[Federal Register: February 10, 2004 (Volume 69, Number 27)]
[Notices]
[Page 6352-6353]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10fe04-143]
[[Page 6352]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49184; File No. SR-CBOE-2003-55]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Amendment No. 1 Thereto by the Chicago Board Options
Exchange, Inc. To Amend Provisions of Its Constitution and Rules
Pertaining to the Governance of the Exchange
February 4, 2004.
I. Introduction
On November 19, 2003, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend provisions of CBOE's
Constitution and rules pertaining to the governance of the Exchange. On
December 11, 2003, CBOE submitted Amendment No. 1 to the proposed rule
change. The proposed rule change, as amended, was published for comment
in the Federal Register on December 29, 2003.\3\ No comments were
received on the proposed rule change. This order approves the proposed
rule change, as amended.
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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. 48950 (December 18,
2003), 68 FR 74991 (``Notice of Proposed Rule Change'').
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II. Description of the Amended Proposal
Terms of Office of Directors and Vice Chairman
The proposed rule change will amend CBOE Constitution Sections
6.1(b), 6.4, and 8.1 to specify that Directors and the Vice Chairman
take office on January 1. Currently, the term of office of Directors
starts at the first regular meeting of the Board held after January 1
following the annual election, while the Vice Chairman's term starts on
the 3rd Friday in December of each year. The proposal also amends CBOE
Constitution Section 6.3(b) to provide the later of 45 days or until
the next regular Board meeting for a Director who fails to maintain
qualifications for a designated category to requalify. During any
period in which a Director fails to maintain qualifications for a
designated category, the Director shall be deemed not to hold office
and the seat formerly held by the Director shall be deemed vacant for
all purposes.
CBOE's Nominating Committee
The proposal amends CBOE Constitution Section 4.1(b) to allow a
member of the Nominating Committee who was elected to a term of less
than three years as a result of a vacancy to stand for reelection. The
proposal also deletes from CBOE Constitution Section 4.3 the
requirements that the Nominating Committee hold three meetings in
October, and that it announce its slate of candidates no later than
October 10th or the first business day thereafter if October 10th is
not a business day. In addition, the proposal adopts new CBOE
Constitution Section 4.8 to require that members of the Nominating
Committee continuously meet the eligibility criteria for the category
to which they were elected. New Constitution Section 4.8 also specifies
that the Board of Directors alone determines whether a Nominating
Committee member satisfies the qualification criteria for the category
to which he or she was elected and that a member of the Nominating
Committee who fails to maintain the applicable qualifications has 45
days from the date the Board determines the member is not qualified to
requalify. During any period in which a member of the Nominating
Committee fails to maintain the applicable qualifications, the member
shall be deemed not to hold office and the seat formerly held by the
member shall be deemed to be vacant for all purposes. The proposal also
adopts new CBOE Constitution Section 4.9, which specifies that the
Board may remove a Nominating Committee member in the event of the
refusal, failure, neglect, or inability to discharge his or her duties,
or for any cause affecting the best interests of the Exchange.
Election and Voting Procedures
The proposal adopts CBOE Constitution Section 3.8 to authorize the
Board to set a ``record date'' to determine which members are entitled
to receive notice and to vote in any Exchange election or vote. The
record date will be the day preceding the date on which notice of the
vote is given, if an alternate record date is not fixed by the Board.
The proposal also amends CBOE Constitution Section 5.2 to provide that
the Exchange may allow voting members to electronically submit ballots
and proxies and to provide for a confidential electronic or online
voting process in the future, if the Board determines to do so. The
proposal also amends CBOE Constitution Section 10.1 to allow the
Exchange to give notice to members and associated persons by messenger,
courier service, facsimile or electronic mail, as well as in person or
by mail or telephone as is currently provided in Section 10.1 while
deleting wireless, telegraph, and cable as available communication
methods. In addition, the proposal amends Constitution Section 10.2 to
allow for the waiver of notice by the same means as notice may be
given.
Provisions for Notice to CBOE Members
The proposal adopts new CBOE Constitution Section 10.1(b) which
limits the types of notices that may be given via e-mail to those
notices provided in the Exchange Bulletin and Regulatory Bulletin and
any other types of notices designated by the Board. CBOE Constitution
Section 10.1(b) will specifically provide that the Exchange may provide
the Exchange Bulletin and the Regulatory Bulletin (including the
notices contained therein) by e-mail. In addition, Section 10.1(b) will
allow the Exchange to permit members and associated persons to request
delivery of the Bulletins (or such other notices as the Board may
designate) by other means, in a form and manner prescribed by the
Exchange.
Securities Transaction Policy
The proposal deletes CBOE Constitution Section 11.4, which
generally prohibited officers and employees of the Exchange from
trading any CBOE-listed option and required them to report to the
Exchange every purchase or sale of any security underlying a CBOE-
listed option. CBOE has represented that the securities transaction
policy will now be included in the Exchange Employee Handbook, instead
of in the Exchange's Constitution. The proposal also deletes from CBOE
Rule 9.17 the requirement that a member organization must obtain
authorization from the CBOE before executing securities transactions
for officers or employees of any national securities exchange that is a
participant of The Options Clearing Corporation.
