[Federal Register: March 8, 2007 (Volume 72, Number 45)]
[Notices]
[Page 10575-10579]
[DOCID:fr08mr07-115]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55389; File No. SR-CBOE-2006-110]

Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Approval of Proposed Rule Change as
Modified by Amendment No. 1 Thereto and Notice of Filing and Order
Granting Accelerated Approval to Amendment Nos. 2 and 3 Relating to the
Establishment of CBOE Stock Exchange, LLC

March 2, 2007.

I. Introduction

    On December 26, 2006, the Chicago Board Options Exchange,
Incorporated, (the ``CBOE'' or ``Exchange'') filed with the Securities
and Exchange Commission (``Commission''), pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934, as amended (``Act''),\1\ and
Rule 19b-4 thereunder,\2\ a proposed rule change relating to the
establishment of the CBOE Stock Exchange (``CBSX''), which will be
operated by CBOE Stock Exchange, LLC (``CBSX LLC''). On January 10,
2007, the CBOE filed Amendment No. 1 to the proposed rule change. The
proposed rule change was published for comment in the Federal Register
on February 1, 2007.\3\ The Commission received no comments regarding
the proposal. On March 1, 2007, the CBOE filed Amendment No. 2 to the
proposed rule change. On March 2, 2007, the CBOE filed Amendment No. 3
to the proposed rule change. This order approves the proposed rule
change, grants accelerated approval to Amendment Nos. 2 and 3, and
solicits comments from interested persons on Amendment Nos. 2 and 3.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 55172 (January 25,
2007), 72 FR 4745.
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II. Overview

     The Exchange proposes to establish CBSX as a facility,\4\ as that
term is defined in Section 3(a)(2) of the Act,\5\ of CBOE. As the self-
regulatory organization (``SRO'') for CBSX, CBOE will have regulatory
responsibility for the activities of CBSX.\6\ CBSX will be a fully
automated marketplace for the trading of securities other than options
by CBOE members. CBSX will be operated by CBSX LLC, a Delaware limited
liability company. In the instant proposed rule change, CBOE seeks the
Commission's approval of the proposed governance structure of CBSX LLC
as reflected in the Operating Agreement of CBSX LLC. CBOE has submitted
separate proposed rule changes to establish rules relating to listing,
membership and trading on CBSX and to establish a permit program in
connection with CBSX.\7\
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    \4\ Pursuant to Section 3(a)(2) of the Act, the term
``facility'' when used with respect to an exchange, includes ``its
premises, tangible or intangible property whether on the premises or
not, any right to the use of such premises or property or any
service thereof for the purpose of effecting or reporting a
transaction on an exchange (including, among other things, any
system of communication to or from the exchange, by ticker or
otherwise, maintained by or with the consent of the exchange), and
any right of the exchange to the use of any property or service.''
15 U.S.C. 78c(a)(2). The Commission notes that although the
Operating Agreement refers to CBSX LLC as a facility of CBOE, the
scope of the CBSX facility is not limited to CBSX LLC.
    \5\ 15 U.S.C. 78c(a)(2).
    \6\ CBOE represents that it has adequate funds to discharge all
regulatory functions related to the facility. CBOE further
represents that CBSX LLC will not be entitled to any revenue
generated in connection with penalties, fines, and regulatory fees
that may be assessed by CBOE against CBOE members in connection with
trading on CBSX. Rather, all regulatory fines, penalties and fees
assessed against and paid by CBOE members to CBOE in connection with
trading on CBSX will remain with CBOE.
    \7\ The Commission approved the Exchange's proposed rule change
relating to the CBSX permit program. See Securities Exchange Act
Release No. 55326 (February 21, 2007), 72 FR 8816 (February 27,
2007). The Commission also approved the Exchange's proposed rule
change to establish the equity trading rules for CBSX. See
Securities Exchange Act Release No. 34-55392 (March 2, 2007).
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    As a limited liability company, ownership of CBSX LLC is
represented by limited liability membership interests. The holders of
such interests are referred to as ``Owners.'' \8\ Initially, there are
five Owners of CBSX LLC. CBOE is one of the Owners of CBSX LLC, and
owns all ``Series A'' Voting Shares \9\ of CBSX LLC, representing 50%
of CBSX LLC.\10\ The other four Owners and their respective ownership
interests are: VDM Chicago, LLC (20%); LaBranche & Co., Inc. (10%); IB
Exchange Corp. (10%); and Susquehanna International Group, LLP. (10%).
Each of these four Owners owns ``Series B'' Voting Shares of CBSX LLC.
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    \8\ ``Owner'' means a limited liability company ``member'' as
that term is defined in Sec.  18-101(11) of the Delaware Limited
Liability Company Act (``DLLCA''), and shall include each Voting
Owner and each Management Owner, but only so long as such person is
shown on CBSX's books and records as the owner of at least one (1)
Share (or fraction of one (1) Share). ``Owner'' shall include a
``Substituted Owner'' as defined in Section 6.5(a) of the Operating
Agreement, but only upon compliance with all of the requirements of
Sections 6.4 and 6.5 of the Operating Agreement. For purposes of
clarity, no person shall become an ``Owner'' as to any Shares, if
the acquisition of those Shares will require a change of ownership
notice to the Commission, or will constitute a proposed rule change
subject to the requirements of the rule filing process of Section 19
of the Act, until all of the requirements of such notice or rule
filing process have been accomplished and, if necessary, approved by
the Commission. See Section 2.1(16) of the Operating Agreement.
    \9\ ``Voting Shares'' means those Shares entitled to vote on
matters submitted to the Owners, which Voting Shares are held by the
Voting Owners. See Section 2.1(27) of the Operating Agreement.
    \10\ As noted in Section 3.2 of the Operating Agreement, it is
the intention of the Owners that no other members of CBSX LLC (other
than Affiliates of CBOE) be owners of Series A Voting Shares, and
that no additional Series A Voting Shares be authorized, created or
issued for such purpose; provided however, that this provision is
not intended to limit or restrict any rights of CBOE to transfer any
of its Series A Voting Shares with the prior approval of the
Commission as provided for in Article VI, including Section 6.14 of
the Operating Agreement, or any other provision thereof, or any
rights to be acquired by a transferee of those Shares as provided
therein.
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    Under Section 3.2 of the Operating Agreement, the CBSX LLC Board of
Directors (``Board of Directors'' or ``Board'') may authorize the
issuance of ``Series C'' Non-Voting Restricted Shares \11\ from time to
time to employees, consultants, or officers of CBSX LLC, or any other
person, each of

