[Federal Register Volume 69, Number 12 (Tuesday, January 20, 2004)]
[Notices]
[Pages 2761-2767]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1114]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49067; File No. SR-BSE-2003-19]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval of Amendments No. 1 and 2 Thereto by the Boston 
Stock Exchange, Inc. Relating to the LLC Operating Agreement of the 
Proposed New Exchange Facility To Be Operated by the Boston Options 
Exchange Group LLC

January 13, 2004.
    On October 16, 2003, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposal to establish, through an operating agreement among its owners, 
a Delaware limited liability company known as the Boston Options 
Exchange Group LLC (``BOX LLC''). BOX LLC would operate a new options 
trading facility of the Exchange. On October 23, 2003, the Commission 
published the proposal in the Federal Register.\3\ The Commission 
received one comment on the proposal.\4\ On November 14, 2003, BSE 
submitted Amendment No. 1 to the proposal.\5\ On January 9, 2004, BSE 
submitted Amendment No. 2 to the proposal.\6\ This order approves the 
proposed rule change, issues notice of and solicits comment on 
Amendments No. 1 and 2, and approves Amendments No. 1 and 2 on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 48650 (October 17, 
2003), 68 FR 60731 (``Notice'').
    \4\ See infra Section II.
    \5\ See letter from George W. Mann, Jr., General Counsel, BSE, 
to Nancy Sanow, Division of Market Regulation (``Division''), 
Commission, dated November 13, 2003 (``Amendment No. 1''). In 
Amendment No. 1, BSE proposes a technical change to substitute the 
term ``BSE'' for the phrase ``Regulatory Services Provider and its 
Affiliates.''
    \6\ See letter from George W. Mann, Jr., General Counsel, BSE, 
to Nancy Sanow, Division, Commission, dated January 9, 2004 
(``Amendment No. 2''). In Amendment No. 2, BSE proposes to clarify 
the restrictions on the Transfer of BOX LLC units and to clarify the 
Commission's jurisdiction over the owners of BOX LLC.
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I. Description of the Proposal

A. Corporate Organization of BOX LLC

    Through a series of related filings, BSE is proposing to establish 
a new options trading facility \7\ to be known as the Boston Options 
Exchange (``BOX'').\8\ In this filing, BSE is seeking the Commission's 
approval of the operating agreement of BOX LLC (the ``LLCOA''). Unlike 
a corporation's charter or bylaws, the LLCOA is a signed contract 
between the owners of BOX LLC

[[Page 2762]]

(``unitholders'').\9\ BSE has asserted that certain provisions of the 
LLCOA do not constitute ``rules of an exchange'' within the meaning of 
Section 3(a)(27) of the Act \10\ and Rule 19b-4. Accordingly, BSE did 
not file, and the Commission is not addressing, these provisions.
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    \7\ See Section 3(a)(2) of the Act, 15 U.S.C. 78c(a)(2).
    \8\ Today the Commission is approving three other BSE proposals 
that together establish the BOX facility. See Securities Exchange 
Act Release Nos. 49066 (January 13, 2004) (SR-BSE-2003-17) 
(establishing fee schedule for proposed BOX facility); 49065 
(January 13, 2004) (SR-BSE-2003-04) creating Boston Options Exchange 
Regulation LLC to which BSE would delegate its self-regulatory 
functions with respect to BOX facility); and 49068 (January 13, 
2004) (SR-BSE-2002-15) (approving trading rules for BOX facility) 
(``BOX Rules''). In addition, the Commission previously approved BSE 
rules providing for the allocation of market maker appointments in 
the BOX facility. See Securities Exchange Act Release No. 48644 
(October 16, 2003), 68 FR 60423 (October 22, 2003) (SR-BSE-2003-13).
    \9\ While ownership interests in a corporation are generally 
referred to as ``shares'' or ``stock,'' ownership interests in an 
LLC are referred to as ``units.'' Therefore, the owners of BOX LLC 
are referred to as ``unitholders.''
    \10\ 15 U.S.C. 78c(a)(27).
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B. Current Ownership and Control of BOX LLC

    Currently, there are three unitholders who have a direct 
controlling interest in BOX (``direct controlling parties''): Bourse de 
Montr[eacute]al Inc. (``Bourse'') (31.27%), the largest derivatives 
exchange in Canada; BSE (26.89%); and Interactive Brokers Group LLC 
(``IBG'') (22.41%), a registered broker-dealer that intends to apply to 
be an Option Participant in the BOX facility.\11\ None of the remaining 
unitholders holds more than a 5% interest in BOX LLC. There is one 
person that has an indirect controlling interest in BOX LLC (i.e., is 
an ``indirect controlling party''): Mr. Thomas Peterffy, who holds a 
controlling interest in IBG, which has a direct controlling interest in 
BOX LLC. No person or entity has a controlling interest in either BSE 
or Bourse.
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    \11\ An Options Participant is a firm or organization that is 
registered with the Exchange to participate in options trading on 
BOX as an order flow provider and/or as a market maker. See BOX 
Rules, Chapter I, Section 1(a)(40).
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C. Changes in Ownership of BOX LLC

