[Federal Register Volume 70, Number 29 (Monday, February 14, 2005)]
[Notices]
[Pages 7531-7541]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-588]



[[Page 7531]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51149, File No. SR-CHX-2004-26]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 and Notice of Filing and Order Granting 
Accelerated Approval to Amendment No. 3 by the Chicago Stock Exchange, 
Inc. Relating to the Demutualization of the Chicago Stock Exchange, 
Inc.

February 8, 2005.

I. Introduction

    On November 24, 2004, the Chicago Stock Exchange, Inc. (``CHX'' 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 effect the demutualization of CHX. CHX filed 
Amendment No. 1 to the proposal on December 15, 2004.\3\ CHX filed 
Amendment Nos. 2 and 3 to the proposal on January 28, 2005.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, CHX revises several references in the 
original proposal to reflect the November 2004 vote of CHX's members 
to approve the demutualization.
    \4\ Amendment No. 3 replaced and superseded Amendment No. 2 in 
its entirety. In Amendment No. 3, CHX revises the proposal to: (1) 
Indicate that the staff of CHX will present to the Board of 
Directors of CHX Holdings for its approval a proposed new Bylaws 
provision stating that CHX Holdings will take such action as is 
necessary to insure that its officers, directors, and employees 
consent to the applicability of Article III, Section 3, and Article 
III, Section 5 of the CHX Holdings Bylaws with respect to CHX-
related activities; (2) confirm CHX's continuing participation in 
various national market system plans following the demutualization; 
(3) correct a typographical error in the numbering of the articles 
of the CHX Bylaws; and (4) clarify language regarding the admission 
of persons to membership.
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    The proposed rule change and Amendment No. 1 were published for 
comment in the Federal Register on December 28, 2004.\5\ The Commission 
received no comment letters regarding the proposal and Amendment No. 1. 
This order approves the proposed rule change, as amended. In addition, 
the Commission is publishing notice to solicit comments on, and is 
simultaneously approving, on an accelerated basis, Amendment No. 3.
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    \5\ See Securities Exchange Act Release No. 50892 (December 20, 
2004), 69 FR 77796.
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II. Description of Proposed Rule Change

    Currently, CHX is a non-stock, not-for-profit Delaware corporation. 
CHX proposes to demutualize by reorganizing as a Delaware for-profit 
stock corporation that will be a subsidiary of a new Delaware for-
profit stock holding company, CHX Holdings, Inc. (``CHX Holdings'').\6\ 
CHX will continue to operate as a national securities exchange 
registered under Section 6 of the Act \7\ and will continue to have 
self-regulatory responsibilities over its members. CHX will have its 
own Board of Directors that will manage CHX's business and affairs.
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    \6\ To accomplish the demutualization, CHX proposes to establish 
two new Delaware stock for-profit corporations: CHX Holdings, a 
direct and wholly-owned subsidiary of CHX; and CHX Merger Sub, Inc. 
(``CHX Merger Sub''), a direct and wholly-owned subsidiary of CHX 
Holdings. Pursuant to an agreement and plan of merger, CHX Merger 
Sub will merge with and into CHX, with CHX surviving the merger as a 
Delaware for-profit stock corporation that is a direct and wholly-
owned subsidiary of CHX Holdings.
    \7\ 15 U.S.C. 78f. The proposed rule change, as amended, 
includes: (1) CHX's revised rules; (2) CHX's revised Certificate of 
Incorporation; (3) CHX's revised Bylaws; (4) the Certificate of 
Incorporation for CHX Holdings; and (5) the Bylaws of CHX Holdings.
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    On the effective date of the demutualization, each person or entity 
that owns a membership in CHX will receive 1,000 shares of common stock 
of CHX Holdings for each membership that the person or entity owns. All 
of the issued and outstanding stock of CHX Holdings (450,000 shares of 
common stock) initially will be owned by the persons or entities that 
owned memberships in the Exchange.\8\ Following the demutualization, 
persons and entities who have been qualified for membership under 
Articles 1, 2, or 3 of the Exchange's current rules and, as a result, 
have access to the Exchange's trading floor and other facilities 
(``qualified trading members'') will separately receive CHX trading 
permits entitling them to maintain their trading access to CHX.
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    \8\ CHX Holdings will have an additional 300,000 shares of 
authorized, but not issued, common stock and 25,000 shares of 
authorized, but not issued, preferred stock. See CHX Holdings 
Certificate of Incorporation, Article Fourth.
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    Shares of CHX Holdings common stock and CHX trading permits will 
not be tied together. As a result, following the demutualization, 
former CHX members will be able to sell the shares of CHX Holdings 
common stock they receive in exchange for their CHX memberships, 
subject to the applicable restrictions described below, while retaining 
the ability to trade and operate on CHX pursuant to their CHX trading 
permits. Any other person who satisfies the regulatory requirements set 
forth in CHX's rules also will be able to obtain a CHX trading permit 
without regard to whether such person is a shareholder of CHX Holdings. 
Persons who hold trading permits in the demutualized Exchange will be 
called ``participants'' or ``participant firms.''
    CHX's proposal included the CHX Holdings Certificate of 
Incorporation and Bylaws; proposed changes to the CHX Certificate of 
Incorporation and Bylaws that reflect the proposed changes in its 
corporate form; proposed governance changes that will, among other 
things, reduce the size of the CHX Board and make certain changes 
relating to CHX committees. In addition, CHX proposed changes to its 
membership rule that are necessary to implement the proposed trading 
permit structure.\9\ Specifically, CHX proposed to replace references 
to ``members,'' ``member organizations,'' and ``member firms'' with 
references to ``participants'' and ``participant firms.'' CHX also 
proposed to delete references to sales of memberships and consolidate 
the current separate articles relating to members into a single article 
regarding participant firms. In its filing, CHX represented that it was 
not proposing to change its existing operational and trading structure.
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    \9\ CHX also proposed to delete the following rules relating to 
events that have occurred or to programs that CHX no longer offers: 
Article IB, ``E-Session Trading Privileges;'' Article XI, Rules 11, 
``Mandatory Year 2000 Testing,'' and 12, ``Mandatory Decimal Pricing 
Testing;'' and Article XIII, Rule 4, ``Advertisements, Market Sales 
Literature Relating to Options and Communications to Customers.''
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A. Corporate Structure

1. CHX Holdings
    CHX Holdings will be the parent company and sole shareholder of 
CHX. As sole shareholder of CHX, CHX Holdings will have the right to 
elect the Board of Directors of CHX and collect dividends, subject to 
certain provisions in the CHX rules that reflect regulatory 
requirements under the federal securities laws. The Certificate of 
Incorporation and the Bylaws of CHX Holdings will govern the activities 
of CHX Holdings.
    (a) CHX Holdings Board of Directors. The business and affairs of 
CHX Holdings will be managed by its Board of Directors (``CHX Holdings 
Board''). The CHX Holdings Board will consist of between 10 and 16 
persons, as determined by the CHX Holdings Board, including the Chief 
Executive Officer (``CEO'') of CHX Holdings.\10\ Initially, the CHX 
Holdings Board will have 14 directors, who will be selected by the 
Chairman, Vice Chairman, and CEO of CHX from among the persons 
currently

[[Page 7532]]

