw the same conclusion
as the commenters regarding how to interpret Article Fifth(b) following
the CBOT's restructuring in order for the Commission to find that the
CBOE's proposed rule change is consistent with the Exchange Act.
---------------------------------------------------------------------------
\21\ See supra notes 5 and 9 (citing the comment letters).
\22\ Letter from Joanne Moffic-Silver, Executive Vice President
and General Counsel, CBOE, to Jonathan G. Katz, Secretary,
Commission, dated May 6, 2005, at 2.
---------------------------------------------------------------------------
A. The Commission Finds CBOE's Determination That the Proposal Is an
Interpretation of Article Fifth(b) To Be Consistent With the Exchange
Act
As noted above, the Commission received three comment letters on
the CBOE's proposed rule change from several members of the CBOE. The
commenters assert that the Commission should not approve the CBOE's
proposed rule change because the proposed rule change does not
constitute an interpretation of Article Fifth(b) as the CBOE claims,
but rather constitutes an amendment to Article Fifth(b), which is
subject to an 80% vote of CBOE membership pursuant to the Articles of
Incorporation.\23\ The Spiegel & Cleven April 28th Letter references
the CBOT demutualization that took effect on April 22, 2005 and
concludes that the CBOT's ``extinguishment of memberships renders the
exercise right for a `member of [CBOT]' set forth in Article Fifth(b)
of the CBOE Articles of Incorporation nugatory--i.e., Article Fifth(b)
no longer confers an exercise right on any person since there are no
longer are any members of the CBOT.'' \24\ In the Joint Letter, the
commenters contend that the proposed rule change ``substantively
amends'' Article Fifth(b) in that it ``change[s] the words'' of Article
Fifth(b).\25\ In particular, the commenters contend that the CBOT's
demutualization effectively extinguished the exercise right such that
``any action by the [CBOE] Board to amend Article Fifth(b) to create a
new exercise right for CBOT stockholders contravenes [Article
Fifth(b)'s] requirements of a 80% vote of the membership.'' \26\
Accordingly, the commenters argue that the CBOE's Board of Directors
acted beyond its powers and inconsistently with the CBOE's Certificate
of Incorporation by
[[Page 30984]]
failing to obtain the requisite approval of CBOE members with respect
to the proposed rule change.\27\
---------------------------------------------------------------------------
\23\ See Spiegel & Cleven April 28th Letter, supra note 5, at 5;
and Joint Letter, supra note 5, at 2. By its terms, Article Fifth(b)
may be amended only with the approval of 80% of CBOE's members
admitted by exercise, and 80% of CBOE's members admitted other than
by exercise, each voting as a separate class.
\24\ Spiegel & Cleven April 28th Letter, supra note 5, at 1-2.
\25\ Joint Letter, supra note 5, at 2.
\26\ Id. at 6.
\27\ See Spiegel & Cleven April 28th Letter, supra note 5, at 6;
and Joint Letter, supra note 5, at 2.
---------------------------------------------------------------------------
The CBOE filed the current proposed rule change to adopt an
interpretation of Article Fifth(b) by amending CBOE Rule 3.16. National
securities exchanges are required under Section 6(b)(1) of the Exchange
Act \28\ to comply with their own rules. The Commission has reviewed
the record in this matter and believes that the CBOE provides a
sufficient basis on which the Commission can find that, as a federal
matter under the Exchange Act, the CBOE complied with its own
Certificate of Incorporation in determining that the proposed rule
change is an interpretation of, not an amendment to, Article Fifth(b).
The Commission is persuaded by the CBOE's analysis of the difference
between ``interpretations'' and ``amendments,'' and the letter of
counsel that concludes that it is within the general authority of the
CBOE's Board of Directors to interpret Article Fifth(b) and that the
Board's interpretation of Article Fifth(b) contemplated by the 2001
Agreement, as amended, does not constitute an amendment to the CBOE's
Certificate of Incorporation.\29\ For these reasons, the Commission
finds the CBOE's proposed rule change consistent with the Exchange Act.
