
[Federal Register: May 28, 2010 (Volume 75, Number 103)]
[Notices]               
[Page 30082-30095]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28my10-145]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62158; File No. SR-CBOE-2008-88]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of Proposed Rule Change as Modified by Amendment 
No. 1 Relating to the Demutualization of Chicago Board Options 
Exchange, Incorporated

May 24, 2010.

I. Introduction

    On August 21, 2008, pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ the 
Chicago Board Options Exchange, Incorporated (``CBOE'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change in connection with its plan to demutualize and 
restructure from a Delaware non-stock corporation to a Delaware stock 
corporation that would be a wholly-owned subsidiary of CBOE Holdings, 
Inc. (``CBOE Holdings''), a holding company organized as a Delaware 
stock corporation (the ``Restructuring Transaction'').\3\ To 
accommodate the Restructuring Transaction, CBOE proposed a Certificate 
of Incorporation and Bylaws for the newly formed CBOE Holdings, a new 
Certificate of Incorporation for CBOE, and to replace CBOE's existing 
Constitution with new Bylaws. Finally, CBOE proposed amendments to its 
rules to address, among other things, trading

[[Page 30083]]

access to the Exchange after the Restructuring Transaction. The 
proposed rule change was published for comment in the Federal Register 
on September 4, 2008.\4\ The Commission received no comments on the 
proposal. On May 21, 2010, the Exchange filed Amendment No. 1 to the 
proposal.\5\ This order provides notice of filing of Amendment No. 1 
and grants accelerated approval to the proposed rule change, as 
modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The term ``Restructuring Transaction'' is defined in 
proposed CBOE Rule 1.1(hhh) as ``the restructuring of the Exchange 
from a non-stock corporation to a stock corporation and wholly-owned 
subsidiary of CBOE Holdings, Inc.''
    \4\ See Securities Exchange Act Release No. 58425 (August 26, 
2008), 73 FR 51652 (``Notice'').
    \5\ The substance of the proposed rule change and its filing 
with the Commission were approved by the Board of Directors of the 
Exchange prior to filing. At that time, the Exchange had not yet 
obtained approval from its members for the changes set forth in the 
proposal. On May 21, 2010, the Exchange obtained the requisite 
approval from its members. Amendment No. 1, among other things, 
reflects the membership's approval of this proposed rule change. See 
infra notes and text following note 172 for a discussion of 
Amendment No. 1 in greater detail.
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II. Discussion and Commission Findings

    After careful review of the proposal, the Commission finds that the 
proposed rule change, as amended, is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to a 
national securities exchange.\6\ In particular, as discussed in more 
detail below, the Commission finds that the proposed rule change is 
consistent with Section 6(b) of the Act.\7\
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    \6\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f.
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A. The Restructuring Transaction

