

[Federal Register: January 22, 2008 (Volume 73, Number 14)]
[Notices]               
[Page 3769-3783]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22ja08-105]                         

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SECURITIES AND EXCHANGE COMMISSION

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

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

 January 15, 2008.

I. Introduction

    On December 12, 2006, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or the ``Exchange'') filed with the Securities 
and Exchange Commission (``Commission'' or ``SEC''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange 
Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
adopt an interpretation of the rules of CBOE in response to the 
acquisition of the Board of Trade of the City of Chicago, Inc. 
(``CBOT'') by Chicago Mercantile Exchange Holdings, Inc. (``CME 
Holdings''). On January 17, 2007, the Exchange filed Amendment No. 1 to 
the proposed rule change which replaced and superseded the filing. The 
proposed rule change, as modified by Amendment No. 1, was published for 
notice and comment in the Federal Register on February 6, 2007.\3\ The 
Commission received 174 comment letters from 134 separate commenters on 
the proposed rule change, including comment letters from CBOT members 
and legal counsel to CBOT and CBOT members. The CBOE submitted its 
response to comments on June 15, 2007.\4\ On June 29, 2007, CBOE filed 
Partial Amendment No. 2 to the proposal.\5\ This order approves the 
proposed rule change, as modified by Amendment Nos. 1 and 2.
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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. 55190 (January 29, 
2007), 72 FR 5472 (SR-CBOE-2006-106) (``Notice'').
    \4\ See Letter from Michael L. Meyer, Schiff Hardin, to Nancy M. 
Morris, Secretary, Commission, dated June 15, 2007 (``CBOE Response 
to Comments'').
    \5\ The CBOE submitted an opinion of counsel as Exhibit 3f to 
Amendment 1 to its proposal. See Letter from Wendell Fenton, Esq., 
Richards, Layton & Finger, to Joanne Moffic-Silver, General Counsel 
and Corporate Secretary, CBOE, dated January 16, 2007 (``First 
Opinion of Counsel''). CBOE subsequently submitted an updated legal 
opinion via Partial Amendment No. 2, which opines that the proposed 
rule change embodied in SR-CBOE-2006-106 constitutes an 
interpretation of Article Fifth(b), and not an amendment of Article 
Fifth(b), consistent with the conclusions reached in the opinion 
letters of Delaware counsel that CBOE submitted to the Commission in 
connection with CBOE rule filings SR-CBOE-2004-16 and SR-CBOE-2005-
19. See Letter from Wendell Fenton, Esq., Richards, Layton & Finger, 
to Joanne Moffic-Silver, General Counsel and Corporate Secretary, 
CBOE, dated June 28, 2007 (``Second Opinion of Counsel''). The 
Commission believes that because Partial Amendment No. 2 raises no 
new or novel issues, it is technical in nature and not subject to 
separate notice and comment.
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II. Description of the Proposed Rule Change

A. Background

    As compensation for the ``special contribution'' of time and money 
that the CBOT expended in the development of the CBOE in the early 
1970s, an ``Exercise Right'' was granted to each ``member of [the 
CBOT]'' entitling him or her to become a member of the CBOE without 
having to acquire a separate CBOE membership.\6\ This right, 
established in Article Fifth(b) of the CBOE Certificate of 
Incorporation (``Article Fifth(b)''), provides, in relevant part:
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    \6\ As CBOE explained in the notice of its proposal, the 
``special contribution'' of the members of CBOT referred to in 
Article Fifth(b) consisted primarily of CBOT's providing the seed 
capital for the start-up of CBOE in the early 1970s by means of 
direct cash expenditures, CBOT's guarantee of a bank loan to CBOE to 
fund additional CBOE start-up costs, and CBOT's contribution of 
intellectual property. See Notice, supra note 3, 72 FR at 5473.

    In recognition of the special contribution made to the 
organization and development of the [CBOE] by the members of [the 
CBOT] * * * every present and future member of [the CBOT] who 
applies for membership in the [CBOE] and who otherwise qualifies 
shall, so long as he remains a member of said Board of Trade, be 
entitled to be a member of the [CBOE] notwithstanding any such 
limitation on the number of members and without the necessity of 
acquiring such membership for consideration or value from the 
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[CBOE], its members or elsewhere.

Article Fifth(b) states that no amendment may be made to it without the 
approval of at least 80% of those CBOT members who have ``exercised'' 
their right to be CBOE members and 80% of all other CBOE members.
    Since Article Fifth(b) does not define what a ``member of [the 
CBOT]'' means, on several occasions in the past, the CBOE has 
interpreted the meaning of Article Fifth(b), in particular the term 
``member of [the CBOT],'' in response to changes in the ownership 
structure of the CBOT. On each such occasion, the CBOE and CBOT 
ultimately reached a mutual agreement on the particular interpretation 
at issue, and those interpretations are reflected in various agreements 
and letter agreements between CBOE and CBOT. CBOE filed these 
interpretations of Article Fifth(b) with the Commission, reflected in 
amendments to CBOE Rule 3.16(b) (``Special Provisions Regarding Chicago 
Board of Trade Exerciser Memberships''), as proposed rule changes 
pursuant to Section 19(b)(1) of the Exchange Act.\7\ The Commission 
approved each such interpretation.
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    \7\ 15 U.S.C. 78s(b)(1).
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1. 1992 Agreement
    In 1993, the Commission approved the CBOE's proposed interpretation 
of the meaning of the term ``member of [the CBOT]'' as used in Article 
Fifth(b) that was embodied in an agreement dated September 1, 1992 (the 
``1992 Agreement'') and reflected in CBOE Rule 3.16(b).\8\ The 1992 
Agreement addressed, among other things, the effect on the Exercise 
Right of CBOT's plans to divide the membership interests of the then-
existing 1,402 member-owners of CBOT into parts. That interpretation 
provided that all such parts, together with the trading rights 
appurtenant thereto, must be in the possession of an individual in 
order for that individual to be eligible to