serving on the Exchange's Board of Governors.\11\
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    \10\ See CHX Holdings Certificate of Incorporation, Article 
Sixth, Sections (b) and (c), and CHX Holdings Bylaws, Article II, 
Section 2.
    \11\ See CHX Holdings Certificate of Incorporation, Article 
Sixth, Section (g).
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    The CHX Holdings Board will elect its Chairman from among the 
directors on the CHX Holdings Board.\12\ The Chairman of the CHX 
Holdings Board may serve as the CEO of CHX Holdings but may hold no 
other office in CHX Holdings.\13\ The Chairman of the CHX Holdings 
Board will nominate the Vice Chairman of the CHX Holdings Board, and 
the CHX Holdings Board will elect the Vice Chairman by majority 
vote.\14\ The Vice Chairman may hold no other office in CHX 
Holdings.\15\ Neither the Chairman nor the Vice Chairman of CHX 
Holdings will be subject to any limit on the number of terms that he or 
she may serve.
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    \12\ See CHX Holdings Bylaws, Article II, Section 4.
    \13\ See CHX Holdings Bylaws, Article II, Section 4.
    \14\ See CHX Holdings Bylaws, Article II, Section 5.
    \15\ See CHX Holdings Bylaws, Article II, Section 5.
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    Each year, the Nominating and Governance Committee of CHX Holdings 
will nominate directors for the class of directors standing for 
election at the CHX Holdings annual meeting of shareholders.\16\ Each 
CHX Holdings shareholder will be entitled to one vote for each share of 
stock he or she owns, absent a provision in the CHX Holdings 
Certificate of Incorporation fixing or denying voting rights.\17\ At 
each annual meeting of the shareholders of CHX Holdings at which a 
quorum is present, the individuals receiving a plurality of the votes 
cast will be elected directors of CHX Holdings.\18\
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    \16\ See CHX Holdings Bylaws, Article II, Section 3.
    \17\ See CHX Holdings Bylaws, Article IV, Section 11.
    \18\ See CHX Holdings Bylaws, Article IV, Section 9.
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    (b) Committees of CHX Holdings. CHX Holdings will have an Executive 
Committee, a Nominating and Governance Committee, an Audit Committee, a 
Compensation Committee, and any other committees that the CHX Holdings 
Board establishes.\19\ The CHX Holdings Board will appoint the CHX 
Holdings Nominating and Governance Committee, which will consist of six 
directors.\20\ The Chairman and Vice Chairman of the CHX Holdings Board 
will appoint the Executive, Audit, and Compensation Committees of CHX 
Holdings, subject to the approval of the CHX Holdings Board.\21\ The 
Vice Chairman of CHX Holdings will appoint the members of other 
standing and special committees, subject to the approval of the CHX 
Holdings Board.\22\ Each committee will have the authority and 
responsibilities determined by the CHX Holdings Board.\23\
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    \19\ See CHX Holdings Bylaws, Article V, Section 1.
    \20\ See CHX Holdings Bylaws, Article II, Section 3.
    \21\ See CHX Holdings Bylaws, Article V, Section 2.
    \22\ See CHX Holdings Bylaws, Article II, Section 5, and CHX 
Holdings Bylaws, Article V, Section 2.
    \23\ See CHX Holdings Bylaws, Article V, Section 3.
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    (c) Officers of CHX Holdings. The officers of CHX Holdings will be 
the CEO of CHX Holdings, one or more Vice Presidents, a Secretary, a 
Treasurer, and such other officers, including a President, as the CHX 
Holdings Board or the CEO of CHX Holdings determine.\24\ The CHX 
Holdings Board will appoint the CEO of CHX Holdings, who will manage 
the business affairs of CHX Holdings.\25\ The officers of CHX Holdings 
will have the responsibilities and authority set out in the CHX 
Holdings Bylaws or given to them by the CEO of CHX Holdings. As an 
initial matter, the CEO of CHX will act as the CEO of CHX Holdings and 
will appoint as officers of CHX Holdings such officers of CHX as he 
believes are necessary to carry out the business of CHX Holdings.
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    \24\ See CHX Holdings Bylaws, Article VI, Section 1.
    \25\ See CHX Holdings Bylaws, Article VI, Section 4.
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    (d) Shareholder Restrictions. The Certificate of Incorporation of 
CHX Holdings places certain restrictions on the ability to transfer, 
own, and vote the stock of CHX Holdings.
    (i) Restrictions on voting. The Certificate of Incorporation of CHX 
Holdings generally prohibits any Person, either alone or together with 
its Related Persons,\26\ from (a) voting or giving a proxy or consent 
with respect to shares representing more than 20% of the voting power 
of the then-issued and outstanding capital stock of CHX Holdings; or 
(b) entering into any agreement, plan, or arrangement that would result 
in the shares of CHX Holdings subject to that agreement, plan, or 
arrangement not being voted on a matter, or any proxy relating thereto 
being withheld, where the effect of that agreement, plan, or 
arrangement would be to enable any Person, alone or together with its 
Related Persons, possessing the right to vote or causing the vote of 
more than 20% of the voting power of the then-issued and outstanding 
capital stock of CHX Holdings.\27\
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    \26\ Article Fifth of the CHX Holdings Certificate of 
Incorporation defines a ``Person'' to mean ``an individual, 
partnership (general or limited), joint stock company, corporation, 
limited liability company, trust or unincorporated organization, or 
any governmental entity or agency or political subdivision 
thereof.'' A ``Related Person'' means ``(A) with respect to any 
Person, all `affiliates' and `associates' of such Person (as such 
terms are defined in Rule 12b-2 under the Securities Exchange Act of 
1934, as amended); (B) with respect to any Person that holds a 
permit issued by the Chicago Stock Exchange, Inc. to trade 
securities on the Chicago Stock Exchange (a `Participant'), any 
broker or dealer with which a Participant is associated; and (C) any 
two or more Persons that have any agreement, arrangement or 
understanding (whether or not in writing) to act together for the 
purpose of acquiring, voting, holding or disposing of shares of the 
capital stock of the Corporation.'' See CHX Holdings Certificate of 
Incorporation, Article Fifth, paragraph (a).
    \27\ See CHX Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(ii)(C).
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    The CHX Holdings Board may waive the voting limitation by approving 
an amendment to the CHX Holdings Bylaws. Before approving a waiver, the 
CHX Holdings Board must determine that, among other things, the waiver 
of the voting limitation will not impair the ability of CHX to carry 
out its functions and responsibilities under the Act and will not 
impair the Commission's ability to enforce the Act.\28\ In addition, 
the CHX Holdings Board also must determine that a Person and any 
Related Persons that would vote more than 20% of the outstanding stock 
of CHX Holdings is not subject to an applicable ``statutory 
disqualification'' (within the meaning of Section 3(a)(39) of the 
Act).\29\ Finally, any amendment to the CHX Holdings Bylaws that would 
permit a Person to vote more than 20% of the outstanding stock of CHX 
Holdings must be filed with and approved by the Commission.\30\
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    \28\ See CHX Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(iii)(B).
    \29\ 15 U.S.C. 78c(a)(39).
    \30\ See CHX Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(iii)(B) and paragraph (b)(iv).
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    (ii) Restrictions on ownership. The CHX Holdings Certificate of 
Incorporation generally prohibits any Person, alone or together with 
its Related Persons, from owning, of record or beneficially, shares 
constituting more than 40% of any class of capital stock of CHX 
Holdings.\31\ The CHX Holdings Board may waive the ownership limitation 
by approving an amendment to the CHX Holdings Bylaws. Before approving 
the ownership waiver, the CHX Holdings Board must determine that, among 
other things, the waiver of the ownership limitation would not impair 
the ability of CHX to carry out its functions and responsibilities 
under

[[Page 7533]]

