[Federal Register: January 22, 2008 (Volume 73, Number 14)]
[Notices]
[Page 3769-3783]
[DOCID:fr22ja08-105]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

Release No. 34-57159; File No. SR-CBOE-2006-106]

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

 January 15, 2008.

I. Introduction

    On December 12, 2006, the Chicago Board Options Exchange,
Incorporated (``CBOE'' or the ``Exchange'') filed with the Securities
and Exchange Commission (``Commission'' or ``SEC''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange
Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
adopt an interpretation of the rules of CBOE in response to the
acquisition of the Board of Trade of the City of Chicago, Inc.
(``CBOT'') by Chicago Mercantile Exchange Holdings, Inc. (``CME
Holdings''). On January 17, 2007, the Exchange filed Amendment No. 1 to
the proposed rule change which replaced and superseded the filing. The
proposed rule change, as modified by Amendment No. 1, was published for
notice and comment in the Federal Register on February 6, 2007.\3\ The
Commission received 174 comment letters from 134 separate commenters on
the proposed rule change, including comment letters from CBOT members
and legal counsel to CBOT and CBOT members. The CBOE submitted its
response to comments on June 15, 2007.\4\ On June 29, 2007, CBOE filed
Partial Amendment No. 2 to the proposal.\5\ This order approves the
proposed rule change, as modified by Amendment Nos. 1 and 2.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 55190 (January 29,
2007), 72 FR 5472 (SR-CBOE-2006-106) (``Notice'').
    \4\ See Letter from Michael L. Meyer, Schiff Hardin, to Nancy M.
Morris, Secretary, Commission, dated June 15, 2007 (``CBOE Response
to Comments'').
    \5\ The CBOE submitted an opinion of counsel as Exhibit 3f to
Amendment 1 to its proposal. See Letter from Wendell Fenton, Esq.,
Richards, Layton & Finger, to Joanne Moffic-Silver, General Counsel
and Corporate Secretary, CBOE, dated January 16, 2007 (``First
Opinion of Counsel''). CBOE subsequently submitted an updated legal
opinion via Partial Amendment No. 2, which opines that the proposed
rule change embodied in SR-CBOE-2006-106 constitutes an
interpretation of Article Fifth(b), and not an amendment of Article
Fifth(b), consistent with the conclusions reached in the opinion
letters of Delaware counsel that CBOE submitted to the Commission in
connection with CBOE rule filings SR-CBOE-2004-16 and SR-CBOE-2005-
19. See Letter from Wendell Fenton, Esq., Richards, Layton & Finger,
to Joanne Moffic-Silver, General Counsel and Corporate Secretary,
CBOE, dated June 28, 2007 (``Second Opinion of Counsel''). The
Commission believes that because Partial Amendment No. 2 raises no
new or novel issues, it is technical in nature and not subject to
separate notice and comment.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

A. Background

    As compensation for the ``special contribution'' of time and money
that the CBOT expended in the development of the CBOE in the early
1970s, an ``Exercise Right'' was granted to each ``member of [the
CBOT]'' entitling him or her to become a member of the CBOE without
having to acquire a separate CBOE membership.\6\ This right,
established in Article Fifth(b) of the CBOE Certificate of
Incorporation (``Article Fifth(b)''), provides, in relevant part:
---------------------------------------------------------------------------

    \6\ As CBOE explained in the notice of its proposal, the
``special contribution'' of the members of CBOT referred to in
Article Fifth(b) consisted primarily of CBOT's providing the seed
capital for the start-up of CBOE in the early 1970s by means of
direct cash expenditures, CBOT's guarantee of a bank loan to CBOE to
fund additional CBOE start-up costs, and CBOT's contribution of
intellectual property. See Notice, supra note 3, 72 FR at 5473.

    In recognition of the special contribution made to the
organization and development of the [CBOE] by the members of [the
CBOT] * * * every 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 said Board of Trade, be
entitled to be a member of the [CBOE] notwithstanding any such
limitation on the number of members and without the necessity of
acquiring such membership for consideration or value from the
---------------------------------------------------------------------------
[CBOE], its members or elsewhere.

Article Fifth(b) 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.
    Since Article Fifth(b) does not define what a ``member of [the
CBOT]'' means, on several occasions in the past, the CBOE has
interpreted the meaning of Article Fifth(b), in particular the term
``member of [the CBOT],'' in response to changes in the ownership
structure of the CBOT. On each such occasion, the CBOE and CBOT
ultimately reached a mutual agreement on the particular interpretation
at issue, and those interpretations are reflected in various agreements
and letter agreements between CBOE and CBOT. CBOE filed these
interpretations of Article Fifth(b) with the Commission, reflected in
amendments to CBOE Rule 3.16(b) (``Special Provisions Regarding Chicago
Board of Trade Exerciser Memberships''), as proposed rule changes
pursuant to Section 19(b)(1) of the Exchange Act.\7\ The Commission
approved each such interpretation.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

1. 1992 Agreement
    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) that was embodied in an agreement dated September 1, 1992 (the
``1992 Agreement'') and reflected in CBOE Rule 3.16(b).\8\ The 1992
Agreement addressed, among other things, the effect on the Exercise
Right of CBOT's plans to divide the membership interests of the then-
existing 1,402 member-owners of CBOT into parts. That interpretation
provided that all such parts, together with the trading rights
appurtenant thereto, must be in the possession of an individual in
order for that individual to be eligible to

utilize the Exercise Right.\9\9 CBOE Rule 3.16(b) reflects this
interpretation in stating that ``[f]or 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] * * *'' \10\
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Release No. 32430 (June 8,
1993), 58 FR 32969 (June 14, 1993) (SR-CBOE-92-42).
    \9\ See 1992 Agreement, Section 2(b).
    \10\ CBOE Rule 3.16(b). 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.
---------------------------------------------------------------------------

2. 2001 Agreement, as Modified by the 2004 and 2005 Letter Agreements
    In connection with CBOT's proposed restructuring, CBOE took the
position that the effect of such a transaction would be to eliminate
entirely the concept of CBOT ``membership'' as it existed when the
Exercise Right was created as a right held by members of CBOT, and
therefore would result in the termination of the Exercise Right.\11\
CBOE and CBOT eventually compromised and entered into an agreement
dated August 7, 2001 (``2001 Agreement'') under which CBOE agreed to
interpret Article Fifth(b) such that the Exercise Right was only
available to a CBOT member that held all of the trading rights of a
full member of CBOT as well as the same number of shares of stock of
CBOT Holdings, Inc. (``CBOT Holdings'') originally issued to CBOT
members in the restructuring.\12\ CBOE agreed, in the 2001 Agreement,
to interpret Article Fifth(b) in this way, only ``in the absence of any
other material changes to the structure or ownership of the CBOT * * *
not contemplated in the CBOT [restructuring].'' \13\
---------------------------------------------------------------------------

    \11\ See Notice, supra note 3, 72 FR at 5473.
    \12\ See id.
    \13\ See id. at 5473-74 (citing the 2001 Agreement).
---------------------------------------------------------------------------

    CBOE and CBOT subsequently agreed to modify the 2001 Agreement by a
Letter Agreement among CBOE, CBOT, and CBOT Holdings dated October 7,
2004 (``October 2004 Letter Agreement''), which was intended to
represent the agreement of the CBOE and CBOT concerning the nature and
scope of the Exercise Right following the restructuring of the CBOT and
in light of the expansion of the CBOE and CBOT's electronic trading
systems. The CBOE, CBOT, and CBOT Holdings entered into another letter
agreement on February 14, 2005 (``February 2005 Letter Agreement'') in
which CBOE confirmed that CBOT's restructuring was consistent with
CBOE's interpretation of Article Fifth(b) as set forth in the 2001
Agreement.
    The CBOE's interpretation of Article Fifth(b) through
interpretations of ``Eligible CBOT Full Member'' as used in CBOE Rule
3.16 were approved by the Commission.\14\ As set forth in the 2001
Agreement, as amended by the letter agreements, the CBOE interprets
Article Fifth(b) such that an individual is deemed to be an ``Eligible
CBOT Full Member'' under CBOE Rule 3.16 if the individual: (1) Is the
owner of the requisite number of Class A Common Stock of CBOT Holdings,
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.\15\ An individual
is deemed to be an ``Eligible CBOT Full Member Delegate,'' under that
Agreement, if the individual: (1) Is in possession of the requisite
number of Class A Common Stock of CBOT Holdings, 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.\16\
---------------------------------------------------------------------------

    \14\ See Securities Exchange Act Release No. 51733 (May 24,
2005), 70 FR 30981 (May 31, 2005) (SR-CBOE-2005-19).
    \15\ See id. at 30983 (footnote 14).
    \16\ See id.
---------------------------------------------------------------------------

B. CBOE's Current Proposal

1. Interpretation of Article Fifth(b)
    The CBOE is again proposing an interpretation of the term ``member
of [the CBOT]'' as used in Article Fifth(b). CBOE believes that its
proposed interpretation is necessary to address the effect on the
Exercise Right of the then-proposed (and now completed) acquisition of
the CBOT by CME Holdings.\17\ Specifically, CBOE believes that the
acquisition of the CBOT by CME Holdings effected ``substantial changes
to the structure and ownership of CBOT, as well as to the rights
represented by CBOT membership,'' in a way that creates a substantive
ambiguity with respect to whether a person who formerly qualified under
Article Fifth(b) as a ``member of [the CBOT]'' for purposes of the
Exercise Right still possesses sufficient attributes of CBOT membership
following the acquisition by CME Holdings.\18\
---------------------------------------------------------------------------

    \17\ That acquisition was accomplished by the merger of CBOT
Holdings, of which CBOT was a subsidiary, with and into CME
Holdings, with CME Holdings continuing as the surviving corporation
and as the parent company of CBOT, as well as of its existing
wholly-owned subsidiary, the Chicago Mercantile Exchange, Inc.
(``CME''). CBOT Holding's shareholders approved the acquisition on
July 9, 2007. See Form 8-K submitted by CME Holdings on July 9,
2007. The transaction was completed on July 12, 2007. See Form 25-
NSE submitted by the New York Stock Exchange, Inc. (regarding
notification of the removal of listing of CBOT Holdings).
    \18\ CBOE Response to Comments, supra note 4, at 17.
---------------------------------------------------------------------------

    In response to the acquisition of the CBOT by CME Holdings, the
CBOE Board of Directors found it necessary to determine whether the
substantive rights of a former CBOT member would continue to qualify
that person as a ``member of [the CBOT]'' pursuant to Article Fifth(b),
as that term was contemplated when Article Fifth(b) was adopted, after
the acquisition of the CBOT by CME Holdings. CBOE determined that it
would not, because former CBOT members ``lose in the CME acquisition
the few remaining membership rights they retained following the
[CBOT's] 2005 restructuring,'' such that ``persons who had formerly
been the full members of CBOT will simply be the holders of trading
permits and will not possess any of the other rights commonly
associated with membership in an exchange.'' \19\
---------------------------------------------------------------------------

    \19\ Id. at 28.
---------------------------------------------------------------------------

    Thus, CBOE's proposed interpretation concludes that, following the
acquisition, there no longer are any individuals who qualify as
``members of [the CBOT]'' within the meaning of Article Fifth(b).
Consequently, no person would qualify under Article Fifth(b) to utilize
the Exercise Right to become and remain a member of CBOE without having
to obtain a separate CBOE membership. This interpretation is based on
CBOE's view that the concept of a member-owner of CBOT, as CBOE
believes that concept was understood when Article Fifth(b) was first
adopted in CBOE's Certificate of Incorporation and when it was
subsequently interpreted in the 1992 Agreement, has been abolished
following the restructuring of CBOT and its subsequent acquisition by
CME Holdings. In this respect, the CBOE's proposal does not extinguish
the Exercise Right or delete Article Fifth(b) from its Certificate of
Incorporation, but rather interprets Article Fifth(b) in a manner than
means no CBOT member is

eligible to utilize that right following the acquisition of CBOT.
    With respect to the prior agreements concerning the interpretation
of Article Fifth(b) with CBOT, CBOE believes that, because the change
in structure effectuated by the acquisition of CBOT by CME Holdings was
not contemplated as part of the 2005 restructuring of CBOT, the
acquisition constitutes a change to the ownership of CBOT that is
inconsistent with a condition to the interpretation embodied in the
2001 Agreement, as amended, that there not be any change to the
ownership of CBOT not contemplated in its 2005 restructuring.\20\
Accordingly, CBOE believes that the 2001 Agreement, as amended, no
longer governs whether and to what extent the Exercise Right will
remain in existence, with the result being that CBOE and CBOT are back
in the position they faced before the 2001 Agreement.\21\
---------------------------------------------------------------------------

    \20\ See Notice, supra note 3, 72 FR at 5474.
    \21\ See id.
---------------------------------------------------------------------------

    With the 2001 Agreement no longer controlling, CBOE looks to the
1992 Agreement, in particular Section 3(d), which addresses the
possibility that CBOT, among other things, may merge or consolidate
with, or be acquired by, another entity. Section 3(d) establishes three
conditions that all must be satisfied for the Exercise Right to remain
available following any such transaction. Those three conditions are:

    1.* * * the survivor of such merger, consolidation or
acquisition (``survivor'') is an exchange which provides or
maintains a market in commodity futures contracts or options,
securities, or other financial instruments, and * * *
    2. the 1,402 holders of CBOT Full Memberships are granted in
such merger, consolidation or acquisition membership in the survivor
(``Survivor Membership''), and * * *
    3. such Survivor Membership entitles the holder thereof to have
full trading rights and privileges in all products then or
thereafter traded on the survivor (except that such trading rights
and privileges need not include products that, at the time of such
merger, consolidation or acquisition, are traded or listed,
designated or otherwise authorized for trading on the other entity
but not on the CBOT) * * * \22\
---------------------------------------------------------------------------

    \22\ See id.