---------------------------------------------------------------------------
\28\ 15 U.S.C. 78f(b)(1).
\29\ See Letter from Wendell Fenton, Richards, Layton & Finger,
to Joanne Moffic-Silver, General Counsel and Corporate Secretary,
CBOE, dated March 28, 2005, at 4.
---------------------------------------------------------------------------
Additionally, the commenters suggested that the fact that CBOT full
members will not be required to own 100% of the equity of the CBOT
should preclude them from being entitled to the Exercise Right.\30\ The
CBOE has determined that there is no requirement for CBOT full members
to own 100% of the equity of the CBOT in order to qualify for the
Exercise Right, only a requirement that a CBOT full member hold
whatever equity was issued to that individual, together with all of the
other interests distributed to the CBOT full member in the
restructuring, for that individual to be eligible to utilize the
Exercise Right.\31\ The Commission believes that this determination is
reasonable.
---------------------------------------------------------------------------
\30\ See Joint Letter, supra note 5, at 1. Commenters noted that
CBOT members initially will receive approximately 77% of the CBOT's
equity, which could be diluted further in the event of an initial
public offering. See id.
\31\ See Letter from Joanne Moffic-Silver, Executive Vice
President and General Counsel, CBOE, to Jonathan G. Katz, Secretary,
Commission, dated May 6, 2005, at 3.
---------------------------------------------------------------------------
Finally, commenters contend that the interpretation in the 2001
Agreement, as amended, ``materially alters the respective rights,
powers and interests of the different classes of CBOE equity holders *
* *'' by creating ``* * * a whole new group of CBOE equity interest
holders * * *'' which ``denigrates the rights and interests of CBOE
treasury seat holders, by diluting their interests and power.'' \32\
Commenters argue that changes to the Exercise Right are a ``zero sum''
game, in that enhancing the rights of CBOT exercise right holders and
CBOE exercise holders ``can correspondingly diminish the rights of CBOE
treasury seat holders by, among other things, diluting their voting
power and the economic value of their seats.'' \33\ Commenters argue
that because the proposed rule change interpreting the term ``member of
the [CBOT]'' in Article Fifth(b) alters the rights of the various and
distinct classes of CBOE equity interest holders, it is an amendment
within the meaning of Section 242 of the Delaware General Corporation
Law.\34\
---------------------------------------------------------------------------
\32\ Spiegel & Cleven April 28th Letter, supra note 5, at 5-6.
\33\ Id. at 6.
\34\ See id.
---------------------------------------------------------------------------
The Commission does not believe that the commenters' argument
refutes CBOE's analysis of why its proposed rule change is an
interpretation to Article Fifth(b), not an amendment. The actions
identified in Section 242(a) are changes that a corporation may make to
its certificate of incorporation by amendment. There is nothing in
Section 242 that requires a corporation to amend its certificate of
incorporation if it makes such changes. If a corporation does amend its
certificate and such amendment is authorized under Section 242(a),
paragraph (b) of Section 242 of the Delaware General Corporation Law
then sets forth the procedures that a corporation must follow to effect
such an amendment. Accordingly, the Commission is persuaded by the
conclusion in the letter of counsel submitted by the CBOE that ``* * *
it is within the general authority of the [CBOE] Board to interpret
Article Fifth(b) in good faith when questions arise as to its
application,'' and that ``the [CBOE] Board's determinations in
approving the interpretations of Article Fifth(b) contemplated by the
Agreements do not constitute amendments to the [CBOE] Certificate [of
Incorporation] and need not satisfy the voting requirements of Article
Fifth(b) that would apply if the Article were being amended.'' \35\
---------------------------------------------------------------------------
\35\ Letter from Wendell Fenton, Richards, Layton & Finger, to
Joanne Moffic-Silver, General Counsel and Corporate Secretary, CBOE,
dated March 28, 2005, at 4.
