[Federal Register Volume 69, Number 85 (Monday, May 3, 2004)]
[Notices]
[Pages 24205-24208]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9978]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49620; File No. SR-CBOE-2004-16]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Inc. Relating to an Interpretation of Paragraph (b) of 
Article Fifth of its Certificate of Incorporation and an Amendment to 
Rule 3.16(b)

April 26, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 4, 2004, the Chicago Board Options Exchange, Inc. (``CBOE'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the CBOE. On April 9, 2004, the CBOE filed 
an amendment to the proposed rule change.\3\ The

[[Page 24206]]

Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Arthur B. Reinstein, Deputy General Counsel, 
CBOE, to Lisa N. Jones, Special Counsel, Division of Market 
Regulation (``Division''), Commission, dated April 8, 2004 
(``Amendment No. 1''). Amendment No. 1 provides further 
clarification to the proposal by including three additional exhibits 
to the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to adopt a proposed rule change consisting of an 
interpretation of paragraph (b) of Article Fifth of the CBOE 
Certificate of Incorporation (``Article Fifth(b)'') pertaining to the 
right of the 1,402 Full Members of CBOT to become members of CBOE 
without having to purchase a CBOE membership (``Exercise Right''). The 
proposed interpretation of the Exercise Right is embodied in an 
agreement dated December 17, 2003 (``2003 Agreement''), between the 
CBOE and the Board of Trade of the City of Chicago, Inc. (``CBOT''). 
The CBOE also proposes related revisions to CBOE Rule 3.16. Below is 
the text of the proposed amendment to CBOE Rule 3.16. Proposed language 
is in italics; proposed deletions are in brackets.
* * * * *

Rule 3.16 Special Provisions Regarding Chicago Board of Trade Exerciser 
Memberships

    (a) Termination of Nontransferable Memberships. [No change]
    (b) Board of Trade Exercisers. For the purpose of entitlement to 
membership on the Exchange in accordance with Paragraph (b) of Article 
Fifth of the Certificate of Incorporation of the Exchange (``Article 
Fifth(b)'') the term ``member of the Board of Trade of the City of 
Chicago'' (the ``CBOT''), as used in Article Fifth(b), is interpreted 
to mean an individual who is either an ``Eligible CBOT Full Member'' or 
an ``Eligible CBOT Full Member Delegate,'' as those terms are defined 
in the Agreement entered into on September 1, 1992 (the ``1992 
Agreement'') between the CBOT and the Exchange, and in the Agreement 
entered into on December 17, 2003, (``the 2003 Agreement'') between the 
CBOT and the Exchange, and shall not mean any other person. In order to 
permit Eligible CBOT Full Members and Eligible CBOT Full Member 
Delegates to participate in an offer, distribution or redemption of the 
kind referred to in the last two sentences of Paragraph 3(a) of the 
1992 Agreement, and solely for such purpose, the Exchange will waive 
all membership dues, fees and other charges and all qualification 
requirements, other than those that may be imposed by law, that may be 
applicable to the application for membership on the Exchange of each 
Eligible CBOT Full Member and Eligible CBOT Full Member Delegate who 
wishes to exercise the Exercise Right during the period commencing on 
the date the Exchange gives notice to the CBOT pursuant to Paragraph 
3(b) of the 1992 Agreement and ending on the date such individual 
participates in such offer, distribution or redemption (as the case may 
be); provided, however, that (i) no Exerciser Member (as defined in the 
1992 Agreement) for whom dues, fees and other charges and qualification 
requirements are waived in accordance with the foregoing shall have any 
rights as a member of the Exchange other than to participate in such 
offer, distribution or redemption, and (ii) the membership on the 
Exchange of each such Exerciser Member shall terminate immediately 
following the time such individual participates in such offer, 
distribution or redemption.
* * * * *

