[Federal Register Volume 70, Number 103 (Tuesday, May 31, 2005)]
[Notices]
[Pages 30981-30986]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2717]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51733; File No. SR-CBOE-2005-19]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval to Proposed Rule Change as 
Amended By Amendment Nos. 1, 2, and 3 Thereto Relating to an 
Interpretation of Paragraph (b) of Article Fifth of Its Certificate of 
Incorporation and an Amendment to Rule 3.16(b)

May 24, 2005.

I. Introduction

    On March 7, 2005, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'') \1\ 
and Rule 19b-4 thereunder,\2\ to adopt an interpretation of paragraph 
(b) of Article Fifth of the Certificate of Incorporation of the CBOE 
(``Article Fifth(b)'') pertaining to the right of the 1,402 Full 
Members of the Board of Trade of the City of Chicago, Inc. (``CBOT'') 
to become members of the CBOE without having to purchase a CBOE 
membership. On March 28, 2005, the Exchange submitted Amendment No. 1 
to the proposed rule change.\3\ The proposed rule change, as amended, 
was published for notice and comment in the Federal Register on April 
7, 2005.\4\ The Commission received three comment letters in response 
to the proposal as published in the Federal Register.\5\ On April 20, 
2005, the CBOE

[[Page 30982]]

filed Amendment No. 2 to the proposed rule change.\6\ The CBOE 
submitted a response to the comment letters on May 6, 2005.\7\ On May 
12, 2005, the CBOE filed Amendment No. 3 to the proposed rule 
change.\8\ Subsequently, the Commission received four comment 
letters.\9\ This order approves the proposed rule change as 
amended.\10\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Due to a motion to reconsider the Commission's approval of 
SR-CBOE-2004-16, which was pending at the time the notice was 
published for comment in the Federal Register, Amendment No. 1 
removed certain language from the text of CBOE Rule 3.16(b) that was 
included with the original filing to reflect the stay of 
effectiveness of the text added by SR-CBOE-2004-16 pending a final 
Commission determination of the motion to reconsider. Amendment No. 
1 also added Exhibit 3d to the filing, consisting of an opinion 
letter from the CBOE's special Delaware counsel pertaining to the 
proposed rule change.
    \4\ See Securities Exchange Act Release No. 51463 (Mar. 31, 
2005), 70 FR 17732 (Apr. 7, 2005).
    \5\ See Letter from Marshall Spiegel and Donald Cleven to 
Jonathan G. Katz, Secretary, Commission, dated April 28, 2005 
(``Spiegel & Cleven April 28th Letter''); Letter from Thomas A. 
Bond, Norman Friedland, Gary P. Lahey, Anthony Arciero, and Marshall 
Spiegel to Jonathan G. Katz, Secretary, Commission, dated April 27, 
2005 (``Joint Letter''); and Letter from Marshall Spiegel to William 
Brodsky, Chairman, CBOE, dated April 26, 2005 (this letter was also 
provided to the Commission as an exhibit to the Spiegel & Cleven 
April 28th Letter; while the Commission has separately considered 
this letter as a comment to the proposed rule change, the Commission 
notes that the substantive arguments set forth in this letter are 
also reflected in the April 28th Letter).
    \6\ In Amendment No. 2, the CBOE modified the text of CBOE Rule 
3.16(b) to include the language added by SR-CBOE-2004-16. That 
language had been removed from the proposed rule change by Amendment 
No. 1 to account for a pending motion to reconsider the Commission's 
approval of SR-CBOE-2004-16. On April 18, 2005, the Commission 
denied the motion for reconsideration. See Securities Exchange Act 
Release No. 51568 (Apr. 18, 2005), 70 FR 20953 (Apr. 22, 2005) 
(order denying motion for reconsideration). Accordingly, the CBOE 
submitted Amendment No. 2 to the filing to incorporate the text of 
CBOE Rule 3.16(b) as currently in effect, including the language 
added to the Rule by SR-CBOE-2004-16. As such, this is a technical 
amendment and is not subject to notice and comment.
    \7\ See Letter from Joanne Moffic-Silver, Executive Vice 
President and General Counsel, CBOE, to Jonathan G. Katz, Secretary, 
Commission, dated May 6, 2005.
    \8\ In Amendment No. 3, the CBOE filed with the Commission a 
copy of the letter sent from Marshall Spiegel to William Brodsky, 
Chairman of the CBOE, dated April 26, 2005. This letter also was 
attached as an appendix to the Spiegel & Cleven April 28th Letter. 
See Spiegel & Cleven April 28th Letter, supra note 5. As such, the 
amendment providing the Commission with the Spiegel & Cleven April 
28th Letter is a technical amendment and is not subject to notice 
and comment.
    \9\ See Letter from Marshall Spiegel and Donald Cleven to 
Jonathan G. Katz, Secretary, Commission, dated May 20, 2005 
(``Spiegel & Cleven May 20th Letter''); Letter from Marshall Spiegel 
to Jonathan G. Katz, Secretary, Commission, dated May 20, 2005 
(``Spiegel May 20th Letter''); Letter from Joanne Moffic-Silver to 
Jonathan G. Katz, Secretary, Commission, dated May 20, 2005; and 
Letter from Charles R. Mills to Jonathan G. Katz, Secretary, 
Commission, dated May 18, 2005 (letter sent on behalf of Marshall 
Spiegel) (``Mills Letter'').
    \10\ There is no basis to support any implication in the Mills 
Letter that the Commission provided any assurance to the CBOE, prior 
to its actions today, that it would approve the proposed rule change 
or that any such approval would occur by a certain date.
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II. Description of the Proposed Rule Change

