[Federal Register Volume 68, Number 148 (Friday, August 1, 2003)]
[Notices]
[Pages 45284-45298]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-19615]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48229; File No. SR-BSE-2003-04]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Boston Stock Exchange, Inc. Relating to the Creation of 
Boston Option Exchange Regulation, L.L.C.

July 25, 2003.
    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 July 17, 2003, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On July 
25, 2003, the Exchange amended the proposed rule change.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See facsimile from John Boese, Vice President, Legal and 
Compliance, Exchange, to Deborah Flynn, Assistant Director, Division 
of Market Regulation, Commission, dated July 25, 2003 (``Amendment 
No. 1''). Amendment No. 1 supersedes and replaces the proposed rule 
change in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to create a new options regulatory 
subsidiary, Boston Option Exchange Regulation, L.L.C. (``BOXR''). The 
text of the proposed rule change is set forth below. Proposed new 
language is in italics.
* * * * *

Rules of the Board of Governors

* * * * *

Chapter XXXVI

SEC. 1 Delegation, Authority and Access

    (a) The Boston Stock Exchange, Inc., delegates to its subsidiary 
(Boston Options Exchange Regulation, L.L.C,

[[Page 45285]]

hereinafter ``BOXR'') the authority to act on behalf of the Exchange as 
set forth in a Plan of Allocation and Delegation adopted by the Board 
of Governors and approved by the Securities and Exchange Commission 
pursuant to its authority under the Securities Exchange Act of 1934 
(``Act'').
    (b) Notwithstanding any delegation of authority to BOXR pursuant to 
this rule, the staff, books, records and premises of BOXR are the 
staff, books, records and premises of the Exchange subject to oversight 
pursuant to the Act, and all officers, directors, employees and agents 
of BOXR are the officers, directors, employees and agents of the 
Exchange for purposes of the Act.

SEC. 2 Plan of Delegation of Functions and Authority by the Boston 
Stock Exchange, Inc., to Boston Options Exchange Regulation, LLC

    The Boston Stock Exchange, Inc. (``BSE'' or ``Exchange''), the 
registered national securities exchange pursuant to Section 6 of the 
Act, is the parent company of the wholly-owned subsidiary BOXR. The 
Boston Options Exchange (``BOX'') is a facility of the BSE pursuant to 
Section 3(a) of the Act operated by Boston Options Exchange Group, 
L.L.C. (``BOX LLC'')

A. Functions and Authority of the BSE

    The BSE shall have ultimate responsibility for the rules and 
regulations of the Exchange and its operation and administration. As 
set forth below, the BSE has delegated certain authority and functions 
to its subsidiary, BOXR. Actions taken pursuant to delegated authority, 
however, remain subject to review, ratification or rejection by the BSE 
Board of Governors in accordance with procedures established by that 
Board. Any function or responsibility of the BSE as a registered 
national securities exchange under the Act, or as set forth in the 
Certificate of Incorporation of the Exchange, the Constitution, the By-
laws, the BSE Rules, or the L.L.C. Agreement of Boston Options Exchange 
Group, is hereby reserved, except as expressly delegated to BOXR. In 
addition, the BSE expressly retains the following authority and 
functions: 
    1. To exercise overall responsibility for ensuring that BSE's 
statutory and self-regulatory obligations and functions are fulfilled.
    2. To delegate authority to BOXR to take actions on behalf of the 
Exchange. 
    3. To appoint the BOXR Options Officials (an ``Options Official'' 
is ``an officer of BOXR vested by the BOXR Board with certain authority 
to supervise option trading on BOX.'' See Rules of the Boston Options 
Exchange Facility, Chapter I, Section 1). 
    4. To review the rulemaking and disciplinary decisions of BOXR. 
    5. To coordinate actions of BOXR and BOX as necessary. 
    6. To resolve any regulatory disputes among BOXR and BOX LLC. 
    7. To administer common overhead and technology of BOXR and BSE. 
    8. To administer internal reviews of BOX LLC and BOXR as deemed 
necessary. 
    9. To manage external BSE relations on major regulatory policy and/
or surveillance issues regarding the BOX options market. 
    10. To direct BOXR and BOX LLC to take action necessary to 
effectuate the purposes and functions of BOX as a facility of the 
Exchange. 
    11. In the BSE's role as the sole owner of BOXR, to incorporate in 
its Board of Governors and Nominating Committee responsibilities, a 
process to elect the Board of Directors of BOXR (``BOXR Board'') 
pursuant to the BOXR L.L.C. Agreement and BOXR By-Laws. 
    12. To take action in an area of responsibility delegated to BOXR 
below. 

B. Access to and Status of Books, Records, Premises, Officers, 
Directors, Agents and Employees of BOX LLC.

    1. Notwithstanding the delegation of authority to BOXR, as set 
forth below, the books, records, premises, officers, directors, agents 
and employees of BOX LLC shall be the books, records, premises, 
officers, directors, agents and employees of BSE for purposes of and 
subject to oversight pursuant to the Securities Exchange Act. The books 
and records of BOX LLC shall be subject at all times to inspection and 
copying by the BSE, BOXR and the Securities and Exchange Commission 
(``Commission''). 
    2. BOX LLC is required to maintain all books and records related to 
BOX within the United States. 
    3. Paragraph (1) above shall not create any rights or benefits for 
any person or entity other than the Commission, the BSE and BOXR. 

C. Delegation of Responsibilities and Functions

    Subject to Section A(12) above and the review, ratification, or 
rejection by the BSE Board, the BSE hereby delegates to BOXR and BOXR 
assumes the following responsibilities and functions with respect to 
the options business of the Exchange:
    1. To interpret rules and regulations including, but not limited 
to, trading rules, fees, access to and use of system facilities and 
participation requirements.
    2. To determine regulatory and trading policies, including 
developing and recommending necessary or appropriate rule changes to 
the BSE Board, relating to the business conduct, trading activities and 
sales practices of BOX Participants and associated persons with respect 
to, but not limited to, (i) financial responsibility, (ii) 
qualifications for BOX participation and association with BOX 
Participants, (iii) clearance and settlement of securities transactions 
and other financial responsibility and operational matters affecting 
BOX Participants in general and the securities listed on BOX, (iv) BOX 
Participant advertising practices, (v) administration, interpretation 
and enforcement of the Rules of the Boston Options Exchange Facility 
(``BOX Rules''), including determination of appropriate exemptions for 
BOX Participants (vi) administration and enforcement of the Options 
Clearing Corporation (``OCC'') rules, the federal securities laws, and 
other laws, rules and regulations that the BSE has the authority to 
administer or enforce and (vii) standards of proof for violations and 
sanctions imposed on BOX Participants and associated persons in 
connection with disciplinary actions.
    3. To take necessary or appropriate action to assure compliance 
with BSE and BOX policies and rules, the federal securities laws, and 
other laws, rules and regulations that the BSE has the authority to 
administer or enforce, through examination, surveillance, 
investigation, enforcement, disciplinary, and other programs.
    4. To administer programs and systems for the surveillance and 
enforcement of rules governing BOX Participants' conduct and trading 
activities in BOX.
    5. To examine and investigate BOX Participants and associated 
persons to determine if they have violated BSE or BOX rules, the 
federal securities laws, and other laws, rules, and regulations that 
the BSE has the authority to administer, interpret, or enforce.
    6. To administer the BOXR's enforcement and disciplinary programs 
regarding BOX Participants, including investigations, adjudication of 
cases, and the imposition of fines and other sanctions.
    7. To conduct qualification examinations and continuing education 
programs.
    8. To determine whether applicants for BOX participation have met 
the requirements for participation established by the BSE.
    9. To place restrictions on the business activities of BOX 
Participants consistent with the public interest, the

[[Page 45286]]

protection of investors, and the federal securities laws.
    10. To determine whether persons seeking to register as BOX 
Participants have met such qualifications for participation as may be 
established by the BSE, including whether statutorily disqualified 
persons will be permitted to associate with particular BOX Participants 
and the conditions of such association.
    11. To oversee all trading activities on BOX.
    12. To propose and assess fees and other charges on BOX 
Participants, associated persons and others using the products, 
services or facilities of the Exchange.
    13. To develop, administer and enforce policies and rules of BOX 
governing listing standards applicable to securities traded on BOX.
    14. To establish the annual budget and business plan for BOXR.
    15. To determine allocation of BOXR resources.
    16. To administer the Exchange's involvement in National Market 
System Plans related to BOX.
    17. To manage external relations on enforcement, regulatory, and 
other policy issues regarding BOX and BOX Participants with Congress, 
the Commission, state regulators, other self-regulatory organizations, 
business groups, and the public.
    18. To establish internal procedures for considering complaints by 
Participants, associated persons, and members of the public who request 
an investigation or disciplinary action by BOXR.

D. Rule Filings

    The BSE Board shall review and ratify a rule change recommended by 
the BOXR Board before the rule change becomes a final action of the 
Exchange.

E. Supplemental Delegation Regarding Management and Committees

    The BOXR Board may designate the Chief Executive Officer, another 
designated officer or one or more committees and delegate to such 
person or committee such powers and authority, as necessary and 
appropriate, to act on behalf of the BOXR Board in carrying out the 
functions and authority delegated to BOXR by the BSE. Such delegations 
shall be in conformance with law and the By-laws of BOXR and the BOX 
Rules. Any action taken by a BOXR officer or committee pursuant to 
delegated authority shall be subject to review, ratification or 
rejection by the BOXR Board in accordance with procedures established 
by the BOXR Board.
* * * * *

Boston Options Exchange Regulation, L.L.C.