(1) Overview of the Proposed Corporate Structure
    CBOE proposes to restructure from a Delaware non-stock corporation 
owned by its members to a Delaware stock corporation that would be a 
wholly-owned subsidiary of CBOE Holdings, a holding company organized 
as a Delaware stock corporation. As a result of the Restructuring 
Transaction, CBOE Holdings would become the sole stockholder of 
CBOE.\8\ In addition, CBOE would transfer to CBOE Holdings all of the 
shares or interests CBOE currently owns in its subsidiaries, other than 
CBOE Stock Exchange, LLC, (``CBSX''), thereby making them wholly-owned 
subsidiaries of CBOE Holdings.\9\ CBSX, which is an equity trading 
facility of CBOE, would remain a facility of CBOE in which CBOE would 
continue to hold a 50% interest.\10\ CBOE would continue to be a self-
regulatory organization (``SRO'') and to operate its exchange business 
and facilities.
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    \8\ In Amendment No. 1, CBOE revised the proposed CBOE Holdings' 
Certificate of Incorporation to include the term ``Regulated 
Securities Exchange Subsidiary'' in the places that had referenced 
CBOE. A ``Regulated Securities Exchange Subsidiary'' is defined as 
``any national securities exchange, controlled, directly or 
indirectly, by CBOE Holdings, including, but not limited to CBOE.'' 
This change in terminology addresses CBOE's other national 
securities exchange C2 Options Exchange, Incorporated and would 
accommodate ownership of more than one national securities exchange 
by CBOE Holdings. See Amendment No. 1 at 4. See also Securities 
Exchange Act Release No. 61152 (December 10, 2009), 74 FR 66699 
(December 16, 2009) (order approving application of C2 Options 
Exchange, Incorporated).
    \9\ These subsidiaries are: CBOE Futures Exchange, LLC, which 
operates an electronic futures exchange; Chicago Options Exchange 
Building Corporation, which owns the building in which CBOE 
operates; CBOE, LLC, which holds a 24.01% interest in OneChicago, 
LLC, a security futures exchange; CBOE II, LLC, which has no assets 
or activities; DerivaTech Corporation, which owns certain 
educational software; Market Data Express, LLC, which distributes 
various types of market data; and The Options Exchange, 
Incorporated, which currently has no assets or activities.
    \10\ The remaining 50% interest in CBSX currently is owned by 
five registered broker-dealers.
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    CBOE has proposed a new Certificate of Incorporation and Bylaws 
that are similar to the CBOE's current Certificate of Incorporation and 
Constitution, except that they reflect CBOE's proposed new structure. 
CBOE also has proposed to adopt a Certificate of Incorporation and 
Bylaws for CBOE Holdings that would address, among other things, the 
operation of the Exchange as an SRO in a holding company structure.\11\ 
Finally, CBOE has proposed amendments to certain rules of the Exchange 
to reflect, among other things, the use of Trading Permits\12\ to 
access the Exchange and its facilities.
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    \11\ See infra note 51 and accompanying text (discussing CBOE's 
role in considering amendments to CBOE Holdings' corporate 
documents).
    \12\ See infra note 118 and accompanying text (describing 
Trading Permits).
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(2) Conversion of Memberships
    After the Restructuring Transaction, the owners of membership 
interests in CBOE would become stockholders of CBOE Holdings through 
the conversion of their memberships into shares of common stock of CBOE 
Holdings. Each transferable CBOE membership existing on the date of the 
Restructuring Transaction would be converted into a certain number of 
shares of Class A common stock of CBOE Holdings.\13\ The Class A common 
stock of CBOE Holdings would represent an equity ownership interest in 
CBOE Holdings, but would not provide its holders with physical or 
electronic access to CBOE and its trading facilities. In addition, 
Class B common stock of CBOE Holdings would be issued in the 
Restructuring Transaction in connection with the settlement of the 
litigation relating to the exercise right.
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    \13\ See Amendment No. 1 at 3. In the event of a future public 
offering by CBOE Holdings, each outstanding share of Class A common 
stock would be converted to one-half of one share of Class A-1 
common stock and one-half share of one share of Class A-2 common 
stock, each of which would be subject to certain transfer 
restrictions. Specifically, Class A-1 common stock resulting from a 
conversion at the time of a pubic offering would be subject to a 
180-day transfer restriction following the offering and Class A-2 
common stock would be subject to a 360-day transfer restriction. 
Upon expiration of the restrictions, Class A-1 and Class A-2 common 
stock would convert to unrestricted common stock of CBOE Holdings. 
See id. Similarly, the Class B common stock of CBOE Holdings that 
will be issued in the Restructuring Transaction in connection with 
the settlement of the litigation relating to the exercise right 
would also be issued in a single class designated as Class B common 
stock. To ensure compliance with the transfer restrictions, Class A, 
Class A-1, Class A-2 and Class B common stock may only be recorded 
on the books and records of CBOE Holdings in the name of the owner 
of the shares. See id. CBOE Holdings would have the ability to issue 
preferred stock and unrestricted common stock including in 
connection with a public offering of shares of stock to investors 
who were not members of CBOE prior to the Restructuring Transaction 
and who would not be Trading Permit holders following the 
Restructuring Transaction. According to the Exchange, CBOE Holdings 
has no current intention to issue any shares of its preferred stock. 
See id.
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B. CBOE Holdings