A. Background

    As compensation for the time and money that the 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), which 
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 1993, the Commission approved the CBOE's proposed interpretation 
of the meaning of the term ``member of the [CBOT]'' as used in Article 
Fifth(b).\11\ This interpretation, proposed by the CBOE and 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) 
(``Special Provisions Regarding Chicago Board of Trade Exerciser 
Memberships''). 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] * * *.'' \12\
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    \11\ See Securities Exchange Act Release No. 32430 (June 8, 
1993), 58 FR 32969 (June 14, 1993).
    \12\ 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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    In 2005, the Commission approved the CBOE's subsequent amendment of 
CBOE Rule 3.16(b) to reflect a further interpretation of the term 
``member of the [CBOT]'' embodied in an agreement dated September 17, 
2003 between the CBOE and the CBOT (``2003 Agreement'').\13\ This 
interpretation was intended 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. In the 
2003 Agreement, the CBOE and the 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.
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    \13\ See Securities Exchange Act Release Nos. 51252 (Feb. 25, 
2005), 70 FR 10442 (Mar. 3, 2005) (order setting aside earlier order 
issued by delegated authority for File No. SR-CBOE-2004-16); and 
51568 (Apr. 18, 2005), 70 FR 20953 (Apr. 22, 2005) (order denying 
motion for reconsideration).
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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) and reflected in CBOE Rule 
3.16. The CBOE believes that this interpretation is necessary to 
address the effect on the Exercise Right of the restructuring of the 
CBOT from a mutual to a demutualized entity, as well as the expansion 
of electronic trading on the CBOT and the CBOE.
    The interpretation of the Exercise Right that is the subject of 
this proposed rule change is embodied in an agreement dated August 7, 
2001 between the CBOE and the CBOT (``2001 Agreement''), as modified by 
a Letter Agreement among CBOE, CBOT, and CBOT Holdings, Inc. dated 
October 7, 2004 (``October 2004 Letter Agreement''), which together 
represent the agreement of the parties concerning the nature and scope 
of the Exercise Right following the restructuring of the CBOT and in 
light of the expansion of the CBOT's electronic trading system. The 
2001 Agreement, as modified by the October 2004 Letter Agreement, 
incorporates the CBOE's interpretation concerning the operation of 
Article Fifth(b) in light of these changed circumstances at the CBOT. 
In a February 14, 2005 Letter Agreement among CBOE, CBOT, and CBOT 
Holdings, Inc., (``February 2005 Letter Agreement'') the parties 
confirmed the CBOT restructuring for purposes of the 2001 Agreement and 
the CBOE's interpretation of Article Fifth(b).
    The CBOE's proposed rule change seeks to revise CBOE Rule 3.16(b), 
which reflects an interpretation of the term ``member of the [CBOT]'' 
used in Article Fifth(b), to incorporate the definitions of ``Eligible 
CBOE Full Member'' and ``Eligible CBOT Full Member Delegate'' found in 
the 2001 Agreement, as modified by the October 2004 Letter Agreement 
and the February 2005 Letter Agreement (``2001 Agreement, as 
amended''). As noted in the 2001 Agreement, as amended, the CBOT's 
restructuring divided the previous single interest of a CBOT member 
into Class B, Series B-1 memberships in CBOT (representing the trading 
rights of full members) and shares of Class A common stock of CBOT 
Holdings, Inc. (representing the

