Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Granting Approval of Proposed Rule Change as Modified by Amendment No. 1 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendment Nos. 2 and 3 Relating to the Establishment of CBOE Stock Exchange, LLC, 10575-10579 [E7-4125]
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Federal Register / Vol. 72, No. 45 / Thursday, March 8, 2007 / Notices
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of such filing also will be
available for inspection and copying at
the principal office of the Exchange. 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
Number SR–CBOE–2006–112 and
should be submitted on or before March
29, 2007.
(‘‘CBSX LLC’’). On January 10, 2007, the
CBOE filed Amendment No. 1 to the
proposed rule change. The proposed
rule change was published for comment
in the Federal Register on February 1,
2007.3 The Commission received no
comments regarding the proposal. On
March 1, 2007, the CBOE filed
Amendment No. 2 to the proposed rule
change. On March 2, 2007, the CBOE
filed Amendment No. 3 to the proposed
rule change. This order approves the
proposed rule change, grants accelerated
approval to Amendment Nos. 2 and 3,
and solicits comments from interested
persons on Amendment Nos. 2 and 3.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,21 that the
proposed rule change (File No. SR–
CBOE–2006–112), as modified by
Amendment No. 1, be, and it hereby is,
approved on an accelerated basis.
II. Overview
The Exchange proposes to establish
CBSX as a facility,4 as that term is
defined in Section 3(a)(2) of the Act,5 of
CBOE. As the self-regulatory
organization (‘‘SRO’’) for CBSX, CBOE
will have regulatory responsibility for
the activities of CBSX.6 CBSX will be a
fully automated marketplace for the
trading of securities other than options
by CBOE members. CBSX will be
operated by CBSX LLC, a Delaware
limited liability company. In the instant
proposed rule change, CBOE seeks the
Commission’s approval of the proposed
governance structure of CBSX LLC as
reflected in the Operating Agreement of
CBSX LLC. CBOE has submitted
separate proposed rule changes to
establish rules relating to listing,
membership and trading on CBSX and
to establish a permit program in
connection with CBSX.7
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.22
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–4124 Filed 3–7–07; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–55389; File No. SR–CBOE–
2006–110]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Order Granting Approval
of Proposed Rule Change as Modified
by Amendment No. 1 Thereto and
Notice of Filing and Order Granting
Accelerated Approval to Amendment
Nos. 2 and 3 Relating to the
Establishment of CBOE Stock
Exchange, LLC
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March 2, 2007.
I. Introduction
On December 26, 2006, the Chicago
Board Options Exchange, Incorporated,
(the ‘‘CBOE’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934, as amended
(‘‘Act’’),1 and Rule 19b–4 thereunder,2 a
proposed rule change relating to the
establishment of the CBOE Stock
Exchange (‘‘CBSX’’), which will be
operated by CBOE Stock Exchange, LLC
21 Id.
22 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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3 See Securities Exchange Act Release No. 55172
(January 25, 2007), 72 FR 4745.
4 Pursuant to Section 3(a)(2) of the Act, the term
‘‘facility’’ when used with respect to an exchange,
includes ‘‘its premises, tangible or intangible
property whether on the premises or not, any right
to the use of such premises or property or any
service thereof for the purpose of effecting or
reporting a transaction on an exchange (including,
among other things, any system of communication
to or from the exchange, by ticker or otherwise,
maintained by or with the consent of the exchange),
and any right of the exchange to the use of any
property or service.’’ 15 U.S.C. 78c(a)(2). The
Commission notes that although the Operating
Agreement refers to CBSX LLC as a facility of
CBOE, the scope of the CBSX facility is not limited
to CBSX LLC.
5 15 U.S.C. 78c(a)(2).
6 CBOE represents that it has adequate funds to
discharge all regulatory functions related to the
facility. CBOE further represents that CBSX LLC
will not be entitled to any revenue generated in
connection with penalties, fines, and regulatory fees
that may be assessed by CBOE against CBOE
members in connection with trading on CBSX.
Rather, all regulatory fines, penalties and fees
assessed against and paid by CBOE members to
CBOE in connection with trading on CBSX will
remain with CBOE.
7 The Commission approved the Exchange’s
proposed rule change relating to the CBSX permit
program. See Securities Exchange Act Release No.
55326 (February 21, 2007), 72 FR 8816 (February
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10575
As a limited liability company,
ownership of CBSX LLC is represented
by limited liability membership
interests. The holders of such interests
are referred to as ‘‘Owners.’’ 8 Initially,
there are five Owners of CBSX LLC.
CBOE is one of the Owners of CBSX
LLC, and owns all ‘‘Series A’’ Voting
Shares 9 of CBSX LLC, representing 50%
of CBSX LLC.10 The other four Owners
and their respective ownership interests
are: VDM Chicago, LLC (20%);
LaBranche & Co., Inc. (10%); IB
Exchange Corp. (10%); and
Susquehanna International Group, LLP.
(10%). Each of these four Owners owns
‘‘Series B’’ Voting Shares of CBSX LLC.
Under Section 3.2 of the Operating
Agreement, the CBSX LLC Board of
Directors (‘‘Board of Directors’’ or
‘‘Board’’) may authorize the issuance of
‘‘Series C’’ Non-Voting Restricted
Shares 11 from time to time to
employees, consultants, or officers of
CBSX LLC, or any other person, each of
27, 2007). The Commission also approved the
Exchange’s proposed rule change to establish the
equity trading rules for CBSX. See Securities
Exchange Act Release No. 34–55392 (March 2,
2007).
8 ‘‘Owner’’ means a limited liability company
‘‘member’’ as that term is defined in § 18–101(11)
of the Delaware Limited Liability Company Act
(‘‘DLLCA’’), and shall include each Voting Owner
and each Management Owner, but only so long as
such person is shown on CBSX’s books and records
as the owner of at least one (1) Share (or fraction
of one (1) Share). ‘‘Owner’’ shall include a
‘‘Substituted Owner’’ as defined in Section 6.5(a) of
the Operating Agreement, but only upon
compliance with all of the requirements of Sections
6.4 and 6.5 of the Operating Agreement. For
purposes of clarity, no person shall become an
‘‘Owner’’ as to any Shares, if the acquisition of
those Shares will require a change of ownership
notice to the Commission, or will constitute a
proposed rule change subject to the requirements of
the rule filing process of Section 19 of the Act, until
all of the requirements of such notice or rule filing
process have been accomplished and, if necessary,
approved by the Commission. See Section 2.1(16)
of the Operating Agreement.
9 ‘‘Voting Shares’’ means those Shares entitled to
vote on matters submitted to the Owners, which
Voting Shares are held by the Voting Owners. See
Section 2.1(27) of the Operating Agreement.
10 As noted in Section 3.2 of the Operating
Agreement, it is the intention of the Owners that no
other members of CBSX LLC (other than Affiliates
of CBOE) be owners of Series A Voting Shares, and
that no additional Series A Voting Shares be
authorized, created or issued for such purpose;
provided however, that this provision is not
intended to limit or restrict any rights of CBOE to
transfer any of its Series A Voting Shares with the
prior approval of the Commission as provided for
in Article VI, including Section 6.14 of the
Operating Agreement, or any other provision
thereof, or any rights to be acquired by a transferee
of those Shares as provided therein.