[[Page 3770]]

utilize the Exercise Right.\9\9 CBOE Rule 3.16(b) reflects this 
interpretation in stating that ``[f]or the purpose of entitlement to 
membership on the [CBOE] in accordance with * * * [Article Fifth(b)] * 
* * the term `member of [the CBOT],' as used in Article Fifth(b), is 
interpreted to mean an individual who is either an `Eligible CBOT Full 
Member' or an `Eligible CBOT Full Member Delegate,' as those terms are 
defined in the [1992 Agreement] * * *'' \10\
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    \8\ See Securities Exchange Act Release No. 32430 (June 8, 
1993), 58 FR 32969 (June 14, 1993) (SR-CBOE-92-42).
    \9\ See 1992 Agreement, Section 2(b).
    \10\ CBOE Rule 3.16(b). In the 1992 Agreement, an ``Eligible 
CBOT Full Member'' is defined as an individual who at the time is 
the holder of one of 1,402 existing CBOT full memberships (``CBOT 
Full Memberships''), and who is in possession of all trading rights 
and privileges of such CBOT Full Memberships. An ``Eligible CBOT 
Full Member Delegate'' is defined as the individual to whom a CBOT 
Full Membership is delegated (i.e., leased) and who is in possession 
of all trading rights and privileges appurtenant to such CBOT Full 
Membership.
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2. 2001 Agreement, as Modified by the 2004 and 2005 Letter Agreements
    In connection with CBOT's proposed restructuring, CBOE took the 
position that the effect of such a transaction would be to eliminate 
entirely the concept of CBOT ``membership'' as it existed when the 
Exercise Right was created as a right held by members of CBOT, and 
therefore would result in the termination of the Exercise Right.\11\ 
CBOE and CBOT eventually compromised and entered into an agreement 
dated August 7, 2001 (``2001 Agreement'') under which CBOE agreed to 
interpret Article Fifth(b) such that the Exercise Right was only 
available to a CBOT member that held all of the trading rights of a 
full member of CBOT as well as the same number of shares of stock of 
CBOT Holdings, Inc. (``CBOT Holdings'') originally issued to CBOT 
members in the restructuring.\12\ CBOE agreed, in the 2001 Agreement, 
to interpret Article Fifth(b) in this way, only ``in the absence of any 
other material changes to the structure or ownership of the CBOT * * * 
not contemplated in the CBOT [restructuring].'' \13\
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    \11\ See Notice, supra note 3, 72 FR at 5473.
    \12\ See id.
    \13\ See id. at 5473-74 (citing the 2001 Agreement).
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    CBOE and CBOT subsequently agreed to modify the 2001 Agreement by a 
Letter Agreement among CBOE, CBOT, and CBOT Holdings dated October 7, 
2004 (``October 2004 Letter Agreement''), which was intended to 
represent the agreement of the CBOE and CBOT concerning the nature and 
scope of the Exercise Right following the restructuring of the CBOT and 
in light of the expansion of the CBOE and CBOT's electronic trading 
systems. The CBOE, CBOT, and CBOT Holdings entered into another letter 
agreement on February 14, 2005 (``February 2005 Letter Agreement'') in 
which CBOE confirmed that CBOT's restructuring was consistent with 
CBOE's interpretation of Article Fifth(b) as set forth in the 2001 
Agreement.
    The CBOE's interpretation of Article Fifth(b) through 
interpretations of ``Eligible CBOT Full Member'' as used in CBOE Rule 
3.16 were approved by the Commission.\14\ As set forth in the 2001 
Agreement, as amended by the letter agreements, the CBOE interprets 
Article Fifth(b) such that an individual is deemed to be an ``Eligible 
CBOT Full Member'' under CBOE Rule 3.16 if the individual: (1) Is the 
owner of the requisite number of Class A Common Stock of CBOT Holdings, 
the requisite number of Series B-1 memberships of the CBOT, and the 
Exercise Right Privilege; (2) has not delegated any of the rights or 
privileges appurtenant to such ownership; and (3) meets applicable 
membership and eligibility requirements of the CBOT.\15\ An individual 
is deemed to be an ``Eligible CBOT Full Member Delegate,'' under that 
Agreement, if the individual: (1) Is in possession of the requisite 
number of Class A Common Stock of CBOT Holdings, the requisite number 
of Series B-1 memberships of the CBOT, and the Exercise Right 
Privilege; (2) holds one or more of the items listed in (1) by means of 
delegation rather than ownership; and (3) meets applicable membership 
and eligibility requirements of the CBOT.\16\
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    \14\ See Securities Exchange Act Release No. 51733 (May 24, 
2005), 70 FR 30981 (May 31, 2005) (SR-CBOE-2005-19).
    \15\ See id. at 30983 (footnote 14).
    \16\ See id.
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B. CBOE's Current Proposal