    Section 8.1(a) of the LLCOA defines a Transfer broadly to be any 
disposition of, sale, assignment, exchange, participation, 
subparticipation, encumbrance, or other transfer of units, and provides 
that, except in certain limited circumstances, no Person may directly 
or indirectly Transfer any BOX LLC units, or any rights arising 
thereunder, without the prior approval of the board of directors of BOX 
LLC.\12\ To be eligible for such approval, the proposed transferee must 
be: (1) Of high professional and financial standing; (2) able to carry 
out its duties as a unitholder under the LLCOA; and (3) under no 
regulatory or governmental disqualification. Section 8.1(b) provides, 
in addition, that a Person shall be admitted to BOX only if such 
Person, among other things, accepts in writing the terms and provisions 
of the LLCOA and the BOX Board accepts it by resolution. Section 8.4(a) 
provides that no Transfer of BOX LLC units shall take place if such 
transaction is prohibited by the LLCOA or any state, federal, or 
provincial securities law. Section 8.4(d) provides that any Transfer of 
BOX LLC units that contravenes Article 8 of the LLCOA shall be void and 
ineffectual and shall not bind or be recognized by BOX LLC.
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    \12\ In Amendment No. 2, the BSE filed changes to Article 8 to 
enhance BOX's ability to prevent Transfers of BOX LLC units in 
contravention of the LLCOA. See Amendment No. 2, supra note .
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    Section 8.4(e) of the LLCOA provides that, beginning after 
Commission approval of this proposed rule change, BOX LLC must provide 
the Commission with written notice ten days prior to the closing date 
of any acquisition that results in a unitholder's percentage ownership 
interest in BOX LLC, alone or together with any affiliate,\13\ meeting 
or crossing either the 5%, 10%, or 15% thresholds. Section 8.4(f) 
provides that any Transfer of BOX LLC units that results in the 
acquisition and holding by any unitholder, alone or together with any 
affiliate, of an interest that meets or crosses the 20% threshold or 
any successive 5% threshold (i.e., 25%, 30%, etc.), would trigger an 
amendment to the LLCOA that would constitute a proposed rule change 
that BSE would have to file with the Commission under Section 19(b) of 
the Act.\14\ In addition, Section 8.4(f) provides that an amendment to 
the LLCOA resulting from a Transfer of BOX LLC units that reduces BSE's 
ownership in BOX LLC to below the 20% threshold would constitute a 
proposed rule change under Section 19(b) of the Act.
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    \13\ The term ``affiliate'' is defined in Section 1.1 of the 
LLCOA and means, with respect to any person, any other person 
controlling, controlled by, or under common control with, such 
person. As used in this definition, the term ``control'' means the 
possession, directly or indirectly, of the power to direct or cause 
the direction of the management and policies of a person, whether 
through the ownership of voting securities, by contract or otherwise 
with respect to such person. A person is presumed to control any 
other person, if that person: (1) Is a director, general partner, or 
officer exercising executive responsibility (or having similar 
status or performing similar functions); (2) directly or indirectly 
has the right to vote 25% or more of a class of voting security, or 
has the power to sell or direct the sale of 25% or more of a class 
of voting securities of the person; or (3) in the case of a 
partnership, has contributed, or has the right to receive upon 
dissolution, 25% or more of the capital of the partnership.
    \14\ For example, assume that a unitholder owns a 28% interest 
in BOX LLC and buys units constituting an additional 3%. Because the 
unitholder would cross the 30% ownership threshold, the acquisition 
would trigger an amendment to the LLCOA that BSE would have to 
submit as a proposed rule change. However, an acquisition of an 
additional 3% that would raise the unitholder's interest from 31% to 
34% would not trigger a proposed rule change.
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    Section 8.4(g) of the LLCOA provides for indirect changes in 
control of BOX LLC. Any person that acquires a controlling interest 
(i.e., an interest of 25% or greater) in a unitholder that holds 20% or 
more of the BOX LLC units would be required to agree to become a party 
to the LLCOA and abide by its terms.\15\ The amendment to the LLCOA 
caused by the addition of the indirect controlling party would trigger 
a proposed rule change that BSE would have to file with the Commission 
pursuant to Section 19(b) of the Act. The rights and privileges of the 
direct controlling party would be suspended until this proposed rule 
change becomes effective under the Act or until the indirect 
controlling party ceases to have a controlling interest in the direct 
controlling party.
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    \15\ For example, assume Company XYZ owns a 25% interest in BOX 
LLC and Firm ABC acquires 35% of Company XYZ. Firm ABC must execute 
an amendment to the LLCOA whereby Firm ABC agrees to become a new 
party to the agreement and abide by all of its provisions. 
Furthermore, a person could become subject to Section 8.4(g) of the 
LLCOA if it acquires an indirect controlling interest in a direct 
controlling party of BOX LLC.
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    In addition to the requirements for proposed rule changes relating 
to direct and indirect changes in control of BOX LLC, Section 4.3(b) of 
the LLCOA prohibits unitholders from entering into voting trust 
agreements with respect to their ownership interests in BOX LLC.

D. Commission Jurisdiction Over Owners of BOX LLC

    In Section 19.6(a), each unitholder of BOX LLC acknowledges that, 
to the extent that they are related to BOX activities, the books, 
records, premises, officers, directors, agents, and employees of the 
unitholder shall be deemed to be the books, records, premises, 
officers, directors, agents, and employees of BSE for the purpose of 
and subject to oversight pursuant to the Act. In Section 19.6(b), each 
unitholder and the officers, directors, agents, and employees thereof 
irrevocably submit to the exclusive jurisdiction of the U.S. federal 
courts, the Commission, and BSE \16\ for the purposes of any suit, 
action, or proceeding pursuant to the U.S. federal securities laws and 
the rules or regulations thereunder, arising out of or relating to BOX 
activities or Section 19.6(a). Also as provided in Section 19.6(b) of 
the LLCOA, each unitholder and the officers, directors, agents, and 
employees thereof waive, and agree not to assert by way of motion, as a 
defense or otherwise in any such suit, action, or proceeding, any claim 
that they are not personally subject to the jurisdiction of the

[[Page 2763]]