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

    In its filing with the Commission, the CBOE included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The CBOE has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    The purpose of the proposed rule change is to provide an 
interpretation to the rules of the CBOE as set forth in Article 
Fifth(b) that will apply, upon the distribution by the CBOT to each of 
its 1,402 Full Members upon their individual request, a separately 
transferable interest representing the Exercise Right component of each 
CBOT Full Membership. According to the CBOE, the CBOT's willingness to 
issue transferable Exercise Right interests is reflected in the 2003 
Agreement and recently adopted changes to the CBOT Rules and 
Regulations. The CBOE notes that the 2003 Agreement, resulting from 
negotiations with the CBOT, is intended to result in the issuance by 
the CBOT of a separately transferable interest representing the 
Exercise Right component of CBOT Full Membership in advance of the 
consummation of the CBOT's proposed corporate restructuring, which 
contemplates a similar structure. The CBOE believes that the CBOT's 
proposed restructuring has not yet been consummated and it is uncertain 
as to when such proposed restructuring will occur.\4\
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    \4\ The CBOE notes that the CBOT's proposal to issue a 
separately transferable interest representing the Exercise Right as 
part of its restructuring was the subject of a prior proposed 
interpretation by the CBOE of Article Fifth(b), which was filed with 
the Commission as a proposed rule change in File No. SR-CBOE-2002-
01. On April 7, 2004, the CBOE withdrew this filing. See letter from 
Arthur B. Reinstein, Deputy General Counsel, CBOE, to Lisa N. Jones, 
Special Counsel, Division, Commission, dated April 6, 2004.
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    Although the CBOT recently reconfirmed to the CBOE its commitment 
to pursue its proposed restructuring, the CBOT also agreed with the 
CBOE that, before it implements such restructuring, it is willing to 
implement a structure that provides for the issuance of separately 
transferable interests representing the Exercise Right component of 
CBOT Full Memberships. As described above, the CBOT's membership has 
approved changes to the CBOT Rules and Regulations, which were proposed 
by the CBOT pursuant to the terms of the 2003 Agreement to give effect 
to a structure providing for the issuance of these interests. The CBOE 
proposes to interpret how Article Fifth(b) of the CBOE Certificate of 
Incorporation will apply once these interests are issued. Such an 
interpretation is embodied in the 2003 Agreement, and it constitutes 
the substance of the proposed rule change that is the subject of this 
filing.\5\
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    \5\ The CBOE notes that the only other change proposed in this 
filing is a conforming amendment to CBOE Rule 3.16 that adds a 
reference to the 2003 Agreement.
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    According to the CBOE, the interpretation of Article Fifth(b) 
embodied in the 2003 Agreement includes definitions of who will be 
``Eligible CBOT Full Members'' and ``Eligible CBOT Full Member 
Delegates'' entitled to exercise after the CBOT has issued separately 
transferable interests representing the Exercise Right component of 
CBOT Full Memberships to those CBOT Full Members who request them. 
(Such interests are referred to in the 2003 Agreement and in this 
filing as ``Exercise Right Privileges.'') Under these definitions, to 
be able to become a member of the CBOE by virtue of the Exercise Right, 
the holder or delegate (i.e., a lessee under CBOT Rules and 
Regulations) of one of the 1,402 outstanding CBOT Full Memberships in 
which an Exercise

[[Page 24207]]