1. Interpretation of Article Fifth(b)
    The CBOE is again proposing an interpretation of the term ``member 
of [the CBOT]'' as used in Article Fifth(b). CBOE believes that its 
proposed interpretation is necessary to address the effect on the 
Exercise Right of the then-proposed (and now completed) acquisition of 
the CBOT by CME Holdings.\17\ Specifically, CBOE believes that the 
acquisition of the CBOT by CME Holdings effected ``substantial changes 
to the structure and ownership of CBOT, as well as to the rights 
represented by CBOT membership,'' in a way that creates a substantive 
ambiguity with respect to whether a person who formerly qualified under 
Article Fifth(b) as a ``member of [the CBOT]'' for purposes of the 
Exercise Right still possesses sufficient attributes of CBOT membership 
following the acquisition by CME Holdings.\18\
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    \17\ That acquisition was accomplished by the merger of CBOT 
Holdings, of which CBOT was a subsidiary, with and into CME 
Holdings, with CME Holdings continuing as the surviving corporation 
and as the parent company of CBOT, as well as of its existing 
wholly-owned subsidiary, the Chicago Mercantile Exchange, Inc. 
(``CME''). CBOT Holding's shareholders approved the acquisition on 
July 9, 2007. See Form 8-K submitted by CME Holdings on July 9, 
2007. The transaction was completed on July 12, 2007. See Form 25-
NSE submitted by the New York Stock Exchange, Inc. (regarding 
notification of the removal of listing of CBOT Holdings).
    \18\ CBOE Response to Comments, supra note 4, at 17.
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    In response to the acquisition of the CBOT by CME Holdings, the 
CBOE Board of Directors found it necessary to determine whether the 
substantive rights of a former CBOT member would continue to qualify 
that person as a ``member of [the CBOT]'' pursuant to Article Fifth(b), 
as that term was contemplated when Article Fifth(b) was adopted, after 
the acquisition of the CBOT by CME Holdings. CBOE determined that it 
would not, because former CBOT members ``lose in the CME acquisition 
the few remaining membership rights they retained following the 
[CBOT's] 2005 restructuring,'' such that ``persons who had formerly 
been the full members of CBOT will simply be the holders of trading 
permits and will not possess any of the other rights commonly 
associated with membership in an exchange.'' \19\
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    \19\ Id. at 28.
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    Thus, CBOE's proposed interpretation concludes that, following the 
acquisition, there no longer are any individuals who qualify as 
``members of [the CBOT]'' within the meaning of Article Fifth(b). 
Consequently, no person would qualify under Article Fifth(b) to utilize 
the Exercise Right to become and remain a member of CBOE without having 
to obtain a separate CBOE membership. This interpretation is based on 
CBOE's view that the concept of a member-owner of CBOT, as CBOE 
believes that concept was understood when Article Fifth(b) was first 
adopted in CBOE's Certificate of Incorporation and when it was 
subsequently interpreted in the 1992 Agreement, has been abolished 
following the restructuring of CBOT and its subsequent acquisition by 
CME Holdings. In this respect, the CBOE's proposal does not extinguish 
the Exercise Right or delete Article Fifth(b) from its Certificate of 
Incorporation, but rather interprets Article Fifth(b) in a manner than 
means no CBOT member is

[[Page 3771]]

eligible to utilize that right following the acquisition of CBOT.
    With respect to the prior agreements concerning the interpretation 
of Article Fifth(b) with CBOT, CBOE believes that, because the change 
in structure effectuated by the acquisition of CBOT by CME Holdings was 
not contemplated as part of the 2005 restructuring of CBOT, the 
acquisition constitutes a change to the ownership of CBOT that is 
inconsistent with a condition to the interpretation embodied in the 
2001 Agreement, as amended, that there not be any change to the 
ownership of CBOT not contemplated in its 2005 restructuring.\20\ 
Accordingly, CBOE believes that the 2001 Agreement, as amended, no 
longer governs whether and to what extent the Exercise Right will 
remain in existence, with the result being that CBOE and CBOT are back 
in the position they faced before the 2001 Agreement.\21\
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    \20\ See Notice, supra note 3, 72 FR at 5474.
    \21\ See id.
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    With the 2001 Agreement no longer controlling, CBOE looks to the 
1992 Agreement, in particular Section 3(d), which addresses the 
possibility that CBOT, among other things, may merge or consolidate 
with, or be acquired by, another entity. Section 3(d) establishes three 
conditions that all must be satisfied for the Exercise Right to remain 
available following any such transaction. Those three conditions are:

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

    CBOE believes that none of these conditions are satisfied following 
the acquisition of CBOT by CME Holdings. Specifically, with respect to 
Condition 1, CBOE notes that the survivor of the acquisition (i.e., the 
acquiring entity that survives the transaction) is CME Holdings, which 
is not an exchange.\23\
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    \23\ See id.
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    Further, CBOE believes that Condition 2 is not satisfied because 
the former 1,402 holders of CBOT Full Memberships have not been granted 
``membership'' in the survivor.\24\ Rather, CBOE's position is that 
there are not any holders of CBOT Full Memberships as they existed in 
1992, because all of these memberships were stripped of their ownership 
attributes in the 2005 restructuring of CBOT.\25\ Likewise, CBOE argues 
that CME Holdings is not an exchange and therefore is not capable of 
granting ``membership'' interests in itself to anyone.\26\ CBOE further 
states that, even if CBOT is considered to have survived the 
acquisition, Condition 2 still would not be satisfied because, except 
for trading rights, former CBOT members no longer have most of the 
other rights in the surviving entity that they formerly held when they 
were full members of CBOT as the term ``member'' was commonly 
understood when Article Fifth(b) was adopted in 1972 and later 
interpreted in 1992.\27\ Accordingly, following the acquisition, CBOE 
believes that former CBOT members will simply be the holders of trading 
permits and will not be granted any of the other rights commonly 
associated with membership in an exchange.\28\
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    \24\ See id.
    \25\ See id. Although CBOE has previously interpreted Article 
Fifth(b) to permit the Exercise Right to continue in existence 
following the 2005 restructuring of CBOT, subject to stated 
conditions, as discussed above, CBOE believes that those earlier 
interpretations, contained in the 2001 Agreement, as amended, are no 
longer controlling because those provisions applied only so long as 
there was no further change to the structure or ownership of CBOT 
not then in contemplation. See id.
    \26\ See Notice, supra note 3, 72 FR at 5474.
    \27\ See id. at 5475. For example, CBOE states that, following 
the acquisition by CME Holdings, CBOT's former Series B-1 members 
will be stripped, among other things, of their right to elect 
directors or nominate candidates for election as directors. See id.
    \28\ See id.
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    Finally, CBOE believes that Condition 3 of Section 3(d) of the 1992 
Agreement is not satisfied following the acquisition of CBOT by CME 
Holdings because that condition contemplates an acquisition where the 
surviving acquirer is an exchange, and it requires CBOT members to have 
essentially the same full trading rights on that surviving exchange as 
they had on CBOT prior to the acquisition.\29\ As CME Holdings is not 
an exchange, CBOE believes that it is not possible for CBOT members to 
have any trading rights on the survivor.\30\ Further, CBOE believes 
that to be the case even if it were to look through CME Holdings to its 
two subsidiary exchanges, CME and CBOT.\31\ CBOE states that, in 
respect of any new products to be introduced on CME after the 
acquisition, the trading rights of CBOT members will be diluted by the 
trading rights granted to other persons (i.e., CME members) to trade 
these same products, in which case the trading rights inherent in CBOT 
membership will be reduced from what they were prior to the 
acquisition.\32\
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    \29\ See id.
    \30\ See id.
    \31\ See id.
    \32\ See Notice, supra note 3, 72 FR at 5474.
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    Consequently, CBOE's proposed interpretation concludes that the 
conditions contained in Section 3(d) of the 1992 Agreement are not 
satisfied following the acquisition of CBOT by CME Holdings, and that 
the terms of Section 3(d) therefore provide that ``Article Fifth(b) 
shall not apply'' following the acquisition. Hence, for the reasons 
discussed in its notice, as summarized above, CBOE's proposed 
interpretation is that the Exercise Right is no longer available as a 
means of acquiring membership in CBOE because there no longer are any 
individuals who qualify as ``members of [the CBOT]'' within the meaning 
of Article Fifth(b).
2. Transition Plan
    In addition to its proposed interpretation of Article Fifth(b), 
CBOE has separately proposed a transition plan in order to avoid a 
sudden disruption to its marketplace as a result of no persons any 
longer being eligible to utilize the Exercise Right on account of the 
acquisition of CBOT by CME Holdings.\33\ Specifically, CBOE submitted a 
separate proposed rule change interpreting CBOE Rule 3.19, which is a 
rule that authorizes the Exchange, when the Exchange determines that 
there are extenuating circumstances, to permit a member ``to retain the 
member's status for such period of time as the Exchange deems 
reasonably necessary'' to enable the member to address specified 
problems that caused the membership status to terminate.
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    \33\ See Securities Exchange Act Release Nos. 56016 (July 5, 
2007), 72 FR 38106 (July 12, 2007) (SR-CBOE-2007-77) and 56458 
(September 18, 2007), 72 FR 54309 (September 24, 2007) (SR-CBOE-
2007-107).
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    Interpretation .01 to CBOE Rule 3.19, allows certain 
``grandfathered'' Exerciser Members who had been trading on CBOE to 
continue to have uninterrupted access to CBOE until such time as the 
Commission takes action on SR-CBOE-2006-106. Under Interpretation .01 
to CBOE Rule 3.19, persons who were Exerciser Members in good standing 
as of July 1, 2007 and who remain Exerciser Members as of the close of 
business on the day before the

[[Page 3772]]

consummation of the acquisition of CBOT by CME Holdings temporarily 
retained their membership status, including their trading access to 
CBOE, for a limited period of time. Such persons were not required to 
hold or maintain any securities, memberships or other interests in 
order to maintain that status, but are required to pay a monthly access 
fee to the Exchange.\34\ Temporary Members are required to remain in 
good standing and must pay all applicable fees, dues, assessments and 
other like charges assessed against CBOE members.
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    \34\ See Securities Exchange Act Release No. 56197 (August 3, 
2007), 72 FR 44897 (August 9, 2007) (SR-CBOE-2007-91) (adopting the 
access fee).
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    On September 4, 2007, CBOE filed a subsequent interpretation of 
CBOE Rule 3.19 to extend this temporary membership beyond any 
Commission approval of SR-CBOE-2006-106 until the earlier of: (1) The 
voluntary termination of a person's temporary membership; (2) any 
Commission approval of a subsequent proposed rule change to terminate 
temporary membership status; or (3) the demutualization of the 
Exchange.\35\
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    \35\ See Securities Exchange Act Release No. 56458 (September 
18, 2007), 72 FR 54309 (September 24, 2007) (SR-CBOE-2007-107).
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III. Comment Letters