11 ‘‘Non-Voting Restricted Share’’ means a Share
held by a Management Owner containing the voting
limitations and other restrictions described in the
Operating Agreement. See Section 2.1(15) of the
Operating Agreement.
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whom would become a Management
Owner 12 of CBSX LLC.
As provided in Section 8.9 of the
Operating Agreement, the outstanding
Series A Voting Shares will, in the
aggregate (and without being deemed to
be a voting trust), be entitled to a
number of votes equal to 50% of the
total number of Voting Shares
outstanding, on each matter submitted
to a vote of the Owners. Each
outstanding Series B Voting Share will
be entitled to one vote on each matter
submitted to a vote of the Owners. The
Series C Non-Voting Restricted Shares
will not be entitled to vote on any
matter submitted to a vote of the
Owners.
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III. Discussion
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange.13 In particular, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(1) of the Act,14 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 rules
or regulations thereunder, and the rules
of the exchange.
The Commission also finds that the
proposed rule change is consistent with
Section 6(b)(5) of the Act,15 which
requires that the rules of a national
securities exchange be designed to
prevent fraudulent and manipulative
acts and practices; to promote just and
equitable principles of trade; to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities; 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; and
are not designed to unfairly
12 ‘‘Management Owner’’ means a natural person
who is identified on Exhibit A of the Operating
Agreement (Exhibit 5C to the proposed rule change)
as a Management Owner, who subsequently
becomes a Management Owner pursuant to the
provisions of Section 3.2(c) of the Operating
Agreement, or who is a transferee or assignee of
Non-Voting Restricted Shares (other than a Voting
Owner). See Section 2.1(13) of the Operating
Agreement.
13 In approving the proposed rule change, the
Commission has considered its impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
14 15 U.S.C. 78f(b)(1).
15 15 U.S.C. 78f(b)(5).
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discriminate between customers,
issuers, brokers, or dealers.
A. CBSX as a Facility of the Exchange
The Commission believes that the
proposed rule change is consistent with
Section 6(b)(1) of the Act 16 in that upon
establishing CBSX as a facility of the
Exchange and entering into the
relationship with CBSX LLC described
above, CBOE will remain so organized,
and have the capacity to be able, to
carry out the purposes of the Act. The
Commission notes that it previously
approved similar structures with respect
to the operation of exchange facilities.17
The Commission believes that CBSX
LLC can be approved as the operator of
the CBSX facility since CBOE will be
the SRO for the CBSX facility, and
CBSX LLC will conduct the facility’s
business operations in a manner
consistent with the regulatory and
oversight responsibilities of CBOE.18
Although CBSX LLC itself will not
carry out any regulatory functions, all
its activities must be consistent with the
Act. Under Section 5.7 of the Operating
Agreement, each CBSX LLC Owner
agrees to comply with the federal
securities laws and rules and
regulations thereunder; to cooperate
with the Commission and CBOE
pursuant to their regulatory authority
and the provisions of the Operating
Agreement; and to engage in conduct
that fosters and does not interfere with
CBSX LLC’s and CBOE’s ability to
prevent fraudulent and manipulative
acts and practices; promote just and
equitable principles of trade; foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities; remove impediments to
and perfect the mechanism of a free and
open market and a national market
system; and, in general, protect
investors and the public interest. In
addition, under Section 9.16 each
Director agrees to comply with the
federal securities laws and the rules and
regulations thereunder, and to cooperate
with the Commission and CBOE
16 15
U.S.C. 78f(b)(1).
Securities Exchange Act Release No. 54399
(September 1, 2006), 71 FR 53728 (September 12,
2006) (order approving the ISE Stock Exchange,
LLC as a facility of the International Securities
Exchange, Inc.); Securities Exchange Act Release
No. 54364 (August 25, 2006), 71 FR 52185 (order
approving the Boston Equities Exchange as a facility
of the Boston Stock Exchange, Inc.); and Securities
Exchange Act Release No. 49065 (January 13, 2004),
69 FR 2768 (January 20, 2004) (order approving the
Boston Options Exchange as a facility of the Boston
Stock Exchange, Inc.).
18 As the SRO, CBOE will have regulatory
responsibility for the facility.
17 See
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pursuant to the respective regulatory
authority of the Commission and CBOE.
In addition, each Director will take into
consideration whether any actions taken
or proposed to be taken as a Director for
or on behalf of CBSX LLC, or any failure
or refusal to act (including a failure to
be present to constitute a quorum, or to
reasonably provide an affirmative vote
or consent) would constitute
interference with CBOE’s regulatory
functions and responsibilities in
violation of the Operating Agreement or
the Act. These provisions reinforce the
notion that CBSX, as a facility of an
exchange, is not solely a commercial
enterprise; it is an integral part of an
SRO registered pursuant to the Act and,
as such, is subject to obligations
imposed by the Act.
These obligations endure as long as
CBSX is a facility of the Exchange,
regardless of the size of CBOE’s
ownership interest in CBSX LLC, the
operator of the facility. The Exchange
currently owns 50% interest in the
operator of the facility and if, in the
future, it wishes to reduce its interest in
CBSX LLC to below 20%, pursuant to
Section 6.12(d) of the Operating
Agreement the Exchange would be
required to file a proposed rule change
with the Commission under Section
19(b) of the Act. The Commission
believes that this is a reasonable
measure to alert the Commission to a
significant reduction of CBOE’s interest
in CBSX LLC. Such a reduction in
ownership could warrant additional
review of the Operating Agreement to
ensure that CBOE’s responsibilities as
the SRO of the CBSX facility are not
compromised.
The Operating Agreement includes
additional provisions that make special
accommodations for CBOE as the SRO
of the CBSX facility. Section 1.8 of the
Operating Agreement sets forth CBOE’s
authority with respect to any action,
transaction or aspect of an action or
transaction that relates to CBOE’s
regulatory responsibilities, by requiring
CBOE’s affirmative vote before such
action or transaction or aspect thereof
can be authorized, undertaken or
effective. For example, Section 9.15(a)
provides that CBSX LLC may not take
certain specific actions without the
approval of a Super Majority of the
Owners,19 and the additional approving
vote of CBOE.
19 ‘‘Super Majority of the Owners’’ means, subject
to the provisions of Section 1.8 of the Operating
Agreement as to Regulatory Requirements, the
affirmative vote of both (i) all of the Owners of the
Series A Voting Shares at the time, and (ii) any two
(2) of the Initial Owners of Series B Voting Shares
who then retain ownership of Series B Voting
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In addition, Section 9.2(b) of the
Operating Agreement provides that, in
light of its ownership of the Series A
Voting Shares, CBOE is entitled to
designate a number of Directors equal to
the aggregate number of Directors
designated by those Owners owning
Series B Voting Shares. Section 9.2(d)
also gives CBOE the right, as long as
CBSX remains a facility of CBOE, to
designate at least one Director regardless
of whether it maintains any ownership
interest in CBSX LLC. In addition,
despite a statement of a general
prohibition against Owners committing
or acting on behalf of CBSX LLC
contained in Section 5.6 of the
Operating Agreement, Section 9.15(a)
would permit CBOE to act on behalf of
CBSX LLC in regulatory matters.
Finally, CBOE has complete access to
information through provisions such as
Section 15.2 of the Operating
Agreement, which allows CBOE, the
other Owners, and their respective
officers, directors, agents, and
employees, to disclose confidential
information to the Commission or
CBOE.