the Act and would not impair the Commission's ability to enforce the 
Act.\32\ In addition, the CHX Holdings Board also must determine that a 
Person and any Related Persons that would own more than 40% of the 
outstanding stock of CHX Holdings is not subject to an applicable 
``statutory disqualification'' (within the meaning of Section 3(a)(39) 
of the Act).\33\ Finally, any amendment to the CHX Holdings Bylaws that 
would permit a Person to own more than 40% of the outstanding stock of 
CHX Holdings must be filed with and approved by the Commission.\34\
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    \31\ See CHX Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(ii)(A). See also CHX Holdings Certificate of 
Incorporation, Article Fifth, paragraph (b)(iii)(A).
    \32\ See CHX Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(iii)(C).
    \33\ 15 U.S.C. 78c(a)(39).
    \34\ See CHX Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(iii)(B) and paragraph (b)(iv).
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    The CHX Holdings Certificate of Incorporation places further 
restrictions on those shareholders of CHX Holdings that also hold CHX 
trading permits. Specifically, CHX Participants and their Related 
Persons may not own, of record or beneficially, shares constituting 
more than 20% of any capital stock of CHX Holdings.\35\ The CHX 
Holdings Board may not waive this restriction.
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    \35\ See CHX Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(ii)(B).
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    (iii) Other shareholder requirements. The CHX Holdings has several 
provisions in its Certificate of Incorporation that will enable it to 
enforce the ownership and voting restrictions. Specifically, if a 
shareholder purports to sell, transfer, assign, or pledge any shares to 
any Person in a transaction that would violate the ownership 
restrictions described above, CHX Holdings will record on its books the 
transfer of only the number of shares that would not violate these 
restrictions and will treat the remaining shares as owned by the 
purported transferor for all purposes, including, without limitation, 
voting, payment of dividends, and distributions.\36\ In addition, if 
any shareholder purports to vote, or to grant any proxy or enter into 
any agreement relating to the voting of shares that would violate the 
voting restrictions described above, CHX Holdings will not honor such 
vote, proxy, or agreement, and any shares subject to that arrangement 
will not be entitled to be voted to the extent of the violation.\37\ 
Finally, if any shareholder purports to sell, transfer, assign, pledge, 
or vote any shares in a transaction that would violate the voting and 
ownership concentration limits, CHX Holdings will have the right to 
redeem such shares at a price equal to the par value of the shares, 
upon the approval of the CHX Holdings Board.\38\
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    \36\ See CHX Holdings Certificate of Incorporation, Article 
Fifth, paragraph (d).
    \37\ See CHX Holdings Certificate of Incorporation, Article 
Fifth, paragraph (d).
    \38\ See CHX Holdings Certificate of Incorporation, Article 
Fifth, paragraph (e).
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    A shareholder that alone or together with its Related Persons owns, 
of record or beneficially, five percent or more of the then outstanding 
shares of the capital stock of CHX Holdings, must immediately give the 
CHX Holdings Board written notice of such ownership.\39\
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    \39\ See CHX Holdings Certificate of Incorporation, Article 
Fifth, paragraph (c)(i).
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    Shareholders may dispose of shares of CHX Holdings only in minimum 
lots of 1,000 shares.\40\
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    \40\ See CHX Holdings Bylaws, Article IX, Section 2.
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    (e) Self-Regulatory Function and Oversight. The CHX Holdings Bylaws 
contain various provisions designed to protect the independence of the 
self-regulatory function of CHX and to clarify the Commission's 
oversight responsibilities. For example, pursuant to the CHX Holdings 
Bylaws, CHX Holdings must give due regard to the preservation of the 
independence of the self-regulatory function of CHX and to its 
obligations to investors and the general public. In addition, CHX 
Holdings is specifically prohibited from taking any actions that would 
interfere with the effectuation of any decisions by the Board of 
Directors of CHX (``CHX Board'') relating to CHX's regulatory 
functions, including disciplinary matters or the structure of the 
market it regulates, or that would interfere with CHX's ability to 
carry out its responsibilities under the Act.\41\ The CHX Holdings 
Bylaws contain a specific requirement that all books and records of 
CHX, and the information contained therein, that reflect confidential 
information pertaining to the self-regulatory function of CHX, which 
comes into the possession of CHX Holdings must be retained in 
confidence by CHX Holdings and its Board, officers, employees, and 
agents, and must not be used for any non-regulatory purposes.\42\
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    \41\ See CHX Holdings Bylaws, Article III, Section 1.
    \42\ See CHX Holdings Bylaws, Article III, Section 2.
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    The CHX Holdings Bylaws also provide that, to the extent they are 
related to the activities of CHX, the books, records, premises, 
officers, directors, agents, and employees of CHX Holdings are deemed 
to be the books, records, premises, officers, directors, agents, and 
employees of CHX for the purposes of, and subject to oversight pursuant 
to, the Act.\43\
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    \43\ See CHX Holdings Bylaws, Article III, Section 3. The 
Commission notes that the staff of CHX has indicated that it will 
present to the CHX Holdings Board for its approval a proposed new 
CHX Holdings Bylaws provision confirming that CHX Holdings will take 
such action as is necessary to ensure that its officers, directors, 
and employees consent to the applicability of Article III, Section 
3, and Article III, Section 5 of the CHX Holdings Bylaws with 
respect to CHX-related activities. See Amendment No. 3, supra note 
4.
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    With regard to the Commission's ability to oversee the activities 
of CHX, the CHX Holdings Bylaws provide that the officers, directors, 
employees, and agents of CHX Holdings, by virtue of their acceptance of 
such position, are deemed to agree to cooperate with the Commission and 
CHX in respect of the Commission's oversight responsibilities regarding 
CHX and the self-regulatory functions and responsibilities of CHX.\44\ 
In addition, the CHX Holdings Bylaws provide that CHX Holdings and its 
officers, directors, employees, and agents, by virtue of their 
acceptance of such position, will be deemed to irrevocably submit to 
the jurisdiction of the U.S. federal courts, the Commission, and CHX, 
for the purpose of any suit, action, or proceeding pursuant to the U.S. 
federal securities laws and the rules and regulations thereunder, 
arising out of, or relating to, the activities of CHX.\45\ Further, CHX 
Holdings and its officers, directors, employees, and agents, by virtue 
of their acceptance of such position, are deemed to waive, and agree 
not to assert by way of motion, as a defense or otherwise in any such 
suit, action, or proceeding, any claims that it or they are not 
personally subject to the jurisdiction of the U.S. federal courts, the 
Commission, or CHX; that the suit, action, or proceeding is in an 
inconvenient forum; that the venue of the suit, action, or proceeding 
is improper; or that the subject matter thereof may not be enforced in 
or by such courts or agency.\46\
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    \44\ See CHX Holdings Bylaws, Article III, Section 4.
    \45\ See CHX Holdings Bylaws, Article III, Section 5. The 
Commission notes that the staff of CHX has indicated that it will 
present to the CHX Holdings Board for its approval a proposed new 
CHX Holdings Bylaws provision stating that CHX Holdings will take 
such action as is necessary to ensure that its officers, directors, 
and employees consent to the applicability of Article III, Section 
3, and Article III, Section 5 of the CHX Holdings Bylaws with 
respect to CHX-related activities. See Amendment No. 3, supra note 
4.
    \46\ See CHX Holdings Bylaws, Article III, Section 5.
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    Finally, the CHX Holdings Certificate of Incorporation and the CHX 
Holdings Bylaws provide that, before any amendment or repeal of a 
provision in the Certificate of Incorporation or the

[[Page 7534]]

Bylaws, respectively, will be effective, it must be submitted to the 
CHX Board and if the CHX Board determines that the amendment or repeal 
of the provision must be filed with the Commission before it may be 
effective, the amendment or repeal of the provision will not be 
effective until it is filed with, or filed with and approved by the 
Commission, as the case may be.\47\
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    \47\ See CHX Holdings Certificate of Incorporation, Article 
Thirteenth, and CHX Bylaws, Article VIII.
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2. CHX
    Following the demutualization, CHX will become a Delaware for-
profit stock corporation that will be wholly-owned by CHX Holdings. 
CHX, however, will continue to be the entity registered as a national 
securities exchange under Section 6 of the Act \48\ and, accordingly, 
CHX will continue to be a self-regulatory organization (``SRO'').
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    \48\ 15 U.S.C. 78f.
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    (a) Governing Documents and CHX Rules. The CHX Certificate of 
Incorporation, CHX Bylaws, and CHX rules will govern the activities of 
CHX. CHX's rules and Bylaws are proposed to reflect, among other 
things, CHX's status as wholly-owned subsidiary of CHX Holdings, its 
management by the CHX Board and its designated officers, and its self-
regulatory responsibilities pursuant to CHX's registration under 
Section 6 of the Act.
    (b) Board of Directors. The CHX Board will consist of between 10 
and 16 persons, as determined by the CHX Board, including the CEO of 
CHX.\49\ Initially, the CHX Board will have 14 directors, whom the 
Chairman, Vice Chairman, and CEO of CHX will select from among the 
persons currently serving on the Exchange's Board of Governors. The 
directors will be divided into three classes, which will be as nearly 
equal in number as the total number of directors then constituting the 
entire CHX Board permits, and will serve staggered three-year terms 
with the term of office of one class expiring each year.\50\
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    \49\ See CHX Certificate of Incorporation, Article Fifth, 
paragraph (b), and CHX Bylaws, Article II, Section 2(a). CHX's 
current Board of Governors consists of 24 governors.
    \50\ See CHX Certificate of Incorporation, Article Fifth, 
paragraph (d), and CHX Bylaws, Article II, Section 2(c).
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    The CHX Board will be comprised of the CEO of CHX, persons who 
qualify as ``Participant Directors,'' and persons who qualify as 
``Public Directors.'' \51\ One-half of the number of CHX directors 
comprising the entire CHX Board must be Public Directors, and the 
remaining directors, other than the CEO of CHX, will be Participant 
Directors.\52\ The CHX Board's initial directors will include the CEO 
of CHX, seven Public Directors, and six Participant Directors.
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    \51\ See CHX Certificate of Incorporation, Article Fifth, 
paragraph (c), and CHX Bylaws, Article II, Section 2(b). CHX's 
Bylaws define a ``Public Director'' as a director who (i) is not a 
participant or an officer, managing member, partner or employee of 
an entity that is a participant, (ii) is not an employee of CHX, CHX 
Holdings or any of their affiliates, (iii) is not a broker or dealer 
or an officer or employee of a broker or dealer, or (iv) does not 
have any other material business relationship with CHX, CHX 
Holdings, or any of their affiliates or any broker or dealer. See 
CHX Bylaws, Article II, Section 2(b). A ``Participant Director'' is 
a director who is a CHX participant or an officer, managing member, 
or partner of an entity that is a CHX participant. A ``participant'' 
is any individual, corporation, partnership, or other entity that 
holds a permit issued by CHX to trade securities on CHX. See CHX 
Bylaws, Article II, Section 2(b). See also CHX Rules, Article I, 
Rule1(l). The definition of ``Public Director'' will replace the 
definitions of ``non-industry governor'' and ``public governor'' set 
out in the Exchange's current governing documents.
    \52\ See CHX Certificate of Incorporation, Article Fifth, 
paragraph (c), and CHX Bylaws, Article II, Section 2(b).
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    The CHX Board will elect its Chairman from among the CEO of CHX and 
the Public Directors.\53\ The Chairman of the CHX Board may serve as 
the CEO of CHX but may hold no other office in CHX.\54\ The Participant 
Directors will elect the Vice Chairman of the CHX Board, who may not 
hold any other office in CHX, from among the Participant Directors.\55\
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    \53\ See CHX Bylaws, Article II, Section 4(a).
    \54\ See CHX Bylaws, Article II, Section 4(a).
    \55\ See CHX Bylaws, Article II, Section 5(a).
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    (c) Nomination and Election of Directors. After the formation of 
the initial CHX Board, the CHX Nominating and Governance Committee, 
which will be comprised of three Public Directors and three Participant 
Directors appointed by the CHX Board, will nominate directors for each 
director position standing for election at the annual meeting of 
shareholders that year.\56\ Because CHX Participants will not be 
shareholders of CHX, they are not entitled to directly elect members of 
the CHX Board. CHX Holdings, as the sole shareholder of CHX, will have 
the sole right and the obligation to vote for the directors of the CHX 
Board. However, to ensure that CHX Participants are afforded fair 
representation as required under Section 6(b)(3) of the Act, CHX has 
proposed a procedure whereby CHX Participants will be involved in the 
selection of Participant Director nominees.\57\
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    \56\ See CHX Bylaws, Article II, Section 3. In addition, the CHX 
Nominating and Governance Committee will periodically review the 
organization and governance structure of CHX. See CHX Rules, Article 
IV, Rule 11.
    \57\ After the Commission approves the proposal, CHX Holdings 
will enter into a voting agreement with CHX confirming its 
obligation to vote for the directors nominated through the process 
set out in the CHX Bylaws.
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    Specifically, the CHX Nominating and Governance Committee will hold 
two open meetings with CHX participants for the purpose of receiving 
recommendations of candidates for election to the Participant Director 
positions. The CHX Nominating and Governance Committee's initial 
candidates for nomination will be announced to CHX participants, who 
will then have the opportunity to identify additional candidates for 
nomination by submitting a petition signed by at least ten 
participants. If no petitions are submitted within the time frame 
prescribed by the CHX Bylaws, the CHX Nominating and Governance 
Committee will nominate the candidates it initially identified. If one 
or more valid petitions are submitted, the participants will vote on 
the entire group of potential candidates, and the individuals receiving 
the largest number of votes will be the persons approved by the 
participants as Participant Director nominees. Each participant will 
have one vote per trading permit with respect to each Participant 
Director position that is to be filled.\58\
---------------------------------------------------------------------------