Right Privilege has been issued must be in possession of one Exercise 
Right Privilege, whether bundled or unbundled from the related CBOT 
Full Membership. In addition, as holder or delegate of a CBOT Full 
Membership, one must also be in possession of all of the other rights 
or privileges appurtenant to a CBOT Full Membership and must meet the 
applicable membership and eligibility requirements of the CBOT and be 
deemed to be a ``CBOT Full Member'' or a ``CBOT Full Member Delegate'' 
under the CBOT Rules and Regulations.
    As noted above, under the proposed interpretation of Article 
Fifth(b) embodied in the 2003 Agreement, Exercise Right Privileges may 
be separately bought and sold and bundled and rebundled with the other 
rights and privileges of CBOT Full Membership for purposes of making 
the holder of an Exercise Right Privilege eligible to exercise. The 
2003 Agreement also provides that the CBOT will adopt and maintain 
rules and procedures acceptable to the CBOE governing the issuance and 
subsequent transfer of Exercise Right Privileges and CBOT Full 
Memberships, to enable the CBOE to administer the operation of the 
Exercise Right in a manner consistent with the interpretation embodied 
in the 2003 Agreement. In addition, the CBOT and the CBOE have each 
agreed to provide to the other certain current information regarding 
the status of their members, including exercisers and persons who own 
or lease an Exercise Right Privilege.
    The CBOE believes that the proposed interpretation of Article 
Fifth(b) is consistent with the language of Article Fifth(b), which 
provides in part that ``every present and future member of the [CBOT] 
who applies for membership in the [CBOE] and who otherwise qualifies 
shall, so long as he remains a member of said Board of Trade, be 
entitled to be a member of the [CBOE] notwithstanding any such 
limitation on the number of members and without the necessity of 
acquiring such membership for consideration or value from the [CBOE], 
its members or elsewhere.'' The CBOE believes that this filing does not 
propose to amend Article Fifth(b) in any respect, but only to interpret 
how it should apply in circumstances that were not envisioned when 
Article Fifth(b) was adopted, and therefore were not addressed in the 
language of Article Fifth(b).\6\
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    \6\ By its terms, Article Fifth(b) may be amended only with the 
approval of 80% of CBOE's members admitted by exercise, and 80% of 
CBOE's members admitted other than by exercise, each voting as a 
separate class.
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    The CBOE believes that the proposed interpretation of Article 
Fifth(b) is also consistent with the interpretation of the Exercise 
Right embodied in the 1992 Agreement. According to the CBOE, the 1992 
Agreement served to resolve a dispute between the CBOE and the CBOT 
concerning the meaning of certain terms in Article Fifth(b) regarding 
the Exercise Right and concerning action taken or proposed to be taken 
by the CBOT at that time to unbundle certain of the trading rights held 
by CBOT members, issue transferable evening trading permits to its 
members, and allow CBOT members to ``delegate'' (i.e., lease) the 
trading rights associated with their memberships. According to the 
CBOE, to preserve the original intent of the Exercise Right, Article 
Fifth(b) was interpreted in the 1992 Agreement so that, in the event of 
any division of the trading rights and privileges appurtenant to a CBOT 
Full Membership, or any division of the CBOT full membership itself, a 
CBOT member retained the right to exercise only if he held all of the 
parts into which his membership may have been divided and all of the 
trading rights and privileges appurtenant thereto. According to the 
CBOE, as a result of the interpretation of Article Fifth(b) embodied in 
the 1992 Agreement, the number of potential ``exerciser'' members of 
the CBOE is limited to the 1,402 Full Members of the CBOT or their 
delegates (lessees), but not both in respect of the same CBOT 
membership.\7\
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    \7\ The CBOE asserts that the interpretation of Article Fifth(b) 
embodied in the 1992 Agreement and an amendment to Rule 3.16 
referring to the 1992 Agreement were approved by the Commission in 
Securities Exchange Act Release No. 32430 (June 8, 1993), 58 FR 
32969 (June 14, 1993).
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    The CBOE notes that the proposed interpretation of the Exercise 
Right that is the subject of this filing does not displace the 
interpretation embodied in the 1992 Agreement, except it provides that 
if there are any inconsistencies between the interpretation embodied in 
the 2003 Agreement and the interpretation embodied in the 1992 
Agreement, then the interpretation embodied in the 2003 Agreement would 
control. Because CBOE Rule 3.16 refers to certain terms that were 
previously interpreted and defined in the 1992 Agreement and are now 
further interpreted and defined in the modified 2003 Agreement, the 
proposed rule change also amends Rule 3.16 to include the definitions 
and interpretations in both Agreements.
    According to the CBOE, the interpretation of Article Fifth(b) 
embodied in the 2003 Agreement is intended to apply solely in the 
circumstances involving the issuance of Exercise Right Privileges to 
some or all of its 1,402 Full Members as described in that Agreement, 
so as to make it clear that such interpretation is not intended to 
cover any other circumstances that might arise and might also have an 
impact on the Exercise Right.
2. Statutory Basis
    The CBOE believes that the proposed interpretation of the Exercise 
Right embodied in the 2003 Agreement and the related proposed amendment 
to CBOE Rule 3.16 that together constitute the proposed rule change is 
consistent with and furthers the objectives of the Act, and section 
6(b)(5) of the Act in particular,\8\ in that it constitutes an 
interpretation of, and an amendment to, the rules of the Exchange that 
are designed to promote just and equitable principles of trade, to 
perfect the mechanisms of a free and open market, and to protect 
investors and the public interest.
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    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule

[[Page 24208]]

change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic comments:

     Use the Commission's Internet comment form 
(http://www.sec.gov/rules/sro.shtml); or
     Send an E-mail to [email protected]. Please 
include File Number SR-CBOE-2004-16 on the subject line.

Paper comments:

     Send paper comments in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0609.

All submissions should refer to File Number SR-CBOE-2004-16. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the CBOE. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-CBOE-2004-16 and should be submitted on or before May 
24, 2004.

    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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-9978 Filed 4-30-04; 8:45 am]
BILLING CODE 8010-01-P