whom would become a Management Owner \12\ of CBSX LLC.
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    \11\ ``Non-Voting Restricted Share'' means a Share held by a
Management Owner containing the voting limitations and other
restrictions described in the Operating Agreement. See Section
2.1(15) of the Operating Agreement.
    \12\ ``Management Owner'' means a natural person who is
identified on Exhibit A of the Operating Agreement (Exhibit 5C to
the proposed rule change) as a Management Owner, who subsequently
becomes a Management Owner pursuant to the provisions of Section
3.2(c) of the Operating Agreement, or who is a transferee or
assignee of Non-Voting Restricted Shares (other than a Voting
Owner). See Section 2.1(13) of the Operating Agreement.
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    As provided in Section 8.9 of the Operating Agreement, the
outstanding Series A Voting Shares will, in the aggregate (and without
being deemed to be a voting trust), be entitled to a number of votes
equal to 50% of the total number of Voting Shares outstanding, on each
matter submitted to a vote of the Owners. Each outstanding Series B
Voting Share will be entitled to one vote on each matter submitted to a
vote of the Owners. The Series C Non-Voting Restricted Shares will not
be entitled to vote on any matter submitted to a vote of the Owners.

III. Discussion

    After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\13\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(1) of the Act,\14\ which
requires a national securities exchange to be so organized and have the
capacity to carry out the purposes of the Act and to enforce compliance
by its members and persons associated with its members with the
provisions of the Act, the rules or regulations thereunder, and the
rules of the exchange.
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    \13\ In approving the proposed rule change, the Commission has
considered its impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(1).
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    The Commission also finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\15\ which requires that the
rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices; to promote just and
equitable principles of trade; to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities; to remove impediments to and perfect the mechanism of a
free and open market and a national market system; and, in general, to
protect investors and the public interest; and are not designed to
unfairly discriminate between customers, issuers, brokers, or dealers.
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    \15\ 15 U.S.C. 78f(b)(5).
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A. CBSX as a Facility of the Exchange

