[Federal Register Volume 69, Number 12 (Tuesday, January 20, 2004)]
[Notices]
[Pages 2768-2773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1115]



[[Page 2768]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49065; File No. SR-BSE-2003-04]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 Thereto and Notice of Filing and Order 
Granting Accelerated Approval to Amendments No. 2 and 3 to Proposed 
Rule Change by the Boston Stock Exchange, Inc. Relating to the Creation 
of the Boston Options Exchange Regulation, LLC

January 13, 2004.

I. Introduction

    On July 17, 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'' or ``Exchange Act)\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to create a new options 
regulatory subsidiary, Boston Options Exchange Regulation, LLC 
(``BOXR''). On July 25, 2003, the Exchange amended the proposed rule 
change.\3\ The proposed rule change, as amended, was published for 
comment in the Federal Register on August 1, 2003.\4\ The Commission 
received one comment letter.\5\ On October 10, 2003, the Exchange filed 
Amendment No. 2 to the proposed rule change.\6\ On November 14, 2003, 
the Exchange filed Amendment No. 3 to the proposed rule change.\7\ This 
order approves the proposed rule change, as amended. In addition, the 
Commission is approving on an accelerated basis, and soliciting 
comments on, Amendment No. 2 and Amendment No. 3.
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    \1\ Exchange Act Section 19(b)(1), 15 U.S.C. 78s(b)(1).
    \2\ Exchange Act Rule 19b-4, 17 CFR 240.19b-4.
    \3\ See letter from John Boese, Vice President, Legal and 
Compliance, Exchange, to Deborah Flynn, Assistant Director, Division 
of Market Regulation (``Division''), Commission, dated July 25, 2003 
(``Amendment No. 1''). Amendment No. 1 replaces the proposed rule 
change in its entirety.
    \4\ See Securities Exchange Act Release No. 48229 (July 25, 
2003), 68 FR 45284 (``Delegation Proposal'').
    \5\ See letter from William J. Brodsky, Chairman and Chief 
Executive Officer, Chicago Board Options Exchange (``CBOE''), to 
Jonathan Katz, Secretary, Commission, dated August 26, 2003 (``CBOE 
Letter'').
    \6\ See letter from John Boese, Vice President, Legal and 
Compliance, Exchange, to Nancy Sanow, Assistant Director, Division, 
Commission, dated October 10, 2003 (``Amendment No. 2''). In 
Amendment No. 2, the Exchange proposes to revise Section 
14(e)(iii)(A) of the proposed BOXR By-Laws to state that the Options 
Participant representatives presented by the BOXR Nominating 
Committee for appointment to the BSE Board of Governors and the BOXR 
Board must be officers or directors of a firm approved as an Options 
Participant. In addition, the BSE proposes to incorporate into the 
BSE Constitution and the BOXR By-Laws provisions that would limit 
the Exchange's use of confidential information relating to the 
activities of Exchange members and Options Participants and develop 
policies and procedures to prevent disclosure of such information.
    \7\ See letter from George W. Mann, Executive Vice President and 
General Counsel, Exchange, to Nancy Sanow, Assistant Director, 
Division, Commission, dated November 13, 2003 (``Amendment No. 3''). 
In Amendment No. 3, the Exchange proposes to revise Section 14(e)(i) 
of the proposed BOXR By-Laws to state that the public 
representatives on BOXR Nominating Committee shall have no material 
business relationship with a broker, dealer, the BSE, BOX or BOXR. 
In addition, the BSE proposes to incorporate into Article I, Section 
3 of the BSE Constitution definitions of the terms ``BOX,'' ``BOX 
Options Participant'' or ``BOX Participant,'' ``BOXR,'' ``BOXR 
Board,'' and ``BOXR Nominating Committee.''
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II. Description of the Proposed Rule Change

