Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Granting Approval to a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 Thereto, Relating to an Interpretation of Paragraph (b) of Article Fifth of Its Certificate of Incorporation, 3769-3783 [E8-954]
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Federal Register / Vol. 73, No. 14 / Tuesday, January 22, 2008 / Notices
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, 100 F Street, NE., Washington,
DC 20549, on official business days
between the hours of 10 a.m. and 3 p.m.
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 publicly available. All
submissions should refer to File
Number SR–BSE–2007–55 and should
be submitted on or before February 12,
2008.
(‘‘CME Holdings’’). On January 17, 2007,
the Exchange filed Amendment No. 1 to
the proposed rule change which
replaced and superseded the filing. The
proposed rule change, as modified by
Amendment No. 1, was published for
notice and comment in the Federal
Register on February 6, 2007.3 The
Commission received 174 comment
letters from 134 separate commenters on
the proposed rule change, including
comment letters from CBOT members
and legal counsel to CBOT and CBOT
members. The CBOE submitted its
response to comments on June 15,
2007.4 On June 29, 2007, CBOE filed
Partial Amendment No. 2 to the
proposal.5 This order approves the
proposed rule change, as modified by
Amendment Nos. 1 and 2.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–997 Filed 1–18–08; 8:45 am]
As compensation for the ‘‘special
contribution’’ of time and money that
the CBOT expended in the development
of the CBOE in the early 1970s, an
‘‘Exercise Right’’ was granted to each
‘‘member of [the CBOT]’’ entitling him
or her to become a member of the CBOE
without having to acquire a separate
CBOE membership.6 This right,
established in Article Fifth(b) of the
CBOE Certificate of Incorporation
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Release No. 34–57159; File No. SR–CBOE–
2006–106]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Order Granting Approval
to a Proposed Rule Change, as
Modified by Amendment Nos. 1 and 2
Thereto, Relating to an Interpretation
of Paragraph (b) of Article Fifth of Its
Certificate of Incorporation
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January 15, 2008.
I. Introduction
On December 12, 2006, the Chicago
Board Options Exchange, Incorporated
(‘‘CBOE’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’ or ‘‘SEC’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’),1 and Rule 19b–4
thereunder,2 a proposed rule change to
adopt an interpretation of the rules of
CBOE in response to the acquisition of
the Board of Trade of the City of
Chicago, Inc. (‘‘CBOT’’) by Chicago
Mercantile Exchange Holdings, Inc.
13 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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II. Description of the Proposed Rule
Change
A. Background
3 See Securities Exchange Act Release No. 55190
(January 29, 2007), 72 FR 5472 (SR–CBOE–2006–
106) (‘‘Notice’’).
4 See Letter from Michael L. Meyer, Schiff Hardin,
to Nancy M. Morris, Secretary, Commission, dated
June 15, 2007 (‘‘CBOE Response to Comments’’).
5 The CBOE submitted an opinion of counsel as
Exhibit 3f to Amendment 1 to its proposal. See
Letter from Wendell Fenton, Esq., Richards, Layton
& Finger, to Joanne Moffic-Silver, General Counsel
and Corporate Secretary, CBOE, dated January 16,
2007 (‘‘First Opinion of Counsel’’). CBOE
subsequently submitted an updated legal opinion
via Partial Amendment No. 2, which opines that the
proposed rule change embodied in SR–CBOE–
2006–106 constitutes an interpretation of Article
Fifth(b), and not an amendment of Article Fifth(b),
consistent with the conclusions reached in the
opinion letters of Delaware counsel that CBOE
submitted to the Commission in connection with
CBOE rule filings SR–CBOE–2004–16 and SR–
CBOE–2005–19. See Letter from Wendell Fenton,
Esq., Richards, Layton & Finger, to Joanne MofficSilver, General Counsel and Corporate Secretary,
CBOE, dated June 28, 2007 (‘‘Second Opinion of
Counsel’’). The Commission believes that because
Partial Amendment No. 2 raises no new or novel
issues, it is technical in nature and not subject to
separate notice and comment.
6 As CBOE explained in the notice of its proposal,
the ‘‘special contribution’’ of the members of CBOT
referred to in Article Fifth(b) consisted primarily of
CBOT’s providing the seed capital for the start-up
of CBOE in the early 1970s by means of direct cash
expenditures, CBOT’s guarantee of a bank loan to
CBOE to fund additional CBOE start-up costs, and
CBOT’s contribution of intellectual property. See
Notice, supra note 3, 72 FR at 5473.
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3769
(‘‘Article Fifth(b)’’), provides, in
relevant part:
In recognition of the special contribution
made to the organization and development of
the [CBOE] by the members of [the CBOT]
* * * every 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 said
Board of Trade, be entitled to be a member
of the [CBOE] notwithstanding any such
limitation on the number of members and
without the necessity of acquiring such
membership for consideration or value from
the [CBOE], its members or elsewhere.
Article Fifth(b) 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.
Since Article Fifth(b) does not define
what a ‘‘member of [the CBOT]’’ means,
on several occasions in the past, the
CBOE has interpreted the meaning of
Article Fifth(b), in particular the term
‘‘member of [the CBOT],’’ in response to
changes in the ownership structure of
the CBOT. On each such occasion, the
CBOE and CBOT ultimately reached a
mutual agreement on the particular
interpretation at issue, and those
interpretations are reflected in various
agreements and letter agreements
between CBOE and CBOT. CBOE filed
these interpretations of Article Fifth(b)
with the Commission, reflected in
amendments to CBOE Rule 3.16(b)
(‘‘Special Provisions Regarding Chicago
Board of Trade Exerciser
Memberships’’), as proposed rule
changes pursuant to Section 19(b)(1) of
the Exchange Act.7 The Commission
approved each such interpretation.
1. 1992 Agreement
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)
that was embodied in an agreement
dated September 1, 1992 (the ‘‘1992
Agreement’’) and reflected in CBOE
Rule 3.16(b).8 The 1992 Agreement
addressed, among other things, the
effect on the Exercise Right of CBOT’s
plans to divide the membership
interests of the then-existing 1,402
member-owners of CBOT into parts.
That interpretation provided that all
such parts, together with the trading
rights appurtenant thereto, must be in
the possession of an individual in order
for that individual to be eligible to
7 15
U.S.C. 78s(b)(1).
Securities Exchange Act Release No. 32430
(June 8, 1993), 58 FR 32969 (June 14, 1993) (SR–
CBOE–92–42).
8 See
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utilize the Exercise Right.99 CBOE Rule
3.16(b) reflects this interpretation in
stating that ‘‘[f]or 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] * * *’’ 10
2. 2001 Agreement, as Modified by the
2004 and 2005 Letter Agreements
In connection with CBOT’s proposed
restructuring, CBOE took the position
that the effect of such a transaction
would be to eliminate entirely the
concept of CBOT ‘‘membership’’ as it
existed when the Exercise Right was
created as a right held by members of
CBOT, and therefore would result in the
termination of the Exercise Right.11
CBOE and CBOT eventually
compromised and entered into an
agreement dated August 7, 2001 (‘‘2001
Agreement’’) under which CBOE agreed
to interpret Article Fifth(b) such that the
Exercise Right was only available to a
CBOT member that held all of the
trading rights of a full member of CBOT
as well as the same number of shares of
stock of CBOT Holdings, Inc. (‘‘CBOT
Holdings’’) originally issued to CBOT
members in the restructuring.12 CBOE
agreed, in the 2001 Agreement, to
interpret Article Fifth(b) in this way,
only ‘‘in the absence of any other
material changes to the structure or
ownership of the CBOT * * * not
contemplated in the CBOT
[restructuring].’’ 13
CBOE and CBOT subsequently agreed
to modify the 2001 Agreement by a
Letter Agreement among CBOE, CBOT,
and CBOT Holdings dated October 7,
2004 (‘‘October 2004 Letter
Agreement’’), which was intended to
represent the agreement of the CBOE
and CBOT concerning the nature and
scope of the Exercise Right following
the restructuring of the CBOT and in
1992 Agreement, Section 2(b).
Rule 3.16(b). 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.
11 See Notice, supra note 3, 72 FR at 5473.
12 See id.
13 See id. at 5473–74 (citing the 2001 Agreement).
light of the expansion of the CBOE and
CBOT’s electronic trading systems. The
CBOE, CBOT, and CBOT Holdings
entered into another letter agreement on
February 14, 2005 (‘‘February 2005
Letter Agreement’’) in which CBOE
confirmed that CBOT’s restructuring
was consistent with CBOE’s
interpretation of Article Fifth(b) as set
forth in the 2001 Agreement.
The CBOE’s interpretation of Article
Fifth(b) through interpretations of
‘‘Eligible CBOT Full Member’’ as used
in CBOE Rule 3.16 were approved by
the Commission.14 As set forth in the
2001 Agreement, as amended by the
letter agreements, the CBOE interprets
Article Fifth(b) such that an individual
is deemed to be an ‘‘Eligible CBOT Full
Member’’ under CBOE Rule 3.16 if the
individual: (1) Is the owner of the
requisite number of Class A Common
Stock of CBOT Holdings, 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.15 An
individual is deemed to be an ‘‘Eligible
CBOT Full Member Delegate,’’ under
that Agreement, if the individual: (1) Is
in possession of the requisite number of
Class A Common Stock of CBOT
Holdings, 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.16
B. CBOE’s Current Proposal
1. Interpretation of Article Fifth(b)
The CBOE is again proposing an
interpretation of the term ‘‘member of
[the CBOT]’’ as used in Article Fifth(b).
CBOE believes that its proposed
interpretation is necessary to address
the effect on the Exercise Right of the
then-proposed (and now completed)
acquisition of the CBOT by CME
Holdings.17 Specifically, CBOE believes
9 See
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10 CBOE
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14 See Securities Exchange Act Release No. 51733
(May 24, 2005), 70 FR 30981 (May 31, 2005) (SR–
CBOE–2005–19).
15 See id. at 30983 (footnote 14).
16 See id.
17 That acquisition was accomplished by the
merger of CBOT Holdings, of which CBOT was a
subsidiary, with and into CME Holdings, with CME
Holdings continuing as the surviving corporation
and as the parent company of CBOT, as well as of
its existing wholly-owned subsidiary, the Chicago
Mercantile Exchange, Inc. (‘‘CME’’). CBOT
Holding’s shareholders approved the acquisition on
July 9, 2007. See Form 8–K submitted by CME
Holdings on July 9, 2007. The transaction was
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Frm 00111
Fmt 4703
Sfmt 4703
that the acquisition of the CBOT by
CME Holdings effected ‘‘substantial
changes to the structure and ownership
of CBOT, as well as to the rights
represented by CBOT membership,’’ in
a way that creates a substantive
ambiguity with respect to whether a
person who formerly qualified under
Article Fifth(b) as a ‘‘member of [the
CBOT]’’ for purposes of the Exercise
Right still possesses sufficient attributes
of CBOT membership following the
acquisition by CME Holdings.18
In response to the acquisition of the
CBOT by CME Holdings, the CBOE
Board of Directors found it necessary to
determine whether the substantive
rights of a former CBOT member would
continue to qualify that person as a
‘‘member of [the CBOT]’’ pursuant to
Article Fifth(b), as that term was
contemplated when Article Fifth(b) was
adopted, after the acquisition of the
CBOT by CME Holdings. CBOE
determined that it would not, because
former CBOT members ‘‘lose in the CME
acquisition the few remaining
membership rights they retained
following the [CBOT’s] 2005
restructuring,’’ such that ‘‘persons who
had formerly been the full members of
CBOT will simply be the holders of
trading permits and will not possess any
of the other rights commonly associated
with membership in an exchange.’’ 19
Thus, CBOE’s proposed interpretation
concludes that, following the
acquisition, there no longer are any
individuals who qualify as ‘‘members of
[the CBOT]’’ within the meaning of
Article Fifth(b). Consequently, no
person would qualify under Article
Fifth(b) to utilize the Exercise Right to
become and remain a member of CBOE
without having to obtain a separate
CBOE membership. This interpretation
is based on CBOE’s view that the
concept of a member-owner of CBOT, as
CBOE believes that concept was
understood when Article Fifth(b) was
first adopted in CBOE’s Certificate of
Incorporation and when it was
subsequently interpreted in the 1992
Agreement, has been abolished
following the restructuring of CBOT and
its subsequent acquisition by CME
Holdings. In this respect, the CBOE’s
proposal does not extinguish the
Exercise Right or delete Article Fifth(b)
from its Certificate of Incorporation, but
rather interprets Article Fifth(b) in a
manner than means no CBOT member is
completed on July 12, 2007. See Form 25–NSE
submitted by the New York Stock Exchange, Inc.
(regarding notification of the removal of listing of
CBOT Holdings).
18 CBOE Response to Comments, supra note 4, at
17.
19 Id. at 28.
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eligible to utilize that right following the
acquisition of CBOT.
With respect to the prior agreements
concerning the interpretation of Article
Fifth(b) with CBOT, CBOE believes that,
because the change in structure
effectuated by the acquisition of CBOT
by CME Holdings was not contemplated
as part of the 2005 restructuring of
CBOT, the acquisition constitutes a
change to the ownership of CBOT that
is inconsistent with a condition to the
interpretation embodied in the 2001
Agreement, as amended, that there not
be any change to the ownership of
CBOT not contemplated in its 2005
restructuring.20 Accordingly, CBOE
believes that the 2001 Agreement, as
amended, no longer governs whether
and to what extent the Exercise Right
will remain in existence, with the result
being that CBOE and CBOT are back in
the position they faced before the 2001
Agreement.21
With the 2001 Agreement no longer
controlling, CBOE looks to the 1992
Agreement, in particular Section 3(d),
which addresses the possibility that
CBOT, among other things, may merge
or consolidate with, or be acquired by,
another entity. Section 3(d) establishes
three conditions that all must be
satisfied for the Exercise Right to remain
available following any such
transaction. Those three conditions are:
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1.* * * the survivor of such merger,
consolidation or acquisition (‘‘survivor’’) is
an exchange which provides or maintains a
market in commodity futures contracts or
options, securities, or other financial
instruments, and * * *
2. the 1,402 holders of CBOT Full
Memberships are granted in such merger,
consolidation or acquisition membership in
the survivor (‘‘Survivor Membership’’), and
* * *
3. such Survivor Membership entitles the
holder thereof to have full trading rights and
privileges in all products then or thereafter
traded on the survivor (except that such
trading rights and privileges need not include
products that, at the time of such merger,
consolidation or acquisition, are traded or
listed, designated or otherwise authorized for
trading on the other entity but not on the
CBOT) * * * 22
CBOE believes that none of these
conditions are satisfied following the
acquisition of CBOT by CME Holdings.
Specifically, with respect to Condition
1, CBOE notes that the survivor of the
acquisition (i.e., the acquiring entity
that survives the transaction) is CME
Holdings, which is not an exchange.23
Further, CBOE believes that Condition
2 is not satisfied because the former
20 See
Notice, supra note 3, 72 FR at 5474.
id.
22 See id.
23 See id.
21 See
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1,402 holders of CBOT Full
Memberships have not been granted
‘‘membership’’ in the survivor.24 Rather,
CBOE’s position is that there are not any
holders of CBOT Full Memberships as
they existed in 1992, because all of
these memberships were stripped of
their ownership attributes in the 2005
restructuring of CBOT.25 Likewise,
CBOE argues that CME Holdings is not
an exchange and therefore is not capable
of granting ‘‘membership’’ interests in
itself to anyone.26 CBOE further states
that, even if CBOT is considered to have
survived the acquisition, Condition 2
still would not be satisfied because,
except for trading rights, former CBOT
members no longer have most of the
other rights in the surviving entity that
they formerly held when they were full
members of CBOT as the term
‘‘member’’ was commonly understood
when Article Fifth(b) was adopted in
1972 and later interpreted in 1992.27
Accordingly, following the acquisition,
CBOE believes that former CBOT
members will simply be the holders of
trading permits and will not be granted
any of the other rights commonly
associated with membership in an
exchange.28
Finally, CBOE believes that Condition
3 of Section 3(d) of the 1992 Agreement
is not satisfied following the acquisition
of CBOT by CME Holdings because that
condition contemplates an acquisition
where the surviving acquirer is an
exchange, and it requires CBOT
members to have essentially the same
full trading rights on that surviving
exchange as they had on CBOT prior to
the acquisition.29 As CME Holdings is
not an exchange, CBOE believes that it
is not possible for CBOT members to
have any trading rights on the
survivor.30 Further, CBOE believes that
to be the case even if it were to look
through CME Holdings to its two
subsidiary exchanges, CME and
24 See
id.
id. Although CBOE has previously
interpreted Article Fifth(b) to permit the Exercise
Right to continue in existence following the 2005
restructuring of CBOT, subject to stated conditions,
as discussed above, CBOE believes that those earlier
interpretations, contained in the 2001 Agreement,
as amended, are no longer controlling because those
provisions applied only so long as there was no
further change to the structure or ownership of
CBOT not then in contemplation. See id.
26 See Notice, supra note 3, 72 FR at 5474.
27 See id. at 5475. For example, CBOE states that,
following the acquisition by CME Holdings, CBOT’s
former Series B–1 members will be stripped, among
other things, of their right to elect directors or
nominate candidates for election as directors. See
id.
28 See id.
29 See id.
30 See id.
25 See
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3771
CBOT.31 CBOE states that, in respect of
any new products to be introduced on
CME after the acquisition, the trading
rights of CBOT members will be diluted
by the trading rights granted to other
persons (i.e., CME members) to trade
these same products, in which case the
trading rights inherent in CBOT
membership will be reduced from what
they were prior to the acquisition.32
Consequently, CBOE’s proposed
interpretation concludes that the
conditions contained in Section 3(d) of
the 1992 Agreement are not satisfied
following the acquisition of CBOT by
CME Holdings, and that the terms of
Section 3(d) therefore provide that
‘‘Article Fifth(b) shall not apply’’
following the acquisition. Hence, for the
reasons discussed in its notice, as
summarized above, CBOE’s proposed
interpretation is that the Exercise Right
is no longer available as a means of
acquiring membership in CBOE because
there no longer are any individuals who
qualify as ‘‘members of [the CBOT]’’
within the meaning of Article Fifth(b).
2. Transition Plan
In addition to its proposed
interpretation of Article Fifth(b), CBOE
has separately proposed a transition
plan in order to avoid a sudden
disruption to its marketplace as a result
of no persons any longer being eligible
to utilize the Exercise Right on account
of the acquisition of CBOT by CME
Holdings.33 Specifically, CBOE
submitted a separate proposed rule
change interpreting CBOE Rule 3.19,
which is a rule that authorizes the
Exchange, when the Exchange
determines that there are extenuating
circumstances, to permit a member ‘‘to
retain the member’s status for such
period of time as the Exchange deems
reasonably necessary’’ to enable the
member to address specified problems
that caused the membership status to
terminate.
Interpretation .01 to CBOE Rule 3.19,
allows certain ‘‘grandfathered’’
Exerciser Members who had been
trading on CBOE to continue to have
uninterrupted access to CBOE until
such time as the Commission takes
action on SR–CBOE–2006–106. Under
Interpretation .01 to CBOE Rule 3.19,
persons who were Exerciser Members in
good standing as of July 1, 2007 and
who remain Exerciser Members as of the
close of business on the day before the
31 See
id.
Notice, supra note 3, 72 FR at 5474.
33 See Securities Exchange Act Release Nos.
56016 (July 5, 2007), 72 FR 38106 (July 12, 2007)
(SR–CBOE–2007–77) and 56458 (September 18,
2007), 72 FR 54309 (September 24, 2007) (SR–
CBOE–2007–107).
32 See
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consummation of the acquisition of
CBOT by CME Holdings temporarily
retained their membership status,
including their trading access to CBOE,
for a limited period of time. Such
persons were not required to hold or
maintain any securities, memberships or
other interests in order to maintain that
status, but are required to pay a monthly
access fee to the Exchange.34 Temporary
Members are required to remain in good
standing and must pay all applicable
fees, dues, assessments and other like
charges assessed against CBOE
members.
On September 4, 2007, CBOE filed a
subsequent interpretation of CBOE Rule
3.19 to extend this temporary
membership beyond any Commission
approval of SR–CBOE–2006–106 until
the earlier of: (1) The voluntary
termination of a person’s temporary
membership; (2) any Commission
approval of a subsequent proposed rule
change to terminate temporary
membership status; or (3) the
demutualization of the Exchange.35
III. Comment Letters
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The Commission received 174
comment letters on the proposed rule
change from 134 different
commenters.36 Legal counsel for CBOT,
legal counsel for CBOT Holdings, and
legal counsel for the putative class of
34 See Securities Exchange Act Release No. 56197
(August 3, 2007), 72 FR 44897 (August 9, 2007)
(SR–CBOE–2007–91) (adopting the access fee).
35 See Securities Exchange Act Release No. 56458
(September 18, 2007), 72 FR 54309 (September 24,
2007) (SR–CBOE–2007–107).
36 Thirteen letters, including three letters from
CBOE’s legal counsel, explicitly supported the
proposed rule change. See Letter from Robert H.