Commission; that the suit, action or proceeding is an inconvenient 
forum; that the venue of the suit, action, or proceeding is improper; 
or that the subject matter of the suit, action, or proceeding may not 
be enforced in or by such courts or agency.
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    \16\ Such jurisdiction includes Delaware for matters relating to 
the organization or internal affairs of BOX LLC, provided that such 
matter is not related to trading on, or the regulation of, the BOX 
Market. See Section 19.6(b) of the LLCOA; see also Amendment No. 2, 
supra note.
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    Section 19.6(c) of the LLCOA provides that the BSE and each 
unitholder shall take such action as is necessary to ensure that such 
unitholder's officers, directors, and employees consent to the 
application of Section 19.6 with respect to their BOX-related 
activities.\17\ Finally, Section 19.6(c) further provides that the 
Bourse and the BSE shall take such action as is necessary to ensure 
that, with respect to their BOX-related activities, the Bourse's 
officer, directors, and employees consent to the communication of their 
``personal information'' by the Bourse to the Commission and the BSE 
and agree to waive the protection of such ``personal information'' that 
is provided by the Act Respecting the Protection of Personal 
Information in the Private Sector, R.S.Q.c.P-39.1 (``Private Sector 
Privacy Act'').\18\
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    \17\ See Amendment No. 2, supra note.
    \18\ Id.
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E. Governance of BOX LLC

    Section 4.2(b) of the LLCOA gives the board of directors of BOX LLC 
the power and responsibility to manage the business of BOX LLC, select 
and evaluate the performance of the Senior Executive, and establish and 
monitor capital and operating budgets. Section 4.1(a) provides that the 
board of BOX LLC will consist of between six and 13 directors. Section 
4.1(b) provides that, initially, Bourse, BSE, and IBG will be entitled 
to designate two directors each. Moreover, for as long as BOX remains a 
facility of the Exchange, BSE has the right to designate at least one 
director. Section 4.1(c) provides that any new unitholder that acquires 
a prescribed percentage interest in BOX LLC also would be entitled to 
designate one director. Section 4.8 provides that, except as otherwise 
expressly provided in the LLCOA or as requested by the board, no 
unitholder shall take part in the day-to-day management or operation of 
the business or affairs of BOX LLC.
    Pursuant to Section 4.1(d) of the LLCOA, a director shall be 
terminated by the board: (i) In the event such director has violated 
any provision of the LLCOA; or (ii) if the board determines that such 
action is necessary or appropriate in the public interest or for the 
protection of investors. In addition, Section 4.2(a) requires each 
director to comply with the federal securities laws and the rules and 
regulations thereunder and to cooperate with the Commission and BSE 
pursuant to their regulatory authority. Section 4.2(a) also requires 
each director to take into consideration whether his or her actions as 
a director would cause BOX LLC to engage in conduct that fosters and 
does not interfere with its ability to prevent fraudulent and 
manipulative acts and practices; promote just and equitable principles 
of trade; foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities; remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system; and, in general, protect investors and the public interest.

F. Regulation of BOX

    BSE will operate BOX as a facility of the Exchange. Accordingly, 
BSE has responsibility under the Act for the BOX facility. In this 
regard, Sections 12.1 and 15 of the LLCOA each provide that the books, 
records, premises, officers, directors, agents, and employees of BOX 
shall be deemed to be the books, records, premises, officers, 
directors, agents, and employees of BSE for the purpose of and subject 
to oversight pursuant to the Act. Moreover, under Section 5.3 of the 
LLCOA, each unitholder agrees to comply with the federal securities 
laws and the rules and regulations thereunder; to cooperate with the 
Commission and BSE pursuant to their regulatory authority and the 
provisions of the LLCOA; and to engage in conduct that fosters and does 
not interfere with BOX LLC's ability to prevent fraudulent and 
manipulative acts and practices; promote just and equitable principles 
of trade; foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities; remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system; and, in general, protect investors and the public interest.
    Section 5.9 of the LLCOA further provides that, after appropriate 
notice and opportunity for hearing, the board, by a two-thirds vote, 
including the affirmative vote of BSE and excluding the vote of the 
unitholder subject to sanction, may suspend or terminate a unitholder's 
voting privileges or ownership: (i) In the event such unitholder is 
subject to a statutory disqualification, as defined in Section 3(a)(39) 
of the Act; (ii) in the event such unitholder has violated any 
provision of the LLCOA or any federal or state securities law; or (iii) 
if the board determines that such action is necessary or appropriate in 
the public interest or for the protection of investors.
    In addition, Section 4.4(a) of the LLCOA provides that BOX LLC may 
not take any major action unless such action is approved by a majority 
of the board, including the affirmative vote of all of the directors 
designated by BSE. A ``major action'' is defined in Section 4.4(b) to 
include, among other things, a merger or consolidation involving BOX 
LLC, a sale of any material portion of its assets, the dissolution or 
winding-up of BOX LLC, entry by BOX into any line of business other 
than that set forth in the LLCOA, entering into any agreement, 
commitment, or transaction with an affiliate of a unitholder that is 
not on commercially reasonable terms, and the purchase of any units of 
BOX LLC.
    Section 16.2(a) of the LLCOA generally provides that a unitholder 
may not disclose any confidential information of BOX LLC to any person, 
except as expressly provided by the LLCOA. However, Section 16.2(b) 
provides exceptions for, among other things, disclosure required by the 
federal securities laws or in response to a request by the Commission 
pursuant to the Act or by the BSE. Similarly, Section 16.5 of the LLCOA 
provides that nothing in the LLCOA should be interpreted as to limit or 
impede the rights of the Commission, BSE, or BOXR to access or examine 
BOX Confidential Information, or to limit or impede the ability of 
unitholders, or their officers, directors, agents, or employees, to 
disclose BOX Confidential Information to the Commission, BSE, or 
BOXR.\19\
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    \19\ See Amendment No. 2, supra note .
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G. Ownership Restrictions on BOX Unitholders Who Are Also Options 
Participants