    CBOE believes that none of these conditions are satisfied following
the acquisition of CBOT by CME Holdings. Specifically, with respect to
Condition 1, CBOE notes that the survivor of the acquisition (i.e., the
acquiring entity that survives the transaction) is CME Holdings, which
is not an exchange.\23\
---------------------------------------------------------------------------

    \23\ See id.
---------------------------------------------------------------------------

    Further, CBOE believes that Condition 2 is not satisfied because
the former 1,402 holders of CBOT Full Memberships have not been granted
``membership'' in the survivor.\24\ Rather, CBOE's position is that
there are not any holders of CBOT Full Memberships as they existed in
1992, because all of these memberships were stripped of their ownership
attributes in the 2005 restructuring of CBOT.\25\ Likewise, CBOE argues
that CME Holdings is not an exchange and therefore is not capable of
granting ``membership'' interests in itself to anyone.\26\ CBOE further
states that, even if CBOT is considered to have survived the
acquisition, Condition 2 still would not be satisfied because, except
for trading rights, former CBOT members no longer have most of the
other rights in the surviving entity that they formerly held when they
were full members of CBOT as the term ``member'' was commonly
understood when Article Fifth(b) was adopted in 1972 and later
interpreted in 1992.\27\ Accordingly, following the acquisition, CBOE
believes that former CBOT members will simply be the holders of trading
permits and will not be granted any of the other rights commonly
associated with membership in an exchange.\28\
---------------------------------------------------------------------------

    \24\ See id.
    \25\ See id. Although CBOE has previously interpreted Article
Fifth(b) to permit the Exercise Right to continue in existence
following the 2005 restructuring of CBOT, subject to stated
conditions, as discussed above, CBOE believes that those earlier
interpretations, contained in the 2001 Agreement, as amended, are no
longer controlling because those provisions applied only so long as
there was no further change to the structure or ownership of CBOT
not then in contemplation. See id.
    \26\ See Notice, supra note 3, 72 FR at 5474.
    \27\ See id. at 5475. For example, CBOE states that, following
the acquisition by CME Holdings, CBOT's former Series B-1 members
will be stripped, among other things, of their right to elect
directors or nominate candidates for election as directors. See id.
    \28\ See id.
---------------------------------------------------------------------------

    Finally, CBOE believes that Condition 3 of Section 3(d) of the 1992
Agreement is not satisfied following the acquisition of CBOT by CME
Holdings because that condition contemplates an acquisition where the
surviving acquirer is an exchange, and it requires CBOT members to have
essentially the same full trading rights on that surviving exchange as
they had on CBOT prior to the acquisition.\29\ As CME Holdings is not
an exchange, CBOE believes that it is not possible for CBOT members to
have any trading rights on the survivor.\30\ Further, CBOE believes
that to be the case even if it were to look through CME Holdings to its
two subsidiary exchanges, CME and CBOT.\31\ CBOE states that, in
respect of any new products to be introduced on CME after the
acquisition, the trading rights of CBOT members will be diluted by the
trading rights granted to other persons (i.e., CME members) to trade
these same products, in which case the trading rights inherent in CBOT
membership will be reduced from what they were prior to the
acquisition.\32\
---------------------------------------------------------------------------

    \29\ See id.
    \30\ See id.
    \31\ See id.
    \32\ See Notice, supra note 3, 72 FR at 5474.
---------------------------------------------------------------------------

    Consequently, CBOE's proposed interpretation concludes that the
conditions contained in Section 3(d) of the 1992 Agreement are not
satisfied following the acquisition of CBOT by CME Holdings, and that
the terms of Section 3(d) therefore provide that ``Article Fifth(b)
shall not apply'' following the acquisition. Hence, for the reasons
discussed in its notice, as summarized above, CBOE's proposed
interpretation is that the Exercise Right is no longer available as a
means of acquiring membership in CBOE because there no longer are any
individuals who qualify as ``members of [the CBOT]'' within the meaning
of Article Fifth(b).
2. Transition Plan
    In addition to its proposed interpretation of Article Fifth(b),
CBOE has separately proposed a transition plan in order to avoid a
sudden disruption to its marketplace as a result of no persons any
longer being eligible to utilize the Exercise Right on account of the
acquisition of CBOT by CME Holdings.\33\ Specifically, CBOE submitted a
separate proposed rule change interpreting CBOE Rule 3.19, which is a
rule that authorizes the Exchange, when the Exchange determines that
there are extenuating circumstances, to permit a member ``to retain the
member's status for such period of time as the Exchange deems
reasonably necessary'' to enable the member to address specified
problems that caused the membership status to terminate.
---------------------------------------------------------------------------

    \33\ See Securities Exchange Act Release Nos. 56016 (July 5,
2007), 72 FR 38106 (July 12, 2007) (SR-CBOE-2007-77) and 56458
(September 18, 2007), 72 FR 54309 (September 24, 2007) (SR-CBOE-
2007-107).
---------------------------------------------------------------------------

    Interpretation .01 to CBOE Rule 3.19, allows certain
``grandfathered'' Exerciser Members who had been trading on CBOE to
continue to have uninterrupted access to CBOE until such time as the
Commission takes action on SR-CBOE-2006-106. Under Interpretation .01
to CBOE Rule 3.19, persons who were Exerciser Members in good standing
as of July 1, 2007 and who remain Exerciser Members as of the close of
business on the day before the

consummation of the acquisition of CBOT by CME Holdings temporarily
retained their membership status, including their trading access to
CBOE, for a limited period of time. Such persons were not required to
hold or maintain any securities, memberships or other interests in
order to maintain that status, but are required to pay a monthly access
fee to the Exchange.\34\ Temporary Members are required to remain in
good standing and must pay all applicable fees, dues, assessments and
other like charges assessed against CBOE members.
---------------------------------------------------------------------------

    \34\ See Securities Exchange Act Release No. 56197 (August 3,
2007), 72 FR 44897 (August 9, 2007) (SR-CBOE-2007-91) (adopting the
access fee).
---------------------------------------------------------------------------

    On September 4, 2007, CBOE filed a subsequent interpretation of
CBOE Rule 3.19 to extend this temporary membership beyond any
Commission approval of SR-CBOE-2006-106 until the earlier of: (1) The
voluntary termination of a person's temporary membership; (2) any
Commission approval of a subsequent proposed rule change to terminate
temporary membership status; or (3) the demutualization of the
Exchange.\35\
---------------------------------------------------------------------------

    \35\ See Securities Exchange Act Release No. 56458 (September
18, 2007), 72 FR 54309 (September 24, 2007) (SR-CBOE-2007-107).
---------------------------------------------------------------------------

III. Comment Letters

    The Commission received 174 comment letters on the proposed rule
change from 134 different commenters.\36\ Legal counsel for CBOT, legal
counsel for CBOT Holdings, and legal counsel for the putative class of
CBOT members from the Delaware litigation (collectively referred to as
``CBOT'') all submitted comment letters\37\ in which they characterized
the proposed rule change as an attempt by CBOE to eliminate one group
of Exchange members (Exerciser Members) for the benefit of another
group of members (CBOE regular members), therein depriving Exerciser
Members and those eligible to become Exerciser Members of a valuable
property right.\38\ CBOT asked the Commission to institute proceedings
to disapprove CBOE's proposed rule change on the basis that the
proposal is an improper use of CBOE's self-regulatory authority to
resolve in its favor a private property dispute that is being litigated
in the Delaware court, fails to meet the requirements of the Exchange
Act, and was adopted without due process.\39\
---------------------------------------------------------------------------

    \36\ Thirteen letters, including three letters from CBOE's legal
counsel, explicitly supported the proposed rule change. See Letter
from Robert H. Bloch, dated February 16, 2007 (``Bloch Letter'');
Letter from Michael J. Post to Elizabeth K. King, Associate
Director, Division of Market Regulation, Commission, dated February
16, 2007 (``Post Letter''); Letter from Steven G. Holtz, dated
February 17, 2007; Letter from Dan Frost, dated February 19, 2007
(``Frost Letter''); Letter from Steve Fanady to Elizabeth K. King,
Associate Director, Division of Market Regulation, Commission, dated
February 20, 2007 (``Fanady Letter''); Letter from Lawrence J. Blum
to Elizabeth K. King, Associate Director, Division of Market
Regulation, Commission, dated February 25, 2007 (``Blum Letter'');
Letter from Norman S. Friedland, dated February 27, 2007
(``Friedland Letter''); Letter from R. Kent Hardy to Nancy M.
Morris, Secretary, Commission, dated February 27, 2007 (``Hardy
Letter''); Letter from Robert Silverstein to Elizabeth K. King,
Associate Director, Division of Market Regulation, Commission, dated
February 27, 2007 (``Silverstein Letter''); Letter from Marshall
Spiegel, dated April 12, 2007 (referencing attached materials);
Letter from Michael L. Meyer, Schiff Hardin, to Elizabeth K. King,
Associate Director, Division of Market Regulation, Commission, dated
January 12, 2007 (``Schiff Hardin Letter 1''); Letter from Michael
L. Meyer, Schiff Hardin, to Nancy M. Morris, Secretary, Commission,
dated March 19, 2007; and CBOE Response to Comments, supra note 4.
The remainder of the letters either opposed the proposal or did not
clearly communicate a position.
    \37\ See Letter from Charles M. Horn, Mayer, Brown, Rowe & Maw,
to Nancy M. Morris, Secretary, Commission, dated December 22, 2006
(``Mayer Brown Letter 1''); Letter from Gordon B. Nash, Jr.,
Gardner, Carton & Douglas, to Nancy M. Morris, Secretary,
Commission, dated December 22, 2006 (on behalf of the putative class
members) (``Gardner Letter''); Letter from Charles M. Horn, Mayer,
Brown, Rowe & Maw, to Nancy M. Morris, Secretary, Commission, dated
January 31, 2007 (``Mayer Brown Letter 2''); Letter from Charles M.
Horn, Mayer, Brown, Rowe & Maw, to Nancy M. Morris, Secretary,
Commission, dated February 27, 2007 (``Mayer Brown Letter 3'');
Letter from Scott C. Lascari, Drinker Biddle Gardner Carton, to
Nancy M. Morris, Secretary, Commission, dated February 27, 2007 (on
behalf of the putative class members); Letter from Charles M. Horn,
Mayer, Brown, Rowe & Maw, to Nancy M. Morris, Secretary, Commission,
dated March 15, 2007 (``Mayer Brown Letter 4''); Letter from Charles
M. Horn, Mayer, Brown, Rowe & Maw, to Nancy M. Morris, Secretary,
Commission, dated July 9, 2007 (``Mayer Brown Letter 5''); and
Letter from Charles M. Horn, Mayer, Brown, Rowe & Maw, to Nancy M.
Morris, Secretary, Commission, dated August 9, 2007 (``Mayer Brown
Letter 6'').
    \38\ See, e.g., Mayer Brown Letter 3, supra note 37, at 6.
    \39\ See Mayer Brown Letter 3, supra note 37, at 1. See also
Letter from Alton B. Harris, Ungaretti & Harris LLP, to Nancy M.
Morris, Secretary, Commission (``Ungaretti Letter''), at 9-10
(arguing that the CBOE impermissibly and unilaterally interpreted a
provision in a bilateral contract and filed this interpretation with
the Commission in an attempt to invoke federal preemption). That
commenter opined that the outcome of this matter could affect the
future willingness of third parties to enter into contracts that may
be subject to unilateral interpretation by a self-regulatory
organization. See id. at 2-3.
---------------------------------------------------------------------------

    Other commenters supplemented the concerns expressed by CBOT with
criticism that the Commission lacked jurisdiction to consider the
CBOE's proposal on the basis that the proposal implicated a contractual
dispute subject to the jurisdiction of a state court.\40\ Commenters
also opposed the proposal as without foundation, believing that the
CBOT's acquisition by CME Holdings should be irrelevant to the
continued validity of the Exercise Right.\41\ Other commenters argued
that

CBOE's proposal violates the rights of CBOT members with respect to the
Exercise Right and violates the agreements between the CBOT and
CBOE,\42\ and complained about the economic impact of the proposed rule
change on CBOT members, especially the fact that the CBOE's proposal
would prohibit CBOT members from sharing in the CBOE's anticipated
demutualization.\43\ The main points raised by the comment letters, as
well as the Commission's findings, are discussed below.
---------------------------------------------------------------------------