    \58\ No participant or participant firm is allowed to hold more 
trading permits than are necessary to the conduct of business on the 
Exchange. All trading permits must be held by an active participant 
or must be held by an active participant firm, where the participant 
firm has assigned an active participant as its nominee. See CHX 
Rules, Article II, Rule 2(e).
---------------------------------------------------------------------------

    (d) Committees. The CHX Board will have the following standing 
committees: (1) An Executive Committee; (2) a Nominating and Governance 
Committee; (3) an Audit Committee; (4) a Compensation Committee; (5) a 
Regulatory Oversight Committee (``ROC''); (6) a Finance Committee; and 
(7) a Judiciary Committee.\59\
---------------------------------------------------------------------------

    \59\ See CHX Bylaws, Article IV, Section 1. Information about 
the composition and responsibilities of the Exchange's committees 
appears in Article IV of the Exchange's rules.
---------------------------------------------------------------------------

    As noted above, the CHX Nominating and Governance Committee will be 
appointed by the CHX Board. The Chairman and Vice Chairman of the CHX 
Board will appoint CHX's Executive, Audit, Finance, and Compensation 
Committees, subject to the approval of the CHX Board. CHX's Executive, 
Compensation, and Audit Committees will have a majority of Public 
Directors.\60\ The Executive Committee will have the powers that the

[[Page 7535]]

CHX Board delegates to it and, between meetings of the CHX Board, will 
have the rights, powers, authority, duties, and obligations of the CHX 
Board not otherwise delegated to another committee, except the 
authority to propose amendments to the CHX Certificate of 
Incorporation, adopt an agreement of merger or consolidation, recommend 
to shareholders the sale, lease or exchange of all or substantially all 
or of the property and assets of CHX, or recommend to the shareholders 
a dissolution of CHX or the revocation of a dissolution.\61\
---------------------------------------------------------------------------

    \60\ See CHX Rules, Article IV, Rules 2, 8, and 9. The proposal 
revises CHX's current rules governing its Audit and Compensation 
Committees by providing that a majority, not just 50%, of the 
members of the Audit and Compensation Committees must be Public 
Directors.
    \61\ See CHX Rules, Article IV, Rule 2. The proposal also 
deletes the requirements that members of the Executive Committee be 
chosen (a) with a view to providing representation to the various 
geographical areas in which there are member organizations that 
support the Exchange; and (b) with a view to having persons on the 
committee who are interested in and knowledgeable about the 
Exchange's business operations and the securities industry as a 
whole.
---------------------------------------------------------------------------

    The revised description of the role of the CHX Audit Committee 
indicates that, among other things, the Audit Committee has ``direct 
responsibility and authority to engage and oversee the work of the 
independent public accountant retained to audit the Exchange's 
financial statements * * *.'' \62\
---------------------------------------------------------------------------

    \62\ See CHX Rules, Article IV, Rule 9.
---------------------------------------------------------------------------

    The Vice Chairman of the CHX Board will appoint CHX's ROC, subject 
to the approval of the Public Directors of the CHX Board. Five of the 
seven members of the ROC will be Public Directors.\63\ In its filing, 
CHX represented that it believed that the composition, 
responsibilities, and appointment mechanism associated with the ROC 
were consistent with the requirements set out in the Commission's 
September 30, 2003, settlement order with CHX.\64\
---------------------------------------------------------------------------

    \63\ See CHX Rules, Article IV, Rule 4.
    \64\ See In the Matter of the Chicago Stock Exchange, Securities 
Exchange Act Release No. 48566 (September 30, 2003) (Admin. Proc. 
File No. 3-11282) (Order Instituting Public Administrative 
Proceedings Pursuant to Sections 19(h) and 21C of the Securities 
Exchange Act of 1934, Making Findings, and Imposing a Censure, a 
Cease-and-Desist Order and Other Relief) (``CHX Settlement Order'').
---------------------------------------------------------------------------

    The CEO of CHX will continue to appoint CHX's Judiciary 
Committee.\65\ The Vice Chairman of the CHX Board will appoint other 
committees, including the newly-formed Participant Advisory Committee 
of CHX, subject to the approval of the CHX Board.\66\ The CHX 
Participant Advisory Committee, which will be comprised entirely of CHX 
participants, will recommend rules for adoption by the CHX Board and 
advise the CHX management regarding enhancements to the Exchange's 
trading facilities and other matters that affect participants.\67\ 
According to CHX, the Participant Advisory Committee is designed to 
provide participants with a formal opportunity to share their concerns 
and ideas with the CHX management.
---------------------------------------------------------------------------

    \65\ See CHX Rules, Article IV, Rule 7.
    \66\ See CHX Bylaws, Article IV, Section 2.
    \67\ See CHX Rules, Article IV, Rule 10.
---------------------------------------------------------------------------

    Each committee will have the authority and responsibilities 
prescribed for it in the CHX Bylaws or rules or by the CHX Board.\68\
---------------------------------------------------------------------------

    \68\ See CHX Bylaws, Article IV, Section 3.
---------------------------------------------------------------------------

    (e) Management. The officers of CHX will be the CEO, one or more 
Vice Presidents, a Secretary, and a Treasurer, and such other officers, 
including a President, as the CHX Board or the CEO may determine.\69\ 
The CEO of CHX will be responsible to the CHX Board for the management 
of its business affairs.\70\
---------------------------------------------------------------------------

    \69\ See CHX Bylaws, Article V, Section 1.
    \70\ See CHX Bylaws, Article V, Section 4.
---------------------------------------------------------------------------

    (f) Self-Regulatory Function and Oversight. As noted above, 
following the demutualization CHX will continue to be registered as a 
national securities exchange under Section 6 of the Act and thus will 
continue to be an SRO.\71\ As an SRO, CHX will be obligated to carry 
out its statutory responsibilities, including enforcing compliance by 
CHX participants and participant firms with the provisions of the 
federal securities laws and the applicable rules of CHX. Further, CHX 
will retain the responsibility to administer and enforce the rules that 
govern CHX's and its members' activities. In addition, CHX will 
continue to be required to file with the Commission, pursuant to 
Section 19(b) of the Act \72\ and Rule 19b-4 thereunder,\73\ any 
changes to its rules and governing documents.
---------------------------------------------------------------------------

    \71\ See 15 U.S.C. 78c(a)(26).
    \72\ 15 U.S.C. 78s(b).
    \73\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    Like the Bylaws of CHX Holdings, the Bylaws of CHX contain specific 
provisions relating to the self-regulatory function of CHX.\74\ For 
example, the CHX Bylaws require the CHX Board to consider applicable 
requirements under Section 6(b) of the Act in connection with the 
management of the Exchange.\75\ In addition, meetings of the CHX Board 
and of its committees that pertain to the self-regulatory function of 
CHX or to the structure of the market CHX regulates must be closed to 
persons who are not members of the CHX Board or CHX officers, staff, 
counsel, or other specifically identified persons.\76\ Further, the CHX 
books and records reflecting confidential information relating to the 
self-regulatory function of CHX must be kept confidential and must not 
be used for non-regulatory purposes, and the books and records of CHX 
must be maintained in the U.S.\77\
---------------------------------------------------------------------------

    \74\ See CHX Bylaws, Article X, Section 1.
    \75\ See CHX Bylaws, Article X, Section 1. Section 6(b) of the 
Act requires, among other things, that the Exchange's rules be 
designed to protect investors and the public interest. It also 
requires that the Exchange be so organized that it has the capacity 
to carry out the purposes of the Act and to enforce compliance by 
its members with the Act, the rules and regulations thereunder, and 
the rules of the Exchange.
    \76\ See CHX Bylaws, Article X, Section 2.
    \77\ See CHX Bylaws, Article X, Sections 3 and 4.
---------------------------------------------------------------------------

    The CHX Bylaws also provide that any revenues received by CHX from 
regulatory fees or penalties must be applied to fund the legal and 
regulatory operations of CHX and may not be used to pay dividends.\78\
---------------------------------------------------------------------------

    \78\ See CHX Bylaws, Article X, Section 5. Regulatory penalties 
that are intended to benefit customers, by, for example, providing 
restitution, must be provided to those customers and CHX will not be 
use them for any purpose.
---------------------------------------------------------------------------