    The Commission believes that the proposed rule change is consistent
with Section 6(b)(1) of the Act \16\ in that upon establishing CBSX as
a facility of the Exchange and entering into the relationship with CBSX
LLC described above, CBOE will remain so organized, and have the
capacity to be able, to carry out the purposes of the Act. The
Commission notes that it previously approved similar structures with
respect to the operation of exchange facilities.\17\
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    \16\ 15 U.S.C. 78f(b)(1).
    \17\ See Securities Exchange Act Release No. 54399 (September 1,
2006), 71 FR 53728 (September 12, 2006) (order approving the ISE
Stock Exchange, LLC as a facility of the International Securities
Exchange, Inc.); Securities Exchange Act Release No. 54364 (August
25, 2006), 71 FR 52185 (order approving the Boston Equities Exchange
as a facility of the Boston Stock Exchange, Inc.); and Securities
Exchange Act Release No. 49065 (January 13, 2004), 69 FR 2768
(January 20, 2004) (order approving the Boston Options Exchange as a
facility of the Boston Stock Exchange, Inc.).
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    The Commission believes that CBSX LLC can be approved as the
operator of the CBSX facility since CBOE will be the SRO for the CBSX
facility, and CBSX LLC will conduct the facility's business operations
in a manner consistent with the regulatory and oversight
responsibilities of CBOE.\18\
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    \18\ As the SRO, CBOE will have regulatory responsibility for
the facility.
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    Although CBSX LLC itself will not carry out any regulatory
functions, all its activities must be consistent with the Act. Under
Section 5.7 of the Operating Agreement, each CBSX LLC Owner agrees to
comply with the federal securities laws and rules and regulations
thereunder; to cooperate with the Commission and CBOE pursuant to their
regulatory authority and the provisions of the Operating Agreement; and
to engage in conduct that fosters and does not interfere with CBSX
LLC's and CBOE's ability to prevent fraudulent and manipulative acts
and practices; promote just and equitable principles of trade; foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities; remove impediments to and
perfect the mechanism of a free and open market and a national market
system; and, in general, protect investors and the public interest. In
addition, under Section 9.16 each Director agrees to comply with the
federal securities laws and the rules and regulations thereunder, and
to cooperate with the Commission and CBOE pursuant to the respective
regulatory authority of the Commission and CBOE. In addition, each
Director will take into consideration whether any actions taken or
proposed to be taken as a Director for or on behalf of CBSX LLC, or any
failure or refusal to act (including a failure to be present to
constitute a quorum, or to reasonably provide an affirmative vote or
consent) would constitute interference with CBOE's regulatory functions
and responsibilities in violation of the Operating Agreement or the
Act. These provisions reinforce the notion that CBSX, as a facility of
an exchange, is not solely a commercial enterprise; it is an integral
part of an SRO registered pursuant to the Act and, as such, is subject
to obligations imposed by the Act.
    These obligations endure as long as CBSX is a facility of the
Exchange, regardless of the size of CBOE's ownership interest in CBSX
LLC, the operator of the facility. The Exchange currently owns 50%
interest in the operator of the facility and if, in the future, it
wishes to reduce its interest in CBSX LLC to below 20%, pursuant to
Section 6.12(d) of the Operating Agreement the Exchange would be
required to file a proposed rule change with the Commission under
Section 19(b) of the Act. The Commission believes that this is a
reasonable measure to alert the Commission to a significant reduction
of CBOE's interest in CBSX LLC. Such a reduction in ownership could
warrant additional review of the Operating Agreement to ensure that
CBOE's responsibilities as the SRO of the CBSX facility are not
compromised.
    The Operating Agreement includes additional provisions that make
special accommodations for CBOE as the SRO of the CBSX facility.
Section 1.8 of the Operating Agreement sets forth CBOE's authority with
respect to any action, transaction or aspect of an action or
transaction that relates to CBOE's regulatory responsibilities, by
requiring CBOE's affirmative vote before such action or transaction or
aspect thereof can be authorized, undertaken or effective. For example,
Section 9.15(a) provides that CBSX LLC may not take certain specific
actions without the approval of a Super Majority of the Owners,\19\ and
the additional approving vote of CBOE.
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    \19\ ``Super Majority of the Owners'' means, subject to the
provisions of Section 1.8 of the Operating Agreement as to
Regulatory Requirements, the affirmative vote of both (i) all of the
Owners of the Series A Voting Shares at the time, and (ii) any two
(2) of the Initial Owners of Series B Voting Shares who then retain
ownership of Series B Voting Shares. See Section 2.1(25) of the
Operating Agreement.