    \40\ See Letter from Gordon Gladstone, dated February 9, 2007;
Letter from Glenn Hollander, dated February 9, 2007; Letter from
Lance R. Goldberg, dated February 10, 2007 (``Goldberg Letter'');
Letter from Mark Mendelson, dated February 12, 2007 (``Mendelson
Letter''); Letter from John Simms, dated February 12, 2007 (``Simms
Letter''); Letter from Charles W. Bergstrom to Nancy M. Morris,
Secretary, Commission, dated February 13, 2007; Letter from Mike P.
Darraugh, dated February 13, 2007 (``Darraugh Letter''); Letter from
Edward E. Kessler, dated February 13, 2007 (``Kessler Letter'');
Letter from Stephen L. O'Bryan, dated February 13, 2007 (``O'Bryan
Letter''); Letter from Mark D. Hellman to Nancy M. Morris,
Secretary, Commission, dated February 14, 2007 (``Hellman Letter'');
Letter from J. Alexander Stevens to Nancy M. Morris, Secretary,
Commission, dated February 14, 2007 (``Stevens Letter''); Letter
from Allen Mitzenmacher to Nancy M. Morris, Secretary, Commission,
dated February 15, 2007 (``Mitzenmacher Letter''); Letter from
Benjamin Nitka, dated February 15, 2007; Letter from Jerome
Israelov, dated February 16, 2007; Letter from Susie McMurray,
submitted February 16, 2007 (``McMurray Letter''); Letter from
Stuart Reif to Nancy M. Morris, Secretary, Commission, dated
February 16, 2007 (`` Letter''); Letter from Doug Riccolo, dated
February 16, 2007; Letter from Burt Gutterman and Noel Moore to
Nancy M. Morris, Secretary, Commission, dated February 17, 2007;
Letter from Charles B. Cox III, dated February 19, 2007 (``C. Cox
Letter''); Letter from Michael J. Crilly, dated February 19, 2007
(``Crilly Letter 1''); Letter from Ronald E. Komo to Nancy M.
Morris, Secretary, Commission, dated February 19, 2007 (``Komo
Letter''); Letter from Thomas M. Myron to Nancy M. Morris,
Secretary, Commission, dated February 19, 2007 (``T.M. Myron
Letter''); Letter from Kyle A. Reed, dated February 20, 2007 (``Reed
Letter''); Letter from Thomas F. Cashman to Nancy M. Morris,
Secretary, Commission, dated February 21, 2007 (``Cashman Letter'');
Letter from Richard Jaman, submitted February 22, 2007 (``Jaman
Letter''); Letter from Lawrence D. Israel to Nancy M. Morris,
Secretary, Commission, dated February 22, 2007 (``Israel Letter'');
Letter from Gerald A. McGreevy, submitted February 22, 2007
(``McGreevy Letter''); Letter from David P. Baby to Nancy M. Morris,
Secretary, Commission, dated February 23, 2007 (``Baby Letter'');
Letter from Stephen Cournoyer to Nancy M. Morris, Secretary,
Commission, dated February 24, 2007 (``S. Cournoyer Letter'');
Letter from Wayne Goodman to Nancy M. Morris, Secretary, Commission,
submitted February 24, 2007 (``Goodman Letter''); Letter from Cary
Chubin, dated February 25, 2007 (``Chubin Letter''); Letter from
John Halston, dated February 25, 2007 (``Halston Letter''); Letter
from Veda Kaufman Levin, dated February 25, 2007 (``Levin Letter'');
Letter from Robert J. Griffin to Nancy M. Morris, Secretary,
Commission, dated February 26, 2007 (``Griffin Letter''); Letter
from Harlan R. Krumpfes, dated February 26, 2007 (``Krumpfes
Letter''); Letter from Nickolas J. Neubauer to Nancy M. Morris,
Secretary, Commission, dated February 26, 2007 (``Neubauer
Letter''); Letter from Ronald Bianchi, dated February 26, 2007
(``Bianchi Letter''); Letter from William Terman to Nancy M. Morris,
Secretary, Commission, dated February 26, 2007 (``Terman Letter'');
Letter from Robert E. Otter, dated February 27, 2007; and Letter
from Paul L. Richards to Nancy M. Morris, Secretary, Commission,
dated August 1, 2007 (``Richards Letter 2''). Cf. Comment Letters
cited in note 36, supra (Bloch Letter, Post Letter, Friedland
Letter, Frost Letter, Fanady Letter, Blum Letter (arguing that the
proposal falls within the Commission's jurisdiction)).
    \41\ See, e.g., Letter from Lawrence C. Dorf, dated February 9,
2007 (``Dorf Letter''); Goldberg Letter, supra note 40; Letter from
Peter M. Todebush to Nancy M. Morris, Secretary, Commission, dated
February 13, 2007 (``Todebush Letter''); Letter from Thomas M. Shuff
Jr., dated February 13, 2007 (``Shuff Letter''); Letter from Norm
Friedman, dated February 16, 2007 (``N. Friedman Letter''); C. Cox
Letter, supra note 40; Crilly Letter 1, supra note 40; Ungaretti
Letter, supra note 39; Letter from Brian Cassidy, dated February 20,
2007 (``Cassidy Letter''); Letter from Gregory J. Ellis, dated
February 20, 2007 (``Ellis Letter''); Letter from Paul R.T. Johnson,
Jr. to Nancy M. Morris, Secretary, Commission, submitted February
20, 2007 (``Johnson Letter''); Reed Letter, supra note 40; Letter
form Michael E. Stone, submitted February 22, 2007 (``Stone Letter
1''); Letter from Robert C. Sheehan, Electronic Brokerage Systems,
LLC, to Nancy M. Morris, Secretary, Commission, dated February 23,
2007 (``Sheehan Letter''); Letter from Carolyn J. Davis to Nancy M.
Morris, Secretary, Commission, dated February 24, 2007; Goodman
Letter, supra note 40; Letter from David G. Northey, M&N Trading,
submitted February 24, 2007 (``Northey Letter''); Letter from Kevin
A. Ward, submitted February 24, 2007; Chubin Letter, supra note 40;
Halston Letter, supra note 40; Letter from Michael E. Stone, dated
February 25, 2007 (``Stone Letter 2''); Letter from Edward A. Cox
and Cynthia R. Cox to Nancy M. Morris, Secretary, Commission, dated
February 26, 2007 (``E. Cox Letter''); Krumpfes Letter, supra note
40; Letter from John L. Pietrzak to Nancy M. Morris, Secretary,
Commission, dated February 26, 2007 (``Pietrzak Letter''); Letter
from Robert Salstone to Nancy M. Morris, Secretary, Commission,
dated February 26, 2007.
    \42\ See Letter from Peter W. Aden, dated February 9, 2007; Dorf
Letter, supra note 41; Letter from Michael C. Rothman, dated
February 9, 2007 (``Rothman Letter''); Goldberg Letter, supra note
40; Letter from Clint Gross, dated February 11, 2007 (``Gross
Letter''); Letter from Richard D. Lupori, dated February 12, 2007;
Mendelson Letter, supra note 40; Letter from Adam Rich to Nancy M.
Morris, Secretary, Commission, dated February 12, 2007 (``Rich
Letter''); Simms Letter, supra note 40; Letter from Frank J. Aiello
to Nancy M. Morris, Secretary, Commission, dated February 13, 2007;
Darraugh Letter, supra note 40; Letter from Michael Forester to
Nancy M. Morris, Secretary, Commission, dated February 13, 2007;
Letter from Richard Friedman, dated February 13, 2007 (``R. Friedman
Letter''); Letter from Ronald F. Grossman, dated February 13, 2007
(``Grossman Letter''); Kessler Letter, supra note 40; Letter from
Robert T. O'Brien to Nancy M. Morris, Secretary, Commission, dated
February 13, 2007; O'Bryan Letter, supra note 40; Shuff Letter,
supra note 41; Todebush Letter, supra note 41; Letter from Arthur
Arenson to Nancy M. Morris, Secretary, Commission, dated February
14, 2007; Letter from Michael Floodstrand to Nancy M. Morris,
Secretary, Commission, dated February 14, 2007 (``Floodstrand
Letter''); Hellman Letter, supra note 40; Letter from Pat Hillegass,
dated February 14, 2007; Letter from Michael D. Morelli to Nancy M.
Morris, Secretary, Commission, dated February 14, 2007 (``Morelli
Letter''); Letter from Ira S. Nathan, dated February 14, 2007
(``Nathan Letter''); Letter from Glenn Beckert, dated February 15,
2007 (``Beckert Letter''); Letter from John V. Grimes, dated
February 15, 2007 (``Grimes Letter''); Mitzenmacher Letter, supra
note 40; Letter from Thomas E. Nelson to Nancy M. Morris, Secretary,
Commission, dated February 15, 2007 (``Nelson Letter''); Letter from
Young Chun, dated February 16, 2007 (``Chun Letter''); N. Friedman
Letter, supra note 41; McMurray Letter, supra note 40; Reif Letter,
supra note 40; Letter from Howard Tasner, dated February 16, 2007;
Letter from Kelly A. Caloia to Nancy M. Morris, Secretary,
Commission, dated February 18, 2007; Letter from Mark Feierberg,
dated February 18, 2007 (``Feierberg Letter''); Letter from J.
Patrick Hennessy to Nancy M. Morris, Secretary, Commission, dated
February 18, 2007; Letter from Alan Matthew to Nancy M. Morris,
Secretary, Commission, dated February 18, 2007; Letter from Nicholas
M. McBride to Nancy M. Morris, Secretary, Commission, dated February
18, 2007; Letter from Richard H. Woodruff to Nancy M. Morris,
Secretary, Commission, dated February 18, 2007 (``Woodruff
Letter''); C. Cox Letter, supra note 40; Crilly Letter 1, supra note
40; Komo Letter, supra note 40; T.M. Myron Letter, supra note 40;
Letter from Patrick H. Arbor to Nancy M. Morris, Secretary,
Commission, dated February 20, 2007 (``Arbor Letter''); Letter from
John T. Brennan, dated February 20, 2007; Letter from Karl G. Estes
to Nancy M. Morris, Secretary, Commission, dated February 20, 2007
(``Estes Letter''); Johnson Letter, supra note 41; Letter from
Patrick A. Walsh, dated February 20, 2007 (``Walsh Letter''); Jaman
Letter, supra note 40; Letter from Ronald G. Lindenberg to Nancy M.
Morris, Secretary, Commission, dated February 21, 2007; McGreevy
Letter, supra note 40; Baby Letter, supra note 40; Sheehan Letter,
supra note 41; Letter from Bryan Cournoyer to Nancy M. Morris,
Secretary, Commission, submitted February 24, 2007 (``B. Cournoyer
Letter''); S. Cournoyer Letter, supra note 40; Goodman Letter, supra
note 40; Northey Letter, supra note 41; Letter from Joyce Selander,
submitted February 24, 2007; Chubin Letter, supra note 40; Letter
from Neil Esterman, dated February 25, 2007 (``Esterman Letter'');
Letter from Terry Myron, dated February 25, 2007; Letter from Martin
Flaherty, dated February 25, 2007; Levin Letter, supra note 40;
Letter from John F. McKerr, Celtic Brokerage, Inc., to Nancy M.
Morris, Secretary, Commission, dated February 25, 2007 (``McKerr
Letter''); Griffin Letter, supra note 40; Krumpfes Letter, supra
note 40; Neubauer Letter, supra note 40; Letter from Sondra Brewer
Pfeffer to Nancy M. Morris, Secretary, Commission, dated February
26, 2007; Bianchi Letter, supra note 40; Terman Letter, supra note
40; Letter from Judy Anne Parrish, dated February 27, 2007
(``Parrish Letter''); Letter from James Ryan, dated February 27,
2007; Letter from Rose G. Schneider, dated February 27, 2007
(``;Schneider Letter''); Letter from Michael J. Crilly to Nancy M.
Morris, Secretary, Commission, dated August 17, 2007 (``Crilly
Letter 2''); Letter from Gary V. Sagui, Templar Securities LLC, to
Nancy M. Morris, Secretary, Commission, dated August 20, 2007; and
Letter from Paul L. Richards to Bill Brodsky, Chairman, CBOE, dated
August 31, 2007.
    \43\ See Dorf Letter, supra note 41; Goldberg Letter, supra note
40; Mendelson Letter, supra note 40; Rich Letter, supra note 42;
Simms Letter, supra note 40; R. Friedman, Letter, supra note 42;
Grossman Letter, supra note 42; Floodstrand Letter, supra note 42;
Nathan Letter, supra note 42; Beckert Letter, supra note 42; Grimes
Letter, supra note 42; Nelson Letter, supra note 42; Letter from
Erskine S. Adam, Jr. to Nancy M. Morris, Secretary, Commission,
dated February 16, 2007; Chun Letter, supra note 42; Letter from
Angelo Dangles, dated February 18, 2007; Feierberg Letter, supra
note 42; Woodruff Letter, supra note 42; C. Cox Letter, supra note
40; Crilly Letter 1, supra note 40; Komo Letter, supra note 40;
Arbor Letter, supra note 42; Ellis Letter, supra note 41; Estes
Letter, supra note 42; Letter from Jay Homan, dated February 20,
2007; Walsh Letter, supra note 42; Cashman letter, supra note 40;
McGreevy Letter, supra note 40; Stone Letter 1 and 2, supra note 41;
Baby Letter, supra note 40; Richards Letter 2, supra note 40; Levin
Letter, supra note 40; Letter from Robert M. Geldermann, dated
February 26, 2007; Letter from Stephen R. Geldermann, dated February
26, 2007; Neubauer Letter, supra note 40; Parrish Letter, supra note
42; Schneider Letter, supra note 42; and Letter from Nancy Williams,
dated February 27, 2007 (``Williams Letter'').
    Some commenters noted that the right to exercise to trade on the
CBOE was priced into their CBOT memberships when they initially
purchased them. See Rothman Letter, supra note 42; Goldberg Letter,
supra note 40; Gross Letter, supra note 42; Williams Letter; Cassidy
Letter, supra note 41; Johnson Letter, supra note 41; Walsh Letter,
supra note 42; Letter from Robert Berry, dated February 21, 2007;
Cashman Letter, supra note 40; Jaman Letter, supra note 40; McGreevy
Letter, supra note 40; B. Cournoyer Letter, supra note 42; Chubin
Letter, supra note 40; C. Cox Letter, supra note 40; Terman Letter,
supra note 40; and Richards Letter 2, supra note 40. Cf. Hardy
Letter, supra note 36 (noting that at some points in time a CBOE
membership cost more than a CBOT membership, thus undercutting the
argument that the CBOT membership reflected a premium for its
attendant CBOE access right).
    One commenter, a self-described founding member of CBOE, argued
that the documents presented to the CBOT board of directors at the
meeting where it decided to spin-off the CBOE do not mention equity
rights to be retained in CBOE by CBOT members; rather, access
rights, liquidation rights in CBOE in case of failure, and how to
get back the initial investment of $750,000 were the main topics of
discussion. See Blum Letter, supra note 36. The commenter notes that
the $750,000 was eventually repaid to CBOT. See also Hardy Letter,
supra note 36 (also noting that the $750,000 was repaid). One
commenter argued that CBOT could have given each of its members a
free seat on the CBOE if an equity position was desired, but instead
they chose to grant access through the Exercise Right. See Hardy
Letter, supra note 36.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    Before turning to the specific questions under consideration, it is
appropriate to review the obligations that the Exchange Act imposes on
the Commission in reviewing SRO proposed rule changes and the manner in
which the Commission carries out those obligations. The Exchange Act
specifically requires an exchange to file with the Commission all
proposed rules and any proposed changes in, additions to, or deletions
from its rules.\44\ As noted below, ``rules'' of an exchange are
defined broadly to include, in this case, interpretations of CBOE's
Certificate of Incorporation.\45\ Once an exchange files a proposed
rule change with the Commission, the Exchange Act requires the
Commission to approve any such 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
exchange.\46\ Alternatively, if the