    (g) Restrictions on ownership. Although there are no percentage-
based restrictions on the ownership of CHX, the CHX Certificate of 
Incorporation confirms that CHX Holdings is the sole shareholder of 
CHX.\79\ Any changes to this provision of the CHX Certificate of 
Incorporation cannot take effect until they are filed with and approved 
by the Commission pursuant to Section 19(b) of the Act.\80\
---------------------------------------------------------------------------

    \79\ See CHX Certificate of Incorporation, Article Fourth.
    \80\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

    (h) National Market System Plans. CHX currently is a participant in 
various national market system (``NMS'') plans, including the 
Consolidated Tape Association Plan, the Consolidated Quotation System 
Plan, the Intermarket Trading System Plan, and the Reporting Plan for 
Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading 
Privileges Basis (``Nasdaq UTP'') Plan.\81\ These plans are joint 
industry plans entered into by SROs for the purpose of addressing last 
sale reporting, quotation reporting, and intermarket equities trading. 
Following the completion of the demutualization, CHX, in its continuing 
role as the SRO, will continue to serve as the voting member of these 
NMS plans, and a representative of CHX will continue to serve as CHX's 
representative with respect to dealing with these plans.\82\
---------------------------------------------------------------------------

    \81\ See Amendment No. 3, supra note 4.
    \82\ See Amendment No. 3, supra note 4.
---------------------------------------------------------------------------

B. Trading Permits

    Following CHX's demutualization, persons and firms who have been 
qualified for membership under Articles 1, 2, or 3 of the Exchange's 
current rules and, as a result, have access to the Exchange's trading 
floor and other

[[Page 7536]]

facilities will receive trading permits entitling them to maintain 
their trading access to CHX. Each trading permit will constitute a 
revocable license allowing the holder of the permit to access CHX 
trading facilities in the same manner as previously authorized for 
CHX's qualified trading members.\83\ According to CHX, the 
demutualization and the implementation of the use of trading permits 
will not change current CHX member access to the Exchange or their 
ability to execute transactions.
---------------------------------------------------------------------------

    \83\ See CHX Rules, Article II, Rule 2.
---------------------------------------------------------------------------

    Persons holding trading permits of CHX will be ``members'' of CHX 
for purposes of the Act and will be characterized as ``participants'' 
in CHX subject to CHX's regulatory jurisdiction.\84\ Trading permit 
holders will not have any ownership interest in CHX or in CHX Holdings 
by virtue of their trading permits.
---------------------------------------------------------------------------

    \84\ See CHX Rules, Article I, Rule 1(l) (definition of 
``Participant'').
---------------------------------------------------------------------------

    Following the demutualization, CHX will require persons seeking 
trading permits to complete appropriate application materials and 
registration forms, satisfy regulatory requirements, and pay processing 
charges and application fees. This process will be substantially 
similar to the current membership application process.\85\ An 
individual participant may obtain only one trading permit, and a 
participant firm may obtain multiple trading permits and may assign a 
nominee to each trading permit. Each person transacting business on the 
Exchange will require a trading permit. For example, a CHX specialist 
firm with 50 co-specialists would need to obtain 50 trading permits and 
register each co-specialist as a nominee. No participant or participant 
firm will be allowed to hold more trading permits than are necessary to 
conduct business on the Exchange, and all trading permits must be held 
by an active participant or an active participant firm, where the 
participant firm has assigned an active participant as its nominee.\86\
---------------------------------------------------------------------------

    \85\ See CHX Rules, Articles II and III.
    \86\ See CHX Rules, Article II, Rule 2(e).
---------------------------------------------------------------------------

    Once issued, a CHX trading permit will be effective for one year 
following its issuance date and will renew automatically for an 
additional one-year term on each anniversary of the issuance date, 
unless the trading permit holder provides the Exchange with 60 days' 
prior written notice of the trading permit holder's waiver of renewal. 
If the participant waives the right to renew the permit, it will expire 
at the end of the then-current term.\87\ A trading permit generally may 
not be sold, leased, or otherwise transferred, although a participant 
firm may transfer its trading permit from the name of one nominee 
employee to the name of another nominee employee, with the approval of 
CHX.\88\ CHX will have the ability to suspend or revoke a trading 
permit for the same reasons that it is currently entitled to suspend or 
revoke a membership and/or sell a seat.\89\
---------------------------------------------------------------------------

    \87\ See CHX Rules, Article II, Rules 3(d) and 7.
    \88\ See CHX Rules, Article II, Rule 6.
    \89\ See generally, CHX Rules, Articles VII and XII.
---------------------------------------------------------------------------

    Currently, CHX rules permit a person (referred to as an ``approved 
lessor'') to purchase a membership solely for the purpose of providing 
a financing mechanism for another person seeking access to CHX.\90\ 
Following demutualization, no person will be permitted to operate as an 
approved lessor or otherwise lease trading access to the Exchange.
---------------------------------------------------------------------------

    \90\ See CHX Rules, Article IA.
---------------------------------------------------------------------------

    There will be nominal processing charges and application fees 
relating to the issuance of trading permits. In addition, all 
participants and participant firms will be subject to an annual trading 
permit fee of $6,000 per year, payable monthly, for each trading 
permit. This fee is identical to CHX's current fee for membership dues. 
These fees appear in the schedule of Participant Fees and Credits.

C. Other Provisions in the Certificate of Incorporation and Bylaws

1. Shareholder Ownership
    The Bylaws for CHX Holdings and CHX contain provisions relating to 
issues associated with shareholder ownership, including provisions 
relating to the timing and conduct of meetings, record dates, quorum 
requirements, proxies, and other matters.\91\ According to CHX, these 
provisions were designed to reflect current corporate practices and are 
identical for CHX Holdings and CHX.
---------------------------------------------------------------------------

    \91\ See CHX Holdings Bylaws, Article IV, and CHX Bylaws, 
Article III.
---------------------------------------------------------------------------

2. Updated provisions of the CHX Certificate of Incorporation and 
Bylaws
    The Exchange proposes to make several changes to CHX's Bylaws and 
Certificate of Incorporation to modernize CHX's governing documents. 
Among other things, these changes streamline the description of CHX's 
corporate purpose; confirm that the CHX Board has the authority to set 
the CHX Board's compensation; set out specific provisions relating to 
the authority of Exchange officers to enter into contracts, sign 
checks, and handle the funds of the Exchange; and provide that the 
Exchange will advance expenses, in appropriate circumstances, to 
directors, officers, and committee members of CHX who are named as 
defendants in certain actions relating to Exchange business.\92\
---------------------------------------------------------------------------

    \92\ See CHX Certificate of Incorporation, Article Third 
(corporate purpose); CHX Bylaws Article II, Section 15 (CHX Board 
compensation), Article IX (contracts, loans, checks, and deposits), 
and Article VI (indemnification and advancing of expenses).
---------------------------------------------------------------------------

D. Description of Amendment No. 3

    In Amendment No. 3, CHX proposes to revise the proposal to: (1) 
Confirm CHX's continuing participation in various NMS plans following 
the demutualization; (2) correct a typographical error in the numbering 
of the articles of the CHX Bylaws; (3) indicate that the staff of CHX 
will present to the CHX Holdings Board for its approval a proposed new 
CHX Holdings Bylaws provision stating that CHX Holdings will take such 
action as is necessary to insure that its officers, directors, and 
employees consent to the applicability of Article III, Section 3, and 
Article III, Section 5 of the CHX Holdings Bylaws with respect to CHX-
related activities; \93\ and (4) revise language regarding the 
admission of new participants.
---------------------------------------------------------------------------

    \93\ Article III, Section 3 of the CHX Holdings Bylaws provides 
that, to the extent they are related to the activities of CHX, the 
books, records, premises, officers, directors, agents, and employees 
of CHX Holdings will be deemed to be the books, records, premises, 
officers, directors, agents, and employees of CHX for the purposes 
of, and subject to oversight pursuant to, the Act. In addition, 
Article III, Section 5 of the CHX Holdings Bylaws provides that CHX 
Holdings and its officers, directors, employees, and agents, by 
virtue of their acceptance of such position, shall be deemed 
irrevocably to submit to the jurisdiction of the U.S. federal 
courts, the Commission, and CHX, for the purposes of any suit, 
action, or proceeding pursuant to the U.S. federal securities laws 
and the rules and regulations thereunder, arising out of, or 
relating to, the activities of CHX. Article III, Section 5, also 
states that CHX Holdings and its officers, directors, employees, and 
agents, by virtue of their acceptance of such position, are deemed 
to waive, and agree not to assert by way of motion, as a defense or 
otherwise in any such suit, action, or proceeding, any claims that 
it or they are not personally subject to the jurisdiction of the 
U.S. federal courts, the Commission, or CHX; that the suit, action, 
or proceeding is in an inconvenient forum; that the venue of the 
suit, action, or proceeding is improper; or that the subject matter 
thereof may not be enforced in or by such courts or agency.
---------------------------------------------------------------------------