Because the Exchange has proposed to
operate CBSX as its facility, CBOE’s
obligations under the Act extend to its
members’ activities on CBSX, as well as
to the operation and administration of
CBSX. The Commission believes that
the provisions described above are
consistent with the Act and enhance the
ability of CBOE to carry out its selfregulatory responsibilities with respect
to its CBSX facility.
B. Changes in Control of CBSX LLC
The Commission believes that the
restrictions in the Operating Agreement
on direct and indirect changes in
control of CBSX LLC are sufficient so
that CBOE would be able to carry out its
self-regulatory responsibilities and that
the Commission can fulfill its
responsibilities under the Act.
Exhibit A of the Operating Agreement
lists all CBSX LLC Owners, the Series of
shares owned, and the percentage
ownership interest in CBSX LLC. A
change to this exhibit (as well as any
other provision of the Operating
Agreement) would need to be filed with
the Commission if so required under
Section 19(b) of the Act and Rule 19b–
4 thereunder. In addition, Section 6.14
of the Operating Agreement provides
that any proposed transfer of CBSX LLC
shares that would cause any person,
alone or together with any Affiliate, to
meet or cross the 20% ownership
threshold or any subsequent 5%
Shares. See Section 2.1(25) of the Operating
Agreement.
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18:53 Mar 07, 2007
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ownership interest level (e.g., 25%,
30%, 35%, etc.) would require CBOE to
file a proposed rule change with the
Commission pursuant to Section 19(b)
of the Act and be subject to approval by
the Commission. Any proposed transfer
of Series A Voting Shares would also
require CBOE to file a proposed rule
change under Section 19(b) of the Act
and Rule 19b–4 thereunder.
Furthermore, Section 6.13 of the
Operating Agreement requires CBOE to
inform the Commission in writing at
least ten days prior to the closing date
of any transaction that results in a
person’s percentage ownership interest,
alone or together with any Affiliate, in
CBSX LLC that would result in such
person meeting or crossing the 5%,
10%, or 15% ownership thresholds. The
Commission believes that this approach
is consistent with the Act in that it is
analogous to the ongoing reporting
requirements of Form 1,20 the
application for (and amendments to the
application for) registration as a national
securities exchange. Exhibit K of Form
1 requires any exchange that is a
corporation or partnership to list any
persons that have an ownership interest
of 5% or more in the exchange; 21 and
Rule 6a–2(a)(2) under the Act 22 requires
an exchange to update its Form 1 within
ten days after any action that renders
inaccurate the information previously
filed in Exhibit K.
Exhibit K imposes no obligation on an
exchange to report parties whose
ownership interest in the exchange is
less than 5%. Similarly, Section 6.13 of
the Operating Agreement requires CBOE
to notify the Commission of an interest
in CBSX LLC only when that interest
reaches 5% or more. The Commission
does not believe that the identity of a
party that has less than a 5% interest in
a facility of a national securities
exchange is a ‘‘rule of the exchange’’
that must be filed pursuant to Section
19(b) of the Act and Rule 19b–4(b)
thereunder.
In addition, Section 15.16 of the
Operating Agreement would require an
indirect controlling party to become a
party to the Operating Agreement upon
establishing a controlling interest in any
Owner who, alone or together with any
Affiliate, holds a Percentage Interest in
CBSX LLC equal to or greater than 20%.
Any such amendment to the Operating
Agreement would require a proposed
20 17
CFR 249.1 and 17 CFR 249.1a.
reporting requirement applies only to
exchanges that have one or more owners,
shareholders, or partners that are not also members
of the exchange. See Form 1, Exhibit K. Exhibit K
applies only to the exchange itself, not to entities
that operate facilities of the exchange.
22 17 CFR 240.6a–2(a)(2).
21 This
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10577
rule change to be filed with the
Commission pursuant to Section 19(b)
of the Act. The proposed rule change
would alert the Commission to the
existence of a proposed indirect
controlling party and present the
Commission and CBOE with an
opportunity to determine what
additional measures, if any, might be
necessary to provide sufficient
regulatory jurisdiction over the
proposed indirect controlling party. The
Commission understands that Section
15.16 of the Operating Agreement
would apply to any ultimate parent of
CBSX LLC, no matter how many levels
of ownership are involved, provided
that a controlling interest exists between
each link of the ownership chain.
In conclusion, the Commission
believes that Sections 6.13, 6.14, and
15.16 of the Operating Agreement,
together with the requirements of
Section 19(b) of the Act and Rule 19b–
4 thereunder, provide the Commission
with sufficient authority over changes in
control of CBSX LLC to enable the
Commission to carry out its regulatory
oversight responsibilities with respect to
CBOE and the CBSX facility.
C. Regulatory Jurisdiction Over CBSX
LLC Owners
The Commission believes that the
terms of the Operating Agreement
provide the Commission and CBOE with
sufficient regulatory jurisdiction over
the controlling parties and Owners to
carry out their responsibilities under the
Act. In Section 6.15(a), each Owner
acknowledges that—to the extent that
they are related to CBSX LLC
activities—the books, records, premises,
officers, directors, agents, and
employees of the Owner are deemed to
be the books, records, premises, officers,
directors, agents, and employees of
CBOE for the purpose of and subject to
oversight pursuant to the Act. Moreover,
in Section 6.15(b) of the Operating
Agreement, each Owner acknowledges
that the books, records, premises,
officers, directors, agents, and
employees of CBSX LLC are deemed to
be the books, records, premises, officers,
directors, agents, and employees of
CBOE for the purpose of and subject to
oversight pursuant to the Act. These
provisions would enable the
Commission to exercise its authority
under Section 19(h)(4) 23 of the Act with
23 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
has: (1) Willfully violated any provision of the Act
or the rules and regulations thereunder, or the rules
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respect to the officers and directors of
CBSX LLC and of all Owners, since all
such officers and directors—to the
extent that they are acting in matters
related to CBSX LLC activities—would
be deemed to be the officers and
directors of CBOE itself. Furthermore,
the records of any Owner—to the extent
that they are related to CBSX LLC
activities—are subject to the
Commission’s examination authority
under Section 17(b)(1) of the Act,24 as
these records would be deemed to be
the records of CBOE itself.
In addition, under the terms of
Section 6.15(c) of the Operating
Agreement, CBSX LLC and each Owner
(other than CBOE for so long as CBSX
is a facility of CBOE) 25—and their
respective officers and directors and
their agents and employees whose
principal place of business and
residence is outside of the United
States—must irrevocably submit to the
jurisdiction of the U.S. federal courts,
the Commission, and CBOE for the
purposes of any suit, action, or
proceeding pursuant to the U.S. federal
securities laws and the rules or
regulations thereunder, commenced and
initiated by the Commission arising out
of or relating to CBSX LLC activities. In
addition, CBSX LLC and each Owner
(other than CBOE for so long as CBSX
LLC is a facility of CBOE)—and their
respective officers and directors and
their agents and employees whose
principal place of business and
residence is outside of the United
States—must waive, and agree not to
assert by way of motion, as a defense or
otherwise in any such suit, action, or
proceeding, any claim that it is not
personally subject to the jurisdiction of
the Commission; that the suit, action or
proceeding is an inconvenient forum;
that the venue of the suit, action, or
proceeding is improper; or that the
subject matter of the suit, action, or
proceeding may not be enforced in or by
such courts or agency. Moreover,
pursuant to Section 6.15(d) of the
Operating Agreement, the CBSX LLC
and each Owner (other than CBOE for
so long as CBSX LLC is a facility of
CBOE) are required to take such action
as is necessary to ensure that such
Owner’s officers and directors and their
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.