Commission cannot so find, it must disapprove the rule proposal.\47\
The Exchange Act requirements for Commission action are not conditioned
upon the absence of issues arising under other federal or state laws.
---------------------------------------------------------------------------

    \44\ See 15 U.S.C. 78s(b)(1).
    \45\ See infra note 70 and accompanying text.
    \46\ See 15 U.S.C. 78s(b)(2). Section 19(b) of the Exchange Act
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. The CBOE consented to an extension of
time for the Commission to consider its filing. See Item 6 of
Amendment No. 1 to CBOE's Form 19b-4 filing, dated January 17, 2007.
    \47\ See 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    The Commission considers proposed rule changes in accordance with
the requirements applicable to national securities exchanges under
Section 6 of the Exchange Act. In addition, because Section 6(b)(1) of
the Exchange Act requires exchanges to enforce compliance by its
members and persons associated with its members with the provisions of
the Exchange Act, the Commission considers whether proposed rule
changes are consistent with all other Exchange Act provisions and
Commission rules adopted thereunder. Further, Sections 6(b)(1) and
19(g)(1) of the Exchange Act \48\ require exchanges to comply with
their own rules; as noted below, those rules are defined by the
Exchange Act to include the exchange's certificate of incorporation and
its bylaws.\49\ Thus, the Commission cannot approve a proposed rule
change if the exchange has failed to complete all action required
under, or to comply with, its own certificate of incorporation or
bylaws.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78s(g)(1), respectively.
    \49\ See infra note 70 and accompanying text.
---------------------------------------------------------------------------

    With respect to CBOE's proposal, the Commission has carefully
reviewed the proposed rule change, all comment letters and attachments
thereto, and the CBOE's response to the comment letters, and finds
that, as a matter of federal law, the proposed rule change is
consistent with the requirements of the Exchange Act, in particular
Section 6 of the Exchange Act \50\ and the rules and regulations
applicable to a national securities exchange.\51\
    In particular, the Commission finds that the proposed rule change
is consistent with: (1) Section 6(b)(1) of the Exchange Act,\52\ which
requires the Exchange to be organized and have the capacity to comply,
and to enforce compliance by its members and persons associated with
its members, with, among other things, the rules of the Exchange; (2)
Section 6(b)(5) of the Exchange Act,\53\ which requires, among other
things, that the rules of an exchange be designed to promote just and
equitable principles of trade and not be unfairly discriminatory; (3)
Section 6(b)(8) of the Exchange Act,\54\ which requires that the rules
of the Exchange not impose any burden on competition that is not
necessary or appropriate in the furtherance of the purposes of the
Exchange Act; (4) Section 6(c)(3)(A) of the Exchange Act,\55\ 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; and (5) Section 6(c)(4)
of the Exchange Act,\56\ which prohibits the Exchange from decreasing
the number of memberships below the number of memberships in effect on
May 1, 1975.\57\ The Commission also finds that the proposed rule
change complied with the requirements of Section 19(b) of the Exchange
Act,\58\ was complete and properly filed, and provided all of the
requisite information specified in Form 19b-4.\59\
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 78f(b).
    \51\ In approving this rule, the Commission has considered the
impact on efficiency, competition, and capital formation. See 15
U.S.C. 78c(f).
    \52\ See 15 U.S.C. 78f(b)(1).
    \53\ See 15 U.S.C. 78f(b)(5).
    \54\ See 15 U.S.C. 78f(b)(8).
    \55\ See 15 U.S.C. 78f(c)(3)(A).
    \56\ See 15 U.S.C. 78f(c)(4).
    \57\ See infra Section IV.C. (discussing the Commission's
findings in greater detail).
    \58\ 15 U.S.C. 78s(b).
    \59\ See infra Section IV.C.2 (discussing the completeness of
CBOE's proposed rule change on Form 19b-4).
---------------------------------------------------------------------------

    While we make these findings under the Exchange Act based on the
record now before us, we discuss below possible reactions by the CBOE
or the Commission to the eventual decision in a lawsuit now pending in
Delaware state court. Depending upon that outcome, it may be
appropriate for CBOE and the Commission to take further actions in
light of the state court's findings and to assess whether they affect
CBOE's compliance with the federal securities laws.\60\
---------------------------------------------------------------------------

    \60\ See infra note 115.
---------------------------------------------------------------------------

A. The Commission Has Jurisdiction To Consider the CBOE's Proposed Rule
Change

    Various commenters challenged the Commission's jurisdiction over
the CBOE's proposed rule change, arguing that the Commission should not
consider or approve the CBOE's proposal because the filing implicates a
contractual dispute arising under state law and therefore is subject to
the jurisdiction of a state court.\61\ In particular, CBOT notes that
the proposed rule change relates to a pending dispute in the Delaware
court involving matters that are governed by state law, including the
interpretation of private contracts between CBOE and CBOT involving a
property right and claims regarding the proper exercise of authority
and fiduciary obligations on the part of CBOE's Board of Directors.\62\
CBOT expressed its view that the Commission's authority to consider the
proposed rule change under the federal securities laws does not preempt
the authority of the state court to determine whether the CBOE's
actions comported with state corporate, fiduciary, and contract
law.\63\
---------------------------------------------------------------------------

    \61\ See Comment Letters cited in note 40, supra (questioning
the Commission's jurisdiction over the proposed rule change).
    \62\ See Mayer Brown Letter 3, supra note 37, at 6.
Specifically, CBOT argues that CBOE's Board of Directors violated
its fiduciary duty towards Exerciser Members and violated prior
contractual agreements between the CBOE and CBOT by submitting a
proposal that has the effect of not affording Exerciser Members
equal treatment in the anticipated CBOE demutualization. See id. at
9-10.
    \63\ See id. at 11.
---------------------------------------------------------------------------

    Accordingly, CBOT and certain commenters have asked the Commission
to either disapprove the proposal or defer consideration of the
proposed rule change until after the Delaware court has adjudicated the
state law issues.\64\ CBOT suggests that, since the state court's
decision may inform the Commission's resolution of the proposed rule
change, it may be more efficient for the Commission to defer its
consideration of the proposal until after the Delaware litigation is
resolved.\65\ For

similar reasons, CBOT claims that the proposed rule change is not a
proper subject of SRO rulemaking because it does not implicate issues
under the federal securities laws.\66\
---------------------------------------------------------------------------

    \64\ See Gardner Letter, supra note 37, at 2; Mayer Brown Letter
1, supra note 37, at 1, 3-4; Mayer Brown Letter 2, supra note 37, at
1; Mayer Brown Letter 3, supra note 37, at 6-7, 10-11; Mayer Brown
Letter 6, supra note 37, at 1-2. According to CBOT, the central
question in the Delaware litigation--the status of the Exercise
Right in light of CBOE's proposed demutualization and the
acquisition of CBOT by CME Holdings--is fundamentally a state law
question because it concerns an interpretation of the CBOE
Certificate of Incorporation, which is treated as a contract under
Delaware law. See Mayer Brown Letter 3, supra note 37, at 10.
    See also, e.g., Kessler Letter, supra note 40; Reed Letter,
supra note 40; Cashman Letter, supra note 40; McKerr Letter, supra
note 42; and Letter from Marshall Spiegel, dated March 19, 2007 (all
requesting that the Commission wait for the Delaware court to rule
before acting on the CBOE's proposal). One commenter urged the
Commission to wait until the Delaware court decides the issue on the
basis that if the Delaware court finds bad faith on the part of the
CBOE Board under state law, then the proposed rule change will have
been improperly filed. See Ungaretti Letter, supra note 39, at 5-6.
    \65\ See Mayer Brown Letter 1, supra note 37, at 3-4. CBOT notes
that, although the Commission has jurisdiction to review proposed
rule changes to ensure that they are consistent with the Exchange
Act, the Commission previously has indicated that it does not
interpret state law to determine whether a rule change is also
consistent with state laws. See Mayer Brown Letter 1, supra note 37,
at 3; Mayer Brown Letter 5, supra note 37, at 5-6.
    \66\ See, e.g., Mayer Brown Letter 5, supra note 37, at 5 (``In
sum, this controversy, and the Proposed Rule Change, have nothing to
do with 'membership issues', and everything to do with the ownership
issues before the Delaware court.''); Mayer Brown Letter 2, supra
note 37, at 1 (``The Proposed Rule Change has no legitimate
securities regulatory or self-regulatory purpose.''); and Mayer
Brown Letter 3, supra note 37, at 6-7.
---------------------------------------------------------------------------

    The Commission believes the proposed rule change is a proper
subject of SRO rulemaking and implicates issues under the federal
securities laws. While the proposed rule change may relate to issues
that are implicated in a lawsuit pending in Delaware court, it is also
a proposal by a self-regulatory organization (``SRO'') to interpret its
rules. Section 19(b)(1) of the Exchange Act \67\ requires CBOE to file
with the Commission any proposed changes to, or interpretations of, its
rules. Accordingly, the Exchange Act unambiguously places CBOE's
proposal firmly within the Commission's authority and responsibility.
Furthermore, the Commission is obligated to consider CBOE's proposal,
as the Exchange Act does not give the Commission authority to defer
consideration of a proposed rule change that has been properly
filed.\68\
---------------------------------------------------------------------------

    \67\ 15 U.S.C. 78s(b)(1).
    \68\ The Commission notes that the pending lawsuit has been
stayed pending Commission action on this proposed rule change. See
CBOT Holdings, Inc. et al. v. Chicago Board Options Exchange Inc.,
et al., Memorandum of Opinion, decided August 3, 2007 (Del. Ch.)
(``Memorandum of Opinion''); see also Letter Opinion, dated October
10, 2007 (denying Plaintiffs' Motion to Lift Stay to Allow for
Filing of a Third Amended Complaint and the Commencement of
Discovery).
---------------------------------------------------------------------------

    As a federal law matter, Congress has given the Commission
jurisdiction over SROs and has required ``[e]ach self-regulatory
organization [to] file with the Commission, in accordance with such
rules as the Commission may prescribe, copies of any proposed rule or
any proposed change in, addition to, or deletion from the rules of such
self-regulatory organization * * *.'' \69\ The ``rules of a self-
regulatory organization'' include, among other things, ``the
constitution, articles of incorporation, bylaws, and rules, or
instruments corresponding to the foregoing, of an exchange * * * [and]
the stated policies, practices, and interpretations of such exchange *
* *.'' \70\ Rule 19b-4(b) under the Exchange Act defines the term
``stated policy, practice, or interpretation'' broadly to include:
    (1) Any statement made generally available to the membership of the
SRO, or to a group or category of persons having or seeking access to
facilities of the SRO, that establishes or changes any standard, limit,
or guideline with respect to the rights, obligations, or privileges of
such persons, or
    (2) the meaning, administration, or enforcement of an existing SRO
rule.\71\
---------------------------------------------------------------------------

    \69\ 15 U.S.C. 78s(b)(1).
    \70\ See Sections 3(a)(27) and 3(a)(28) of the Exchange Act; 15
U.S.C. 77c(a)(27) and (28).
    \71\ See 17 CFR 240.19b-4(b).
---------------------------------------------------------------------------

    Accordingly, because the CBOE's Certificate of Incorporation and
the CBOE's interpretation thereof constitute ``rules'' of the Exchange,
the Exchange Act clearly establishes that CBOE's proposed rule change,
an interpretation of Article Fifth(b) of its Certificate of
Incorporation, was the proper subject of a rule filing under Section
19(b)(1) of the Exchange Act. Indeed, Section 19(b)(1) of the Exchange
Act \72\ requires CBOE to file with the Commission any proposed changes
to, or interpretations of, its Certificate of Incorporation.
---------------------------------------------------------------------------

    \72\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

    In compliance with Section 19(b)(1), CBOE filed its proposed
interpretation of its Certificate of Incorporation with the Commission
on December 12, 2006. Once CBOE filed this proposed rule change,
Section 19(b)(2) of the Exchange Act \73\ required the Commission to
publish notice of the proposed rule change and either approve it or
institute proceedings to determine whether the proposed rule change
should be disapproved.\74\ Accordingly, the Commission has the
obligation under the Exchange Act to consider and affirmatively
dispose, by either approving or disapproving, of the CBOE's proposal.
The existence of a contractual dispute arising under state law subject
to pending litigation in state court does not in any way displace or
supplant the Commission's jurisdiction to consider a proposed rule
change submitted by an SRO.\75\
---------------------------------------------------------------------------