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.\94\ In

[[Page 7537]]

particular, the Commission finds that the proposed rule change, as 
amended, is consistent with Section 6(b)(1) of the Act,\95\ which 
requires a national securities exchange to be so organized and have the 
capacity to carry out the purposes of the Act and to enforce compliance 
by its members and persons associated with its members with the 
provisions of the Act. The Commission also finds that the proposed rule 
change, as amended, is consistent with Section 6(b)(3) of the Act,\96\ 
which requires that the rules of a national securities exchange assure 
the fair representation of its members in the selection of its 
directors and administration of its affairs, and provide that one or 
more directors shall be representative of issuers and investors and not 
be associated with a member of the exchange, broker, or dealer. 
Further, the Commission finds that the proposed rule change, as 
amended, is consistent with Section 6(b)(5) of the Act,\97\ in that it 
is designed, among other things, to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
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.
---------------------------------------------------------------------------

    \94\ 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).
    \95\ 15 U.S.C. 78f(b)(1).
    \96\ 15 U.S.C. 78f(b)(3).
    \97\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

A. CHX Holdings as Sole Shareholder

    Following completion of the demutualization, CHX Holdings will be 
the sole shareholder of CHX. Section 19(b) of the Act \98\ and Rule 
19b-4 thereunder \99\ require an SRO to file proposed rule changes with 
the Commission. Although CHX Holdings is not an SRO, certain provisions 
of its Certificate of Incorporation and Bylaws may be rules of an 
exchange \100\ if they are the stated policies, practices, or 
interpretations, as defined in Rule 19b-4 of the Act, of CHX. Any 
proposed rule or any proposed change in, addition to, or deletion from, 
the rules of an exchange must be filed with the Commission pursuant to 
Section 19(b) of the Act and Rule 19b-4 thereunder. Accordingly, CHX 
has filed the CHX Holdings Certificate of Incorporation and CHX 
Holdings Bylaws with the Commission. If CHX Holdings decides to change 
its Certificate of Incorporation or Bylaws, it must submit such changes 
to the CHX Board so that it can determine if the changes must be filed 
with, and approved by, the Commission. The Commission believes that 
these provisions will assist CHX in fulfilling its self-regulatory 
obligations and in administrating and complying with the requirements 
under the Act.
---------------------------------------------------------------------------

    \98\ 15 U.S.C. 78s(b).
    \99\ 17 CFR 240.19b-4.
    \100\ Section 3(a)(27) of the Act defines the rules of an 
exchange to be the constitution, articles of incorporation, bylaws, 
and rules, or instruments corresponding to the foregoing, of an 
exchange, and such stated policies, practices, or interpretations of 
such exchange as the Commission, by rule, may determine to be 
necessary or appropriate in the public interest or for the 
protection of investors to be deemed to be rules of such exchange. 
15 U.S.C. 78c(a)(27).
---------------------------------------------------------------------------

B. Changes in Control of CHX

    The Commission believes that the restrictions in the CHX Holdings 
Certificate of Incorporation on direct and indirect changes in control 
of CHX Holdings are sufficient to enable CHX to carry out its self-
regulatory responsibilities and to enable the Commission to fulfill its 
responsibilities under the Act.\101\
---------------------------------------------------------------------------

    \101\ The Commission notes that it is in the process of 
reviewing issues related to new ownership structures of SROs and has 
proposed rules relating to the ownership of SROs, including limiting 
the restrictions on ownership and voting to members of an SRO or a 
facility of an SRO. See Securities Exchange Act Release No. 50699 
(November 18, 2004), 69 FR 71126 (December 8, 2004) (``Proposed 
Rulemaking''). See also Securities Exchange Act Release No. 51019 
(January 11, 2005), 70 FR 2829 (January 18, 2005) (extending the 
comment period for the Proposed Rulemaking until March 8, 2005).
---------------------------------------------------------------------------

    Specifically, as proposed, CHX will be wholly-owned subsidiary of 
CHX Holdings, i.e., CHX Holdings will own all of the shares of CHX. The 
CHX Certificate of Incorporation identifies this ownership 
structure.\102\ Any changes to the CHX Certificate of Incorporation, 
including any change to the provision that identifies CHX shareholders, 
must be filed with, and approved by, the Commission pursuant to Section 
19(b) of the Act.\103\
---------------------------------------------------------------------------

    \102\ See CHX Certificate of Incorporation, Article Fourth.
    \103\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

    In addition, the CHX Holdings Certificate of Incorporation imposes 
limitations on direct and indirect changes in control of CHX Holdings 
through voting and ownership limitations placed on the capital stock of 
CHX Holdings (whether common or preferred stock) and allows CHX 
Holdings to monitor potential changes in control through a notification 
requirement once a threshold percentage of ownership of capital stock 
is reached.\104\ Specifically, the CHX Holdings Certificate of 
Incorporation prohibits any Person, either alone or together with its 
Related Persons, from voting or giving a proxy or consent with respect 
to shares representing more than 20% of the voting power of the issued 
and outstanding shares of CHX Holdings.\105\ Furthermore, the CHX 
Holdings Certificate of Incorporation limits the right of any Person, 
either alone or together with its Related Persons, to enter into any 
agreement with respect to the withholding of any vote or proxy where 
the effect of the agreement would be to enable any person or group to 
obtain more than 20% of the outstanding voting power.\106\ The CHX 
Holdings Certificate of Incorporation also restricts the ability of any 
Person, either alone or together with its Related Persons, from owning, 
directly or indirectly, shares constituting more than 40% of the 
outstanding shares of capital stock of CHX Holdings.\107\
---------------------------------------------------------------------------

    \104\ The CHX Holdings Certificate of Incorporation requires 
that any person, either alone or together with its affiliates or 
associates or any other person, who at any time owns five percent or 
more of then outstanding shares of capital stock and who has the 
right to vote in the election of the CHX Holdings Board, shall, 
immediately upon so owning five percent or more of the then 
outstanding shares of such stock, give the CHX Holdings Board a 
written notice of such ownership and update that notice promptly 
after an ownership change of a specified percentage. See CHX 
Holdings Certificate of Incorporation, Article Fifth, paragraph (c).
    \105\ See CHX Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(ii)(C). See note 26, supra, for the definitions 
of ``Person'' and ``Related Person.''
    \106\ See CHX Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(ii)(C).
    \107\ See CHX Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(ii)(A).
---------------------------------------------------------------------------

    If any shareholder votes, sells, transfers, assigns, or pledges any 
shares in violation of the voting and ownership limitations, CHX 
Holdings will treat those shares as owned by the transferor for all 
purposes, including, without limitation, voting, payment of dividends, 
and distributions.\108\ In addition, if any shareholder votes, sells, 
transfers, assigns, or pledges any shares in violation of the voting 
and ownership limitations, CHX Holdings has the right to redeem those 
shares at a price equal to the par value thereof, upon the approval of 
the CHX Holdings Board.\109\
---------------------------------------------------------------------------

    \108\ See CHX Holdings Certificate of Incorporation, Article 
Fifth, paragraph (d).
    \109\ See CHX Holdings Certificate of Incorporation, Article 
Fifth, paragraph (e).
---------------------------------------------------------------------------

    The CHX Holdings Board has the authority to waive these voting and 
ownership limitations by adopting an amendment to the CHX Holdings 
Bylaws. The CHX Holdings Board must determine that the waiver of a 
voting or ownership requirement will not impair CHX's ability to carry 
out its self-regulatory functions and will not impair the Commission's 
ability to enforce the Act. In addition, the CHX Holdings Board must 
determine that the person to whom it is giving either a voting or

[[Page 7538]]

ownership waiver is not subject to any applicable ``statutory 
disqualification'' (within the meaning of Section 3(a)(39) of the Act 
\110\). Finally, the CHX Holdings Board must submit any amendment to 
the CHX Holdings Bylaws to the CHX Board, and if the CHX Board 
determines that the proposed change to the CHX Holdings Bylaws must be 
filed with the Commission, then the CHX Holdings Bylaw change will not 
be effective until it is filed with, or filed with and approved by the 
Commission, as the case may be.\111\ The Commission believes that any 
such amendment to the CHX Holdings Bylaws would be a proposed rule 
change that would need to be filed with the Commission pursuant to 
Section 19(b) of the Act.\112\ The proposed rule change would present 
the Commission with an opportunity to determine what additional 
measures, if any, might be necessary to provide sufficient regulatory 
jurisdiction over the proposed controlling person.
---------------------------------------------------------------------------

    \110\ 15 U.S.C. 78c(a)(39).
    \111\ See CHX Holdings Bylaws, Article VIII. A similar 
requirement applies to changes to the CHX Holdings Certificate of 
Incorporation. See CHX Holdings Certificate of Incorporation, 
Article Thirteenth.
    \112\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

    CHX has also proposed to require CHX Holdings shareholders that 
own, of record or beneficially, five percent or more of the then 
outstanding shares to give the CHX Holdings Board written notice of 
such ownership. This notice should enable CHX Holdings to monitor the 
ownership of its stock to ensure that no limitation is reached.\113\
---------------------------------------------------------------------------

    \113\ The Commission believes that CHX Holdings should disclose 
periodically, or otherwise make available upon request, information 
regarding the number of outstanding shares of its capital stock, so 
that persons that own stock of CHX Holdings can determine whether 
they are reaching or have reached any of the thresholds that 
restrict that person's ability to vote or own the shares or require 
that person to provide written notice under the Article Fifth, 
paragraph (c) of the CHX Holdings Certificate of Incorporation.
---------------------------------------------------------------------------