By-Laws

Definitions

    When used in these By-Laws, unless the context otherwise requires, 
the term.
    (a) ``Act'' shall mean the Securities Exchange Act of 1934, as 
amended;
    (b) ``Associated person'' means a person who is a partner, officer, 
director, or employee of a Participant, or any person directly or 
indirectly controlling, controlled by or under common control with a 
Participant.
    (c) ``Board'' means the Board of Directors of Boston Options 
Exchange Regulation, L.L.C.;
    (d) ``BOX'' means the Boston Options Exchange Facility;
    (e) ``BOXR'' means the Boston Options Exchange Regulation, L.L.C.;
    (f) ``BOX Rules'' means the Rules of the Boston Options Exchange 
Facility;
    (g) ``broker'' shall have the same meaning as in Section 3(a)(4) of 
the Act;
    (h) ``BSE Rules'' means the Constitution and the Rules of the Board 
of Governors of the Boston Stock Exchange, Inc;
    (i) ``Commission'' means the Securities and Exchange Commission;
    (j) ``day'' means calendar day;
    (k) ``dealer'' shall have the same meaning as in Section 3(a)(5) of 
the Act;
    (l) ``Delegation Plan'' means the ``Plan of Delegation of Functions 
and Authority by the Boston Stock Exchange, Inc. to Boston Options 
Exchange Regulation, L.L.C.'' as approved by the Commission and amended 
from time to time;
    (m) ``Director'' means a member of the Board;
    (n) ``L.L.C. Agreement'' means the ``Boston Options Exchange Group 
L.L.C. Operating Agreement'';
    (o) ``Options Participant'' or ``Participant'' means a firm, or 
organization that is registered with the Exchange pursuant to Chapter 
II of the BOX Rules for purposes of participating in options trading on 
BOX as an ``Order Flow Provider'' and/or ``Market Maker''.
    (p) ``Public Director'' means a director who has no material 
business relationship with a broker, dealer, the BSE, BOX or BOXR.
    (q) ``Regulatory Services Agreement'' means the Regulatory Services 
Agreement entered into between BSE and Boston Options Exchange Group, 
L.L.C.;

Location

    SEC. 1 Boston Options Exchange Regulation, L.L.C., shall maintain a 
registered office in the State of Delaware as required by law. BOXR may 
also have offices and/or trading facilities at other places, within or 
without the State of Delaware, as the Board of Directors may from time 
to time determine or as the business of BOXR may require.

General Powers

    SEC. 2 The property, business and affairs of BOXR shall be managed 
by or under the direction of the Board. The Board may exercise all such 
powers of BOXR and have the authority to perform all such lawful acts 
as are permitted by law, the L.L.C. Agreement, the Regulatory Services 
Agreement, these By-Laws, or the Delegation Plan to assist the BSE in 
fulfilling its self regulatory responsibilities as set forth in Section 
6(b) of the Act, and to support such other initiatives as the Board may 
deem appropriate. To the fullest extent permitted by applicable law, 
the L.L.C. Agreement, the Regulatory Services Agreement, and these By-
Laws, the Board may delegate any of its powers to a committee appointed 
pursuant to Section 14 of the By-Laws, or to the BOXR staff in a manner 
not inconsistent with the Delegation Plan.

Number of Directors

    SEC. 3 The Board shall consist of no fewer than seven nor more than 
thirteen Directors, the exact number to be determined by resolution 
adopted by the BSE Board from time to time. The BSE Board shall appoint 
directors to the BOXR Board, 50% of whom will serve until the first 
annual meeting of the BOXR Board, and 50% of whom will serve until the 
second consecutive annual meeting of the BOXR Board, in accordance with 
Section 5, below. In accordance with Section 4, below, the Chief 
Executive Officer of the BSE will be considered a member of the Board 
of Directors for voting purposes, but not for qualification percentage 
purposes. The General Counsel of the BSE will not be considered a 
member of the Board of Directors for voting purposes or qualification 
percentage purposes.

Qualifications

    SEC. 4 Directors need not be Participants of BOX, or members of 
BSE. Industry Directors must be representatives of the securities 
industry as provided in Article II of the BSE Constitution. At least 
fifty percent (50%) of the Directors will be Public Directors. The 
Board shall include the Chief Executive Officer of the BSE, who will 
not be considered for the purposes of

[[Page 45287]]

determining the qualification percentages for the Board set forth 
herein. The General Counsel of the BSE shall act as an advisor to the 
Board for all legal and regulatory matters, and shall not be a member 
or director of the Board. At least twenty percent (20%) of the 
Directors (but no fewer than two (2) Directors) will be officers or 
directors of a firm approved as a BOX Option Participant. An officer or 
director of a facility of the BSE may serve on the Board of Directors. 
The term of office of a Director shall not be affected by any decrease 
in the authorized number of Directors.
    As soon as practicable, following the annual appointment of 
Directors, the Board shall elect from its members a Chair and Vice 
Chair and such other persons having such titles as it shall deem 
necessary or advisable to serve until the next annual appointment or 
until their successors are chosen and qualify. The persons so elected 
shall have such powers and duties as may be determined from time to 
time by the Board. The Board, by resolution adopted by a majority of 
Directors then in office, may remove any such person from such position 
at any time.

Appointment and Term of Directors

    SEC. 5 Directors of BOXR shall be appointed, as necessary, each 
year by the BSE Board, at its next annual meeting after the BOXR 
Nominating Committee presents its candidates for the two BOX 
representatives on the BOXR Board each October. Directors shall be 
appointed for no more than four consecutive two-year terms, with the 
exception of the initial Board of Directors, 50% of whom will be 
appointed by the BSE Board to one year terms, and 50% of whom will be 
appointed by the BSE Board to two year terms, with the percentages of 
each apportioned as evenly as practicable between Public Directors and 
non-Public Directors in accordance with Section 4, above.

Resignation

    SEC. 6 Any Director may resign at any time either upon written 
notice of resignation to the Chairman of the Board, the President, or 
the Secretary. Any such resignation shall take effect at the time 
specified therein or, if the time is not specified, upon receipt 
thereof, and the acceptance of such resignation, unless required by the 
terms thereof, shall not be necessary to make such resignation 
effective.

Removal

    SEC. 7 Unless otherwise restricted by the L.L.C. Agreement, these 
By-Laws, the BSE Rules or the BOX Rules, any or all of the Directors 
may be removed from office at any time, with cause, only if a 
determination is reasonably and promptly made by the BSE Board by a 
majority vote, that, based upon the facts known to the BSE Board at the 
time such determination is made that the Director sought to be removed 
(i) acted in bad faith; or (ii) did not act in a manner in the best 
interests of BOXR; or (iii) engaged in conduct which was unlawful; or 
(iv) deliberately breached his or her duty to BOXR.

Disqualification

    SEC. 8 The term of office of a Director shall terminate immediately 
upon a determination by the Board, by a majority vote of the remaining 
Directors, that: (a) the Director no longer satisfies classification 
for which the Director was elected; and (b) the Director's continued 
service as such would violate the compositional requirements of the 
Board as set forth in Section 4 of these By-Laws. If the term of office 
of a Director terminates under this section, and the remaining term of 
office of such Director at the time of termination is not more than six 
months, during the term of vacancy the Board shall not be deemed to be 
in violation of Section 4 by virtue of such vacancy.

Filling of Vacancies

    SEC. 9 If a Director position becomes vacant for any reason, the 
BSE Board or Executive Committee shall appoint a person to satisfy the 
classification (e.g. Industry or Public) for the directorship, except 
that if the remaining term of office for the vacant Director position 
is not more than six months, no replacement shall be required.

Quorum and Voting

    SEC. 10 At all meetings of the Board, unless otherwise set forth in 
these By-Laws or required by law, a quorum for the transaction of 
business shall consist of the presence of a majority of the number of 
Directors fixed by Section 3. In the absence of a quorum, a majority of 
the Directors present may adjourn the meeting until a quorum is 
present. The vote of a majority of the Directors present at a meeting 
at which a quorum is present shall be the act of the Board.

Regulation

    SEC. 11 The Board may adopt such rules, regulations, and 
requirements for the conduct of the business and management of BOXR not 
inconsistent with the law, BSE and BOX Rules, L.L.C. Agreement, 
Regulatory Services Agreement, or these By-Laws, as the Board may deem 
proper. A Director shall, in the performance of such Director's duties, 
be fully protected in relying in good faith upon the books of accounts 
or reports made to BOXR by any of its officers, by an independent 
professional (e.g. attorney, certified public accountant, business 
consultant) or in relying in good faith upon other records of BOXR.

Meetings

    SEC. 12 (a) An annual meeting of the Board shall be held for the 
purpose of organization, election of officers, and transaction of any 
other business. The annual meeting of the Board shall be held 
immediately following the BSE Board's first regularly scheduled meeting 
following October 1 of each year or any adjournment thereof, at the 
place where the BSE Board's regularly scheduled meeting following 
October 1 of each year was held or at such other time and place as a 
majority of the Directors determine. If a quorum is then present, no 
notice of the meeting shall be necessary. If the annual meeting is not 
so held, it shall be called and held in the manner provided herein for 
special meetings of the Board.
    (b) Regular meetings of the Board, other than the annual meeting, 
may be held without notice at such time and place, within or without 
the State of Delaware, as determined from time to time by the Board.
    (c) Special meetings of the Board may be called by the Chairman of 
the Board, by the President, or by at least one-third of the Directors 
then in office. Adequate notice shall be provided to all Board members 
of the time and place of any Special Meetings.
    (d) A Director or member of any committee appointed by the Board 
may participate in a meeting of the Board or of such committee through 
the use of a telephone or similar communications equipment by means of 
which all persons participating in the meeting may hear one another, 
and such participation shall constitute presence in person at such 
meeting for all purposes.

Notice of Meetings; Waiver of Notice

    SEC. 13 (a) Notice of any meeting of the Board shall be deemed to 
be duly given to a Director if (i) mailed to the address last made 
known in writing to BOXR by such Director as the address to which such 
notices are to be sent, at least seven days before the day on which 
such meeting is to be held; (ii) sent to the Director at such address 
by telegraph, telefax, cable, radio, or wireless, not later than the 
day before

[[Page 45288]]

the day on which such meeting is to be held; or (iii) delivered to the 
Director personally or orally, by telephone or otherwise, not later 
than the day before the day on which such meeting is to be held. Each 
notice shall state the time and place of the meeting and the purpose(s) 
thereof.
    (b) Notice of any meeting of the Board need not be given to any 
Director if waived by that Director in writing whether before or after 
the holding of such meeting, or if such Director is present at such 
meeting.
    (c) Any meeting of the Board shall be a legal meeting without any 
prior notice if all Directors then in office shall be present.