CBOE has represented that it plans to liberalize the securities
transaction policies to allow employees (with certain restrictions
applicable to Regulatory Services Division employees) to trade CBOE-
listed products and to require employees to report transactions in CBOE
listed products to the Exchange. In addition, CBOE Rule 9.17 will
continue to require member organizations to obtain authorization from
the CBOE before executing securities transactions for CBOE officers and
employees.
[[Page 6353]]
Composition of the MTS Committee
CBOE is amending Rule 8.82 to modify the composition of the MTS
Committee. Under the proposed rule change, the nine elected members of
the MTS Committee will include: three persons whose primary business is
as a Market-Maker, three persons whose primary business is as a Market-
Maker or as a Designated Primary Market Maker (``DPM'') Designee, and
three persons whose primary business is as a Floor Broker, at least two
of whom represent public customer business in the course of their
activities as a Floor Broker. The proposal removes a provision
requiring that no more than two members of the MTS Committee be
associated with a DPM. The Vice Chairman of the Exchange and the
Chairman of the Market Performance Committee will continue to serve on
the MTS Committee.
The amendments to CBOE Rule 8.82 also provide that one of the nine
elected positions on the MTS Committee may instead be filled by a
lessor whose primary business is not as a Market-Maker, DPM Designee,
or Floor Broker, and whose primary residence is located within 80 miles
of the Exchange's trading floor. In addition, the amendments to Rule
8.82 provide that the sole judge of whether a candidate satisfies the
applicable qualifications for election to the MTS Committee in a
designated category shall be the Nominating Committee, in the case of
candidates nominated by the Nominating Committee, or the Executive
Committee, in the case of candidates nominated by petition, and the
decision of the respective committee shall be final. The proposal
further amends CBOE Rule 8.82 to provide that: (i) no elected member of
the MTS Committee may be affiliated with any other elected member of
the MTS Committee; (ii) the term of office of elected MTS Committee
members will commence at the time of the first regular Board meeting of
the calendar year; (iii) the Board of Directors is the sole judge of
whether or not an MTS Committee member no longer qualifies to serve on
the Committee; (iv) the Board may remove MTS Committee members for
cause; and (v) the Vice Chairman, with the approval of the Board, may
fill vacancies on the MTS Committee until the first regular Board
meeting of the calendar year following the next annual election. The
MTS Committee monitors and implements the Exchange's DPM program.
Terms of Office for Committee Members
The proposed rule change also amends CBOE Rule 2.1 to provide that
the term of office for committee members appointed pursuant to that
Rule will continue until the first regular Board meeting of the next
calendar year and until their successors are appointed or until death,
resignation or removal. In addition, amended Rule 2.1 provides that any
action taken by majority of the committee members voting, as opposed to
present, at a meeting shall be the act of the committee.
Other Business Activities of the President of the Exchange
The Exchange also is amending CBOE Constitution Section 8.6 to
allow the Board of Directors to exempt the President from the
prohibition against engaging in any business other than as President of
the Exchange, in the same manner that the Board may exempt the Chairman
of the Board pursuant to Constitution Section 8.2. The Commission notes
that the Pacific Exchange, Inc. (``PCX'') has a similar provision in
its Constitution.\4\ In addition, the Commission notes that under CBOE
Rule 8.1(d), the President cannot be affiliated with a CBOE member.
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\4\ See PCX Constitution Section 2(a).
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In addition to the changes described above, the Exchange is
adopting changes to several provisions of its Constitution and rules
that are intended to update those provisions to reflect current
practice. Those changes are described in the Notice of Proposed Rule
Change.
III. Discussion
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\5\ In particular, the Commission finds that the
proposal is consistent with the requirements of Sections 6(b)(3) \6\
and 6(b)(5) \7\ of the Act. Section 6(b)(3) requires, among other
things, that the CBOE's rules assure a fair representation of its
members in the administration of its affairs. Section 6(b)(5) requires,
among other things, that CBOE's rules be designed to promote just and
equitable principles of trade, to prevent fraudulent and manipulative
acts and practices, and, in general, protect investors and the public
interest.
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\5\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\6\ 15 U.S.C. 78f(b)(3).
\7\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the proposed rule change should
clarify CBOE's Constitution with respect to the terms of office of its
Directors and committee members, as well as the composition of its
Nominating Committee and thereby should increase the efficiency of
CBOE's governance. In addition, the Commission believes that the
amendments to the composition of CBOE's MTS Committee are consistent
with its obligation to ensure its members are fairly represented in the
administration of its affairs, and should permit CBOE to include
representatives of diversified broker-dealers on the Committee without
permitting the Committee to become dominated by any one type of member
constituency. Further, the Commission believes that the proposed rule
change should update CBOE's election and voting procedures, as well as
the methods by which CBOE may provide notice to its members.
IV. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change, as amended, is consistent with the requirements of the Act
and rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\8\ that the proposed rule change, as amended, (SR-CBOE-2003-55) is
approved.
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\8\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-2824 Filed 2-9-04; 8:45 am]
BILLING CODE 8010-01-P