    Section 8.4(h) of the LLCOA imposes a ``voting collar'' on any 
unitholder who, alone or together with an affiliate, has an interest in 
BOX LLC in excess of 20% and is also an Options Participant in the BOX 
market. The interests owned by such a unitholder in excess of 20% are 
deemed ``excess units.'' No unitholder who is also an Options 
Participant is permitted to vote or give proxy rights to vote with 
respect to any excess units. However, Section 8.4(h) further provides 
that the excess units would be considered for quorum purposes of any 
meeting of the board, and the person presiding over quorum and vote 
matters would vote the excess

[[Page 2764]]

units in the same proportion that the units held by the other 
unitholders are voted.
    BSE is proposing a temporary exemption until January 1, 2014 from 
the voting collar provisions of Section 8.4(h) for IBG, a unitholder 
that is also an Options Participant. Under the second paragraph of 
Section 8.4(h), IBG is permitted to vote its excess units, but only 
with respect to any vote regarding a merger, consolidation, or 
dissolution of BOX LLC or any sale of all or substantially all of the 
assets of BOX LLC.

II. Comment Received

    The Commission received one comment letter on the proposal, from 
the Chicago Board Options Exchange (``CBOE'').\20\ CBOE's principal 
concern is that BSE and its partners propose to create a new securities 
exchange to act as a market for the trading of standardized securities 
options without registering the new exchange as a national securities 
exchange. Moreover, CBOE questions whether ``a web of undertakings and 
provisions embodied in various complex and apparently overlapping 
agreements (not all of which have been filed with the Commission) will 
be sufficient to assure the adequacy of regulation and of the 
Commission's jurisdiction over BOX and its owners,'' and questions 
``how the independence of BOX's governance will be assured'' and ``the 
conflicts between its for-profit structure and its regulatory 
obligations will be resolved.''
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    \20\ See letter from William J. Brodsky, Chairman and Chief 
Executive Officer, CBOE, to Jonathan G. Katz, Secretary, Commission, 
dated November 20, 2003.
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    In addition, CBOE criticizes the manner in which BSE presented the 
LLCOA to the Commission for its review under Section 19(b) of the Act, 
arguing that BSE should have filed the LLCOA in its entirety, rather 
than in redacted form. In support of that view, CBOE likens an LLCOA to 
the articles of incorporation of a corporation and claims that, if an 
entity organized as a corporation applied for registration as a 
national securities exchange, it would be required to provide its 
articles in their entirety. CBOE argues, in addition, that ``the filing 
does not present a comprehensive description of who are the owners of 
BOX,'' noting that only the three controlling unitholders that 
collectively have an ownership interest of 80.67% were listed. CBOE 
notes that its concerns about the ownership and control of BOX LLC were 
``heightened by the fact that BOX's largest single owner is a non-U.S. 
person.'' CBOE also objects to redactions to the LLCOA regarding the 
``major actions'' over which BSE had veto power, arguing that a proper 
analysis of BOX's governance and regulation could not be performed 
without the redacted information. CBOE concludes that ``the idea that 
an applicant can pick and choose which provisions of the [LLCOA] of an 
exchange to submit for review is wholly inconsistent with the statutory 
scheme of exchange regulation provided for in the Exchange Act.''

III. Discussion

    After careful consideration of the proposal and the comment letter 
submitted by CBOE, the Commission finds that the proposed rule change, 
as amended, is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\21\ In 
particular, the Commission finds that the proposal is consistent with 
Section 6(b)(1) of the Act,\22\ which requires a national securities 
exchange to be so organized and have the capacity to be able to carry 
out the purposes of the Act. The Commission also finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\23\ which 
requires, among other things, that the rules of an exchange be designed 
to promote just and equitable principles of trade; to facilitate 
transactions in securities; to remove impediments to and perfect the 
mechanisms of a free and open market and a national market system; and, 
in general, to protect investors and the public interest.
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    \21\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78f(b)(1).
    \23\ 15 U.S.C. 78f(b)(5).
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A. BOX as a Facility of the Exchange

    The Commission believes that the proposed rule change is consistent 
with Section 6(b)(1) of the Act \24\ in that, upon establishing the BOX 
facility, BSE will remain so organized, and have the capacity to be 
able, to carry out the purposes of Act. Moreover, the Commission 
believes that the BSE's proposal to operate BOX as its facility is 
properly filed under Section 19(b) of the Act and Rule 19b-4 
thereunder, and that BOX is not required, separate from BSE, to apply 
for registration as a national securities exchange pursuant to Section 
6(a) of the Act.\25\
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    \24\ 15 U.S.C. 78f(b)(1).
    \25\ 15 U.S.C. 78f(a).
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    BOX LLC is the limited liability company established under Delaware 
law that will operate the BSE's proposed options trading facility.\26\ 
The BSE is a registered exchange and, therefore, an SRO with 
obligations to comply with the Act and to enforce compliance by its 
members and persons associated with its members with the Act, the rules 
thereunder, and its own rules. As the CBOE points out in its comment 
letter, the rules of an exchange, as defined in Section 3(a)(27) of the 
Act, include the constitution, articles of incorporation, bylaws, and 
rules. Thus, any changes to these BSE instruments would have to be 
filed pursuant to Section 19(b) of the Act and Rule 19b-4 thereunder. 
The LLCOA, however, is the organizational document of the BOX LLC, not 
the BSE.
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    \26\ The Commission notes that the BOX facility includes the 
server, its hardware and software, wherever located.
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    Nevertheless, certain provisions in the LLCOA may be rules of an 
exchange if they are the stated policies, practices, and 
interpretations, as defined in Rule 19b-4 of the Act, of the BSE. Any 
proposed rule or any proposed change in, addition to, or deletion from 
any such rules of an exchange must be filed pursuant to Section 19(b) 
of the Act and Rule 19b-4 thereunder. In its comment letter, the CBOE 
contends that the BSE should have filed the entire LLCOA. The 
Commission, however, does not believe that Section 19(b) of the Act and 
Rule 19b-4 thereunder requires that all provisions of a document must 
be filed solely because some provisions of that document are rules of 
the exchange.\27\
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    \27\ The CBOE also states that it assumed that the BSE would 
only file changes to those provisions of the operating agreement 
included in this filing. In this regard, the Commission clarifies 
that whether or not a proposed rule change must be filed under 
Section 19(b) of the Act is not determined solely on the basis of 
whether the original rule was filed.
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    BSE has filed the proposed rule change to establish BOX LLC as the 
operator of one of its facilities, despite the fact that BSE does not 
hold the largest ownership interest in BOX LLC. As a preliminary 
matter, the Commission does not believe that the ownership structure of 
BOX LLC precludes approval of this proposal. The Act does not require 
that an SRO have any ownership interest in the operator of one of its 
facilities.
    In a similar prior case involving the establishment of ArcaEx as a 
facility of the Pacific Exchange (``PCX''), the Commission determined 
that a national securities exchange need not have a significant 
ownership interest in the operator of one of its facilities.\28\ This