24 15 U.S.C. 78q(b)(1).
25 The Commission notes that CBOE and its
officers, directors and employees are subject to the
Commission’s jurisdiction because CBOE is an SRO
and as such is subject to the Act and the rules and
regulations thereunder.
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18:53 Mar 07, 2007
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agents and employees whose principal
place of business and residence is
outside the United States, consent to the
application of these requirements with
respect to their CBSX LLC-related
activities. Finally, under Section 5.7 of
the Operating Agreement, CBSX LLC
and each Owner agree to cooperate with
the Commission and CBOE pursuant to
their respective regulatory authority.
The Commission also notes that, even
in the absence of these provisions of the
Operating Agreement, Section 20(a) of
the Act 26 provides that any person with
a controlling interest in CBSX LLC
would be jointly and severally liable
with and to the same extent that CBSX
LLC 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.
The Commission believes that,
together, these provisions grant the
Commission sufficient jurisdictional
authority over CBSX LLC and its
Owners. Moreover, CBOE 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.27 A failure
on the part of CBOE to enforce its rules
could result in suspension or revocation
of registration under Section 19(h)(1) of
the Act.28
D. Ownership and Voting Restrictions
on CBSX LLC Owners
Section 6.12(a) of the Operating
Agreement prohibits a person (other
than CBOE), either alone or together
with its Affiliates, from directly or
indirectly owning more than a 20%
Percentage Interest in the Company
(‘‘Concentration Limitation’’). Although
Section 6.12(b) permits this limitation to
be waived by the Board, as long as such
waiver has been filed with and
approved by the Commission, it
precludes such a waiver if the person or
its Affiliates is a CBOE member.
Further, Section 8.10 of the Operating
Agreement states that if an Owner of
Voting Shares that is also a CBOE
member owns more than 20% of the
Outstanding Voting Shares (‘‘Excess
Shares’’), alone or together with any
Affiliate, such Owner shall have no
voting rights with respect to the Excess
Shares.
In addition, proposed CBOE Rule 3.32
sets forth ownership concentration
limitations for CBOE members and
permits the Exchange to take
26 15
U.S.C. 78t(a).
U.S.C. 78c(a)(27).
28 15 U.S.C. 78s(h)(1).
27 15
PO 00000
Frm 00090
Fmt 4703
Sfmt 4703
appropriate disciplinary action in the
event a violation of the ownership
concentration limitation is not cured
within a specified time frame. Proposed
Rule 3.32 also sets forth restrictions on
affiliations between the Exchange and
its members.
The Commission believes that the
ownership concentration and voting
limitations contained in the Operating
Agreement and the provisions of
proposed CBOE Rule 3.32 are
reasonable and consistent with the Act.
It is common for members who trade on
an exchange to have ownership interests
in the exchange. However, a member’s
interest could become so large as to cast
doubt on whether the exchange can
fairly and objectively exercise its selfregulatory responsibilities with respect
to that member. A member that is also
a controlling shareholder of an exchange
might be tempted to exercise that
controlling influence by directing the
exchange to refrain from diligently
surveilling 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 surveil and
enforce its rules zealously against a
member that the exchange relies on as
its largest source of capital.
Finally, the Commission believes that
the restriction on voting trust
agreements in Section 8.8 of the
Operating Agreement is reasonable and
consistent with the Act. In the absence
of such a provision, unaffiliated parties
could act in concert and evade the
Operating Agreement’s provisions
regarding changes in control of CBSX
LLC.29 A voting trust agreement would
not necessarily be inconsistent with the
Act, but any Owner wishing to establish
a voting trust agreement first would
need to have the Operating Agreement
amended to enable a voting trust to be
established. Any such amendment
would require a proposed rule change
under Section 19(b) of the Act, thus
affording the Commission an
opportunity to review the matter.
E. Accelerated Approval of Amendment
Nos. 2 and 3
The Commission finds good cause for
approving Amendment Nos. 2 and 3 to
the proposed rule change prior to the
thirtieth day after publishing notice of
Amendment Nos. 2 and 3 in the Federal
Register pursuant to Section 19(b)(2) of
the Act.30
29 The Operating Agreement treats as belonging to
a single person any shares held by affiliated parties
of the person. See Sections 6.13, 6.14, and 15.16 of
the Operating Agreement.
30 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2)
of the Act, the Commission may not approve any
E:\FR\FM\08MRN1.SGM
08MRN1
Federal Register / Vol. 72, No. 45 / Thursday, March 8, 2007 / Notices
In Amendment No. 2, CBOE: (i)
Amended Section 1.7 to clarify the role
of CBOE, as the SRO, for the activities
of CBSX LLC; (ii) amended Section 5.7
to add a reference to CBOE; (iii)
amended Section 6.14 to clarify that any
transfer of Series A Voting Shares would
require a rule filing under Section 19 of
the Exchange Act, subject to approval by
the Commission; (iv) amended Section
6.15 by, among other things, revising
paragraphs (c) and (d) to indicate that
those paragraphs are inapplicable in the
case of CBOE and its respective officers,
directors, agents and employees for so
long as CBSX LLC is a facility of CBOE
and to clarify the application of these
paragraphs in the case of the agents and
employees of CBSX LLC and its Owners
whose principal place of business and
residence is outside of the United
States; and (v) amended various sections
of the Operating Agreement to refer to
CBOE rather than ‘‘Regulatory Services
Provider.’’ Amendment No. 2 also
updated Exhibit A–1 of the Operating
Agreement. Amendment No. 3 amended
Section 6.15(c) to clarify the U.S. agent
for service of process.
The Commission believes that
Amendment Nos. 2 and 3 serve to
clarify and enhance the proposal and
that publication of its provisions would
needlessly delay the implementation of
the proposal. The Commission therefore
finds good cause exists to accelerate
approval of Amendment Nos. 2 and 3,
pursuant to Section 19(b)(2) of the
Act.31
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether Amendment Nos. 2
and 3 are consistent with the Act.
Comments may be submitted by any of
the following methods:
sroberts on PROD1PC70 with NOTICES
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–CBOE–2006–110 on the
subject line.
All submissions should refer to File
Number SR–CBOE–2006–110. 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 change 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. Copies of the filing also will be
available for inspection and copying at
the principal office of the Exchange. 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 Amendment
Nos. 2 and 3 of File Number SR–CBOE–
2006–110 and should be submitted on
or before March 29, 2007.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,32 that the
proposed rule change (SR–CBOE–2006–
110), as modified by Amendment No. 1,
be, and it hereby is approved and
Amendment Nos. 2 and 3 are approved
on an accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.33
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–4125 Filed 3–7–07; 8:45 am]
BILLING CODE 8010–01–P
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
Station Place, 100 F Street, NE.,
Washington, DC 20549–1090.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–55365; File No. SR–DTC–
2006–07]
Self-Regulatory Organizations; The
Depository Trust Company; Order
Granting Approval of a Proposed Rule
Change Relating to the Wind-Down of
a Participant
February 27, 2007.