---------------------------------------------------------------------------
B. The Commission Does Not Believe That the CBOE Unreasonably Relied on
Its Opinion of Outside Counsel
Commenters contend that the opinion of CBOE's Delaware counsel is
``logically flawed and consequently should not allow the CBOE's Board
of Directors to interpret [Article Fifth(b)] in the CBOT's
demutualization.'' \36\ As stated above, the commenters contend that
the CBOT's demutualization effectively extinguished the exercise right
such that ``any action by the [CBOE] Board to amend Article Fifth(b) to
create a new exercise right for CBOT stockholders contravenes [Article
Fifth(b)'s] requirements of a 80% vote of the membership.'' \37\
Commenters further argue that the CBOE Board's good faith is
``irrelevant when it acts without authority * * * [and] in
contravention of the powers exclusively reposed in the membership by
the Articles with respect to amendments to the Articles.'' \38\ In
addition, commenters argue, in so far as a corporation's board of
directors may delegate certain authority, powers, and duties of
management to a committee of the corporation, ``that committee can
easily be interpreted to be the membership in a membership corporation
such as the CBOE * * *'' such that the authority of the CBOE's Board of
Directors has been delegated to the CBOE membership with respect to
interpretations of Article Fifth(b), which by its terms provides for a
vote of the membership in the case of an amendment to its terms.\39\
---------------------------------------------------------------------------
\36\ Joint Letter, supra note 5, at 5. See also Spiegel & Cleven
April 28th Letter, supra note 5, at 7 (n. 3).
\37\ Joint Letter, supra note 5, at 6.
\38\ Id. at 6.
\39\ Id. at 5-6.
---------------------------------------------------------------------------
The CBOE represents that it has been advised by its Delaware
counsel that, under Delaware state law, it is within the general
authority of CBOE's Board of Directors to interpret its governing
documents when questions arise as to their application in these types
of circumstances, so long as the interpretation adopted by the
Exchange's Board of Directors is consistent with the terms of the
governing documents themselves.\40\ The
[[Page 30985]]
CBOE represents that the interpretations contained in its proposed rule
change do not constitute amendments to the governing documents, and
thus are not subject to the procedures that would apply if they were
actually being amended. Further, the CBOE notes that no delegation of
power or authority was made to the CBOE membership in the case of the
Board's power to interpret the Certificate of Incorporation.\41\ The
Commission is persuaded by the letter of CBOE's outside counsel and
does not agree with the commenters' contention that the opinion letter
is logically flawed. Accordingly, as stated above, the Commission finds
that CBOE's interpretation of Article Fifth(b) is consistent with the
Exchange Act.
---------------------------------------------------------------------------
\40\ See Letter from Wendell Fenton, Richards, Layton & Finger,
to Joanne Moffic-Silver, General Counsel and Corporate Secretary,
CBOE, dated March 28, 2005 (providing a legal opinion from Delaware
counsel in connection with SR-CBOE-2005-19).
\41\ See Letter from Joanne Moffic-Silver, Executive Vice
President and General Counsel, CBOE, to Jonathan G. Katz, Secretary,
Commission, dated May 6, 2005, at 7.
---------------------------------------------------------------------------
C. The Commission Does Not Agree With the Commenters' Assertion of a
Conflict of Interest on the Part of the CBOE Board With Respect to the
Proposed Rule Change
The Spiegel & Cleven April 28th Letter argues that the
interpretation in the 2001 Agreement, as amended, implicates a breach
of fiduciary duty on the part of the CBOE Board of Directors in that
the CBOE Board of Directors should be considered ``conflicted from
attempting to determine the competing and conflicting reclassification
of rights and interests among the different classes of CBOE equity
interest holders'' because its interpretation ``overtly benefits one
class of equity holder over another even when the favored class by its
own election to demutualize the CBOT necessarily caused the
extinguishment of any rights they might have qualified for under
Article Fifth(b).'' \42\ The Joint Letter similarly argues that the
Commission should not approve the CBOE's proposed rule change because
the CBOE management and the CBOE Board of Directors are conflicted in
their decision not to require a vote of the CBOE membership with
respect to the proposed rule change.\43\ The commenters note that the
CBOE has announced that it is exploring demutualization \44\ and assert
that the CBOE's top management will directly benefit from fees and
other incentives in any demutualization such that they are
``indifferent as to the number of CBOE members'' because any financial
rewards accompanying a CBOE demutualization would be independent of the
number of CBOE members.\45\
---------------------------------------------------------------------------
\42\ Spiegel & Cleven April 28th Letter, supra note 5, at 7-8.