Committees

    SEC. 14 (a) The Board may, by resolution or resolutions adopted by 
a majority of the whole Board, appoint one or more committees. Each 
committee shall include one or more Public Directors; provided that 
there are Public Directors who are both willing to accept appointment 
to such committee and are not otherwise an interested director with 
respect to the responsibilities of such committee. Except as herein 
provided, vacancies in membership of any committee shall be filled by 
the vote of a majority of the whole Board. The Board may designate one 
or more Directors as alternate members of any committee, who may 
replace any absent or disqualified member at any meeting of the 
committee. In the absence or disqualification of any member of a 
committee, the member or members thereof present at any meeting and not 
disqualified from voting, whether or not such member or members 
constitute a quorum, may unanimously appoint another Director to act at 
the meeting in the place of any such absent or disqualified member. 
Members of a committee shall hold office for such period as may be 
fixed by a resolution adopted by a majority of the whole Board. Any 
member of a committee may be removed from such committee only after a 
majority vote of the whole Board, after appropriate notice, for 
refusal, failure, neglect, or inability to discharge such member's 
duties.
    (b) The Board may, by resolution or resolutions adopted by a 
majority of the whole Board, delegate to one or more committees the 
power and authority to act on behalf of the Board in carrying out the 
functions and authority delegated to BOXR by the BSE under the 
Delegation Plan. Such delegation shall be in accordance with applicable 
law, the L.L.C. Agreement, the Regulatory Services Agreement, and the 
Delegation Plan. Action taken by a committee pursuant to such delegated 
authority shall be subject to review, ratification, or rejection by the 
Board. In all other matters, the Board may, by resolution or 
resolutions adopted by a majority of the whole Board, delegate to one 
or more committees that consist solely of one or more Directors the 
power and authority to act on behalf of the Board in the management of 
the business and affairs of BOXR to the extent permitted by law and not 
inconsistent with the Delegation Plan.
    (c) Unless otherwise provided by these By-Laws, a majority of a 
committee shall constitute a quorum for the transaction of business, 
and the vote of a majority of the members of such committee present at 
a meeting at which a quorum is present shall be an act of such 
committee.
    (d) The Board may appoint an Executive Committee, which shall, to 
the fullest extent permitted by Delaware Law and other applicable law, 
have and be permitted to exercise all the powers and authority of the 
Board in the management of the business and affairs of BOXR between 
meetings of the Board. The Executive Committee shall consist of five 
Directors, including at least two Public Directors, and at least one 
Options Participant Director. The Chief Executive Officer of the BSE 
shall be a member of the Executive Committee, and the General Counsel 
of the BSE will act in advisory role to the Executive Committee on 
legal and regulatory matters. Executive Committee members shall hold 
office for a term of one year. At all meetings of the Executive 
Committee, a quorum for the transaction of business shall consist of a 
majority of the Executive Committee, including at least fifty percent 
of the Public Directors and at least one Options Participant Director.
    (e) Nominating Committee. The Nominating Committee shall nominate 
Participant representatives to the BOXR Board and the BSE Board of 
Governors and members for each vacant position on the Nominating 
Committee.
    (i) Composition of Nominating Committee. There shall be elected by 
ballot six persons to serve on the BOXR Nominating Committee which 
shall consist of a total of seven persons, five of whom shall represent 
broker-dealer Participant organizations of BOX (at least one of which 
shall be a BOX Market Maker), and two of whom shall be public 
representatives (one of whom will be a ``Public Director'' of the BOXR 
Board, and appointed to the Nominating Committee by the BOXR Board, as 
set forth in Paragraph (a) of this Section 14).
    (ii) Nomination, Appointment, and Election of Nominating Committee 
Members. All members of the Committee shall serve a term of two years. 
The terms of Nominating Committee members shall be staggered, so that 
each year elections will be held for three open positions on the 
Nominating Committee, as well as to fill any vacancies on the 
Committee. No member of the Committee shall be eligible to serve two 
consecutive terms, and any vacancy on the Committee may be filled until 
the next annual election by a majority vote of the remaining members. 
The Committee shall elect its own Chairman, and shall be broadly 
representative of the Participants of BOX.
    (A) Meeting of Nominating Committee. The Nominating Committee shall 
hold at least one meeting, prior to or in the month of June, at which 
time the committee shall elect its own Chairman. The Chairman shall 
designate a date in the month of July, due notice of which shall be 
posted electronically to Participants, inviting them to attend said 
meeting for the purpose of suggesting one nominee to fill each open 
position during the next term of the Nominating Committee. Such 
Committee shall notify the Secretary of the Exchange (or in his absence 
an Officer appointed by the Chairman), on or before the last Monday in 
August, of the nominees for such open positions on the Nominating 
Committee. The names of nominees shall be posted forthwith 
electronically to Participants. The Secretary shall prepare ballots 
reflecting such nominees for use in the annual election.
    (B) Independent nominations. On the written and signed petition of 
five Participants of BOX, additional nominations may be made for the 
open positions on the Nominating Committee to be elected at the annual 
election. These nominations shall be filed with the Secretary of the 
Exchange (or in his absence an Officer appointed by the Chairman) on or 
before the third Monday in September and forthwith posted to 
Participants. The ballots as prepared by the Secretary shall include 
such nominations.
    (C) No person shall be a candidate for election to the Nominating 
Committee at the annual election who is not nominated in accordance 
with the provisions of this Section.
    (D) Notice of annual election. Notice of the annual election of 
Participants shall be mailed or delivered to each Participant of BOX at 
his business address registered with the Exchange by the Secretary (or 
in his absence by an Officer appointed by the Chairman) not

[[Page 45289]]

more than twenty-five nor less than twenty days before the date of the 
election, which shall occur no later than the last day of October. Such 
notice shall specify the time and date of the election, and the persons 
nominated (both by the Nominating Committee and by petition of 
Participants).
    (E) Annual Election. Voting by Participants shall be by secret 
ballot, which may be delivered in person or by electronic or physical 
mail to the Secretary (or in his absence to an Officer appointed by the 
Chairman). The Secretary (or in his absence an Officer appointed by the 
Chairman) shall collect all ballots and tally all votes for the 
specified nominee. The nominees receiving the highest number of votes 
for the open positions on the Nominating Committee shall be declared 
elected thereto. Tie votes shall be decided by the BOXR Board at its 
first meeting following the election.
    (F) The terms of office will begin on January 1 of each year.
    (iii) Nomination, Appointment, and Election of Representatives to 
the BSE Board of Governors and the BOXR Board.
    (A) Meeting of Nominating Committee. The Nominating Committee 
Chairman shall designate a date in the month of July, due notice of 
which shall be posted electronically to Participants, inviting them to 
attend said meeting for the purpose of suggesting one nominee for each 
open position for BOX participant representatives for the BOXR Board 
and the one nominee for the BSE Board of Governors that are to be 
filled at the annual election. The Nominating Committee shall notify 
the Secretary of the Exchange (or in his absence an Officer appointed 
by the Chairman), on or before the last Monday in August, of the 
nominees for such offices. The names of nominees shall be posted 
forthwith electronically to Participants. The Secretary shall prepare 
ballots reflecting such nominees for use in the annual election.
    (B) Independent nominations. On the written and signed petition of 
five Participants of BOX, additional nominations may be made for the 
two positions on the BOXR Board reserved for representatives of 
Participants and the Participant representative on the Board of 
Governors. These nominations shall be filed with the Secretary of the 
Exchange (or in his absence an Officer appointed by the Chairman) on or 
before the third Monday in September and forthwith posted to 
Participants. The ballots as prepared by the Secretary shall include 
such nominations.
    (C) No person shall be a candidate for election to any office at 
the annual election who is not nominated in accordance with the 
provisions of this Section.
    (D) Notice of annual election. Notice of the annual election of 
Participants shall be mailed or delivered to each Participant of BOX at 
his business address registered with the Exchange by the Secretary (or 
in his absence by an Officer appointed by the Chairman) not more than 
twenty-five nor less than twenty days before the date of the election, 
which shall occur no later than the last day of October. Such notice 
shall specify the time and date of the election, and the persons 
nominated (both by the Nominating Committee and by petition of 
Participants).
    (E) Annual Election. Voting by Participants shall be by secret 
ballot, which may be delivered in person or by electronic or physical 
mail to the Secretary (or in his absence to an Officer appointed by the 
Chairman). The Secretary (or in his absence an Officer appointed by the 
Chairman) shall collect all ballots and tally all votes for the 
specified nominee. In each case, the two nominees receiving the highest 
number of votes for the BOXR Board and the one nominee receiving the 
highest number of votes for the BSE Board of Governors shall be 
declared elected thereto. Tie votes shall be decided by the respective 
Board at its first meeting following the election.
    (F) At the conclusion of the election, the successful candidates 
thereof for the two positions on the BOXR Board reserved for 
representatives of Participants and the Participant representative on 
the Board of Governors shall be presented to the BSE Board for 
appointment, in accordance with Article II, Section 4, of the BSE 
Constitution. Such presentation to the BSE Board shall be administered 
by the Chairman of the BOXR Nominating Committee and shall occur prior 
to or during the next regularly scheduled annual meeting of the BSE 
Board of Governors.
    (G) The terms of office will begin on January 1 of each year.
    (f) Hearing Committee. Promptly after the annual meeting of BOXR, 
the Chairman of the Board of BOXR, shall appoint a Hearing Committee 
composed of such number of Participants and non-Participants as the 
Chairman of BOXR shall deem necessary, none of whom shall be members of 
the BOXR Board of Directors or the BSE Board of Governors. This 
Committee or any panel thereof shall have at least one Options 
Participant member and shall have exclusive jurisdiction to conduct 
hearings on disciplinary proceedings brought by BOXR against any 
Participant, or any person employed by or associated with any 
Participant for any alleged violation of the Securities Exchange Act of 
1934, the Rules and Regulations thereunder, the Constitution or Rules 
of the Board of Governors of the Boston Stock Exchange, Inc., the Rules 
of Boston Options Exchange, LLC, the By-Laws of Boston Options Exchange 
Regulation, or the interpretations and stated policies of either the 
BSE Board of Governors or the Board of Directors of BOXR.
    (i) If a Participant, or person employed by or associated with a 
Participant is adjudged guilty in any disciplinary proceeding, the 
Committee or any panel thereof shall be empowered to impose one or more 
of the following disciplinary sanctions: fine, censure, suspension, 
expulsion, limitation or termination as to activities, functions, 
operations or association with a BSE member or Participant, or any 
other appropriate sanction with respect to each charge as to which 
guilt is determined. Any Participant or person adjudged guilty in any 
disciplinary proceeding by the Committee or any panel thereof shall 
have the right to appeal such decision to the BOXR Board. Any decision 
of the BOXR Board may subsequently be appealed to the BSE Board of 
Governors, which shall have the discretion whether to hear such appeal. 
If the BSE Board of Governors does not order review of a decision of 
the BOXR Board, or, in its discretion, elects not to hear an appeal of 
a decision of the BOXR Board, then the decision of the BOXR Board shall 
be deemed to be the final action of the Exchange. Any decision of the 
BSE Board of Governors, or the BOXR Board (in cases where the BSE Board 
in its discretion has elected not to hear the appeal) may be ultimately 
appealed to the Commission.
    (ii) The foregoing jurisdiction, function and powers shall be 
exercised by the Committee in accordance with the provision of the 
Rules of the Board of Governors of the BSE, as set forth in Chapter XXX 
therein. With respect to the reference to ``members'', ``member 
organizations'', ``membership'' or similar terms in the BSE Rules, the 
applicability of the relevant sections inures to BOX ``Participants''.
    (iii) Appellate Review of the Committee's Decision by the BOXR 
Board. The decision of the Committee or any panel thereof shall be 
subject to appellate review by the BOXR Board, either on the BOXR 
Board's own motion within thirty days after issuance (or within thirty 
days of when the BOXR Board receives written notice from the Committee 
of such decision of the