Bloch, dated February 16, 2007 (‘‘Bloch Letter’’);
Letter from Michael J. Post to Elizabeth K. King,
Associate Director, Division of Market Regulation,
Commission, dated February 16, 2007 (‘‘Post
Letter’’); Letter from Steven G. Holtz, dated
February 17, 2007; Letter from Dan Frost, dated
February 19, 2007 (‘‘Frost Letter’’); Letter from
Steve Fanady to Elizabeth K. King, Associate
Director, Division of Market Regulation,
Commission, dated February 20, 2007 (‘‘Fanady
Letter’’); Letter from Lawrence J. Blum to Elizabeth
K. King, Associate Director, Division of Market
Regulation, Commission, dated February 25, 2007
(‘‘Blum Letter’’); Letter from Norman S. Friedland,
dated February 27, 2007 (‘‘Friedland Letter’’); Letter
from R. Kent Hardy to Nancy M. Morris, Secretary,
Commission, dated February 27, 2007 (‘‘Hardy
Letter’’); Letter from Robert Silverstein to Elizabeth
K. King, Associate Director, Division of Market
Regulation, Commission, dated February 27, 2007
(‘‘Silverstein Letter’’); Letter from Marshall Spiegel,
dated April 12, 2007 (referencing attached
materials); Letter from Michael L. Meyer, Schiff
Hardin, to Elizabeth K. King, Associate Director,
Division of Market Regulation, Commission, dated
January 12, 2007 (‘‘Schiff Hardin Letter 1’’); Letter
from Michael L. Meyer, Schiff Hardin, to Nancy M.
Morris, Secretary, Commission, dated March 19,
2007; and CBOE Response to Comments, supra note
4. The remainder of the letters either opposed the
proposal or did not clearly communicate a position.
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CBOT members from the Delaware
litigation (collectively referred to as
‘‘CBOT’’) all submitted comment
letters37 in which they characterized the
proposed rule change as an attempt by
CBOE to eliminate one group of
Exchange members (Exerciser Members)
for the benefit of another group of
members (CBOE regular members),
therein depriving Exerciser Members
and those eligible to become Exerciser
Members of a valuable property right.38
CBOT asked the Commission to institute
proceedings to disapprove CBOE’s
proposed rule change on the basis that
the proposal is an improper use of
CBOE’s self-regulatory authority to
resolve in its favor a private property
dispute that is being litigated in the
Delaware court, fails to meet the
requirements of the Exchange Act, and
was adopted without due process.39
Other commenters supplemented the
concerns expressed by CBOT with
criticism that the Commission lacked
jurisdiction to consider the CBOE’s
proposal on the basis that the proposal
implicated a contractual dispute subject
to the jurisdiction of a state court.40
37 See Letter from Charles M. Horn, Mayer,
Brown, Rowe & Maw, to Nancy M. Morris,
Secretary, Commission, dated December 22, 2006
(‘‘Mayer Brown Letter 1’’); Letter from Gordon B.
Nash, Jr., Gardner, Carton & Douglas, to Nancy M.
Morris, Secretary, Commission, dated December 22,
2006 (on behalf of the putative class members)
(‘‘Gardner Letter’’); Letter from Charles M. Horn,
Mayer, Brown, Rowe & Maw, to Nancy M. Morris,
Secretary, Commission, dated January 31, 2007
(‘‘Mayer Brown Letter 2’’); Letter from Charles M.
Horn, Mayer, Brown, Rowe & Maw, to Nancy M.
Morris, Secretary, Commission, dated February 27,
2007 (‘‘Mayer Brown Letter 3’’); Letter from Scott
C. Lascari, Drinker Biddle Gardner Carton, to Nancy
M. Morris, Secretary, Commission, dated February
27, 2007 (on behalf of the putative class members);
Letter from Charles M. Horn, Mayer, Brown, Rowe
& Maw, to Nancy M. Morris, Secretary,
Commission, dated March 15, 2007 (‘‘Mayer Brown
Letter 4’’); Letter from Charles M. Horn, Mayer,
Brown, Rowe & Maw, to Nancy M. Morris,
Secretary, Commission, dated July 9, 2007 (‘‘Mayer
Brown Letter 5’’); and Letter from Charles M. Horn,
Mayer, Brown, Rowe & Maw, to Nancy M. Morris,
Secretary, Commission, dated August 9, 2007
(‘‘Mayer Brown Letter 6’’).
38 See, e.g., Mayer Brown Letter 3, supra note 37,
at 6.
39 See Mayer Brown Letter 3, supra note 37, at 1.
See also Letter from Alton B. Harris, Ungaretti &
Harris LLP, to Nancy M. Morris, Secretary,
Commission (‘‘Ungaretti Letter’’), at 9–10 (arguing
that the CBOE impermissibly and unilaterally
interpreted a provision in a bilateral contract and
filed this interpretation with the Commission in an
attempt to invoke federal preemption). That
commenter opined that the outcome of this matter
could affect the future willingness of third parties
to enter into contracts that may be subject to
unilateral interpretation by a self-regulatory
organization. See id. at 2–3.
40 See Letter from Gordon Gladstone, dated
February 9, 2007; Letter from Glenn Hollander,
dated February 9, 2007; Letter from Lance R.
Goldberg, dated February 10, 2007 (‘‘Goldberg
Letter’’); Letter from Mark Mendelson, dated
February 12, 2007 (‘‘Mendelson Letter’’); Letter
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Commenters also opposed the proposal
as without foundation, believing that
the CBOT’s acquisition by CME
Holdings should be irrelevant to the
continued validity of the Exercise
Right.41 Other commenters argued that
from John Simms, dated February 12, 2007 (‘‘Simms
Letter’’); Letter from Charles W. Bergstrom to Nancy
M. Morris, Secretary, Commission, dated February
13, 2007; Letter from Mike P. Darraugh, dated
February 13, 2007 (‘‘Darraugh Letter’’); Letter from
Edward E. Kessler, dated February 13, 2007
(‘‘Kessler Letter’’); Letter from Stephen L. O’Bryan,
dated February 13, 2007 (‘‘O’Bryan Letter’’); Letter
from Mark D. Hellman to Nancy M. Morris,
Secretary, Commission, dated February 14, 2007
(‘‘Hellman Letter’’); Letter from J. Alexander
Stevens to Nancy M. Morris, Secretary,
Commission, dated February 14, 2007 (‘‘Stevens
Letter’’); Letter from Allen Mitzenmacher to Nancy
M. Morris, Secretary, Commission, dated February
15, 2007 (‘‘Mitzenmacher Letter’’); Letter from
Benjamin Nitka, dated February 15, 2007; Letter
from Jerome Israelov, dated February 16, 2007;
Letter from Susie McMurray, submitted February
16, 2007 (‘‘McMurray Letter’’); Letter from Stuart
Reif to Nancy M. Morris, Secretary, Commission,
dated February 16, 2007 (‘‘ Letter’’); Letter from
Doug Riccolo, dated February 16, 2007; Letter from
Burt Gutterman and Noel Moore to Nancy M.
Morris, Secretary, Commission, dated February 17,
2007; Letter from Charles B. Cox III, dated February
19, 2007 (‘‘C. Cox Letter’’); Letter from Michael J.
Crilly, dated February 19, 2007 (‘‘Crilly Letter 1’’);
Letter from Ronald E. Komo to Nancy M. Morris,
Secretary, Commission, dated February 19, 2007
(‘‘Komo Letter’’); Letter from Thomas M. Myron to
Nancy M. Morris, Secretary, Commission, dated
February 19, 2007 (‘‘T.M. Myron Letter’’); Letter
from Kyle A. Reed, dated February 20, 2007 (‘‘Reed
Letter’’); Letter from Thomas F. Cashman to Nancy
M. Morris, Secretary, Commission, dated February
21, 2007 (‘‘Cashman Letter’’); Letter from Richard
Jaman, submitted February 22, 2007 (‘‘Jaman
Letter’’); Letter from Lawrence D. Israel to Nancy M.
Morris, Secretary, Commission, dated February 22,
2007 (‘‘Israel Letter’’); Letter from Gerald A.
McGreevy, submitted February 22, 2007
(‘‘McGreevy Letter’’); Letter from David P. Baby to
Nancy M. Morris, Secretary, Commission, dated
February 23, 2007 (‘‘Baby Letter’’); Letter from
Stephen Cournoyer to Nancy M. Morris, Secretary,
Commission, dated February 24, 2007 (‘‘S.
Cournoyer Letter’’); Letter from Wayne Goodman to
Nancy M. Morris, Secretary, Commission,
submitted February 24, 2007 (‘‘Goodman Letter’’);
Letter from Cary Chubin, dated February 25, 2007
(‘‘Chubin Letter’’); Letter from John Halston, dated
February 25, 2007 (‘‘Halston Letter’’); Letter from
Veda Kaufman Levin, dated February 25, 2007
(‘‘Levin Letter’’); Letter from Robert J. Griffin to
Nancy M. Morris, Secretary, Commission, dated
February 26, 2007 (‘‘Griffin Letter’’); Letter from
Harlan R. Krumpfes, dated February 26, 2007
(‘‘Krumpfes Letter’’); Letter from Nickolas J.
Neubauer to Nancy M. Morris, Secretary,
Commission, dated February 26, 2007 (‘‘Neubauer
Letter’’); Letter from Ronald Bianchi, dated
February 26, 2007 (‘‘Bianchi Letter’’); Letter from
William Terman to Nancy M. Morris, Secretary,
Commission, dated February 26, 2007 (‘‘Terman
Letter’’); Letter from Robert E. Otter, dated February
27, 2007; and Letter from Paul L. Richards to Nancy
M. Morris, Secretary, Commission, dated August 1,
2007 (‘‘Richards Letter 2’’). Cf. Comment Letters
cited in note 36, supra (Bloch Letter, Post Letter,
Friedland Letter, Frost Letter, Fanady Letter, Blum
Letter (arguing that the proposal falls within the
Commission’s jurisdiction)).
41 See, e.g., Letter from Lawrence C. Dorf, dated
February 9, 2007 (‘‘Dorf Letter’’); Goldberg Letter,
supra note 40; Letter from Peter M. Todebush to
Nancy M. Morris, Secretary, Commission, dated
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CBOE’s proposal violates the rights of
CBOT members with respect to the
Exercise Right and violates the
agreements between the CBOT and
CBOE,42 and complained about the
economic impact of the proposed rule
change on CBOT members, especially
the fact that the CBOE’s proposal would
prohibit CBOT members from sharing in
the CBOE’s anticipated
demutualization.43 The main points
February 13, 2007 (‘‘Todebush Letter’’); Letter from
Thomas M. Shuff Jr., dated February 13, 2007
(‘‘Shuff Letter’’); Letter from Norm Friedman, dated
February 16, 2007 (‘‘N. Friedman Letter’’); C. Cox
Letter, supra note 40; Crilly Letter 1, supra note 40;
Ungaretti Letter, supra note 39; Letter from Brian
Cassidy, dated February 20, 2007 (‘‘Cassidy
Letter’’); Letter from Gregory J. Ellis, dated February
20, 2007 (‘‘Ellis Letter’’); Letter from Paul R.T.
Johnson, Jr. to Nancy M. Morris, Secretary,
Commission, submitted February 20, 2007
(‘‘Johnson Letter’’); Reed Letter, supra note 40;
Letter form Michael E. Stone, submitted February
22, 2007 (‘‘Stone Letter 1’’); Letter from Robert C.
Sheehan, Electronic Brokerage Systems, LLC, to
Nancy M. Morris, Secretary, Commission, dated
February 23, 2007 (‘‘Sheehan Letter’’); Letter from
Carolyn J. Davis to Nancy M. Morris, Secretary,
Commission, dated February 24, 2007; Goodman
Letter, supra note 40; Letter from David G. Northey,
M&N Trading, submitted February 24, 2007
(‘‘Northey Letter’’); Letter from Kevin A. Ward,
submitted February 24, 2007; Chubin Letter, supra
note 40; Halston Letter, supra note 40; Letter from
Michael E. Stone, dated February 25, 2007 (‘‘Stone
Letter 2’’); Letter from Edward A. Cox and Cynthia
R. Cox to Nancy M. Morris, Secretary, Commission,
dated February 26, 2007 (‘‘E. Cox Letter’’);
Krumpfes Letter, supra note 40; Letter from John L.
Pietrzak to Nancy M. Morris, Secretary,
Commission, dated February 26, 2007 (‘‘Pietrzak
Letter’’); Letter from Robert Salstone to Nancy M.
Morris, Secretary, Commission, dated February 26,
2007.
42 See Letter from Peter W. Aden, dated February
9, 2007; Dorf Letter, supra note 41; Letter from
Michael C. Rothman, dated February 9, 2007
(‘‘Rothman Letter’’); Goldberg Letter, supra note 40;
Letter from Clint Gross, dated February 11, 2007
(‘‘Gross Letter’’); Letter from Richard D. Lupori,
dated February 12, 2007; Mendelson Letter, supra
note 40; Letter from Adam Rich to Nancy M. Morris,
Secretary, Commission, dated February 12, 2007
(‘‘Rich Letter’’); Simms Letter, supra note 40; Letter
from Frank J. Aiello to Nancy M. Morris, Secretary,
Commission, dated February 13, 2007; Darraugh
Letter, supra note 40; Letter from Michael Forester
to Nancy M. Morris, Secretary, Commission, dated
February 13, 2007; Letter from Richard Friedman,
dated February 13, 2007 (‘‘R. Friedman Letter’’);
Letter from Ronald F. Grossman, dated February 13,
2007 (‘‘Grossman Letter’’); Kessler Letter, supra
note 40; Letter from Robert T. O’Brien to Nancy M.
Morris, Secretary, Commission, dated February 13,
2007; O’Bryan Letter, supra note 40; Shuff Letter,
supra note 41; Todebush Letter, supra note 41;
Letter from Arthur Arenson to Nancy M. Morris,
Secretary, Commission, dated February 14, 2007;
Letter from Michael Floodstrand to Nancy M.
Morris, Secretary, Commission, dated February 14,
2007 (‘‘Floodstrand Letter’’); Hellman Letter, supra
note 40; Letter from Pat Hillegass, dated February
14, 2007; Letter from Michael D. Morelli to Nancy
M. Morris, Secretary, Commission, dated February
14, 2007 (‘‘Morelli Letter’’); Letter from Ira S.
Nathan, dated February 14, 2007 (‘‘Nathan Letter’’);
Letter from Glenn Beckert, dated February 15, 2007
(‘‘Beckert Letter’’); Letter from John V. Grimes,
dated February 15, 2007 (‘‘Grimes Letter’’);
Mitzenmacher Letter, supra note 40; Letter from
Thomas E. Nelson to Nancy M. Morris, Secretary,
Commission, dated February 15, 2007 (‘‘Nelson
Letter’’); Letter from Young Chun, dated February
16, 2007 (‘‘Chun Letter’’); N. Friedman Letter, supra
note 41; McMurray Letter, supra note 40; Reif
Letter, supra note 40; Letter from Howard Tasner,
dated February 16, 2007; Letter from Kelly A. Caloia
to Nancy M. Morris, Secretary, Commission, dated
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February 18, 2007; Letter from Mark Feierberg,
dated February 18, 2007 (‘‘Feierberg Letter’’); Letter
from J. Patrick Hennessy to Nancy M. Morris,
Secretary, Commission, dated February 18, 2007;
Letter from Alan Matthew to Nancy M. Morris,
Secretary, Commission, dated February 18, 2007;
Letter from Nicholas M. McBride to Nancy M.
Morris, Secretary, Commission, dated February 18,
2007; Letter from Richard H. Woodruff to Nancy M.
Morris, Secretary, Commission, dated February 18,
2007 (‘‘Woodruff Letter’’); C. Cox Letter, supra note
40; Crilly Letter 1, supra note 40; Komo Letter,
supra note 40; T.M. Myron Letter, supra note 40;
Letter from Patrick H. Arbor to Nancy M. Morris,
Secretary, Commission, dated February 20, 2007
(‘‘Arbor Letter’’); Letter from John T. Brennan, dated
February 20, 2007; Letter from Karl G. Estes to
Nancy M. Morris, Secretary, Commission, dated
February 20, 2007 (‘‘Estes Letter’’); Johnson Letter,
supra note 41; Letter from Patrick A. Walsh, dated
February 20, 2007 (‘‘Walsh Letter’’); Jaman Letter,
supra note 40; Letter from Ronald G. Lindenberg to
Nancy M. Morris, Secretary, Commission, dated
February 21, 2007; McGreevy Letter, supra note 40;
Baby Letter, supra note 40; Sheehan Letter, supra
note 41; Letter from Bryan Cournoyer to Nancy M.
Morris, Secretary, Commission, submitted February
24, 2007 (‘‘B. Cournoyer Letter’’); S. Cournoyer
Letter, supra note 40; Goodman Letter, supra note
40; Northey Letter, supra note 41; Letter from Joyce
Selander, submitted February 24, 2007; Chubin
Letter, supra note 40; Letter from Neil Esterman,
dated February 25, 2007 (‘‘Esterman Letter’’); Letter
from Terry Myron, dated February 25, 2007; Letter
from Martin Flaherty, dated February 25, 2007;
Levin Letter, supra note 40; Letter from John F.
McKerr, Celtic Brokerage, Inc., to Nancy M. Morris,
Secretary, Commission, dated February 25, 2007
(‘‘McKerr Letter’’); Griffin Letter, supra note 40;
Krumpfes Letter, supra note 40; Neubauer Letter,
supra note 40; Letter from Sondra Brewer Pfeffer to
Nancy M. Morris, Secretary, Commission, dated
February 26, 2007; Bianchi Letter, supra note 40;
Terman Letter, supra note 40; Letter from Judy
Anne Parrish, dated February 27, 2007 (‘‘Parrish
Letter’’); Letter from James Ryan, dated February 27,
2007; Letter from Rose G. Schneider, dated
February 27, 2007 (‘‘Schneider Letter’’); Letter from
Michael J. Crilly to Nancy M. Morris, Secretary,
Commission, dated August 17, 2007 (‘‘Crilly Letter
2’’); Letter from Gary V. Sagui, Templar Securities
LLC, to Nancy M. Morris, Secretary, Commission,
dated August 20, 2007; and Letter from Paul L.
Richards to Bill Brodsky, Chairman, CBOE, dated
August 31, 2007.
43 See Dorf Letter, supra note 41; Goldberg Letter,
supra note 40; Mendelson Letter, supra note 40;
Rich Letter, supra note 42; Simms Letter, supra note
40; R. Friedman, Letter, supra note 42; Grossman
Letter, supra note 42; Floodstrand Letter, supra note
42; Nathan Letter, supra note 42; Beckert Letter,
supra note 42; Grimes Letter, supra note 42; Nelson
Letter, supra note 42; Letter from Erskine S. Adam,
Jr. to Nancy M. Morris, Secretary, Commission,
dated February 16, 2007; Chun Letter, supra note
42; Letter from Angelo Dangles, dated February 18,
2007; Feierberg Letter, supra note 42; Woodruff
Letter, supra note 42; C. Cox Letter, supra note 40;
Crilly Letter 1, supra note 40; Komo Letter, supra
note 40; Arbor Letter, supra note 42; Ellis Letter,
supra note 41; Estes Letter, supra note 42; Letter
from Jay Homan, dated February 20, 2007; Walsh
Letter, supra note 42; Cashman letter, supra note
40; McGreevy Letter, supra note 40; Stone Letter 1
and 2, supra note 41; Baby Letter, supra note 40;
Richards Letter 2, supra note 40; Levin Letter, supra
note 40; Letter from Robert M. Geldermann, dated
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3773
raised by the comment letters, as well as
the Commission’s findings, are
discussed below.
IV. Discussion and Commission
Findings
Before turning to the specific
questions under consideration, it is
appropriate to review the obligations
that the Exchange Act imposes on the
Commission in reviewing SRO proposed
rule changes and the manner in which
the Commission carries out those
obligations. The Exchange Act
specifically requires an exchange to file
with the Commission all proposed rules
and any proposed changes in, additions
to, or deletions from its rules.44 As
noted below, ‘‘rules’’ of an exchange are
defined broadly to include, in this case,
interpretations of CBOE’s Certificate of
Incorporation.45 Once an exchange files
a proposed rule change with the
Commission, the Exchange Act requires
the Commission to approve any such
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
exchange.46 Alternatively, if the
February 26, 2007; Letter from Stephen R.
Geldermann, dated February 26, 2007; Neubauer
Letter, supra note 40; Parrish Letter, supra note 42;
Schneider Letter, supra note 42; and Letter from
Nancy Williams, dated February 27, 2007
(‘‘Williams Letter’’).
Some commenters noted that the right to exercise
to trade on the CBOE was priced into their CBOT
memberships when they initially purchased them.
See Rothman Letter, supra note 42; Goldberg Letter,
supra note 40; Gross Letter, supra note 42; Williams
Letter; Cassidy Letter, supra note 41; Johnson
Letter, supra note 41; Walsh Letter, supra note 42;
Letter from Robert Berry, dated February 21, 2007;
Cashman Letter, supra note 40; Jaman Letter, supra
note 40; McGreevy Letter, supra note 40; B.