[[Page 2765]]

determination was predicated on the extent to which PCX, as the SRO, 
regulates and oversees ArcaEx, notwithstanding its limited ownership 
interest in the operator of the facility. As the Commission stated in 
the PCX/ArcaEx Approval Order: ``the PCX will be fully responsible for 
all activity that takes place through ArcaEx, including its regulation 
and oversight, because ArcaEx is a part of the Exchange.''\29\ 
Similarly, the Commission believes that BOX LLC can be approved as the 
operator of the BOX facility on the same basis that it approved Arca 
LLC as the operator of the ArcaEx facility. BSE will be the SRO for the 
BOX facility, and BOX LLC will conduct the facility's business 
operations in a manner consistent with the regulatory and oversight 
responsibilities of BSE.\30\
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    \28\ See Securities Exchange Act Release No. 44983 (October 25, 
2001), 66 FR 55225, 55229-30 (November 1, 2001) (approving SR-PCX-
00-25) (``PCX/Arca Approval Order''). ArcaEx is operated by 
Archipelago Exchange LLC (``Arca LLC''). At the time of this 
approval, PCX's ownership interest in Arca LLC consisted solely of a 
10% interest in Archipelago Holdings LLC, the parent company of Arca 
LLC. See 66 FR at 55225.
    \29\ Id. at 66 FR at 55229 (citation omitted). PCX established a 
new subsidiary, PCX Equities Inc. (``PCXE''), to which it delegated 
its authority as an SRO to surveil and regulate the PCX's trading 
functions. In its approval order, the Commission noted that PCX 
retained ultimate responsibility for the operation, administration, 
rules, and regulation of PCXE. The Commission added that PCX must 
review rulemaking and disciplinary decisions of PCXE and direct PCXE 
to take action that may be necessary to effectuate the purposes and 
functions of the Act. See id.
    \30\ BSE--through a newly established wholly owned subsidiary, 
Boston Options Exchange Regulation LLC (``BOXR'') `` will assume all 
regulatory responsibilities under the Act for the BOX facility. See 
SR-BSE-2003-04, supra note.
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    Although BOX LLC itself will not carry out any regulatory 
functions, all of its activities must be consistent with the Act. Under 
Section 5.3 of the LLCOA, each unitholder of BOX LLC agrees to comply 
with federal securities law; to cooperate with the Commission and BSE 
pursuant to their regulatory authority and the provisions of the LLCOA; 
and to engage in conduct that fosters and does not interfere with BOX 
LLC's ability to prevent fraudulent and manipulative acts and 
practices; promote just and equitable principles of trade; foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities; remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system; and, in general, protect investors and the public interest. 
Section 4.2(a) of the LLCOA imposes similar obligations on each 
director of BOX LLC. Section 4.2(a) also requires each director to 
cooperate with the Commission and BSE in carrying out their regulatory 
responsibilities. These provisions reinforce the notion that BOX, as a 
facility of an exchange, is not solely a commercial enterprise; it is 
an integral part of an SRO registered pursuant to the Act and, as such, 
is subject to obligations imposed by the Act.
    These obligations endure so long as BOX is a facility of the 
Exchange, regardless of the size of BSE's ownership interest in BOX 
LLC, the operator of that facility. The BSE currently owns a 
controlling interest in the operator of the facility and if, in the 
future, it wishes to reduce its interest in BOX LLC to below 20%, the 
amendments to the LLCOA to effect such a Transfer of units would, 
pursuant to Section 8.4(f)(ii) of the LLCOA, have to be filed as a 
proposed rule change under Section 19(b) of the Act. The Commission 
believes that this is a reasonable measure to alert the Commission to a 
significant reduction of BSE's interest in BOX LLC. Such a reduction 
could warrant additional review of the LLCOA to ensure that BSE's 
responsibilities as the SRO of the BOX facility are not compromised.
    The LLCOA includes additional provisions that make special 
accommodations for BSE as the SRO of the BOX facility. For example, 
Section 4.4(a) of the LLCOA provides that BOX LLC may not take any 
major action unless such action is approved by a majority of the BOX 
LLC board, including the affirmative vote of all of the directors 
designated by BSE.\31\ Section 4.1(b) of the LLCOA provides that, with 
its present ownership interest, BSE is entitled to two seats on the 
board. Section 4.1(b) also gives BSE a perpetual right to designate at 
least one director on the BOX LLC board regardless of whether it 
maintains any ownership interest. In addition, Section 5.2 of the LLCOA 
allows BSE to act on behalf of BOX LLC in regulatory matters, despite a 
general prohibition against unitholders committing or acting on behalf 
of BOX LLC.\32\ Finally, as provided in Amendment No. 2, Sections 
16.2(b) and 16.5 of the LLCOA allows BSE, and the other unitholders, 
their officers, directors, agents, and employees, to disclose to the 
Commission Confidential Information of BOX.\33\
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    \31\ CBOE objects to the fact that BSE redacted from the 
published version of the LLCOA certain of the major actions over 
which the controlling unitholders and BSE (regardless of whether it 
remains a controlling unitholder) will have veto power. BSE is not 
required to file these portions of Section 4.4(b) under Section 
19(b) of the Act and Rule 19b-4 thereunder if they do not constitute 
a material aspect of the operation of the BOX facility, or are 
otherwise rules of, or stated policies, practices or 
interpretations, of the exchange. See Section 3(a)(27) of the Act, 
15 U.S.C. 78c(a)(27). See also 17 CFR 240.19b-4(b).
    \32\ In the event that BSE ceases to be a unitholder of BOX LLC 
at some future date, the Commission would have to consider whether 
this provision should be amended so that BSE could continue to carry 
out its regulatory responsibilities with respect to BOX.
    \33\ See Amendment No. 2, supra note.
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    Because the BSE has proposed to operate BOX as its facility, the 
BSE's obligations under the Act extend to its members' activities on 
BOX, as well as to the operation and administration of BOX. The 
Commission believes that Section 19 of the Act affords the Commission 
the ability to determine whether the BSE's proposal is consistent with 
the Act, as would a separate application by BOX to register as a 
securities exchange.\34\ More specifically, the Commission believes 
that these provisions described above are consistent with the Act and 
enhance the ability of BSE to carry out its self-regulatory 
responsibilities with respect to its BOX facility.
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    \34\ This is consistent with the Commission's approval of ArcaEx 
as the equities trading facility of PCX pursuant to a rule filing 
submitted by the PCX under Section 19(b)(1) of the Act, 15 U.S.C. 
78s(b)(1), and Rule 19b-4 hereunder, 17 CFR 240.19b-4. See PCX/Arca 
Approval Order, supra note.
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B. Changes in Control of BOX LLC