    The Commission received 174 comment letters on the proposed rule 
change from 134 different commenters.\36\ Legal counsel for CBOT, legal 
counsel for CBOT Holdings, and legal counsel for the putative class of 
CBOT members from the Delaware litigation (collectively referred to as 
``CBOT'') all submitted comment letters\37\ in which they characterized 
the proposed rule change as an attempt by CBOE to eliminate one group 
of Exchange members (Exerciser Members) for the benefit of another 
group of members (CBOE regular members), therein depriving Exerciser 
Members and those eligible to become Exerciser Members of a valuable 
property right.\38\ CBOT asked the Commission to institute proceedings 
to disapprove CBOE's proposed rule change on the basis that the 
proposal is an improper use of CBOE's self-regulatory authority to 
resolve in its favor a private property dispute that is being litigated 
in the Delaware court, fails to meet the requirements of the Exchange 
Act, and was adopted without due process.\39\
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    \36\ Thirteen letters, including three letters from CBOE's legal 
counsel, explicitly supported the proposed rule change. See Letter 
from Robert H. Bloch, dated February 16, 2007 (``Bloch Letter''); 
Letter from Michael J. Post to Elizabeth K. King, Associate 
Director, Division of Market Regulation, Commission, dated February 
16, 2007 (``Post Letter''); Letter from Steven G. Holtz, dated 
February 17, 2007; Letter from Dan Frost, dated February 19, 2007 
(``Frost Letter''); Letter from Steve Fanady to Elizabeth K. King, 
Associate Director, Division of Market Regulation, Commission, dated 
February 20, 2007 (``Fanady Letter''); Letter from Lawrence J. Blum 
to Elizabeth K. King, Associate Director, Division of Market 
Regulation, Commission, dated February 25, 2007 (``Blum Letter''); 
Letter from Norman S. Friedland, dated February 27, 2007 
(``Friedland Letter''); Letter from R. Kent Hardy to Nancy M. 
Morris, Secretary, Commission, dated February 27, 2007 (``Hardy 
Letter''); Letter from Robert Silverstein to Elizabeth K. King, 
Associate Director, Division of Market Regulation, Commission, dated 
February 27, 2007 (``Silverstein Letter''); Letter from Marshall 
Spiegel, dated April 12, 2007 (referencing attached materials); 
Letter from Michael L. Meyer, Schiff Hardin, to Elizabeth K. King, 
Associate Director, Division of Market Regulation, Commission, dated 
January 12, 2007 (``Schiff Hardin Letter 1''); Letter from Michael 
L. Meyer, Schiff Hardin, to Nancy M. Morris, Secretary, Commission, 
dated March 19, 2007; and CBOE Response to Comments, supra note 4. 
The remainder of the letters either opposed the proposal or did not 
clearly communicate a position.
    \37\ See Letter from Charles M. Horn, Mayer, Brown, Rowe & Maw, 
to Nancy M. Morris, Secretary, Commission, dated December 22, 2006 
(``Mayer Brown Letter 1''); Letter from Gordon B. Nash, Jr., 
Gardner, Carton & Douglas, to Nancy M. Morris, Secretary, 
Commission, dated December 22, 2006 (on behalf of the putative class 
members) (``Gardner Letter''); Letter from Charles M. Horn, Mayer, 
Brown, Rowe & Maw, to Nancy M. Morris, Secretary, Commission, dated 
January 31, 2007 (``Mayer Brown Letter 2''); Letter from Charles M. 
Horn, Mayer, Brown, Rowe & Maw, to Nancy M. Morris, Secretary, 
Commission, dated February 27, 2007 (``Mayer Brown Letter 3''); 
Letter from Scott C. Lascari, Drinker Biddle Gardner Carton, to 
Nancy M. Morris, Secretary, Commission, dated February 27, 2007 (on 
behalf of the putative class members); Letter from Charles M. Horn, 
Mayer, Brown, Rowe & Maw, to Nancy M. Morris, Secretary, Commission, 
dated March 15, 2007 (``Mayer Brown Letter 4''); Letter from Charles 
M. Horn, Mayer, Brown, Rowe & Maw, to Nancy M. Morris, Secretary, 
Commission, dated July 9, 2007 (``Mayer Brown Letter 5''); and 
Letter from Charles M. Horn, Mayer, Brown, Rowe & Maw, to Nancy M. 
Morris, Secretary, Commission, dated August 9, 2007 (``Mayer Brown 
Letter 6'').
    \38\ See, e.g., Mayer Brown Letter 3, supra note 37, at 6.
    \39\ See Mayer Brown Letter 3, supra note 37, at 1. See also 
Letter from Alton B. Harris, Ungaretti & Harris LLP, to Nancy M. 
Morris, Secretary, Commission (``Ungaretti Letter''), at 9-10 
(arguing that the CBOE impermissibly and unilaterally interpreted a 
provision in a bilateral contract and filed this interpretation with 
the Commission in an attempt to invoke federal preemption). That 
commenter opined that the outcome of this matter could affect the 
future willingness of third parties to enter into contracts that may 
be subject to unilateral interpretation by a self-regulatory 
organization. See id. at 2-3.
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    Other commenters supplemented the concerns expressed by CBOT with 
criticism that the Commission lacked jurisdiction to consider the 
CBOE's proposal on the basis that the proposal implicated a contractual 
dispute subject to the jurisdiction of a state court.\40\ Commenters 
also opposed the proposal as without foundation, believing that the 
CBOT's acquisition by CME Holdings should be irrelevant to the 
continued validity of the Exercise Right.\41\ Other commenters argued 
that

[[Page 3773]]

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

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

[[Page 3774]]