Cournoyer Letter, supra note 42; Chubin Letter,
supra note 40; C. Cox Letter, supra note 40; Terman
Letter, supra note 40; and Richards Letter 2, supra
note 40. Cf. Hardy Letter, supra note 36 (noting that
at some points in time a CBOE membership cost
more than a CBOT membership, thus undercutting
the argument that the CBOT membership reflected
a premium for its attendant CBOE access right).
One commenter, a self-described founding
member of CBOE, argued that the documents
presented to the CBOT board of directors at the
meeting where it decided to spin-off the CBOE do
not mention equity rights to be retained in CBOE
by CBOT members; rather, access rights, liquidation
rights in CBOE in case of failure, and how to get
back the initial investment of $750,000 were the
main topics of discussion. See Blum Letter, supra
note 36. The commenter notes that the $750,000
was eventually repaid to CBOT. See also Hardy
Letter, supra note 36 (also noting that the $750,000
was repaid). One commenter argued that CBOT
could have given each of its members a free seat on
the CBOE if an equity position was desired, but
instead they chose to grant access through the
Exercise Right. See Hardy Letter, supra note 36.
44 See 15 U.S.C. 78s(b)(1).
45 See infra note 70 and accompanying text.
46 See 15 U.S.C. 78s(b)(2). Section 19(b) of the
Exchange Act requires the Commission to approve
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Commission cannot so find, it must
disapprove the rule proposal.47 The
Exchange Act requirements for
Commission action are not conditioned
upon the absence of issues arising under
other federal or state laws.
The Commission considers proposed
rule changes in accordance with the
requirements applicable to national
securities exchanges under Section 6 of
the Exchange Act. In addition, because
Section 6(b)(1) of the Exchange Act
requires exchanges to enforce
compliance by its members and persons
associated with its members with the
provisions of the Exchange Act, the
Commission considers whether
proposed rule changes are consistent
with all other Exchange Act provisions
and Commission rules adopted
thereunder. Further, Sections 6(b)(1)
and 19(g)(1) of the Exchange Act 48
require exchanges to comply with their
own rules; as noted below, those rules
are defined by the Exchange Act to
include the exchange’s certificate of
incorporation and its bylaws.49 Thus,
the Commission cannot approve a
proposed rule change if the exchange
has failed to complete all action
required under, or to comply with, its
own certificate of incorporation or
bylaws.
With respect to CBOE’s proposal, the
Commission has carefully reviewed the
proposed rule change, all comment
letters and attachments thereto, and the
CBOE’s response to the comment letters,
and finds that, as a matter of federal
law, the proposed rule change is
consistent with the requirements of the
Exchange Act, in particular Section 6 of
the Exchange Act 50 and the rules and
regulations applicable to a national
securities exchange.51
In particular, the Commission finds
that the proposed rule change is
consistent with: (1) Section 6(b)(1) of
the Exchange Act,52 which requires the
Exchange to be organized and have the
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. The
CBOE consented to an extension of time for the
Commission to consider its filing. See Item 6 of
Amendment No. 1 to CBOE’s Form 19b–4 filing,
dated January 17, 2007.
47 See 15 U.S.C. 78s(b)(2).
48 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78s(g)(1),
respectively.
49 See infra note 70 and accompanying text.
50 15 U.S.C. 78f(b).
51 In approving this rule, the Commission has
considered the impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
52 See 15 U.S.C. 78f(b)(1).
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capacity to comply, and to enforce
compliance by its members and persons
associated with its members, with,
among other things, the rules of the
Exchange; (2) Section 6(b)(5) of the
Exchange Act,53 which requires, among
other things, that the rules of an
exchange be designed to promote just
and equitable principles of trade and
not be unfairly discriminatory; (3)
Section 6(b)(8) of the Exchange Act,54
which requires that the rules of the
Exchange not impose any burden on
competition that is not necessary or
appropriate in the furtherance of the
purposes of the Exchange Act; (4)
Section 6(c)(3)(A) of the Exchange Act,55
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; and (5) Section 6(c)(4) of the
Exchange Act,56 which prohibits the
Exchange from decreasing the number
of memberships below the number of
memberships in effect on May 1, 1975.57
The Commission also finds that the
proposed rule change complied with the
requirements of Section 19(b) of the
Exchange Act,58 was complete and
properly filed, and provided all of the
requisite information specified in Form
19b–4.59
While we make these findings under
the Exchange Act based on the record
now before us, we discuss below
possible reactions by the CBOE or the
Commission to the eventual decision in
a lawsuit now pending in Delaware state
court. Depending upon that outcome, it
may be appropriate for CBOE and the
Commission to take further actions in
light of the state court’s findings and to
assess whether they affect CBOE’s
compliance with the federal securities
laws.60
A. The Commission Has Jurisdiction To
Consider the CBOE’s Proposed Rule
Change
Various commenters challenged the
Commission’s jurisdiction over the
CBOE’s proposed rule change, arguing
that the Commission should not
consider or approve the CBOE’s
proposal because the filing implicates a
contractual dispute arising under state
53 See
15 U.S.C. 78f(b)(5).
15 U.S.C. 78f(b)(8).
55 See 15 U.S.C. 78f(c)(3)(A).
56 See 15 U.S.C. 78f(c)(4).
57 See infra Section IV.C. (discussing the
Commission’s findings in greater detail).
58 15 U.S.C. 78s(b).
59 See infra Section IV.C.2 (discussing the
completeness of CBOE’s proposed rule change on
Form 19b–4).
60 See infra note 115.
54 See
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law and therefore is subject to the
jurisdiction of a state court.61 In
particular, CBOT notes that the
proposed rule change relates to a
pending dispute in the Delaware court
involving matters that are governed by
state law, including the interpretation of
private contracts between CBOE and
CBOT involving a property right and
claims regarding the proper exercise of
authority and fiduciary obligations on
the part of CBOE’s Board of Directors.62
CBOT expressed its view that the
Commission’s authority to consider the
proposed rule change under the federal
securities laws does not preempt the
authority of the state court to determine
whether the CBOE’s actions comported
with state corporate, fiduciary, and
contract law.63
Accordingly, CBOT and certain
commenters have asked the Commission
to either disapprove the proposal or
defer consideration of the proposed rule
change until after the Delaware court
has adjudicated the state law issues.64
CBOT suggests that, since the state
court’s decision may inform the
Commission’s resolution of the
proposed rule change, it may be more
efficient for the Commission to defer its
consideration of the proposal until after
the Delaware litigation is resolved.65 For
61 See Comment Letters cited in note 40, supra
(questioning the Commission’s jurisdiction over the
proposed rule change).
62 See Mayer Brown Letter 3, supra note 37, at 6.
Specifically, CBOT argues that CBOE’s Board of
Directors violated its fiduciary duty towards
Exerciser Members and violated prior contractual
agreements between the CBOE and CBOT by
submitting a proposal that has the effect of not
affording Exerciser Members equal treatment in the
anticipated CBOE demutualization. See id. at 9–10.
63 See id. at 11.
64 See Gardner Letter, supra note 37, at 2; Mayer
Brown Letter 1, supra note 37, at 1, 3–4; Mayer
Brown Letter 2, supra note 37, at 1; Mayer Brown
Letter 3, supra note 37, at 6–7, 10–11; Mayer Brown
Letter 6, supra note 37, at 1–2. According to CBOT,
the central question in the Delaware litigation—the
status of the Exercise Right in light of CBOE’s
proposed demutualization and the acquisition of
CBOT by CME Holdings—is fundamentally a state
law question because it concerns an interpretation
of the CBOE Certificate of Incorporation, which is
treated as a contract under Delaware law. See Mayer
Brown Letter 3, supra note 37, at 10.
See also, e.g., Kessler Letter, supra note 40; Reed
Letter, supra note 40; Cashman Letter, supra note
40; McKerr Letter, supra note 42; and Letter from
Marshall Spiegel, dated March 19, 2007 (all
requesting that the Commission wait for the
Delaware court to rule before acting on the CBOE’s
proposal). One commenter urged the Commission to
wait until the Delaware court decides the issue on
the basis that if the Delaware court finds bad faith
on the part of the CBOE Board under state law, then
the proposed rule change will have been
improperly filed. See Ungaretti Letter, supra note
39, at 5–6.
65 See Mayer Brown Letter 1, supra note 37, at 3–
4. CBOT notes that, although the Commission has
jurisdiction to review proposed rule changes to
ensure that they are consistent with the Exchange
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similar reasons, CBOT claims that the
proposed rule change is not a proper
subject of SRO rulemaking because it
does not implicate issues under the
federal securities laws.66
The Commission believes the
proposed rule change is a proper subject
of SRO rulemaking and implicates
issues under the federal securities laws.
While the proposed rule change may
relate to issues that are implicated in a
lawsuit pending in Delaware court, it is
also a proposal by a self-regulatory
organization (‘‘SRO’’) to interpret its
rules. Section 19(b)(1) of the Exchange
Act 67 requires CBOE to file with the
Commission any proposed changes to,
or interpretations of, its rules.
Accordingly, the Exchange Act
unambiguously places CBOE’s proposal
firmly within the Commission’s
authority and responsibility.
Furthermore, the Commission is
obligated to consider CBOE’s proposal,
as the Exchange Act does not give the
Commission authority to defer
consideration of a proposed rule change
that has been properly filed.68
As a federal law matter, Congress has
given the Commission jurisdiction over
SROs and has required ‘‘[e]ach selfregulatory organization [to] file with the
Commission, in accordance with such
rules as the Commission may prescribe,
copies of any proposed rule or any
proposed change in, addition to, or
deletion from the rules of such selfregulatory organization * * *.’’ 69 The
‘‘rules of a self-regulatory organization’’
include, among other things, ‘‘the
constitution, articles of incorporation,
bylaws, and rules, or instruments
corresponding to the foregoing, of an
exchange * * * [and] the stated
policies, practices, and interpretations
Act, the Commission previously has indicated that
it does not interpret state law to determine whether
a rule change is also consistent with state laws. See
Mayer Brown Letter 1, supra note 37, at 3; Mayer
Brown Letter 5, supra note 37, at 5–6.
66 See, e.g., Mayer Brown Letter 5, supra note 37,
at 5 (‘‘In sum, this controversy, and the Proposed
Rule Change, have nothing to do with ’membership
issues’, and everything to do with the ownership
issues before the Delaware court.’’); Mayer Brown
Letter 2, supra note 37, at 1 (‘‘The Proposed Rule
Change has no legitimate securities regulatory or
self-regulatory purpose.’’); and Mayer Brown Letter
3, supra note 37, at 6–7.
67 15 U.S.C. 78s(b)(1).
68 The Commission notes that the pending lawsuit
has been stayed pending Commission action on this
proposed rule change. See CBOT Holdings, Inc. et
al. v. Chicago Board Options Exchange Inc., et al.,
Memorandum of Opinion, decided August 3, 2007
(Del. Ch.) (‘‘Memorandum of Opinion’’); see also
Letter Opinion, dated October 10, 2007 (denying
Plaintiffs’ Motion to Lift Stay to Allow for Filing of
a Third Amended Complaint and the
Commencement of Discovery).
69 15 U.S.C. 78s(b)(1).
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of such exchange * * *.’’ 70 Rule 19b–
4(b) under the Exchange Act defines the
term ‘‘stated policy, practice, or
interpretation’’ broadly to include:
(1) Any statement made generally
available to the membership of the SRO,
or to a group or category of persons
having or seeking access to facilities of
the SRO, that establishes or changes any
standard, limit, or guideline with
respect to the rights, obligations, or
privileges of such persons, or
(2) the meaning, administration, or
enforcement of an existing SRO rule.71
Accordingly, because the CBOE’s
Certificate of Incorporation and the
CBOE’s interpretation thereof constitute
‘‘rules’’ of the Exchange, the Exchange
Act clearly establishes that CBOE’s
proposed rule change, an interpretation
of Article Fifth(b) of its Certificate of
Incorporation, was the proper subject of
a rule filing under Section 19(b)(1) of
the Exchange Act. Indeed, Section
19(b)(1) of the Exchange Act 72 requires
CBOE to file with the Commission any
proposed changes to, or interpretations
of, its Certificate of Incorporation.
In compliance with Section 19(b)(1),
CBOE filed its proposed interpretation
of its Certificate of Incorporation with
the Commission on December 12, 2006.
Once CBOE filed this proposed rule
change, Section 19(b)(2) of the Exchange
Act 73 required the Commission to
publish notice of the proposed rule
change and either approve it or institute
proceedings to determine whether the
proposed rule change should be
disapproved.74 Accordingly, the
Commission has the obligation under
the Exchange Act to consider and
affirmatively dispose, by either
approving or disapproving, of the
CBOE’s proposal. The existence of a
contractual dispute arising under state
law subject to pending litigation in state
court does not in any way displace or
supplant the Commission’s jurisdiction
to consider a proposed rule change
submitted by an SRO.75
70 See Sections 3(a)(27) and 3(a)(28) of the
Exchange Act; 15 U.S.C. 77c(a)(27) and (28).
71 See 17 CFR 240.19b–4(b).
72 15 U.S.C. 78s(b)(1).
73 15 U.S.C. 78s(b)(2).
74 The CBOE consented to an extension of time
for the Commission to consider its filing. See Item
6 of Amendment No. 1 to CBOE’s Form 19b–4
filing, dated January 17, 2007.
75 CBOE asserts that the proposed rule change
was not an attempt to undercut the Delaware court’s
authority to resolve the litigation initiated by the
CBOT and the putative class, because, at the time
the proposed rule change was filed, the Delaware
litigation dealt only with the valuation issues
arising from the CBOE demutualization, whereas
the proposed rule change addresses the impact of
the change in the CBOT corporate structure on the
eligibility to be, and remain, an Exercise Member.
See Schiff Hardin Letter 1, supra note 36, at 2; and
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Moreover, Article Fifth(b), which
entitles ‘‘members of [the CBOT]’’ to be
members of the CBOE, implicates
several important Exchange Act issues.
First, by its terms, this provision of the
CBOE’s Certificate of Incorporation
relates to membership on the Exchange.
The Exchange Act clearly establishes
the Commission’s oversight
responsibility with regard to matters of
exchange membership,76 which
includes access to trading on the
exchange. For example, Section 6(b)(2)
of the Exchange Act requires that
‘‘[s]ubject to the provisions of
subsection (c) * * *, the rules of the
exchange provide that any registered
broker or dealer or natural person
associated with a broker or dealer may
become a member of such exchange
* * *.’’ 77 Section 6(c) of the Exchange
Act further specifies when a national
securities exchange may deny
membership to, or condition the
membership of, a registered broker or
dealer.78 An exchange’s rules are also
required, among other things, to provide
a fair procedure for the denial of
membership to any person seeking
membership and the prohibition or
limitation by the exchange of any
person’s access to services offered by
the exchange.79 Further, the
Commission has authority under
Sections 19(d) and (f) of the Exchange
Act to, among other things, review
denials of membership by a national
securities exchange.80
Second, the Exchange Act manifests a
strong federal interest in the governance
of national securities exchanges.81
CBOE Response to Comments, supra note 4, at 17–
18.
76 CBOE notes that state courts have previously
recognized the Commission’s exclusive authority
over membership rules and membership decisions,
including CBOE’s interpretations of Article Fifth(b),
and have noted that the Commission’s authority
preempts direct judicial consideration of exchange
membership issues. See CBOE Response to
Comments, supra note 4, at 6–8; Schiff Hardin
Letter 1, supra note 36, at 5–6. CBOE opined that
the preeminence of federal law with respect to
membership issues is critical to avoid having
inconsistent standards imposed on exchanges by
competing judicial authorities, which CBOE
believes would undermine the federal regulatory
scheme. See CBOE Response to Comments, supra
note 4, at 8–10.
77 15 U.S.C. 78f(b)(2).
78 See 15 U.S.C. 78f(c).
79 See 15 U.S.C. 78f(b)(6).
80 See 15 U.S.C. 78s(d) and (f), respectively.
81 See, e.g., Securities Exchange Act Release No.
48946 (December 17, 2003), 68 FR 74678 (December
24, 2003) (SR–NYSE–2003–34) (approving NYSE’s
governance proposal to establish a new board of
directors composed wholly of independent
directors; an advisory board of executives that
would be representative of the exchange’s various
constituencies; independent board committees with
specific oversight authority for compensation, audit
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Section 6(b)(3) of the Exchange Act
requires the rules of the exchange to
assure ‘‘a fair representation of its
members in the selection of its directors
and administration of its affairs and
provide that one or more directors shall
* * * not be associated with a member
of the exchange, broker, or dealer.’’ 82 By
giving members a voice in the
governance of an SRO, this requirement
‘‘serves to ensure that an exchange is
administered in a way that is equitable
to all market members and
participants,’’ 83 and helps to preserve
the integrity of an exchange’s selfregulatory functions. Effective
governance of an exchange is also
important to an exchange’s ability to
satisfy the requirement under Section
6(b)(1) of the Exchange Act that an
exchange be organized and have the
capacity to carry out the purposes of the
Exchange Act and to comply and
enforce compliance with the Exchange
Act, the rules and regulations
thereunder, and exchange rules.84
The CBOE’s interpretation of Article
Fifth(b) affects who is entitled to be a
member of the CBOE. Because of the
role that CBOE members have in the
governance of the Exchange, including
the election of the CBOE Board of
Directors,85 the Commission has an
interest in who is entitled to be a
member of the Exchange, because it
affects how the Exchange is governed
and how it fulfills its regulatory
responsibilities consistent with Section
6(b) of the Exchange Act.
functions, the nominations process and regulatory
matters; and an autonomous regulatory unit that
would report directly to the regulatory oversight
committee).
82 15 U.S.C. 78f(b)(3). The Exchange Act requires
that at least one director be representative of issuers
and investors because of the public’s interest in
ensuring the fairness and stability of significant
markets. See id.
83 Securities Exchange Act Release No. 40760
(December 8, 1998), 63 FR 70844, 70882 (December
22, 1998) (S7–12–98).
84 See, e.g., Securities Exchange Act Release No.
21439 (October 31, 1984), 49 FR 44577 (November
7, 1984) (SR–CBOE–84–15 and SR–CBOE–84–16).
This order instituted proceedings to disapprove two
CBOE proposals to change certain of its rules
related to governance. The first proposal would
have increased the number of floor directors on the
Board of Directors. The Commission subsequently
disapproved this proposal because it could not find
that it was consistent with the Act, particularly
Sections 6(b)(1), 6(b)(3), and 6(b)(5). See Securities
Exchange Act Release No. 22058 (May 21, 1985), 50
FR 23090 (May 30, 1985) (SR–CBOE–84–15 and
SR–CBOE–84–16). The second proposal provided
that, in the event there is more than one candidate
for Chairman of the CBOE Executive Committee, the
Chairman would be elected by a plurality of CBOE
members voting at an annual meeting of the
membership. This proposal was later approved. See
id.
85 See CBOE Constitution, Section 6.1.
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B. Compliance With Its Own Rules
National securities exchanges are
required under Sections 6(b)(1) and
19(g)(1) of the Exchange Act to comply
with their own rules.86 In this case,
commenters and the CBOT present two
questions of the CBOE’s compliance
with its rules, which are (1) whether the
CBOE should have treated the rule as an
amendment instead of an interpretation
and (2) whether the Board of Directors
of the CBOE breached duties under state
law when approving the proposed rule.
We begin with a discussion of the way
the Commission evaluates arguments
such as these in the course of reviewing
a proposed SRO rule and then turn to
the two specific issues the CBOT and
commenters present.
Both of the issues concerning the
CBOE’s compliance with its own rules
raise state law questions. Typically, the
Commission does not consider matters
outside the scope of the federal
securities laws, except to the extent that
consideration of a matter of state law is
necessary to inform a Commission
finding on a federal matter arising under
the Exchange Act. Generally, the
analysis of whether an SRO has
complied with its own rules is
straightforward and does not require
consideration of disputed areas of state
law. For instance, the question might
involve whether an SRO complied with
requirements relating to a particular
time period or some other readily
ascertainable procedural step. In those
cases, the Commission has a
straightforward task in determining
whether the SRO complied with its own
rules. Other cases, however, might
present a more nuanced question of
compliance that turns on a difficult or
novel issue of state law. In those cases,
the Commission generally looks for
expert guidance and reaches a decision
based on the submissions and
sufficiency of the basis of the action of
the SRO. However, the Commission is
not the final arbiter on questions of state
law. If an authoritative decision by a
court reaches a conclusion about the
relevant state law in a dispute
concerning the SRO’s actions that
differs from the position the
Commission relied on, the Commission
expects the SRO promptly to propose
changes to its rules necessary to comply
with the outcome of any such litigation.
In other words, when a proposed rule
change raises a difficult or novel
question of SRO compliance with its
certificate of incorporation or bylaws,
the Exchange Act requires the
Commission to determine whether the
86 15
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SRO has so complied, even though the
question of compliance turns on the
interpretation and application of state
law. In that situation, the Commission
relies on the conclusions of experts or
other authorities as to the content and
application of state law.87
1. Interpretation vs. Amendment of
Article Fifth(b)
CBOT argues that CBOE deviated
from its own rules and procedures in
failing to obtain the necessary vote
when it ‘‘amended’’ Article Fifth(b) to
eliminate the property right created
therein.88 In response, CBOE states that
a vote of its membership was not
necessary because the proposed rule
change constituted an interpretation of,
rather than an amendment to, Article
Fifth(b), and thus is not subject to a vote
pursuant to the terms of Article
Fifth(b).89 Based on the record before it,
the Commission agrees with CBOE.
