[Federal Register Volume 70, Number 77 (Friday, April 22, 2005)]
[Notices]
[Pages 20953-20955]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1912]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51568; File No. SR-CBOE-2004-16]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Denying Motion for Reconsideration of 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)

April 18, 2005.

I

    On February 25, 2005, we issued an order (``Order'') setting aside 
a July 15, 2004 order \1\ that approved by authority delegated to the 
Division of Market Regulation a proposed rule change (SR-CBOE-2004-16) 
submitted by the Chicago Board Options Exchange, Incorporated 
(``CBOE''), and approving the proposed rule change as amended.\2\ Our 
Order was in response to a petition for review submitted by Marshall 
Spiegel (``Petitioner'') on August 23, 2004.\3\ The CBOE's proposed 
rule change interprets certain terms used in Article Fifth(b) of CBOE's 
Certificate of Incorporation (``Article Fifth(b)''). Article Fifth(b) 
relates, in part, to the ability of a Board of Trade of the City of 
Chicago, Inc. (``CBOT'') member to become a member of the CBOE without 
purchasing a CBOE membership (``Exercise Right''). CBOE's stated 
purpose behind its proposed rule change is the interpretation of 
Article Fifth(b) in accordance with the original intent of the Article 
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.
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    \1\ Securities Exchange Act Release No. 50028 (July 15, 2004), 
69 FR 43644 (July 21, 2004).
    \2\ Securities Exchange Act Release No. 51252 (Feb. 25, 2005), 
70 FR 10442 (Mar. 3, 2005) (hereinafter ``Order'').
    \3\ Letter from Marshall Spiegel, CBOE Equity Member, to 
Margaret H. McFarland, Deputy Secretary, Office of the Secretary, 
Commission, dated September 13, 2004.
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    In issuing the Order, we found that the CBOE provided a sufficient 
basis for finding that, as a federal matter under the Securities 
Exchange Act of 1934 (``Exchange Act''), the CBOE complied with its 
Certificate of Incorporation, as required by Section 6(b)(1) of the 
Exchange Act,\4\ in determining that its proposed rule change was an 
interpretation of, not an amendment to, Article Fifth(b).\5\ Further, 
we found that the proposed rule change was consistent with the Exchange 
Act, including Section 6(b)(5) thereunder.\6\
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    \4\ 15 U.S.C. 78f(b)(1).
    \5\ Order, supra note 2, at 10444.
    \6\ Id. at 10447.
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II

    A motion to reconsider is governed by Rule 470 of the Commission's 
Rules of Practice.\7\ Rule 470 permits us to reconsider our decisions 
in exceptional cases.\8\ The remedy is intended to correct manifest 
errors of law or fact or to permit the presentation of newly discovered 
evidence.\9\ We find that Petitioner's motion for reconsideration does 
not present the exceptional circumstances required to compel us to 
reconsider our earlier Order in that it does not present any newly 
discovered evidence \10\ and does not support any findings of manifest 
errors of law or fact underlying our Order.
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    \7\ 17 CFR 201.470.
    \8\ See In the Matter of the Application of Reuben D. Peters, et 
al., Securities Exchange Act Release No. 51237 (Feb. 22, 2005), at 
text accompanying n. 6 (Admin. Proc. File No. 3-11277) (addressing 
the application of Rule 470).
    \9\ See In the Matter of KPMG Peat Marwick LLP, Securities 
Exchange Act Release No. 44050 (Mar. 8, 2001), 74 SEC Docket 1351, 
1352-53 n.7 (Admin. Proc. File No. 3-9500) (specifying that 
efficiency and fairness concerns embodied in federal court practice 
of rejecting motions for reconsideration unless correction of 
manifest errors of law or fact or presentation of newly discovered 
evidence is sought ``likewise inform our review of motions for 
reconsideration under Rule 470'').
    \10\ Petitioner's brief does, however, appear to present new 
arguments in support of his position. We note that settled 
principles of federal court practice establish that a party may not 
seek rehearing of an appellate decision in order to advance an 
argument that it could have made previously but elected not to. See, 
e.g., Anderson v. Beatrice Foods Co., 900 F.2d 388, 397 (1st Cir. 
1990). In considering motions for reconsideration of federal 
district court rulings, courts have likewise cautioned that ``[t]he 
purpose of a motion for reconsideration is to correct manifest 
errors of law or fact or to present newly discovered evidence'' and 
that a ``motion for reconsideration should not be used as a vehicle 
to present authorities available at the time of the first decision 
or to reiterate arguments previously made. * * * *. Z.K. Marine, 
Inc. v. M/V Archigetis, 808 F. Supp. 1561, 1563 (S.D. Fla. 1992) 
(quoting Harsco Corp. v. Zlotnicki, 779 F.2d 906, 909 (3d Cir. 
1985)). The efficiency and fairness concerns that underlie these 
settled principles of federal court practice likewise inform our 
review of motions for reconsideration under Rule 470. See KPMG Peat 
Marwick LLP, Order Denying Request for Reconsideration, Securities 
Exchange Act Release No. 44050 (Mar. 8, 2001), 74 SEC Docket 1351.
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A. Petitioner's Assertion That the CBOE Board's Proposed Rule Change Is 
an Amendment Because the Change Affects Equity Holder Rights Is a New 
Argument