    The Exchange proposes to create a new, wholly-owned, options 
regulatory subsidiary, BOXR, and to transfer to it all of the assets 
and liabilities that solely support the regulation of the standardized 
equity options trading business of the BSE. Upon this transfer, 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.\8\ The BSE's Delegation Proposal would be effected through: 
(i) The addition of Chapter XXXVI to the BSE Rules of the Board of 
Governors (``Delegation Plan''); (ii) proposed By-Laws for BOXR; and 
(iii) amendments to the BSE Constitution.
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    \8\ BOX would provide automatic order execution capabilities to 
BOX Options Participants (``Options Participants'') for standardized 
equity options securities listed or traded on the BSE, and would be 
operated by Boston Options Exchange Group, LLC (``BOX LLC''). See 
Securities Exchange Act Release No. 49068 (January 13, 2004) (SR-
BSE-2002-15) (``BOX Trading Rules'').
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A. Delegation Plan

    The BSE is a founding and controlling member of BOX LLC, and has 
entered into various agreements with BOX LLC under which BOX LLC would 
operate BOX as a facility of the BSE.\9\ The BSE, through BOXR, would 
be responsible 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.
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    \9\ Under the Exchange 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 Exchange Act Section 3(a)(2), 15 
U.S.C. 78c(a)(2).
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    The BSE would delegate specified regulatory authority to BOXR to 
oversee the BOX market. BOXR would conduct all necessary surveillance 
of the trading effected through the BOX facility, and enforce 
compliance by Options Participants with the BOX Rules, applicable BSE 
Rules, and the federal securities laws and the rules thereunder. BOXR 
would have regulatory oversight authority over BOX LLC and its 
officers, directors, agents and employees, each of whom would be 
required to cooperate with BOXR in the fulfillment of its regulatory 
obligations.\10\
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    \10\ See BOX LLC Operating Agreement, Article 5, Section 5.3, 
Securities Exchange Act Release No. 48650 (October 17, 2003), 68 FR 
60731 (October 23, 2003) (SR-BSE-2003-19).
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1. BOXR
    BOXR would be operated as a Delaware limited liability company, all 
of the issued shares of stock of which would be owned by the BSE. 
Current BSE members would retain their memberships, and thus, their 
ownership interests in the BSE. BOXR would be governed by the 
Delegation Plan, the BOXR By-Laws, and applicable BSE Rules.
2. Regulation of BOXR
    As discussed above, BOXR would operate as a subsidiary of the BSE, 
which is a national securities exchange registered under Section 6 of 
the Act.\11\ The BSE, as the SRO, would retain ultimate responsibility 
for compliance by Options Participants with the federal securities 
laws, the rules and regulations thereunder, and BOX Rules, as well as 
the BSE Rules specifically cross-referenced and incorporated by 
reference into the BOX Rules.\12\ Pursuant to the proposed BOX Rules, 
Options Participants would be granted trading rights for options listed 
on the Exchange and traded on BOX.\13\ Options Participant status would 
confer neither a right to participate in trading on the BSE (other than 
options trading on BOX), nor an entitlement to the rights and 
responsibilities regarding the

[[Page 2769]]