The proposal interprets who qualifies
as a ‘‘member of [the CBOT]’’ under
Article Fifth(b) in light of circumstances
external to the proposed rule change
(i.e., CBOT’s decision to be acquired by
CME Holdings). CBOT argues that the
proposed rule change is an
unreasonable interpretation 90 that
violates CBOE’s Certificate of
Incorporation and breaches the 1992
Agreement because it is based on the
faulty premise that, following the
acquisition by CME Holdings, former
CBOT members will no longer be
‘‘members’’ within the meaning of
Article Fifth(b).91 Rather, CBOT asserts
87 Cf. Fed. R. Civ. P. 44.1 (in determining foreign
law, a court may consider any relevant material or
source).
88 See Mayer Brown Letter 3, supra note 37, at 26
and 33. CBOT notes that the terms of Article
Fifth(b) require an 80% class vote to amend that
provision. See id. at 26.
89 See CBOE Response to Comments, supra note
4, at 19–20 and 22–23.
90 One commenter criticizes the CBOE’s proposal
on the basis that it ignores the CBOT’s ‘‘reasonable
alternative interpretation.’’ See Ungaretti Letter,
supra note 39, at 9. The Commission, however, is
not required to find that the interpretation proposed
is the most reasonable, but only that the one
proposed is consistent with the Exchange Act.
91 See Mayer Brown Letter 3, supra note 37, at 34.
CBOT also notes CBOE’s (now expired)
arrangement with the Intercontinental Exchange
(‘‘ICE’’) when ICE was attempting to acquire the
CBOT in which ICE and CBOE would have paid
$665.5 million to compensate, in part, for the loss
of the Exercise Right. See Mayer Brown Letter 5,
supra note 37, at 2. CBOT believes that this
arrangement undercut CBOE’s claim that after the
acquisition by CME Holdings, the Exercise Right
will have no value and the rights of Eligible CBOT
Full Members will be extinguished. See id. The
Commission disagrees. An offer of settlement in
which compensation is to be paid does not
necessarily suggest that the underlying matter in
dispute has any particular validity or value. An
offer to settle a disputed matter has value it its own
right, for example the savings associated with the
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that its former members continue to
qualify as ‘‘CBOT Full Members’’ and
continue to have all the same trading
rights they had in the past.92 In
addition, CBOT argues that the
provisions in the 1992 Agreement
regarding the effect of a potential merger
involving CBOT do not adversely affect
the continued availability of the
Exercise Right in this case.93 CBOT
believes that members of CBOT after the
acquisition continue to hold sufficient
indicia of CBOT membership to qualify
for CBOE membership under Article
Fifth(b).94
In particular, CBOT points out that
the CBOT itself did not merge with any
entity and will survive the transaction
with CME Holdings.95 CBOT affirms
that the acquisition by CME Holdings is
‘‘precisely the kind of transaction that
CBOE has already agreed would have no
effect on the Exercise Right under the
1992 Agreement.’’ 96 CBOT asserts that
as part of its 2005 restructuring it split
full memberships into three
components: The Exercise Right
Privilege, a Series B–1 membership, and
stock in CBOT Holdings, and possession
of all three components qualifies a
person as an ‘‘Eligible CBOT Full
Member’’ within the meaning of the
1992 Agreement (therefore qualifying
such person for the Exercise Right).97
CBOT argues that the Exercise Right
should survive because the only change
after the acquisition by CME Holdings is
that ‘‘the 27,338 shares of Class A
common stock of CBOT Holdings that
Exercise Right holders held before the
merger was consummated will be
converted into 8,217.80 shares of CME
Holdings Class A common stock.’’ 98
In response, CBOE argues that the
concept of a CBOT ‘‘member’’ was
eliminated by the acquisition of CBOT,
and the only reason persons had
continued to qualify as ‘‘members’’ of
CBOT for purposes of Article Fifth(b)
after CBOT’s restructuring is because
under the 2001 Agreement, CBOE
interpreted Article Fifth(b) so that
persons would qualify as ‘‘members’’ of
CBOT if they held all of three specified
interests in CBOT and CBOT Holdings
following CBOT’s restructuring.99 CBOE
avoidance of protracted legal proceedings and the
ability to bring a dispute to a final conclusion.
92 See Mayer Brown Letter 3, supra note 37, at
34–36.
93 See id.
94 See id. at 37.
95 See id. at 35. Rather, CBOT Holdings (of which
CBOT is a subsidiary) was acquired by CME
Holdings.
96 See id.
97 See id. at 36.
98 See id. at 34.
99 See CBOE Response to Comments, supra note
4, at 26 and 29. The Commission notes that there
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points out that Article Fifth(b) was
designed to recognize contributions
made by CBOT members in their
capacities as owners, and so an
ownership stake in CBOT is essential to
the definition of ‘‘member.’’ 100
However, after the CME/CBOT
transaction, the concept of CBOT
‘‘members’’ as originally contemplated
in Article Fifth(b) no longer exists
because CBOT is now owned by CME
Holdings.101 Similarly, after the
acquisition, persons who were former
members of the CBOT only hold trading
permits and no longer possess any of the
other rights commonly associated with
membership in an exchange.102 In
particular, according to CBOE, a former
CBOT member no longer has a right to
elect directors, the right to nominate
candidates for director, or the right to
amend or repeal the bylaws of CBOT.103
In addition, CBOE notes that one of the
conditions in the 1992 Agreement for
Exercise Rights to continue after an
acquisition is that ‘‘the survivor’’ entity
of any merger be an exchange, a
condition that is no longer satisfied
since the survivor of the transaction is
not an exchange, but rather a holding
company.104 CBOE states that
ownership of shares of CME Holdings is
not enough to support Exercise Right
eligibility because the interpretation of
Article Fifth(b) embodied in the 2001
Agreement was that ‘‘persons remain
‘members’ of CBOT only if they
continue to hold all of three specified
interests in CBOT and CBOT Holdings
following the 2005 demutualization of
CBOT—namely, one Class B, Series B–
1 membership in CBOT, one [Exercise
Right Privilege] and 27,338 shares of
Class A stock of CBOT Holdings.’’ 105
However, as CBOE notes, after CBOT is
acquired by CME Holdings, ‘‘there no
longer will be any persons who could
hold all three of these interests—
because CBOT Holdings Class A stock
will cease to exist and instead will be
converted into either cash or shares of
CME Holdings.’’ 106 Further, CBOE notes
is support for this position in the Memorandum of
Opinion: ‘‘The CBOE agreed, albeit with some
reluctance, that the restructuring of the CBOT into
CBOT Holdings would not render the Exercise
Right inapplicable, a circumstance that would
likely have been the case if a provision under the
parties’ agreement in 1992 had been strictly
interpreted.’’ Memorandum of Opinion, supra note
68, at 3.
100 See CBOE Response to Comments, supra note
4, at 26–27.
101 See id. at 26.
102 See id. at 28.
103 See id.
104 See id.
105 Id. at 29.
106 CBOE Response to Comments, supra note 4, at
29.
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that the 2001 Agreement states that the
provisions applicable to the Exercise
Right would continue to apply only ‘‘in
the absence of any other material
changes to the structure or ownership of
the CBOT * * * not contemplated in
the CBOT [restructuring].’’ 107
Additionally, in response to the
assertion that issues raised in the
proposed rule change are governed by
state contract law, CBOE responds that
the 1992 Agreement was not a contract
in which new rights were created, but
was rather an interpretation serving to
clarify the term ‘‘Exercise Member’’ and
what is required to qualify as such.108
Specifically, according to CBOE, any
contractual grant of exercise rights that
added or detracted from those afforded
by Article Fifth(b) would have
represented an amendment of Article
Fifth(b), which under its own terms
would have required an affirmative vote
of at least 80% of Exercise Members and
CBOE Seat Owners, voting as separate
groups.109 Thus, CBOE concludes that,
since no vote was taken, the 1992
Agreement cannot be construed as a
contractual source of new exercise
rights, and, at most, must be construed
to be a mutually shared interpretation of
Article Fifth(b).
The Commission believes that the
record provides a sufficient basis on
which the Commission can find that 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).110 After considering the
materials on this issue submitted by
both the CBOE and CBOT, the
Commission is persuaded by CBOE’s
analysis of the difference between
‘‘interpretations’’ and ‘‘amendments.’’ In
particular, the Commission notes that
the CBOT’s letter of counsel was based
on an error of fact with respect to the
composition of the CBOE Board at the
time of the interpretation of Article
Fifth(b), and, in fact, the CBOE’s Board
of Directors was composed of a majority
of disinterested public directors at the
time. This issue is discussed below.111
In approving this proposal, the
Commission is relying on the CBOE’s
representation that its approach is
107 Id.
at 27.
id. at 13–15.
109 See id.
110 See 15 U.S.C. 78f(b)(1).
111 See infra note 120 (citing to CBOT’s opinion
letter from Frederick H. Alexander, Morris, Nichols,
Arsht & Tunnell LLP, to Erik R. Sirri and Elizabeth
K. King, Division of Market Regulation,
Commission, dated August 20, 2007) and note 124
(citing to CBOE’s opinion letter from Michael D.
Allen, Richards, Layton & Finger, to Nancy M.
Morris, Secretary, Commission, dated August 31,
2007).
108 See
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appropriate under Delaware state law.
The Commission is also relying on
CBOE’s letter of counsel that concludes
that the Board’s interpretation of Article
Fifth(b) does not constitute an
amendment to the CBOE’s Certificate of
Incorporation and 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.112
Without opining on the merits of any
claims arising solely under state law,
the Commission finds that CBOE has
articulated a sufficient basis to support
its proposed rule change and for the
foregoing reasons finds that it is
consistent with the Exchange Act.
Further, the Commission agrees that
the actions of the CBOT necessitated
CBOE’s interpretation of Article Fifth(b)
to clarify whether the substantive rights
of a former CBOT member would
continue to qualify that person as a
‘‘member of [the CBOT]’’ pursuant to
Article Fifth(b) in response to changes
in the ownership of the CBOT.113 While
CBOE could have interpreted Article
Fifth(b) in any number of ways
following that transaction, its proposed
interpretation is one that the
Commission may find, and herein has
found, to be consistent with the
Exchange Act. In particular, the
Commission finds that CBOE’s proposed
interpretation is consistent with Section
6(b)(5) of the Exchange Act, which
requires, among other things, that the
rules of an exchange be designed to
promote just and equitable principles of
trade, because the proposal interprets
CBOE’s rules fairly and reasonably with
respect to eligibility for the Exercise
Right following the acquisition of CBOT
by CME Holdings.114
Except to the extent necessary to
make these findings under the Exchange
112 See Second Opinion of Counsel, supra note 5,
at 5. The Commission’s evaluation of CBOE’s
interpretation of Delaware law rests solely on the
materials in the record before it.
113 See CBOE Response to Comments, supra note
4, at 24.
114 15 U.S.C. 78f(b)(5). See also Securities
Exchange Act Release No. 51733 (May 24, 2005), 70
FR 30981, 30983 (May 31, 2005) (SR–CBOE–2005–
19) (finding CBOE’s proposal to be consistent with
Section 6(b)(5) of the Exchange Act, which requires,
among other things, that the rules of an exchange
be designed to promote just and equitable
principles of trade, because it interpreted 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).
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Act, the Commission is not purporting
to decide a question of state law. Rather,
the Commission’s approval of the
CBOE’s proposal under federal law
leaves undisturbed any aspects arising
solely under state law for the
consideration and disposition by the
competent state authorities. The
currently pending Delaware state court
action may result in authoritative
decisions on some of the issues we have
addressed and could make some of the
conclusions reached here infirm. If that
occurs, the Commission expects CBOE
to propose appropriate amendments to
its rules. Should CBOE fail to take the
required steps, the Commission has the
authority to act.115
2. Independence of CBOE Directors
Voting on the Matter
When filing a proposed rule change
with the Commission, an SRO is
required to state that the proposal was
validly approved pursuant to the SRO’s
governing documents.116 If the CBOE
Board’s action in approving the
proposal for filing with the Commission
was invalid, the consequence would be
that the CBOE’s proposal would not
satisfy the Exchange Act requirements,
specified in Form 19b–4, regarding the
necessity of valid approval by the SRO’s
governing body to authorize the filing of
the proposal with the Commission.
CBOT argues that the proposal was
approved by a conflicted board of
directors that had a financial interest in
the status of the Exercise Right.117
Further, CBOT argues that, while the
CBOE Board of Directors may interpret
the CBOE Certificate of Incorporation
‘‘in good faith, consistent with the terms
of [Article Fifth(b)], and not for
inequitable purposes,’’ 118 in this
particular instance, the CBOE Board
‘‘acted in bad faith, for inequitable
purposes, inconsistently with the clear
terms of the CBOE Charter, and in
breach of its fiduciary duties’’ and was
‘‘dominated by members with personal
115 See, e.g., Section 19(c) of the Exchange Act; 15
U.S.C. 78s(c) (authorizing the Commission to
abrogate, add to, and delete from exchange rules as
necessary or appropriate to conform those rules to
the requirements of the Exchange Act).
116 See Item 2 of Form 19b–4 (requiring an SRO
to ‘‘[d]escribe action on the proposed rule change
taken by members or board of directors. * * * ’’)
and General Instruction E (specifying that the
Commission will not approve a proposal before the
SRO has completed all action required to be taken
under its governing documents with respect to the
submission of such proposal to the Commission).
117 See Mayer Brown Letter 3, supra note 37, at
11.
118 Id. (citing CBOE’s Second Opinion of
Counsel).
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financial interests in expropriating the
rights of CBOT members.’’ 119
The Commission notes that the CBOT
submitted an opinion of counsel
opining that the CBOE Board breached
its fiduciary duties in determining to
extinguish the rights of Exerciser
Members.120 That opinion letter
concludes that ‘‘[a] majority of the
directors serving on the CBOE Board
and interpreting Article Fifth(b) are
either regular members of CBOE (who
stand to benefit financially from the
proposed rule change) or are affiliated
with, or beholden to, such regular
members.’’ 121 Specifically, the opinion
letter notes that ‘‘11 of the 23 members
of the CBOE Board’’ are regular CBOE
members or affiliated with or employed
by such members.122 Together with the
Chairman and CEO of CBOE, the letter
opines that ‘‘12 of CBOE’s 23 Board
members are not independent’’ with
respect to the decision on how to treat
Exerciser Members.123 The letter also
criticized the CBOE Board’s failure to
appoint a special committee to interpret
Article Fifth(b), as it had done before
CBOT announced its planned
acquisition, in connection with the
determination regarding how to treat
Exerciser Members in connection with
CBOE’s planned demutualization.124
CBOE responds to the CBOT’s
comment by stating that it is based on
factual errors with respect to the CBOE
Board’s deliberations.125 CBOE affirms
that its Board of Directors followed
deliberative procedures designed to
ensure that the interpretation of Article
Fifth(b) was considered and agreed
upon by directors who did not have a
119 Id. One commenter asserts that if the CBOT’s
allegations are correct that the CBOE Board of
Directors lacked corporate authority in filing the
proposed rule change in so much as they acted in
bad faith and for inequitable purposes, then the
issue of whether the proposal had the requisite
corporate authority is a central question that can
only be resolved by the Delaware state court. See
Ungaretti Letter, supra note 39, at 7.
120 See Letter from Frederick H. Alexander,
Morris, Nichols, Arsht & Tunnell LLP, to Erik R.
Sirri and Elizabeth K. King, Division of Market
Regulation, Commission, dated August 20, 2007
(‘‘Morris Nichols Opinion Letter’’) (originally
submitted as an appendix to a comment letter to
File No. SR–CBOE–2007–77 from Jerrold E.
Salzman, Skadden, Arps, Slate, Meagher & Flom
LLP, dated August 20, 2007).
121 See id. at 3–4.
122 See id. at 4.
123 See id.
124 See id.
125 See CBOE Response to Comments, supra note
4, at 15–23. See also Letter from Michael D. Allen,
Richards, Layton & Finger, to Nancy M. Morris,
Secretary, Commission, dated August 31, 2007
(‘‘Richards Layton August Opinion Letter’’)
(originally submitted as an appendix to a comment
letter to File No. SR–CBOE–2007–77 from Patrick
Sexton, Associate General Counsel, CBOE, dated
August 31, 2007).
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personal or financial interest in the
issue and who were not subject to
improper influence from those who
might have such an interest.126
Specifically, according to CBOE,
although interested directors were
permitted to participate in the general
discussion of the interpretation, the
disinterested public directors’ vote was
conducted independently under
procedures that ensured that the vote
was free from any undue influence.127
CBOE also responded to the Morris
Nichols Opinion Letter by submitting a
subsequent opinion letter from its own
counsel.128 In particular, the CBOE’s
opinion letter states that, contrary to the
Morris Nichols Opinion Letter’s
assertion that the CBOE Board was
composed of 23 members, 12 of whom
had a material interest in the
interpretation, the CBOE Board in fact
had a majority of disinterested directors
at the time of the December 21, 2006
meeting of the CBOE’s Board of
Directors when the Board considered
the proposed rule change.129
Specifically, the opinion letter states
that the Board was comprised of 21
members, 11 of whom had no
membership interest in CBOE,
possessed no right to acquire a
membership interest in CBOE, and had
no affiliation with an entity that owned
any CBOE membership (i.e., they were
CBOE’s ‘‘Public Directors’’).130 The
opinion letter notes that an additional
director was an Exerciser Member (the
‘‘Exerciser Director’’), and therefore did
not have a personal interest in favor of
regular full CBOE members.131
In an affidavit provided by CBOE’s
General Counsel, CBOE affirms that at
the December 21, 2006 meeting of the
CBOE’s Board of Directors, seven of the
Public Directors were present (in person
or by telephone).132 The four Public
Directors who were members of a
Special Committee of the Board that
previously had been convened to
consider certain issues related to
CBOE’s planned demutualization were
present at the meeting but recused
themselves from the discussion and vote
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126 See
CBOE Response to Comments, supra note
4, at 19–20.
127 See id. at 19–22. See also Richards Layton
August Opinion Letter, supra note 125.
128 See Richards Layton August Opinion Letter,
supra note 125.
129 See id. at 2.
130 See id.
131 See id. at 3.
132 See Affidavit of Joanne Moffic-Silver, dated
August 30, 2007, at 1–2 (originally submitted as an
appendix to a comment letter to File No. SR–CBOE–
2007–77 from Paul E. Dengel, Schiff Hardin LLP,
dated August 30, 2007) (‘‘Moffic-Silver Affidavit’’).
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on the proposed interpretation.133 In a
separate meeting, all seven Public
Directors voted unanimously in favor of
the interpretation.134 Following the
separate meeting of the Public Directors,
the entire CBOE Board met to discuss
the interpretation.135 At that time, six
Industry Directors were present and
voted unanimously in favor of the
interpretation, one of whom was an
Exerciser Member.136 The seven Public
Directors also voted in favor of the
proposal.137 The remaining three
Industry Directors abstained from the
vote.138 In addition, the Chairman of the
Board was present and voted for the
proposal.139
Accordingly, the opinion letter notes
that ‘‘a majority of the members of the
Board voting when the full Board
considered the Exercise Right
Interpretation were also Public Directors
or Exerciser Directors’’ and the
proposed interpretation was
unanimously approved by the seven
voting Public Directors, who also had
met and unanimously approved the
proposal in closed session, as well as
the one Exerciser Director and the
remaining six voting directors.140
CBOT also asserts that the proposal is
inconsistent with the requirements of
Section 6(b)(3) of the Exchange Act,
which requires fair representation of
CBOE members in the administration of
the exchange’s affairs, because the fact
that the proposal would eliminate the
Exercise Right without compensation
demonstrates per se that Exerciser
Members were not represented in the
administration of CBOE’s affairs.141
However, in response, CBOE notes that
the presence of an Exerciser Member
representative on CBOE’s Board
demonstrates that CBOE provided fair
representation to Exerciser Members in
satisfaction of Section 6(b)(3) of the
Exchange Act.142
The Commission believes that the
CBOE has adequately responded to
these commenters’ contentions, and
believes, based on the record before it,
that the CBOE Board’s approval of the
interpretation filed in this proposed rule
change was proper and that the CBOE
133 See id. at 2. See also Richards Layton August
Opinion Letter, supra note 125, at footnote 3.
134 See Moffic-Silver Affidavit, supra note 132, at
2.
135 See id.
136 See id.
137 See id.
138 See id.
139 See id.
140 See Richards Layton August Opinion Letter,
supra note 125, at 3.
141 See Mayer Brown Letter 3, supra note 37, at
19.
142 See Richards Layton August Opinion Letter,
supra note 125, at 2.