I. Introduction
On March 28, 2006, The Depository
Trust Company (‘‘DTC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) and on September 29,
2006, amended proposed rule change
SR–DTC–2006–07 pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’).1 Notice of the proposal
was published in the Federal Register
on December 20, 2006.2 No comment
letters were received. For the reasons
discussed below, the Commission is
granting approval of the proposed rule
change as modified by Amendment No.
1.
II. Description
The proposed rule change would add
a new Rule 32, Wind-Down of a
Participant, to DTC’s Rules to address a
situation where a participant notifies
DTC that it intends to wind down its
activities, and DTC determines in its
discretion that it must take special
action in order to protect itself and its
participants.3
The proposed rule change would
allow DTC to make a determination that
a participant is a wind-down participant
and would set forth the conditions DTC
using its discretion may place on a
wind-down participant and the actions
DTC using its discretion may take with
respect to a wind-down participant to
protect itself and its participants. Such
actions may include restricting or
modifying the wind-down participant’s
use of any or all of DTC’s services and
requiring the wind-down participant to
post increased participants fund
deposits. DTC will retain all of its other
rights set forth in its rules and
participant agreements, including the
right to cease to act for the wind-down
participant.
The rule is designed to ensure that
DTC has the needed flexibility to
appropriately manage the risks
1 15
U.S.C. 78s(b)(1).
Exchange Act Release No. 54927
(December 13, 2006), 71 FR 76397.
3 Similar proposed rule changes have been filed
by the Fixed Income Clearing Corporation [File No.
SR–FICC–2006–05] and the National Securities
Clearing Corporation [File No. SR–NSCC–2006–05].
2 Securities
proposed rule change, or amendment thereto, prior
to the thirtieth day after the date of publication of
the notice thereof, unless the Commission finds
good cause for so doing.
31 15 U.S.C. 78s(b)(2).
VerDate Aug<31>2005
18:53 Mar 07, 2007
Jkt 211001
32 15
33 17
PO 00000
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
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10579
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]]>Agencies
[Federal Register Volume 72, Number 45 (Thursday, March 8, 2007)]
[Notices]
[Pages 10575-10579]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-4125]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55389; File No. SR-CBOE-2006-110]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Approval of Proposed Rule Change as
Modified by Amendment No. 1 Thereto and Notice of Filing and Order
Granting Accelerated Approval to Amendment Nos. 2 and 3 Relating to the
Establishment of CBOE Stock Exchange, LLC
March 2, 2007.
I. Introduction
On December 26, 2006, the Chicago Board Options Exchange,
Incorporated, (the ``CBOE'' or ``Exchange'') filed with the Securities
and Exchange Commission (``Commission''), pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934, as amended (``Act''),\1\ and
Rule 19b-4 thereunder,\2\ a proposed rule change relating to the
establishment of the CBOE Stock Exchange (``CBSX''), which will be
operated by CBOE Stock Exchange, LLC (``CBSX LLC''). On January 10,
2007, the CBOE filed Amendment No. 1 to the proposed rule change. The
proposed rule change was published for comment in the Federal Register
on February 1, 2007.\3\ The Commission received no comments regarding
the proposal. On March 1, 2007, the CBOE filed Amendment No. 2 to the
proposed rule change. On March 2, 2007, the CBOE filed Amendment No. 3
to the proposed rule change. This order approves the proposed rule
change, grants accelerated approval to Amendment Nos. 2 and 3, and
solicits comments from interested persons on Amendment Nos. 2 and 3.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 55172 (January 25,
2007), 72 FR 4745.
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II. Overview
The Exchange proposes to establish CBSX as a facility,\4\ as that
term is defined in Section 3(a)(2) of the Act,\5\ of CBOE. As the self-
regulatory organization (``SRO'') for CBSX, CBOE will have regulatory
responsibility for the activities of CBSX.\6\ CBSX will be a fully
automated marketplace for the trading of securities other than options
by CBOE members. CBSX will be operated by CBSX LLC, a Delaware limited
liability company. In the instant proposed rule change, CBOE seeks the
Commission's approval of the proposed governance structure of CBSX LLC
as reflected in the Operating Agreement of CBSX LLC. CBOE has submitted
separate proposed rule changes to establish rules relating to listing,
membership and trading on CBSX and to establish a permit program in
connection with CBSX.\7\
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\4\ Pursuant to Section 3(a)(2) of the Act, the term
``facility'' when used with respect to an exchange, includes ``its
premises, tangible or intangible property whether on the premises or
not, any right to the use of such premises or property or any
service thereof for the purpose of effecting or reporting a
transaction on an exchange (including, among other things, any
system of communication to or from the exchange, by ticker or
otherwise, maintained by or with the consent of the exchange), and
any right of the exchange to the use of any property or service.''
15 U.S.C. 78c(a)(2). The Commission notes that although the
Operating Agreement refers to CBSX LLC as a facility of CBOE, the
scope of the CBSX facility is not limited to CBSX LLC.
\5\ 15 U.S.C. 78c(a)(2).
\6\ CBOE represents that it has adequate funds to discharge all
regulatory functions related to the facility. CBOE further
represents that CBSX LLC will not be entitled to any revenue
generated in connection with penalties, fines, and regulatory fees
that may be assessed by CBOE against CBOE members in connection with
trading on CBSX. Rather, all regulatory fines, penalties and fees
assessed against and paid by CBOE members to CBOE in connection with
trading on CBSX will remain with CBOE.
\7\ The Commission approved the Exchange's proposed rule change
relating to the CBSX permit program. See Securities Exchange Act
Release No. 55326 (February 21, 2007), 72 FR 8816 (February 27,
2007). The Commission also approved the Exchange's proposed rule
change to establish the equity trading rules for CBSX. See
Securities Exchange Act Release No. 34-55392 (March 2, 2007).
---------------------------------------------------------------------------
As a limited liability company, ownership of CBSX LLC is
represented by limited liability membership interests. The holders of
such interests are referred to as ``Owners.'' \8\ Initially, there are
five Owners of CBSX LLC. CBOE is one of the Owners of CBSX LLC, and
owns all ``Series A'' Voting Shares \9\ of CBSX LLC, representing 50%
of CBSX LLC.\10\ The other four Owners and their respective ownership
interests are: VDM Chicago, LLC (20%); LaBranche & Co., Inc. (10%); IB
Exchange Corp. (10%); and Susquehanna International Group, LLP. (10%).
Each of these four Owners owns ``Series B'' Voting Shares of CBSX LLC.
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\8\ ``Owner'' means a limited liability company ``member'' as
that term is defined in Sec. 18-101(11) of the Delaware Limited
Liability Company Act (``DLLCA''), and shall include each Voting
Owner and each Management Owner, but only so long as such person is
shown on CBSX's books and records as the owner of at least one (1)
Share (or fraction of one (1) Share). ``Owner'' shall include a
``Substituted Owner'' as defined in Section 6.5(a) of the Operating
Agreement, but only upon compliance with all of the requirements of
Sections 6.4 and 6.5 of the Operating Agreement. For purposes of
clarity, no person shall become an ``Owner'' as to any Shares, if
the acquisition of those Shares will require a change of ownership
notice to the Commission, or will constitute a proposed rule change
subject to the requirements of the rule filing process of Section 19
of the Act, until all of the requirements of such notice or rule
filing process have been accomplished and, if necessary, approved by
the Commission. See Section 2.1(16) of the Operating Agreement.