governance of the BSE of a BSE Member.\14\ Options Participants would 
not have ownership interests in the BSE, although they would have 
certain voting and representation rights.\15\
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    \11\ Exchange Act Section 6, 15 U.S.C. 78f.
    \12\ For such purposes of cross-referencing, interpreting and 
applying the Rules of the BSE to BOX Options Participants, any 
reference to ``member'' of the BSE in such cross-referenced rules is 
to be read as a synonym for ``Options Participant'' on BOX, whether 
order flow provider, market maker or both. See BOX Trading Rules, 
Chapter I, Section 2(c). For this reason, Options Participants would 
be statutory ``members'' of BSE.
    \13\ See BOX Trading Rules, Chapter II, Section 1(a).
    \14\ See BOX Trading Rules, Chapter II, Section 1(e).
    \15\ As discussed below, under Section 6(b)(3) of the Exchange 
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. Exchange Act Section 6(b)(3), 15 
U.S.C. 78f(b)(3).
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    Pursuant to the proposed changes to the BSE Constitution, the BSE 
Board would be composed of the BSE Chairman, Vice Chairman and 20 
governors, one of whom would represent Options Participants to provide 
input on the BSE Board. This governor (``Options Participant 
Governor'') would be nominated by the BOXR Nominating Committee \16\ 
and must be either an officer or director of an Options 
Participant.\17\ The BSE Board would be required to appoint the 
candidate presented by the BOXR Nominating Committee.\18\
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    \16\ See discussion of the proposed BOXR Nominating Committee 
below.
    \17\ See proposed BOXR By-Laws, Section 14(e)(3)(A), as amended 
by Amendment No. 2.
    \18\ See proposed changes to Article II, Section 4 of the BSE 
Constitution.
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    While ultimately responsible, the BSE would delegate specific self-
regulatory responsibilities to BOXR, pursuant to the proposed 
Delegation Plan. Specifically, BOXR would assume responsibility with 
respect to the options business of the Exchange for, among other 
things: (i) 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 BSE Rules, BOX Rules, the federal securities laws and 
rules thereunder; (iv) administering surveillance programs and systems 
for enforcing rules governing the conduct and trading activities of 
Options Participants on BOX; (v) examining and investigating Options 
Participants and their associated persons to determine if they have 
violated the BSE Rules, BOX Rules, the federal securities laws or the 
rules thereunder; (vi) administering the BOXR enforcement and 
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 facility; (xi) 
administering the Exchange's involvement in the national market system 
plans for options; and (xii) developing, administering and enforcing 
listing standards for securities traded on BOX.\19\
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    \19\ Proposed Delegation Plan, Section 2(C).
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    While BOXR would have extensive delegated authority to regulate and 
oversee the options trading business, the BSE, as the SRO, would retain 
the ultimate responsibility for the Rules and regulations of BOX, as 
well as for the operation and administration of the BSE's subsidiary, 
BOXR. As part of its self-regulatory responsibilities, the BSE would 
review disciplinary decisions of BOXR, review and ratify proposed rule 
changes recommended by BOXR, and direct BOXR to take action that may be 
necessary to effectuate the purposes and functions of the Act.\20\
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    \20\ Proposed Delegation Plan, Section 2(A) and 2(D).
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B. BOXR By-Laws

1. BOXR Board
    Pursuant to the proposed BOXR By-Laws, the BOXR Board would consist 
of no fewer than seven and no more than thirteen directors, and would 
be composed of (i) the Chief Executive Officer (``CEO'') of the BSE 
(who would be considered a member for voting purposes, but not for 
purposes of calculating the number of Public Directors and Options 
Participant Directors, as defined below); (ii) at least fifty percent 
Public Directors; \21\ and (iii) at least twenty percent, but no fewer 
than two, nominees of Options Participants (``Options Participant 
Directors'').\22\
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    \21\ ``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 proposed BOXR By-Laws, Definition (p).
    \22\ Proposed BOXR By-Laws, Section 4.
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    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 discussed 
below \23\ for the selection of the 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 proposed BOXR By-Laws.\24\ Any vacancy 
on the BOXR Board would be filled with a person, appointed by the BSE 
Board or Executive Committee, who satisfies the classification 
associated with the vacant seat, i.e., a member of the public or a 
representative of an Options Participant.
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    \23\ See discussion of the proposed BOXR Nominating Committee 
below.
    \24\ Proposed Section 7 of the BOXR By-Laws would permit the BSE 
to remove any or all of the directors on the BOXR Board 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; (ii) did 
not act in a manner in the best interests of BOXR; (iii) engaged in 
conduct which was unlawful; or (iv) deliberately breached his or her 
duty to BOXR.
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    The Options Participants Directors must be officers or directors of 
an Options Participant and must be elected by a plurality of votes cast 
by Options Participants, following nomination by the BOXR Nominating 
Committee or by petition of at least five Options Participants.\25\ 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.\26\
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    \25\ See discussion of the proposed BOXR Nominating Committee 
below.
    \26\ Proposed Amendments to Article II, Section 4 of the BSE 
Constitution would require the BSE to elect the slate presented by 
the BOXR Nominating Committee.
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2. BOXR Committees
    The BSE would commence BOXR operations with two committees: A BOXR 
Nominating Committee and a BOXR Hearing Committee, both of which would 
provide for Options Participant involvement in the oversight of the 
day-to-day operations of BOX.
    a. BOXR Nominating Committee. The BOXR Nominating Committee would 
be responsible for nominating Options Participant candidates for two 
positions on the BOXR Board, one position on the BSE Board, and any 
vacant positions on the BOXR Nominating Committee (collectively, the 
``available positions''), and for presenting the slate of these 
candidates to the BSE Board. The BOXR Nominating Committee would 
consist of seven members, six of whom would be elected by a plurality 
of the Options Participants voting by secret ballot in the annual 
election. The seventh would be appointed by the BOXR Board, and must be 
one of the BOXR Board's existing Public Directors. Of the six elected 
members, five would represent broker-dealer Options Participants of BOX 
(at least one of which would be a market maker on BOX), and one would 
be a representative of the public.\27\
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    \27\ Proposed BOXR By-Laws, Section 14(e).
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    In addition, Options Participants would be able to submit 
additional nominees for each of the available positions. Independent 
nominations for

