[Federal Register Volume 70, Number 41 (Thursday, March 3, 2005)]
[Notices]
[Pages 10442-10447]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-833]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51252; File No. SR-CBOE-2004-16]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Setting Aside Earlier Order Issued by Delegated Authority 
and Granting Approval to a Proposed Rule Change and Amendment No. 1 
Thereto Relating to an Interpretation of Paragraph (b) of Article Fifth 
of Its Certificate of Incorporation and an Amendment to Rule 3.16(b)

February 25, 2005.

I. Introduction

    On March 4, 2004, the Chicago Board Options Exchange, Inc. 
(``CBOE'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend CBOE Rule 3.16(b). The 
proposed amendment would interpret certain terms used in paragraph (b) 
of Article Fifth of the CBOE Certificate of Incorporation (``Article 
Fifth(b)''). On April 9, 2004, the CBOE filed Amendment No. 1 to the 
proposed rule change.\3\ The proposed rule change, as amended, was 
published for comment in the Federal Register on May 3, 2004.\4\ The 
Commission received one comment letter on the proposed rule change.\5\ 
On May 25, 2004, the CBOE submitted a response to the comment 
letter,\6\ and two of the original commenters replied to CBOE's 
response in a letter submitted on June 14, 2004.\7\ On July 15, 2004, 
the Commission approved, by authority delegated to the Division of 
Market Regulation, the proposed rule change, as amended.\8\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Letter from Arthur B. Reinstein, Deputy General Counsel, 
CBOE, to Lisa N. Jones, Special Counsel, Division of Market 
Regulation (``Division''), Commission, dated April 8, 2004 
(``Amendment No. 1'').
    \4\ Securities Exchange Act Release No. 49620 (April 26, 2004), 
69 FR 24205 (May 3, 2004).
    \5\ Letter from Thomas A. Bond, Norman Friedland, Gary P. Lahey, 
Marshall Spiegel, Anthony Arciero, Peter C. Guth, Robert Kalmin, 
Sheldon Weinberg, David Carman and Jeffrey T. Kaufmann, Members, 
CBOE, to Jonathan G. Katz, Secretary, Commission, dated April 28, 
2004 (``April 28th Comment Letter''). This comment letter includes 
comments on another CBOE proposed rule change, SR-CBOE-2002-01, that 
was withdrawn on April 7, 2004. See Letter from Arthur B. Reinstein, 
Deputy General Counsel, CBOE, to Lisa N. Jones, Special Counsel, 
Division, Commission, dated April 6, 2004. See also letters from 
Marshall Spiegel to Margaret H. McFarland, dated November 4, 2004 
(``November 2004 Letter'') and December 22, 2004 (``December 2004 
Letter'').
    \6\ Letter from Joanne Moffic-Silver, General Counsel and 
Corporate Secretary, CBOE, to Jonathan G. Katz, Secretary, 
Commission, dated May 24, 2003.
    \7\ Letter from Thomas A. Bond and Gary P. Lahey, Members, CBOE, 
to Jonathan G. Katz, Secretary, Commission, dated June 8, 2004 
(``June 8th Letter'').
    \8\ Securities Exchange Act Release No. 50028 (July 15, 2004), 
69 FR 43644 (July 21, 2004) (``July 15th Order'').
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    On August 23, 2004, Marshall Spiegel (``Petitioner'') filed with 
the Commission a notice of intention to file a petition for review of 
the Commission's approval by delegated authority,\9\ and on September 
13, 2004, Petitioner filed a petition for review.\10\ On September 17, 
2004, the Commission acknowledged receipt of these documents from 
Petitioner and confirmed that the automatic stay provided in Rule 
431(e) of the Commission's Rules of Practice was in effect.\11\
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    \9\ Letter from Marshall Spiegel, CBOE Equity Member, to 
Margaret H. McFarland, Deputy Secretary, Office of Secretary, 
Commission, dated August 23, 2004.
    \10\ Letter from Marshall Spiegel, CBOE Equity Member, to 
Margaret H. McFarland, Deputy Secretary, Office of the Secretary, 
Commission, dated September 13, 2004 (``Petition for Review'').
    \11\ Letter from Margaret H. McFarland, Deputy Secretary, Office 
of the Secretary, Commission, to Marshall Spiegel, CBOE Equity 
Member, dated September 17, 2004.
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    The Commission has considered the petition and for the reasons 
described below, has determined to set aside the earlier action taken 
by delegated authority and grant approval of the proposed rule change, 
as amended.\12\
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    \12\ See July 15th Order, supra note 8.
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II. Description of the Proposed Rule Change

A. Background

    As compensation for the time and money that the Board of Trade of 
the City of Chicago (``CBOT'') had expended in the development of the 
CBOE, a member of the CBOT is entitled to become a member of the CBOE 
without having to acquire a separate CBOE membership. This entitlement 
is established by Article Fifth(b) of the CBOE's Certificate of 
Incorporation (``Article Fifth(b)''). Article Fifth(b) provides, in 
relevant part:

    [E]very present and future member of the [CBOT] who applies for 
membership in the [CBOE] and who otherwise qualifies shall, so long 
as he remains a member of [the CBOT], be entitled to be a member of 
the [CBOE] notwithstanding any limitation on the number of members 
and without the necessity of acquiring such membership for 
consideration or value from the [CBOE] (``Exercise Rights'').