\9\ ``Voting Shares'' means those Shares entitled to vote on
matters submitted to the Owners, which Voting Shares are held by the
Voting Owners. See Section 2.1(27) of the Operating Agreement.
\10\ As noted in Section 3.2 of the Operating Agreement, it is
the intention of the Owners that no other members of CBSX LLC (other
than Affiliates of CBOE) be owners of Series A Voting Shares, and
that no additional Series A Voting Shares be authorized, created or
issued for such purpose; provided however, that this provision is
not intended to limit or restrict any rights of CBOE to transfer any
of its Series A Voting Shares with the prior approval of the
Commission as provided for in Article VI, including Section 6.14 of
the Operating Agreement, or any other provision thereof, or any
rights to be acquired by a transferee of those Shares as provided
therein.
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Under Section 3.2 of the Operating Agreement, the CBSX LLC Board of
Directors (``Board of Directors'' or ``Board'') may authorize the
issuance of ``Series C'' Non-Voting Restricted Shares \11\ from time to
time to employees, consultants, or officers of CBSX LLC, or any other
person, each of
[[Page 10576]]
whom would become a Management Owner \12\ of CBSX LLC.
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\11\ ``Non-Voting Restricted Share'' means a Share held by a
Management Owner containing the voting limitations and other
restrictions described in the Operating Agreement. See Section
2.1(15) of the Operating Agreement.
\12\ ``Management Owner'' means a natural person who is
identified on Exhibit A of the Operating Agreement (Exhibit 5C to
the proposed rule change) as a Management Owner, who subsequently
becomes a Management Owner pursuant to the provisions of Section
3.2(c) of the Operating Agreement, or who is a transferee or
assignee of Non-Voting Restricted Shares (other than a Voting
Owner). See Section 2.1(13) of the Operating Agreement.
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As provided in Section 8.9 of the Operating Agreement, the
outstanding Series A Voting Shares will, in the aggregate (and without
being deemed to be a voting trust), be entitled to a number of votes
equal to 50% of the total number of Voting Shares outstanding, on each
matter submitted to a vote of the Owners. Each outstanding Series B
Voting Share will be entitled to one vote on each matter submitted to a
vote of the Owners. The Series C Non-Voting Restricted Shares will not
be entitled to vote on any matter submitted to a vote of the Owners.
III. Discussion
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\13\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(1) of the Act,\14\ 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 rules or regulations thereunder, and the
rules of the exchange.
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\13\ In approving the proposed rule change, the Commission has
considered its impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\14\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------
The Commission also finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\15\ which requires that the
rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices; to promote just and
equitable principles of trade; to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities; 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; and are not designed to
unfairly discriminate between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
A. CBSX as a Facility of the Exchange
The Commission believes that the proposed rule change is consistent
with Section 6(b)(1) of the Act \16\ in that upon establishing CBSX as
a facility of the Exchange and entering into the relationship with CBSX
LLC described above, CBOE will remain so organized, and have the
capacity to be able, to carry out the purposes of the Act. The
Commission notes that it previously approved similar structures with
respect to the operation of exchange facilities.\17\
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\16\ 15 U.S.C. 78f(b)(1).
\17\ See Securities Exchange Act Release No. 54399 (September 1,
2006), 71 FR 53728 (September 12, 2006) (order approving the ISE
Stock Exchange, LLC as a facility of the International Securities
Exchange, Inc.); Securities Exchange Act Release No. 54364 (August
25, 2006), 71 FR 52185 (order approving the Boston Equities Exchange
as a facility of the Boston Stock Exchange, Inc.); and Securities
Exchange Act Release No. 49065 (January 13, 2004), 69 FR 2768
(January 20, 2004) (order approving the Boston Options Exchange as a
facility of the Boston Stock Exchange, Inc.).
---------------------------------------------------------------------------
The Commission believes that CBSX LLC can be approved as the
operator of the CBSX facility since CBOE will be the SRO for the CBSX
facility, and CBSX LLC will conduct the facility's business operations
in a manner consistent with the regulatory and oversight
responsibilities of CBOE.\18\
---------------------------------------------------------------------------
\18\ As the SRO, CBOE will have regulatory responsibility for
the facility.
---------------------------------------------------------------------------
Although CBSX LLC itself will not carry out any regulatory
functions, all its activities must be consistent with the Act. Under
Section 5.7 of the Operating Agreement, each CBSX LLC Owner agrees to
comply with the federal securities laws and rules and regulations
thereunder; to cooperate with the Commission and CBOE pursuant to their
regulatory authority and the provisions of the Operating Agreement; and
to engage in conduct that fosters and does not interfere with CBSX
LLC's and CBOE's ability to prevent fraudulent and manipulative acts
and practices; promote just and equitable principles of trade; foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities; remove impediments to and
perfect the mechanism of a free and open market and a national market
system; and, in general, protect investors and the public interest. In
addition, under Section 9.16 each Director agrees to comply with the
federal securities laws and the rules and regulations thereunder, and
to cooperate with the Commission and CBOE pursuant to the respective
regulatory authority of the Commission and CBOE. In addition, each
Director will take into consideration whether any actions taken or
proposed to be taken as a Director for or on behalf of CBSX LLC, or any
failure or refusal to act (including a failure to be present to
constitute a quorum, or to reasonably provide an affirmative vote or
consent) would constitute interference with CBOE's regulatory functions
and responsibilities in violation of the Operating Agreement or the
Act. These provisions reinforce the notion that CBSX, as a facility of
an exchange, is not solely a commercial enterprise; it is an integral
part of an SRO registered pursuant to the Act and, as such, is subject
to obligations imposed by the Act.
These obligations endure as long as CBSX is a facility of the
Exchange, regardless of the size of CBOE's ownership interest in CBSX
LLC, the operator of the facility. The Exchange currently owns 50%
interest in the operator of the facility and if, in the future, it
wishes to reduce its interest in CBSX LLC to below 20%, pursuant to
Section 6.12(d) of the Operating Agreement the Exchange would be
required to file a proposed rule change with the Commission under
Section 19(b) of the Act. The Commission believes that this is a
reasonable measure to alert the Commission to a significant reduction
of CBOE's interest in CBSX LLC. Such a reduction in ownership could
warrant additional review of the Operating Agreement to ensure that
CBOE's responsibilities as the SRO of the CBSX facility are not
compromised.
The Operating Agreement includes additional provisions that make
special accommodations for CBOE as the SRO of the CBSX facility.
Section 1.8 of the Operating Agreement sets forth CBOE's authority with
respect to any action, transaction or aspect of an action or
transaction that relates to CBOE's regulatory responsibilities, by
requiring CBOE's affirmative vote before such action or transaction or
aspect thereof can be authorized, undertaken or effective. For example,
Section 9.15(a) provides that CBSX LLC may not take certain specific
actions without the approval of a Super Majority of the Owners,\19\ and
the additional approving vote of CBOE.
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\19\ ``Super Majority of the Owners'' means, subject to the
provisions of Section 1.8 of the Operating Agreement as to
Regulatory Requirements, the affirmative vote of both (i) all of the
Owners of the Series A Voting Shares at the time, and (ii) any two
(2) of the Initial Owners of Series B Voting Shares who then retain
ownership of Series B Voting Shares. See Section 2.1(25) of the
Operating Agreement.