[[Page 2770]]

each of the available positions would require a petition of five 
Options Participants. Options Participants alone would vote at the 
annual election, by plurality, to choose the individuals who would 
represent them in the available positions. Following the annual 
election, the successful candidates would be presented to the BSE Board 
by the Chairman of the BOXR Nominating Committee for appointment to 
their respective available positions. Pursuant to the proposed changes 
to the BSE Constitution, the BSE Board would be required to appoint the 
candidates presented by the BOXR Nominating Committee.\28\
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    \28\ See proposed changes to Article II, Section 4 of the BSE 
Constitution.
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    b. Hearing Committee. The BOXR disciplinary process would be 
similar to the existing BSE disciplinary process, and would be governed 
by a BOXR Hearing Committee, which would be appointed by the Chairman 
of the Board of BOXR. The BOXR Hearing Committee would be comprised of 
at least one Options Participant member and such number of other 
members as the Chairman may deem necessary.\29\
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    \29\ Proposed BOXR By-Laws, Section 14(f).
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    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 would be appealable 
for review to the BOXR Board. Any decision of the BOXR Board 
subsequently would be appealable to the BSE Board, which would have 
discretion as to whether to hear such appeal. In addition, the BSE 
Board could choose to review a decision of the BOXR Board on its own 
motion. If the BSE Board were to not order review of a decision of the 
BOXR Board, or, in its discretion, were to elect not to hear an appeal 
of a decision of the BOXR Board, then the decision of the BOXR Board 
would be deemed to be the final action of the Exchange. Any decision of 
the BSE Board, or the BOXR Board (in cases where the BSE Board in its 
discretion has elected not to hear the appeal) would be ultimately 
appealable to the Commission. As with all BSE decisions, the Commission 
would have the authority to review final disciplinary sanctions imposed 
by BOXR or the BSE on Options Participants, including sanctions imposed 
for violations of BOX Rules.\30\
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    \30\ Exchange Act Section 19(d)(2), 15 U.S.C. 78s(d)(2).
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\31\ In particular, the Commission believes that the proposed 
rule change, as amended, is consistent with Section 6(b) of the 
Act,\32\ in general, and furthers the objectives of Section 
6(b)(5),\33\ in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and in general, to 
protect investors and the public interest. Moreover, the Commission 
believes that the proposed rule change furthers the objectives of 
Section 6(b)(3) of the Act,\34\ in that it assures fair representation 
of Options Participants in the selection of directors and the 
administration of the affairs of the BSE and BOXR. Finally, the 
Commission believes that the BSE's proposal to establish BOXR is 
consistent with the BSE's obligation under Section 6(b)(1) of the Act 
\35\ to be so organized and have the capacity to carry out the purposes 
of the Act and to comply, and to enforce compliance by its members and 
persons associated with its members, with the Act, the rules 
thereunder, and the rules of the Exchange.
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    \31\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. Exchange Act Section 3(f), 15 U.S.C. 78c(f).
    \32\ Exchange Act Section 6(b), 15 U.S.C. 78f(b).
    \33\ Exchange Act Section 6(b)(5), 15 U.S.C. 78f(b)(5).
    \34\ Exchange Act Section 6(b)(3), 15 U.S.C. 78f(b)(3).
    \35\ Exchange Act Section 6(b)(1), 15 U.S.C. 78f(b)(1).
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A. BOX as a Facility of the BSE