    Article Fifth(b) also explicitly states that no amendment may be 
made to it without the approval of at least 80% of those CBOT members 
who have ``exercised'' their right to be CBOE members and 80% of all 
other CBOE members.
    In 1992, the Commission approved the CBOE's proposed interpretation 
of the meaning of the term ``member of the [CBOT]'' as used in Article 
Fifth(b). The interpretation proposed by the CBOE was one agreed upon 
by the CBOE and the CBOT, is embodied in an agreement dated September 
1, 1992 (``1992 Agreement''), and is reflected in CBOE Rule 3.16(b). 
CBOE Rule 3.16(b) states that ``for the purpose of entitlement to 
membership on the [CBOE] in accordance with * * * [Article Fifth(b)] * 
* * the term ``member of the [CBOT],'' as used in Article Fifth(b), is 
interpreted to mean an individual who is either an ``Eligible CBOT Full 
Member'' or an ``Eligible CBOT Full Member Delegate,'' as those terms 
are defined in the [1992 Agreement] * * * \13\
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    \13\ In the 1992 Agreement, an ``Eligible CBOT Full Member'' is 
defined as an individual who at the time is the holder of one of 
1,402 existing CBOT full memberships (``CBOT Full Memberships''), 
and who is in possession of all trading rights and privileges of 
such CBOT Full Memberships. An ``Eligible CBOT Full Member 
Delegate'' is defined as the individual to whom a CBOT Full 
Membership is delegated (i.e., leased) and who is in possession of 
all trading rights and privileges appurtenant to such CBOT Full 
Membership.

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[[Page 10443]]

B. CBOE's Current Proposal

    The CBOE is again proposing an interpretation of the term ``member 
of the [CBOT]'' as used in Article Fifth(b). The CBOE believes that 
this interpretation is necessary to clarify which individuals will be 
entitled to the Exercise Right upon distribution by the CBOT of a 
separately transferable interest (``Exercise Right Privilege'') 
representing the Exercise Right component of a CBOT membership. The 
CBOT's intention to issue these Exercise Right Privileges is set forth 
in an agreement dated September 17, 2003 between the CBOE and the CBOT 
(``2003 Agreement''). In the 2003 Agreement, the CBOE and CBOT agreed 
on an interpretation of the term ``member of the [CBOT]'' as used in 
Article Fifth(b) once these Exercise Right Privileges are issued. 
Specifically, the 2003 Agreement modifies the definitions of ``Eligible 
CBOT Full Member'' \14\ and ``Eligible CBOT Full Member Delegate'' used 
in the 1992 Agreement. The CBOE's proposed rule change would revise 
Rule 3.16(b) to incorporate the definitions of ``Eligible CBOE Full 
Member'' and ``Eligible CBOT Full Member Delegate'' found in the 2003 
Agreement.
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    \14\ Under the 2003 Agreement, an individual would be deemed an 
Eligible CBOT Full Member (and therefore a ``member of the [CBOT]'' 
under Article Fifth (b)) only if such individual: (1) Held one 
Exercise Right Privilege; (2) held a CBOT Full Membership, which 
gives him all of the other rights and privileges appurtenant to CBOT 
membership; and (3) meets CBOT membership and eligibility 
requirements.
    The holder of a CBOT Full Membership in respect of which an 
Exercise Right Privilege has not been issued shall qualify as an 
Eligible CBOT Full Member if the requirements of the 1992 Agreement 
are still satisfied without such holder having to possess an 
Exercise Right Privilege.
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III. Discussion and Commission Findings

    As noted above, the Commission received a comment letter and a 
follow up letter on the proposed rule change from several members of 
the CBOE.\15\ In addition, the Commission received a petition for 
review of the action taken by delegated authority.\16\ Discussed below 
are these commenters' and the Petitioner's arguments as to why the 
Commission should not approve the proposed rule change.
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    \15\ See April 28th Comment Letter, supra note 5 and June 8th 
Letter, supra note 7.
    \16\ See Petition for Review, supra note 10.
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A.The Commission's Jurisdiction to Consider the Proposed Rule Change