    Petitioner's brief in support of his motion to reconsider contends 
that the CBOE's action of interpreting Article Fifth(b) alters the 
rights of CBOE equity holders. Petitioner states that ``[p]reviously, 
exercise rights were inalienable from full CBOT membership,'' and that 
``[h]ere, the CBOT unilaterally has sought to change the exercise 
rights into separate securities.'' \11\ Petitioner continues by noting 
that the way in which these changes by the CBOT are treated by the CBOE 
under Article Fifth(b) will affect the legal and economic rights of the 
CBOT exercise right.\12\ Because the CBOE honors the changes being made 
by the CBOT, Petitioner claims it diminishes the rights and interests 
of CBOE treasury seat holders by recognizing a new class of persons who 
have economic influence over the CBOE.\13\ There would be a different 
result, Petitioner argues, if CBOE determined that the Exercise Right 
under Article Fifth(b) would be extinguished if ever transferred apart 
from the sale or rental of a full CBOT membership.\14\ Because the 
Petitioner believes that the interpretation by the CBOE ``alters the 
rights of various and distinct classes of CBOE equity interest 
holders,'' he contends that such interpretation is an amendment under 
Delaware Law.\15\
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    \11\ Brief in Support of Motion of Marshall Spiegel for 
Reconsideration of the Commission's February 25, 2005 Order, dated 
March 7, 2005, at 7 (``Petitioner's Brief in Support of Motion to 
Reconsider'').
    \12\ Id. at 8.
    \13\ Id.
    \14\ Id.
    \15\ Id.
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    This appears to us to be a new argument presented by Petitioner. 
Petitioner previously argued that the December 17, 2003 agreement 
between the CBOE and the CBOT (``2003 Agreement'') and the CBOE's 
proposed rule change amended Article Fifth(b) by redefining the term 
CBOT member ``by permitting CBOT members to carve up membership rights 
and sell them separately to third parties without extinguishing their 
rights to CBOE

[[Page 20954]]

membership under Article Fifth(b).'' \16\ Petitioner argued 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 economics and legal rights of CBOE membership 
and governance.'' \17\ In response to this argument, we noted that 
neither the 2003 Agreement nor the proposed rule change alter CBOT 
membership rights or permit the CBOT to divide membership rights by 
issuing Exercise Right Privileges.\18\ Petitioner also argued 
previously that the CBOT actions alter the economic and corporate 
relationships among current CBOE members and, thus, constitute an 
amendment to Article Fifth(b).\19\ The Petitioner did not, however, 
make an argument--as he does now--that the interpretation by the CBOE 
Board diminishes the rights of CBOE equity holders and, therefore, is 
an amendment under Delaware law. Because Petitioner cannot raise an 
argument for the first time on a Motion for Reconsideration, the 
Commission is not addressing the merits of this new argument.\20\
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    \16\ Legal Memorandum of Points and Authorities in Support of 
the Statement of Petitioner Marshall Spiegel in Opposition to Staff 
Action, Oct. 26, 2004, at 4 (``Legal Memorandum'').
    \17\ Id.
    \18\ Order, supra note 2, at 10444.
    \19\ Legal Memorandum, supra note 16, at 5.
    \20\ See supra note 10 (discussing the standard of review for a 
motion to reconsider).
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B. Petitioner's Assertion That the Commission Did Not Consider the CBOE 
Board's Conflict of Interest Is a New Argument