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    In addition, Section 9.2(b) of the Operating Agreement provides
that, in light of its ownership of the Series A Voting Shares, CBOE is
entitled to designate a number of Directors equal to the aggregate
number of Directors designated by those Owners owning Series B Voting
Shares. Section 9.2(d) also gives CBOE the right, as long as CBSX
remains a facility of CBOE, to designate at least one Director
regardless of whether it maintains any ownership interest in CBSX LLC.
In addition, despite a statement of a general prohibition against
Owners committing or acting on behalf of CBSX LLC contained in Section
5.6 of the Operating Agreement, Section 9.15(a) would permit CBOE to
act on behalf of CBSX LLC in regulatory matters. Finally, CBOE has
complete access to information through provisions such as Section 15.2
of the Operating Agreement, which allows CBOE, the other Owners, and
their respective officers, directors, agents, and employees, to
disclose confidential information to the Commission or CBOE.
    Because the Exchange has proposed to operate CBSX as its facility,
CBOE's obligations under the Act extend to its members' activities on
CBSX, as well as to the operation and administration of CBSX. The
Commission believes that the provisions described above are consistent
with the Act and enhance the ability of CBOE to carry out its self-
regulatory responsibilities with respect to its CBSX facility.

B. Changes in Control of CBSX LLC

    The Commission believes that the restrictions in the Operating
Agreement on direct and indirect changes in control of CBSX LLC are
sufficient so that CBOE would be able to carry out its self-regulatory
responsibilities and that the Commission can fulfill its
responsibilities under the Act.
    Exhibit A of the Operating Agreement lists all CBSX LLC Owners, the
Series of shares owned, and the percentage ownership interest in CBSX
LLC. A change to this exhibit (as well as any other provision of the
Operating Agreement) would need to be filed with the Commission if so
required under Section 19(b) of the Act and Rule 19b-4 thereunder. In
addition, Section 6.14 of the Operating Agreement provides that any
proposed transfer of CBSX LLC shares that would cause any person, alone
or together with any Affiliate, to meet or cross the 20% ownership
threshold or any subsequent 5% ownership interest level (e.g., 25%,
30%, 35%, etc.) would require CBOE to file a proposed rule change with
the Commission pursuant to Section 19(b) of the Act and be subject to
approval by the Commission. Any proposed transfer of Series A Voting
Shares would also require CBOE to file a proposed rule change under
Section 19(b) of the Act and Rule 19b-4 thereunder.
    Furthermore, Section 6.13 of the Operating Agreement requires CBOE
to inform the Commission in writing at least ten days prior to the
closing date of any transaction that results in a person's percentage
ownership interest, alone or together with any Affiliate, in CBSX LLC
that would result in such person meeting or crossing the 5%, 10%, or
15% ownership thresholds. The Commission believes that this approach is
consistent with the Act in that it is analogous to the ongoing
reporting requirements of Form 1,\20\ the application for (and
amendments to the application for) registration as a national
securities exchange. Exhibit K of Form 1 requires any exchange that is
a corporation or partnership to list any persons that have an ownership
interest of 5% or more in the exchange; \21\ and Rule 6a-2(a)(2) under
the Act \22\ requires an exchange to update its Form 1 within ten days
after any action that renders inaccurate the information previously
filed in Exhibit K.
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    \20\ 17 CFR 249.1 and 17 CFR 249.1a.
    \21\ This reporting requirement applies only to exchanges that
have one or more owners, shareholders, or partners that are not also
members of the exchange. See Form 1, Exhibit K. Exhibit K applies
only to the exchange itself, not to entities that operate facilities
of the exchange.
    \22\ 17 CFR 240.6a-2(a)(2).
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    Exhibit K imposes no obligation on an exchange to report parties
whose ownership interest in the exchange is less than 5%. Similarly,
Section 6.13 of the Operating Agreement requires CBOE to notify the
Commission of an interest in CBSX LLC only when that interest reaches
5% or more. The Commission does not believe that the identity of a
party that has less than a 5% interest in a facility of a national
securities exchange is a ``rule of the exchange'' that must be filed
pursuant to Section 19(b) of the Act and Rule 19b-4(b) thereunder.
    In addition, Section 15.16 of the Operating Agreement would require
an indirect controlling party to become a party to the Operating
Agreement upon establishing a controlling interest in any Owner who,
alone or together with any Affiliate, holds a Percentage Interest in
CBSX LLC equal to or greater than 20%. Any such amendment to the
Operating Agreement would require a proposed rule change to be filed
with the Commission pursuant to Section 19(b) of the Act. The proposed
rule change would alert the Commission to the existence of a proposed
indirect controlling party and present the Commission and CBOE with an
opportunity to determine what additional measures, if any, might be
necessary to provide sufficient regulatory jurisdiction over the
proposed indirect controlling party. The Commission understands that
Section 15.16 of the Operating Agreement would apply to any ultimate
parent of CBSX LLC, no matter how many levels of ownership are
involved, provided that a controlling interest exists between each link
of the ownership chain.
    In conclusion, the Commission believes that Sections 6.13, 6.14,
and 15.16 of the Operating Agreement, together with the requirements of
Section 19(b) of the Act and Rule 19b-4 thereunder, provide the
Commission with sufficient authority over changes in control of CBSX
LLC to enable the Commission to carry out its regulatory oversight
responsibilities with respect to CBOE and the CBSX facility.