    The Petitioner argues that the Commission should not approve the 
proposed rule change because the filing proposes to interpret contracts 
and instruments created in and under Illinois law and subject to 
``interpretation'' under Illinois and Delaware state law.\17\ Thus, 
Petitioner contends that the Commission is overstepping its 
jurisdiction and should not approve the proposal on that basis. In this 
regard, section 3(a)(27) of the Exchange Act defines the ``rules of an 
exchange'' to include, among other things, the constitution, articles 
of incorporation, and instruments corresponding to the foregoing of an 
exchange, as well as the stated policies, practices, and 
interpretations of such exchange.\18\ Rule 19b-4 under the Exchange Act 
\19\ defines the term ``stated policy, practice, or interpretation'' 
broadly to include
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    \17\ See Petitioner's Statement in Opposition to Action Made by 
Delegated Authority, October 27, 2004, at 2 (``Statement in 
Opposition'').
    \18\ 15 U.S.C. 77c(a)(27).
    \19\ 17 CFR 240.19b-4.
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    (1) Any statement made generally available to (a) the membership of 
the self-regulatory organization (``SRO''), or (b) to a group or 
category of persons having or seeking access to facilities of the SRO, 
that establishes or changes any standard, limit, or guideline with 
respect to the rights, obligations, or privileges of such persons, or
    (2) The meaning, administration, or enforcement of an existing SRO 
rule.
    The CBOE's Certificate of Incorporation, as well as the 
interpretation in CBOE Rule 3.16 of terms used in the Certificate, are 
``rules of the exchange.'' As such, section 19(b)(1) of the Exchange 
Act requires CBOE to file with the Commission any proposed changes to 
those rules.\20\ Once filed, section 19(b) of the Exchange Act requires 
the Commission to publish notice of the proposed rule change and 
approve it, or institute proceedings to determine whether the proposed 
rule change should be disapproved. Accordingly, the Commission believes 
that the Exchange Act establishes clearly that the proposed rule change 
is within its jurisdiction.
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    \20\ 15 U.S.C. 78s(b)(1).
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B. Petitioner's Right to Receive Notice of Commission Approval of the 
Proposed Rule Change

    The Petitioner also claims that it is premature for the Commission 
to consider this Petition for Review because the Commission never 
served actual notice on him of its approval of CBOE's proposed rule 
change.\21\ There, however, is no requirement that the Commission 
notify those who comment on a proposed rule change that it is approved. 
Instead, the Commission publishes its approval orders in the Federal 
Register and posts them on its Web site. Accordingly, the Commission 
does not believe it is premature to consider the petition for review.
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    \21\ See Petition for Review, supra note 10, at 3.
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C.The Commission Finds CBOE's Determination That the Proposal is an 
Interpretation of Article Fifth(b) To be Consistent With the Exchange 
Act

    The commenters' and Petitioner's principal argument as to why the 
Commission should not approve the CBOE's proposed rule change is that 
the proposed rule change does not constitute an interpretation of 
Article Fifth(b) as CBOE claims, but an amendment to Article Fifth(b) 
instead. Thus, Petitioner states that the CBOE's Board of Directors 
(``Board'') acted inconsistently with the CBOE's Certificate of 
Incorporation by failing to obtain the approval of 80% of those CBOT 
members who exercised their right to be CBOE members and 80% of other 
CBOE members.\22\ The commenters to the CBOE proposal made similar 
arguments as to why the Commission should not approve the proposal.\23\ 
In this regard, the Petitioner's legal memorandum states that the 
Commission's order is not in compliance with section 19(b)(1) of the 
Exchange Act because the order purports to decide fundamental issues of 
corporate governance of the CBOE, which are matters that should fall 
within the province of Delaware law and the state courts, not the 
Commission.\24\
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    \22\ See Statement in Opposition, supra note 17, at 2.
    \23\ For example, commenters argued that the proposed rule 
change is an amendment to Article Fifth(b) in that the 2003 
Agreement states that disputes concerning the definitions of what 
constitutes a member of the CBOT will be subject to arbitration, 
which commenters believed would supersede the current membership 
process under Article Fifth(b) in which an 80% member vote is 
required. See April 28th Comment Letter, supra note 5. The 
Commission notes that CBOE has not proposed to change the terms of 
Article Fifth(b), which still applies. Further, the Commission is 
not approving or disapproving the terms of the 2003 Agreement.
    \24\ See Legal Memorandum of Points and Authorities in Support 
of the Statement of Petitioner Marshall Spiegel in Opposition to 
Staff Action, October 26, 2004, at 6 (``Legal Memorandum'').
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    The CBOE filed a proposed rule change to adopt an interpretation of

[[Page 10444]]