    The Commission received one comment letter on the proposed rule 
change that strongly opposes the BSE's proposal.\36\ Specifically, CBOE 
argues that, by seeking approval for BOX as a facility of the BSE, the 
BSE has improperly circumvented the exchange registration process, 
thereby avoiding scrutiny of BOX's ownership and governance. In CBOE's 
view, BOX's failure to seek registration as a national securities 
exchange has prevented consideration of the ``potential conflict 
between BOX's regulatory responsibilities and its for-profit structure, 
and how the Commission's jurisdiction over BOX's non-U.S. owners can be 
assured.''\37\ CBOE supports this assertion by stating its view that 
had BOX ``sought registration as a national securities exchange, its 
principle governing document, the Operating Agreement of BOX LLC, would 
have been filed as an exhibit to its application,'' which would have 
subjected any subsequent changes to the BOX LLC Operating Agreement to 
the Act's Section 19(b) rule filing process. In addition, CBOE argues 
that, if BOX had submitted such an application, BOX would have had to 
assure the Commission that its members would be subject to appropriate 
regulation and that BOX would both be organized and have the capacity 
to carry out the purposes of the Act and comply with its provisions. 
CBOE argues that, because BOX was not required to register as a 
national securities exchange, BOX has been granted an unfair 
competitive advantage over CBOE and the other registered options 
exchanges.\38\
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    \36\ See CBOE Letter, supra note 5.
    \37\ Id.
    \38\ Id.
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    The Commission believes that the BSE's proposal that BOX be 
operated as its facility is properly filed under Section 19(b) of the 
Act and Rule 19b-4 thereunder,\39\ and that BOX is not required, 
separate from the BSE, to register as a national securities exchange 
under Section 6(a) of the Act.\40\ Moreover, as an SRO, the BSE is 
required to comply with the Act and to enforce compliance by its 
members and persons associated with its members with the Act.\41\ 
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 BOXR. The Commission 
notes that the instant rule filing relates not to the approval of

[[Page 2771]]

BOX,\42\ but to the delegation of regulatory responsibility between the 
BSE and its wholly-owned subsidiary, BOXR, as well as to the fair 
representation issues with respect to the composition of the BSE Board, 
the BOXR Board, and the operation of the BOXR Board committees. 
Consequently, the Commission believes that Section 19 of the Act \43\ 
affords the Commission a comparable 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.
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    \39\ Exchange Act Section 19(b), 15 U.S.C. 78s(b) and Exchange 
Act Rule 19b-4, 17 CFR 240.19b-4. See Securities Exchange Act 
Release No. 42759 (May 5, 2000), 65 FR 30654 (May 12, 2000) (SR-PCX-
99-39) (order approving the Pacific Exchange's proposal to operate 
Archipelago as an equity trading facility) (``PCX/Arca Order''). The 
Commission notes that Section 19(b) of the Act, and Rule 19b-4 
thereunder, require that any proposed change to any material aspect 
of the operation of the facilities of the SRO must be filed with the 
Commission.
    \40\ Exchange Act Section 6(a), 15 U.S.C. 78f(a). See PCX/Arca 
Order, supra note 39.
    \41\ Exchange Act Section 6(b)(1), 15 U.S.C. 78f(b)(1).
    \42\ The BSE has filed the BOX LLC Operating Agreement and the 
BOX Trading Rules under separate cover. The Commission is approving 
both of these related filings concurrently with the instant 
proposal. See Securities Exchange Act Release Nos. 49067 (January 
13, 2004) (SR-BSE-2003-19) and 49068, supra note 8.
    \43\ Exchange Act Section 19, 15 U.S.C. 78s.
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B. Fair Representation