C. Regulatory Jurisdiction Over CBSX LLC Owners

    The Commission believes that the terms of the Operating Agreement
provide the Commission and CBOE with sufficient regulatory jurisdiction
over the controlling parties and Owners to carry out their
responsibilities under the Act. In Section 6.15(a), each Owner
acknowledges that--to the extent that they are related to CBSX LLC
activities--the books, records, premises, officers, directors, agents,
and employees of the Owner are deemed to be the books, records,
premises, officers, directors, agents, and employees of CBOE for the
purpose of and subject to oversight pursuant to the Act. Moreover, in
Section 6.15(b) of the Operating Agreement, each Owner acknowledges
that the books, records, premises, officers, directors, agents, and
employees of CBSX LLC are deemed to be the books, records, premises,
officers, directors, agents, and employees of CBOE for the purpose of
and subject to oversight pursuant to the Act. These provisions would
enable the Commission to exercise its authority under Section 19(h)(4)
\23\ of the Act with

respect to the officers and directors of CBSX LLC and of all Owners,
since all such officers and directors--to the extent that they are
acting in matters related to CBSX LLC activities--would be deemed to be
the officers and directors of CBOE itself. Furthermore, the records of
any Owner--to the extent that they are related to CBSX LLC activities--
are subject to the Commission's examination authority under Section
17(b)(1) of the Act,\24\ as these records would be deemed to be the
records of CBOE itself.
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    \23\ 15 U.S.C. 78s(h)(4). Section 19(h)(4) authorizes the
Commission, by order, to remove from office or censure any officer
or director of a national securities exchange if it finds, after
notice and an opportunity for hearing, that such officer or director
has: (1) Willfully violated any provision of the Act or the rules
and regulations thereunder, or the rules of a national securities
exchange; (2) willfully abused his or her authority; or (3) without
reasonable justification or excuse, has failed to enforce compliance
with any such provision by a member or person associated with a
member of the national securities exchange.
    \24\ 15 U.S.C. 78q(b)(1).
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    In addition, under the terms of Section 6.15(c) of the Operating
Agreement, CBSX LLC and each Owner (other than CBOE for so long as CBSX
is a facility of CBOE) \25\--and their respective officers and
directors and their agents and employees whose principal place of
business and residence is outside of the United States--must
irrevocably submit to the jurisdiction of the U.S. federal courts, the
Commission, and CBOE for the purposes of any suit, action, or
proceeding pursuant to the U.S. federal securities laws and the rules
or regulations thereunder, commenced and initiated by the Commission
arising out of or relating to CBSX LLC activities. In addition, CBSX
LLC and each Owner (other than CBOE for so long as CBSX LLC is a
facility of CBOE)--and their respective officers and directors and
their agents and employees whose principal place of business and
residence is outside of the United States--must waive, and agree not to
assert by way of motion, as a defense or otherwise in any such suit,
action, or proceeding, any claim that it is not personally subject to
the jurisdiction of the Commission; that the suit, action or proceeding
is an inconvenient forum; that the venue of the suit, action, or
proceeding is improper; or that the subject matter of the suit, action,
or proceeding may not be enforced in or by such courts or agency.
Moreover, pursuant to Section 6.15(d) of the Operating Agreement, the
CBSX LLC and each Owner (other than CBOE for so long as CBSX LLC is a
facility of CBOE) are required to take such action as is necessary to
ensure that such Owner's officers and directors and their agents and
employees whose principal place of business and residence is outside
the United States, consent to the application of these requirements
with respect to their CBSX LLC-related activities. Finally, under
Section 5.7 of the Operating Agreement, CBSX LLC and each Owner agree
to cooperate with the Commission and CBOE pursuant to their respective
regulatory authority.
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    \25\ The Commission notes that CBOE and its officers, directors
and employees are subject to the Commission's jurisdiction because
CBOE is an SRO and as such is subject to the Act and the rules and
regulations thereunder.
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    The Commission also notes that, even in the absence of these
provisions of the Operating Agreement, Section 20(a) of the Act \26\
provides that any person with a controlling interest in CBSX LLC would
be jointly and severally liable with and to the same extent that CBSX
LLC is liable under any provision of the Act, unless the controlling
person acted in good faith and did not directly or indirectly induce
the act or acts constituting the violation or cause of action.
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    \26\ 15 U.S.C. 78t(a).
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    The Commission believes that, together, these provisions grant the
Commission sufficient jurisdictional authority over CBSX LLC and its
Owners. Moreover, CBOE is required to enforce compliance with these
provisions because they are ``rules of the exchange'' within the
meaning of Section 3(a)(27) of the Act.\27\ A failure on the part of
CBOE to enforce its rules could result in suspension or revocation of
registration under Section 19(h)(1) of the Act.\28\
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    \27\ 15 U.S.C. 78c(a)(27).
    \28\ 15 U.S.C. 78s(h)(1).
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D. Ownership and Voting Restrictions on CBSX LLC Owners