[[Page 45290]]

Committee), or upon written petition of any party to the Proceeding 
filed within fifteen business days after issuance. The following 
procedures shall apply to reviews by the BOXR Board:
    Procedure Following Petition for Appellate Review by the BOXR 
Board.
    (A) Additional Submissions and Appointment of the Appellate Review 
Panel. Petitions for appellate review of Hearing Committee decisions 
shall be referred to the BOXR Board which shall be furnished with all 
material considered by the Committee or panel thereof. Parties may 
submit a written statement to the BOXR Board and may request an 
opportunity to make an oral presentation before the BOXR Board; the 
BOXR Board, in its discretion, may grant or deny the request for oral 
presentation. In the absence of a request for such a presentation, or 
at any time, the BOXR Board may require an oral presentation. Whether 
appellate review is conducted by hearing or by review on the papers 
alone, the matter shall be referred to an appropriate Appellate Review 
Panel appointed by the BOXR Board. A transcript shall be made of any 
oral presentation and shall become part of the record.
    (B) Decision of the BOXR Appellate Review Panel. Appellate Review 
by the BOXR Board pursuant to paragraph (f)(iii) shall be made upon the 
material furnished it by the Committee or panel thereof as well as by 
the parties, and shall be made after such further proceedings as the 
BOXR Board shall order. The BOXR Board may confirm, reverse or modify 
in whole or in part the decision of the Committee or panel thereof and 
may make any findings or conclusions which in its judgment are proper. 
The decision of the BOXR Board shall be in writing, shall contain a 
concise statement of the findings and conclusions of the BOXR Board and 
the reasons in support thereof, and shall be sent to the parties to the 
Proceedings.
    (iv) Appellate Review of the BOXR Board's Decision by the BSE 
Board. The decision of the BOXR Board or any panel thereof, shall be 
subject to appellate review by the BSE Board, either on the BSE Board's 
own motion within thirty days after issuance (or within thirty days of 
when the BSE Board receives written notice from the BOXR Board of such 
decision of the BOXR Board), or upon written petition of any party to 
the Proceeding filed within fifteen business days after issuance. If 
the BSE Board does not order review of a decision of the BOXR Board, 
or, in its discretion, elects not to hear an appeal of a decision of 
the BOXR Board, then the decision of the BOXR Board shall be deemed to 
be the final action of the Exchange. The following procedures shall 
apply to reviews by the BSE Board:
    Procedure Following Petition for Appellate Review by the BSE Board.
    (A) Additional Submissions and Appointment of the BSE Board 
Appellate Review Panel. Petitions for appellate review of BOXR Board 
decisions shall be referred to the BSE Board which shall be furnished 
with all material considered by the BOXR Board or panel thereof. 
Parties may submit a written statement to the BSE Board and may request 
an opportunity to make an oral presentation before the BSE Board; the 
BSE Board, in its discretion, may grant or deny the request for oral 
presentation. In the absence of a request for such a presentation, or 
at any time, the BSE Board may require an oral presentation. Whether 
appellate review is conducted by hearing or by review on the papers 
alone, the matter shall be referred to an appropriate Appellate Review 
Panel appointed by the BSE Board. A transcript shall be made of any 
oral presentation and shall become part of the record.
    (B) Decision of the BSE Board Appellate Review Panel. Appellate 
Review by the BSE Board pursuant to paragraph (f)(iv) shall be made 
upon the material furnished it by the BOXR Board or panel thereof as 
well as by the parties, and shall be made after such further 
proceedings as the BSE Board shall order. The BSE Board may confirm, 
reverse or modify in whole or in part the decision of the BOXR Board or 
panel thereof and may make any findings or conclusions which in its 
judgment are proper. The decision of the BSE Board shall be in writing, 
shall contain a concise statement of the findings and conclusions of 
the BSE Board and the reasons in support thereof, and shall be sent to 
the parties to the Proceedings.

Action Without Meeting

    SEC. 15 Any action required or permitted to be taken at a meeting 
of the Board or of a committee may be taken with or without a meeting 
if all Directors or all members of such committee, as the case may be, 
consent thereto in writing, and the writing or writings are filed with 
the minutes of proceedings of the Board or the committee.

Expenses

    SEC. 16 Funds to meet the regular expense of each committee shall 
be provided by the Board, and all such expenses shall be subject to the 
approval of the Board.

Officers

    SEC. 17 (a) The Board shall elect the officers of BOXR, which may 
include a President, a Secretary, and such other executive or 
administrative officers as it shall deem necessary or advisable, 
including a Chief Regulatory Officer. All officers shall have such 
titles, powers, and duties, and shall be entitled to such compensation, 
as shall be determined from time to time by the Board. The terms of 
office of such officers shall be at the pleasure of the Board, which by 
affirmative vote of a majority of the Board, may remove any such 
officer at any time. One person may hold the offices and perform the 
duties of any two or more of such offices, except the offices and 
duties of President and any other office or duties. None of the 
officers, except the President, need be Directors of BOXR.
    (b) The Chairman of the Board of the BSE or the President of BOXR 
may be the Chief Executive Officer of BOXR, as the Board of Directors 
may from time to time determine. Subject to the control of the Board, 
the Chief Executive Officer, or such other officer or officers as may 
be designated by the Board, shall have general executive charge, 
management and control of the properties, business and operations of 
BOXR with all such powers as may be reasonably incident to such 
responsibilities; may agree upon and execute all leases, contracts, 
evidences of indebtedness and other obligations in the name of the 
Company; and shall have such other powers and duties as designated in 
accordance with these By-Laws and as from time to time be assigned by 
the Board.

Absence of the President

    SEC. 18 In the case of the absence or inability to act of the 
President of BOXR, or in the case of a vacancy in such office, the 
Board may appoint its Chairman or such other person as it may designate 
to act as such officer pro tem, who shall assume all the functions and 
discharge all the duties of the President.

Agents and Employees

    SEC. 19 In addition to the officers, BOXR may employ such agents 
and employees as the Board may deem necessary or advisable, each of 
whom shall hold office for such period and exercise such authority and 
perform such duties as the Board, the President, or any officer 
designated by the Board from time to time determine. Agents and 
employees of BOXR shall be under the supervision and control of the 
officers of BOXR, unless the Board, by resolution, provides that an 
agent or employee shall

[[Page 45291]]

be under the supervision and control of the Board.

Delegation of Duties of Officers

    SEC. 20 The Board may delegate the duties and powers of any officer 
of BOXR to any other officer or to any Director for a specified period 
of time and for any reason that the Board may deem sufficient.

Resignation and Removal of Officers

    SEC. 21 (a) Any officer may resign at any time upon written notice 
of resignation to the Board or the President. Any such resignation 
shall take effect upon receipt of such notice or at any later time 
specified therein. The acceptance of a resignation shall not be 
necessary to make the resignation effective.
    (b) Any officer of BOXR may be removed, with or without cause, by 
resolution adopted by a majority of the Directors then in office at any 
regular or special meeting of the Board or by a written consent signed 
by all of the Directors then in office. Such removal shall be without 
prejudice to the contractual rights of the affected officer, if any, 
with BOXR.

Bond

    SEC. 22 BOXR may secure the fidelity of any or all of its officers, 
agents, or employees by bond or otherwise.

Compensation of Board and Committee Members

    SEC. 23 The Board may provide for reasonable compensation of the 
Chairman of the Board, the Directors, and the members of any committee 
of the Board. The Board may also provide for reimbursement of 
reasonable expenses incurred by such persons in connection with the 
business of BOXR.