[[Page 30983]]

ownership rights of full members).\14\ Accordingly, the interpretation 
embodied in the 2001 Agreement, as amended, clarifies that, following 
the CBOT's restructuring, the Exercise Right remains available to 
persons who continue to hold all of the interests into which their CBOT 
full memberships were divided in the restructuring.
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    \14\ As specified in the 2001 Agreement, as amended, an 
individual is deemed to be an ``Eligible CBOT Full Member'' if the 
individual: (1) Is the owner of the requisite number of Class A 
Common Stock of CBOT Holdings, Inc., the requisite number of Series 
B-1 memberships of the CBOT, and the Exercise Right Privilege; (2) 
has not delegated any of the rights or privileges appurtenant to 
such ownership; and (3) meets applicable membership and eligibility 
requirements of the CBOT. An individual is deemed to be a ``Eligible 
CBOT Full Member Delegate'' if the individual: (1) Is in possession 
of the requisite number of Class A Common Stock of CBOT Holdings, 
Inc., the requisite number of Series B-1 memberships of the CBOT, 
and the Exercise Right Privilege; (2) holds one or more of the items 
listed in (1) by means of delegation rather than ownership; and (3) 
meets applicable membership and eligibility requirements of the 
CBOT.
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III. Discussion and Commission Findings