Commission cannot so find, it must disapprove the rule proposal.\47\ 
The Exchange Act requirements for Commission action are not conditioned 
upon the absence of issues arising under other federal or state laws.
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    \44\ See 15 U.S.C. 78s(b)(1).
    \45\ See infra note 70 and accompanying text.
    \46\ See 15 U.S.C. 78s(b)(2). Section 19(b) of the Exchange Act 
requires the Commission to approve a proposed rule change or 
institute proceedings to determine whether the proposed rule change 
should be disapproved ``[w]ithin thirty-five days of the date of 
publication of notice of the filing of a proposed rule change * * * 
or within such longer period as the Commission may designate up to 
ninety days of such date * * * or as to which the self-regulatory 
organization consents.'' Id. The CBOE consented to an extension of 
time for the Commission to consider its filing. See Item 6 of 
Amendment No. 1 to CBOE's Form 19b-4 filing, dated January 17, 2007.
    \47\ See 15 U.S.C. 78s(b)(2).
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    The Commission considers proposed rule changes in accordance with 
the requirements applicable to national securities exchanges under 
Section 6 of the Exchange Act. In addition, because Section 6(b)(1) of 
the Exchange Act requires exchanges to enforce compliance by its 
members and persons associated with its members with the provisions of 
the Exchange Act, the Commission considers whether proposed rule 
changes are consistent with all other Exchange Act provisions and 
Commission rules adopted thereunder. Further, Sections 6(b)(1) and 
19(g)(1) of the Exchange Act \48\ require exchanges to comply with 
their own rules; as noted below, those rules are defined by the 
Exchange Act to include the exchange's certificate of incorporation and 
its bylaws.\49\ Thus, the Commission cannot approve a proposed rule 
change if the exchange has failed to complete all action required 
under, or to comply with, its own certificate of incorporation or 
bylaws.
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    \48\ 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78s(g)(1), respectively.
    \49\ See infra note 70 and accompanying text.
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    With respect to CBOE's proposal, the Commission has carefully 
reviewed the proposed rule change, all comment letters and attachments 
thereto, and the CBOE's response to the comment letters, and finds 
that, as a matter of federal law, the proposed rule change is 
consistent with the requirements of the Exchange Act, in particular 
Section 6 of the Exchange Act \50\ and the rules and regulations 
applicable to a national securities exchange.\51\
    In particular, the Commission finds that the proposed rule change 
is consistent with: (1) Section 6(b)(1) of the Exchange Act,\52\ which 
requires the Exchange to be organized and have the capacity to comply, 
and to enforce compliance by its members and persons associated with 
its members, with, among other things, the rules of the Exchange; (2) 
Section 6(b)(5) of the Exchange Act,\53\ which requires, among other 
things, that the rules of an exchange be designed to promote just and 
equitable principles of trade and not be unfairly discriminatory; (3) 
Section 6(b)(8) of the Exchange Act,\54\ which requires that the rules 
of the Exchange not impose any burden on competition that is not 
necessary or appropriate in the furtherance of the purposes of the 
Exchange Act; (4) Section 6(c)(3)(A) of the Exchange Act,\55\ which 
permits, among other things, an exchange to examine and verify the 
qualifications of an applicant to become a member, in accordance with 
the procedures established by exchange rules; and (5) Section 6(c)(4) 
of the Exchange Act,\56\ which prohibits the Exchange from decreasing 
the number of memberships below the number of memberships in effect on 
May 1, 1975.\57\ The Commission also finds that the proposed rule 
change complied with the requirements of Section 19(b) of the Exchange 
Act,\58\ was complete and properly filed, and provided all of the 
requisite information specified in Form 19b-4.\59\
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    \50\ 15 U.S.C. 78f(b).
    \51\ In approving this rule, the Commission has considered the 
impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
    \52\ See 15 U.S.C. 78f(b)(1).
    \53\ See 15 U.S.C. 78f(b)(5).
    \54\ See 15 U.S.C. 78f(b)(8).
    \55\ See 15 U.S.C. 78f(c)(3)(A).
    \56\ See 15 U.S.C. 78f(c)(4).
    \57\ See infra Section IV.C. (discussing the Commission's 
findings in greater detail).
    \58\ 15 U.S.C. 78s(b).
    \59\ See infra Section IV.C.2 (discussing the completeness of 
CBOE's proposed rule change on Form 19b-4).
---------------------------------------------------------------------------

    While we make these findings under the Exchange Act based on the 
record now before us, we discuss below possible reactions by the CBOE 
or the Commission to the eventual decision in a lawsuit now pending in 
Delaware state court. Depending upon that outcome, it may be 
appropriate for CBOE and the Commission to take further actions in 
light of the state court's findings and to assess whether they affect 
CBOE's compliance with the federal securities laws.\60\
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    \60\ See infra note 115.
---------------------------------------------------------------------------