    Section 6.12(a) of the Operating Agreement prohibits a person
(other than CBOE), either alone or together with its Affiliates, from
directly or indirectly owning more than a 20% Percentage Interest in
the Company (``Concentration Limitation''). Although Section 6.12(b)
permits this limitation to be waived by the Board, as long as such
waiver has been filed with and approved by the Commission, it precludes
such a waiver if the person or its Affiliates is a CBOE member.
Further, Section 8.10 of the Operating Agreement states that if an
Owner of Voting Shares that is also a CBOE member owns more than 20% of
the Outstanding Voting Shares (``Excess Shares''), alone or together
with any Affiliate, such Owner shall have no voting rights with respect
to the Excess Shares.
    In addition, proposed CBOE Rule 3.32 sets forth ownership
concentration limitations for CBOE members and permits the Exchange to
take appropriate disciplinary action in the event a violation of the
ownership concentration limitation is not cured within a specified time
frame. Proposed Rule 3.32 also sets forth restrictions on affiliations
between the Exchange and its members.
    The Commission believes that the ownership concentration and voting
limitations contained in the Operating Agreement and the provisions of
proposed CBOE Rule 3.32 are reasonable and consistent with the Act. It
is common for members who trade on an exchange to have ownership
interests in the exchange. However, a member's interest could become so
large as to cast doubt on whether the exchange can fairly and
objectively exercise its self-regulatory responsibilities with respect
to that member. A member that is also a controlling shareholder of an
exchange might be tempted to exercise that controlling influence by
directing the exchange to refrain from diligently surveilling the
member's conduct or from punishing any conduct that violates the rules
of the exchange or the federal securities laws. An exchange also might
be reluctant to surveil and enforce its rules zealously against a
member that the exchange relies on as its largest source of capital.
    Finally, the Commission believes that the restriction on voting
trust agreements in Section 8.8 of the Operating Agreement is
reasonable and consistent with the Act. In the absence of such a
provision, unaffiliated parties could act in concert and evade the
Operating Agreement's provisions regarding changes in control of CBSX
LLC.\29\ A voting trust agreement would not necessarily be inconsistent
with the Act, but any Owner wishing to establish a voting trust
agreement first would need to have the Operating Agreement amended to
enable a voting trust to be established. Any such amendment would
require a proposed rule change under Section 19(b) of the Act, thus
affording the Commission an opportunity to review the matter.
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    \29\ The Operating Agreement treats as belonging to a single
person any shares held by affiliated parties of the person. See
Sections 6.13, 6.14, and 15.16 of the Operating Agreement.
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E. Accelerated Approval of Amendment Nos. 2 and 3

    The Commission finds good cause for approving Amendment Nos. 2 and
3 to the proposed rule change prior to the thirtieth day after
publishing notice of Amendment Nos. 2 and 3 in the Federal Register
pursuant to Section 19(b)(2) of the Act.\30\
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    \30\ 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2) of the
Act, the Commission may not approve any proposed rule change, or
amendment thereto, prior to the thirtieth day after the date of
publication of the notice thereof, unless the Commission finds good
cause for so doing.