    Section 19(b) of the Exchange Act requires the Commission to 
approve the CBOE's proposed rule change if it finds that the proposed 
rule change is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to the CBOE.\15\ The 
Commission has carefully reviewed the proposed rule change, the comment 
letters received and the attachments thereto, and the CBOE's response 
to the comments, and finds that the proposed rule change is consistent 
with the requirements of Act, and in particular Section 6 of the 
Exchange Act,\16\ and the rules and regulations applicable to a 
national securities exchange.\17\ More specifically, the Commission 
finds that the proposed rule change is consistent with Section 6(b)(5) 
of the Exchange Act,\18\ which requires, among other things, that the 
rules of an exchange be designed to promote just and equitable 
principles of trade, because it interprets the CBOE's rules fairly and 
reasonably with respect to the eligibility of a CBOT full member to 
become a member of the CBOE following the CBOT's restructuring. In 
addition, the Commission finds that the proposed rule change is 
consistent with Section 6(c)(3)(A) of the Exchange Act,\19\ which 
permits, among other things, an exchange to examine and verify the 
qualifications of an applicant to become a member, in accordance with 
the procedures established by exchange rules, because it clarifies how 
the CBOE's rules regarding eligibility for membership pursuant to the 
Exercise Right in Article Fifth(b) apply following the CBOT's 
restructuring.
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    \15\ 15 U.S.C. 78s(b). Section 19(b) requires the Commission to 
approve a proposed rule change or institute proceedings to determine 
whether the proposed rule change should be disapproved ``[w]ithin 
thirty-five days of the date of publication of notice of the filing 
of a proposed rule change * * *, or within such longer period as the 
Commission may designate up to ninety days of such date * * * or as 
to which the self-regulatory organization consents.'' Id. On May 18, 
2005, the CBOE consented to an extension of time until June 10, 
2005, for the Commission to consider this filing.
    \16\ 15 U.S.C. 78f.
    \17\ In approving this rule, the Commission has considered the 
impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
    \18\ 15 U.S.C. 78f(b)(5).
    \19\ 15 U.S.C. 78f(c)(3)(A).
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    The Commission is approving the proposed rule change filed by the 
CBOE, which interprets the CBOE's rules. The Commission is not 
approving the 2001 Agreement, as amended. Further, in approving this 
proposal, the Commission is relying on the CBOE's representation that 
its interpretation is appropriate under Delaware state law, and CBOE's 
opinion of counsel \20\ that it is within the general authority of the 
CBOE's Board of Directors to interpret Article Fifth(b) when questions 
arise as to its application under certain circumstances, so long as the 
interpretation adopted by the Exchange's Board of Directors is made in 
good faith, consistent with the terms of the governing documents 
themselves, and not for inequitable purposes.
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    \20\ See Letter from Wendell Fenton, Richards, Layton & Finger, 
to Joanne Moffic-Silver, General Counsel and Corporate Secretary, 
CBOE, dated March 28, 2005. The Commission has not independently 
evaluated the CBOE's interpretation under Delaware state law.
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    The commenters assert that the CBOT's reorganization extinguished 
the Exercise Right as it pertains to Article Fifth(b) and CBOE Rule 
3.16(b) because the CBOT is no longer a membership corporation.\21\ The 
Commission notes that the CBOE explains that following the CBOT's 
restructuring, ``the CBOT maintains its existence as a Delaware non-
stock, membership corporation and continues to be owned by its members, 
who have the same trading rights on the futures exchange operated by 
CBOT as they had prior to the restructuring.'' \22\ Thus, the CBOE 
concludes that CBOT ``full'' memberships continue to represent under 
CBOT's rules the trading rights of full members of the CBOT as they 
existed prior to the restructuring. The Commission believes that the 
commenters' assertion that the Exercise Right has been extinguished by 
the CBOT's restructuring constitutes one possible interpretation of 
Article Fifth(b); the CBOE is not required to draw the same conclusion 
as the commenters regarding how to interpret Article Fifth(b) following 
the CBOT's restructuring in order for the Commission to find that the 
CBOE's proposed rule change is consistent with the Exchange Act.
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    \21\ See supra notes 5 and 9 (citing the comment letters).
    \22\ Letter from Joanne Moffic-Silver, Executive Vice President 
and General Counsel, CBOE, to Jonathan G. Katz, Secretary, 
Commission, dated May 6, 2005, at 2.
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A. The Commission Finds CBOE's Determination That the Proposal Is an 
Interpretation of Article Fifth(b) To Be Consistent With the Exchange 
Act

    As noted above, the Commission received three comment letters on 
the CBOE's proposed rule change from several members of the CBOE. The 
commenters assert that the Commission should not approve the CBOE's 
proposed rule change because the proposed rule change does not 
constitute an interpretation of Article Fifth(b) as the CBOE claims, 
but rather constitutes an amendment to Article Fifth(b), which is 
subject to an 80% vote of CBOE membership pursuant to the Articles of 
Incorporation.\23\ The Spiegel & Cleven April 28th Letter references 
the CBOT demutualization that took effect on April 22, 2005 and 
concludes that the CBOT's ``extinguishment of memberships renders the 
exercise right for a `member of [CBOT]' set forth in Article Fifth(b) 
of the CBOE Articles of Incorporation nugatory--i.e., Article Fifth(b) 
no longer confers an exercise right on any person since there are no 
longer are any members of the CBOT.'' \24\ In the Joint Letter, the 
commenters contend that the proposed rule change ``substantively 
amends'' Article Fifth(b) in that it ``change[s] the words'' of Article 
Fifth(b).\25\ In particular, the commenters contend that the CBOT's 
demutualization effectively extinguished the exercise right such that 
``any action by the [CBOE] Board to amend Article Fifth(b) to create a 
new exercise right for CBOT stockholders contravenes [Article 
Fifth(b)'s] requirements of a 80% vote of the membership.'' \26\ 
Accordingly, the commenters argue that the CBOE's Board of Directors 
acted beyond its powers and inconsistently with the CBOE's Certificate 
of Incorporation by