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

    Various commenters challenged the Commission's jurisdiction over 
the CBOE's proposed rule change, arguing that the Commission should not 
consider or approve the CBOE's proposal because the filing implicates a 
contractual dispute arising under state law and therefore is subject to 
the jurisdiction of a state court.\61\ In particular, CBOT notes that 
the proposed rule change relates to a pending dispute in the Delaware 
court involving matters that are governed by state law, including the 
interpretation of private contracts between CBOE and CBOT involving a 
property right and claims regarding the proper exercise of authority 
and fiduciary obligations on the part of CBOE's Board of Directors.\62\ 
CBOT expressed its view that the Commission's authority to consider the 
proposed rule change under the federal securities laws does not preempt 
the authority of the state court to determine whether the CBOE's 
actions comported with state corporate, fiduciary, and contract 
law.\63\
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    \61\ See Comment Letters cited in note 40, supra (questioning 
the Commission's jurisdiction over the proposed rule change).
    \62\ See Mayer Brown Letter 3, supra note 37, at 6. 
Specifically, CBOT argues that CBOE's Board of Directors violated 
its fiduciary duty towards Exerciser Members and violated prior 
contractual agreements between the CBOE and CBOT by submitting a 
proposal that has the effect of not affording Exerciser Members 
equal treatment in the anticipated CBOE demutualization. See id. at 
9-10.
    \63\ See id. at 11.
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    Accordingly, CBOT and certain commenters have asked the Commission 
to either disapprove the proposal or defer consideration of the 
proposed rule change until after the Delaware court has adjudicated the 
state law issues.\64\ CBOT suggests that, since the state court's 
decision may inform the Commission's resolution of the proposed rule 
change, it may be more efficient for the Commission to defer its 
consideration of the proposal until after the Delaware litigation is 
resolved.\65\ For

[[Page 3775]]

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

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

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

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

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

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

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

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

    In compliance with Section 19(b)(1), CBOE filed its proposed 
interpretation of its Certificate of Incorporation with the Commission 
on December 12, 2006. Once CBOE filed this proposed rule change, 
Section 19(b)(2) of the Exchange Act \73\ required the Commission to 
publish notice of the proposed rule change and either approve it or 
institute proceedings to determine whether the proposed rule change 
should be disapproved.\74\ Accordingly, the Commission has the 
obligation under the Exchange Act to consider and affirmatively 
dispose, by either approving or disapproving, of the CBOE's proposal. 
The existence of a contractual dispute arising under state law subject 
to pending litigation in state court does not in any way displace or 
supplant the Commission's jurisdiction to consider a proposed rule 
change submitted by an SRO.\75\
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    \73\ 15 U.S.C. 78s(b)(2).
    \74\ The CBOE consented to an extension of time for the 
Commission to consider its filing. See Item 6 of Amendment No. 1 to 
CBOE's Form 19b-4 filing, dated January 17, 2007.
    \75\ CBOE asserts that the proposed rule change was not an 
attempt to undercut the Delaware court's authority to resolve the 
litigation initiated by the CBOT and the putative class, because, at 
the time the proposed rule change was filed, the Delaware litigation 
dealt only with the valuation issues arising from the CBOE 
demutualization, whereas the proposed rule change addresses the 
impact of the change in the CBOT corporate structure on the 
eligibility to be, and remain, an Exercise Member. See Schiff Hardin 
Letter 1, supra note 36, at 2; and CBOE Response to Comments, supra 
note 4, at 17-18.
---------------------------------------------------------------------------

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

    \76\ CBOE notes that state courts have previously recognized the 
Commission's exclusive authority over membership rules and 
membership decisions, including CBOE's interpretations of Article 
Fifth(b), and have noted that the Commission's authority preempts 
direct judicial consideration of exchange membership issues. See 
CBOE Response to Comments, supra note 4, at 6-8; Schiff Hardin 
Letter 1, supra note 36, at 5-6. CBOE opined that the preeminence of 
federal law with respect to membership issues is critical to avoid 
having inconsistent standards imposed on exchanges by competing 
judicial authorities, which CBOE believes would undermine the 
federal regulatory scheme. See CBOE Response to Comments, supra note 
4, at 8-10.
    \77\ 15 U.S.C. 78f(b)(2).
    \78\ See 15 U.S.C. 78f(c).
    \79\ See 15 U.S.C. 78f(b)(6).
    \80\ See 15 U.S.C. 78s(d) and (f), respectively.
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    Second, the Exchange Act manifests a strong federal interest in the 
governance of national securities exchanges.\81\

[[Page 3776]]

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

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

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

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

B. Compliance With Its Own Rules

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

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

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

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

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

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

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

[[Page 3777]]

that its former members continue to qualify as ``CBOT Full Members'' 
and continue to have all the same trading rights they had in the 
past.\92\ In addition, CBOT argues that the provisions in the 1992 
Agreement regarding the effect of a potential merger involving CBOT do 
not adversely affect the continued availability of the Exercise Right 
in this case.\93\ CBOT believes that members of CBOT after the 
acquisition continue to hold sufficient indicia of CBOT membership to 
qualify for CBOE membership under Article Fifth(b).\94\
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    \90\ One commenter criticizes the CBOE's proposal on the basis 
that it ignores the CBOT's ``reasonable alternative 
interpretation.'' See Ungaretti Letter, supra note 39, at 9. The 
Commission, however, is not required to find that the interpretation 
proposed is the most reasonable, but only that the one proposed is 
consistent with the Exchange Act.
    \91\ See Mayer Brown Letter 3, supra note 37, at 34. CBOT also 
notes CBOE's (now expired) arrangement with the Intercontinental 
Exchange (``ICE'') when ICE was attempting to acquire the CBOT in 
which ICE and CBOE would have paid $665.5 million to compensate, in 
part, for the loss of the Exercise Right. See Mayer Brown Letter 5, 
supra note 37, at 2. CBOT believes that this arrangement undercut 
CBOE's claim that after the acquisition by CME Holdings, the 
Exercise Right will have no value and the rights of Eligible CBOT 
Full Members will be extinguished. See id. The Commission disagrees. 
An offer of settlement in which compensation is to be paid does not 
necessarily suggest that the underlying matter in dispute has any 
particular validity or value. An offer to settle a disputed matter 
has value it its own right, for example the savings associated with 
the avoidance of protracted legal proceedings and the ability to 
bring a dispute to a final conclusion.
    \92\ See Mayer Brown Letter 3, supra note 37, at 34-36.
    \93\ See id.
    \94\ See id. at 37.
---------------------------------------------------------------------------