Indemnification of Directors, Officers, Employees, Agents, and 
Committee Members

    SEC. 24 (a) BOXR shall indemnify, and hold harmless, to the fullest 
extent permitted by Delaware law as it presently exists or may 
thereafter be amended, any person (and the heirs, executors, and 
administrators of such person) who, by reason of the fact that he or 
she is or was a Director, officer, or employee of BOXR, or committee 
member, or is or was a Director, officer, or employee of BOXR who is or 
was serving at the request of BOXR as a director, officer, employee, or 
agent of another corporation, partnership, joint venture, trust, 
enterprise, or non-profit entity, including service with respect to 
employee benefit plans, is or was a party, or is threatened to be made 
a party to:
    (i) any threatened, pending, or completed action, suit, or 
proceeding, whether civil, criminal, administrative, or investigative, 
against expenses (including attorneys' fees and disbursements), 
judgments, fines, and amounts paid in settlement actually and 
reasonably incurred by such person in connection with any such action, 
suit, or proceeding; or
    (ii) any threatened, pending, or completed action or suit by or in 
the right of BOXR to procure a judgment in its favor against expenses 
(including attorneys' fees and disbursements) actually and reasonably 
incurred by such person in connection with the defense or settlement of 
such action or suit.
    (b) BOXR shall advance expenses (including attorneys' fees and 
disbursements) to persons described in subsection (a); provided, 
however, that the payment of expenses incurred by such person in 
advance of the final disposition of the matter shall be conditioned 
upon receipt of a written undertaking by that person to repay all 
amounts advanced if it should be ultimately determined that the person 
is not entitled to be indemnified under this Section or otherwise.
    (c) BOXR may, in its discretion, indemnify and hold harmless, to 
the fullest extent permitted by Delaware law as it presently exists or 
may thereafter be amended, any person (and the heirs, executors, and 
administrators of such persons) who, by reason of the fact that he or 
she is or was an agent of BOXR or is or was an agent of BOXR who is or 
was serving at the request of BOXR as a director, officer, employee, or 
agent of another corporation, partnership, trust, enterprise, or non-
profit entity, including service with respect to employee benefit 
plans, was or is a party, or is threatened to be made a party to any 
action or proceeding described in subsection (a).
    (d) BOXR may, in its discretion, pay the expenses (including 
attorneys' fees and disbursements) reasonably and actually incurred by 
an agent in defending any action, suit, or proceeding in advance of its 
final disposition; provided, however, that the payment of expenses 
incurred by such person in advance of the final disposition of the 
matter shall be conditioned upon receipt of a written undertaking by 
that person to repay all amounts advanced if it should be ultimately 
determined that the person is not entitled to be indemnified under this 
Section or otherwise.
    (e) Notwithstanding the foregoing or any other provision of these 
By-Laws, no advance shall be made by BOXR to an agent or non-officer 
employee if a determination is reasonably and promptly made by the 
Board by a majority vote of those Directors who have not been named 
parties to the action, even though less than a quorum, or, if there are 
no such Directors or if such Directors so direct, by independent legal 
counsel, that, based upon the facts known to the Board or such counsel 
at the time such determination is made: (1) the person seeking 
advancement of expenses (i) acted in bad faith, or (ii) did not act in 
a manner that he or she reasonably believed to be in or not opposed to 
the best interests of BOXR; (2) with respect to any criminal 
proceeding, such person believed or had reasonable cause to believe 
that his or her conduct was unlawful; or (3) such person deliberately 
breached his or her duty to BOXR.
    (f) The indemnification provided by this Section in a specific case 
shall not be deemed exclusive of any other rights to which a person 
seeking indemnification may be entitled, both as to action in his or 
her official capacity and as to action in another capacity while 
holding such office, and shall continue as to a person who has ceased 
to be a Director, officer, or committee member, employee, or agent and 
shall inure to the benefit of such person's heirs, executors, and 
administrators.
    (g) Notwithstanding the foregoing, but subject to subsection (j), 
BOXR shall be required to indemnify any person identified in subsection 
(a) in connection with a proceeding (or part thereof) initiated by such 
person only if the initiation of such proceeding (or part thereof) by 
such person was authorized by the Board.
    (h) BOXR's obligation, if any, to indemnify or advance expenses to 
any person who is or was serving at its request as a director, officer, 
employee, or agent of another corporation, partnership, joint venture, 
trust, enterprise, or non-profit entity shall be reduced by any amount 
such person may collect as indemnification or advancement from such 
other corporation, partnership, joint venture, trust, enterprise, or 
non-profit entity.
    (i) Any repeal or modification of the foregoing provisions of this 
Section shall not adversely affect any right or protection hereunder of 
any person respecting any act or omission occurring prior to the time 
of such repeal or modification.
    (j) If a claim for indemnification or advancement of expenses under 
this Article is not paid in full within 60 days

[[Page 45292]]

after a written claim therefor by an indemnified person has been 
received by BOXR, the indemnified person may file suit to recover the 
unpaid amount of such claim and, if successful in whole or in part, 
shall be entitled to be paid the expense of prosecuting such claim. In 
any such action, BOXR shall have the burden of proving that the 
indemnified person is not entitled to the requested indemnification or 
advancement of expenses under Delaware law.

Indemnification Insurance

    SEC. 25 BOXR shall have the power to purchase and maintain 
insurance on behalf of any person who is or was a Director, officer, or 
committee member, employee or agent of BOXR, or who is or was serving 
as a director, officer, employee, or agent of another corporation, 
partnership, joint venture, trust, enterprise, or non-profit entity 
against any liability asserted against such person and incurred by such 
person in any such capacity, or arising out of such person's status as 
such, whether or not BOXR would have the power to indemnify such person 
against such liability hereunder.

Fiscal Year

    SEC. 26 The fiscal year of BOXR shall begin on the first day of 
October in each year, or such other month as the BSE Board may 
determine by resolution.

Waiver of Notice

    SEC. 27 (a) Whenever notice is required to be given by law, or 
these By-Laws, a written waiver thereof, signed by the person or 
persons entitles to such notice, whether before or after the time 
stated therein, shall be deemed equivalent to notice. Neither the 
business to be transacted at, nor the purpose of, any regular or 
special meeting of the Directors, or members of a committee of a 
Directors need be specified in any written waiver of notice.
    (b) Attendance of a person at a meeting shall constitute a waiver 
of notice of such meeting, except when the person attends a meeting for 
the purposes of objecting, at the beginning of the meeting, to the 
transaction of any business because the meeting is not lawfully called 
or convened.

Execution of Instruments, Contracts, etc.

    SEC. 28 (a) All checks, drafts, bills of exchange, notes, or other 
obligations or orders for the payment of money shall be signed in the 
name of BOXR by such officer or officers or person or persons as the 
Board, or a duly authorized committee thereof, may from time to time 
designate. Except as otherwise provided by law, the Board, any 
committee given specific authority in the premises by the Board, or any 
committee given authority to exercise generally the powers of the Board 
during intervals between meetings of the Board, may authorize any 
officer, employee, or agent, in the name of and on behalf of BOXR, to 
enter into or execute and deliver deeds, bonds, mortgages, contracts, 
and other obligations or instruments, and such authority may be general 
or confined to specific instances.
    (b) All applications, written instruments, and papers required by 
any department of the United States Government or by any state, county, 
municipal, or other governmental authority, may be executed in the name 
of BOXR by any principal officer or subordinate officer of BOXR, or, to 
the extent designated for such purpose from time to time by the Board, 
by an employee or agent of BOXR. Such designation may contain the power 
to substitute, in the discretion of the person named, one or more other 
persons.

Form of Records

    SEC. 29 Any records maintained by BOXR in the regular course of 
business, including its books of account and minute books, may be kept 
on, or be in the form of, magnetic tape, computer disk, or any other 
information storage device, provided that the records so kept can be 
converted into clearly legible form within a reasonable time.

Alteration of By-Laws by Directors

    SEC. 30 To the extent permitted by law, these By-Laws, BSE Rules, 
BOX Rules, the L.L.C. Agreement or the Regulatory Services Agreement, 
these By-Laws may be altered, amended, repealed, or new By-Laws adopted 
by approval of a majority of the BSE Board at any regular or special 
meeting of the BSE Board.

Emergency By-Laws

    SEC. 31 The Board may adopt emergency By-Laws subject to repeal or 
change by action of the BSE Board that shall, notwithstanding any 
different provision of law, the L.L.C. Agreement, the Regulatory 
Services Agreement, or these By-Laws, be operative during any emergency 
resulting from any nuclear or atomic disaster, an attack on the United 
States or on a locality in which BOXR conducts its business or 
customarily holds meetings of the Board, any catastrophe, or other 
emergency condition, as a result of which a quorum of the Board or a 
committee thereof cannot readily be convened for action. Such emergency 
By-Laws may make any provision that may be practicable and necessary 
under the circumstances of the emergency.
* * * * *

Boston Stock Exchange, Inc. Constitution

* * * * *
Article II
* * * * *
Board of Governors
* * * * *
Composition of the Board
    SEC. 1. The government of the Exchange shall be vested in a Board 
of Governors composed of the Chairman, Vice Chairman and twenty others, 
ten of whom shall be representatives from the securities industry and 
ten of whom shall be representatives of the public. Of the ten 
securities industry representatives, all must represent broker-dealer 
members of the Exchange, at least one shall represent BOX Participants, 
and at least five shall represent firms active on the trading floor 
(each of whom may satisfy more than one of these criteria). Of the 
floor representation, two must be active as specialists. Of the ten 
representatives of the public, at least five shall be from financial 
institutions not directly associated with a member organization or 
broker-dealer, and at least one shall be an officer or director of a 
company which has a class of stock listed on the Exchange.
    The Chairman shall be appointed by the Board of Governors to serve 
at its pleasure. The Vice Chairman shall be a representative from a 
member organization and shall be elected to serve a one-year term. 
Neither the Chairman nor the listed company representative shall be 
associated with a member of the Exchange or a broker or dealer. All are 
to be elected in the manner hereinafter provided, except no governor 
other than the Chairman and the Vice Chairman may serve more than four 
consecutive terms.
* * * * *
Specific Powers
    SEC. 4. The Board of Governors, in furtherance of its powers 
specified in Section 1 of this Article, shall entertain appeals from 
the decisions of the Market Performance Committee and may hold hearings 
on any such appeal; shall have the entire control of the property and 
finances of the Exchange; including the authority to purchase and 
cancel memberships in the Exchange, shall fix the amount of fees and 
compensation, if any, to be paid to any member of the