    The Commission believes that the restrictions in the LLCOA on 
direct and indirect changes in control of BOX LLC are sufficient so 
that BSE is able to carry out its self-regulatory responsibilities and 
that the Commission can fulfill its responsibilities under the Act. 
Schedule D of the LLCOA lists all unitholders of BOX LLC, the number of 
units each holds, and the percentage of ownership in BOX LLC that such 
units represent. A change to this schedule (as well as to any other 
provision of the LLCOA) would have to be filed with the Commission if 
so required under Section 19(b) of the Act and Rule 19b-4 thereunder. 
In addition, Section 8.4(f) of the LLCOA provides that BSE must file 
with the Commission as a proposed rule change any amendment to the 
LLCOA resulting from a proposed acquisition of BOX LLC units that would 
cause the acquirer to meet or cross the 20% ownership threshold or any 
subsequent 5% ownership threshold (e.g., 25%, 30%, 35%, etc.).
    Furthermore, Section 8.4(e) of the LLCOA requires BSE to inform the 
Commission in writing at least ten days before any proposed acquisition 
of BOX LLC units that would result in the acquirer meeting or crossing 
the 5%, 10%, or 15% ownership thresholds. The Commission believes that 
this approach is consistent with the Act in that it is analogous to the 
ongoing reporting

[[Page 2766]]