Article Fifth(b) by amending CBOE Rule 3.16. Section 19(b) of the 
Exchange Act \25\ requires that the Commission approve an exchange's 
proposed rule change if it finds that the proposal is consistent with 
the requirements of the Exchange Act, and the rules thereunder 
applicable to exchanges. Among other things, national securities 
exchanges are required under section 6(b)(1) of the Exchange Act \26\ 
to comply with their own rules. Thus, if CBOE has failed to comply with 
its own Certificate of Incorporation, which is a rule of the exchange, 
the Commission believes that this may not only violate state 
corporation law, but it would also be inconsistent with the Exchange 
Act and, thus, the Commission could not approve the proposed rule 
change under section 19.
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    \25\ 15 U.S.C. 78s(b).
    \26\ 15 U.S.C. 77(f)(b)(1).
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    The Commission has reviewed the record in this matter and believes 
that the CBOE provides sufficient basis on which the Commission can 
find that, as a federal matter under the Exchange Act, the CBOE 
complied with its own Certificate of Incorporation in determining that 
the proposed rule change is an interpretation of, not an amendment to, 
Article Fifth(b). The Commission finds persuasive CBOE's analysis of 
the difference between ``interpretations'' and ``amendments,'' \27\ and 
the letter of counsel that concludes that it is within the general 
authority of the CBOE's Board to interpret Article Fifth(b) and that 
the ``Board's interpretation of Article Fifth(b) contemplated by the 
[2003 Agreement] does not constitute an amendment to the Certificate 
and need not satisfy the voting requirements of Article Fifth(b) that 
would apply if the Article were being amended.'' \28\
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    \27\ See Statement of Chicago Board Options Exchange in Support 
of Approval of Rule Under Delegated Authority, October 26, 2004, at 
6 (``CBOE's Statement in Support of Approval'').
    \28\ Letter from Michael D. Allen, Richard, Layton & Finger, to 
Joanne Moffic-Silver, General Counsel and Corporate Secretary, CBOE 
(June 29, 2004).
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    Petitioner argues that the 2003 Agreement denigrates the definition 
of CBOT member ``by permitting CBOT members to carve up membership 
rights and sell them separately to third parties without extinguishing 
their rights to exercise CBOE membership under Article Fifth(b),'' and 
that ``[t]his fundamental change and augmentation in the economic and 
legal rights of CBOT members and the structure of CBOT membership 
materially and profoundly affect the economic and legal rights of CBOE 
membership and governance.'' \29\ Accordingly, Petitioner states that 
``[i]t cannot be fairly concluded that by altering the economic and 
corporate control relationships among CBOT members, third parties and 
current CBOE members in such material ways does not constitute an 
amendment to the provisions of Article Fifth(b).''
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    \29\ Legal Memorandum, supra note 24, at 4-5.
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    The Commission does not believe that Petitioner's argument refutes, 
to any degree, CBOE's analysis of why its proposed rule change is an 
interpretation to Article Fifth(b), not an amendment. As discussed 
further below, the Commission does not believe that either the 2003 
Agreement or the proposed rule change alter CBOT membership in the way 
Petitioner claims. To the extent changes to CBOT memberships are being 
made, they are being done by the CBOT as part of its restructuring. 
Once the CBOT issues the exercise rights, which it states is its 
intent, the CBOE believes it must interpret Article Fifth(b) to address 
the ambiguity with respect to the definition of member of the CBOT that 
will be created by CBOT's actions.\30\ The Commission agrees that it is 
circumstances external to this proposed rule change that present the 
question about what it means to be a ``member of the CBOT'' under 
Article Fifth(b).
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    \30\ See id. at 7.
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    Petitioner's legal memorandum also states that by purporting to 
decide issues of corporate governance, the July 15th Order \31\ 
materially compromises the rights of CBOE members to obtain judicial 
review of those issues. Petitioner argues that the issues do not 
implicate market integrity concerns under the Exchange Act and thus the 
Commission should maintain neutrality on these corporate governance 
issues.\32\ Except to the extent that the Commission's analysis of 
state law informs its finding that, as a federal matter under the 
Exchange Act, the CBOE complied with its own Certificate of 
Incorporation in determining that the proposed rule change is an 
interpretation of, not an amendment to, Article Fifth(b), the 
Commission is not purporting to decide a question of state law.\33\
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    \31\ See July 15th Order, supra note 8.
    \32\ See Legal Memorandum, supra note 24, at 6.
    \33\ CBOE Rule 6.7A states that:
    No member or person associated with a member shall institute a 
lawsuit or other legal proceeding against the Exchange or any 
director, officer, employee, contractor, agent or other official of 
the Exchange or any subsidiary of the Exchange, for actions taken or 
omitted to be taken in connection with the official business of the 
Exchange or any subsidiary, except to the extent such actions or 
omissions constitute violations of the federal securities laws for 
which a private right of action exists.
    Prior to April 2002, CBOE Rule 6.7A only precluded lawsuits 
against directors, officers, employees, contractors, agents and 
other officials of the CBOE. See Securities Exchange Act Release No. 
37421 (July 11, 1996), 61 FR 37513 (July 18, 1996). In April 2002, 
CBOE filed a proposed rule change to extend the prohibition to 
lawsuits against the Exchange. This change was filed under Section 
19(b)(3)(A) of the Exchange Act and, therefore, became effective 
upon filing. See Securities Exchange Act Release No. 45837 (Apr. 26, 
2002), 67 FR 22142 (May 2, 2002) (notice of CBOE's proposed rule 
change). Accordingly, the Commission did not issue an order finding 
that the rule change is consistent with the requirements of the 
Exchange Act. When there is no approval order, a court considering a 
contention that a rule is not consistent with the requirements of 
the Exchange Act, or that the rule does not preempt state law, will 
not have the authoritative views of the Commission on the relevant 
issues, and will have to resolve those claims de novo.
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D.The CBOT Restructuring