    The CHX Holdings Certificate of Incorporation also provides that no 
Person, either alone or together with its Related Persons, who is a 
trading permit holder of CHX may own, directly or indirectly, shares 
constituting more than 20% of any class of capital stock of CHX 
Holdings.\114\ The Commission finds that the limitation on ownership of 
shares of CHX Holdings by CHX trading permit holders is consistent with 
the Act. Under the member-owned exchange model, a member who trades 
securities through the facilities of an exchange can have an ownership 
interest in the exchange. A regulatory concern can arise if a member's 
interest becomes so large as to cast doubt on whether the exchange can 
fairly and objectively exercise its self-regulatory responsibilities 
with respect to that member. For example, a member that directly or 
indirectly controls an exchange might be tempted to exercise that 
controlling influence by directing the exchange to refrain from 
diligently monitoring 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 diligently 
monitor and conduct surveillance of trading conduct and to enforce its 
rules and the federal securities laws against a member that the 
exchange relies on for a large source of capital. The Commission 
believes that the proposed limitation would help mitigate the conflicts 
of interest that could occur if a member were to control a significant 
stake in the Exchange through ownership in shares in the Exchange's 
parent company and are necessary and appropriate to help ensure that 
the Exchange can effectively carry out its statutory obligations under 
Section 6(b) of the Act.\115\
---------------------------------------------------------------------------

    \114\ See CHX Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(ii)(B). Unlike the 40% ownership and 20% voting 
limitations discussed above, the CHX Holdings Board may not waive 
the 20% ownership limitation applicable to CHX trading permit 
holders.
    \115\ 15 U.S.C. 78f(b).
---------------------------------------------------------------------------

C. Regulatory Jurisdiction Over CHX Holdings

    The Commission believes that the terms of CHX Holdings Bylaws 
provide the Commission with sufficient regulatory jurisdiction over the 
controlling parties of the Exchange to carry out its oversight 
responsibilities under the Act. The CHX Holdings Bylaws provide that, 
to the extent that they are related to the activities of CHX, the 
books, records, premises, officers, directors, agents, and employees of 
CHX Holdings are deemed to be the books, records, premises, officers, 
directors, agents, and employees of CHX for purposes of and subject to 
oversight pursuant to the Act.\116\ This provision would enable the 
Commission to exercise its authority under Section 19(h)(4) of the Act 
\117\ with respect to officers and directors of CHX Holdings, because 
all such officers and directors, to the extent that they are acting on 
matters related to CHX activities, would be deemed to be officers and 
directors of CHX. Furthermore, the books and records of CHX Holdings, 
to the extent that they are related to the activities of CHX, are 
subject to the Commission's examination authority under Section 
17(b)(1) of the Act,\118\ as these records would be deemed to be the 
records of CHX itself.
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    \116\ See CHX Holdings Bylaws, Article III, Section 3. As noted 
above, the staff of CHX has indicated that it will present to the 
CHX Holdings Board for its approval a proposed new CHX Holdings 
Bylaws provision stating that CHX Holdings will take such action as 
is necessary to ensure that its officers, directors, and employees 
consent to the applicability of Article III, Section 3, and Article 
III, Section 5 of the CHX Holdings Bylaws with respect to CHX-
related activities. See Amendment No. 3, supra note 4.
    \117\ 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: (1) Has 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.
    \118\ 15 U.S.C. 78q(b)(1).
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    In addition, pursuant to the CHX Holdings Bylaws, CHX Holdings 
officers, directors, employees, and agents, by virtue of their 
acceptance of such position, are deemed to irrevocably submit to the 
jurisdiction of the U.S. federal courts, the Commission, and CHX for 
the purposes of any suit, action, or proceeding pursuant to the U.S. 
federal securities laws and the rules and regulations thereunder, 
arising out of, or relating to, the activities of the Exchange.\119\ 
Moreover, CHX Holdings and such officers, directors, employees, and 
agents, by virtue of their acceptance of any such position, are deemed 
to waive and agree not to assert by way of motion as a defense or 
otherwise in any such suit, action, or proceeding any claims that it or 
they are not personally subject to the jurisdiction of the U.S. federal 
courts, the Commission, or CHX, that the suit, action, or proceeding is 
an inconvenient forum, or that the venue of the suit, action, or 
proceeding is improper, or that the subject matter of that suit, 
action, or proceeding may not be enforced in or by such courts or 
agency.\120\ Finally, the CHX Holdings Bylaws provide that the 
officers, directors, employees, and agents of CHX Holdings, by virtue 
of their acceptance

[[Page 7539]]

of such position, are deemed to agree to cooperate with the Commission 
and CHX in respect of the Commission's oversight responsibilities 
regarding CHX and the self-regulatory functions and responsibilities of 
CHX.\121\
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    \119\ See CHX Holdings Bylaws, Article III, Section 5. As noted 
above, the staff of CHX has indicated that it will present to the 
CHX Holdings Board for its approval a proposed new CHX Holdings 
Bylaws provision stating that CHX Holdings will take such action as 
is necessary to ensure that its officers, directors, and employees 
consent to the applicability of Article III, Section 3, and Article 
III, Section 5 of the CHX Holdings Bylaws with respect to CHX-
related activities. See Amendment No. 3, supra note 4.
    \120\ See CHX Holdings Bylaws, Article III, Section 5.
    \121\ See CHX Holdings Bylaws, Article III, Section 4.
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    The Commission also notes that, even in the absence of these 
provisions of the CHX Holdings Bylaws, Section 20(a) of the Act \122\ 
provides that any person with a controlling interest in CHX would be 
jointly and severally liable with and to the same extent that CHX 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. In addition, 
Section 20(e) of the Act \123\ creates aiding and abetting liability 
for any person who knowingly provides substantial assistance to another 
person in violation of any provision of the Act or rule thereunder, and 
Section 21C of the Act \124\ authorizes the Commission to enter a 
cease-and-desist order against any person who has been ``a cause of'' a 
violation of any provision of the Act through an act or omission that 
the person knew or should have known would contribute to the violation. 
The Commission believes that, taken together, these provisions grant 
the Commission sufficient jurisdictional authority over the controlling 
persons of CHX. Moreover, CHX 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.\125\ A failure on the part of 
CHX to enforce its rules could result in suspension or revocation of 
CHX's registration under Section 19(h)(1) of the Act.\126\
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    \122\ 15 U.S.C. 78t(a).
    \123\ 15 U.S.C. 78t(e).
    \124\ 15 U.S.C. 78u-3.
    \125\ 15 U.S.C. 78c(a)(27).
    \126\ 15 U.S.C. 78s(h)(1).
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D. Self-Regulatory Function of CHX

    Following the demutualization, the rules and bylaws of CHX will 
reflect its status as a wholly-owned subsidiary of CHX Holdings, under 
management of the CHX Board and its designated officers and with self-
regulatory obligations pursuant to CHX's registration as a national 
securities exchange under Section 6 of the Act.
    As the sole shareholder of CHX, the Commission believes that CHX 
Holdings' activities with respect to its ownership of CHX must be 
consistent with CHX's obligations under the Act. Under the CHX Holdings 
Bylaws, the CHX Holdings Board and the officers, employees, and agents 
of CHX Holdings must give due regard to the preservation of the 
independence of the self-regulatory function of CHX and to its 
obligations to investors and the general public and not take any 
actions that would interfere with the effectuation of any decisions by 
the CHX Board relating to its regulatory functions or the structure of 
the market it regulates or which would interfere with the ability of 
CHX to carry out its responsibilities under the Act.\127\ In addition, 
all books and records of CHX reflecting confidential information 
pertaining to its self-regulatory function (including but not limited 
to disciplinary matters, trading data, trading practices, and audit 
information) which come into the possession of CHX Holdings, and the 
information contained therein, must be retained in confidence by CHX 
Holdings and its directors, officers, employees, and agents and must 
not be used for any non-regulatory purposes.\128\ The Commission 
believes that these provisions, which are designed to acknowledge the 
need to maintain the independence of the self-regulatory role of CHX 
following the demutualization and protect from improper use information 
pertaining to its self-regulatory function, are appropriate.
---------------------------------------------------------------------------

    \127\ See CHX Holdings Bylaws, Article III, Section 1.
    \128\ See CHX Holdings Bylaws, Article III, Section 2.
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    Further, the Commission notes that the CHX Bylaws expressly require 
that the CHX Board consider applicable requirements for registration as 
a national securities exchange under Section 6(b) of the Act,\129\ 
including the requirement that the rules of the Exchange be designed to 
protect investors and the public interest and the requirement that the 
Exchange be so organized and have the capacity to carry out the 
purposes of the Act and to enforce compliance by its members and 
persons associated with members with the provisions of the Act, the 
rules and regulations thereunder and with the rules of the 
Exchange.\130\ In the Commission's view, this provision should serve to 
remind the CHX Board that it must consider the interests of the 
Exchange's constituents and the requirements of the Act when taking 
action on behalf of the Exchange.
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    \129\ 15 U.S.C. 78f(b).
    \130\ See CHX Bylaws, Article X, Section 1.
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E. Fair Representation

    Section 6(b)(3) of the Act \131\ requires that the rules of an 
exchange assure fair representation of its members in the selection of 
its directors and administration of its affairs and provide that one or 
more directors be representative of issuers and investors and not be 
associated with a member of the exchange or with a broker or dealer. In 
addition, Section 6(b)(1) of the Act \132\ requires that an exchange be 
so organized and have the capacity to be able to carry out the purposes 
of the Act.
---------------------------------------------------------------------------