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3779
has provided a sufficient basis on which
the Commission, as a federal matter
under the Exchange Act, can find that
the CBOE’s proposed rule change was
properly authorized and validly filed. In
this regard, the Commission approved
CBOE’s rules establishing the
composition of its board of directors,
including the number of public
directors.143 In 2002, the Commission
found that CBOE’s proposal to increase
the number of public directors from 8 to
11 is consistent with the requirements
of Section 6(b)(5) of the Exchange Act
‘‘because it is designed to promote just
and equitable principles of trade and to
protect investors and the public interest
by increasing public representation on
the Exchange’s Board and certain
committees so that the Board and those
committees will be balanced between
industry (member) and public
directors.’’ 144
The Commission is persuaded by
CBOE’s letter of counsel affirming that,
at the time of the CBOE Board’s
consideration of the Exercise Right
interpretation, a majority of the CBOE
Board was disinterested and
independent.145 The Commission is
relying on the CBOE’s representations
and its letter of counsel, which
conclude that a majority of the CBOE
Board’s directors during the
consideration of the interpretation did
not have a personal interest to favor the
regular CBOE members, which, counsel
concludes, entitles the Board to the
presumption of the business judgment
rule.146
C. Additional Concerns Expressed by
the CBOT and Commenters
As stated above, the Commission
herein finds that CBOE’s proposed
interpretation of Article Fifth(b) is
consistent with the Exchange Act. In
particular, the Commission would like
to address CBOT’s contentions that: (1)
Due process was not given; (2) the
proposal does not comply with the
requirements of Form 19b–4; (3) the
proposal unfairly discriminates among
classes of CBOE members by revoking
the memberships of a defined group for
reasons that do not apply to all CBOE
members or potential members; (4) the
proposal fails to allocate fairly fees and
dues by increasing the value of one
143 Section 6.1(a) of CBOE’s Constitution defines
‘‘public directors’’ as persons who are not members
and who are not broker-dealers or persons affiliated
with broker-dealers.
144 See Securities Exchange Act Release No.
46718 (October 24, 2002), 67 FR 66186 (October 30,
2002) (SR–CBOE–2002–48).
145 See Richards Layton August Opinion Letter,
supra note 125, at 3.
146 See id. at 2–3.
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group’s CBOE membership and forcing
another group to purchase new
memberships at an added cost; (5) the
proposal does not promote free and
open markets because it reduces the
number of members of the CBOE and
therefore negatively impacts liquidity
and depth of the markets; (6) the
proposal places an unnecessary burden
on competition by eliminating the
membership rights of current Exerciser
Members and eligible Exercise Members
and thus reduces the number of people
who are able to trade on the Exchange;
and (7) that the proposal is inconsistent
with Section 6(c)(4) of the Exchange
Act.147 The CBOT also argues that the
proposal is an unreasonable
interpretation and breach of contract
under state law.148 Each of these points
is addressed in turn, below.
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1. Due Process and Sufficiency of Notice
CBOT contends that there were
failures of due process in the CBOE
Board’s approval of the proposal.149 In
particular, CBOT believes that CBOE
did not provide Exerciser Members or
eligible Exercise Members sufficient
notice or an opportunity to be heard ‘‘at
a meaningful time’’ prior to filing the
proposal with the Commission, which
consequently deprived CBOT members
of valuable property rights without due
process.150
In response, CBOE notes that it has
complied with the requirements of the
Exchange Act in proposing its
interpretation of Article Fifth(b) and
believes that there is no basis to argue
that the fulfillment of its filing
147 See Mayer Brown Letter 3, supra note 37, at
17–26. CBOT’s contention that the proposal was
improperly adopted in so far as CBOE failed to
comply with its own rules in promulgating the
proposed rule change is addressed above. See supra
Section IV.B.
148 See Mayer Brown Letter 3, supra note 37, at
34.
149 See Mayer Brown Letter 3, supra note 37, at
27–34. See also Stevens Letter, supra note 40. CBOT
argues that CBOE, as a state actor endowed with
quasi-governmental authority, was obligated to set
rules that provide fair procedures when taking
actions that deny membership or limit a person’s
access to the services of the Exchange. See Mayer
Brown Letter 3, supra note 37, at 27–29.
150 See Mayer Brown Letter 3, supra note 37, at
30–34. CBOT notes that CBOE stated in its Form
19b–4 submission that it did not solicit or receive
comments on the proposed rule change, and uses
this fact to support its contention that the CBOE’s
process for consideration of the proposal was
flawed. See id. at 32. Item 5 of Form 19b–4 directs
an SRO to summarize any written comments it may
have received on a proposal prior to filing such
proposal with the Commission. The requirement to
solicit written comments, however, is not a
prerequisite to filing a proposal with the
Commission. Rather, the act of filing a proposal
with the Commission initiates a public notice and
comment procedure in which the Commission
provides notice of and solicits comments on an
SRO’s proposed rule change.
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obligations under the Exchange Act
constitutes a deprivation of due
process.151
The Commission is not persuaded
that the CBOE should be considered a
government actor subject to
constitutional due process requirements
in the context of its decision to file with
the Commission a proposed rule change
pursuant to Section 19 of the Exchange
Act. Even if the CBOE were found to be
a state actor when proposing an
interpretation of its rules, we do not
believe that the CBOE, in fulfilling its
filing obligations, has deprived CBOT
members of any process they are due.
Based on the record before it, the
Commission finds that the CBOE has
satisfied all requirements prerequisite to
filing a proposed rule change with the
Commission and in so doing has
complied with the applicable
requirements of the Exchange Act,
which are designed to provide
interested parties with notice and an
opportunity to express their views.
CBOE filed its proposal with the
Commission and the Commission then
promptly published it for notice and
comment in the Federal Register. The
proposal was posted on the
Commission’s Web site as well as the
CBOE’s Web site. This process, required
by the Exchange Act, provided the
public with a meaningful opportunity to
be heard and afforded an opportunity
for interested persons to alert the
Commission to facts or reasons that may
indicate why a proposed rule change
may not satisfy the requirements for a
proposed rule change under Section
19(b) of the Exchange Act. If in fact the
Commission believes that a proposal
may not be consistent with the
Exchange Act and the rules and
regulations thereunder applicable to the
exchange, the consequence would be
that the Commission would institute
disapproval proceedings and, if the
proper findings were made, would not
allow an SRO to proceed with its
proposal. In the present case, the
Commission does not believe that any
commenters have raised facts or reasons
indicating that the CBOE’s proposal is
not consistent with the Exchange Act
and the rules thereunder applicable to
CBOE.
The Commission is confident that the
public and all affected entities have
received ample notice of CBOE’s
proposed rule change, and commenters,
including the CBOT members, have
availed themselves of this opportunity
to provide their views to the
151 CBOE Response to Comments, supra note 4, at
18 (footnote 28).
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Commission.152 Further, because CBOE
filed its proposal in December 2006, a
full six months before CBOT Holdings
shareholders voted on the acquisition,
and CBOE granted the Commission an
extension of time to consider the
proposal, affected entities were put on
notice of the CBOE’s position and were
afforded an extended opportunity to be
heard before the Commission
considered the proposal.
Finally, the Commission disagrees
with the CBOT’s argument that CBOE
was required to provide due process to
the Exerciser Members prior to filing the
proposal with the Commission pursuant
to Section 19(b), because CBOE’s act of
filing a rule change for Commission
consideration does not deprive the
Exerciser Members of property interests
requiring prior due process.153 The
CBOT argues that ‘‘the CBOT members
who hold Exercise Rights are holding a
valuable property interest with an
ascertainable pecuniary value’’ and that
the ‘‘value of an Exercise Right is also
reflected in the total value of a CBOT
Full Membership, which in itself is fully
transferable.’’ 154 In essence, the CBOT
appears to argue that the CBOE has
deprived the Exerciser Members of a
valuable property right simply by filing
the proposal with the Commission for
consideration pursuant to the Exchange
Act.155
This argument is not persuasive. Any
diminution of the value of the CBOT
memberships is not a deprivation of a
property interest that would compel the
provision of due process by the CBOE.
The proposal is simply that, a proposal.
At the time it was filed with the
Commission, it had not taken effect.
Further, the proposal could not take
effect before the provisions of Section
19(b) of the Exchange Act had been
satisfied, which, in this case, include a
determination by the Commission that
the proposed rule change complies with
the requirements of the Exchange Act.
Although the rule filing might have
caused a decreased value in an Exercise
Right, in the way the filing of litigation
can affect a company’s stock price, the
rule filing process mandated by the
Exchange Act affords due process.
152 As noted previously, the Commission received
174 comment letters on this proposal from 134
different commenters. See supra note 36 and
accompanying text.
153 See, e.g., Mathews v. Eldridge, 424 U.S. 319,
332 (1976) (noting that ‘‘procedural due process
imposes constraints on governmental decisions
which deprive individuals of ‘‘liberty’’ or
‘‘property.’’)
154 Mayer Brown Letter 3, supra note 37, at 30.
155 See id. (stating that ‘‘the Proposed Rule
Change affects the current value of the Exercise
Rights and the CBOT memberships regardless of
whether the Merger ever occurs.’’).
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Therefore, the CBOE did not deprive the
Exerciser Members of any due process
that would warrant additional process
in advance of CBOE’s filing a proposed
rule change with the Commission.
2. Completeness of CBOE’s Form 19b–
4 Submission
Item 3(b) in Form 19b–4 requires the
SRO to ‘‘explain why the proposed rule
change is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
the self-regulatory organization.’’ 156
CBOT argues that the proposed rule
change is inconsistent with the
requirements of the Exchange Act
because Item 3 of CBOE’s Form 19b–4
submission was incomplete.157 In
response, CBOE states that it satisfied
the requirements of Form 19b–4 by
providing a detailed history behind the
proposed interpretation, explained the
need for the interpretation, stated the
purpose served by the interpretation,
and noted why the interpretation is fair
and reasonable.158 Furthermore, CBOE
submits that it provided a full
explanation in Item 3 of why its
proposed interpretation is consistent
with the Exchange Act and then simply
stated the conclusion in Section II.A(2)
of the Notice.159 The Commission finds
that the proposed rule change was
complete and properly filed in that it
provided all of the requisite information
specified in Form 19b–4.
3. Unfair Discrimination
CBOT argues that the proposed rule
change discriminates among classes of
CBOE members (i.e., Exerciser Members
vs. ‘‘regular’’ CBOE full members) by
impermissibly applying ‘‘different
membership rules to Regular [CBOE]
Members and Exerciser Members
without justification * * *.’’ 160 In
response, CBOE states that equal
treatment is not required in this case
because it is not relevant to the validity
of the proposed interpretation whether
persons who previously would have
qualified as Exerciser Members will not
be treated the same as regular members
under the interpretation.161 According
to CBOE, the argument that Exerciser
Members are entitled to the same
treatment as regular CBOE members
presumes that persons are still eligible
156 See
Item 3(b) in Form 19b–4.
Mayer Brown Letter 3, supra note 37, at
17; Mayer Brown Letter 5, supra note 37, at 6–7.
158 See CBOE Response to Comments, supra note
4, at 23–24.
159 See id.
160 See Mayer Brown Letter 3, supra note 37, at
18.
161 See CBOE Response to Comments, supra note
4, at 30–32.
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157 See
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to become and remain Exerciser
Members, and is consequently flawed
because the CBOT/CME transaction
resulted in no persons being eligible to
remain Exercise Members.162
In other words, CBOE asserts that its
proposed interpretation does not
‘‘terminate’’ or ‘‘extinguish’’ the
Exercise Right for persons who
otherwise would be entitled thereto.
Rather, it is the actions of the CBOT that
has resulted in no persons being able to
qualify as ‘‘members’’ of the CBOT for
purposes of Article Fifth(b).163 In
addition, CBOE notes that the proposal
does not delete Article Fifth(b) or the
Exercise Right contained therein, but
rather addresses whether anyone will
continue to be eligible to utilize that
right after the acquisition of CBOT by
CME Holdings.164 CBOE notes that the
express terms of Article Fifth(b) state
that the Exercise Right will remain
available for a person only for ‘‘so long
as he remains a member of [CBOT],’’ 165
and, as explicitly contemplated in the
1992 Agreement, CBOE believes that
CBOT was well aware that the
consequence of a merger or acquisition
of the CBOT might be to eliminate the
eligibility of persons to utilize the
Exercise Right.166
The Commission believes that the
CBOE’s proposed interpretation of
Article Fifth(b) is consistent with
Section 6(b)(5) of the Exchange Act,167
which requires, among other things, that
exchange rules not be unfairly
discriminatory. The CBOE is
interpreting an existing rule that allows
certain persons to become members
without buying a seat on the exchange.
These persons must satisfy all other
prerequisites to membership.168 Article
Fifth(b) only relates to members of the
CBOT. It entitled such members to
membership on CBOE under certain
circumstances, which have been
interpreted over many years by CBOE,
including specifically in the 1992 and
2001 Agreements, which addressed the
status of Exerciser Members in the event
that significant changes in the
ownership structure of the CBOT
occurred. The interpretation proposed
162 See
id. at 30–32. In addition, CBOE notes that
Exerciser Members and regular CBOE members
were treated differently in one respect—Exerciser
Members were not permitted to transfer their CBOE
Exercise Membership. See id. at 30.
163 See id. at 24.
164 See id. at 24–25.
165 See id. at 25.
166 See id.
167 15 U.S.C. 78f(b)(5).
168 See, e.g., CBOE Rule 3.3 (Qualifications and
Membership Statuses of Member Organizations).
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by the CBOE applies equally to all
persons similarly situated.
4. Allocation of Fees and Dues/
Economic Impact of Proposal
CBOT argues that the proposal fails to
provide for a reasonable allocation of
dues, fees, and other charges in that it
could have the effect of increasing the
value of a CBOE membership while
requiring former Exerciser Members to
‘‘pay twice’’ for access to CBOE.169
Further, CBOT argues that the proposal
will result in a windfall enrichment of
regular CBOE members in connection
with CBOE’s proposed
demutualization.170 Additionally, one
commenter argued that the potential
economic impact of the proposal
presented a reason for the Commission
to disapprove the proposed rule
change.171
In response, CBOE states that former
Exerciser Members have no claim to any
value derived from their former rights
for which they no longer qualify.172
According to CBOE, the value of the
Exercise Right was lost, not because of
action taken by the CBOE, but rather
because of the CME’s acquisition of
CBOT.173
The Commission notes that the
CBOE’s proposed rule change does not
propose any new or modified fees, dues,
or other charges. Further, the
Commission is not required to consider
the potential effect on the value of a
CBOE or CBOT membership that arises
as a consequence of the CBOE’s
proposed rule change. Section 6 of the
Exchange Act does not establish
standards regarding the impact of
exchange rules on the value of an
exchange’s membership or the value of
a membership in a separate entity.
5. Market Impact
CBOT argues that the proposed rule
change will adversely affect the
liquidity and depth of CBOE’s market
because it would reduce the number of
CBOE members as Exerciser Members
lose their ability to trade on the
CBOE.174 In response, CBOE notes that
169 See
Mayer Brown Letter 3, supra note 37, at
22.
170 See Mayer Brown Letter 3, supra note 37, at
25. See also Ungaretti Letter, supra note 39, at 11.
171 See Ungaretti Letter, supra note 39, at 2 and
10.
172 See CBOE Response to Comments, supra note
4, at 32.
173 See id.
174 See Mayer Brown Letter 3, supra note 37, at
24–25. See also Ungaretti Letter, supra note 39, at
11–12; Morelli Letter, supra note 42; Crilly Letter
1, supra note 40; Cashman Letter, supra note 40;
Israel Letter, supra note 40; Chubin Letter, supra
note 40; Esterman Letter, supra note 42; Pietrzak
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the proposal contemplates that CBOE
will provide temporary interim trading
access to allow former Exerciser
Members to continue to have
uninterrupted access to CBOE in order
to avoid a sudden disruption to CBOE’s
market.175 The CBOE has since filed its
temporary membership plan for former
Exerciser Members, which will become
operative following today’s approval of
the interpretation.176 In addition, CBOE
believes that a negative impact on the
quality of CBOE’s markets is unlikely,
given the number of people who
currently provide liquidity as market
makers on CBOE’s market.177
The Commission agrees. The CBOE’s
proposed temporary membership plan
was filed on September 13, 2007 under
Section 19(b)(3)(A) and was
immediately effective upon filing. The
Commission did not, and is not today,
approving that proposed rule change.
This temporary membership plan,
however, does preserve the status quo in
existence prior to the acquisition of
CBOT by CME Holdings with respect to
those individuals that had utilized the
Exercise Right to trade on the CBOE.
Because of these temporary
memberships, the Commission believes
that its approval of this proposed rule
change will not impact the quality or
fairness of CBOE’s market and is,
therefore, consistent with Section
6(b)(5) of the Exchange Act.178
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6. Burden on Competition
CBOT asserts that the proposal
imposes an unnecessary burden on
competition, which CBOE has failed to
justify, because it drastically reduces the
number of people who are able to trade
on CBOE.179 CBOE’s position is that the
effect on the Exercise Right is a
consequence of former CBOT members’
approval of the acquisition of CBOT by
CME Holdings, in which case the failure
to qualify as a ‘‘member of [the CBOT]’’
under Article Fifth(b) is a self-imposed
consequence of substantial changes to
the structure and ownership of the
CBOT.180
The Commission agrees that the
CBOE’s proposal does not impose an
Letter, supra note 41; Bianchi Letter, supra note 40;
Todebush Letter, supra note 41; Richards Letter 2,
supra note 40; and Crilly Letter 2, supra note 42.
175 See CBOE Response to Comments, supra note
4, at 33.
176 See Securities Exchange Act Release No.
56458 (September 18, 2007), 72 FR 54309
(September 24, 2007) (SR–CBOE–2007–107).
177 See CBOE Response to Comments, supra note
4, at 33.
178 15 U.S.C. 78f(b)(5).
179 See Mayer Brown Letter 3, supra note 37, at
24.
180 See CBOE Response to Comments, supra note
4, at 33.
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20:38 Jan 18, 2008
Jkt 214001
inappropriate burden on competition,
and is therefore consistent with Section
6(b)(8) of the Exchange Act.181 In
particular, following Commission
approval of CBOE’s proposal, CBOE’s
existing full members, as well as former
Exerciser Members who access the
Exchange pursuant to temporary
memberships, will continue to have
uninterrupted access to CBOE’s markets.
Accordingly, the Commission believes
that CBOE will continue to
accommodate a membership pool that
provides for vigorous competition on
CBOE’s markets. Furthermore, CBOE’s
proposal is an application of existing
rules and interpretations to a new set of
facts arising from the CME’s acquisition
of CBOT. Accordingly, the Commission
finds that CBOE’s proposed
interpretation does not impose any
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Exchange Act.
7. The Proposed Interpretation Is
Consistent With Section 6(c)(4) of the
Exchange Act
One commenter urged the
Commission to disapprove the proposal
on the basis that it would violate
Section 6(c)(4) of the Exchange Act,182
which requires that an exchange not
‘‘decrease the number of memberships
in such exchange’’ below the number of
memberships ‘‘in effect on May 1,
1975.’’ 183 CBOE argues that the
proposed interpretation does not
‘‘terminate’’ or ‘‘extinguish’’ the
Exercise Right for persons who
otherwise would be entitled thereto, and
therefore it has not taken any action that
would violate Section 6(c)(4) of the
Exchange Act.184 Rather, CBOE states,
that it is the actions of the CBOT to
enter into the CME Holdings acquisition
that has resulted in no persons being
able to qualify as ‘‘members of the
[CBOT]’’ for purposes of Article
Fifth(b).185
The Commission finds that the
proposed rule change is not an attempt
on the part of CBOE to decrease the
number of CBOE memberships in
violation of Section 6(c)(4) of the
Exchange Act. Rather, CBOE’s proposal
was to address the status of the Exercise
Right following the acquisition of CBOT
by CME Holdings.
In addition, the CBOE’s temporary
access plan allows former Exerciser
Members to maintain their temporary
181 15
U.S.C. 78f(b)(8).
U.S.C. 78f(c)(4).
183 See Ungaretti Letter, supra note 39, at 12.
184 See CBOE Response to Comments, supra note
4, at 33.
185 See id.
182 15
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Frm 00123
Fmt 4703
Sfmt 4703
memberships on CBOE and continue, on
an uninterrupted basis, to have access to
CBOE’s markets. To change or terminate
its temporary access plan, CBOE would
be required to file a proposed rule
change with the Commission and any
such proposal would have to be
consistent with the Exchange Act,
including Section 6(c)(4) thereof.
Even if the Commission were to view
the CBOE’s proposal as an effort on the
part of CBOE to decrease the number of
exchange memberships below the 1975
level, the Commission finds that the
number of CBOE memberships in effect
on November 2, 2007 exceeds the
number of CBOE memberships in effect
in 1975. Specifically, the CBOE has
represented that as of June 30, 1975,186
the number of CBOE memberships was
1,025.187 CBOE has represented that the
number of CBOE memberships in effect
on November 2, 2007 was 1,179.188 The
222 Temporary Members are
‘‘members’’ under Section 3(a)(3) of the
Exchange Act with the same rights ‘‘to
effect transactions on [the CBOE]
without the services of another person
acting as broker.’’ 189 Accordingly, the
current number of CBOE memberships
exceeds the number of CBOE
memberships in effect in 1975 for
purposes of Section 6(c)(4) of the
Exchange Act.