1. The Commission is Not Approving the CBOT's Breaking of Its 
Memberships into Separate, Transferable Interests
    Petitioner's legal memorandum states that the 2003 Agreement amends 
Article Fifth(b) by redefining the term CBOT member in a manner other 
than was originally contemplated when Article Fifth(b) was adopted in 
1972, when all of the rights and benefits that constituted a CBOT 
membership were an integrated whole that could not be separated and 
transferred to third parties, as was further confirmed in the 1992 
Agreement.\34\ The legal memorandum also states that the 2003 Agreement 
now permits CBOT members to divide membership rights and sell them 
separately to third parties without extinguishing the right to exercise 
and become a CBOE member under Article Fifth(b).\35\
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    \34\ See Legal Memorandum, supra note 24, at 4.
    \35\ See id.
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    The Commission believes that the Petitioner mischaracterizes the 
2003 Agreement in several respects. First, the 2003 Agreement does not 
permit the CBOT to divide membership rights by issuing Exercise Right 
Privileges. The 2003 Agreement begins by stating that the CBOT intends 
to issue these Exercise Right Privileges. The purpose of the agreement 
is to resolve who will be a ``member of the [CBOT],'' and therefore 
entitled to the Exercise Right under Article Fifth(b), following the 
issuance of these Exercise Right Privileges. In addition, the 
Commission does not believe that the 1992 Agreement confirms that all 
the rights and benefits that constitute a CBOT membership were an 
integrated whole. To the contrary, the 1992 Agreement was necessitated 
by the division of CBOT memberships into trading rights

[[Page 10445]]