    \73\ 15 U.S.C. 78s(b)(2).
    \74\ The CBOE consented to an extension of time for the
Commission to consider its filing. See Item 6 of Amendment No. 1 to
CBOE's Form 19b-4 filing, dated January 17, 2007.
    \75\ CBOE asserts that the proposed rule change was not an
attempt to undercut the Delaware court's authority to resolve the
litigation initiated by the CBOT and the putative class, because, at
the time the proposed rule change was filed, the Delaware litigation
dealt only with the valuation issues arising from the CBOE
demutualization, whereas the proposed rule change addresses the
impact of the change in the CBOT corporate structure on the
eligibility to be, and remain, an Exercise Member. See Schiff Hardin
Letter 1, supra note 36, at 2; and CBOE Response to Comments, supra
note 4, at 17-18.
---------------------------------------------------------------------------

    Moreover, Article Fifth(b), which entitles ``members of [the
CBOT]'' to be members of the CBOE, implicates several important
Exchange Act issues. First, by its terms, this provision of the CBOE's
Certificate of Incorporation relates to membership on the Exchange. The
Exchange Act clearly establishes the Commission's oversight
responsibility with regard to matters of exchange membership,\76\ which
includes access to trading on the exchange. For example, Section
6(b)(2) of the Exchange Act requires that ``[s]ubject to the provisions
of subsection (c) * * *, the rules of the exchange provide that any
registered broker or dealer or natural person associated with a broker
or dealer may become a member of such exchange * * *.'' \77\ Section
6(c) of the Exchange Act further specifies when a national securities
exchange may deny membership to, or condition the membership of, a
registered broker or dealer.\78\ An exchange's rules are also required,
among other things, to provide a fair procedure for the denial of
membership to any person seeking membership and the prohibition or
limitation by the exchange of any person's access to services offered
by the exchange.\79\ Further, the Commission has authority under
Sections 19(d) and (f) of the Exchange Act to, among other things,
review denials of membership by a national securities exchange.\80\
---------------------------------------------------------------------------

    \76\ CBOE notes that state courts have previously recognized the
Commission's exclusive authority over membership rules and
membership decisions, including CBOE's interpretations of Article
Fifth(b), and have noted that the Commission's authority preempts
direct judicial consideration of exchange membership issues. See
CBOE Response to Comments, supra note 4, at 6-8; Schiff Hardin
Letter 1, supra note 36, at 5-6. CBOE opined that the preeminence of
federal law with respect to membership issues is critical to avoid
having inconsistent standards imposed on exchanges by competing
judicial authorities, which CBOE believes would undermine the
federal regulatory scheme. See CBOE Response to Comments, supra note
4, at 8-10.
    \77\ 15 U.S.C. 78f(b)(2).
    \78\ See 15 U.S.C. 78f(c).
    \79\ See 15 U.S.C. 78f(b)(6).
    \80\ See 15 U.S.C. 78s(d) and (f), respectively.
---------------------------------------------------------------------------

    Second, the Exchange Act manifests a strong federal interest in the
governance of national securities exchanges.\81\

Section 6(b)(3) of the Exchange Act requires the rules of the exchange
to assure ``a fair representation of its members in the selection of
its directors and administration of its affairs and provide that one or
more directors shall * * * not be associated with a member of the
exchange, broker, or dealer.'' \82\ By giving members a voice in the
governance of an SRO, this requirement ``serves to ensure that an
exchange is administered in a way that is equitable to all market
members and participants,'' \83\ and helps to preserve the integrity of
an exchange's self-regulatory functions. Effective governance of an
exchange is also important to an exchange's ability to satisfy the
requirement under Section 6(b)(1) of the Exchange Act that an exchange
be organized and have the capacity to carry out the purposes of the
Exchange Act and to comply and enforce compliance with the Exchange
Act, the rules and regulations thereunder, and exchange rules.\84\
---------------------------------------------------------------------------

    \81\ See, e.g., Securities Exchange Act Release No. 48946
(December 17, 2003), 68 FR 74678 (December 24, 2003) (SR-NYSE-2003-
34) (approving NYSE's governance proposal to establish a new board
of directors composed wholly of independent directors; an advisory
board of executives that would be representative of the exchange's
various constituencies; independent board committees with specific
oversight authority for compensation, audit functions, the
nominations process and regulatory matters; and an autonomous
regulatory unit that would report directly to the regulatory
oversight committee).
    \82\ 15 U.S.C. 78f(b)(3). The Exchange Act requires that at
least one director be representative of issuers and investors
because of the public's interest in ensuring the fairness and
stability of significant markets. See id.
    \83\ Securities Exchange Act Release No. 40760 (December 8,
1998), 63 FR 70844, 70882 (December 22, 1998) (S7-12-98).
    \84\ See, e.g., Securities Exchange Act Release No. 21439
(October 31, 1984), 49 FR 44577 (November 7, 1984) (SR-CBOE-84-15
and SR-CBOE-84-16). This order instituted proceedings to disapprove
two CBOE proposals to change certain of its rules related to
governance. The first proposal would have increased the number of
floor directors on the Board of Directors. The Commission
subsequently disapproved this proposal because it could not find
that it was consistent with the Act, particularly Sections 6(b)(1),
6(b)(3), and 6(b)(5). See Securities Exchange Act Release No. 22058
(May 21, 1985), 50 FR 23090 (May 30, 1985) (SR-CBOE-84-15 and SR-
CBOE-84-16). The second proposal provided that, in the event there
is more than one candidate for Chairman of the CBOE Executive
Committee, the Chairman would be elected by a plurality of CBOE
members voting at an annual meeting of the membership. This proposal
was later approved. See id.
---------------------------------------------------------------------------

    The CBOE's interpretation of Article Fifth(b) affects who is
entitled to be a member of the CBOE. Because of the role that CBOE
members have in the governance of the Exchange, including the election
of the CBOE Board of Directors,\85\ the Commission has an interest in
who is entitled to be a member of the Exchange, because it affects how
the Exchange is governed and how it fulfills its regulatory
responsibilities consistent with Section 6(b) of the Exchange Act.
---------------------------------------------------------------------------

    \85\ See CBOE Constitution, Section 6.1.
---------------------------------------------------------------------------

B. Compliance With Its Own Rules

    National securities exchanges are required under Sections 6(b)(1)
and 19(g)(1) of the Exchange Act to comply with their own rules.\86\ In
this case, commenters and the CBOT present two questions of the CBOE's
compliance with its rules, which are (1) whether the CBOE should have
treated the rule as an amendment instead of an interpretation and (2)
whether the Board of Directors of the CBOE breached duties under state
law when approving the proposed rule. We begin with a discussion of the
way the Commission evaluates arguments such as these in the course of
reviewing a proposed SRO rule and then turn to the two specific issues
the CBOT and commenters present.
---------------------------------------------------------------------------

    \86\ 15 U.S.C. 78f(b)(1) and 78s(g)(1).
---------------------------------------------------------------------------

    Both of the issues concerning the CBOE's compliance with its own
rules raise state law questions. Typically, the Commission does not
consider matters outside the scope of the federal securities laws,
except to the extent that consideration of a matter of state law is
necessary to inform a Commission finding on a federal matter arising
under the Exchange Act. Generally, the analysis of whether an SRO has
complied with its own rules is straightforward and does not require
consideration of disputed areas of state law. For instance, the
question might involve whether an SRO complied with requirements
relating to a particular time period or some other readily
ascertainable procedural step. In those cases, the Commission has a
straightforward task in determining whether the SRO complied with its
own rules. Other cases, however, might present a more nuanced question
of compliance that turns on a difficult or novel issue of state law. In
those cases, the Commission generally looks for expert guidance and
reaches a decision based on the submissions and sufficiency of the
basis of the action of the SRO. However, the Commission is not the
final arbiter on questions of state law. If an authoritative decision
by a court reaches a conclusion about the relevant state law in a
dispute concerning the SRO's actions that differs from the position the
Commission relied on, the Commission expects the SRO promptly to
propose changes to its rules necessary to comply with the outcome of
any such litigation.
    In other words, when a proposed rule change raises a difficult or
novel question of SRO compliance with its certificate of incorporation
or bylaws, the Exchange Act requires the Commission to determine
whether the SRO has so complied, even though the question of compliance
turns on the interpretation and application of state law. In that
situation, the Commission relies on the conclusions of experts or other
authorities as to the content and application of state law.\87\
---------------------------------------------------------------------------

    \87\ Cf. Fed. R. Civ. P. 44.1 (in determining foreign law, a
court may consider any relevant material or source).
---------------------------------------------------------------------------

1. Interpretation vs. Amendment of Article Fifth(b)
    CBOT argues that CBOE deviated from its own rules and procedures in
failing to obtain the necessary vote when it ``amended'' Article
Fifth(b) to eliminate the property right created therein.\88\ In
response, CBOE states that a vote of its membership was not necessary
because the proposed rule change constituted an interpretation of,
rather than an amendment to, Article Fifth(b), and thus is not subject
to a vote pursuant to the terms of Article Fifth(b).\89\ Based on the
record before it, the Commission agrees with CBOE.
---------------------------------------------------------------------------

    \88\ See Mayer Brown Letter 3, supra note 37, at 26 and 33. CBOT
notes that the terms of Article Fifth(b) require an 80% class vote
to amend that provision. See id. at 26.
    \89\ See CBOE Response to Comments, supra note 4, at 19-20 and
22-23.
---------------------------------------------------------------------------

    The proposal interprets who qualifies as a ``member of [the CBOT]''
under Article Fifth(b) in light of circumstances external to the
proposed rule change (i.e., CBOT's decision to be acquired by CME
Holdings). CBOT argues that the proposed rule change is an unreasonable
interpretation \90\ that violates CBOE's Certificate of Incorporation
and breaches the 1992 Agreement because it is based on the faulty
premise that, following the acquisition by CME Holdings, former CBOT
members will no longer be ``members'' within the meaning of Article
Fifth(b).\91\ Rather, CBOT asserts

that its former members continue to qualify as ``CBOT Full Members''
and continue to have all the same trading rights they had in the
past.\92\ In addition, CBOT argues that the provisions in the 1992
Agreement regarding the effect of a potential merger involving CBOT do
not adversely affect the continued availability of the Exercise Right
in this case.\93\ CBOT believes that members of CBOT after the
acquisition continue to hold sufficient indicia of CBOT membership to
qualify for CBOE membership under Article Fifth(b).\94\
---------------------------------------------------------------------------

    \90\ One commenter criticizes the CBOE's proposal on the basis
that it ignores the CBOT's ``reasonable alternative
interpretation.'' See Ungaretti Letter, supra note 39, at 9. The
Commission, however, is not required to find that the interpretation
proposed is the most reasonable, but only that the one proposed is
consistent with the Exchange Act.
    \91\ See Mayer Brown Letter 3, supra note 37, at 34. CBOT also
notes CBOE's (now expired) arrangement with the Intercontinental
Exchange (``ICE'') when ICE was attempting to acquire the CBOT in
which ICE and CBOE would have paid $665.5 million to compensate, in
part, for the loss of the Exercise Right. See Mayer Brown Letter 5,
supra note 37, at 2. CBOT believes that this arrangement undercut
CBOE's claim that after the acquisition by CME Holdings, the
Exercise Right will have no value and the rights of Eligible CBOT
Full Members will be extinguished. See id. The Commission disagrees.
An offer of settlement in which compensation is to be paid does not
necessarily suggest that the underlying matter in dispute has any
particular validity or value. An offer to settle a disputed matter
has value it its own right, for example the savings associated with
the avoidance of protracted legal proceedings and the ability to
bring a dispute to a final conclusion.
    \92\ See Mayer Brown Letter 3, supra note 37, at 34-36.
    \93\ See id.
    \94\ See id. at 37.
---------------------------------------------------------------------------

    In particular, CBOT points out that the CBOT itself did not merge
with any entity and will survive the transaction with CME Holdings.\95\
CBOT affirms that the acquisition by CME Holdings is ``precisely the
kind of transaction that CBOE has already agreed would have no effect
on the Exercise Right under the 1992 Agreement.'' \96\ CBOT asserts
that as part of its 2005 restructuring it split full memberships into
three components: The Exercise Right Privilege, a Series B-1
membership, and stock in CBOT Holdings, and possession of all three
components qualifies a person as an ``Eligible CBOT Full Member''
within the meaning of the 1992 Agreement (therefore qualifying such
person for the Exercise Right).\97\ CBOT argues that the Exercise Right
should survive because the only change after the acquisition by CME
Holdings is that ``the 27,338 shares of Class A common stock of CBOT
Holdings that Exercise Right holders held before the merger was
consummated will be converted into 8,217.80 shares of CME Holdings
Class A common stock.'' \98\
---------------------------------------------------------------------------

    \95\ See id. at 35. Rather, CBOT Holdings (of which CBOT is a
subsidiary) was acquired by CME Holdings.
    \96\ See id.
    \97\ See id. at 36.
    \98\ See id. at 34.
---------------------------------------------------------------------------