Accordingly, based on the record
before us, the Commission finds that the
186 CBOE has informed the Commission that it is
unable to locate historical records from May 1,
1975, but has located financial statements from June
30, 1975 that contain a full count of memberships
then in effect. See Letter from Joanne Moffic-Silver,
General Counsel, CBOE, to Richard Holley III,
Senior Special Counsel, Division of Market
Regulation, Commission, dated November 2, 2007.
187 See id. Of those, 774 were transferable
memberships and 251 were exerciser memberships.
See id. Cf. Letter from Peter B. Carey to Richard
Holley III, Senior Special Counsel, Division of
Market Regulation, Commission, dated November 9,
2007 (arguing that the number of CBOE
memberships in 1975 should include all 1,402
exerciser memberships both active and inactive).
Under the Exchange Act, a ‘‘member’’ of a national
securities exchange is defined as a person permitted
to effect transactions on an exchange without the
services of another person acting as broker. See 15
U.S.C. 78c(a)(3)(A). Thus, only those persons who
affirmatively exercised their rights under Article
Fifth(b) to trade on CBOE would have been
considered members of the CBOE because only
those persons were permitted to effect transactions
on the exchange without the services of another
person acting as broker.
188 See Letter from Joanne Moffic-Silver, General
Counsel, CBOE, to Richard Holley III, Senior
Special Counsel, Division of Market Regulation,
Commission, dated November 2, 2007, at 2. Of
those, 930 are transferable memberships, 222 are
temporary members (i.e., former Exerciser
Members), and 27 are CBOE Stock Exchange
permits. See id.
189 See 15 U.S.C. 78c(a)(3)(A). See also Securities
Exchange Act Release Nos. 56016 (July 5, 2007), 72
FR 38106 (July 12, 2007) (SR–CBOE–2007–77) and
56458 (September 18, 2007), 72 FR 54309
(September 24, 2007) (SR–CBOE–2007–107).
E:\FR\FM\22JAN1.SGM
22JAN1
Federal Register / Vol. 73, No. 14 / Tuesday, January 22, 2008 / Notices
proposal is consistent with Section
6(c)(4) of the Exchange Act and does not
constitute an effort by CBOE to decrease
the number of CBOE members.
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V. Pending State Court Litigation
The Commission wants to emphasize
the limited nature of our position on the
state law issues we have addressed. The
Commission is aware of the state court
litigation between the CBOE and
members of the CBOT and the state
court’s decision to stay the litigation
until the Commission acts on the CBOE
rule proposal. We stress that our
consideration of the state law questions
in this matter should in no way
prejudice or affect the state court’s
consideration of those questions. As we
explained, the state law questions
played a role in our analysis of the
federal law considerations the
Commission is charged with deciding
under the Exchange Act. To carry out
our responsibilities under the Exchange
Act (and also to avoid an endless cycle
of our deference to the state court on the
state law issues and the state court’s
deference to us on the federal law
issues) we have proceeded to review the
CBOE rule proposal. Our decisions
about state law matters, however, are
only those required to serve as a basis
for carrying out our Exchange Act
responsibilities.
We also recognize that our review of
the CBOE proposed rule involves
procedures different from those the state
court uses in the pending litigation.
This review process is not a forum to
litigate state law issues that may arise
regarding an SRO’s rule proposal.
Rather, our review of a proposed rule of
an SRO employs public notice and
comment, the receipt of written
submissions from the SRO and the
public, and the possibility of a
proceeding to determine whether it
should be disapproved. To this process,
we bring familiarity with SROs and
their rules and extensive knowledge and
experience with the relevant provisions
of the Exchange Act. The state court
applies the range of procedures used in
traditional adversarial litigation,
including discovery, rules of evidence,
witnesses, cross-examination, motions,
and the like. It has deep and specialized
knowledge of Delaware corporate law.
The state court thus is free to find the
relevant facts and determine and apply
the relevant state law in its normal
fashion without according weight to our
evaluation of the state law questions,
which was done employing different
procedures and for different
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20:38 Jan 18, 2008
Jkt 214001
3783
purposes.190 And, as we have explained,
if the state law decision calls into
question the basis on which our
decision here with respect to these state
law issues or any other relevant state
law issues was made, we would expect
CBOE to respond appropriately, or we
will act on our own as necessary.
controversial’’ proposed rule change
pursuant to Section 19(b)(3)(A)(iii) of
the Act 3 and Rule 19b–4(f)(6)
thereunder,4 which renders it effective
upon filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,191
that the proposed rule change (SR–
CBOE–2006–106), as amended, be, and
hereby is approved.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA’s proposed rule change relates
to the dissemination of last sale
information for transactions of fewer
than 100 shares in OTC Equity
Securities.5 Specifically, FINRA is
proposing that for OTC Equity
Securities that traded at or above
$175.00 per share during the fourth
calendar quarter of 2007, FINRA will
change the ‘‘unit of trade’’ from 100
shares to one share (such that
transactions in these securities will no
longer be considered ‘‘odd-lot
transactions’’ for dissemination
purposes) and will disseminate last sale
information for all reported transactions
of one or more shares in these securities.
The proposed rule change amends
FINRA’s trade report dissemination
policy and does not require
amendments to any rules.
By the Commission.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–954 Filed 1–18–08; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Release No. 34–57143; File No. SR–FINRA–
2007–034]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change Relating to Dissemination
of Trade Reports for OTC Equity
Securities Transactions of Fewer Than
100 Shares
January 14, 2008.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
19, 2007, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) (f/k/a
National Association of Securities
Dealers, Inc. (‘‘NASD’’)) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been
substantially prepared by FINRA.
FINRA filed the proposal as a ‘‘non190 The
Delaware court discussed possible ways
in which the Commission’s jurisdiction and the
court’s state law authority might interact. As the
court emphasized, the court ‘‘has jurisdiction to
consider the ‘economic rights’ issues by the
Complaint because those claims emerge from and
are governed by state contract or fiduciary duty
law.’’ See Memorandum of Opinion, supra note 68,
at 29. The court also noted that ‘‘even if it turns out
that the SEC’s mandate requires that CBOT Full
Members be excluded from trading on the CBOE,’’
then ‘‘it does not ineluctably follow that, in these
unique circumstances, they are also divested of
whatever economic (or contractual) rights they hold
as a result of that status.’’ Id. at note 48. We agree
with the Delaware court and welcome its expert
determination of these issues.
191 15 U.S.C. 78s(b)(2).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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Frm 00124
Fmt 4703
Sfmt 4703
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
the purpose of, and basis for, the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of those
statements may be examined at the
places specified in Item IV below.
FINRA has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Only reports of transactions that meet
the ‘‘unit of trade’’ test pursuant to
FINRA’s dissemination protocols are
publicly disseminated. As a general
matter, OTC Equity Securities have a
unit of trade of 100 shares. While
3 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6).
5 NASD Rule 6610(d) defines OTC Equity
Security as ‘‘any non-exchange-listed security and
certain exchange-listed securities that do not
otherwise qualify for real-time trade reporting.’’
4 17
E:\FR\FM\22JAN1.SGM
22JAN1
]]>Agencies
[Federal Register Volume 73, Number 14 (Tuesday, January 22, 2008)]
[Notices]
[Pages 3769-3783]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-954]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Release No. 34-57159; File No. SR-CBOE-2006-106]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Approval to a Proposed Rule Change, as
Modified by Amendment Nos. 1 and 2 Thereto, Relating to an
Interpretation of Paragraph (b) of Article Fifth of Its Certificate of
Incorporation
January 15, 2008.
I. Introduction
On December 12, 2006, the Chicago Board Options Exchange,
Incorporated (``CBOE'' or the ``Exchange'') filed with the Securities
and Exchange Commission (``Commission'' or ``SEC''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange
Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
adopt an interpretation of the rules of CBOE in response to the
acquisition of the Board of Trade of the City of Chicago, Inc.
(``CBOT'') by Chicago Mercantile Exchange Holdings, Inc. (``CME
Holdings''). On January 17, 2007, the Exchange filed Amendment No. 1 to
the proposed rule change which replaced and superseded the filing. The
proposed rule change, as modified by Amendment No. 1, was published for
notice and comment in the Federal Register on February 6, 2007.\3\ The
Commission received 174 comment letters from 134 separate commenters on
the proposed rule change, including comment letters from CBOT members
and legal counsel to CBOT and CBOT members. The CBOE submitted its
response to comments on June 15, 2007.\4\ On June 29, 2007, CBOE filed
Partial Amendment No. 2 to the proposal.\5\ This order approves the
proposed rule change, as modified by Amendment Nos. 1 and 2.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 55190 (January 29,
2007), 72 FR 5472 (SR-CBOE-2006-106) (``Notice'').
\4\ See Letter from Michael L. Meyer, Schiff Hardin, to Nancy M.
Morris, Secretary, Commission, dated June 15, 2007 (``CBOE Response
to Comments'').
\5\ The CBOE submitted an opinion of counsel as Exhibit 3f to
Amendment 1 to its proposal. See Letter from Wendell Fenton, Esq.,
Richards, Layton & Finger, to Joanne Moffic-Silver, General Counsel
and Corporate Secretary, CBOE, dated January 16, 2007 (``First
Opinion of Counsel''). CBOE subsequently submitted an updated legal
opinion via Partial Amendment No. 2, which opines that the proposed
rule change embodied in SR-CBOE-2006-106 constitutes an
interpretation of Article Fifth(b), and not an amendment of Article
Fifth(b), consistent with the conclusions reached in the opinion
letters of Delaware counsel that CBOE submitted to the Commission in
connection with CBOE rule filings SR-CBOE-2004-16 and SR-CBOE-2005-
19. See Letter from Wendell Fenton, Esq., Richards, Layton & Finger,
to Joanne Moffic-Silver, General Counsel and Corporate Secretary,
CBOE, dated June 28, 2007 (``Second Opinion of Counsel''). The
Commission believes that because Partial Amendment No. 2 raises no
new or novel issues, it is technical in nature and not subject to
separate notice and comment.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
A. Background
As compensation for the ``special contribution'' of time and money
that the CBOT expended in the development of the CBOE in the early
1970s, an ``Exercise Right'' was granted to each ``member of [the
CBOT]'' entitling him or her to become a member of the CBOE without
having to acquire a separate CBOE membership.\6\ This right,
established in Article Fifth(b) of the CBOE Certificate of
Incorporation (``Article Fifth(b)''), provides, in relevant part:
---------------------------------------------------------------------------
\6\ As CBOE explained in the notice of its proposal, the
``special contribution'' of the members of CBOT referred to in
Article Fifth(b) consisted primarily of CBOT's providing the seed
capital for the start-up of CBOE in the early 1970s by means of
direct cash expenditures, CBOT's guarantee of a bank loan to CBOE to
fund additional CBOE start-up costs, and CBOT's contribution of
intellectual property. See Notice, supra note 3, 72 FR at 5473.
In recognition of the special contribution made to the
organization and development of the [CBOE] by the members of [the
CBOT] * * * every 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 said Board of Trade, be
entitled to be a member of the [CBOE] notwithstanding any such
limitation on the number of members and without the necessity of
acquiring such membership for consideration or value from the
---------------------------------------------------------------------------
[CBOE], its members or elsewhere.
Article Fifth(b) 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.
Since Article Fifth(b) does not define what a ``member of [the
CBOT]'' means, on several occasions in the past, the CBOE has
interpreted the meaning of Article Fifth(b), in particular the term
``member of [the CBOT],'' in response to changes in the ownership
structure of the CBOT. On each such occasion, the CBOE and CBOT
ultimately reached a mutual agreement on the particular interpretation
at issue, and those interpretations are reflected in various agreements
and letter agreements between CBOE and CBOT. CBOE filed these
interpretations of Article Fifth(b) with the Commission, reflected in
amendments to CBOE Rule 3.16(b) (``Special Provisions Regarding Chicago
Board of Trade Exerciser Memberships''), as proposed rule changes
pursuant to Section 19(b)(1) of the Exchange Act.\7\ The Commission
approved each such interpretation.
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------
1. 1992 Agreement
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) that was embodied in an agreement dated September 1, 1992 (the
``1992 Agreement'') and reflected in CBOE Rule 3.16(b).\8\ The 1992
Agreement addressed, among other things, the effect on the Exercise
Right of CBOT's plans to divide the membership interests of the then-
existing 1,402 member-owners of CBOT into parts. That interpretation
provided that all such parts, together with the trading rights
appurtenant thereto, must be in the possession of an individual in
order for that individual to be eligible to
[[Page 3770]]
utilize the Exercise Right.\9\9 CBOE Rule 3.16(b) reflects this
interpretation in stating that ``[f]or 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] * * *'' \10\
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 32430 (June 8,
1993), 58 FR 32969 (June 14, 1993) (SR-CBOE-92-42).
\9\ See 1992 Agreement, Section 2(b).
\10\ CBOE Rule 3.16(b). 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.
---------------------------------------------------------------------------
2. 2001 Agreement, as Modified by the 2004 and 2005 Letter Agreements
In connection with CBOT's proposed restructuring, CBOE took the
position that the effect of such a transaction would be to eliminate
entirely the concept of CBOT ``membership'' as it existed when the
Exercise Right was created as a right held by members of CBOT, and
therefore would result in the termination of the Exercise Right.\11\
CBOE and CBOT eventually compromised and entered into an agreement
dated August 7, 2001 (``2001 Agreement'') under which CBOE agreed to
interpret Article Fifth(b) such that the Exercise Right was only
available to a CBOT member that held all of the trading rights of a
full member of CBOT as well as the same number of shares of stock of
CBOT Holdings, Inc. (``CBOT Holdings'') originally issued to CBOT
members in the restructuring.\12\ CBOE agreed, in the 2001 Agreement,
to interpret Article Fifth(b) in this way, only ``in the absence of any
other material changes to the structure or ownership of the CBOT * * *
not contemplated in the CBOT [restructuring].'' \13\
---------------------------------------------------------------------------
\11\ See Notice, supra note 3, 72 FR at 5473.
\12\ See id.
\13\ See id. at 5473-74 (citing the 2001 Agreement).
---------------------------------------------------------------------------
CBOE and CBOT subsequently agreed to modify the 2001 Agreement by a
Letter Agreement among CBOE, CBOT, and CBOT Holdings dated October 7,
2004 (``October 2004 Letter Agreement''), which was intended to
represent the agreement of the CBOE and CBOT concerning the nature and
scope of the Exercise Right following the restructuring of the CBOT and
in light of the expansion of the CBOE and CBOT's electronic trading
systems. The CBOE, CBOT, and CBOT Holdings entered into another letter
agreement on February 14, 2005 (``February 2005 Letter Agreement'') in
which CBOE confirmed that CBOT's restructuring was consistent with
CBOE's interpretation of Article Fifth(b) as set forth in the 2001
Agreement.
The CBOE's interpretation of Article Fifth(b) through
interpretations of ``Eligible CBOT Full Member'' as used in CBOE Rule
3.16 were approved by the Commission.\14\ As set forth in the 2001
Agreement, as amended by the letter agreements, the CBOE interprets
Article Fifth(b) such that an individual is deemed to be an ``Eligible
CBOT Full Member'' under CBOE Rule 3.16 if the individual: (1) Is the
owner of the requisite number of Class A Common Stock of CBOT Holdings,
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.\15\ An individual
is deemed to be an ``Eligible CBOT Full Member Delegate,'' under that
Agreement, if the individual: (1) Is in possession of the requisite
number of Class A Common Stock of CBOT Holdings, 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.\16\
---------------------------------------------------------------------------
\14\ See Securities Exchange Act Release No. 51733 (May 24,
2005), 70 FR 30981 (May 31, 2005) (SR-CBOE-2005-19).
\15\ See id. at 30983 (footnote 14).
\16\ See id.
---------------------------------------------------------------------------
B. CBOE's Current Proposal
1. Interpretation of Article Fifth(b)
The CBOE is again proposing an interpretation of the term ``member
of [the CBOT]'' as used in Article Fifth(b). CBOE believes that its
proposed interpretation is necessary to address the effect on the
Exercise Right of the then-proposed (and now completed) acquisition of
the CBOT by CME Holdings.\17\ Specifically, CBOE believes that the
acquisition of the CBOT by CME Holdings effected ``substantial changes
to the structure and ownership of CBOT, as well as to the rights
represented by CBOT membership,'' in a way that creates a substantive
ambiguity with respect to whether a person who formerly qualified under
Article Fifth(b) as a ``member of [the CBOT]'' for purposes of the
Exercise Right still possesses sufficient attributes of CBOT membership
following the acquisition by CME Holdings.\18\
---------------------------------------------------------------------------
\17\ That acquisition was accomplished by the merger of CBOT
Holdings, of which CBOT was a subsidiary, with and into CME
Holdings, with CME Holdings continuing as the surviving corporation
and as the parent company of CBOT, as well as of its existing
wholly-owned subsidiary, the Chicago Mercantile Exchange, Inc.
(``CME''). CBOT Holding's shareholders approved the acquisition on
July 9, 2007. See Form 8-K submitted by CME Holdings on July 9,
2007. The transaction was completed on July 12, 2007. See Form 25-
NSE submitted by the New York Stock Exchange, Inc. (regarding
notification of the removal of listing of CBOT Holdings).
\18\ CBOE Response to Comments, supra note 4, at 17.
---------------------------------------------------------------------------
In response to the acquisition of the CBOT by CME Holdings, the
CBOE Board of Directors found it necessary to determine whether the
substantive rights of a former CBOT member would continue to qualify
that person as a ``member of [the CBOT]'' pursuant to Article Fifth(b),
as that term was contemplated when Article Fifth(b) was adopted, after
the acquisition of the CBOT by CME Holdings. CBOE determined that it
would not, because former CBOT members ``lose in the CME acquisition
the few remaining membership rights they retained following the
[CBOT's] 2005 restructuring,'' such that ``persons who had formerly
been the full members of CBOT will simply be the holders of trading
permits and will not possess any of the other rights commonly
associated with membership in an exchange.'' \19\
---------------------------------------------------------------------------
\19\ Id. at 28.
---------------------------------------------------------------------------
Thus, CBOE's proposed interpretation concludes that, following the
acquisition, there no longer are any individuals who qualify as
``members of [the CBOT]'' within the meaning of Article Fifth(b).
Consequently, no person would qualify under Article Fifth(b) to utilize
the Exercise Right to become and remain a member of CBOE without having
to obtain a separate CBOE membership. This interpretation is based on
CBOE's view that the concept of a member-owner of CBOT, as CBOE
believes that concept was understood when Article Fifth(b) was first
adopted in CBOE's Certificate of Incorporation and when it was
subsequently interpreted in the 1992 Agreement, has been abolished
following the restructuring of CBOT and its subsequent acquisition by
CME Holdings. In this respect, the CBOE's proposal does not extinguish
the Exercise Right or delete Article Fifth(b) from its Certificate of
Incorporation, but rather interprets Article Fifth(b) in a manner than
means no CBOT member is
[[Page 3771]]
eligible to utilize that right following the acquisition of CBOT.
With respect to the prior agreements concerning the interpretation
of Article Fifth(b) with CBOT, CBOE believes that, because the change
in structure effectuated by the acquisition of CBOT by CME Holdings was
not contemplated as part of the 2005 restructuring of CBOT, the
acquisition constitutes a change to the ownership of CBOT that is
inconsistent with a condition to the interpretation embodied in the
2001 Agreement, as amended, that there not be any change to the
ownership of CBOT not contemplated in its 2005 restructuring.\20\
Accordingly, CBOE believes that the 2001 Agreement, as amended, no
longer governs whether and to what extent the Exercise Right will
remain in existence, with the result being that CBOE and CBOT are back
in the position they faced before the 2001 Agreement.\21\
---------------------------------------------------------------------------
\20\ See Notice, supra note 3, 72 FR at 5474.
\21\ See id.
---------------------------------------------------------------------------
With the 2001 Agreement no longer controlling, CBOE looks to the
1992 Agreement, in particular Section 3(d), which addresses the
possibility that CBOT, among other things, may merge or consolidate
with, or be acquired by, another entity. Section 3(d) establishes three
conditions that all must be satisfied for the Exercise Right to remain
available following any such transaction. Those three conditions are:
1.* * * the survivor of such merger, consolidation or
acquisition (``survivor'') is an exchange which provides or
maintains a market in commodity futures contracts or options,
securities, or other financial instruments, and * * *
2. the 1,402 holders of CBOT Full Memberships are granted in
such merger, consolidation or acquisition membership in the survivor
(``Survivor Membership''), and * * *
3. such Survivor Membership entitles the holder thereof to have
full trading rights and privileges in all products then or
thereafter traded on the survivor (except that such trading rights
and privileges need not include products that, at the time of such
merger, consolidation or acquisition, are traded or listed,
designated or otherwise authorized for trading on the other entity
but not on the CBOT) * * * \22\
---------------------------------------------------------------------------
\22\ See id.
CBOE believes that none of these conditions are satisfied following
the acquisition of CBOT by CME Holdings. Specifically, with respect to
Condition 1, CBOE notes that the survivor of the acquisition (i.e., the
acquiring entity that survives the transaction) is CME Holdings, which
is not an exchange.\23\
---------------------------------------------------------------------------
\23\ See id.