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

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

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

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

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

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

    The Commission believes that the record provides a sufficient basis 
on which the Commission can find that the CBOE complied with its own 
Certificate of Incorporation in determining that the proposed rule 
change is an interpretation of, not an amendment to, Article 
Fifth(b).\110\ After considering the materials on this issue submitted 
by both the CBOE and CBOT, the Commission is persuaded by CBOE's 
analysis of the difference between ``interpretations'' and 
``amendments.'' In particular, the Commission notes that the CBOT's 
letter of counsel was based on an error of fact with respect to the 
composition of the CBOE Board at the time of the interpretation of 
Article Fifth(b), and, in fact, the CBOE's Board of Directors was 
composed of a majority of disinterested public directors at the time. 
This issue is discussed below.\111\
---------------------------------------------------------------------------

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

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

[[Page 3778]]

appropriate under Delaware state law. The Commission is also relying on 
CBOE's letter of counsel that concludes that the Board's interpretation 
of Article Fifth(b) does not constitute an amendment to the CBOE's 
Certificate of Incorporation and that it is within the general 
authority of the CBOE's Board of Directors to interpret Article 
Fifth(b) when questions arise as to its application under certain 
circumstances, so long as the interpretation adopted by the Exchange's 
Board of Directors is made in good faith, consistent with the terms of 
the governing documents themselves, and not for inequitable 
purposes.\112\ Without opining on the merits of any claims arising 
solely under state law, the Commission finds that CBOE has articulated 
a sufficient basis to support its proposed rule change and for the 
foregoing reasons finds that it is consistent with the Exchange Act.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 3779]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

C. Additional Concerns Expressed by the CBOT and Commenters

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

[[Page 3780]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 3781]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 3782]]

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

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

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

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

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

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

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

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

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

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

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

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

    Accordingly, based on the record before us, the Commission finds 
that the

[[Page 3783]]

proposal is consistent with Section 6(c)(4) of the Exchange Act and 
does not constitute an effort by CBOE to decrease the number of CBOE 
members.

V. Pending State Court Litigation

    The Commission wants to emphasize the limited nature of our 
position on the state law issues we have addressed. The Commission is 
aware of the state court litigation between the CBOE and members of the 
CBOT and the state court's decision to stay the litigation until the 
Commission acts on the CBOE rule proposal. We stress that our 
consideration of the state law questions in this matter should in no 
way prejudice or affect the state court's consideration of those 
questions. As we explained, the state law questions played a role in 
our analysis of the federal law considerations the Commission is 
charged with deciding under the Exchange Act. To carry out our 
responsibilities under the Exchange Act (and also to avoid an endless 
cycle of our deference to the state court on the state law issues and 
the state court's deference to us on the federal law issues) we have 
proceeded to review the CBOE rule proposal. Our decisions about state 
law matters, however, are only those required to serve as a basis for 
carrying out our Exchange Act responsibilities.
    We also recognize that our review of the CBOE proposed rule 
involves procedures different from those the state court uses in the 
pending litigation. This review process is not a forum to litigate 
state law issues that may arise regarding an SRO's rule proposal. 
Rather, our review of a proposed rule of an SRO employs public notice 
and comment, the receipt of written submissions from the SRO and the 
public, and the possibility of a proceeding to determine whether it 
should be disapproved. To this process, we bring familiarity with SROs 
and their rules and extensive knowledge and experience with the 
relevant provisions of the Exchange Act. The state court applies the 
range of procedures used in traditional adversarial litigation, 
including discovery, rules of evidence, witnesses, cross-examination, 
motions, and the like. It has deep and specialized knowledge of 
Delaware corporate law.
    The state court thus is free to find the relevant facts and 
determine and apply the relevant state law in its normal fashion 
without according weight to our evaluation of the state law questions, 
which was done employing different procedures and for different 
purposes.\190\ And, as we have explained, if the state law decision 
calls into question the basis on which our decision here with respect 
to these state law issues or any other relevant state law issues was 
made, we would expect CBOE to respond appropriately, or we will act on 
our own as necessary.
---------------------------------------------------------------------------

    \190\ The Delaware court discussed possible ways in which the 
Commission's jurisdiction and the court's state law authority might 
interact. As the court emphasized, the court ``has jurisdiction to 
consider the `economic rights' issues by the Complaint because those 
claims emerge from and are governed by state contract or fiduciary 
duty law.'' See Memorandum of Opinion, supra note 68, at 29. The 
court also noted that ``even if it turns out that the SEC's mandate 
requires that CBOT Full Members be excluded from trading on the 
CBOE,'' then ``it does not ineluctably follow that, in these unique 
circumstances, they are also divested of whatever economic (or 
contractual) rights they hold as a result of that status.'' Id. at 
note 48. We agree with the Delaware court and welcome its expert 
determination of these issues.
---------------------------------------------------------------------------

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\191\ that the proposed rule change (SR-CBOE-2006-106), as 
amended, be, and hereby is approved.
---------------------------------------------------------------------------

    \191\ 15 U.S.C. 78s(b)(2).

By the Commission.
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-954 Filed 1-18-08; 8:45 am]

BILLING CODE 8011-01-P