that could be leased and ownership rights.\36\
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    \36\ In 1992, the CBOE filed a proposed rule change with the 
Commission that embodied in CBOE Rule 3.16 an interpretation of 
``member of the [CBOT]'' as used in Article Fifth(b). This 
interpretation was agreed upon by the CBOT and CBOE in a 1992 
agreement between the exchanges. The Commission approved the CBOE's 
proposed rule change. See Securities Exchange Act Release No. 32430 
(June 8, 1993), 58 FR 32969 (June 14, 2993) (SR-CBOE-92-42).
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    The Commission notes that it is required under the Exchange Act to 
make a finding that CBOE's proposed interpretation is consistent with 
the CBOE's own rules, and the Exchange Act. The Commission is not 
approving either the CBOT's action to separate or to transfer interests 
in the Exercise Right or the 2003 Agreement. With regard to 
Petitioner's argument that the 2003 Agreement is not consistent with 
the 1992 Agreement, and thus cannot be an interpretation of Article 
Fifth(b), an exchange may propose a new interpretation or new rule that 
is, in practice, fundamentally different from a previous interpretation 
or rule, so long as the proposed interpretation is consistent with the 
Exchange Act.
2. The Commission Does Not Have to Consider the CBOT's Restructuring
    The commenters argued that the CBOT's proposed changes to its 
corporate structure, which are pending, are an amendment to Article 
Fifth(b) of the CBOE's Certificate of Incorporation because, following 
the demutualization of the CBOT, CBOT will no longer be a membership 
organization.\37\ Commenters also contended that ``[w]hen the CBOE was 
created in 1972, the equity of the CBOT was only contained in the 
`member of the Board of Trade.' '' \38\ Also, because CBOT is proposing 
in its demutualization that the current members of the CBOT would 
receive approximately 77% of the equity in a new holding company, the 
definition of ``member of the Board of Trade'' as used in Article 
Fifth(b) of the CBOE's Certificate of Incorporation is being 
amended.\39\ Commenters also claimed that because CBOT's 
demutualization would affect the CBOT's governance, the CBOE's proposed 
rule change is an amendment to Article Fifth(b).\40\
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    \37\ See April 28th Comment Letter, supra note 5, at 2.
    \38\ Id.
    \39\ See id.
    \40\ See id.
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    Similarly, Petitioner asserts in his legal memorandum that the 2003 
Agreement denigrates the definition of CBOT member ``by permitting CBOT 
members to carve up membership rights and sell them separately to third 
parties without extinguishing the right to exercise and become a CBOE 
member under Article Fifth(b).'' \41\ The Commission, however, does not 
believe that the proposed rule change is what allows the CBOT to divide 
equity ownership in the CBOT into several parts and issue separately 
transferable securities representing each part. The proposed rule 
change merely sets forth how the CBOE proposes to apply its rules once 
the CBOT issues such securities, and does not ask the Commission to 
approve any action being taken by the CBOT with regard to its 
memberships.
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    \41\ Legal Memorandum, supra note 24, at 4.
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    The Petitioner asserts that the CBOT has moved ahead with its 
demutualization by separating the Exercise Right as described in this 
proposal, and opening its market to the trading of memberships without 
Exercise Rights and the trading of the Exercise Right itself.\42\ 
Petitioner further argues in his legal memorandum that third parties 
controlling membership Exercise Rights will have substantial powers and 
influence over the future course of CBOE governance, and that altering 
the ``economic and corporate control relationships among CBOT members, 
third parties and current CBOE members in such a material way'' 
constitutes an amendment to Article Fifth(b).\43\ The Petitioner also 
believes that the dilution of CBOT equity through an initial public 
offering expected in 2005 will allow less costly access to CBOE.\44\ 
Thus, according to Petitioner's legal memorandum, the CBOT's impending 
restructuring is material to the Commission's discussion on the issues 
presented in the proposed rule change.\45\
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    \42\ See Statement in Opposition, supra note 17, at 5.
    \43\ See Legal Memorandum, supra note 24, at 5.
    \44\ See Statement in Opposition, supra note 17, at 11.
    \45\ See Legal Memorandum, supra note 24, at 16.
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    The Commission does not believe that changes CBOT makes to its 
memberships, such as CBOT's pending restructuring, could be considered 
an amendment to CBOE's Certificate of Incorporation. The CBOT and CBOE 
are separate corporate entities. The Commission does not believe that 
any changes that the CBOT makes to its corporate structure should, by 
themselves, be considered a change to the CBOE's Certificate of 
Incorporation. The Commission is not approving in this order the CBOT's 
separation of the Exercise Rights or any other aspect of its 
restructuring.\46\
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    \46\ Petitioner argues in his legal memorandum that the CBOT has 
pending with the Commission a Form S-4, which he believes is in the 
final stages of review. See Legal Memorandum, supra note 24, at 6. 
Thus, Petitioner believes that the CBOT's restructuring of its 
membership materially affects the rights of CBOE members under 
Article Fifth(b). See id. The Commission review of the CBOT's Form 
S-4 is to ensure the adequacy of disclosure about the CBOT's actions 
and therefore it is unclear what bearing the Commission's 
determination with regard to this proposal would have on the Form S-
4 or CBOT's restructuring.
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E. The Commission Does Not Have to Consider Proposed Rule Changes That 
CBOE May File in the Future

    The Petitioner contends that the Commission should require the CBOE 
to file other agreements that the Petitioner considers relevant to the 
proposed rule change the Commission is currently considering.\47\ In 
particular, Petitioner objects to the CBOE's withdrawal of its proposed 
rule change SR-CBOE-2002-01.\48\ Petitioner claims that the 
interpretation of Article Fifth(b) in the August 7, 2001 agreement 
between the CBOE and CBOT is integrally related to the proposed rule 
change.\49\ Subsequently, Petitioner similarly argued that the 
Commission should require the CBOE to file this August 7, 2001 
agreement, as well as other subsequent, related agreements because \50\ 
the CBOE and CBOT are acting to effectuate the terms of such 
agreements. Petitioner contends that the CBOE and CBOT should not 
effectuate the terms of these agreements until such agreements are 
filed and approved by the Commission.
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    \47\ See Reply of Marshall Spiegel to CBOE Response of November 
10, 2004, November 17, 2004, at 3 (``Petitioner's November 2004 
Reply''). See also November 2004 Letter, supra note 5; December 2004 
Letter, supra note 5.
    \48\ See November 2004 Letter, supra note 5.
    \49\ CBOE explains that it withdrew SR-CBOE-2002-01 because 
CBOT's demutualization plans were suspended. See CBOE's Statement in 
Support of Approval, supra note 27, at 10.
    \50\ See December 2004 Letter, supra note 5.
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    As discussed above, section 19(b)(1) of the Exchange Act requires 
CBOE to file with the Commission any proposed changes to its rules. 
Once filed, section 19(b) requires the Commission to take certain 
actions. The Commission is not required to consider proposed rule 
changes that may be filed by an SRO at a future date.
    The Commission also notes that agreements between SROs and third 
parties are not, per se, proposed rule changes that must be filed with 
the Commission. In fact, as noted above, the Commission is not 
approving the 2003 Agreement, but is approving only the interpretation 
of Article Fifth(b), which