[[Page 45293]]

Board or of any other committee; and shall fix dues, fees, assessments 
and other charges to be paid by members, allied members, member firms 
and member corporations. It shall regulate the making and performance 
of Exchange contracts; transactions on the Exchange; access to and 
conduct upon the floor of the Exchange and the use of Exchange 
facilities; the formation, continuance and interests of members in 
member firms and corporations; business conduct; capital requirements 
and insolvency of members, member firms and member corporations; 
arbitration procedures; transfers of memberships and disposition of the 
proceeds of the sale of such memberships; the listing and delisting of 
and the suspension of trading in securities on the Exchange; activities 
of specialists and odd lot dealers; matters relating to quotations and 
price reports; use of ticker services; and means of communication with 
non-members. It may examine the financial condition and business 
conduct of members, member firms and member corporations and business 
conduct of allied members and may require any member, allied member or 
officer or employee of any member firm or corporation to appear before 
it to testify as to such financial condition or business conduct; may 
require that transactions in securities admitted to dealing on the 
Exchange be executed on the Exchange; may credit a portion of the 
income of the Exchange for any current year to the members 
proportionately in settlement of the contribution which members are 
obligated to make in connection with the Gratuity Fund of the Exchange; 
and may require that officers, appointees or employees of the Exchange 
give good and sufficient bonds for the faithful performance of their 
duties.
    At the Board of Governors' next meeting after the BOXR Nominating 
Committee presents its candidates for the two positions reserved on the 
BOXR Board for representatives of BOX Participants, and its candidate 
for the position on the BSE Board of Governors reserved for a 
representative of BOX Participants, in October of each year, the Board 
of Governors shall select and appoint the Board of Directors of BOXR 
for the following year, as set forth in the Plan of Delegation of 
Functions and Authority by the Boston Stock Exchange, Inc. to Boston 
Options Exchange Regulation, L.L.C., and in accordance with the 
qualification provisions set forth in Section 4 of the By-Laws of 
Boston Options Exchange Regulation, L.L.C., including the appointment 
of the candidates presented by the BOXR Nominating Committee for the 
two BOXR Board positions reserved for representatives of BOX 
Participants. The Board of Governors shall also select and appoint as 
Governor the candidate put forth by the BOXR Nominating Committee for 
the position on the Board of Governors reserved for a representative of 
BOX Participants. Additionally, the Board of Governors shall appoint 
the initial Board of Directors of BOXR, in accordance with the term 
provisions set forth in Section 5 of the By-Laws of Boston Options 
Exchange Regulation, L.L.C., and the number of Directors provisions set 
forth in Section 3 of the By-Laws of Boston Options Exchange 
Regulation, L.L.C.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange 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 these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In order to create a new options regulatory subsidiary, the BSE 
proposes to transfer to BOXR, a Delaware limited liability company and 
a wholly-owned subsidiary of the BSE, all of the assets and liabilities 
that solely support the regulation of the standardized equity options 
trading business of the BSE. Upon this transfer, however, the BSE would 
continue to be the self-regulatory organization (``SRO'') for BOXR and 
the Boston Options Exchange (``BOX''), the BSE's proposed new exchange 
facility for the trading of standardized equity options securities.\4\ 
BOX would provide automatic order execution capabilities to BOX Options 
Participants (``Options Participants'') for standardized equity options 
securities listed or traded on the BSE. BOX would be operated by Boston 
Options Exchange Group, L.L.C. (``BOX LLC''). The proposed rule change 
for implementing the creation of BOXR includes: (i) Changes to the BSE 
Rules of the Board of Governors; (ii) the proposed Plan of Delegation 
of Functions and Authority by the Boston Stock Exchange, Inc., to 
Boston Options Exchange Regulation, L.L.C. (``Delegation Plan''); (iii) 
proposed By-Laws for BOXR; and (iv) amendments to the BSE Constitution.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 47186 (Jan. 14, 
2003), 68 FR 3062 (Jan. 22, 2003) (SR-BSE-2002-15) (``BOX Proposing 
Release'').
---------------------------------------------------------------------------

(I) Delegation Plan

(A) Relationship of BSE, BOXR and BOX LLC
    The BSE is a founding and controlling member of BOX LLC. Pursuant 
to contractual agreement, the BSE has the right to appoint two 
representatives to the board of BOX LLC. In addition to its ownership 
stake in BOX LLC, the BSE has entered into various agreements with BOX 
LLC under which BOX LLC would operate BOX as a facility of the BSE.\5\ 
Pursuant to these agreements, the BSE, through BOXR, would maintain 
responsibility for all regulatory functions related to the facility, 
and BOX LLC would be responsible for the business operations of the 
facility to the extent those activities are not inconsistent with the 
regulatory and oversight functions of the BSE and BOXR. This means that 
BOX LLC would not interfere with the BSE's self-regulatory 
responsibilities or those delegated to BOXR.
---------------------------------------------------------------------------

    \5\ Under the Act, ``the term `facility' when used with respect 
to an exchange includes its premises, tangible or intangible 
property whether on the premises or not, any right to the use of 
such premises or property or any service thereof for the purpose of 
effecting or reporting a transaction on an exchange (including, 
among other things, any system of communication to or from the 
exchange, by ticker or otherwise, maintained by or with the consent 
of the exchange), and any right of the exchange to the use of any 
property or service.'' See 15 U.S.C. 78c(a)(2).
---------------------------------------------------------------------------

    The BSE wholly owns BOXR as a subsidiary of the Exchange and 
proposes to delegate certain regulatory authority to BOXR for oversight 
of the BOX market. Under the proposal, BOXR would use its own 
regulatory staff, and not the employees of BOX LLC, to perform its 
regulatory oversight duties. In addition, BOXR would conduct all 
necessary surveillance of the trading effected through the BOX facility 
as well as enforcement of the BOX Rules, applicable BSE Rules and the 
federal securities laws and the rules thereunder.\6\ Pursuant to the 
proposed Delegation Plan and contractual agreements, BOXR would have 
regulatory oversight authority over BOX LLC and its officers, 
directors, agents and employees, each of whom would be

[[Page 45294]]

required to cooperate with BOXR in the fulfillment of its regulatory 
obligations.
---------------------------------------------------------------------------

    \6\ See BOX Proposing Release.
---------------------------------------------------------------------------

    The relationship between the BSE, BOXR, BOX LLC and BOX is 
explained further in the Delegation Plan.\7\ The BSE is proposing to 
adopt the Delegation Plan which sets forth the purpose, function, 
governance, procedures and responsibilities of the BSE and BOXR 
following approval of the Delegation Plan. The Delegation Plan 
describes the options regulatory subsidiary, BOXR; sets forth the 
delegation of authority to BOXR by the BSE; and describes the purpose, 
function, authority and responsibilities of BOXR, including the 
procedures for proposed rule change recommendations in regard to BOX 
and BOXR.
---------------------------------------------------------------------------

    \7\ The BSE notes that the Delegation Plan is based on PCX 
Equities Rule 14.3 of the PCX Plan of Delegation and the NASD's Plan 
of Allocation and Delegation of Functions by NASD to Subsidiaries.
---------------------------------------------------------------------------

    Through the adoption of new Chapter XXXVI and the Delegation Plan, 
BOXR and BOX LLC would also be subject to Commission oversight and 
examination. The Commission would oversee the premises, personnel, and 
records of BOXR and BOX LLC to the same extent that it currently 
oversees the premises, personnel, and records of the BSE. Under section 
1(b) and section 2(B)(1) of the proposed Delegation Plan, the books, 
records, premises, officers, directors, agents and employees of BOXR 
and BOX LLC would be the books, records, premises, officers, directors, 
agents and employees of the BSE for purposes of, and subject to, 
oversight pursuant to the Act. The books and records of BOXR and BOX 
LLC would be subject at all times to inspection and copying by the BSE 
and the Commission. BOXR and BOX LLC would be required to maintain all 
books and records related to BOX within the United States. Also, by 
delegated authority, the books and records of BOX LLC would be subject 
at all times to inspection and copying by BOXR. However, as set forth 
in the proposed Section 2(B)(3) of the Delegation Plan, proposed 
section 2(B)(1) would not create any rights or benefits for any person 
or entity other than the BSE, BOXR and the Commission. The Commission 
and the BSE's access to and oversight of BOX LLC as the operating 
company of BOX is further solidified in the private contracts related 
to BOX. The text of Section 2(B) of the Delegation Plan is included in 
various contractual agreements between the BSE and BOX LLC. Therefore, 
BOX LLC has not only a regulatory obligation to abide by the Delegation 
Plan, but a private contractual obligation as well.
(B) BOXR
(1) Corporate Status
    BOXR would be operated as a Delaware limited liability company. All 
of the issued shares of stock of BOXR would be owned by the BSE. 
Current BSE members would retain their memberships, and thus, their 
ownership interests in the BSE.
(2) Governing Documents and Rules
    BOXR's By-Laws, the BOX Rules and the applicable BSE Rules would 
govern its activities. The BOX Rules and the BOXR By-Laws would reflect 
the status of BOXR as a wholly-owned subsidiary of BSE, under 
management of the BOXR Board of Directors (``BOXR Board'') and its 
designated officers, ultimately subject to the self-regulatory 
authority of the BSE.
(3) Regulation of BOXR
    BOXR would operate as a subsidiary of BSE, which is a national 
securities exchange registered under section 6 of the Act.\8\ The BSE, 
as the SRO, retains ultimate responsibility for compliance by its 
members with the provisions of the Act and the rules and regulations 
thereunder. As set forth in the proposed BOX Rules, Options 
Participants are required to comply with all the BOX Rules as well as 
those BSE Board of Governors Rules specifically cross-referenced and 
incorporated by reference in the BOX Rules. For such purposes of cross-
referencing, interpreting and applying the Rules of the BSE to Options 
Participants, any reference to ``member'' of the BSE in such cross-
referenced rules is to be read as a synonym for ``Participant'' on BOX, 
whether OFP, Market Maker or both.\9\ For this reason, BOX Options 
Participants would be statutory ``members'' of BSE. Pursuant to the 
proposed BOX Rules, Options Participants are granted trading rights for 
options listed on the Exchange and traded on BOX.\10\ Options 
Participant status does not confer on the Options Participant any right 
to participate in trading on the BSE other than options trading on BOX, 
nor shall Options Participants be entitled to all the rights and 
responsibilities regarding the governance of the BSE as other BSE 
Members.\11\ They do not have ownership interests in the BSE, however, 
as discussed more fully below, they would have certain voting and 
representations rights.\12\
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f.
    \9\ See Chapter I, Section 2(c) of the Proposed BOX Rules in the 
BOX Proposing Release.
    \10\ See BOX Proposing Release Chapter II, Section 1(a).
    \11\ See BOX Proposing Release Chapter II, Section 1(e).
    \12\ Under section 6(b)(3) of the Act, the rules of an exchange 
must assure that its members are fairly represented in the selection 
of its directors and administration of its affairs. 15 U.S.C. 
78f(b)(3).
---------------------------------------------------------------------------

