

[Federal Register: March 8, 2007 (Volume 72, Number 45)]
[Notices]               
[Page 10575-10579]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[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

[[Page 10576]]

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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[[Page 10577]]

    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

[[Page 10578]]

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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[[Page 10579]]

    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 rule-comments@sec.gov. 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