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[[Page 10577]]
In addition, Section 9.2(b) of the Operating Agreement provides
that, in light of its ownership of the Series A Voting Shares, CBOE is
entitled to designate a number of Directors equal to the aggregate
number of Directors designated by those Owners owning Series B Voting
Shares. Section 9.2(d) also gives CBOE the right, as long as CBSX
remains a facility of CBOE, to designate at least one Director
regardless of whether it maintains any ownership interest in CBSX LLC.
In addition, despite a statement of a general prohibition against
Owners committing or acting on behalf of CBSX LLC contained in Section
5.6 of the Operating Agreement, Section 9.15(a) would permit CBOE to
act on behalf of CBSX LLC in regulatory matters. Finally, CBOE has
complete access to information through provisions such as Section 15.2
of the Operating Agreement, which allows CBOE, the other Owners, and
their respective officers, directors, agents, and employees, to
disclose confidential information to the Commission or CBOE.
Because the Exchange has proposed to operate CBSX as its facility,
CBOE's obligations under the Act extend to its members' activities on
CBSX, as well as to the operation and administration of CBSX. The
Commission believes that the provisions described above are consistent
with the Act and enhance the ability of CBOE to carry out its self-
regulatory responsibilities with respect to its CBSX facility.
B. Changes in Control of CBSX LLC
The Commission believes that the restrictions in the Operating
Agreement on direct and indirect changes in control of CBSX LLC are
sufficient so that CBOE would be able to carry out its self-regulatory
responsibilities and that the Commission can fulfill its
responsibilities under the Act.
Exhibit A of the Operating Agreement lists all CBSX LLC Owners, the
Series of shares owned, and the percentage ownership interest in CBSX
LLC. A change to this exhibit (as well as any other provision of the
Operating Agreement) would need to be filed with the Commission if so
required under Section 19(b) of the Act and Rule 19b-4 thereunder. In
addition, Section 6.14 of the Operating Agreement provides that any
proposed transfer of CBSX LLC shares that would cause any person, alone
or together with any Affiliate, to meet or cross the 20% ownership
threshold or any subsequent 5% ownership interest level (e.g., 25%,
30%, 35%, etc.) would require CBOE to file a proposed rule change with
the Commission pursuant to Section 19(b) of the Act and be subject to
approval by the Commission. Any proposed transfer of Series A Voting
Shares would also require CBOE to file a proposed rule change under
Section 19(b) of the Act and Rule 19b-4 thereunder.
Furthermore, Section 6.13 of the Operating Agreement requires CBOE
to inform the Commission in writing at least ten days prior to the
closing date of any transaction that results in a person's percentage
ownership interest, alone or together with any Affiliate, in CBSX LLC
that would result in such person meeting or crossing the 5%, 10%, or
15% ownership thresholds. The Commission believes that this approach is
consistent with the Act in that it is analogous to the ongoing
reporting requirements of Form 1,\20\ the application for (and
amendments to the application for) registration as a national
securities exchange. Exhibit K of Form 1 requires any exchange that is
a corporation or partnership to list any persons that have an ownership
interest of 5% or more in the exchange; \21\ and Rule 6a-2(a)(2) under
the Act \22\ requires an exchange to update its Form 1 within ten days
after any action that renders inaccurate the information previously
filed in Exhibit K.
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\20\ 17 CFR 249.1 and 17 CFR 249.1a.
\21\ This reporting requirement applies only to exchanges that
have one or more owners, shareholders, or partners that are not also
members of the exchange. See Form 1, Exhibit K. Exhibit K applies
only to the exchange itself, not to entities that operate facilities
of the exchange.
\22\ 17 CFR 240.6a-2(a)(2).
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Exhibit K imposes no obligation on an exchange to report parties
whose ownership interest in the exchange is less than 5%. Similarly,
Section 6.13 of the Operating Agreement requires CBOE to notify the
Commission of an interest in CBSX LLC only when that interest reaches
5% or more. The Commission does not believe that the identity of a
party that has less than a 5% interest in a facility of a national
securities exchange is a ``rule of the exchange'' that must be filed
pursuant to Section 19(b) of the Act and Rule 19b-4(b) thereunder.
In addition, Section 15.16 of the Operating Agreement would require
an indirect controlling party to become a party to the Operating
Agreement upon establishing a controlling interest in any Owner who,
alone or together with any Affiliate, holds a Percentage Interest in
CBSX LLC equal to or greater than 20%. Any such amendment to the
Operating Agreement would require a proposed rule change to be filed
with the Commission pursuant to Section 19(b) of the Act. The proposed
rule change would alert the Commission to the existence of a proposed
indirect controlling party and present the Commission and CBOE with an
opportunity to determine what additional measures, if any, might be
necessary to provide sufficient regulatory jurisdiction over the
proposed indirect controlling party. The Commission understands that
Section 15.16 of the Operating Agreement would apply to any ultimate
parent of CBSX LLC, no matter how many levels of ownership are
involved, provided that a controlling interest exists between each link
of the ownership chain.
In conclusion, the Commission believes that Sections 6.13, 6.14,
and 15.16 of the Operating Agreement, together with the requirements of
Section 19(b) of the Act and Rule 19b-4 thereunder, provide the
Commission with sufficient authority over changes in control of CBSX
LLC to enable the Commission to carry out its regulatory oversight
responsibilities with respect to CBOE and the CBSX facility.
C. Regulatory Jurisdiction Over CBSX LLC Owners
The Commission believes that the terms of the Operating Agreement
provide the Commission and CBOE with sufficient regulatory jurisdiction
over the controlling parties and Owners to carry out their
responsibilities under the Act. In Section 6.15(a), each Owner
acknowledges that--to the extent that they are related to CBSX LLC
activities--the books, records, premises, officers, directors, agents,
and employees of the Owner are deemed to be the books, records,
premises, officers, directors, agents, and employees of CBOE for the
purpose of and subject to oversight pursuant to the Act. Moreover, in
Section 6.15(b) of the Operating Agreement, each Owner acknowledges
that the books, records, premises, officers, directors, agents, and
employees of CBSX LLC are deemed to be the books, records, premises,
officers, directors, agents, and employees of CBOE for the purpose of
and subject to oversight pursuant to the Act. These provisions would
enable the Commission to exercise its authority under Section 19(h)(4)
\23\ of the Act with
[[Page 10578]]
respect to the officers and directors of CBSX LLC and of all Owners,
since all such officers and directors--to the extent that they are
acting in matters related to CBSX LLC activities--would be deemed to be
the officers and directors of CBOE itself. Furthermore, the records of
any Owner--to the extent that they are related to CBSX LLC activities--
are subject to the Commission's examination authority under Section
17(b)(1) of the Act,\24\ as these records would be deemed to be the
records of CBOE itself.
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\23\ 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
has: (1) 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.
\24\ 15 U.S.C. 78q(b)(1).