    The Commission finds that the proposed changes to the composition 
of the BSE Board and the proposed composition of the BOXR Board are 
structured in a manner that satisfies the fair representation 
requirements of Section 6(b)(3) of the Act.\44\
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    \44\ Exchange Act Section 6(b)(3), 15 U.S.C. 78f(b)(3).
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    Under Section 6(b)(3) of the Act,\45\ the rules of an exchange must 
assure that its members are fairly represented in the selection of its 
directors and in the administration of its affairs. The section 6(b)(3) 
fair representation requirement allows statutory members to have a 
voice in an exchange's use of its self-regulatory authority. Moreover, 
this statutory requirement helps to ensure that 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.
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    \45\ Id.
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1. BSE Board
    As discussed above, under the proposal, the BSE Board, composed of 
the BSE Chairman, Vice Chairman, and 20 governors, would include one 
governor representing Options Participants to provide input on the BSE 
Board. This Options Participant Governor must be presented by the BOXR 
Nominating Committee, and must be either an officer or director of an 
Options Participant.\46\ The BSE Board would be required, pursuant to 
the proposed amendments to the BSE Constitution, to appoint the 
candidate selected by Options Participants and presented by the 
Chairman of the BOXR Nominating Committee.\47\ Moreover, as discussed 
below, the nominating process would allow for Options Participants to 
nominate additional candidates for the BSE Board on the petition of 
five Options Participants.\48\
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    \46\ See proposed BOXR By-Laws, Section 14(e)(iii)(A), as 
amended by Amendment No. 2.
    \47\ See proposed changes to Article II, Section 4 of the BSE 
Constitution.
    \48\ Proposed BOXR By-Laws, Section 14(e).
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    The BSE Constitution would continue to require that the BSE Board 
include ten securities industry representatives, representing members 
of the BSE (one of whom would be the Options Participant Governor), and 
ten public representatives.\49\ All of the governors, other than the 
Options Participant Governor, would continue to be elected to the BSE 
Board by a plurality of BSE members (other than Options Participants), 
voting in the BSE's annual election, following nomination by the BSE 
Nominating Committee or by independent petition of fifteen BSE members 
(other than Options Participants).\50\
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    \49\ BSE Constitution, Article I, Section I.
    \50\ BSE Constitution, Article II, Sections 1, 3, and 4.
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    In its comment letter, CBOE argues that the BSE's proposal does not 
satisfy the statutory requirement that members must be fairly 
represented in the governance of a national securities exchange and in 
the administration of its affairs. Specifically, CBOE contends that the 
representation of one Options Participant on the 22-person BSE Board 
does not satisfy the statutory requirements of fair representation. 
Because Options Participants would have a voice in the administration 
of the affairs of the BSE, and BSE members (other than Options 
Participants) would continue to elect ten of 22 members on the BSE 
Board, the Commission believes that the proposal satisfies the fair 
representation requirements of Section 6(b)(3) of the Act.\51\
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    \51\ Exchange Act Section 6(b)(3), 15 U.S.C. 78f(b)(3).
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2. BOXR Board
    Pursuant to the proposal, the BOXR Board would consist of no fewer 
than seven nor more than thirteen directors. The composition of the 
BOXR Board would be: (i) The CEO of the BSE (who would be considered a 
member of the Board for voting purposes, but not for purposes of 
calculating the number of Public Directors and Options Participant 
Directors); (ii) at least fifty percent Public Directors; \52\ and 
(iii) at least twenty percent, but no fewer than two, Options 
Participant Directors.\53\
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    \52\ See supra note 20, for a definition of Public Directors.
    \53\ Proposed BOXR By-Laws, Section 4.
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    a. BOXR Nominating Committee. Because the BOXR Nominating Committee 
is responsible for selecting Options Participant representatives for 
the BOXR Board, the BSE Board, and the BOXR Nominating Committee, its 
composition should generally reflect the composition of Options 
Participants (i.e., the users). As discussed above, the BOXR Nominating 
Committee would consist of seven members, six of whom would be elected 
by a plurality of the Options Participants voting by secret ballot in 
the annual election and one of whom would be appointed by the BOXR 
Board and must be one of the BOXR Board's existing Public 
Directors.\54\ Of the six elected members, five would represent broker-
dealer Options Participants (at least one of which would be a BOX 
market maker) and the sixth would be a representative of the public. 
The seven members of the BOXR Nominating Committee would therefore 
include two representatives of the public and five representatives of 
the Options Participants.\55\
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    \54\ See supra note 21, for a definition of Public Directors.
    \55\ Proposed BOXR By-Laws, Section 14(e).
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    Moreover, Options Participants have an additional opportunity to 
nominate other candidates. Specifically, five Options Participants may 
petition to add a nominee to be included on the ballot.\56\ Finally, 
the Commission notes that Options Participants would vote to select the 
Options Participant nominees to the available positions on the BSE 
Board, the BOXR Board, and BOXR Nominating Committee from among those 
nominated by the BOXR Nominating Committee and by petition. The BSE, as 
the sole shareholder of BOXR, would be required, pursuant to its 
Constitution, to appoint the Options Participant nominees so selected 
by the Options Participants and presented to the BSE Board by the 
Chairman of the BOXR Nominating Committee.\57\
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    \56\ See proposed BOXR By-Laws, Section 14(e).
    \57\ See proposed changes to Article II, Section 4 of the BSE 
Constitution.
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    In its comment letter, CBOE argues that because the BSE Board would 
appoint the BOXR Board, Options Participants would not have the right 
to choose which Options Participants serve on the BOXR Board, in 
violation of the fair representation requirements of the Act.\58\ As 
just discussed, however, pursuant to the proposed changes to the BSE 
Constitution, the BSE Board would be required to appoint the BOXR 
Options Participant candidates selected