[[Page 10446]]

references certain terms as used in the 2003 Agreement. Whether or not 
agreements entered into by the CBOE are proposed rule changes is a 
judgment that, in the first instance, CBOE must make. To the extent, 
however, that any part of an agreement is a ``policy, practice, or 
interpretation'' of CBOE's rules and that ``policy, practice, or 
interpretation'' has not been approved by the Commission it would be a 
violation of section 19(b) of the Exchange Act and the Commission could 
take appropriate action against the CBOE.

F.The Commission Does Not Have to Find That the Proposed Rule Change is 
Consistent with the 1992 Agreement

    Commenters have contended that the entire 1992 Agreement is part of 
CBOE Rule 3.16(b) and, therefore, any change to the terms of that 
agreement is an amendment of Article Fifth(b), which Rule 3.16(b) 
interprets.\51\ In particular, commenters noted that the 1992 Agreement 
states that a CBOT ``exercise member shall not have the right to 
transfer * * * their CBOE regular memberships or any other trading 
rights and privileges appurtenant thereto.'' \52\ Petitioner argues 
that the 2003 Agreement is not consistent with the 1992 Agreement 
because the 1992 Agreement prohibits the un-bundling of CBOE trading 
rights.\53\ The commenters also contended that the proposed rule change 
allows the CBOT to demutualize into A, B, and C shares, which are 
separately transferable, in contravention of the 1992 Agreement.\54\ 
Similarly, Petitioner asserts that the CBOE's new interpretation of 
Article Fifth(b) contradicts the 1992 Agreement's meaning of what a 
CBOT member is and changes the structure of CBOT memberships in a way 
not contemplated in Article Fifth(b).\55\
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    \51\ See April 28th Comment Letter, supra note 5, at 2-3.
    \52\ See 1992 Agreement, Section 3(a).
    \53\ See Statement in Opposition, supra note 17, at 11.
    \54\ See April 28th Comment Letter, supra note 5, at 2.
    \55\ See Statement in Opposition, supra note 17, at 11.
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    The Commission notes that it did not approve the 1992 Agreement 
itself. Instead, the Commission approved CBOE Rule 3.16(b), which 
refers to the 1992 Agreement only for the definitions of ``Eligible 
CBOT Full Member'' and ``Eligible CBOT Full Member Delegate'' contained 
in that agreement. Thus, the Commission disagrees with commenters' 
contention that the entire 1992 Agreement is part of CBOE Rule 3.16(b). 
In addition, as discussed above, the Commission does not believe that 
the proposed rule change is what allows CBOT to demutualize and 
separate its memberships into A, B, and C shares. Because the 1992 
Agreement is not part of the CBOE's rules, the Commission does not 
believe it is inconsistent with the Exchange Act if the new 
interpretation of Article Fifth(b) contradicts that agreement. 
Agreements between the CBOE and CBOT may be amended without Commission 
approval unless such an amendment is a proposed rule change that must 
be filed under section 19(b). In the matter before it, the Commission 
must find that the CBOE's proposal is consistent with the Exchange Act, 
not the 1992 Agreement.

G. The Commission Has Considered Whether the Proposed Rule Change 
Promotes Efficiency, Competition and Capital Formation

    Petitioner argues in its legal memorandum that the proposed rule 
change is not consistent with efficiency, competition and capital 
formation because CBOE's Board actions were contrary to its powers 
under the Certificate of Incorporation and adversely affect efficiency, 
competition and capital formation by creating legal uncertainties, 
necessitating litigation and compromising the rights of CBOE equity 
holders.\56\ Section 3(f) of the Exchange Act requires, in the review 
of an SRO rule, the Commission to consider whether the action will 
promote efficiency, competition, and capital formation.\57\ The 
Commission is not required to make a finding under section 3(f) in all 
cases. The Commission has considered whether the proposal promotes 
efficiency, competition, and capital formation, and believes that it is 
important to clarify that Petitioner's claim is not that the proposed 
interpretation itself compromises the rights of CBOE equity holders, 
but instead that the Board's action to approve the proposed 
interpretation without a vote under Article Fifth(b) has compromised 
CBOE equity holders' rights.
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    \56\ See Legal Memorandum, Supra note 24, at 7.
    \57\ 15 U.S.C. 78c(f).
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H. Prescribing New Conditions to Membership Not Permitted Without a 
Vote of CBOE Members