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    In Amendment No. 2, CBOE: (i) Amended Section 1.7 to clarify the
role of CBOE, as the SRO, for the activities of CBSX LLC; (ii) amended
Section 5.7 to add a reference to CBOE; (iii) amended Section 6.14 to
clarify that any transfer of Series A Voting Shares would require a
rule filing under Section 19 of the Exchange Act, subject to approval
by the Commission; (iv) amended Section 6.15 by, among other things,
revising paragraphs (c) and (d) to indicate that those paragraphs are
inapplicable in the case of CBOE and its respective officers,
directors, agents and employees for so long as CBSX LLC is a facility
of CBOE and to clarify the application of these paragraphs in the case
of the agents and employees of CBSX LLC and its Owners whose principal
place of business and residence is outside of the United States; and
(v) amended various sections of the Operating Agreement to refer to
CBOE rather than ``Regulatory Services Provider.'' Amendment No. 2 also
updated Exhibit A-1 of the Operating Agreement. Amendment No. 3 amended
Section 6.15(c) to clarify the U.S. agent for service of process.
    The Commission believes that Amendment Nos. 2 and 3 serve to
clarify and enhance the proposal and that publication of its provisions
would needlessly delay the implementation of the proposal. The
Commission therefore finds good cause exists to accelerate approval of
Amendment Nos. 2 and 3, pursuant to Section 19(b)(2) of the Act.\31\
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    \31\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment Nos. 2
and 3 are consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to<EMAIL_ADDRESS>Please include

File Number SR-CBOE-2006-110 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2006-110. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all

written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of the filing
also will be available for inspection and copying at the principal
office of the Exchange. All comments received will be posted without
change; the Commission does not edit personal identifying information
from submissions. You should submit only information that you wish to
make available publicly. All submissions should refer to Amendment Nos.
2 and 3 of File Number SR-CBOE-2006-110 and should be submitted on or
before March 29, 2007.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\32\ that the proposed rule change (SR-CBOE-2006-110), as modified
by Amendment No. 1, be, and it hereby is approved and Amendment Nos. 2
and 3 are approved on an accelerated basis.
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    \32\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-4125 Filed 3-7-07; 8:45 am]

BILLING CODE 8010-01-P


[Federal Register: June 1, 2010 (Volume 75, Number 104)]
[Notices]
[Page 30451-30452]
[DOCID:fr01jn10-121]

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SECURITIES AND EXCHANGE COMMISSION

Self-Regulatory Organizations; The Options Clearing Corporation;
Order Granting Approval of Accelerated Delivery of Supplement to the
Options Disclosure Document Reflecting Certain Changes to Disclosure
Regarding Options on Conventional Index-Linked Securities and Amendment
to the Options Disclosure Document Inside Front Cover