[[Page 2772]]

by the Options Participants and presented to the BSE Board by the 
Chairman of the BOXR Nominating Committee.
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    \58\ See CBOE Letter, supra note 5.
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    Furthermore, the proposed composition of the BOXR Board would 
provide Options Participant representation comparable to that provided 
to members of PCX Equities, Inc. (``PCXE'') and the American Stock 
Exchange LLC (``Amex''), both of which the Commission found consistent 
with the Act.\59\ PCXE's by-laws provide that at least twenty percent, 
but no fewer than two, of the directors on the PCXE board be Equity 
Trading Permit Holders (``ETP Holders'')\60\ nominated by a nominating 
committee, six of seven members of which shall be ETP Holders.\61\ 
Similarly, the Amex's constitution provides that four of the eighteen 
members of the Amex board of governors be floor governors proposed by 
either the Amex nominating committee (consisting of three floor members 
and two public members), or by petition of 25 regular or options 
principle members, and selected by a plurality of the Amex regular and 
options principle members voting together as a single class.\62\ The 
Commission similarly believes that the BSE's proposal is consistent 
with the Act. The Commission believes further that the proposed 
petition process, coupled with the right to vote for their 
representatives, should help to ensure that Options Participants have 
the opportunity to be involved in the selection of their 
representatives for the BOXR Board, the BSE Board, and the BOXR 
Nominating Committee. Thus, as with the BSE Board, the fair 
representation requirements are satisfied.
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    \59\ See PCX/Arca Order, supra note 39 and Securities Exchange 
Act Release No. 40622 (October 30, 1998), 63 FR 59819 (November 5, 
1998) (File Nos. SR-Amex-98-32, SR-NASD-98-56, SR-NASD-98-67).
    \60\ An ETP Holder is an entity that has been issued a permit to 
effect securities transactions on the PCXE's trading facility and 
has status as a ``member'' of the Pacific Exchange, Inc., as that 
term is defined in Section 3 of the Act. Archipelago Exchange 
Facility Rules 1.1(m) and 1.1(n).
    \61\ See Bylaws of PCX Equities, Inc., Article III, Section 
3.02. See also Archipelago Exchange Facility Rule 3.2, Equity 
Committees.
    \62\ The NASD must approve the floor governors, but may reject 
the nominees only on specific regulatory grounds. See Amex 
Constitution, Article II, Section 1.
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    b. BOXR Hearing Committee. The Commission finds that the proposed 
composition and authority of the BOXR Hearing Committee are consistent 
with Sections 6(b)(3) \63\ and 6(b)(7) \64\ of the Act, respectively. 
The BOXR Hearing Committee would include at least one Options 
Participant member, which should help to ensure that decisions of the 
BOXR Hearing Committee are made in a fair and impartial manner, as 
required by Section 6(b)(3) of the Act. Moreover, because aggrieved 
Options Participants may appeal decisions of the BOXR Hearing Committee 
to the BOXR Board, the BSE Board, and, ultimately, to the Commission, 
the Commission finds that the proposal should provide for a fair 
procedure for disciplining Options Participants and overseeing any 
denial, prohibition or limitation of membership or access to BOX or its 
services, in satisfaction of the standards set forth in Section 6(b)(7) 
of the Act.\65\
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    \63\ Exchange Act Section 6(b)(3), 15 U.S.C. 78f(b)(3).
    \64\ Exchange Act Section 6(b)(7), 15 U.S.C. 78f(b)(7).
    \65\ Id.
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C. Proposed Delegation of Authority to BOXR