requirements of Form 1,\35\ the application for (and amendments to the 
application for) registration as a national securities exchange. 
Exhibit K of Form 1 requires any exchange that is a corporation or 
partnership to list any persons that have an ownership interest of 5% 
or more in the exchange;\36\ and Rule 6a-2(a)(2) under the Act \37\ 
requires an exchange to update its Form 1 within ten days after any 
action that renders inaccurate the information previously filed in 
Exhibit K.
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    \35\ 17 CFR 249.1 and 17 CFR 249.1a.
    \36\ This reporting requirement applies only to exchanges that 
have one or more owners, shareholders, or partners that are not also 
members of the exchange. See Form 1, Exhibit K. Exhibit K applies 
only to the exchange itself, not to entities that operate facilities 
of the exchange.
    \37\ 17 CFR 240.6a-2(a)(2).
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    Exhibit K imposes no obligation on an exchange to report parties 
whose ownership interest in the exchange is less than 5%. Similarly, 
Section 8.4(e) of the LLCOA requires BSE to notify the Commission of an 
interest in BOX LLC only when that interest reaches 5% or more. The 
Commission does not believe that the identity of a party that has less 
than a 5% interest in a facility of a national securities exchange is a 
``rule of the exchange'' that must be filed pursuant to Section 19(b) 
and Rule 19b-4(b) thereunder. In this regard, the Commission does not 
agree with CBOE's comment that the filing ``does not present a 
comprehensive description of who are the owners of BOX.''
    In addition, Section 8.4(g) of the LLCOA would require an indirect 
controlling party to join the LLCOA. This amendment to the agreement 
would trigger a proposed rule change that BSE must file with the 
Commission pursuant to Section 19(b) of the Act. The proposed rule 
change would alert the Commission to the existence of a proposed 
indirect controlling party and present the Commission and BSE with an 
opportunity to determine what additional measures, if any, might be 
necessary to provide sufficient regulatory jurisdiction over the 
proposed indirect controlling party.\38\ The Commission understands 
that Section 8.4(g) of the LLCOA would apply to any ultimate parent of 
BOX LLC, no matter how many levels of ownership are involved, provided 
that a controlling interest exists between each link of the ownership 
chain.
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    \38\ BOX LLC currently has an indirect controlling party, Mr. 
Thomas Peterffy, who holds a controlling interest in IBG. Under 
Section 19.6(a) of the LLCOA, IBG acknowledges that, to the extent 
that they are related to BOX activities, the officers and directors 
of IBG are deemed to be the officers and directors of BSE for the 
purpose of and subject to oversight pursuant to the Act. Because Mr. 
Peterffy is an officer and director of IBG, he is deemed, with 
respect to IBG's BOX activities, to be an officer and director of 
BSE itself, thereby subjecting him to Commission authority under 
Section 19(h)(4) of the Act, 15 U.S.C. 78s(h)(4). Furthermore, under 
Section 19.6(b) of the LLCOA, IBG and its officers and directors 
(including Mr. Peterffy) irrevocably submit to the jurisdiction of 
the U.S. federal courts, the Commission, and BSE for the purposes of 
any suit, action, or proceeding pursuant to the U.S. federal 
securities laws arising out of or relating to their BOX activities. 
In addition, as a registered broker-dealer, IBG is subject to 
Commission authority pursuant to Section 15(b)(4) of the Act, 15 
U.S.C. 78o(b)(4). Also, a ``person associated with a broker or 
dealer'' is defined in Section 3(a)(18) of the Act, 15 U.S.C. 
78c(a)(18), to include in part an officer or director of a broker or 
dealer, as well as any person directly or indirectly controlling 
such broker or dealer. Under Section 15(b)(6) of the Act, 15 U.S.C. 
78o(b)(6), the Commission has the authority to censure a person 
associated with a broker or dealer, place limitations on such 
person's activities or functions, suspend such person for a period 
not exceeding twelve months or bar such person from being associated 
with a broker or dealer. Mr. Peterffy, as an officer and director 
of, and the holder of a controlling interest in, IBG, falls within 
the definition of ``person associated with a broker or dealer'' and 
therefore is subject to the Commission's authority under Section 
15(b)(6) of the Act.
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    In conclusion, the Commission believes that Sections 8.4(e), (f), 
and (g) of the LLCOA, together with the requirements of Section 19(b) 
of the Act and Rule 19b-4 thereunder, provide the Commission with 
sufficient authority over changes in control of BOX LLC to enable the 
Commission to carry out its regulatory oversight responsibilities with 
respect to BSE and the BOX facility.

C. Regulatory Jurisdiction Over Owners of BOX LLC

    The Commission believes that the terms of the LLCOA provide the 
Commission and BSE with sufficient regulatory jurisdiction over the 
controlling parties and other unitholders of BOX LLC to carry out their 
responsibilities under the Act. In Section 19.6(a), each unitholder of 
BOX LLC acknowledges that--to the extent that they are related to BOX 
activities--the books, records, premises, officers, directors, agents, 
and employees of the unitholder are deemed to be the books, records, 
premises, officers, directors, agents, and employees of BSE itself for 
the purpose of and subject to oversight pursuant to the Act. Moreover, 
in Sections 12.1 and 15 of the LLOCA, all of the BOX LLC unitholders 
acknowledge that the books, records, premises, officers, directors, 
agents, and employees of BOX are deemed to be the books, records, 
premises, officers, directors, agents, and employees of BSE for the 
purpose of and subject to oversight pursuant to the Act. These 
provisions would enable the Commission to exercise its authority under 
Section 19(h)(4) of the Act \39\ with respect to the officers and 
directors of BOX LLC and of all unitholders of BOX LLC, since all such 
officers and directors--to the extent that they are acting in matters 
related to BOX activities--would be deemed to be the officers and 
directors of BSE itself. Furthermore, the records of any unitholder--to 
the extent that they are related to BOX activities--are subject to the 
Commission's examination authority under Section 17(b)(1) of the 
Act,\40\ as these records would be deemed to be the records of BSE 
itself.
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    \39\ 15 U.S.C. 78s(h)(4). Section 19(h)(4) authorizes the 
Commission, by order, to remove from office or censure any officer 
or director of a national securities exchange if it finds, after 
notice and an opportunity for hearing, that such officer or director 
has: (1) Willfully violated any provision of the Act or the rules 
and regulations thereunder, or the rules of a national securities 
exchange; (2) willfully abused his or her authority; or (3) without 
reasonable justification or excuse, has failed to enforce compliance 
with any such provision by a member or person associated with a 
member of the national securities exchange.
    \40\ 15 U.S.C. 78q(b)(1).
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    In addition, in Section 19.6(b) of the LLCOA, each unitholder--and 
each officer, director, agent, and employee thereof--irrevocably 
submits to the exclusive jurisdiction of the U.S. federal courts, the 
Commission, and BSE for the purposes of any suit, action, or proceeding 
pursuant to the U.S. federal securities laws and the rules or 
regulations thereunder, arising out of or relating to BOX activities. 
In addition, each unitholder--and each officer, director, agent, and 
employee thereof--waives, and agrees not to assert by way of motion, as 
a defense or otherwise in any such suit, action, or proceeding, any 
claim that it is not personally subject to the jurisdiction of the 
Commission; that the suit, action or proceeding is an inconvenient 
forum; that the venue of the suit, action, or proceeding is improper; 
or that the subject matter of the suit, action, or proceeding may not 
be enforced in or by such courts or agency. Moreover, pursuant to 
Section 19.6(c) of the LLCOA, the BSE and each unitholder are required 
to take such action as is necessary to ensure that such unitholder's 
officers, directors, and employees consent to the application of these 
requirements with respect to their BOX-related activities. Section 
19.6(c) further requires the Bourse and the BSE to take such action as 
is necessary to ensure that the Bourse's officers, directors, and 
employees consent to the communication of their personal information to 
the Commission and the BSE and agree to waive the protection of such 
personal information that is provided by the Private Sector Privacy