[[Page 30984]]

failing to obtain the requisite approval of CBOE members with respect 
to the proposed rule change.\27\
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    \23\ See Spiegel & Cleven April 28th Letter, supra note 5, at 5; 
and Joint Letter, supra note 5, at 2. By its terms, Article Fifth(b) 
may be amended only with the approval of 80% of CBOE's members 
admitted by exercise, and 80% of CBOE's members admitted other than 
by exercise, each voting as a separate class.
    \24\ Spiegel & Cleven April 28th Letter, supra note 5, at 1-2.
    \25\ Joint Letter, supra note 5, at 2.
    \26\ Id. at 6.
    \27\ See Spiegel & Cleven April 28th Letter, supra note 5, at 6; 
and Joint Letter, supra note 5, at 2.
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    The CBOE filed the current proposed rule change to adopt an 
interpretation of Article Fifth(b) by amending CBOE Rule 3.16. National 
securities exchanges are required under Section 6(b)(1) of the Exchange 
Act \28\ to comply with their own rules. The Commission has reviewed 
the record in this matter and believes that the CBOE provides 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). 
The Commission is persuaded by the 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 of Directors to interpret Article Fifth(b) and that the 
Board's interpretation of Article Fifth(b) contemplated by the 2001 
Agreement, as amended, does not constitute an amendment to the CBOE's 
Certificate of Incorporation.\29\ For these reasons, the Commission 
finds the CBOE's proposed rule change consistent with the Exchange Act.
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    \28\ 15 U.S.C. 78f(b)(1).
    \29\ See Letter from Wendell Fenton, Richards, Layton & Finger, 
to Joanne Moffic-Silver, General Counsel and Corporate Secretary, 
CBOE, dated March 28, 2005, at 4.
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    Additionally, the commenters suggested that the fact that CBOT full 
members will not be required to own 100% of the equity of the CBOT 
should preclude them from being entitled to the Exercise Right.\30\ The 
CBOE has determined that there is no requirement for CBOT full members 
to own 100% of the equity of the CBOT in order to qualify for the 
Exercise Right, only a requirement that a CBOT full member hold 
whatever equity was issued to that individual, together with all of the 
other interests distributed to the CBOT full member in the 
restructuring, for that individual to be eligible to utilize the 
Exercise Right.\31\ The Commission believes that this determination is 
reasonable.
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    \30\ See Joint Letter, supra note 5, at 1. Commenters noted that 
CBOT members initially will receive approximately 77% of the CBOT's 
equity, which could be diluted further in the event of an initial 
public offering. See id.
    \31\ See Letter from Joanne Moffic-Silver, Executive Vice 
President and General Counsel, CBOE, to Jonathan G. Katz, Secretary, 
Commission, dated May 6, 2005, at 3.
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    Finally, commenters contend that the interpretation in the 2001 
Agreement, as amended, ``materially alters the respective rights, 
powers and interests of the different classes of CBOE equity holders * 
* *'' by creating ``* * * a whole new group of CBOE equity interest 
holders * * *'' which ``denigrates the rights and interests of CBOE 
treasury seat holders, by diluting their interests and power.'' \32\ 
Commenters argue that changes to the Exercise Right are a ``zero sum'' 
game, in that enhancing the rights of CBOT exercise right holders and 
CBOE exercise holders ``can correspondingly diminish the rights of CBOE 
treasury seat holders by, among other things, diluting their voting 
power and the economic value of their seats.'' \33\ Commenters argue 
that because the proposed rule change interpreting the term ``member of 
the [CBOT]'' in Article Fifth(b) alters the rights of the various and 
distinct classes of CBOE equity interest holders, it is an amendment 
within the meaning of Section 242 of the Delaware General Corporation 
Law.\34\
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    \32\ Spiegel & Cleven April 28th Letter, supra note 5, at 5-6.
    \33\ Id. at 6.
    \34\ See id.
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    The Commission does not believe that the commenters' argument 
refutes CBOE's analysis of why its proposed rule change is an 
interpretation to Article Fifth(b), not an amendment. The actions 
identified in Section 242(a) are changes that a corporation may make to 
its certificate of incorporation by amendment. There is nothing in 
Section 242 that requires a corporation to amend its certificate of 
incorporation if it makes such changes. If a corporation does amend its 
certificate and such amendment is authorized under Section 242(a), 
paragraph (b) of Section 242 of the Delaware General Corporation Law 
then sets forth the procedures that a corporation must follow to effect 
such an amendment. Accordingly, the Commission is persuaded by the 
conclusion in the letter of counsel submitted by the CBOE that ``* * * 
it is within the general authority of the [CBOE] Board to interpret 
Article Fifth(b) in good faith when questions arise as to its 
application,'' and that ``the [CBOE] Board's determinations in 
approving the interpretations of Article Fifth(b) contemplated by the 
Agreements do not constitute amendments to the [CBOE] Certificate [of 
Incorporation] and need not satisfy the voting requirements of Article 
Fifth(b) that would apply if the Article were being amended.'' \35\
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    \35\ Letter from Wendell Fenton, Richards, Layton & Finger, to 
Joanne Moffic-Silver, General Counsel and Corporate Secretary, CBOE, 
dated March 28, 2005, at 4.
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B. The Commission Does Not Believe That the CBOE Unreasonably Relied on 
Its Opinion of Outside Counsel