    Although the BSE has delegated certain regulatory authority over 
BOX to BOXR, and certain operational authority over BOX to BOX LLC, the 
BSE, as the SRO, retains the ultimate responsibility for the operation, 
administration, rules, and regulation of BOX, BOXR, and BOX LLC. 
Pursuant to the proposed BSE Rules, the BSE must approve any proposed 
changes to the BOXR By-Laws and the BOX Rules, and such proposed 
changes must be filed by the BSE with the Commission pursuant to 
Section 19(b) of the Act \66\ and Rule 19b-4 \67\ thereunder.\68\ The 
BSE also must review disciplinary decisions of BOXR and direct BOXR to 
take any action that may be necessary to effectuate the purposes and 
functions of the Act.\69\
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    \66\ Exchange Act Section 19(b), 15 U.S.C. 78s(b).
    \67\ Exchange Act Rule 19b-4, 17 CFR 240.19b-4.
    \68\ The BSE Board must review and ratify all proposed rule 
changes recommended by the BOXR Board before they are submitted to 
the Commission. See Section 2(D) of the proposed Delegation Plan.
    \69\ Proposed Delegation Plan, Sections 2(A)(4) and 2(A)(10).
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    Furthermore, pursuant to the proposed Delegation Plan, the 
Commission would have oversight over the premises, personnel, and 
records of BOXR and BOX LLC to the same extent that it currently has 
oversight over the premises, personnel, and records of the BSE. The 
books, records, premises, officers, directors, agents and employees of 
BOXR and BOX LLC would be deemed to be the books, records, premises, 
officers, directors, agents and employees of the BSE for purposes of, 
and subject to, oversight pursuant to the Act.\70\ 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, and the books and records of 
BOX LLC would be subject at all times to inspection and copying by 
BOXR.\71\ In addition, BOXR and BOX LLC would be required to maintain 
all books and records related to BOX within the United States.\72\
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    \70\ Proposed Delegation Plan, Sections 1(b) and 2(B)(1).
    \71\ Proposed Delegation Plan, Section 2(B)(1).
    \72\ Proposed Delegation Plan, Section 2(B)(2).
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    The Commission believes that neither Amendment No. 2 nor Amendment 
No. 3 significantly alters the original proposal, which was subject to 
a full notice and comment period, or raises any novel issue of 
regulatory concern. Moreover, the Commission believes that the changes 
made to the BSE Rules and the BOXR By-Laws strengthen and clarify the 
proposal.\73\ Therefore, the Commission finds that granting accelerated 
approval to Amendment No. 2 and Amendment No. 3 is appropriate and 
consistent with Section 19(b)(2) of the Act.\74\ Accordingly, the 
Commission hereby finds good cause for approving Amendment No. 2 and 
Amendment No. 3 to the proposal, prior to the 30th day after publishing 
notice of these amendments in the Federal Register.
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    \73\ See supra notes 6 and 7.
    \74\ Exchange Act Section 19(b)(2), 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 Amendment No. 2 and Amendment No. 3, including 
whether the proposed amendments 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 may also be submitted 
electronically at the following e-mail address: [email protected]. 
All comment letters should refer to File No. SR-BSE-2003-04. This file 
number should be included on the subject line if e-mail is used. To 
help us process and review 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 Section, 450 Fifth Street, NW.,

[[Page 2773]]

Washington, DC 20549-0609. Copies of such filing will also be available 
for inspection and copying at the principal office of the BSE. All 
submissions should refer to File No. SR-BSE-2003-04 and should be 
submitted by February 10, 2004.

V. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposal is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\75\ that the proposed rule change (File No. SR-BSE-2003-04), as 
amended by Amendment No. 1, be, and hereby is, approved, and Amendment 
No. 2 and Amendment No. 3 are approved on an accelerated basis.
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    \75\ Exchange Act Section 19(b)(2), 15 U.S.C. 78s(b)(2).

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1115 Filed 1-16-04; 8:45 am]
BILLING CODE 8010-01-P