    In response, CBOE argues that the concept of a CBOT ``member'' was
eliminated by the acquisition of CBOT, and the only reason persons had
continued to qualify as ``members'' of CBOT for purposes of Article
Fifth(b) after CBOT's restructuring is because under the 2001
Agreement, CBOE interpreted Article Fifth(b) so that persons would
qualify as ``members'' of CBOT if they held all of three specified
interests in CBOT and CBOT Holdings following CBOT's restructuring.\99\
CBOE points out that Article Fifth(b) was designed to recognize
contributions made by CBOT members in their capacities as owners, and
so an ownership stake in CBOT is essential to the definition of
``member.'' \100\ However, after the CME/CBOT transaction, the concept
of CBOT ``members'' as originally contemplated in Article Fifth(b) no
longer exists because CBOT is now owned by CME Holdings.\101\
Similarly, after the acquisition, persons who were former members of
the CBOT only hold trading permits and no longer possess any of the
other rights commonly associated with membership in an exchange.\102\
In particular, according to CBOE, a former CBOT member no longer has a
right to elect directors, the right to nominate candidates for
director, or the right to amend or repeal the bylaws of CBOT.\103\ In
addition, CBOE notes that one of the conditions in the 1992 Agreement
for Exercise Rights to continue after an acquisition is that ``the
survivor'' entity of any merger be an exchange, a condition that is no
longer satisfied since the survivor of the transaction is not an
exchange, but rather a holding company.\104\ CBOE states that ownership
of shares of CME Holdings is not enough to support Exercise Right
eligibility because the interpretation of Article Fifth(b) embodied in
the 2001 Agreement was that ``persons remain `members' of CBOT only if
they continue to hold all of three specified interests in CBOT and CBOT
Holdings following the 2005 demutualization of CBOT--namely, one Class
B, Series B-1 membership in CBOT, one [Exercise Right Privilege] and
27,338 shares of Class A stock of CBOT Holdings.'' \105\ However, as
CBOE notes, after CBOT is acquired by CME Holdings, ``there no longer
will be any persons who could hold all three of these interests--
because CBOT Holdings Class A stock will cease to exist and instead
will be converted into either cash or shares of CME Holdings.'' \106\
Further, CBOE notes that the 2001 Agreement states that the provisions
applicable to the Exercise Right would continue to apply only ``in the
absence of any other material changes to the structure or ownership of
the CBOT * * * not contemplated in the CBOT [restructuring].'' \107\
---------------------------------------------------------------------------

    \99\ See CBOE Response to Comments, supra note 4, at 26 and 29.
The Commission notes that there is support for this position in the
Memorandum of Opinion: ``The CBOE agreed, albeit with some
reluctance, that the restructuring of the CBOT into CBOT Holdings
would not render the Exercise Right inapplicable, a circumstance
that would likely have been the case if a provision under the
parties' agreement in 1992 had been strictly interpreted.''
Memorandum of Opinion, supra note 68, at 3.
    \100\ See CBOE Response to Comments, supra note 4, at 26-27.
    \101\ See id. at 26.
    \102\ See id. at 28.
    \103\ See id.
    \104\ See id.
    \105\ Id. at 29.
    \106\ CBOE Response to Comments, supra note 4, at 29.
    \107\ Id. at 27.
---------------------------------------------------------------------------

    Additionally, in response to the assertion that issues raised in
the proposed rule change are governed by state contract law, CBOE
responds that the 1992 Agreement was not a contract in which new rights
were created, but was rather an interpretation serving to clarify the
term ``Exercise Member'' and what is required to qualify as such.\108\
Specifically, according to CBOE, any contractual grant of exercise
rights that added or detracted from those afforded by Article Fifth(b)
would have represented an amendment of Article Fifth(b), which under
its own terms would have required an affirmative vote of at least 80%
of Exercise Members and CBOE Seat Owners, voting as separate
groups.\109\ Thus, CBOE concludes that, since no vote was taken, the
1992 Agreement cannot be construed as a contractual source of new
exercise rights, and, at most, must be construed to be a mutually
shared interpretation of Article Fifth(b).
---------------------------------------------------------------------------

    \108\ See id. at 13-15.
    \109\ See id.
---------------------------------------------------------------------------

    The Commission believes that the record provides a sufficient basis
on which the Commission can find that 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).\110\ After considering the materials on this issue submitted
by both the CBOE and CBOT, the Commission is persuaded by CBOE's
analysis of the difference between ``interpretations'' and
``amendments.'' In particular, the Commission notes that the CBOT's
letter of counsel was based on an error of fact with respect to the
composition of the CBOE Board at the time of the interpretation of
Article Fifth(b), and, in fact, the CBOE's Board of Directors was
composed of a majority of disinterested public directors at the time.
This issue is discussed below.\111\
---------------------------------------------------------------------------

    \110\ See 15 U.S.C. 78f(b)(1).
    \111\ See infra note 120 (citing to CBOT's opinion letter from
Frederick H. Alexander, Morris, Nichols, Arsht & Tunnell LLP, to
Erik R. Sirri and Elizabeth K. King, Division of Market Regulation,
Commission, dated August 20, 2007) and note 124 (citing to CBOE's
opinion letter from Michael D. Allen, Richards, Layton & Finger, to
Nancy M. Morris, Secretary, Commission, dated August 31, 2007).
---------------------------------------------------------------------------

    In approving this proposal, the Commission is relying on the CBOE's
representation that its approach is

appropriate under Delaware state law. The Commission is also relying on
CBOE's letter of counsel that concludes that the Board's interpretation
of Article Fifth(b) does not constitute an amendment to the CBOE's
Certificate of Incorporation and 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.\112\ Without opining on the merits of any claims arising
solely under state law, the Commission finds that CBOE has articulated
a sufficient basis to support its proposed rule change and for the
foregoing reasons finds that it is consistent with the Exchange Act.
---------------------------------------------------------------------------

    \112\ See Second Opinion of Counsel, supra note 5, at 5. The
Commission's evaluation of CBOE's interpretation of Delaware law
rests solely on the materials in the record before it.
---------------------------------------------------------------------------

    Further, the Commission agrees that the actions of the CBOT
necessitated CBOE's interpretation of Article Fifth(b) to clarify
whether the substantive rights of a former CBOT member would continue
to qualify that person as a ``member of [the CBOT]'' pursuant to
Article Fifth(b) in response to changes in the ownership of the
CBOT.\113\ While CBOE could have interpreted Article Fifth(b) in any
number of ways following that transaction, its proposed interpretation
is one that the Commission may find, and herein has found, to be
consistent with the Exchange Act. In particular, the Commission finds
that CBOE's proposed interpretation is consistent with Section 6(b)(5)
of the Exchange Act, which requires, among other things, that the rules
of an exchange be designed to promote just and equitable principles of
trade, because the proposal interprets CBOE's rules fairly and
reasonably with respect to eligibility for the Exercise Right following
the acquisition of CBOT by CME Holdings.\114\
---------------------------------------------------------------------------

    \113\ See CBOE Response to Comments, supra note 4, at 24.
    \114\ 15 U.S.C. 78f(b)(5). See also Securities Exchange Act
Release No. 51733 (May 24, 2005), 70 FR 30981, 30983 (May 31, 2005)
(SR-CBOE-2005-19) (finding CBOE's proposal to be consistent with
Section 6(b)(5) of the Exchange Act, which requires, among other
things, that the rules of an exchange be designed to promote just
and equitable principles of trade, because it interpreted 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).
---------------------------------------------------------------------------

    Except to the extent necessary to make these findings under the
Exchange Act, the Commission is not purporting to decide a question of
state law. Rather, the Commission's approval of the CBOE's proposal
under federal law leaves undisturbed any aspects arising solely under
state law for the consideration and disposition by the competent state
authorities. The currently pending Delaware state court action may
result in authoritative decisions on some of the issues we have
addressed and could make some of the conclusions reached here infirm.
If that occurs, the Commission expects CBOE to propose appropriate
amendments to its rules. Should CBOE fail to take the required steps,
the Commission has the authority to act.\115\
---------------------------------------------------------------------------

    \115\ See, e.g., Section 19(c) of the Exchange Act; 15 U.S.C.
78s(c) (authorizing the Commission to abrogate, add to, and delete
from exchange rules as necessary or appropriate to conform those
rules to the requirements of the Exchange Act).
---------------------------------------------------------------------------

2. Independence of CBOE Directors Voting on the Matter
    When filing a proposed rule change with the Commission, an SRO is
required to state that the proposal was validly approved pursuant to
the SRO's governing documents.\116\ If the CBOE Board's action in
approving the proposal for filing with the Commission was invalid, the
consequence would be that the CBOE's proposal would not satisfy the
Exchange Act requirements, specified in Form 19b-4, regarding the
necessity of valid approval by the SRO's governing body to authorize
the filing of the proposal with the Commission.
---------------------------------------------------------------------------

    \116\ See Item 2 of Form 19b-4 (requiring an SRO to ``[d]escribe
action on the proposed rule change taken by members or board of
directors. * * * '') and General Instruction E (specifying that the
Commission will not approve a proposal before the SRO has completed
all action required to be taken under its governing documents with
respect to the submission of such proposal to the Commission).
---------------------------------------------------------------------------

    CBOT argues that the proposal was approved by a conflicted board of
directors that had a financial interest in the status of the Exercise
Right.\117\ Further, CBOT argues that, while the CBOE Board of
Directors may interpret the CBOE Certificate of Incorporation ``in good
faith, consistent with the terms of [Article Fifth(b)], and not for
inequitable purposes,'' \118\ in this particular instance, the CBOE
Board ``acted in bad faith, for inequitable purposes, inconsistently
with the clear terms of the CBOE Charter, and in breach of its
fiduciary duties'' and was ``dominated by members with personal
financial interests in expropriating the rights of CBOT members.''
\119\
---------------------------------------------------------------------------

    \117\ See Mayer Brown Letter 3, supra note 37, at 11.
    \118\ Id. (citing CBOE's Second Opinion of Counsel).
    \119\ Id. One commenter asserts that if the CBOT's allegations
are correct that the CBOE Board of Directors lacked corporate
authority in filing the proposed rule change in so much as they
acted in bad faith and for inequitable purposes, then the issue of
whether the proposal had the requisite corporate authority is a
central question that can only be resolved by the Delaware state
court. See Ungaretti Letter, supra note 39, at 7.
---------------------------------------------------------------------------

    The Commission notes that the CBOT submitted an opinion of counsel
opining that the CBOE Board breached its fiduciary duties in
determining to extinguish the rights of Exerciser Members.\120\ That
opinion letter concludes that ``[a] majority of the directors serving
on the CBOE Board and interpreting Article Fifth(b) are either regular
members of CBOE (who stand to benefit financially from the proposed
rule change) or are affiliated with, or beholden to, such regular
members.'' \121\ Specifically, the opinion letter notes that ``11 of
the 23 members of the CBOE Board'' are regular CBOE members or
affiliated with or employed by such members.\122\ Together with the
Chairman and CEO of CBOE, the letter opines that ``12 of CBOE's 23
Board members are not independent'' with respect to the decision on how
to treat Exerciser Members.\123\ The letter also criticized the CBOE
Board's failure to appoint a special committee to interpret Article
Fifth(b), as it had done before CBOT announced its planned acquisition,
in connection with the determination regarding how to treat Exerciser
Members in connection with CBOE's planned demutualization.\124\
---------------------------------------------------------------------------

    \120\ See Letter from Frederick H. Alexander, Morris, Nichols,
Arsht & Tunnell LLP, to Erik R. Sirri and Elizabeth K. King,
Division of Market Regulation, Commission, dated August 20, 2007
(``Morris Nichols Opinion Letter'') (originally submitted as an
appendix to a comment letter to File No. SR-CBOE-2007-77 from
Jerrold E. Salzman, Skadden, Arps, Slate, Meagher & Flom LLP, dated
August 20, 2007).
    \121\ See id. at 3-4.
    \122\ See id. at 4.
    \123\ See id.
    \124\ See id.
---------------------------------------------------------------------------

    CBOE responds to the CBOT's comment by stating that it is based on
factual errors with respect to the CBOE Board's deliberations.\125\
CBOE affirms that its Board of Directors followed deliberative
procedures designed to ensure that the interpretation of Article
Fifth(b) was considered and agreed upon by directors who did not have a

personal or financial interest in the issue and who were not subject to
improper influence from those who might have such an interest.\126\
Specifically, according to CBOE, although interested directors were
permitted to participate in the general discussion of the
interpretation, the disinterested public directors' vote was conducted
independently under procedures that ensured that the vote was free from
any undue influence.\127\
---------------------------------------------------------------------------

    \125\ See CBOE Response to Comments, supra note 4, at 15-23. See
also Letter from Michael D. Allen, Richards, Layton & Finger, to
Nancy M. Morris, Secretary, Commission, dated August 31, 2007
(``Richards Layton August Opinion Letter'') (originally submitted as
an appendix to a comment letter to File No. SR-CBOE-2007-77 from
Patrick Sexton, Associate General Counsel, CBOE, dated August 31,
2007).
    \126\ See CBOE Response to Comments, supra note 4, at 19-20.
    \127\ See id. at 19-22. See also Richards Layton August Opinion
Letter, supra note 125.
---------------------------------------------------------------------------

    CBOE also responded to the Morris Nichols Opinion Letter by
submitting a subsequent opinion letter from its own counsel.\128\ In
particular, the CBOE's opinion letter states that, contrary to the
Morris Nichols Opinion Letter's assertion that the CBOE Board was
composed of 23 members, 12 of whom had a material interest in the
interpretation, the CBOE Board in fact had a majority of disinterested
directors at the time of the December 21, 2006 meeting of the CBOE's
Board of Directors when the Board considered the proposed rule
change.\129\ Specifically, the opinion letter states that the Board was
comprised of 21 members, 11 of whom had no membership interest in CBOE,
possessed no right to acquire a membership interest in CBOE, and had no
affiliation with an entity that owned any CBOE membership (i.e., they
were CBOE's ``Public Directors'').\130\ The opinion letter notes that
an additional director was an Exerciser Member (the ``Exerciser
Director''), and therefore did not have a personal interest in favor of
regular full CBOE members.\131\
---------------------------------------------------------------------------