    Commenters contend that the opinion of CBOE's Delaware counsel is 
``logically flawed and consequently should not allow the CBOE's Board 
of Directors to interpret [Article Fifth(b)] in the CBOT's 
demutualization.'' \36\ As stated above, the commenters contend that 
the CBOT's demutualization effectively extinguished the exercise right 
such that ``any action by the [CBOE] Board to amend Article Fifth(b) to 
create a new exercise right for CBOT stockholders contravenes [Article 
Fifth(b)'s] requirements of a 80% vote of the membership.'' \37\ 
Commenters further argue that the CBOE Board's good faith is 
``irrelevant when it acts without authority * * * [and] in 
contravention of the powers exclusively reposed in the membership by 
the Articles with respect to amendments to the Articles.'' \38\ In 
addition, commenters argue, in so far as a corporation's board of 
directors may delegate certain authority, powers, and duties of 
management to a committee of the corporation, ``that committee can 
easily be interpreted to be the membership in a membership corporation 
such as the CBOE * * *'' such that the authority of the CBOE's Board of 
Directors has been delegated to the CBOE membership with respect to 
interpretations of Article Fifth(b), which by its terms provides for a 
vote of the membership in the case of an amendment to its terms.\39\
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    \36\ Joint Letter, supra note 5, at 5. See also Spiegel & Cleven 
April 28th Letter, supra note 5, at 7 (n. 3).
    \37\ Joint Letter, supra note 5, at 6.
    \38\ Id. at 6.
    \39\ Id. at 5-6.
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    The CBOE represents that it has been advised by its Delaware 
counsel that, under Delaware state law, it is within the general 
authority of CBOE's Board of Directors to interpret its governing 
documents when questions arise as to their application in these types 
of circumstances, so long as the interpretation adopted by the 
Exchange's Board of Directors is consistent with the terms of the 
governing documents themselves.\40\ The

[[Page 30985]]

CBOE represents that the interpretations contained in its proposed rule 
change do not constitute amendments to the governing documents, and 
thus are not subject to the procedures that would apply if they were 
actually being amended. Further, the CBOE notes that no delegation of 
power or authority was made to the CBOE membership in the case of the 
Board's power to interpret the Certificate of Incorporation.\41\ The 
Commission is persuaded by the letter of CBOE's outside counsel and 
does not agree with the commenters' contention that the opinion letter 
is logically flawed. Accordingly, as stated above, the Commission finds 
that CBOE's interpretation of Article Fifth(b) is consistent with the 
Exchange Act.
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    \40\ See Letter from Wendell Fenton, Richards, Layton & Finger, 
to Joanne Moffic-Silver, General Counsel and Corporate Secretary, 
CBOE, dated March 28, 2005 (providing a legal opinion from Delaware 
counsel in connection with SR-CBOE-2005-19).
    \41\ See Letter from Joanne Moffic-Silver, Executive Vice 
President and General Counsel, CBOE, to Jonathan G. Katz, Secretary, 
Commission, dated May 6, 2005, at 7.
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C. The Commission Does Not Agree With the Commenters' Assertion of a 
Conflict of Interest on the Part of the CBOE Board With Respect to the 
Proposed Rule Change