---------------------------------------------------------------------------
Further, CBOE believes that Condition 2 is not satisfied because
the former 1,402 holders of CBOT Full Memberships have not been granted
``membership'' in the survivor.\24\ Rather, CBOE's position is that
there are not any holders of CBOT Full Memberships as they existed in
1992, because all of these memberships were stripped of their ownership
attributes in the 2005 restructuring of CBOT.\25\ Likewise, CBOE argues
that CME Holdings is not an exchange and therefore is not capable of
granting ``membership'' interests in itself to anyone.\26\ CBOE further
states that, even if CBOT is considered to have survived the
acquisition, Condition 2 still would not be satisfied because, except
for trading rights, former CBOT members no longer have most of the
other rights in the surviving entity that they formerly held when they
were full members of CBOT as the term ``member'' was commonly
understood when Article Fifth(b) was adopted in 1972 and later
interpreted in 1992.\27\ Accordingly, following the acquisition, CBOE
believes that former CBOT members will simply be the holders of trading
permits and will not be granted any of the other rights commonly
associated with membership in an exchange.\28\
---------------------------------------------------------------------------
\24\ See id.
\25\ See id. Although CBOE has previously interpreted Article
Fifth(b) to permit the Exercise Right to continue in existence
following the 2005 restructuring of CBOT, subject to stated
conditions, as discussed above, CBOE believes that those earlier
interpretations, contained in the 2001 Agreement, as amended, are no
longer controlling because those provisions applied only so long as
there was no further change to the structure or ownership of CBOT
not then in contemplation. See id.
\26\ See Notice, supra note 3, 72 FR at 5474.
\27\ See id. at 5475. For example, CBOE states that, following
the acquisition by CME Holdings, CBOT's former Series B-1 members
will be stripped, among other things, of their right to elect
directors or nominate candidates for election as directors. See id.
\28\ See id.
---------------------------------------------------------------------------
Finally, CBOE believes that Condition 3 of Section 3(d) of the 1992
Agreement is not satisfied following the acquisition of CBOT by CME
Holdings because that condition contemplates an acquisition where the
surviving acquirer is an exchange, and it requires CBOT members to have
essentially the same full trading rights on that surviving exchange as
they had on CBOT prior to the acquisition.\29\ As CME Holdings is not
an exchange, CBOE believes that it is not possible for CBOT members to
have any trading rights on the survivor.\30\ Further, CBOE believes
that to be the case even if it were to look through CME Holdings to its
two subsidiary exchanges, CME and CBOT.\31\ CBOE states that, in
respect of any new products to be introduced on CME after the
acquisition, the trading rights of CBOT members will be diluted by the
trading rights granted to other persons (i.e., CME members) to trade
these same products, in which case the trading rights inherent in CBOT
membership will be reduced from what they were prior to the
acquisition.\32\
---------------------------------------------------------------------------
\29\ See id.
\30\ See id.
\31\ See id.
\32\ See Notice, supra note 3, 72 FR at 5474.
---------------------------------------------------------------------------
Consequently, CBOE's proposed interpretation concludes that the
conditions contained in Section 3(d) of the 1992 Agreement are not
satisfied following the acquisition of CBOT by CME Holdings, and that
the terms of Section 3(d) therefore provide that ``Article Fifth(b)
shall not apply'' following the acquisition. Hence, for the reasons
discussed in its notice, as summarized above, CBOE's proposed
interpretation is that the Exercise Right is no longer available as a
means of acquiring membership in CBOE because there no longer are any
individuals who qualify as ``members of [the CBOT]'' within the meaning
of Article Fifth(b).
2. Transition Plan
In addition to its proposed interpretation of Article Fifth(b),
CBOE has separately proposed a transition plan in order to avoid a
sudden disruption to its marketplace as a result of no persons any
longer being eligible to utilize the Exercise Right on account of the
acquisition of CBOT by CME Holdings.\33\ Specifically, CBOE submitted a
separate proposed rule change interpreting CBOE Rule 3.19, which is a
rule that authorizes the Exchange, when the Exchange determines that
there are extenuating circumstances, to permit a member ``to retain the
member's status for such period of time as the Exchange deems
reasonably necessary'' to enable the member to address specified
problems that caused the membership status to terminate.
---------------------------------------------------------------------------
\33\ See Securities Exchange Act Release Nos. 56016 (July 5,
2007), 72 FR 38106 (July 12, 2007) (SR-CBOE-2007-77) and 56458
(September 18, 2007), 72 FR 54309 (September 24, 2007) (SR-CBOE-
2007-107).
---------------------------------------------------------------------------
Interpretation .01 to CBOE Rule 3.19, allows certain
``grandfathered'' Exerciser Members who had been trading on CBOE to
continue to have uninterrupted access to CBOE until such time as the
Commission takes action on SR-CBOE-2006-106. Under Interpretation .01
to CBOE Rule 3.19, persons who were Exerciser Members in good standing
as of July 1, 2007 and who remain Exerciser Members as of the close of
business on the day before the
[[Page 3772]]
consummation of the acquisition of CBOT by CME Holdings temporarily
retained their membership status, including their trading access to
CBOE, for a limited period of time. Such persons were not required to
hold or maintain any securities, memberships or other interests in
order to maintain that status, but are required to pay a monthly access
fee to the Exchange.\34\ Temporary Members are required to remain in
good standing and must pay all applicable fees, dues, assessments and
other like charges assessed against CBOE members.
---------------------------------------------------------------------------
\34\ See Securities Exchange Act Release No. 56197 (August 3,
2007), 72 FR 44897 (August 9, 2007) (SR-CBOE-2007-91) (adopting the
access fee).
---------------------------------------------------------------------------
On September 4, 2007, CBOE filed a subsequent interpretation of
CBOE Rule 3.19 to extend this temporary membership beyond any
Commission approval of SR-CBOE-2006-106 until the earlier of: (1) The
voluntary termination of a person's temporary membership; (2) any
Commission approval of a subsequent proposed rule change to terminate
temporary membership status; or (3) the demutualization of the
Exchange.\35\
---------------------------------------------------------------------------
\35\ See Securities Exchange Act Release No. 56458 (September
18, 2007), 72 FR 54309 (September 24, 2007) (SR-CBOE-2007-107).
---------------------------------------------------------------------------
III. Comment Letters
The Commission received 174 comment letters on the proposed rule
change from 134 different commenters.\36\ Legal counsel for CBOT, legal
counsel for CBOT Holdings, and legal counsel for the putative class of
CBOT members from the Delaware litigation (collectively referred to as
``CBOT'') all submitted comment letters\37\ in which they characterized
the proposed rule change as an attempt by CBOE to eliminate one group
of Exchange members (Exerciser Members) for the benefit of another
group of members (CBOE regular members), therein depriving Exerciser
Members and those eligible to become Exerciser Members of a valuable
property right.\38\ CBOT asked the Commission to institute proceedings
to disapprove CBOE's proposed rule change on the basis that the
proposal is an improper use of CBOE's self-regulatory authority to
resolve in its favor a private property dispute that is being litigated
in the Delaware court, fails to meet the requirements of the Exchange
Act, and was adopted without due process.\39\
---------------------------------------------------------------------------
\36\ Thirteen letters, including three letters from CBOE's legal
counsel, explicitly supported the proposed rule change. See Letter
from Robert H. Bloch, dated February 16, 2007 (``Bloch Letter'');
Letter from Michael J. Post to Elizabeth K. King, Associate
Director, Division of Market Regulation, Commission, dated February
16, 2007 (``Post Letter''); Letter from Steven G. Holtz, dated
February 17, 2007; Letter from Dan Frost, dated February 19, 2007
(``Frost Letter''); Letter from Steve Fanady to Elizabeth K. King,
Associate Director, Division of Market Regulation, Commission, dated
February 20, 2007 (``Fanady Letter''); Letter from Lawrence J. Blum
to Elizabeth K. King, Associate Director, Division of Market
Regulation, Commission, dated February 25, 2007 (``Blum Letter'');
Letter from Norman S. Friedland, dated February 27, 2007
(``Friedland Letter''); Letter from R. Kent Hardy to Nancy M.
Morris, Secretary, Commission, dated February 27, 2007 (``Hardy
Letter''); Letter from Robert Silverstein to Elizabeth K. King,
Associate Director, Division of Market Regulation, Commission, dated
February 27, 2007 (``Silverstein Letter''); Letter from Marshall
Spiegel, dated April 12, 2007 (referencing attached materials);
Letter from Michael L. Meyer, Schiff Hardin, to Elizabeth K. King,
Associate Director, Division of Market Regulation, Commission, dated
January 12, 2007 (``Schiff Hardin Letter 1''); Letter from Michael
L. Meyer, Schiff Hardin, to Nancy M. Morris, Secretary, Commission,
dated March 19, 2007; and CBOE Response to Comments, supra note 4.
The remainder of the letters either opposed the proposal or did not
clearly communicate a position.
\37\ See Letter from Charles M. Horn, Mayer, Brown, Rowe & Maw,
to Nancy M. Morris, Secretary, Commission, dated December 22, 2006
(``Mayer Brown Letter 1''); Letter from Gordon B. Nash, Jr.,
Gardner, Carton & Douglas, to Nancy M. Morris, Secretary,
Commission, dated December 22, 2006 (on behalf of the putative class
members) (``Gardner Letter''); Letter from Charles M. Horn, Mayer,
Brown, Rowe & Maw, to Nancy M. Morris, Secretary, Commission, dated
January 31, 2007 (``Mayer Brown Letter 2''); Letter from Charles M.
Horn, Mayer, Brown, Rowe & Maw, to Nancy M. Morris, Secretary,
Commission, dated February 27, 2007 (``Mayer Brown Letter 3'');
Letter from Scott C. Lascari, Drinker Biddle Gardner Carton, to
Nancy M. Morris, Secretary, Commission, dated February 27, 2007 (on
behalf of the putative class members); Letter from Charles M. Horn,
Mayer, Brown, Rowe & Maw, to Nancy M. Morris, Secretary, Commission,
dated March 15, 2007 (``Mayer Brown Letter 4''); Letter from Charles
M. Horn, Mayer, Brown, Rowe & Maw, to Nancy M. Morris, Secretary,
Commission, dated July 9, 2007 (``Mayer Brown Letter 5''); and
Letter from Charles M. Horn, Mayer, Brown, Rowe & Maw, to Nancy M.
Morris, Secretary, Commission, dated August 9, 2007 (``Mayer Brown
Letter 6'').
\38\ See, e.g., Mayer Brown Letter 3, supra note 37, at 6.
\39\ See Mayer Brown Letter 3, supra note 37, at 1. See also
Letter from Alton B. Harris, Ungaretti & Harris LLP, to Nancy M.
Morris, Secretary, Commission (``Ungaretti Letter''), at 9-10
(arguing that the CBOE impermissibly and unilaterally interpreted a
provision in a bilateral contract and filed this interpretation with
the Commission in an attempt to invoke federal preemption). That
commenter opined that the outcome of this matter could affect the
future willingness of third parties to enter into contracts that may
be subject to unilateral interpretation by a self-regulatory
organization. See id. at 2-3.
---------------------------------------------------------------------------
Other commenters supplemented the concerns expressed by CBOT with
criticism that the Commission lacked jurisdiction to consider the
CBOE's proposal on the basis that the proposal implicated a contractual
dispute subject to the jurisdiction of a state court.\40\ Commenters
also opposed the proposal as without foundation, believing that the
CBOT's acquisition by CME Holdings should be irrelevant to the
continued validity of the Exercise Right.\41\ Other commenters argued
that
[[Page 3773]]
CBOE's proposal violates the rights of CBOT members with respect to the
Exercise Right and violates the agreements between the CBOT and
CBOE,\42\ and complained about the economic impact of the proposed rule
change on CBOT members, especially the fact that the CBOE's proposal
would prohibit CBOT members from sharing in the CBOE's anticipated
demutualization.\43\ The main points raised by the comment letters, as
well as the Commission's findings, are discussed below.
---------------------------------------------------------------------------
\40\ See Letter from Gordon Gladstone, dated February 9, 2007;
Letter from Glenn Hollander, dated February 9, 2007; Letter from
Lance R. Goldberg, dated February 10, 2007 (``Goldberg Letter'');
Letter from Mark Mendelson, dated February 12, 2007 (``Mendelson
Letter''); Letter from John Simms, dated February 12, 2007 (``Simms
Letter''); Letter from Charles W. Bergstrom to Nancy M. Morris,
Secretary, Commission, dated February 13, 2007; Letter from Mike P.
Darraugh, dated February 13, 2007 (``Darraugh Letter''); Letter from
Edward E. Kessler, dated February 13, 2007 (``Kessler Letter'');
Letter from Stephen L. O'Bryan, dated February 13, 2007 (``O'Bryan
Letter''); Letter from Mark D. Hellman to Nancy M. Morris,
Secretary, Commission, dated February 14, 2007 (``Hellman Letter'');
Letter from J. Alexander Stevens to Nancy M. Morris, Secretary,
Commission, dated February 14, 2007 (``Stevens Letter''); Letter
from Allen Mitzenmacher to Nancy M. Morris, Secretary, Commission,
dated February 15, 2007 (``Mitzenmacher Letter''); Letter from
Benjamin Nitka, dated February 15, 2007; Letter from Jerome
Israelov, dated February 16, 2007; Letter from Susie McMurray,
submitted February 16, 2007 (``McMurray Letter''); Letter from
Stuart Reif to Nancy M. Morris, Secretary, Commission, dated
February 16, 2007 (`` Letter''); Letter from Doug Riccolo, dated
February 16, 2007; Letter from Burt Gutterman and Noel Moore to
Nancy M. Morris, Secretary, Commission, dated February 17, 2007;
Letter from Charles B. Cox III, dated February 19, 2007 (``C. Cox
Letter''); Letter from Michael J. Crilly, dated February 19, 2007
(``Crilly Letter 1''); Letter from Ronald E. Komo to Nancy M.
Morris, Secretary, Commission, dated February 19, 2007 (``Komo
Letter''); Letter from Thomas M. Myron to Nancy M. Morris,
Secretary, Commission, dated February 19, 2007 (``T.M. Myron
Letter''); Letter from Kyle A. Reed, dated February 20, 2007 (``Reed
Letter''); Letter from Thomas F. Cashman to Nancy M. Morris,
Secretary, Commission, dated February 21, 2007 (``Cashman Letter'');
Letter from Richard Jaman, submitted February 22, 2007 (``Jaman
Letter''); Letter from Lawrence D. Israel to Nancy M. Morris,
Secretary, Commission, dated February 22, 2007 (``Israel Letter'');
Letter from Gerald A. McGreevy, submitted February 22, 2007
(``McGreevy Letter''); Letter from David P. Baby to Nancy M. Morris,
Secretary, Commission, dated February 23, 2007 (``Baby Letter'');
Letter from Stephen Cournoyer to Nancy M. Morris, Secretary,
Commission, dated February 24, 2007 (``S. Cournoyer Letter'');
Letter from Wayne Goodman to Nancy M. Morris, Secretary, Commission,
submitted February 24, 2007 (``Goodman Letter''); Letter from Cary
Chubin, dated February 25, 2007 (``Chubin Letter''); Letter from
John Halston, dated February 25, 2007 (``Halston Letter''); Letter
from Veda Kaufman Levin, dated February 25, 2007 (``Levin Letter'');
Letter from Robert J. Griffin to Nancy M. Morris, Secretary,
Commission, dated February 26, 2007 (``Griffin Letter''); Letter
from Harlan R. Krumpfes, dated February 26, 2007 (``Krumpfes
Letter''); Letter from Nickolas J. Neubauer to Nancy M. Morris,
Secretary, Commission, dated February 26, 2007 (``Neubauer
Letter''); Letter from Ronald Bianchi, dated February 26, 2007
(``Bianchi Letter''); Letter from William Terman to Nancy M. Morris,
Secretary, Commission, dated February 26, 2007 (``Terman Letter'');
Letter from Robert E. Otter, dated February 27, 2007; and Letter
from Paul L. Richards to Nancy M. Morris, Secretary, Commission,
dated August 1, 2007 (``Richards Letter 2''). Cf. Comment Letters
cited in note 36, supra (Bloch Letter, Post Letter, Friedland
Letter, Frost Letter, Fanady Letter, Blum Letter (arguing that the
proposal falls within the Commission's jurisdiction)).
\41\ See, e.g., Letter from Lawrence C. Dorf, dated February 9,
2007 (``Dorf Letter''); Goldberg Letter, supra note 40; Letter from
Peter M. Todebush to Nancy M. Morris, Secretary, Commission, dated
February 13, 2007 (``Todebush Letter''); Letter from Thomas M. Shuff
Jr., dated February 13, 2007 (``Shuff Letter''); Letter from Norm
Friedman, dated February 16, 2007 (``N. Friedman Letter''); C. Cox
Letter, supra note 40; Crilly Letter 1, supra note 40; Ungaretti
Letter, supra note 39; Letter from Brian Cassidy, dated February 20,
2007 (``Cassidy Letter''); Letter from Gregory J. Ellis, dated
February 20, 2007 (``Ellis Letter''); Letter from Paul R.T. Johnson,
Jr. to Nancy M. Morris, Secretary, Commission, submitted February
20, 2007 (``Johnson Letter''); Reed Letter, supra note 40; Letter
form Michael E. Stone, submitted February 22, 2007 (``Stone Letter
1''); Letter from Robert C. Sheehan, Electronic Brokerage Systems,
LLC, to Nancy M. Morris, Secretary, Commission, dated February 23,
2007 (``Sheehan Letter''); Letter from Carolyn J. Davis to Nancy M.
Morris, Secretary, Commission, dated February 24, 2007; Goodman
Letter, supra note 40; Letter from David G. Northey, M&N Trading,
submitted February 24, 2007 (``Northey Letter''); Letter from Kevin
A. Ward, submitted February 24, 2007; Chubin Letter, supra note 40;
Halston Letter, supra note 40; Letter from Michael E. Stone, dated
February 25, 2007 (``Stone Letter 2''); Letter from Edward A. Cox
and Cynthia R. Cox to Nancy M. Morris, Secretary, Commission, dated
February 26, 2007 (``E. Cox Letter''); Krumpfes Letter, supra note
40; Letter from John L. Pietrzak to Nancy M. Morris, Secretary,
Commission, dated February 26, 2007 (``Pietrzak Letter''); Letter
from Robert Salstone to Nancy M. Morris, Secretary, Commission,
dated February 26, 2007.
\42\ See Letter from Peter W. Aden, dated February 9, 2007; Dorf
Letter, supra note 41; Letter from Michael C. Rothman, dated
February 9, 2007 (``Rothman Letter''); Goldberg Letter, supra note
40; Letter from Clint Gross, dated February 11, 2007 (``Gross
Letter''); Letter from Richard D. Lupori, dated February 12, 2007;
Mendelson Letter, supra note 40; Letter from Adam Rich to Nancy M.
Morris, Secretary, Commission, dated February 12, 2007 (``Rich
Letter''); Simms Letter, supra note 40; Letter from Frank J. Aiello
to Nancy M. Morris, Secretary, Commission, dated February 13, 2007;
Darraugh Letter, supra note 40; Letter from Michael Forester to
Nancy M. Morris, Secretary, Commission, dated February 13, 2007;
Letter from Richard Friedman, dated February 13, 2007 (``R. Friedman
Letter''); Letter from Ronald F. Grossman, dated February 13, 2007
(``Grossman Letter''); Kessler Letter, supra note 40; Letter from
Robert T. O'Brien to Nancy M. Morris, Secretary, Commission, dated
February 13, 2007; O'Bryan Letter, supra note 40; Shuff Letter,
supra note 41; Todebush Letter, supra note 41; Letter from Arthur
Arenson to Nancy M. Morris, Secretary, Commission, dated February
14, 2007; Letter from Michael Floodstrand to Nancy M. Morris,
Secretary, Commission, dated February 14, 2007 (``Floodstrand
Letter''); Hellman Letter, supra note 40; Letter from Pat Hillegass,
dated February 14, 2007; Letter from Michael D. Morelli to Nancy M.
Morris, Secretary, Commission, dated February 14, 2007 (``Morelli
Letter''); Letter from Ira S. Nathan, dated February 14, 2007
(``Nathan Letter''); Letter from Glenn Beckert, dated February 15,
2007 (``Beckert Letter''); Letter from John V. Grimes, dated
February 15, 2007 (``Grimes Letter''); Mitzenmacher Letter, supra
note 40; Letter from Thomas E. Nelson to Nancy M. Morris, Secretary,
Commission, dated February 15, 2007 (``Nelson Letter''); Letter from
Young Chun, dated February 16, 2007 (``Chun Letter''); N. Friedman
Letter, supra note 41; McMurray Letter, supra note 40; Reif Letter,
supra note 40; Letter from Howard Tasner, dated February 16, 2007;
Letter from Kelly A. Caloia to Nancy M. Morris, Secretary,
Commission, dated February 18, 2007; Letter from Mark Feierberg,
dated February 18, 2007 (``Feierberg Letter''); Letter from J.