    \128\ See Richards Layton August Opinion Letter, supra note 125.
    \129\ See id. at 2.
    \130\ See id.
    \131\ See id. at 3.
---------------------------------------------------------------------------

    In an affidavit provided by CBOE's General Counsel, CBOE affirms
that at the December 21, 2006 meeting of the CBOE's Board of Directors,
seven of the Public Directors were present (in person or by
telephone).\132\ The four Public Directors who were members of a
Special Committee of the Board that previously had been convened to
consider certain issues related to CBOE's planned demutualization were
present at the meeting but recused themselves from the discussion and
vote on the proposed interpretation.\133\ In a separate meeting, all
seven Public Directors voted unanimously in favor of the
interpretation.\134\ Following the separate meeting of the Public
Directors, the entire CBOE Board met to discuss the
interpretation.\135\ At that time, six Industry Directors were present
and voted unanimously in favor of the interpretation, one of whom was
an Exerciser Member.\136\ The seven Public Directors also voted in
favor of the proposal.\137\ The remaining three Industry Directors
abstained from the vote.\138\ In addition, the Chairman of the Board
was present and voted for the proposal.\139\
---------------------------------------------------------------------------

    \132\ See Affidavit of Joanne Moffic-Silver, dated August 30,
2007, at 1-2 (originally submitted as an appendix to a comment
letter to File No. SR-CBOE-2007-77 from Paul E. Dengel, Schiff
Hardin LLP, dated August 30, 2007) (``Moffic-Silver Affidavit'').
    \133\ See id. at 2. See also Richards Layton August Opinion
Letter, supra note 125, at footnote 3.
    \134\ See Moffic-Silver Affidavit, supra note 132, at 2.
    \135\ See id.
    \136\ See id.
    \137\ See id.
    \138\ See id.
    \139\ See id.
---------------------------------------------------------------------------

    Accordingly, the opinion letter notes that ``a majority of the
members of the Board voting when the full Board considered the Exercise
Right Interpretation were also Public Directors or Exerciser
Directors'' and the proposed interpretation was unanimously approved by
the seven voting Public Directors, who also had met and unanimously
approved the proposal in closed session, as well as the one Exerciser
Director and the remaining six voting directors.\140\
---------------------------------------------------------------------------

    \140\ See Richards Layton August Opinion Letter, supra note 125,
at 3.
---------------------------------------------------------------------------

    CBOT also asserts that the proposal is inconsistent with the
requirements of Section 6(b)(3) of the Exchange Act, which requires
fair representation of CBOE members in the administration of the
exchange's affairs, because the fact that the proposal would eliminate
the Exercise Right without compensation demonstrates per se that
Exerciser Members were not represented in the administration of CBOE's
affairs.\141\ However, in response, CBOE notes that the presence of an
Exerciser Member representative on CBOE's Board demonstrates that CBOE
provided fair representation to Exerciser Members in satisfaction of
Section 6(b)(3) of the Exchange Act.\142\
---------------------------------------------------------------------------

    \141\ See Mayer Brown Letter 3, supra note 37, at 19.
    \142\ See Richards Layton August Opinion Letter, supra note 125,
at 2.
---------------------------------------------------------------------------

    The Commission believes that the CBOE has adequately responded to
these commenters' contentions, and believes, based on the record before
it, that the CBOE Board's approval of the interpretation filed in this
proposed rule change was proper and that the CBOE has provided a
sufficient basis on which the Commission, as a federal matter under the
Exchange Act, can find that the CBOE's proposed rule change was
properly authorized and validly filed. In this regard, the Commission
approved CBOE's rules establishing the composition of its board of
directors, including the number of public directors.\143\ In 2002, the
Commission found that CBOE's proposal to increase the number of public
directors from 8 to 11 is consistent with the requirements of Section
6(b)(5) of the Exchange Act ``because it is designed to promote just
and equitable principles of trade and to protect investors and the
public interest by increasing public representation on the Exchange's
Board and certain committees so that the Board and those committees
will be balanced between industry (member) and public directors.''
\144\
---------------------------------------------------------------------------

    \143\ Section 6.1(a) of CBOE's Constitution defines ``public
directors'' as persons who are not members and who are not broker-
dealers or persons affiliated with broker-dealers.
    \144\ See Securities Exchange Act Release No. 46718 (October 24,
2002), 67 FR 66186 (October 30, 2002) (SR-CBOE-2002-48).
---------------------------------------------------------------------------

    The Commission is persuaded by CBOE's letter of counsel affirming
that, at the time of the CBOE Board's consideration of the Exercise
Right interpretation, a majority of the CBOE Board was disinterested
and independent.\145\ The Commission is relying on the CBOE's
representations and its letter of counsel, which conclude that a
majority of the CBOE Board's directors during the consideration of the
interpretation did not have a personal interest to favor the regular
CBOE members, which, counsel concludes, entitles the Board to the
presumption of the business judgment rule.\146\
---------------------------------------------------------------------------

    \145\ See Richards Layton August Opinion Letter, supra note 125,
at 3.
    \146\ See id. at 2-3.
---------------------------------------------------------------------------

C. Additional Concerns Expressed by the CBOT and Commenters

    As stated above, the Commission herein finds that CBOE's proposed
interpretation of Article Fifth(b) is consistent with the Exchange Act.
In particular, the Commission would like to address CBOT's contentions
that: (1) Due process was not given; (2) the proposal does not comply
with the requirements of Form 19b-4; (3) the proposal unfairly
discriminates among classes of CBOE members by revoking the memberships
of a defined group for reasons that do not apply to all CBOE members or
potential members; (4) the proposal fails to allocate fairly fees and
dues by increasing the value of one

group's CBOE membership and forcing another group to purchase new
memberships at an added cost; (5) the proposal does not promote free
and open markets because it reduces the number of members of the CBOE
and therefore negatively impacts liquidity and depth of the markets;
(6) the proposal places an unnecessary burden on competition by
eliminating the membership rights of current Exerciser Members and
eligible Exercise Members and thus reduces the number of people who are
able to trade on the Exchange; and (7) that the proposal is
inconsistent with Section 6(c)(4) of the Exchange Act.\147\ The CBOT
also argues that the proposal is an unreasonable interpretation and
breach of contract under state law.\148\ Each of these points is
addressed in turn, below.
---------------------------------------------------------------------------

    \147\ See Mayer Brown Letter 3, supra note 37, at 17-26. CBOT's
contention that the proposal was improperly adopted in so far as
CBOE failed to comply with its own rules in promulgating the
proposed rule change is addressed above. See supra Section IV.B.
    \148\ See Mayer Brown Letter 3, supra note 37, at 34.
---------------------------------------------------------------------------

1. Due Process and Sufficiency of Notice
    CBOT contends that there were failures of due process in the CBOE
Board's approval of the proposal.\149\ In particular, CBOT believes
that CBOE did not provide Exerciser Members or eligible Exercise
Members sufficient notice or an opportunity to be heard ``at a
meaningful time'' prior to filing the proposal with the Commission,
which consequently deprived CBOT members of valuable property rights
without due process.\150\
---------------------------------------------------------------------------

    \149\ See Mayer Brown Letter 3, supra note 37, at 27-34. See
also Stevens Letter, supra note 40. CBOT argues that CBOE, as a
state actor endowed with quasi-governmental authority, was obligated
to set rules that provide fair procedures when taking actions that
deny membership or limit a person's access to the services of the
Exchange. See Mayer Brown Letter 3, supra note 37, at 27-29.
    \150\ See Mayer Brown Letter 3, supra note 37, at 30-34. CBOT
notes that CBOE stated in its Form 19b-4 submission that it did not
solicit or receive comments on the proposed rule change, and uses
this fact to support its contention that the CBOE's process for
consideration of the proposal was flawed. See id. at 32. Item 5 of
Form 19b-4 directs an SRO to summarize any written comments it may
have received on a proposal prior to filing such proposal with the
Commission. The requirement to solicit written comments, however, is
not a prerequisite to filing a proposal with the Commission. Rather,
the act of filing a proposal with the Commission initiates a public
notice and comment procedure in which the Commission provides notice
of and solicits comments on an SRO's proposed rule change.
---------------------------------------------------------------------------

    In response, CBOE notes that it has complied with the requirements
of the Exchange Act in proposing its interpretation of Article Fifth(b)
and believes that there is no basis to argue that the fulfillment of
its filing obligations under the Exchange Act constitutes a deprivation
of due process.\151\
---------------------------------------------------------------------------

    \151\ CBOE Response to Comments, supra note 4, at 18 (footnote
28).
---------------------------------------------------------------------------

    The Commission is not persuaded that the CBOE should be considered
a government actor subject to constitutional due process requirements
in the context of its decision to file with the Commission a proposed
rule change pursuant to Section 19 of the Exchange Act. Even if the
CBOE were found to be a state actor when proposing an interpretation of
its rules, we do not believe that the CBOE, in fulfilling its filing
obligations, has deprived CBOT members of any process they are due.
Based on the record before it, the Commission finds that the CBOE has
satisfied all requirements prerequisite to filing a proposed rule
change with the Commission and in so doing has complied with the
applicable requirements of the Exchange Act, which are designed to
provide interested parties with notice and an opportunity to express
their views. CBOE filed its proposal with the Commission and the
Commission then promptly published it for notice and comment in the
Federal Register. The proposal was posted on the Commission's Web site
as well as the CBOE's Web site. This process, required by the Exchange
Act, provided the public with a meaningful opportunity to be heard and
afforded an opportunity for interested persons to alert the Commission
to facts or reasons that may indicate why a proposed rule change may
not satisfy the requirements for a proposed rule change under Section
19(b) of the Exchange Act. If in fact the Commission believes that a
proposal may not be consistent with the Exchange Act and the rules and
regulations thereunder applicable to the exchange, the consequence
would be that the Commission would institute disapproval proceedings
and, if the proper findings were made, would not allow an SRO to
proceed with its proposal. In the present case, the Commission does not
believe that any commenters have raised facts or reasons indicating
that the CBOE's proposal is not consistent with the Exchange Act and
the rules thereunder applicable to CBOE.
    The Commission is confident that the public and all affected
entities have received ample notice of CBOE's proposed rule change, and
commenters, including the CBOT members, have availed themselves of this
opportunity to provide their views to the Commission.\152\ Further,
because CBOE filed its proposal in December 2006, a full six months
before CBOT Holdings shareholders voted on the acquisition, and CBOE
granted the Commission an extension of time to consider the proposal,
affected entities were put on notice of the CBOE's position and were
afforded an extended opportunity to be heard before the Commission
considered the proposal.
---------------------------------------------------------------------------

    \152\ As noted previously, the Commission received 174 comment
letters on this proposal from 134 different commenters. See supra
note 36 and accompanying text.
---------------------------------------------------------------------------

    Finally, the Commission disagrees with the CBOT's argument that
CBOE was required to provide due process to the Exerciser Members prior
to filing the proposal with the Commission pursuant to Section 19(b),
because CBOE's act of filing a rule change for Commission consideration
does not deprive the Exerciser Members of property interests requiring
prior due process.\153\ The CBOT argues that ``the CBOT members who
hold Exercise Rights are holding a valuable property interest with an
ascertainable pecuniary value'' and that the ``value of an Exercise
Right is also reflected in the total value of a CBOT Full Membership,
which in itself is fully transferable.'' \154\ In essence, the CBOT
appears to argue that the CBOE has deprived the Exerciser Members of a
valuable property right simply by filing the proposal with the
Commission for consideration pursuant to the Exchange Act.\155\
---------------------------------------------------------------------------

    \153\ See, e.g., Mathews v. Eldridge, 424 U.S. 319, 332 (1976)
(noting that ``procedural due process imposes constraints on
governmental decisions which deprive individuals of ``liberty'' or
``property.'')
    \154\ Mayer Brown Letter 3, supra note 37, at 30.
    \155\ See id. (stating that ``the Proposed Rule Change affects
the current value of the Exercise Rights and the CBOT memberships
regardless of whether the Merger ever occurs.'').
---------------------------------------------------------------------------

    This argument is not persuasive. Any diminution of the value of the
CBOT memberships is not a deprivation of a property interest that would
compel the provision of due process by the CBOE. The proposal is simply
that, a proposal. At the time it was filed with the Commission, it had
not taken effect. Further, the proposal could not take effect before
the provisions of Section 19(b) of the Exchange Act had been satisfied,
which, in this case, include a determination by the Commission that the
proposed rule change complies with the requirements of the Exchange
Act. Although the rule filing might have caused a decreased value in an
Exercise Right, in the way the filing of litigation can affect a
company's stock price, the rule filing process mandated by the Exchange
Act affords due process.

