[Federal Register Volume 69, Number 27 (Tuesday, February 10, 2004)]
[Notices]
[Pages 6352-6353]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-2824]



[[Page 6352]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49184; File No. SR-CBOE-2003-55]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Inc. To Amend Provisions of Its Constitution and Rules 
Pertaining to the Governance of the Exchange

February 4, 2004.

I. Introduction

    On November 19, 2003, the Chicago Board Options Exchange, Inc. 
(``CBOE'' 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 proposed rule change to amend provisions of CBOE's 
Constitution and rules pertaining to the governance of the Exchange. On 
December 11, 2003, CBOE submitted Amendment No. 1 to the proposed rule 
change. The proposed rule change, as amended, was published for comment 
in the Federal Register on December 29, 2003.\3\ No comments were 
received on the proposed rule change. This order approves the proposed 
rule change, as amended.
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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. 48950 (December 18, 
2003), 68 FR 74991 (``Notice of Proposed Rule Change'').
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II. Description of the Amended Proposal

Terms of Office of Directors and Vice Chairman

    The proposed rule change will amend CBOE Constitution Sections 
6.1(b), 6.4, and 8.1 to specify that Directors and the Vice Chairman 
take office on January 1. Currently, the term of office of Directors 
starts at the first regular meeting of the Board held after January 1 
following the annual election, while the Vice Chairman's term starts on 
the 3rd Friday in December of each year. The proposal also amends CBOE 
Constitution Section 6.3(b) to provide the later of 45 days or until 
the next regular Board meeting for a Director who fails to maintain 
qualifications for a designated category to requalify. During any 
period in which a Director fails to maintain qualifications for a 
designated category, the Director shall be deemed not to hold office 
and the seat formerly held by the Director shall be deemed vacant for 
all purposes.

CBOE's Nominating Committee

    The proposal amends CBOE Constitution Section 4.1(b) to allow a 
member of the Nominating Committee who was elected to a term of less 
than three years as a result of a vacancy to stand for reelection. The 
proposal also deletes from CBOE Constitution Section 4.3 the 
requirements that the Nominating Committee hold three meetings in 
October, and that it announce its slate of candidates no later than 
October 10th or the first business day thereafter if October 10th is 
not a business day. In addition, the proposal adopts new CBOE 
Constitution Section 4.8 to require that members of the Nominating 
Committee continuously meet the eligibility criteria for the category 
to which they were elected. New Constitution Section 4.8 also specifies 
that the Board of Directors alone determines whether a Nominating 
Committee member satisfies the qualification criteria for the category 
to which he or she was elected and that a member of the Nominating 
Committee who fails to maintain the applicable qualifications has 45 
days from the date the Board determines the member is not qualified to 
requalify. During any period in which a member of the Nominating 
Committee fails to maintain the applicable qualifications, the member 
shall be deemed not to hold office and the seat formerly held by the 
member shall be deemed to be vacant for all purposes. The proposal also 
adopts new CBOE Constitution Section 4.9, which specifies that the 
Board may remove a Nominating Committee member in the event of the 
refusal, failure, neglect, or inability to discharge his or her duties, 
or for any cause affecting the best interests of the Exchange.

Election and Voting Procedures

    The proposal adopts CBOE Constitution Section 3.8 to authorize the 
Board to set a ``record date'' to determine which members are entitled 
to receive notice and to vote in any Exchange election or vote. The 
record date will be the day preceding the date on which notice of the 
vote is given, if an alternate record date is not fixed by the Board. 
The proposal also amends CBOE Constitution Section 5.2 to provide that 
the Exchange may allow voting members to electronically submit ballots 
and proxies and to provide for a confidential electronic or online 
voting process in the future, if the Board determines to do so. The 
proposal also amends CBOE Constitution Section 10.1 to allow the 
Exchange to give notice to members and associated persons by messenger, 
courier service, facsimile or electronic mail, as well as in person or 
by mail or telephone as is currently provided in Section 10.1 while 
deleting wireless, telegraph, and cable as available communication 
methods. In addition, the proposal amends Constitution Section 10.2 to 
allow for the waiver of notice by the same means as notice may be 
given.

Provisions for Notice to CBOE Members

    The proposal adopts new CBOE Constitution Section 10.1(b) which 
limits the types of notices that may be given via e-mail to those 
notices provided in the Exchange Bulletin and Regulatory Bulletin and 
any other types of notices designated by the Board. CBOE Constitution 
Section 10.1(b) will specifically provide that the Exchange may provide 
the Exchange Bulletin and the Regulatory Bulletin (including the 
notices contained therein) by e-mail. In addition, Section 10.1(b) will 
allow the Exchange to permit members and associated persons to request 
delivery of the Bulletins (or such other notices as the Board may 
designate) by other means, in a form and manner prescribed by the 
Exchange.