Patrick Hennessy to Nancy M. Morris, Secretary, Commission, dated
February 18, 2007; Letter from Alan Matthew to Nancy M. Morris,
Secretary, Commission, dated February 18, 2007; Letter from Nicholas
M. McBride to Nancy M. Morris, Secretary, Commission, dated February
18, 2007; Letter from Richard H. Woodruff to Nancy M. Morris,
Secretary, Commission, dated February 18, 2007 (``Woodruff
Letter''); C. Cox Letter, supra note 40; Crilly Letter 1, supra note
40; Komo Letter, supra note 40; T.M. Myron Letter, supra note 40;
Letter from Patrick H. Arbor to Nancy M. Morris, Secretary,
Commission, dated February 20, 2007 (``Arbor Letter''); Letter from
John T. Brennan, dated February 20, 2007; Letter from Karl G. Estes
to Nancy M. Morris, Secretary, Commission, dated February 20, 2007
(``Estes Letter''); Johnson Letter, supra note 41; Letter from
Patrick A. Walsh, dated February 20, 2007 (``Walsh Letter''); Jaman
Letter, supra note 40; Letter from Ronald G. Lindenberg to Nancy M.
Morris, Secretary, Commission, dated February 21, 2007; McGreevy
Letter, supra note 40; Baby Letter, supra note 40; Sheehan Letter,
supra note 41; Letter from Bryan Cournoyer to Nancy M. Morris,
Secretary, Commission, submitted February 24, 2007 (``B. Cournoyer
Letter''); S. Cournoyer Letter, supra note 40; Goodman Letter, supra
note 40; Northey Letter, supra note 41; Letter from Joyce Selander,
submitted February 24, 2007; Chubin Letter, supra note 40; Letter
from Neil Esterman, dated February 25, 2007 (``Esterman Letter'');
Letter from Terry Myron, dated February 25, 2007; Letter from Martin
Flaherty, dated February 25, 2007; Levin Letter, supra note 40;
Letter from John F. McKerr, Celtic Brokerage, Inc., to Nancy M.
Morris, Secretary, Commission, dated February 25, 2007 (``McKerr
Letter''); Griffin Letter, supra note 40; Krumpfes Letter, supra
note 40; Neubauer Letter, supra note 40; Letter from Sondra Brewer
Pfeffer to Nancy M. Morris, Secretary, Commission, dated February
26, 2007; Bianchi Letter, supra note 40; Terman Letter, supra note
40; Letter from Judy Anne Parrish, dated February 27, 2007
(``Parrish Letter''); Letter from James Ryan, dated February 27,
2007; Letter from Rose G. Schneider, dated February 27, 2007
(``;Schneider Letter''); Letter from Michael J. Crilly to Nancy M.
Morris, Secretary, Commission, dated August 17, 2007 (``Crilly
Letter 2''); Letter from Gary V. Sagui, Templar Securities LLC, to
Nancy M. Morris, Secretary, Commission, dated August 20, 2007; and
Letter from Paul L. Richards to Bill Brodsky, Chairman, CBOE, dated
August 31, 2007.
\43\ See Dorf Letter, supra note 41; Goldberg Letter, supra note
40; Mendelson Letter, supra note 40; Rich Letter, supra note 42;
Simms Letter, supra note 40; R. Friedman, Letter, supra note 42;
Grossman Letter, supra note 42; Floodstrand Letter, supra note 42;
Nathan Letter, supra note 42; Beckert Letter, supra note 42; Grimes
Letter, supra note 42; Nelson Letter, supra note 42; Letter from
Erskine S. Adam, Jr. to Nancy M. Morris, Secretary, Commission,
dated February 16, 2007; Chun Letter, supra note 42; Letter from
Angelo Dangles, dated February 18, 2007; Feierberg Letter, supra
note 42; Woodruff Letter, supra note 42; C. Cox Letter, supra note
40; Crilly Letter 1, supra note 40; Komo Letter, supra note 40;
Arbor Letter, supra note 42; Ellis Letter, supra note 41; Estes
Letter, supra note 42; Letter from Jay Homan, dated February 20,
2007; Walsh Letter, supra note 42; Cashman letter, supra note 40;
McGreevy Letter, supra note 40; Stone Letter 1 and 2, supra note 41;
Baby Letter, supra note 40; Richards Letter 2, supra note 40; Levin
Letter, supra note 40; Letter from Robert M. Geldermann, dated
February 26, 2007; Letter from Stephen R. Geldermann, dated February
26, 2007; Neubauer Letter, supra note 40; Parrish Letter, supra note
42; Schneider Letter, supra note 42; and Letter from Nancy Williams,
dated February 27, 2007 (``Williams Letter'').
Some commenters noted that the right to exercise to trade on the
CBOE was priced into their CBOT memberships when they initially
purchased them. See Rothman Letter, supra note 42; Goldberg Letter,
supra note 40; Gross Letter, supra note 42; Williams Letter; Cassidy
Letter, supra note 41; Johnson Letter, supra note 41; Walsh Letter,
supra note 42; Letter from Robert Berry, dated February 21, 2007;
Cashman Letter, supra note 40; Jaman Letter, supra note 40; McGreevy
Letter, supra note 40; B. Cournoyer Letter, supra note 42; Chubin
Letter, supra note 40; C. Cox Letter, supra note 40; Terman Letter,
supra note 40; and Richards Letter 2, supra note 40. Cf. Hardy
Letter, supra note 36 (noting that at some points in time a CBOE
membership cost more than a CBOT membership, thus undercutting the
argument that the CBOT membership reflected a premium for its
attendant CBOE access right).
One commenter, a self-described founding member of CBOE, argued
that the documents presented to the CBOT board of directors at the
meeting where it decided to spin-off the CBOE do not mention equity
rights to be retained in CBOE by CBOT members; rather, access
rights, liquidation rights in CBOE in case of failure, and how to
get back the initial investment of $750,000 were the main topics of
discussion. See Blum Letter, supra note 36. The commenter notes that
the $750,000 was eventually repaid to CBOT. See also Hardy Letter,
supra note 36 (also noting that the $750,000 was repaid). One
commenter argued that CBOT could have given each of its members a
free seat on the CBOE if an equity position was desired, but instead
they chose to grant access through the Exercise Right. See Hardy
Letter, supra note 36.
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IV. Discussion and Commission Findings
Before turning to the specific questions under consideration, it is
appropriate to review the obligations that the Exchange Act imposes on
the Commission in reviewing SRO proposed rule changes and the manner in
which the Commission carries out those obligations. The Exchange Act
specifically requires an exchange to file with the Commission all
proposed rules and any proposed changes in, additions to, or deletions
from its rules.\44\ As noted below, ``rules'' of an exchange are
defined broadly to include, in this case, interpretations of CBOE's
Certificate of Incorporation.\45\ Once an exchange files a proposed
rule change with the Commission, the Exchange Act requires the
Commission to approve any such 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
exchange.\46\ Alternatively, if the
[[Page 3774]]
Commission cannot so find, it must disapprove the rule proposal.\47\
The Exchange Act requirements for Commission action are not conditioned
upon the absence of issues arising under other federal or state laws.
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\44\ See 15 U.S.C. 78s(b)(1).
\45\ See infra note 70 and accompanying text.
\46\ See 15 U.S.C. 78s(b)(2). Section 19(b) of the Exchange Act
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. The CBOE consented to an extension of
time for the Commission to consider its filing. See Item 6 of
Amendment No. 1 to CBOE's Form 19b-4 filing, dated January 17, 2007.
\47\ See 15 U.S.C. 78s(b)(2).
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The Commission considers proposed rule changes in accordance with
the requirements applicable to national securities exchanges under
Section 6 of the Exchange Act. In addition, because Section 6(b)(1) of
the Exchange Act requires exchanges to enforce compliance by its
members and persons associated with its members with the provisions of
the Exchange Act, the Commission considers whether proposed rule
changes are consistent with all other Exchange Act provisions and
Commission rules adopted thereunder. Further, Sections 6(b)(1) and
19(g)(1) of the Exchange Act \48\ require exchanges to comply with
their own rules; as noted below, those rules are defined by the
Exchange Act to include the exchange's certificate of incorporation and
its bylaws.\49\ Thus, the Commission cannot approve a proposed rule
change if the exchange has failed to complete all action required
under, or to comply with, its own certificate of incorporation or
bylaws.
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\48\ 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78s(g)(1), respectively.
\49\ See infra note 70 and accompanying text.
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With respect to CBOE's proposal, the Commission has carefully
reviewed the proposed rule change, all comment letters and attachments
thereto, and the CBOE's response to the comment letters, and finds
that, as a matter of federal law, the proposed rule change is
consistent with the requirements of the Exchange Act, in particular
Section 6 of the Exchange Act \50\ and the rules and regulations
applicable to a national securities exchange.\51\
In particular, the Commission finds that the proposed rule change
is consistent with: (1) Section 6(b)(1) of the Exchange Act,\52\ which
requires the Exchange to be organized and have the capacity to comply,
and to enforce compliance by its members and persons associated with
its members, with, among other things, the rules of the Exchange; (2)
Section 6(b)(5) of the Exchange Act,\53\ which requires, among other
things, that the rules of an exchange be designed to promote just and
equitable principles of trade and not be unfairly discriminatory; (3)
Section 6(b)(8) of the Exchange Act,\54\ which requires that the rules
of the Exchange not impose any burden on competition that is not
necessary or appropriate in the furtherance of the purposes of the
Exchange Act; (4) Section 6(c)(3)(A) of the Exchange Act,\55\ 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; and (5) Section 6(c)(4)
of the Exchange Act,\56\ which prohibits the Exchange from decreasing
the number of memberships below the number of memberships in effect on
May 1, 1975.\57\ The Commission also finds that the proposed rule
change complied with the requirements of Section 19(b) of the Exchange
Act,\58\ was complete and properly filed, and provided all of the
requisite information specified in Form 19b-4.\59\
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\50\ 15 U.S.C. 78f(b).
\51\ In approving this rule, the Commission has considered the
impact on efficiency, competition, and capital formation. See 15
U.S.C. 78c(f).
\52\ See 15 U.S.C. 78f(b)(1).
\53\ See 15 U.S.C. 78f(b)(5).
\54\ See 15 U.S.C. 78f(b)(8).
\55\ See 15 U.S.C. 78f(c)(3)(A).
\56\ See 15 U.S.C. 78f(c)(4).
\57\ See infra Section IV.C. (discussing the Commission's
findings in greater detail).
\58\ 15 U.S.C. 78s(b).
\59\ See infra Section IV.C.2 (discussing the completeness of
CBOE's proposed rule change on Form 19b-4).
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While we make these findings under the Exchange Act based on the
record now before us, we discuss below possible reactions by the CBOE
or the Commission to the eventual decision in a lawsuit now pending in
Delaware state court. Depending upon that outcome, it may be
appropriate for CBOE and the Commission to take further actions in
light of the state court's findings and to assess whether they affect
CBOE's compliance with the federal securities laws.\60\
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\60\ See infra note 115.
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A. The Commission Has Jurisdiction To Consider the CBOE's Proposed Rule
Change
Various commenters challenged the Commission's jurisdiction over
the CBOE's proposed rule change, arguing that the Commission should not
consider or approve the CBOE's proposal because the filing implicates a
contractual dispute arising under state law and therefore is subject to
the jurisdiction of a state court.\61\ In particular, CBOT notes that
the proposed rule change relates to a pending dispute in the Delaware
court involving matters that are governed by state law, including the
interpretation of private contracts between CBOE and CBOT involving a
property right and claims regarding the proper exercise of authority
and fiduciary obligations on the part of CBOE's Board of Directors.\62\
CBOT expressed its view that the Commission's authority to consider the
proposed rule change under the federal securities laws does not preempt
the authority of the state court to determine whether the CBOE's
actions comported with state corporate, fiduciary, and contract
law.\63\
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\61\ See Comment Letters cited in note 40, supra (questioning
the Commission's jurisdiction over the proposed rule change).
\62\ See Mayer Brown Letter 3, supra note 37, at 6.
Specifically, CBOT argues that CBOE's Board of Directors violated
its fiduciary duty towards Exerciser Members and violated prior
contractual agreements between the CBOE and CBOT by submitting a
proposal that has the effect of not affording Exerciser Members
equal treatment in the anticipated CBOE demutualization. See id. at
9-10.
\63\ See id. at 11.
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Accordingly, CBOT and certain commenters have asked the Commission
to either disapprove the proposal or defer consideration of the
proposed rule change until after the Delaware court has adjudicated the
state law issues.\64\ CBOT suggests that, since the state court's
decision may inform the Commission's resolution of the proposed rule
change, it may be more efficient for the Commission to defer its
consideration of the proposal until after the Delaware litigation is
resolved.\65\ For
[[Page 3775]]
similar reasons, CBOT claims that the proposed rule change is not a
proper subject of SRO rulemaking because it does not implicate issues
under the federal securities laws.\66\
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\64\ See Gardner Letter, supra note 37, at 2; Mayer Brown Letter
1, supra note 37, at 1, 3-4; Mayer Brown Letter 2, supra note 37, at
1; Mayer Brown Letter 3, supra note 37, at 6-7, 10-11; Mayer Brown
Letter 6, supra note 37, at 1-2. According to CBOT, the central
question in the Delaware litigation--the status of the Exercise
Right in light of CBOE's proposed demutualization and the
acquisition of CBOT by CME Holdings--is fundamentally a state law
question because it concerns an interpretation of the CBOE
Certificate of Incorporation, which is treated as a contract under
Delaware law. See Mayer Brown Letter 3, supra note 37, at 10.
See also, e.g., Kessler Letter, supra note 40; Reed Letter,
supra note 40; Cashman Letter, supra note 40; McKerr Letter, supra
note 42; and Letter from Marshall Spiegel, dated March 19, 2007 (all
requesting that the Commission wait for the Delaware court to rule
before acting on the CBOE's proposal). One commenter urged the
Commission to wait until the Delaware court decides the issue on the
basis that if the Delaware court finds bad faith on the part of the
CBOE Board under state law, then the proposed rule change will have
been improperly filed. See Ungaretti Letter, supra note 39, at 5-6.
\65\ See Mayer Brown Letter 1, supra note 37, at 3-4. CBOT notes
that, although the Commission has jurisdiction to review proposed
rule changes to ensure that they are consistent with the Exchange
Act, the Commission previously has indicated that it does not
interpret state law to determine whether a rule change is also
consistent with state laws. See Mayer Brown Letter 1, supra note 37,
at 3; Mayer Brown Letter 5, supra note 37, at 5-6.
\66\ See, e.g., Mayer Brown Letter 5, supra note 37, at 5 (``In
sum, this controversy, and the Proposed Rule Change, have nothing to
do with 'membership issues', and everything to do with the ownership
issues before the Delaware court.''); Mayer Brown Letter 2, supra
note 37, at 1 (``The Proposed Rule Change has no legitimate
securities regulatory or self-regulatory purpose.''); and Mayer
Brown Letter 3, supra note 37, at 6-7.
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The Commission believes the proposed rule change is a proper
subject of SRO rulemaking and implicates issues under the federal
securities laws. While the proposed rule change may relate to issues
that are implicated in a lawsuit pending in Delaware court, it is also
a proposal by a self-regulatory organization (``SRO'') to interpret its
rules. Section 19(b)(1) of the Exchange Act \67\ requires CBOE to file
with the Commission any proposed changes to, or interpretations of, its
rules. Accordingly, the Exchange Act unambiguously places CBOE's
proposal firmly within the Commission's authority and responsibility.
Furthermore, the Commission is obligated to consider CBOE's proposal,
as the Exchange Act does not give the Commission authority to defer
consideration of a proposed rule change that has been properly
filed.\68\
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\67\ 15 U.S.C. 78s(b)(1).
\68\ The Commission notes that the pending lawsuit has been
stayed pending Commission action on this proposed rule change. See
CBOT Holdings, Inc. et al. v. Chicago Board Options Exchange Inc.,
et al., Memorandum of Opinion, decided August 3, 2007 (Del. Ch.)
(``Memorandum of Opinion''); see also Letter Opinion, dated October
10, 2007 (denying Plaintiffs' Motion to Lift Stay to Allow for
Filing of a Third Amended Complaint and the Commencement of
Discovery).
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As a federal law matter, Congress has given the Commission
jurisdiction over SROs and has required ``[e]ach self-regulatory
organization [to] file with the Commission, in accordance with such
rules as the Commission may prescribe, copies of any proposed rule or
any proposed change in, addition to, or deletion from the rules of such
self-regulatory organization * * *.'' \69\ The ``rules of a self-
regulatory organization'' include, among other things, ``the
constitution, articles of incorporation, bylaws, and rules, or
instruments corresponding to the foregoing, of an exchange * * * [and]
the stated policies, practices, and interpretations of such exchange *
* *.'' \70\ Rule 19b-4(b) under the Exchange Act defines the term
``stated policy, practice, or interpretation'' broadly to include:
(1) Any statement made generally available to the membership of the
SRO, or to a group or category of persons having or seeking access to
facilities of the SRO, that establishes or changes any standard, limit,
or guideline with respect to the rights, obligations, or privileges of
such persons, or
(2) the meaning, administration, or enforcement of an existing SRO
rule.\71\
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\69\ 15 U.S.C. 78s(b)(1).
\70\ See Sections 3(a)(27) and 3(a)(28) of the Exchange Act; 15
U.S.C. 77c(a)(27) and (28).
\71\ See 17 CFR 240.19b-4(b).
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Accordingly, because the CBOE's Certificate of Incorporation and
the CBOE's interpretation thereof constitute ``rules'' of the Exchange,
the Exchange Act clearly establishes that CBOE's proposed rule change,
an interpretation of Article Fifth(b) of its Certificate of
Incorporation, was the proper subject of a rule filing under Section
19(b)(1) of the Exchange Act. Indeed, Section 19(b)(1) of the Exchange
Act \72\ requires CBOE to file with the Commission any proposed changes
to, or interpretations of, its Certificate of Incorporation.
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\72\ 15 U.S.C. 78s(b)(1).
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In compliance with Section 19(b)(1), CBOE filed its proposed
interpretation of its Certificate of Incorporation with the Commission
on December 12, 2006. Once CBOE filed this proposed rule change,
Section 19(b)(2) of the Exchange Act \73\ required the Commission to
publish notice of the proposed rule change and either approve it or
institute proceedings to determine whether the proposed rule change
should be disapproved.\74\ Accordingly, the Commission has the
obligation under the Exchange Act to consider and affirmatively
dispose, by either approving or disapproving, of the CBOE's proposal.
The existence of a contractual dispute arising under state law subject
to pending litigation in state court does not in any way displace or
supplant the Commission's jurisdiction to consider a proposed rule
change submitted by an SRO.\75\
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\73\ 15 U.S.C. 78s(b)(2).
\74\ The CBOE consented to an extension of time for the
Commission to consider its filing. See Item 6 of Amendment No. 1 to
CBOE's Form 19b-4 filing, dated January 17, 2007.
\75\ CBOE asserts that the proposed rule change was not an
attempt to undercut the Delaware court's authority to resolve the
litigation initiated by the CBOT and the putative class, because, at
the time the proposed rule change was filed, the Delaware litigation
dealt only with the valuation issues arising from the CBOE
demutualization, whereas the proposed rule change addresses the
impact of the change in the CBOT corporate structure on the
eligibility to be, and remain, an Exercise Member. See Schiff Hardin
Letter 1, supra note 36, at 2; and CBOE Response to Comments, supra
note 4, at 17-18.
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Moreover, Article Fifth(b), which entitles ``members of [the
CBOT]'' to be members of the CBOE, implicates several important
Exchange Act issues. First, by its terms, this provision of the CBOE's
Certificate of Incorporation relates to membership on the Exchange. The
Exchange Act clearly establishes the Commission's oversight
responsibility with regard to matters of exchange membership,\76\ which
includes access to trading on the exchange. For example, Section
6(b)(2) of the Exchange Act requires that ``[s]ubject to the provisions
of subsection (c) * * *, the rules of the exchange provide that any
registered broker or dealer or natural person associated with a broker
or dealer may become a member of such exchange * * *.'' \77\ Section
6(c) of the Exchange Act further specifies when a national securities
exchange may deny membership to, or condition the membership of, a
registered broker or dealer.\78\ An exchange's rules are also required,
among other things, to provide a fair procedure for the denial of
membership to any person seeking membership and the prohibition or
limitation by the exchange of any person's access to services offered
by the exchange.\79\ Further, the Commission has authority under
Sections 19(d) and (f) of the Exchange Act to, among other things,
review denials of membership by a national securities exchange.\80\
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\76\ CBOE notes that state courts have previously recognized the
Commission's exclusive authority over membership rules and
membership decisions, including CBOE's interpretations of Article
Fifth(b), and have noted that the Commission's authority preempts
direct judicial consideration of exchange membership issues. See
CBOE Response to Comments, supra note 4, at 6-8; Schiff Hardin
Letter 1, supra note 36, at 5-6. CBOE opined that the preeminence of
federal law with respect to membership issues is critical to avoid
having inconsistent standards imposed on exchanges by competing
judicial authorities, which CBOE believes would undermine the
federal regulatory scheme. See CBOE Response to Comments, supra note
4, at 8-10.
\77\ 15 U.S.C. 78f(b)(2).
\78\ See 15 U.S.C. 78f(c).
\79\ See 15 U.S.C. 78f(b)(6).
\80\ See 15 U.S.C. 78s(d) and (f), respectively.
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