Therefore, the CBOE did not deprive the Exerciser Members of any due
process that would warrant additional process in advance of CBOE's
filing a proposed rule change with the Commission.
2. Completeness of CBOE's Form 19b-4 Submission
    Item 3(b) in Form 19b-4 requires the SRO to ``explain why the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to the self-regulatory
organization.'' \156\ CBOT argues that the proposed rule change is
inconsistent with the requirements of the Exchange Act because Item 3
of CBOE's Form 19b-4 submission was incomplete.\157\ In response, CBOE
states that it satisfied the requirements of Form 19b-4 by providing a
detailed history behind the proposed interpretation, explained the need
for the interpretation, stated the purpose served by the
interpretation, and noted why the interpretation is fair and
reasonable.\158\ Furthermore, CBOE submits that it provided a full
explanation in Item 3 of why its proposed interpretation is consistent
with the Exchange Act and then simply stated the conclusion in Section
II.A(2) of the Notice.\159\ The Commission finds that the proposed rule
change was complete and properly filed in that it provided all of the
requisite information specified in Form 19b-4.
---------------------------------------------------------------------------

    \156\ See Item 3(b) in Form 19b-4.
    \157\ See Mayer Brown Letter 3, supra note 37, at 17; Mayer
Brown Letter 5, supra note 37, at 6-7.
    \158\ See CBOE Response to Comments, supra note 4, at 23-24.
    \159\ See id.
---------------------------------------------------------------------------

3. Unfair Discrimination
    CBOT argues that the proposed rule change discriminates among
classes of CBOE members (i.e., Exerciser Members vs. ``regular'' CBOE
full members) by impermissibly applying ``different membership rules to
Regular [CBOE] Members and Exerciser Members without justification * *
*.'' \160\ In response, CBOE states that equal treatment is not
required in this case because it is not relevant to the validity of the
proposed interpretation whether persons who previously would have
qualified as Exerciser Members will not be treated the same as regular
members under the interpretation.\161\ According to CBOE, the argument
that Exerciser Members are entitled to the same treatment as regular
CBOE members presumes that persons are still eligible to become and
remain Exerciser Members, and is consequently flawed because the CBOT/
CME transaction resulted in no persons being eligible to remain
Exercise Members.\162\
---------------------------------------------------------------------------

    \160\ See Mayer Brown Letter 3, supra note 37, at 18.
    \161\ See CBOE Response to Comments, supra note 4, at 30-32.
    \162\ See id. at 30-32. In addition, CBOE notes that Exerciser
Members and regular CBOE members were treated differently in one
respect--Exerciser Members were not permitted to transfer their CBOE
Exercise Membership. See id. at 30.
---------------------------------------------------------------------------

    In other words, CBOE asserts that its proposed interpretation does
not ``terminate'' or ``extinguish'' the Exercise Right for persons who
otherwise would be entitled thereto. Rather, it is the actions of the
CBOT that has resulted in no persons being able to qualify as
``members'' of the CBOT for purposes of Article Fifth(b).\163\ In
addition, CBOE notes that the proposal does not delete Article Fifth(b)
or the Exercise Right contained therein, but rather addresses whether
anyone will continue to be eligible to utilize that right after the
acquisition of CBOT by CME Holdings.\164\ CBOE notes that the express
terms of Article Fifth(b) state that the Exercise Right will remain
available for a person only for ``so long as he remains a member of
[CBOT],'' \165\ and, as explicitly contemplated in the 1992 Agreement,
CBOE believes that CBOT was well aware that the consequence of a merger
or acquisition of the CBOT might be to eliminate the eligibility of
persons to utilize the Exercise Right.\166\
---------------------------------------------------------------------------

    \163\ See id. at 24.
    \164\ See id. at 24-25.
    \165\ See id. at 25.
    \166\ See id.
---------------------------------------------------------------------------

    The Commission believes that the CBOE's proposed interpretation of
Article Fifth(b) is consistent with Section 6(b)(5) of the Exchange
Act,\167\ which requires, among other things, that exchange rules not
be unfairly discriminatory. The CBOE is interpreting an existing rule
that allows certain persons to become members without buying a seat on
the exchange. These persons must satisfy all other prerequisites to
membership.\168\ Article Fifth(b) only relates to members of the CBOT.
It entitled such members to membership on CBOE under certain
circumstances, which have been interpreted over many years by CBOE,
including specifically in the 1992 and 2001 Agreements, which addressed
the status of Exerciser Members in the event that significant changes
in the ownership structure of the CBOT occurred. The interpretation
proposed by the CBOE applies equally to all persons similarly situated.
---------------------------------------------------------------------------

    \167\ 15 U.S.C. 78f(b)(5).
    \168\ See, e.g., CBOE Rule 3.3 (Qualifications and Membership
Statuses of Member Organizations).
---------------------------------------------------------------------------

4. Allocation of Fees and Dues/ Economic Impact of Proposal
    CBOT argues that the proposal fails to provide for a reasonable
allocation of dues, fees, and other charges in that it could have the
effect of increasing the value of a CBOE membership while requiring
former Exerciser Members to ``pay twice'' for access to CBOE.\169\
Further, CBOT argues that the proposal will result in a windfall
enrichment of regular CBOE members in connection with CBOE's proposed
demutualization.\170\ Additionally, one commenter argued that the
potential economic impact of the proposal presented a reason for the
Commission to disapprove the proposed rule change.\171\
---------------------------------------------------------------------------

    \169\ See Mayer Brown Letter 3, supra note 37, at 22.
    \170\ See Mayer Brown Letter 3, supra note 37, at 25. See also
Ungaretti Letter, supra note 39, at 11.
    \171\ See Ungaretti Letter, supra note 39, at 2 and 10.
---------------------------------------------------------------------------

    In response, CBOE states that former Exerciser Members have no
claim to any value derived from their former rights for which they no
longer qualify.\172\ According to CBOE, the value of the Exercise Right
was lost, not because of action taken by the CBOE, but rather because
of the CME's acquisition of CBOT.\173\
---------------------------------------------------------------------------

    \172\ See CBOE Response to Comments, supra note 4, at 32.
    \173\ See id.
---------------------------------------------------------------------------

    The Commission notes that the CBOE's proposed rule change does not
propose any new or modified fees, dues, or other charges. Further, the
Commission is not required to consider the potential effect on the
value of a CBOE or CBOT membership that arises as a consequence of the
CBOE's proposed rule change. Section 6 of the Exchange Act does not
establish standards regarding the impact of exchange rules on the value
of an exchange's membership or the value of a membership in a separate
entity.
5. Market Impact
    CBOT argues that the proposed rule change will adversely affect the
liquidity and depth of CBOE's market because it would reduce the number
of CBOE members as Exerciser Members lose their ability to trade on the
CBOE.\174\ In response, CBOE notes that

the proposal contemplates that CBOE will provide temporary interim
trading access to allow former Exerciser Members to continue to have
uninterrupted access to CBOE in order to avoid a sudden disruption to
CBOE's market.\175\ The CBOE has since filed its temporary membership
plan for former Exerciser Members, which will become operative
following today's approval of the interpretation.\176\ In addition,
CBOE believes that a negative impact on the quality of CBOE's markets
is unlikely, given the number of people who currently provide liquidity
as market makers on CBOE's market.\177\
---------------------------------------------------------------------------

    \174\ See Mayer Brown Letter 3, supra note 37, at 24-25. See
also Ungaretti Letter, supra note 39, at 11-12; Morelli Letter,
supra note 42; Crilly Letter 1, supra note 40; Cashman Letter, supra
note 40; Israel Letter, supra note 40; Chubin Letter, supra note 40;
Esterman Letter, supra note 42; Pietrzak Letter, supra note 41;
Bianchi Letter, supra note 40; Todebush Letter, supra note 41;
Richards Letter 2, supra note 40; and Crilly Letter 2, supra note
42.
    \175\ See CBOE Response to Comments, supra note 4, at 33.
    \176\ See Securities Exchange Act Release No. 56458 (September
18, 2007), 72 FR 54309 (September 24, 2007) (SR-CBOE-2007-107).
    \177\ See CBOE Response to Comments, supra note 4, at 33.
---------------------------------------------------------------------------

    The Commission agrees. The CBOE's proposed temporary membership
plan was filed on September 13, 2007 under Section 19(b)(3)(A) and was
immediately effective upon filing. The Commission did not, and is not
today, approving that proposed rule change. This temporary membership
plan, however, does preserve the status quo in existence prior to the
acquisition of CBOT by CME Holdings with respect to those individuals
that had utilized the Exercise Right to trade on the CBOE. Because of
these temporary memberships, the Commission believes that its approval
of this proposed rule change will not impact the quality or fairness of
CBOE's market and is, therefore, consistent with Section 6(b)(5) of the
Exchange Act.\178\
---------------------------------------------------------------------------

    \178\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

 6. Burden on Competition
    CBOT asserts that the proposal imposes an unnecessary burden on
competition, which CBOE has failed to justify, because it drastically
reduces the number of people who are able to trade on CBOE.\179\ CBOE's
position is that the effect on the Exercise Right is a consequence of
former CBOT members' approval of the acquisition of CBOT by CME
Holdings, in which case the failure to qualify as a ``member of [the
CBOT]'' under Article Fifth(b) is a self-imposed consequence of
substantial changes to the structure and ownership of the CBOT.\180\
---------------------------------------------------------------------------

    \179\ See Mayer Brown Letter 3, supra note 37, at 24.
    \180\ See CBOE Response to Comments, supra note 4, at 33.
---------------------------------------------------------------------------

    The Commission agrees that the CBOE's proposal does not impose an
inappropriate burden on competition, and is therefore consistent with
Section 6(b)(8) of the Exchange Act.\181\ In particular, following
Commission approval of CBOE's proposal, CBOE's existing full members,
as well as former Exerciser Members who access the Exchange pursuant to
temporary memberships, will continue to have uninterrupted access to
CBOE's markets. Accordingly, the Commission believes that CBOE will
continue to accommodate a membership pool that provides for vigorous
competition on CBOE's markets. Furthermore, CBOE's proposal is an
application of existing rules and interpretations to a new set of facts
arising from the CME's acquisition of CBOT. Accordingly, the Commission
finds that CBOE's proposed interpretation does not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.
---------------------------------------------------------------------------

    \181\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

7. The Proposed Interpretation Is Consistent With Section 6(c)(4) of
the Exchange Act
    One commenter urged the Commission to disapprove the proposal on
the basis that it would violate Section 6(c)(4) of the Exchange
Act,\182\ which requires that an exchange not ``decrease the number of
memberships in such exchange'' below the number of memberships ``in
effect on May 1, 1975.'' \183\ CBOE argues that the proposed
interpretation does not ``terminate'' or ``extinguish'' the Exercise
Right for persons who otherwise would be entitled thereto, and
therefore it has not taken any action that would violate Section
6(c)(4) of the Exchange Act.\184\ Rather, CBOE states, that it is the
actions of the CBOT to enter into the CME Holdings acquisition that has
resulted in no persons being able to qualify as ``members of the
[CBOT]'' for purposes of Article Fifth(b).\185\
---------------------------------------------------------------------------

    \182\ 15 U.S.C. 78f(c)(4).
    \183\ See Ungaretti Letter, supra note 39, at 12.
    \184\ See CBOE Response to Comments, supra note 4, at 33.
    \185\ See id.
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change is not an
attempt on the part of CBOE to decrease the number of CBOE memberships
in violation of Section 6(c)(4) of the Exchange Act. Rather, CBOE's
proposal was to address the status of the Exercise Right following the
acquisition of CBOT by CME Holdings.
    In addition, the CBOE's temporary access plan allows former
Exerciser Members to maintain their temporary memberships on CBOE and
continue, on an uninterrupted basis, to have access to CBOE's markets.
To change or terminate its temporary access plan, CBOE would be
required to file a proposed rule change with the Commission and any
such proposal would have to be consistent with the Exchange Act,
including Section 6(c)(4) thereof.
    Even if the Commission were to view the CBOE's proposal as an
effort on the part of CBOE to decrease the number of exchange
memberships below the 1975 level, the Commission finds that the number
of CBOE memberships in effect on November 2, 2007 exceeds the number of
CBOE memberships in effect in 1975. Specifically, the CBOE has
represented that as of June 30, 1975,\186\ the number of CBOE
memberships was 1,025.\187\ CBOE has represented that the number of
CBOE memberships in effect on November 2, 2007 was 1,179.\188\ The 222
Temporary Members are ``members'' under Section 3(a)(3) of the Exchange
Act with the same rights ``to effect transactions on [the CBOE] without
the services of another person acting as broker.'' \189\ Accordingly,
the current number of CBOE memberships exceeds the number of CBOE
memberships in effect in 1975 for purposes of Section 6(c)(4) of the
Exchange Act.
---------------------------------------------------------------------------

    \186\ CBOE has informed the Commission that it is unable to
locate historical records from May 1, 1975, but has located
financial statements from June 30, 1975 that contain a full count of
memberships then in effect. See Letter from Joanne Moffic-Silver,
General Counsel, CBOE, to Richard Holley III, Senior Special
Counsel, Division of Market Regulation, Commission, dated November
2, 2007.
    \187\ See id. Of those, 774 were transferable memberships and
251 were exerciser memberships. See id. Cf. Letter from Peter B.
Carey to Richard Holley III, Senior Special Counsel, Division of
Market Regulation, Commission, dated November 9, 2007 (arguing that
the number of CBOE memberships in 1975 should include all 1,402
exerciser memberships both active and inactive). Under the Exchange
Act, a ``member'' of a national securities exchange is defined as a
person permitted to effect transactions on an exchange without the
services of another person acting as broker. See 15 U.S.C.
78c(a)(3)(A). Thus, only those persons who affirmatively exercised
their rights under Article Fifth(b) to trade on CBOE would have been
considered members of the CBOE because only those persons were
permitted to effect transactions on the exchange without the
services of another person acting as broker.
    \188\ See Letter from Joanne Moffic-Silver, General Counsel,
CBOE, to Richard Holley III, Senior Special Counsel, Division of
Market Regulation, Commission, dated November 2, 2007, at 2. Of
those, 930 are transferable memberships, 222 are temporary members
(i.e., former Exerciser Members), and 27 are CBOE Stock Exchange
permits. See id.
    \189\ See 15 U.S.C. 78c(a)(3)(A). See also Securities Exchange
Act Release Nos. 56016 (July 5, 2007), 72 FR 38106 (July 12, 2007)
(SR-CBOE-2007-77) and 56458 (September 18, 2007), 72 FR 54309
(September 24, 2007) (SR-CBOE-2007-107).