[[Page 2767]]

Act. Finally, under Section 5.3 of the LLCOA each unitholder of BOX LLC 
agrees to cooperate with the Commission and BSE pursuant to their 
regulatory authority.
    The Commission also notes that, even in the absence of these 
provisions of the LLCOA, Section 20(a) of the Act \41\ provides that 
any person with a controlling interest in BOX LLC would be jointly and 
severally liable with and to the same extent that BOX LLC is liable 
under any provision of the Act, unless the controlling person acted in 
good faith and did not directly or indirectly induce the act or acts 
constituting the violation or cause of action.
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    \41\ 15 U.S.C. 78t(a).
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    The Commission believes that, together, these provisions grant the 
Commission sufficient jurisdictional authority over the controlling 
parties and other unitholders of BOX LLC. Moreover, BSE is required to 
enforce compliance with these provisions because they are ``rules of 
the exchange'' within the meaning of Section 3(a)(27) of the Act.\42\ A 
failure on the part of BSE to enforce its rules could result in 
suspension or revocation of registration under Section 19(h)(1) of the 
Act.\43\
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    \42\ 15 U.S.C. 78c(a)(27).
    \43\ 15 U.S.C. 78s(h)(1).
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D. Ownership Restrictions on BOX Option Participants

    The Commission believes that the restriction on voting trust 
agreements in Section 4.3(b) of the LLCOA is reasonable and consistent 
with the Act. In the absence of such a provision, unaffiliated parties 
could act in concert and evade the LLCOA's provisions regarding changes 
in control of BOX LLC.\44\ A voting trust agreement would not 
necessarily be inconsistent with the Act, but any unitholders wishing 
to establish a voting trust agreement would first have to amend the 
LLCOA to enable them to do so. Such amendment would trigger a proposed 
rule change, thus affording the Commission an opportunity to review the 
matter.
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    \44\ However, the LLCOA treats as belonging to a single 
unitholder any BOX LLC units held by affiliated parties of the 
unitholder. See Sections 8.4(e)-(g) of the LLCOA.
---------------------------------------------------------------------------

    In addition, the Commission believes that the voting collar 
provision that prevents a unitholder that is also a BOX Options 
Participant from voting any excess units of BOX LLC (i.e., units in 
excess of a 20% aggregate interest) is reasonable and consistent with 
the Act. It is common for members who trade on an exchange to have 
ownership interests in the exchange. However, a member's interest could 
become so large as to cast doubt on whether the exchange can fairly and 
objectively exercise its self-regulatory responsibilities with respect 
to that member. A member that is also a controlling shareholder of an 
exchange might be tempted to exercise that controlling influence by 
directing the exchange to refrain from diligently surveilling the 
member's conduct or from punishing any conduct that violates the rules 
of the exchange or the federal securities laws. An exchange also might 
be reluctant to surveil and enforce its rules zealously against a 
member that the exchange relies on as its largest source of capital.
    The Commission believes that a limited temporary exemption for IBG 
from the voting collar provision is justified and consistent with the 
Act. The exemption is designed to afford IBG some ability to protect 
its investment but also to limit the possibility that the Exchange's 
ability to carry out its self-regulatory responsibilities would be 
impaired. Under the exemption, IBG would be permitted to vote its 
excess units, but only with respect to a merger, consolidation, or 
dissolution of BOX LLC or a sale of all or substantially all of the 
assets of BOX LLC. This exemption is substantially similar to an 
exemption granted to founder members of the International Securities 
Exchange (``ISE'').\45\
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    \45\ See Securities Exchange Act Release Nos. 45803 (April 23, 
2002), 67 FR 21306, 21307 (April 30, 2002) (approval of SR-ISE-2002-
01) (conversion of ISE from an LLC to a corporation); and 42455 
(February 24, 2000), 65 FR 11388, 11391-92 (March 2, 2000) (File No. 
10-127) (approval of registration of ISE as a national securities 
exchange).
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E. Accelerated Approval

    Pursuant to Section 19(b)(2) of the Act,\46\ the Commission may not 
approve any proposed rule change, or amendment thereto, before the 
thirtieth day after publication of notice of the filing thereof, unless 
the Commission finds good cause for so doing and publishes its reasons 
for making that finding. The Commission hereby finds good cause for 
approving Amendments No. 1 and 2, prior to the thirtieth day after 
publishing notice of these amendments in the Federal Register. 
Amendment No. 1 makes only one technical change to the rule text. 
Amendment No. 2 merely clarifies the restrictions on the Transfer of 
BOX LLC units and the Commission's jurisdiction over BOX LLC 
unitholders. The Commission believes that no purpose would be served by 
delaying approval of the amended proposal, particularly in light of the 
fact that only one comment letter was received in response to the 
original notice. Therefore, the Commission finds that good cause exists 
to accelerate approval of Amendments No. 1 and 2 to the proposed rule 
change, pursuant to Section 19(b)(2) of the Act.
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    \46\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendments No. 1 and 2, including whether 
Amendments No. 1 and 2 are 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. Comments also may be submitted electronically at the 
following e-mail address: [email protected]. All submissions should 
refer to File No. SR-BSE-2003-19. This file number should be included 
on the subject line if e-mail is used. To help us process and review 
your comments more efficiently, comments should be sent in hardcopy or 
by e-mail but not by both methods. 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 filings will also be available for 
inspection and copying at the principal office of the Exchange. All 
submissions should be submitted by February 10, 2004.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\47\ that the proposed rule change (SR-BSE-2003-19) is approved, 
and Amendments No. 1 and 2 to the proposed rule change are approved on 
an accelerated basis.
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    \47\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1114 Filed 1-16-04; 8:45 am]
BILLING CODE 8010-01-P