    The BSE Board is currently composed of the BSE Chairman, Vice 
Chairman and 20 governors. The composition of the BSE Board would be 
modified as part of the restructuring to include one governor 
representing Options Participants to provide input on the BSE Board. 
This governor (``Options Participant Governor'') would be nominated by 
the BOXR Nominating Committee and must be either an officer or director 
of an Options Participant.\13\ Pursuant to the proposed amendments to 
the BSE Constitution, the BSE Board would be required to appoint the 
candidate presented by the BOXR Nominating Committee.\14\
---------------------------------------------------------------------------

    \13\ See discussion of the proposed BOXR Nominating Committee 
below.
    \14\ See discussion of the proposed amendments to the BSE 
Constitution below.
---------------------------------------------------------------------------

    As a registered national securities exchange and the parent company 
of BOXR, the BSE would continue to carry out its statutory 
responsibilities to enforce compliance by Options Participants with the 
provisions of the federal securities laws and rules thereunder, as well 
as the BSE and BOX Rules, and to govern the administration of BOXR. In 
particular, to be effective, any changes to the BOX Rules and governing 
documents of BOXR must be ultimately approved by the BSE. The Exchange 
proposes that the Delegation Plan become part of the Rules of the BSE 
and, thus, may only be amended upon Commission approval. Moreover, 
changes to the BOXR By-Laws and the BOX Rules must be filed with the 
Commission pursuant to Section 19(b) of the Act \15\ and Rule 19b-4\16\ 
thereunder and must be submitted by the BSE.\17\
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b).
    \16\ 17 CFR 240.19b-4.
    \17\ The BSE Board must review and ratify all BOXR proposed rule 
changes before they are submitted to the Commission. See Section 2D 
of the Delegation Plan.
---------------------------------------------------------------------------

    While ultimately responsible, the BSE proposes to delegate specific 
self-regulatory responsibilities to BOXR, pursuant to a Delegation 
Plan. Specifically, BOXR would assume responsibility with respect to 
the options business of the Exchange for, among other things: (i) 
Establishing and interpreting rules governing the activities of Options 
Participants: (ii) determining regulatory and trading policies relating 
to the business activities of Options Participants; (iii) assuring 
compliance with BOX Rules

[[Page 45295]]

and the federal securities laws; (iv) administering surveillance 
programs and systems for enforcing rules governing the conduct and 
trading activities of Options Participants and their associated persons 
on BOX; (v) examining and investigating Options Participants and their 
associated persons to determine if they have violated the BOX Rules or 
the federal securities laws; (vi) administering the BOXR disciplinary 
programs; (vii) determining whether applicants meet the requirements 
for an Options Participant; (viii) placing restrictions on the business 
activities of Options Participants and their associated persons 
consistent with the public interest, the protection of investors and 
the federal securities laws; (ix) proposing fees and charges; (x) 
overseeing the operation of the BOX trading facilities; (xi) collecting 
and consolidating information for the surveillance audit trail; (xii) 
developing rule changes for the collection, processing and 
dissemination of quote and transaction information; (xiii) developing 
and adopting rules, interpretations and policies to maintain and 
enhance the integrity, fairness, efficiency and competitiveness of BOX; 
(xiv) administering the Exchange's involvement in the national market 
system (``NMS'') plans for options; and (xv) developing, administering 
and enforcing listing standards for securities traded on BOX.
    While BOXR would have extensive delegated authority to regulate and 
oversee the options trading business, the BSE would retain the ultimate 
responsibility for the Rules and regulations of BOX, as well as for the 
operation and administration of its subsidiary, BOXR. As part of its 
self-regulatory responsibilities, the BSE would review rulemaking and 
disciplinary decisions of BOXR and direct BOXR to take action that may 
be necessary to effectuate the purposes and functions of the Act. The 
BSE believes that these types of checks and balances should ensure that 
the BSE remains aware of the affairs of its options business conducted 
through BOXR, and that its options business is conducted in a manner 
consistent with the Act. Thus, while BOXR would be a separate entity, 
it would still remain under the self-regulatory authority of the BSE.
(4) Agreement Between BSE and BOXR
    Under the proposal, the BSE's equities and options regulatory 
functions would share certain infrastructure and personnel. After the 
completion of the restructuring, these shared assets would remain the 
property of BSE and the shared personnel would continue to be employed 
by BSE. In each case, however, BOXR would have access to those 
resources through inter-company contracts with BSE. In particular, BSE 
would contract to provide BOXR with certain management and support 
services and staff. The contract would include services for 
administration, membership, technology, finance and accounting, human 
resources and legal and regulatory services. The agreement between BSE 
and BOXR would allocate charges for these services and staff between 
BSE and BOXR.
(5) National Market System Plans
    The BSE currently is a participant in various NMS plans, including 
the Consolidated Tape Association (``CTA'') Plan, the Consolidated 
Quotation System (``CQS'') Plan, the Nasdaq Unlisted Trading Privileges 
Plan (``UTP'') Plan, and the Intermarket Trading System Plan, as well 
as a conditional participant, subject to Commission approval, in 
several options NMS plans, including the Options Price Reporting 
Authority (``OPRA'') Plan, the Options Listing Procedures (``OLPP'') 
Plan and the Intermarket Options Linkage Plan.\18\ These plans are 
joint industry plans for SROs that address last sale reporting, 
quotation reporting, listing procedures, and intermarket trading. 
Following the creation of BOXR, BSE, in its continuing role as the SRO, 
would continue to serve as the voting member of these NMS Plans. 
Nevertheless, BSE expects that, for those plans that relate to options 
trading, i.e., the OPRA Plan, the OLPP Plan and the Intermarket Options 
Linkage Plan, a BOXR representative would serve as the BSE's 
representative in dealing with these plans.
---------------------------------------------------------------------------

    \18\ The BSE is also a conditional participant in the Options 
Self-Regulatory Council (``OSRC''). The OSRC Plan is not an NMS plan 
under Section 11A of the Act, but rather a plan to allocate 
regulatory responsibilities under Rule 17d-2 under the Act. 17 CFR 
240.17d-2.
---------------------------------------------------------------------------

(II) BOXR By-Laws

    The BOXR By-Laws would reflect the status of BOXR as a wholly-owned 
subsidiary of BSE, ultimately subject to the self-regulatory authority 
of the BSE. As a separate corporate entity, BOXR would have its own 
board of directors and officers that would administer its day-to-day 
operations.
(A) BOXR Board of Directors
    The BOXR Board would consist of no fewer than 7 or more than 13 
directors. Currently, the Exchange contemplates that there would be 7 
directors. The composition of the BOXR Board would be as follows:
    [sbull] The Chief Executive Officer (``CEO'') of BSE (who will be 
considered a member of the Board for voting purposes, but not for 
qualification percentage purposes);
    [sbull] At least 50% Public Directors;\19\
---------------------------------------------------------------------------

    \19\ ``Public Director'' is defined as a Director who has no 
material business relationship with a broker or dealer, or the BSE, 
BOX, or BOXR. See BOXR By-Laws, Definition (p).
---------------------------------------------------------------------------

    [sbull] At least 20%, but no fewer than 2, nominees of Options 
Participants (the ``Options Participant Directors'').
    The BSE, as the founder and sole member, would appoint the initial 
BOXR Board. Subsequently, the BOXR Board would be nominated by the 
sitting BOXR Board, subject to the nominating procedures set forth 
below \20\ for the selection of at least twenty percent, but no fewer 
than two Options Participant Directors. The BOXR Board would be elected 
by the BSE Board, as the BSE is the sole shareholder of BOXR. The BSE 
would have the right to approve, remove, and replace any member of the 
BOXR Board by virtue of its status as sole shareholder, subject to the 
By-Laws. Any vacancy on the BOXR Board would be filled with a person 
who satisfies the classification associated with the vacant seat, i.e., 
a member of the public or a representative of an Options Participant.
---------------------------------------------------------------------------

    \20\ See discussion of the proposed BOXR Nominating Committee 
below.
---------------------------------------------------------------------------

    To the extent that the number of BOXR Board seats is changed from 
the initially contemplated 7 members, at least 50 percent of the BOXR 
Board must be Public Directors and at least 20 percent, but no fewer 
than two, representatives of Options Participants. The BSE believes 
that this provision would ensure that the public interest is adequately 
represented in the Exchange's decision-making process pursuant to 
section 6(b)(3) of the Act.\21\ Further, the Exchange acknowledges that 
public representatives help to ensure that no single group of market 
participants has the ability to systemically disadvantage other market 
participants through the exchange governance process. The BSE believes 
that Public Directors can provide unique, unbiased perspectives, which 
should enhance the ability of the BOXR Board to address issues in a 
non-discriminatory fashion and foster the integrity of BOXR. In this 
way, the Public Directors may help to prevent unfair discrimination 
between customers, brokers, or dealers in the administration of BOXR, 
and protect investors and the public interest,