May 24, 2010.
    On October 27, 2009, The Options Clearing Corporation (``OCC'')
submitted to the Securities and Exchange Commission (``Commission''),
pursuant to Rule 9b-1 under the Securities and Exchange Act of 1934
(``Act''),\1\ five preliminary copies of a supplement to its options
disclosure document (``ODD'') reflecting certain changes to disclosure
regarding options on conventional index-linked securities.\2\ The ODD
would also be amended to update its front inside cover page so that it
contains a current list of the U.S. exchanges that trade options issued
by the OCC. On May 18, 2010, the OCC submitted to the Commission five
definitive copies of the supplement.\3\
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    \1\ 17 CFR 240.9b-1.
    \2\ See letter from Jean M. Cawley, Senior Vice President and
Deputy General Counsel, OCC, to Sharon Lawson, Senior Special
Counsel, Division of Trading and Markets (``Division''), Commission,
dated October 27, 2009.
    \3\ See letter from Jean M. Cawley, Senior Vice President and
Deputy General Counsel, OCC, to Sharon Lawson, Senior Special
Counsel, Division, Commission, dated May 14, 2010.
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    The ODD currently contains general disclosures on the
characteristics and risks of trading standardized options. Since July
2008, eight options exchanges amended their respective rules to permit
the listing and trading of options on conventional index-linked
securities.\4\ Further, BATS began trading options in February of
2010.\5\ The proposed supplement amends the ODD to accommodate these
changes by providing disclosures regarding options on conventional
index-linked securities and to update the inside front cover page of
the ODD to include BATS.\6\
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    \4\ BATS Exchange, Inc. (``BATS''), Chicago Board Options
Exchange, Incorporated, International Securities Exchange, LLC,
NASDAQ OMX BX, Inc, NASDAQ OMX PHLX, Inc., NASDAQ Stock Market, LLC,
NYSE Amex LLC, and NYSE Arca, Inc. each have provisions in their
respective rules for the listing and trading of options on
conventional index-linked securities. See e.g., Securities Exchange
Act Release Nos. 58203 (July 22, 2008), 73 FR 43812 (July 28, 2008)
(SR-NYSEArca-2008-57) (approving listing and trading options on
conventional index-linked securities); 58204 (July 22, 2008), 73 FR
43807 (July 28, 2008) (SR-CBOE-2008-64); and 58985 (November 20,
2008), 73 FR 72538 (November 28, 2008) (SR-ISE-2008-86); and see
e.g., Securities Exchange Act Release Nos. 60822 (October 14, 2009),
74 FR 54114 (October 21, 2009) (SR-NYSEArca-2009-77) (permitting the
listing and trading of options on conventional index-linked
securities linked to CBOE VIX); 60823 (October 14, 2009), 74 FR
54112 (October 21, 2009) (SR-NYSEAmex-2009-59); and 60857 (October
21, 2009), 74 FR 55611 (October 28, 2009) (SR-CBOE-2009-74).
    \5\ See Securities Exchange Act Release No. 61419 (January 26,
2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-31).
    \6\ The proposed May 2010 Supplement to the ODD amends the
February 1994 version of the booklet entitled ``Characteristics and
Risks of Standardized Options,'' and portions of the May 2007, June
2007, June 2008, and September 2008 Supplement thereto.
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    Specifically, the proposed supplement to the ODD adds new
disclosure regarding the characteristics of options on conventional
index-linked securities,\7\ as well as the special risks of these
options. In addition, the ODD is amended to add BATS, which currently
trades options issued by the OCC, and its corporate address to the
front inside cover page of the ODD. This change will ensure that the
ODD accurately identifies the markets on which options currently trade.
The proposed supplement is intended to be read in conjunction with the
more general ODD, which, as described above, discusses the
characteristics and risks of options generally.\8\
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    \7\ For purposes of the ODD, conventional index-linked
securities refer to non-convertible debt of an issuer (with a term
of at least one year but not greater than thirty years) that
provides for the payment at maturity of a cash amount based directly
on the performance of a specified underlying ``reference asset.''
Unlike conventional index-linked securities, leveraged or inverse
index-linked securities provide for a cash payment at maturity based
on a multiple or inverse of the performance of a specified
underlying ``reference asset.'' The Commission notes that, to date,
it has only approved trading of options on conventional index-linked
securities, and not on leveraged or inverse index-linked securities.
Accordingly, the ODD disclosure only covers the characteristics and
risks of options on conventional index-linked securities.
    \8\ The Commission notes that the options markets must continue
to ensure that the ODD is in compliance with the requirements of
Rule 9b-1(b)(2)(i) under the Act, 17 CFR 240.9b-1(b)(2)(i),
including when future changes regarding options on conventional
index-linked securities are made. Any future changes to the rules of
the options markets concerning options on index linked securities
would need to be submitted to the Commission under Section 19(b) of
the Act. 15 U.S.C. 78s(b).

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    Rule 9b-1(b)(2)(i) under the Act \9\ provides that an options
market must file five copies of an amendment or supplement to the ODD
with the Commission at least 30 days prior to the date definitive
copies are furnished to customers, unless the Commission determines
otherwise, having due regard to the adequacy of information disclosed
and the public interest and protection of investors.\10\ In addition,
five copies of the definitive ODD, as amended or supplemented, must be
filed with the Commission not later than the date the amendment or
supplement, or the amended options disclosure document, is furnished to
customers. The Commission has reviewed the proposed supplement and
amendment and finds, having due regard to the adequacy of information
disclosed and the public interest and protection of investors, that
they may be furnished to customers as of the date of this order.
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    \9\ 17 CFR 240.9b-1(b)(2)(i).
    \10\ This provision permits the Commission to shorten or
lengthen the period of time which must elapse before definitive
copies may be furnished to customers.
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    It is therefore ordered, pursuant to Rule 9b-1 under the Act,\11\
that definitive copies of the proposed supplement and amendment to the
ODD (SR-ODD-2010-01), reflecting changes to disclosure regarding
certain options on conventional index-linked securities and to the
inside front cover of the ODD, may be furnished to customers as of the
date of this order.
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    \11\ 17 CFR 240.9b-1.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(39).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-12986 Filed 5-28-10; 8:45 am]
BILLING CODE 8010-01-P