[Federal Register Volume 71, Number 142 (Tuesday, July 25, 2006)]
[Notices]
[Pages 42142-42143]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-11793]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54169; File No. SR-CBOE-2006-45]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change Regarding 
the Review Authority of the Board of Directors

July 18, 2006.

I. Introduction

    On May 5, 2006, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend its rules to clarify the 
authority of CBOE's Board of Directors (``Board'') with respect to 
actions or inactions of CBOE committees and CBOE officers, 
representatives, or designees. The proposed rule change was published 
for comment in the Federal Register on June 2, 2006.\3\ The Commission 
received one comment letter regarding the proposal \4\ and a response 
to the comment letter from the Exchange.\5\ This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 53872 (May 25, 
2006), 71 FR 32156.
    \4\ See letter to Nancy M. Morris, Secretary, Commission, from 
Lawrence J. Blum, Member, CBOE, dated June 5, 2006 (``Blum 
Letter'').
    \5\ See letter to Nancy Sanow, Assistant Director, Division of 
Market Regulation (``Division''), Commission, from Jennifer M. 
Lamie, Managing Senior Attorney, Legal Division, CBOE, dated July 7, 
2006 (``CBOE Response Letter'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to add new CBOE Rule 2.2, Power of the Board 
to Review Exchange Decisions, which would provide that, in connection 
with any delegation to a committee or committees pursuant to Article 
EIGHTH of CBOE's Certificate of Incorporation (``Certificate''), the 
Board would retain the power and authority to review, affirm, modify, 
suspend, or overrule any and all actions or inactions of CBOE 
committees, and of all officers, representatives, or designees of CBOE. 
Proposed CBOE Rule 2.2 would not apply to actions taken (or inactions) 
pursuant to Chapters XVII (Discipline), XVIII (Arbitration), and XIX 
(Hearings and Review) of the Exchange's Rules, unless specifically 
provided for in those Rules, or to actions taken by (or inactions of) 
the Nominating Committee or Executive Committee pursuant to Article IV 
of the Exchange's Constitution, which sets forth the Exchange's 
nominations process. In addition, the proposed rule change would amend 
CBOE Rule 2.1, Committees of the Exchange, to clarify that CBOE 
committees would have, in addition to the powers and duties that are 
specifically granted in the Exchange's Constitution or Rules, only such 
other powers and duties as may be delegated to them by the Board.

III. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change, the 
comment letter received, and the CBOE Response Letter, and finds that 
the proposed rule change is consistent with the requirements of the 
Act,\6\ and, in particular, the requirements of Section 6 of the 
Act.\7\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(1) of the Act,\8\ which requires 
that an exchange be so organized and have the capacity to be able to 
carry out the purposes of the Act and to comply, and (subject to any 
rule or order of the Commission pursuant to Section 17(d) \9\ or 
19(g)(2) \10\ of the Act) to enforce compliance by its members and 
persons associated with its members, with the provisions of the Act, 
the rules and regulations thereunder, and the rules of the Exchange.
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    \6\ In approving this proposed rule change the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(1).
    \9\ 15 U.S.C. 78q(d).
    \10\ 15 U.S.C. 78s(g)(2).
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    The commenter asserted that the proposed rule change is unnecessary 
and generally in conflict with the CBOE Constitution.\11\ The commenter 
also expressed concern that the aim of the proposed rule change is to 
reduce the influence of member/owners.\12\ In response, the Exchange 
noted that CBOE is a membership corporation formed

[[Page 42143]]

under Delaware's General Corporation Law, which provides that ``the 
business and affairs of every corporation shall be managed by or under 
the direction of a board of directors, except as may be otherwise * * * 
provided in its certificate of incorporation * * * * '' \13\ CBOE 
stated that its Certificate provides that the Board is CBOE's governing 
body and is vested with all powers necessary for the management of the 
Exchange's business and affairs, except to the extent that the 
authority, powers, and duties of such management are delegated to a 
committee or committees established pursuant to CBOE's Constitution or 
Rules. According to CBOE, its Certificate and Constitution provide that 
the Board may establish one or more committees, each of which has the 
authority, powers, and duties as may be prescribed in the Constitution, 
Exchange Rules, or by resolution of the Board.\14\ CBOE advised that, 
under these provisions, it has established various committees and has 
delegated to those committees specific authority, powers, and duties.
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    \11\ See Blum Letter at 1, supra note 4.
    \12\ Id. at 2.
    \13\ See CBOE Response Letter, supra note 5, at 1.
    \14\ Id.
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    CBOE further noted that its Rules provide that each committee ``is 
subject to the control and supervision of the Board.'' \15\ CBOE 
stated, however, that such supervisory power alone does not make 
explicit the power of the Board to directly modify or overrule the 
action (or inaction) of a committee when the decision-making authority 
with respect to the action has been delegated to the committee. CBOE 
pointed out that the specific delegations contained in its 
Constitution, Rules, and resolutions vary in scope: Some involve a 
complete delegation and others involve a limited delegation where the 
Board has explicitly or implicitly reserved certain authorities. CBOE 
noted that, although the specific delegations contained in its 
Constitution, Rules, and Board resolutions vary in describing the scope 
of the authority delegated, its Board retains the power to revoke, 
limit, or change a committee delegation, either by rule change or by 
resolution as appropriate.
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    \15\ CBOE Rule 2.1(d).
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    The purpose of the proposed rule change, CBOE asserted, is to apply 
an explicit, uniform standard of review by the Board to the general 
organizational and administrative structure of CBOE's committees and to 
resolve any ambiguity that may exist. Thus, CBOE contended that the 
proposed rule change would clarify that the Board retains the power and 
authority to review, affirm, modify, suspend or overrule any and all 
actions or inactions of CBOE committees and officers, representatives, 
or designees, except as otherwise specified. In CBOE's view, the 
proposal is consistent with its Certificate and Constitution.
    CBOE also advised that the proposed rule change is consistent with 
the provisions of its Constitution pertaining to the Executive 
Committee. CBOE stated that the Executive Committee is a committee of 
the Board that performs the functions of the Board when the Board is 
not in session or it is not practicable to arrange a meeting of the 
Board within the time reasonably available. Thus, to the extent that 
the Executive Committee would take any action pursuant to Article VII, 
Section 7.2 of its Constitution, CBOE asserted that the Board retains 
jurisdiction over those matters and may later determine to review, 
affirm, modify, suspend or overrule any and all actions of the 
Executive Committee.
    In the Commission's view, the Exchange has provided a sufficient 
basis on which the Commission can find that, as a federal matter under 
the Act, the Exchange is complying with its own Certificate and 
Constitution. Further, in approving this proposal, the Commission is 
relying on CBOE's representation that the proposed rule change is 
appropriate under Delaware state law.\16\ Thus, the Commission believes 
that the proposed rule change clarifies the Board's review authority by 
providing an explicit, uniform standard to be applied to any delegation 
of Board authority, powers, and duties and is consistent with the Act.
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    \16\ Telephone conference among Jennifer M. Lamie, Managing 
Senior Attorney, Legal Division, CBOE; Leah Mesfin, Special Counsel, 
Division, Commission; and Jan Woo, Attorney, Division, Commission, 
on July 18, 2006.
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and in 
particular, with Section 6(b)(1) of the Act.\17\
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    \17\ 15 U.S.C. 78f(b)(1).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (File No. SR-CBOE-2006-45) is 
hereby approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-11793 Filed 7-24-06; 8:45 am]
BILLING CODE 8010-01-P