\43\ See Joint Letter, supra note 5, at 4.
\44\ See id.
\45\ See id.
---------------------------------------------------------------------------
The Commission does not believe there is any support for the
commenters' conclusions about an alleged conflict of interest on the
part of the CBOE Board of Directors with respect to the current
proposed rule change. The Commission agrees with the CBOE that the CBOE
Board's consideration of whether changes to CBOE's own corporate
structure may be in CBOE's and its members' best interests does not
support the commenters' suggestion that the CBOE's directors or its
management were conflicted in considering how to interpret Article
Fifth(b).\46\ Further, the Commission does not believe that because
there may be conflicting interests among CBOE members, that the CBOE
Board of Directors is conflicted.
---------------------------------------------------------------------------
\46\ See Letter from Joanne Moffic-Silver, Executive Vice
President and General Counsel, CBOE, to Jonathan G. Katz, Secretary,
Commission, dated May 6, 2005, at 7. Later comment letters assert
that members of the CBOE who are members because they exercised
their rights as ``members of [the CBOT]'' under Article Fifth(b)
were on the CBOE's board of directors during the time when the CBOE
entered into various agreements with the CBOT regarding the CBOE's
interpretation of Article Fifth(b). Without evidence to the
contrary, these commenters do not accept the CBOE's assertion that
no conflicts existed. See Spiegel & Cleven May 20th Letter, supra
note 9, at 4, and Spiegel May 20th Letter, supra note 9, at 4-5. The
Commission does not believe that commenters provide any support for
their allegations of a conflict of interest on the part of certain
CBOE board members.
---------------------------------------------------------------------------
D. Neither the CBOE's Offer To Purchase Exercise Rights Nor the 2001
Agreement, as Amended, Is the Subject of the Present Filing
The Spiegel & Cleven April 28th Letter contends that ``the 2001
Agreement, as amended, and the interpretation it embodies cannot become
effective prior to Commission approval of it.'' \47\ Moreover, these
commenters argue that the CBOE's ``Offer to Purchase for Cash Exercise
Right Privileges,'' through which the CBOE informed certain CBOT
members of the CBOE's plans to conduct a purchase of Exercise Right
Privileges for cash in a tender to be completed around May 25, 2005,
violates Section 19 of the Exchange Act because it ``effectuates,
relies on and implements'' the interpretation in the 2001 Agreement, as
amended, prior to Commission approval of the applicable rule filing
(SR-CBOE-2005-19).\48\ The commenters argue that by employing the
definition of CBOT Full Member contained in the 2001 Agreement, as
amended, prior to Commission approval of the applicable filing, the
CBOE engaged in a ``willful violation'' of Section 19 of the Exchange
Act that constitutes a basis for the Commission not to approve the
proposed rule change.\49\
---------------------------------------------------------------------------
\47\ Spiegel & Cleven April 28th Letter, supra note 5, at 2.
\48\ Id. at 3.
\49\ Id. at 4. See also Spiegel & Cleven May 20th Letter, supra
note 9, at 5-8, and Spiegel May 20th Letter, supra note 9, at 5-8.
---------------------------------------------------------------------------
The Commission notes that an agreement between an exchange and a
third party is not, per se, a proposed rule change that must be filed
with the Commission. Whether or not agreements proposed by or entered
into by the CBOE are proposed rule changes is a judgment that, in the
first instance, CBOE must make. To the extent, however, that any part
of an agreement is a ``policy, practice, or interpretation'' of CBOE's
rules and that ``policy, practice, or interpretation'' has not been
filed with, and under certain circumstances approved by, the
Commission, it would be a violation of Section 19(b) of the Exchange
Act and the Commission could take appropriate action against the CBOE.