    The Spiegel & Cleven April 28th Letter argues that the 
interpretation in the 2001 Agreement, as amended, implicates a breach 
of fiduciary duty on the part of the CBOE Board of Directors in that 
the CBOE Board of Directors should be considered ``conflicted from 
attempting to determine the competing and conflicting reclassification 
of rights and interests among the different classes of CBOE equity 
interest holders'' because its interpretation ``overtly benefits one 
class of equity holder over another even when the favored class by its 
own election to demutualize the CBOT necessarily caused the 
extinguishment of any rights they might have qualified for under 
Article Fifth(b).'' \42\ The Joint Letter similarly argues that the 
Commission should not approve the CBOE's proposed rule change because 
the CBOE management and the CBOE Board of Directors are conflicted in 
their decision not to require a vote of the CBOE membership with 
respect to the proposed rule change.\43\ The commenters note that the 
CBOE has announced that it is exploring demutualization \44\ and assert 
that the CBOE's top management will directly benefit from fees and 
other incentives in any demutualization such that they are 
``indifferent as to the number of CBOE members'' because any financial 
rewards accompanying a CBOE demutualization would be independent of the 
number of CBOE members.\45\
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    \42\ Spiegel & Cleven April 28th Letter, supra note 5, at 7-8.
    \43\ See Joint Letter, supra note 5, at 4.
    \44\ See id.
    \45\ See id.
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    The Commission does not believe there is any support for the 
commenters' conclusions about an alleged conflict of interest on the 
part of the CBOE Board of Directors with respect to the current 
proposed rule change. The Commission agrees with the CBOE that the CBOE 
Board's consideration of whether changes to CBOE's own corporate 
structure may be in CBOE's and its members' best interests does not 
support the commenters' suggestion that the CBOE's directors or its 
management were conflicted in considering how to interpret Article 
Fifth(b).\46\ Further, the Commission does not believe that because 
there may be conflicting interests among CBOE members, that the CBOE 
Board of Directors is conflicted.
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    \46\ See Letter from Joanne Moffic-Silver, Executive Vice 
President and General Counsel, CBOE, to Jonathan G. Katz, Secretary, 
Commission, dated May 6, 2005, at 7. Later comment letters assert 
that members of the CBOE who are members because they exercised 
their rights as ``members of [the CBOT]'' under Article Fifth(b) 
were on the CBOE's board of directors during the time when the CBOE 
entered into various agreements with the CBOT regarding the CBOE's 
interpretation of Article Fifth(b). Without evidence to the 
contrary, these commenters do not accept the CBOE's assertion that 
no conflicts existed. See Spiegel & Cleven May 20th Letter, supra 
note 9, at 4, and Spiegel May 20th Letter, supra note 9, at 4-5. The 
Commission does not believe that commenters provide any support for 
their allegations of a conflict of interest on the part of certain 
CBOE board members.
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D. Neither the CBOE's Offer To Purchase Exercise Rights Nor the 2001 
Agreement, as Amended, Is the Subject of the Present Filing