    \131\ 15 U.S.C. 78f(b)(3).
    \132\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    CHX has proposed to amend the size and composition of its Board. 
Specifically, the CHX Board will have no less than ten and no more than 
16 directors. At least 50% of the total number of directors on the CHX 
Board must be Public Directors and the remaining directors will be 
Participant Directors and the CEO.
    Because CHX's participants will not be shareholders of CHX, they 
will not directly elect members of the CHX Board. As the sole 
shareholder of CHX, CHX Holdings will have the sole right and 
obligation to vote for the director nominees nominated by the CHX 
Nominating and Governance Committee.\133\ The CHX Bylaws, however, 
establish a procedure that will allow participants to be involved in 
the selection of candidates to fill Participant Director positions on 
the CHX Board.\134\ Each participant will have one vote per trading 
permit with respect to each Participant Director position to be 
filled.\135\
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    \133\ Upon approval of the demutualization, CHX Holdings will 
enter into a voting agreement with CHX confirming its obligation to 
vote for the directors nominated through the process set out in the 
CHX Bylaws.
    \134\ See CHX Bylaws, Article II, Section 3.
    \135\ As noted above, no participant or participant firm is 
allowed to hold more trading permits than are necessary to the 
conduct of business on the Exchange. All trading permits must be 
held by an active participant or must be held by an active 
participant firm, where the participant firm has assigned an active 
participant as its nominee. See CHX Rules, Article II, Rule 2(e).
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    Under the procedures for selecting Participant Director 
candidates,\136\ the CHX Nominating and Governance Committee, which 
will have three Participant Directors and three Public Directors, will 
hold two open meetings with CHX participants for the purpose of 
receiving recommendations of candidates for election to the position of 
Participant Director. The CHX Nominating and Governance Committee's 
initial candidates for nomination will be announced to CHX 
participants, who will then have the opportunity to identify additional 
candidates for nomination by submitting a petition signed by at least 
ten participants. If no petitions are

[[Page 7540]]

submitted within the time frame prescribed by the CHX Bylaws, the CHX 
Nominating and Governance Committee will nominate the candidates it 
initially identified. If one or more valid petitions are submitted, the 
participants will vote on the entire group of potential candidates, and 
the individuals receiving the largest number of votes will be the 
persons approved by the participants as Participant Director nominees. 
The CHX Nominating and Governance Committee will nominate only those 
persons whose names have been presented to, and approved by, CHX's 
participants pursuant to the procedures set forth in the CHX 
Bylaws.\137\ CHX Holdings, as the sole shareholder of CHX, will have 
the sole right and obligation to vote for the director nominees 
nominated by the CHX Nominating and Governance Committee.\138\
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    \136\ See CHX Bylaws, Article II, Section 3.
    \137\ See CHX Bylaws, Article II, Section 3(b).
    \138\ See note 134, supra.
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    In addition to their representation on the CHX Nominating and 
Governance Committee, CHX participants will participate on other 
committees of CHX. For example, three of the seven members of the 
Committee on Exchange Procedure will be CHX participants, the Judiciary 
Committee will be comprised of five participants and/or general 
partners or officers of participant firms, and the ROC will include one 
on-floor Participant Director and one off-floor Participant Director. 
In addition, the newly-formed Participant Advisory Committee will have 
not less than five members, all of whom will be participants.\139\ 
Among other things, the Participant Advisory Committee will recommend 
rules for adoption by the CHX Board and advise the CHX management 
regarding enhancements to the Exchange's trading facilities and other 
matters that affect participants. According to CHX, the Participant 
Advisory Committee is designed to provide participants with a formal 
opportunity to share their concerns and ideas with the CHX management.
---------------------------------------------------------------------------

    \139\ See CHX Rules, Article IV, Rule 10.
---------------------------------------------------------------------------

    Certain committees of the CHX Board will be comprised of a majority 
of Public Directors. Specifically, the Executive Committee, the 
Compensation Committee, and the Audit Committee will be comprised of a 
majority of Public Directors.\140\ The CHX Nominating and Governance 
Committee will consist of three Public Directors and three Participant 
Directors.\141\ Five of the seven members of the ROC will be Public 
Directors, and the Vice Chairman of the CHX Board will appoint the 
members of the ROC, subject to the approval of the Public Directors of 
the CHX Board.\142\ As noted above, CHX represents that the 
composition, responsibilities, and appointment mechanism associated 
with the ROC are consistent with the requirements set out in the CHX 
Settlement Order.\143\
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    \140\ See CHX Rules, Article IV, Rules 2, 8, and 9.
    \141\ See CHX Bylaws, Article II, Section 3.
    \142\ See CHX Rules, Article IV, Rule 4.
    \143\ See note 64, supra, and accompanying text.
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    The Commission finds that the requirement that at least one-half of 
the directors of the CHX Board be Public Directors is consistent with 
Sections 6(b)(1) and 6(b)(3) of the Act, which requires that one or 
more directors be representative of issuers and investors. The 
Commission also finds that the requirement that the remaining 
directors, other than the CEO of CHX, be Participant Directors and the 
manner in which such directors will be nominated and elected, together 
with the representation of CHX participants on key committees, 
satisfies the fair representation requirements in Section 6(b)(3) of 
the Act. The Commission notes, however, that after the demutualization 
trading privileges will be separated from corporate ownership of CHX 
and will be available exclusively through trading permits. Therefore, 
the Commission expects that trading permits will not be issued in a 
manner that would undermine or circumvent the requirement in Section 
6(b)(3) of the Act for fair representation of members. The Commission 
also notes that participants will retain a voice in the administration 
of the affairs of CHX following the demutualization, including 
rulemaking and the disciplinary process, through participants' 
participation on various CHX committees.
    Finally, the Commission notes that it is in the process of 
reviewing a range of governance issues relating to SROs, including 
possible steps to strengthen the framework for the governance of SROs 
and ways to improve the transparency of the governance procedures of 
all SROs and has proposed rules in furtherance of this goal.\144\ 
Depending on the results of the proposed rules, CHX may be required to 
make further changes to strengthen its governance structure. The 
Commission also believes that the CHX Board should continue to monitor 
and evaluate its governance structure and process on an ongoing basis 
and propose further changes as appropriate.
---------------------------------------------------------------------------

    \144\ See Proposed Rulemaking, supra note 101.
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F. Dividends

    With the demutualization, the holders of capital stock of CHX will 
have the dividend and other distribution rights of a shareholder in a 
Delaware stock corporation. The CHX Bylaws allow the CHX Board to 
declare dividends.\145\ However, the CHX Bylaws further provide that 
any revenues received by CHX from regulatory fees or regulatory 
penalties will be applied to fund the legal and regulatory operations, 
including the surveillance and enforcement activities, of CHX and will 
not be used to pay dividends.\146\ This limitation would preclude CHX 
from providing dividends derived from regulatory fees or penalties to 
the sole shareholder of CHX, i.e., CHX Holdings. As a result, CHX 
Holdings would not be able to provide dividends derived from regulatory 
fees or penalties belonging to CHX to the shareholders of CHX Holdings. 
The Commission finds that the prohibition on the use of regulatory fees 
or penalties to fund dividends is consistent with Section 6(b)(1) of 
the Act because it will ensure that the regulatory authority of CHX is 
not used improperly to benefit CHX Holdings and its shareholders.
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    \145\ See CHX Bylaws, Article XI, Section 2.
    \146\ For purposes of this provision, regulatory penalties 
include restitution and disgorgement of funds intended for 
customers. See CHX Bylaws, Article X, Section 5.
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IV. Accelerated Approval of Amendment No. 3

    The Commission finds good cause for approving Amendment No. 3 to 
the proposal prior to the thirtieth day after date of notice of filing 
thereof in the Federal Register. Amendment No. 3 clarifies the proposal 
by confirming CHX's continuing participation in various NMS plans 
following the demutualization and by correcting a typographical error 
in the numbering of the articles of the CHX Bylaws. In addition, 
Amendment No. 3 strengthens the proposal by indicating that the staff 
of CHX will present to the Board of Directors of CHX Holdings for its 
approval a proposed new CHX Holdings Bylaws provision stating that CHX 
Holdings will take such action as is necessary to ensure that its 
officers, directors, and employees consent to the applicability of 
Article III, Section 3, and Article III, Section 5 of the CHX Holdings 
Bylaws with respect to CHX-related activities. Finally, Amendment No. 3 
clarifies the language in the CHX's rules regarding the admission of 
members to be consistent with the language in the Act. Accordingly, the 
Commission finds that it is consistent

[[Page 7541]]

with Sections 6(b)(5) and 19(b) of the Act to approve Amendment No. 3 
on an accelerated basis.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 3, including whether Amendment No. 3 
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-CHX 2004-26 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 No. SR-CHX-2004-26. 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 changes 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, 450 Fifth Street, 
NW, Washington, DC 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of CHX. 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 No. SR-CHX-2004-26 and should be 
submitted on or before March 7, 2005.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\147\ that the proposed rule change (SR-CHX-2004-26), as amended, 
is approved, and Amendment No. 3 is approved on an accelerated basis.

    \147\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\148\
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    \148\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E5-588 Filed 2-11-05; 8:45 am]
BILLING CODE 8010-01-P