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In addition, under the terms of Section 6.15(c) of the Operating
Agreement, CBSX LLC and each Owner (other than CBOE for so long as CBSX
is a facility of CBOE) \25\--and their respective officers and
directors and their agents and employees whose principal place of
business and residence is outside of the United States--must
irrevocably submit to the jurisdiction of the U.S. federal courts, the
Commission, and CBOE for the purposes of any suit, action, or
proceeding pursuant to the U.S. federal securities laws and the rules
or regulations thereunder, commenced and initiated by the Commission
arising out of or relating to CBSX LLC activities. In addition, CBSX
LLC and each Owner (other than CBOE for so long as CBSX LLC is a
facility of CBOE)--and their respective officers and directors and
their agents and employees whose principal place of business and
residence is outside of the United States--must waive, and agree not to
assert by way of motion, as a defense or otherwise in any such suit,
action, or proceeding, any claim that it is not personally subject to
the jurisdiction of the Commission; that the suit, action or proceeding
is an inconvenient forum; that the venue of the suit, action, or
proceeding is improper; or that the subject matter of the suit, action,
or proceeding may not be enforced in or by such courts or agency.
Moreover, pursuant to Section 6.15(d) of the Operating Agreement, the
CBSX LLC and each Owner (other than CBOE for so long as CBSX LLC is a
facility of CBOE) are required to take such action as is necessary to
ensure that such Owner's officers and directors and their agents and
employees whose principal place of business and residence is outside
the United States, consent to the application of these requirements
with respect to their CBSX LLC-related activities. Finally, under
Section 5.7 of the Operating Agreement, CBSX LLC and each Owner agree
to cooperate with the Commission and CBOE pursuant to their respective
regulatory authority.
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\25\ The Commission notes that CBOE and its officers, directors
and employees are subject to the Commission's jurisdiction because
CBOE is an SRO and as such is subject to the Act and the rules and
regulations thereunder.
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The Commission also notes that, even in the absence of these
provisions of the Operating Agreement, Section 20(a) of the Act \26\
provides that any person with a controlling interest in CBSX LLC would
be jointly and severally liable with and to the same extent that CBSX
LLC 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.
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\26\ 15 U.S.C. 78t(a).
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The Commission believes that, together, these provisions grant the
Commission sufficient jurisdictional authority over CBSX LLC and its
Owners. Moreover, CBOE 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.\27\ A failure on the part of
CBOE to enforce its rules could result in suspension or revocation of
registration under Section 19(h)(1) of the Act.\28\
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\27\ 15 U.S.C. 78c(a)(27).
\28\ 15 U.S.C. 78s(h)(1).
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D. Ownership and Voting Restrictions on CBSX LLC Owners
Section 6.12(a) of the Operating Agreement prohibits a person
(other than CBOE), either alone or together with its Affiliates, from
directly or indirectly owning more than a 20% Percentage Interest in
the Company (``Concentration Limitation''). Although Section 6.12(b)
permits this limitation to be waived by the Board, as long as such
waiver has been filed with and approved by the Commission, it precludes
such a waiver if the person or its Affiliates is a CBOE member.
Further, Section 8.10 of the Operating Agreement states that if an
Owner of Voting Shares that is also a CBOE member owns more than 20% of
the Outstanding Voting Shares (``Excess Shares''), alone or together
with any Affiliate, such Owner shall have no voting rights with respect
to the Excess Shares.
In addition, proposed CBOE Rule 3.32 sets forth ownership
concentration limitations for CBOE members and permits the Exchange to
take appropriate disciplinary action in the event a violation of the
ownership concentration limitation is not cured within a specified time
frame. Proposed Rule 3.32 also sets forth restrictions on affiliations
between the Exchange and its members.
The Commission believes that the ownership concentration and voting
limitations contained in the Operating Agreement and the provisions of
proposed CBOE Rule 3.32 are reasonable and consistent with the Act. It
is common for members who trade on an exchange to have ownership
interests in the exchange. However, a member's interest could become so
large as to cast doubt on whether the exchange can fairly and
objectively exercise its self-regulatory responsibilities with respect
to that member. A member that is also a controlling shareholder of an
exchange might be tempted to exercise that controlling influence by
directing the exchange to refrain from diligently surveilling 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 surveil and enforce its rules zealously against a
member that the exchange relies on as its largest source of capital.
Finally, the Commission believes that the restriction on voting
trust agreements in Section 8.8 of the Operating Agreement is
reasonable and consistent with the Act. In the absence of such a
provision, unaffiliated parties could act in concert and evade the
Operating Agreement's provisions regarding changes in control of CBSX
LLC.\29\ A voting trust agreement would not necessarily be inconsistent
with the Act, but any Owner wishing to establish a voting trust
agreement first would need to have the Operating Agreement amended to
enable a voting trust to be established. Any such amendment would
require a proposed rule change under Section 19(b) of the Act, thus
affording the Commission an opportunity to review the matter.
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\29\ The Operating Agreement treats as belonging to a single
person any shares held by affiliated parties of the person. See
Sections 6.13, 6.14, and 15.16 of the Operating Agreement.
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E. Accelerated Approval of Amendment Nos. 2 and 3
The Commission finds good cause for approving Amendment Nos. 2 and
3 to the proposed rule change prior to the thirtieth day after
publishing notice of Amendment Nos. 2 and 3 in the Federal Register
pursuant to Section 19(b)(2) of the Act.\30\
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\30\ 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2) of the
Act, the Commission may not approve any proposed rule change, or
amendment thereto, prior to the thirtieth day after the date of
publication of the notice thereof, unless the Commission finds good
cause for so doing.
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[[Page 10579]]
In Amendment No. 2, CBOE: (i) Amended Section 1.7 to clarify the
role of CBOE, as the SRO, for the activities of CBSX LLC; (ii) amended
Section 5.7 to add a reference to CBOE; (iii) amended Section 6.14 to
clarify that any transfer of Series A Voting Shares would require a
rule filing under Section 19 of the Exchange Act, subject to approval
by the Commission; (iv) amended Section 6.15 by, among other things,
revising paragraphs (c) and (d) to indicate that those paragraphs are
inapplicable in the case of CBOE and its respective officers,
directors, agents and employees for so long as CBSX LLC is a facility
of CBOE and to clarify the application of these paragraphs in the case
of the agents and employees of CBSX LLC and its Owners whose principal
place of business and residence is outside of the United States; and
(v) amended various sections of the Operating Agreement to refer to
CBOE rather than ``Regulatory Services Provider.'' Amendment No. 2 also
updated Exhibit A-1 of the Operating Agreement. Amendment No. 3 amended
Section 6.15(c) to clarify the U.S. agent for service of process.
The Commission believes that Amendment Nos. 2 and 3 serve to
clarify and enhance the proposal and that publication of its provisions
would needlessly delay the implementation of the proposal. The
Commission therefore finds good cause exists to accelerate approval of
Amendment Nos. 2 and 3, pursuant to Section 19(b)(2) of the Act.\31\
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\31\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment Nos. 2
and 3 are 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 rule-comments@sec.gov. Please include
File Number SR-CBOE-2006-110 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2006-110. 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 change 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. Copies of the filing
also will be available for inspection and copying at the principal
office of the Exchange. 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 Amendment Nos.
2 and 3 of File Number SR-CBOE-2006-110 and should be submitted on or
before March 29, 2007.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\32\ that the proposed rule change (SR-CBOE-2006-110), as modified
by Amendment No. 1, be, and it hereby is approved and Amendment Nos. 2
and 3 are approved on an accelerated basis.
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\32\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-4125 Filed 3-7-07; 8:45 am]
BILLING CODE 8010-01-P