[[Page 45296]]

consistent with the provisions of Section 6(b)(5) of the Act.\22\
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78f(b)(3).
    \22\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The proposed BOXR By-Laws provide that at least 20 percent (but no 
fewer than two directors) must be directors who are officers or 
directors of an Options Participant and are elected by plurality vote 
of Options Participants, following a nomination process which involves 
the BOXR Nominating Committee.\23\ The Options Participant Directors 
would be nominated by the BOXR Nominating Committee or by petition of 
at least 5 Options Participants. When a vote is held, the candidates 
selected by Options Participants must be supported by a plurality of 
the Options Participants who cast votes in order to be selected as a 
candidate for the BOXR Board. Pursuant to the proposed amendments to 
the Constitution, the BSE, as the sole member, would be required to 
appoint the Options Participant Directors so chosen and put forth to 
the BSE Board by the BOXR Nominating Committee.\24\
---------------------------------------------------------------------------

    \23\ See discussion of the proposed BOXR Nominating Committee 
below.
    \24\ See discussion of the proposed amendments to the BSE 
Constitution below, which requires the BSE to elect the slate 
submitted by the BOXR Nominating Committee.
---------------------------------------------------------------------------

(B) Management
    BOXR would have a Chairman of the Board and may have a President, 
either of whom may be the CEO of BOXR. In addition, BOXR would have a 
Chief Regulatory Officer who would be appointed by, and serve at the 
pleasure of, the BOXR Board. The officers of BOXR would manage the 
business and affairs of BOXR, subject to the oversight of the BOXR 
Board, and, in some cases, subject to the approval of BSE as the sole 
member and SRO.
(C) BOXR Committees
    In an effort to streamline its management, the BSE has chosen to 
commence BOXR operations with only two administrative committees, 
although there are specific provisions in the proposed By-Laws 
permitting the appointment of additional committees by the BOXR Board, 
as necessary. There would be a BOXR Nominating Committee and a BOXR 
Hearing Committee, both of which would provide Options Participant 
involvement in the administration of the day-to-day operations of BOX.
(1) Nominating Committee
    The BOXR Nominating Committee would be responsible for nominating 
two candidates for the BOXR Board, one candidate for the BSE Board, and 
members for any vacant positions on the Nominating Committee. These 
candidates would represent Options Participants on the respective 
Boards. The BOXR Nominating Committee would consist of seven members, 
six of whom would be elected by ballot. The seventh would be appointed 
by the BOXR Board, and must be one of that Board's existing Public 
Directors. Of the six elected members, five shall represent broker-
dealer Options Participants of BOX (at least one of which shall also 
represent a Market Maker on BOX), and one shall be a representative of 
the public. Thus, of the seven total members of the committee, there 
would be two members who are representatives of the public. The BOXR 
Nominating Committee would propose a slate of two eligible nominees for 
the BOXR Board, one eligible nominee for the BSE Board and the nominees 
for the BOXR Nominating Committee.
    The BSE has also set forth a proposed provision which it believes 
ensures further fair representation of Options Participants in the 
nominating process. Options Participants would be able to submit 
additional nominees for each of the available positions by way of 
petition for independent nominations. In recognition of the fact that 
BOX would be an electronic marketplace with geographically diverse 
Options Participants, the Exchange has proposed that independent 
nominations may take place by petition of only five Options 
Participants. This is in contrast to the independent nomination process 
for the BSE, which requires fifteen BSE Member signatures for an 
independent nomination to be effected. By lowering the number of 
signatures required for an independent nomination from Options 
Participants, the Exchange believes it is encouraging independent 
nominations, thereby enhancing the potential for more effective 
representation of Options Participants. This process is proposed for 
not only the position reserved on the BSE Board for the Options 
Participant Governor, but for the two positions reserved on the BOXR 
Board for Options Participant representatives and the nominees for the 
BOXR Nominating Committee as well.
    Furthermore, and perhaps most importantly, Options Participants 
alone would vote, by plurality, to choose the individuals who would 
represent them. Only after this vigorous and full nomination and 
electoral process concludes would the chosen candidates be presented, 
by the BOXR Nominating Committee, to the BSE Board for appointment. In 
accordance with the proposed Constitutionally established standards and 
the proposed BOXR By-Laws, the BSE Board is then charged with 
appointing the BOXR Board, as well as accepting the Options Participant 
Governor candidate for the BSE Board of Governors.
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act, in general, and furthers the objectives of section 
6(b)(3),\25\ in particular, in that it is consistent with the fair 
representation principles set forth in the Act. Under section 6(b)(3), 
the rules of an exchange must assure that its members are fairly 
represented in the selection of its directors and administration of its 
affairs. The fair representation requirement of section 6(b)(3) allows 
statutory members to have a voice in an exchange's use of its self-
regulatory authority. This statutory requirement also helps ensure that 
exchange members are protected from unfair, unfettered actions by an 
exchange pursuant to its rules, and that, in general, an exchange is 
administered in a way that is equitable to all those who trade on its 
market or through its facilities. The BSE believes that the proposals 
contained in this filing would ensure that Options Participants are 
treated in a manner consistent with the requirements of section 
6(b)(3).
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------

    In addition, to make sure that the public interest is adequately 
represented in an exchange's decision-making process, section 6(b)(3) 
of the Act states that an exchange's rules must provide that one or 
more of its directors be representative of issuers and investors, and 
not associated with a member of the exchange, or with any broker-
dealer. The Exchange's proposal would allow a representative of Options 
Participants to be on the BSE Board, but would not alter the 
composition of the BSE Board. In particular, the Exchange notes that 
the 50% public representation on the BSE Board is not affected. The 
Exchange is in agreement with a long established belief expressed by 
the Commission on this regard that the inclusion of public 
representatives on exchange oversight bodies is critical to ensuring 
that an exchange works to protect the public interest in the exchange 
governance process. The Exchange values unique, unbiased perspectives 
on the BSE Board and other governing bodies. In this regard, the 
proposed nominating process for Options Participant representatives has 
been made less stringent so as to permit and encourage greater 
participation by what would be a diverse group of Participants in the 
BOX marketplace. Therefore, by the combination of Board composition and 
the nominating/election process, the

[[Page 45297]]

Exchange believes it is assuring that Options Participants are 
represented fairly in the selection of the BSE and BOXR Boards, and 
thereby in the administration of Exchange affairs and in the affairs of 
the Exchange subsidiary, BOXR, which would most directly affect them.
(2) Hearing Committee
    The BOXR disciplinary process would be similar to the existing BSE 
disciplinary process, and would be governed by a BOXR Hearing 
Committee. The BOXR Hearing Committee would be appointed by the 
Chairman of the Board of BOXR. Membership of the committee shall be 
comprised of at least one Options Participant member and such number of 
non-Participant members as the Chairman may deem necessary.
    The BOXR Chief Regulatory Officer, or his staff, would authorize 
the initiation of disciplinary hearings and proceedings. The BOXR 
Hearing Committee would conduct hearings, render decisions and impose 
sanctions. Decisions of the BOXR Hearing Committee may be appealed for 
review to the BOXR Board. Any decision of the BOXR Board may 
subsequently be appealed to the BSE Board of Governors, which shall 
have the discretion whether to hear such appeal. If the BSE Board of 
Governors does not order review of a decision of the BOXR Board, or, in 
its discretion, elects not to hear an appeal of a decision of the BOXR 
Board, then the decision of the BOXR Board shall be deemed to be the 
final action of the Exchange. Any decision of the BSE Board of 
Governors, or the BOXR Board (in cases where the BSE Board in its 
discretion has elected not to hear the appeal) may be ultimately 
appealed to the Commission. As with all BSE decisions, the Commission 
has the authority to review final disciplinary sanctions imposed by 
BOXR or the BSE on Options Participants, including sanctions imposed 
for violations of BOX rules.
    The Exchange believes that its Hearing Committee, BOXR Board and 
BSE Board of Governors Appeals process is consistent with the Act, and 
in particular section 6(b)(7) thereunder, in that the Exchange has 
established fair procedures for disciplining Options Participants. The 
BSE Board of Governors has appellate jurisdiction of sanctions and 
findings of the BOXR Hearing Committee and the BOXR Board for 
violations of the rules and regulations of the Act, the Constitution 
and Rules of the BSE, the BOX Rules, the BOXR By-Laws, and the 
interpretations and stated policies of either the BSE Board of 
Governors or the Board of Directors of BOXR. Moreover, aggrieved 
Options Participants may appeal the decision of the BSE Board of 
Governors to the Commission.

(III) Changes to the Boston Stock Exchange Constitution

    The proposed changes to the BSE Constitution have two primary 
purposes. First, the proposed amendment to Article II, Section 1, 
reserves a seat on the BSE Board for a representative of BOX Options 
Participants. Although the proposal would permit a representative of 
Options Participants to serve on the BSE Board, the proposal would not 
alter the overall BSE Board composition. The BSE Board would continue 
to be comprised of fifty percent Public Directors (at least five of 
which shall be from financial institutions not directly associated with 
a member organization or broker-dealer). Also, the BSE Board would 
continue to consist of twenty directors, in addition to the Chairman 
and Vice-Chairman of the Exchange.
    Second, in section 4 of the same Article IV, the BSE has proposed 
to ensure that the candidates elected by Options Participants are 
seated by the BSE Board. Specifically, this applies to both the Options 
Participant Governor elected to serve on the BSE Board, as well as the 
two Options Participant representatives elected to serve on the BOXR 
Board. Such a process is consistent with the established process in 
which BSE Board members are elected by BSE Members, and subsequently 
selected and appointed both by and to the BSE Board.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with section 6(b)\26\ of the Act, in general, and furthers 
the objectives of section 6(b)(5),\27\ in particular, in that it is 
designed to facilitate transactions in securities; to prevent 
fraudulent and manipulative acts and practices; to promote just and 
equitable principles of trade; to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities; to remove impediments to and perfect the mechanism of a 
free and open market and a national market system; and in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78f(b).
    \27\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve the proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-BSE-2003-04 and should be submitted by August 22, 2003.


[[Page 45298]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-19615 Filed 7-31-03; 8:45 am]
BILLING CODE 8010-01-P