    The Spiegel & Cleven April 28th Letter contends that ``the 2001 
Agreement, as amended, and the interpretation it embodies cannot become 
effective prior to Commission approval of it.'' \47\ Moreover, these 
commenters argue that the CBOE's ``Offer to Purchase for Cash Exercise 
Right Privileges,'' through which the CBOE informed certain CBOT 
members of the CBOE's plans to conduct a purchase of Exercise Right 
Privileges for cash in a tender to be completed around May 25, 2005, 
violates Section 19 of the Exchange Act because it ``effectuates, 
relies on and implements'' the interpretation in the 2001 Agreement, as 
amended, prior to Commission approval of the applicable rule filing 
(SR-CBOE-2005-19).\48\ The commenters argue that by employing the 
definition of CBOT Full Member contained in the 2001 Agreement, as 
amended, prior to Commission approval of the applicable filing, the 
CBOE engaged in a ``willful violation'' of Section 19 of the Exchange 
Act that constitutes a basis for the Commission not to approve the 
proposed rule change.\49\
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    \47\ Spiegel & Cleven April 28th Letter, supra note 5, at 2.
    \48\ Id. at 3.
    \49\ Id. at 4. See also Spiegel & Cleven May 20th Letter, supra 
note 9, at 5-8, and Spiegel May 20th Letter, supra note 9, at 5-8.
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    The Commission notes that an agreement between an exchange and a 
third party is not, per se, a proposed rule change that must be filed 
with the Commission. Whether or not agreements proposed by or 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 
filed with, and under certain circumstances 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. 
The CBOE is not requesting that the Commission approve its ``Offer to 
Purchase for Cash Exercise Right Privileges'' sent to certain CBOT 
members, nor is the CBOE seeking approval of the 2001 Agreement, as 
amended. The proposed rule change solely relates to the CBOE's 
interpretation of Article Fifth(b) as embodied in the 2001 Agreement, 
as amended, and it is the substance of this interpretation that the 
Commission finds consistent with the Exchange Act.\50\ The Commission 
does not believe it needs to determine whether the CBOE has complied 
with Section 19 of the Exchange Act in taking actions it is not being 
asked to approve in order to find the proposed rule change consistent 
with the Exchange Act. The Commission makes no finding as to the offer 
to certain CBOT members.
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    \50\ The Commission notes that the CBOE membership approved the 
proposed purchase offer initiative in a vote on April 19, 2004, and 
that the CBOE represents that it has not yet accepted or paid for 
any Exercise Right privileges that may be tendered pursuant to its 
``Offer to Purchase for Cash Exercise Right Privileges.'' See Letter 
from Joanne Moffic-Silver, Executive Vice President and General 
Counsel, CBOE, to Jonathan G. Katz, Secretary, Commission, dated May 
6, 2005, at 8-9.
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    Additionally, commenters argue that the provision in the 2001 
Agreement relating to arbitration of certain issues that may arise 
under that agreement constitutes an amendment of Article Fifth(b) in 
that decisions ``that should be made by the CBOE membership in an 
[Article Fifth(b)] vote [are] being

[[Page 30986]]

decided by an arbitration panel.'' \51\ The Commission reiterates that 
it is not approving the 2001 Agreement.\52\
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    \51\ Joint Letter, supra note 5, at 1-2.
    \52\ If the CBOE comes to believe that any of the conditions in 
the 2001 Agreement, as amended, are no longer satisfied by the CBOT 
or CBOT Holdings, Inc. such that the interpretation the Commission 
is today approving is no longer proper, the CBOE would be required 
to file with the Commission any subsequent interpretation of Article 
Fifth(b).
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IV. Conclusion

    The Commission received two requests for the Commission to extend 
the comment period for this proposed rule change. The reasons for these 
requests were for ``additional time to study and comment on the April 
18th release as it pertains to these rule filings,'' \53\ and to permit 
the public time to submit comments in response to the CBOE's May 6, 
2005 letter filed in response to the two earlier comment letters.\54\ 
The proposed rule change was publicly available on March 7, 2005 when 
the CBOE filed it. On April 7, 2005, the proposal was published in the 
Federal Register along with Amendment No. 1, which included a technical 
amendment and the opinion letter from CBOE's Delaware counsel.\55\ The 
Commission sees no reason to delay action on the CBOE's current 
proposed rule change to accommodate commenters' review of the 
Commission's order denying reconsideration of a separate filing. In 
addition, the Commission believes that the public has had sufficient 
time to review the substance of the CBOE's proposed rule change and 
provide the Commission with comments.
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    \53\ Joint Letter, supra note 5, at 7. See also Securities 
Exchange Act Release No. 51568 (Apr. 18, 2005), 70 FR 20953 (Apr. 
22, 2005) (order denying motion for reconsideration of the 
Commission's order approving SR-CBOE-2004-16).
    \54\ See Mills Letter, supra note 9.
    \55\ See supra note 3.
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    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Exchange Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and in particular, with Section 6(b)(5) of the Exchange Act.\56\
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    \56\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\57\ that the proposed rule change (SR-CBOE-2005-19), as 
amended, be, and it hereby is, approved.
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    \57\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-2717 Filed 5-27-05; 8:45 am]
BILLING CODE 8010-01-P