Securities Transaction Policy

    The proposal deletes CBOE Constitution Section 11.4, which 
generally prohibited officers and employees of the Exchange from 
trading any CBOE-listed option and required them to report to the 
Exchange every purchase or sale of any security underlying a CBOE-
listed option. CBOE has represented that the securities transaction 
policy will now be included in the Exchange Employee Handbook, instead 
of in the Exchange's Constitution. The proposal also deletes from CBOE 
Rule 9.17 the requirement that a member organization must obtain 
authorization from the CBOE before executing securities transactions 
for officers or employees of any national securities exchange that is a 
participant of The Options Clearing Corporation.
    CBOE has represented that it plans to liberalize the securities 
transaction policies to allow employees (with certain restrictions 
applicable to Regulatory Services Division employees) to trade CBOE-
listed products and to require employees to report transactions in CBOE 
listed products to the Exchange. In addition, CBOE Rule 9.17 will 
continue to require member organizations to obtain authorization from 
the CBOE before executing securities transactions for CBOE officers and 
employees.

[[Page 6353]]

Composition of the MTS Committee

    CBOE is amending Rule 8.82 to modify the composition of the MTS 
Committee. Under the proposed rule change, the nine elected members of 
the MTS Committee will include: three persons whose primary business is 
as a Market-Maker, three persons whose primary business is as a Market-
Maker or as a Designated Primary Market Maker (``DPM'') Designee, and 
three persons whose primary business is as a Floor Broker, at least two 
of whom represent public customer business in the course of their 
activities as a Floor Broker. The proposal removes a provision 
requiring that no more than two members of the MTS Committee be 
associated with a DPM. The Vice Chairman of the Exchange and the 
Chairman of the Market Performance Committee will continue to serve on 
the MTS Committee.
    The amendments to CBOE Rule 8.82 also provide that one of the nine 
elected positions on the MTS Committee may instead be filled by a 
lessor whose primary business is not as a Market-Maker, DPM Designee, 
or Floor Broker, and whose primary residence is located within 80 miles 
of the Exchange's trading floor. In addition, the amendments to Rule 
8.82 provide that the sole judge of whether a candidate satisfies the 
applicable qualifications for election to the MTS Committee in a 
designated category shall be the Nominating Committee, in the case of 
candidates nominated by the Nominating Committee, or the Executive 
Committee, in the case of candidates nominated by petition, and the 
decision of the respective committee shall be final. The proposal 
further amends CBOE Rule 8.82 to provide that: (i) no elected member of 
the MTS Committee may be affiliated with any other elected member of 
the MTS Committee; (ii) the term of office of elected MTS Committee 
members will commence at the time of the first regular Board meeting of 
the calendar year; (iii) the Board of Directors is the sole judge of 
whether or not an MTS Committee member no longer qualifies to serve on 
the Committee; (iv) the Board may remove MTS Committee members for 
cause; and (v) the Vice Chairman, with the approval of the Board, may 
fill vacancies on the MTS Committee until the first regular Board 
meeting of the calendar year following the next annual election. The 
MTS Committee monitors and implements the Exchange's DPM program.

Terms of Office for Committee Members

    The proposed rule change also amends CBOE Rule 2.1 to provide that 
the term of office for committee members appointed pursuant to that 
Rule will continue until the first regular Board meeting of the next 
calendar year and until their successors are appointed or until death, 
resignation or removal. In addition, amended Rule 2.1 provides that any 
action taken by majority of the committee members voting, as opposed to 
present, at a meeting shall be the act of the committee.

Other Business Activities of the President of the Exchange

    The Exchange also is amending CBOE Constitution Section 8.6 to 
allow the Board of Directors to exempt the President from the 
prohibition against engaging in any business other than as President of 
the Exchange, in the same manner that the Board may exempt the Chairman 
of the Board pursuant to Constitution Section 8.2. The Commission notes 
that the Pacific Exchange, Inc. (``PCX'') has a similar provision in 
its Constitution.\4\ In addition, the Commission notes that under CBOE 
Rule 8.1(d), the President cannot be affiliated with a CBOE member.
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    \4\ See PCX Constitution Section 2(a).
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    In addition to the changes described above, the Exchange is 
adopting changes to several provisions of its Constitution and rules 
that are intended to update those provisions to reflect current 
practice. Those changes are described in the Notice of Proposed Rule 
Change.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\5\ In particular, the Commission finds that the 
proposal is consistent with the requirements of Sections 6(b)(3) \6\ 
and 6(b)(5) \7\ of the Act. Section 6(b)(3) requires, among other 
things, that the CBOE's rules assure a fair representation of its 
members in the administration of its affairs. Section 6(b)(5) requires, 
among other things, that CBOE's rules be designed to promote just and 
equitable principles of trade, to prevent fraudulent and manipulative 
acts and practices, and, in general, protect investors and the public 
interest.
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    \5\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(3).
    \7\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed rule change should 
clarify CBOE's Constitution with respect to the terms of office of its 
Directors and committee members, as well as the composition of its 
Nominating Committee and thereby should increase the efficiency of 
CBOE's governance. In addition, the Commission believes that the 
amendments to the composition of CBOE's MTS Committee are consistent 
with its obligation to ensure its members are fairly represented in the 
administration of its affairs, and should permit CBOE to include 
representatives of diversified broker-dealers on the Committee without 
permitting the Committee to become dominated by any one type of member 
constituency. Further, the Commission believes that the proposed rule 
change should update CBOE's election and voting procedures, as well as 
the methods by which CBOE may provide notice to its members.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change, as amended, (SR-CBOE-2003-55) is 
approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-2824 Filed 2-9-04; 8:45 am]
BILLING CODE 8010-01-P