The CBOE is not requesting that the Commission approve its ``Offer to
Purchase for Cash Exercise Right Privileges'' sent to certain CBOT
members, nor is the CBOE seeking approval of the 2001 Agreement, as
amended. The proposed rule change solely relates to the CBOE's
interpretation of Article Fifth(b) as embodied in the 2001 Agreement,
as amended, and it is the substance of this interpretation that the
Commission finds consistent with the Exchange Act.\50\ The Commission
does not believe it needs to determine whether the CBOE has complied
with Section 19 of the Exchange Act in taking actions it is not being
asked to approve in order to find the proposed rule change consistent
with the Exchange Act. The Commission makes no finding as to the offer
to certain CBOT members.
---------------------------------------------------------------------------
\50\ The Commission notes that the CBOE membership approved the
proposed purchase offer initiative in a vote on April 19, 2004, and
that the CBOE represents that it has not yet accepted or paid for
any Exercise Right privileges that may be tendered pursuant to its
``Offer to Purchase for Cash Exercise Right Privileges.'' See Letter
from Joanne Moffic-Silver, Executive Vice President and General
Counsel, CBOE, to Jonathan G. Katz, Secretary, Commission, dated May
6, 2005, at 8-9.
---------------------------------------------------------------------------
Additionally, commenters argue that the provision in the 2001
Agreement relating to arbitration of certain issues that may arise
under that agreement constitutes an amendment of Article Fifth(b) in
that decisions ``that should be made by the CBOE membership in an
[Article Fifth(b)] vote [are] being
[[Page 30986]]
decided by an arbitration panel.'' \51\ The Commission reiterates that
it is not approving the 2001 Agreement.\52\
---------------------------------------------------------------------------
\51\ Joint Letter, supra note 5, at 1-2.
\52\ If the CBOE comes to believe that any of the conditions in
the 2001 Agreement, as amended, are no longer satisfied by the CBOT
or CBOT Holdings, Inc. such that the interpretation the Commission
is today approving is no longer proper, the CBOE would be required
to file with the Commission any subsequent interpretation of Article
Fifth(b).
---------------------------------------------------------------------------
IV. Conclusion
The Commission received two requests for the Commission to extend
the comment period for this proposed rule change. The reasons for these
requests were for ``additional time to study and comment on the April
18th release as it pertains to these rule filings,'' \53\ and to permit
the public time to submit comments in response to the CBOE's May 6,
2005 letter filed in response to the two earlier comment letters.\54\
The proposed rule change was publicly available on March 7, 2005 when
the CBOE filed it. On April 7, 2005, the proposal was published in the
Federal Register along with Amendment No. 1, which included a technical
amendment and the opinion letter from CBOE's Delaware counsel.\55\ The
Commission sees no reason to delay action on the CBOE's current
proposed rule change to accommodate commenters' review of the
Commission's order denying reconsideration of a separate filing. In
addition, the Commission believes that the public has had sufficient
time to review the substance of the CBOE's proposed rule change and
provide the Commission with comments.
---------------------------------------------------------------------------
\53\ Joint Letter, supra note 5, at 7. See also Securities
Exchange Act Release No. 51568 (Apr. 18, 2005), 70 FR 20953 (Apr.
22, 2005) (order denying motion for reconsideration of the
Commission's order approving SR-CBOE-2004-16).
\54\ See Mills Letter, supra note 9.
\55\ See supra note 3.
---------------------------------------------------------------------------
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the Exchange Act and the rules and
regulations thereunder applicable to a national securities exchange,
and in particular, with Section 6(b)(5) of the Exchange Act.\56\
---------------------------------------------------------------------------
\56\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\57\ that the proposed rule change (SR-CBOE-2005-19), as
amended, be, and it hereby is, approved.
---------------------------------------------------------------------------
\57\ 15 U.S.C. 78s(b)(2).
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-2717 Filed 5-27-05; 8:45 am]
BILLING CODE 8010-01-P