    Petitioner contends, in another new argument first raised in his 
motion to reconsider, that the Commission ``does not even deign to 
address--and appears oblivious to--the material conflicts of interests 
of the Board of Directors of [CBOE] in attempting to `interpret' the 
Certificate of Incorporation* * *.'' \21\ Petitioner elaborates on his 
position by arguing that ``the CBOE Board, which owes fiduciary duties 
of honesty, loyalty and good faith to all equity holders, is conflicted 
with respect to the interpretation it has made* * *.'' \22\ Petitioner 
is not permitted to raise an argument for the first time on a Motion 
for Reconsideration and, for this reason, the Commission is not 
addressing the merits of this new argument.\23\
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    \21\ Petitioner's Brief in Support of Motion to Reconsider, 
supra note 11, at 1.
    \22\ Id. at 2.
    \23\ See supra note 10 (discussing the standard of review for a 
motion to reconsider).
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C. Petitioner's Assertion That the Commission Erred in Accepting the 
CBOE Board's Authority To Determine the Question of What It Means To Be 
a CBOT Member Is Without Merit

    The Petitioner argues that the Commission's Order ``manifestly errs 
in concluding that the CBOE Board has independent, unilateral, and 
final authority to determine the answer* * * '' to the question of what 
it means to be a ``member of the [CBOT]'' under Article Fifth(b).\24\ 
Petitioner asserts that Delaware law does not permit the CBOE Board to 
make such an interpretation, and that the fiduciary obligations on the 
CBOE Board under Delaware and federal law preclude the Board from doing 
so.\25\
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    \24\ Petitioner's Brief in Support of Motion to Reconsider, 
supra note 11, at 3.
    \25\ Id.
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    First, Petitioner mischaracterizes our conclusion. Nowhere in our 
Order did we conclude that the CBOE Board has independent, unilateral, 
and final authority to determine what it means to be a ``member of the 
[CBOT]'' under Article Fifth(b). The CBOE cannot interpret the term 
``member of the [CBOT]'' under Article Fifth(b) in a manner the 
Commission does not find consistent with the Exchange Act. Instead, we 
stated that we found ``persuasive CBOE's analysis of the difference 
between `interpretations' and `amendments,' 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.''' \26\ The letter of CBOE's legal 
counsel also stated that in interpreting Article Fifth(b), the CBOE 
Board must make such determination in good faith, consistent with the 
terms of Article Fifth(b) and not for inequitable purposes.
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    \26\ Order, supra note 2, at 10444 (quoting Letter from Michael 
D. Allen, Richard, Layton & Finger, to Joanne Moffic-Silver, General 
Counsel and Corporate Secretary, CBOE (June 29, 2004), at 5).
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    Further, we do not find persuasive Petitioner's assertion that 
fiduciary obligations on the CBOE Board under Delaware law and federal 
law preclude the Board from interpreting its Certificate of 
Incorporation. We have previously found that the CBOE submitted 
sufficient support for its position that its proposed rule change 
involved an interpretation of Article Fifth(b) of its Certificate of 
Incorporation.\27\ Accordingly, we do not believe that fiduciary duties 
preclude the CBOE Board from interpreting its Certificate of 
Incorporation in an attempt to address potential interpretive 
ambiguities that the CBOE and CBOT have identified in advance of the 
CBOT's restructuring. Accordingly, Petitioner's contention regarding 
the authority of the CBOE Board is without merit.
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    \27\ Order, supra note 2, at 10444.
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D. Petitioner Erroneously Asserts a Manifest Error in the Commission's 
Application of Contract Interpretation

    The Petitioner asserts that the Commission's application of 
principles of contract interpretation to uphold the CBOE Board's 
interpretation is manifestly erroneous, arguing that the Order ``errs 
in its conclusion incorporated from the CBOE's Statement in Support of 
Approval that principles of contract interpretation support the 
Commission's ruling.'' \28\ We did not, contrary to the Petitioner's 
assertion, apply principles of contract interpretation in our Order in 
the manner suggested by Petitioner, nor did we incorporate by reference 
any principles of contract interpretation included in the CBOE's 
Statement in Support of Approval. Rather, we found that the CBOE 
provided a ``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).'' \29\ Further, we found persuasive CBOE's analysis of the 
difference between ``interpretations'' and ``amendments'' and the 
letter of CBOE's counsel concluding that it is within the general 
authority of the CBOE's Board to interpret Article Fifth(b)* * *.'' 
\30\ Finally, we did ``not believe that Petitioner's argument refuted, 
to any degree, CBOE's analysis of why its proposed rule change is an 
interpretation of Article Fifth(b), not an amendment.'' \31\ 
Accordingly, we find Petitioner's assertion of error in the 
Commission's purported application of contract principles to be without 
merit.
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    \28\ Petitioner's Brief in Support of Motion to Reconsider, 
supra note 11, at 10.
    \29\ Order, supra note 2, at 10444.
    \30\ Id.
    \31\ Id.