    The Petitioner's legal memorandum states that the 2003 Agreement is 
invalid because it alters the conditions of membership by introducing a 
new membership eligibility regime never before contemplated.\58\ 
Petitioner contends that section 2.2 of CBOE's Constitution provides 
that ``membership shall be limited to individuals, partnerships, and 
corporations, subject to their meeting the conditions of approval as 
stated in the Constitution.'' \59\ Petitioner then concludes that 
because section 2.1(a) of the CBOE Constitution provides that 
``membership in the Exchange shall be made available by the Exchange * 
* * and * * * shall be proposed by the Board and approved by the 
affirmative vote of the majority of voting members * * *'' the CBOE 
Board usurped the exclusive power of the voting members of CBOE to 
make, alter, or repeal the Constitution. Section 2.2 of CBOE's 
Constitution, however, states in relevant part:

    \58\ See Legal Memorandum, Supra note 24, at 14.
    \59\ See id. at 14-15.
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``[m]embership shall be limited to individuals, partnerships, and 
corporations, subject to their meeting the conditions of approval as 
stated in the Constitution and Rules.'' Emphasis added.

    Thus, a full reading of the CBOE's Constitution indicates that CBOE 
may introduce new conditions of membership in accordance with its rules 
which would not necessitate an affirmative majority vote by CBOE 
members.

I. Timeliness of Petitioner's FOIA Requests

    The Petitioner argues that the Commission is depriving him of his 
due process rights by not timely complying with his FOIA requests. 
However, the records that Petitioner seeks in his FOIA requests are 
also available as part of the public file in this matter. Thus, the 
FOIA request is not relevant to Petitioner's due process rights.

J. The Proposal Is Consistent With Section 6(b)(5) and Section 
6(c)(3)(A) of the Exchange Act

    The Petitioner's legal memorandum states that the proposal is not 
consistent with section 6(b)(5) of the Exchange Act because it 
circumvents the requirements of CBOE's Certificate of Incorporation 
which cannot be deemed to promote just and equitable principles of 
trade or to protect investors and the public interest.\60\ Section 
6(b)(5) of the Exchange Act requires that the rules of the exchange be 
designed to, among other things, promote just and equitable principles 
of trade.\61\ As discussed above, in approving the proposed rule 
change, the Commission is not deciding whether the Board's action was 
consistent with state corporation law.

[[Page 10447]]

 Rather, the Commission finds that the proposed interpretation of 
Article Fifth(b) is consistent with the Exchange Act, including section 
6(b)(5).
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    \60\ See id. at 7.
    \61\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Petitioner's legal memorandum states that the proposal is not 
consistent with section 6(c)(3)(A) of the Exchange Act ``because the 
proposed rule does not address the qualifications of CBOT members to 
become CBOE members in accordance with the voting rights and procedures 
established by Article Fifth(b).'' \62\ Section 6(c)(3)(A) of the 
Exchange Act provides that an exchange ``may deny membership to, or 
condition the membership of, a registered broker-dealer'' if, among 
other things, such broker-dealer does not meet financial responsibility 
or operational capability standards set forth in the exchange's 
rules.\63\ This provision is further qualified by section 6(c)(4) of 
the Exchange Act, which permits an exchange to limit the number of 
members of the exchange, provided that the exchange does not decrease 
the number of memberships below such number in effect on May 1, 
1975.\64\ Article Fifth(b) states that a member of the CBOT is entitled 
to be a member of the CBOE, notwithstanding any limitation on the 
number of CBOE members, if such CBOT member applies for membership and 
otherwise qualifies for membership. The CBOE is proposing to interpret 
the meaning of the term ``member of the [CBOT]'' as used in Article 
Fifth(b). This interpretation does not implicate Section 6(c)(3)(A) and 
is consistent with Section 6(c)(4) because the CBOE is not proposing to 
reduce the number of members of the exchange.
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    \62\ Legal Memorandum, Supra note 24, at 7-8.
    \63\ 15 U.S.C. 78f(c)(3)(A).
    \64\ 15 U.S.C. 78f(c)(4).
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VI. Conclusion

    It is therefore ordered, that the earlier action taken by delegated 
authority \65\ is set aside and the proposed rule change (SR-CBOE-2004-
16), as amended, is approved pursuant to section 19(b)(2) of the 
Exchange Act.\66\
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    \65\ July 15th Order, Supra note 8.
    \66\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-833 Filed 3-2-05; 8:45 am]
BILLING CODE 8010-01-P