70 FR 103 pgs. 30981-30986 - 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)
Type: NOTICEVolume: 70Number: 103Pages: 30981 - 30986
Docket number: [Release No. 34-51733; File No. SR-CBOE-2005-19]
FR document: [FR Doc. E5-2717 Filed 5-27-05; 8:45 am]
Agency: Securities and Exchange Commission
Official PDF Version: PDF Version
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")1and Rule 19b-4 thereunder,2to 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.3The proposed rule change, as amended, was published for notice and comment in the Federal Register on April 7, 2005.4The Commission received three comment letters in response to the proposal as published in the Federal Register .5On April 20, 2005, the CBOE filed Amendment No. 2 to the proposed rule change.6The CBOE submitted a response to the comment letters on May 6, 2005.7On May 12, 2005, the CBOE filed Amendment No. 3 to the proposed rule change.8Subsequently, the Commission received four comment letters.9This order approves the proposed rule change as amended.10
Footnotes:
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 asan 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.
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).11This 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
Footnotes:
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.
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").13This 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.
Footnotes:
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).
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 ownership rights of full members).14Accordingly, 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.
Footnotes:
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.
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.15The 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,16and the rules and regulations applicable to a national securities exchange.17More specifically, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Exchange Act,18which 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,19which 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.
Footnotes:
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).
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 counsel20that 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.
Footnotes:
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.
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.21The 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."22Thus, 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.
Footnotes:
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.
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.23The 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."24In 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).25In 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."26Accordingly, the commenters argue that the CBOE's Board of Directors acted beyond its powers and inconsistently with the CBOE's Certificate of Incorporation by failing to obtain the requisite approval of CBOE members with respect to the proposed rule change.27
Footnotes:
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.
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 Act28to 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.29For these reasons, the Commission finds the CBOE's proposed rule change consistent with the Exchange Act.
Footnotes:
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.
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.30The 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.31The Commission believes that this determination is reasonable.
Footnotes:
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.
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."32Commenters 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."33Commenters 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
Footnotes:
32 Spiegel Cleven April 28th Letter, supra note 5, at 5-6.
33 Id. at 6.
34 See id.
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
Footnotes:
35 Letter from Wendell Fenton, Richards, Layton Finger, to Joanne Moffic-Silver, General Counsel and Corporate Secretary, CBOE, dated March 28, 2005, at 4.
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."36As 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."37Commenters 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."38In 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
Footnotes:
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.
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.40The 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.41The 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.
Footnotes:
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 fromDelaware 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.
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)."42The 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.43The commenters note that the CBOE has announced that it is exploring demutualization44and 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
Footnotes:
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.
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).46Further, the Commission does not believe that because there may be conflicting interests among CBOE members, that the CBOE Board of Directors is conflicted.
Footnotes:
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.
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."47Moreover, 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).48The 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
Footnotes:
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.
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.50The 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.
Footnotes:
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.
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 decided by an arbitration panel."51The Commission reiterates that it is not approving the 2001 Agreement.52
Footnotes:
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).
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,"53and 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.54The 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.55The 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.
Footnotes:
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.
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
Footnotes:
56 15 U.S.C. 78f(b)(5).
It is therefore ordered , pursuant to Section 19(b)(2) of the Exchange Act,57that the proposed rule change (SR-CBOE-2005-19), as amended, be, and it hereby is, approved.
Footnotes:
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