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[[Page 20955]]

E. Petitioner's Assertion That the Commission Improperly Relied on the 
Letter of CBOE's Outside Counsel Is Without Merit

    Petitioner further contends that the Commission's ``reliance'' on 
the opinion of CBOE's outside counsel is manifestly erroneous.\32\ 
Petitioner claims that the opinion letter of CBOE's outside counsel 
failed to cite any relevant authority or provide any rationale to 
support its characterization of the CBOE's action as an 
``interpretation'' of Article Fifth(b) and accordingly should be given 
less weight.\33\ Petitioner decried the opinion letter's elevation of 
``form over substance,'' its failure to ``address the circumstances 
when an `interpretation' must also be deemed in substance an 
amendment,'' and its failure to discuss ``the CBOE Board's conflict of 
interest in making and enforcing the interpretation at issue here.'' 
\34\
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    \32\ Petitioner's Brief in Support of Motion to Reconsider, 
supra note 11, at 12. See also Statement of Chicago Board of Options 
Exchange in Support of Approval of Rule Under Delegated Authority, 
October 26, 2004.
    \33\ Petitioner's Brief in Support of Motion to Reconsider, 
supra note 11, at 12-13.
    \34\ Id. at 12.
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    Petitioner's assertion that the opinion letter of CBOE's outside 
counsel failed to cite any relevant authority or provide any rationale 
is incorrect. Further, we did not solely rely on the opinion of CBOE's 
outside counsel. We found the opinion letter, along with the CBOE's 
Statement in Support of Approval, to be ``persuasive,'' and we found 
that those materials provided a ``sufficient basis'' to support a 
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).'' \35\ Further, and most importantly, we specifically 
noted that we did ``not believe that Petitioner's argument refutes, to 
any degree, CBOE's analysis of why its proposed rule change is an 
interpretation of Article Fifth(b), not an amendment.'' \36\ 
Accordingly, we find Petitioner's allegation of error based on the 
letter of CBOE's outside counsel to be without merit.
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    \35\ Order, supra note 2, at 10444.
    \36\ Id.
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F. Petitioner's Allegation That the Commission Made a Finding 
Suggesting That Not Approving CBOE's Interpretation Would Paralyze the 
Exchange Is Factually Baseless

    Petitioner concludes his brief by arguing that ``[t]he Commission's 
Order finding (incorporated from page 6 of the CBOE's Statement in 
Support of Approval) that failing to approve the CBOE Board's 
`interpretation' would `paralyze' the Exchange is without basis in 
fact.'' \37\ As stated above, while we cited to the CBOE's Statement in 
Support of Approval, we did not incorporate by reference the substance 
of that document into our Order. Nor did we make any finding in our 
Order that failing to approve the CBOE's rule change would paralyze the 
CBOE. Accordingly, Petitioner's argument is unsupported and will not be 
considered as grounds for reconsideration.
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    \37\ Petitioner's Brief in Support of Motion to Reconsider, 
supra note 11, at 13.
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III

    In the alternative, Petitioner suggests that ``the CBOT's recent 
formal actions to demutualize have the capacity to render the proposed 
rule change moot'' since the proposed rule change, the Petitioner 
argues, is only relevant if the CBOT is structured as a member 
organization.\38\ Accordingly, the Petitioner suggests that the 
Commission should consider holding final determination of the validity 
of the proposed rule change in abeyance until the CBOT members' vote on 
whether to demutualize is complete.\39\ We disagree. Self-regulatory 
organizations are not required to delay making changes to their rules 
in order to account for future contingencies that may or may not impact 
such rule in the future. Rather, to the extent that changed 
circumstances warrant further revisions to the CBOE's rules, the CBOE 
would need to submit a subsequent rule change pursuant to Section 
19(b)(1) of the Act \40\ and Rule 19b-4 thereunder.\41\ Accordingly, we 
see no reason to hold final determination of this motion to reconsider 
in abeyance as suggested by Petitioner.
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    \38\ Id. at 3.
    \39\ Id.
    \40\ 15 U.S.C. 78s(b)(1).
    \41\ 17 CFR 240.19b-4.
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    Accordingly, we find that Petitioner's motion does not present the 
exceptional circumstances required for us to reconsider our earlier 
Order.
    It is therefore ordered, that the motion for reconsideration filed 
by Marshall Spiegel be, and it hereby is, denied.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-1912 Filed 4-21-05; 8:45 am]
BILLING CODE 8010-01-P