    After the Restructuring Transaction, CBOE Holdings would become the 
parent company and sole shareholder of CBOE. The proposed Certificate 
of Incorporation and Bylaws of CBOE Holdings would govern the 
activities of CBOE Holdings.
(1) Governing Structure
    CBOE Holdings Board of Directors. The CBOE Holdings Board of 
Directors (``CBOE Holdings Board'') would be composed of between 11 and 
23 directors. Except with respect to the initial CBOE Holdings Board, 
the exact number would be established by the CBOE Holdings Board.\14\ 
The initial CBOE Holdings Board would be composed of the 22 directors 
of CBOE immediately prior to the Restructuring Transaction.\15\
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    \14\ See proposed Article Seventh(b) of the CBOE Holdings 
Certificate of Incorporation and proposed Article 3.2 of the CBOE 
Holdings Bylaws.
    \15\ See Amendment No. 1 at 5-6 (concerning the size of the 
initial CBOE Holdings Board). CBOE currently has a 23-person Board 
with one vacancy that the CBOE Board does not intend to fill prior 
to the consummation of the Restructuring Transaction.
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    Except with respect to the initial CBOE Holdings Board, the 
Nominating and Governance Committee \16\ would

[[Page 30084]]

nominate candidates for the CBOE Holdings Board.\17\ Each holder of 
CBOE Holdings voting stock would be entitled to one vote for each share 
of voting stock held, except as otherwise provided by the General 
Corporation Law of the State of Delaware or the Certificate of 
Incorporation or Bylaws of CBOE Holdings.\18\
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    \16\ See ``Nominating and Governance Committee,'' infra Section 
II.B.2. (describing composition of Nomination and Governance 
Committee).
    \17\ See proposed Article 2.11 of the CBOE Holdings Bylaws. 
Pursuant to proposed Article 2.11, the CBOE Holdings Board or a 
committee thereof each year would nominate candidates for the 
directors standing for election at the CBOE Holdings annual meeting 
of shareholders. See also Amendment No. 1 at 6-7 (discussing 
director nominees). In addition, subject to certain conditions, 
stockholders also have the right under this provision to nominate 
persons for the CBOE Holdings Board.
    \18\ See proposed Article 2.8 of the CBOE Holdings Bylaws. The 
Commission notes that there are no provisions in the proposed CBOE 
Holdings corporate documents providing for anything other than one 
vote for each share of voting stock held.
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    The CBOE Holdings Board would be subject to a heightened 
independence requirement, with at least two-thirds of the directors 
satisfying the independence requirements adopted by the CBOE Holdings 
Board, as may be amended from time to time, which shall satisfy the 
independence requirements in the listing standards of the New York 
Stock Exchange (``NYSE'') or The Nasdaq Stock Market.\19\ CBOE Holdings 
directors would serve one-year terms.\20\
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    \19\ See Amendment No. 1 at 6. See proposed Article 3.3 of the 
CBOE Holdings Bylaws. See also Sections 303A.01 and 303A.02 of the 
NYSE's Listed Company Manual and Nasdaq Stock Market Rule 5605.
    \20\ See Amendment No. 1 at 6 (changing term duration from two 
years, as initially proposed, to one year).
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    The CBOE Holdings Board would appoint one of its directors to serve 
as Chairman,\21\ and may also appoint an independent director to serve 
as Lead Director, who would perform such duties and possess such powers 
as the CBOE Holdings Board may from time to time prescribe.\22\
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    \21\ See proposed Article 3.6 of the CBOE Holdings Bylaws. The 
proposed CBOE Holdings Bylaws would not restrict the Chief Executive 
Officer of CBOE Holdings from serving in this role. See proposed 
Article 5.1 of the CBOE Holdings Bylaws.
    \22\ See proposed Article 3.7 of the CBOE Holdings Bylaws.
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    Committees of CBOE Holdings. CBOE Holdings would have an Executive 
Committee, an Audit Committee, a Compensation Committee, a Nominating 
and Governance Committee, and such other committees that the CBOE 
Holdings Board establishes.\23\ The members of each committee would be 
selected by the CBOE Holdings Board.
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    \23\ See proposed Article 4.1 of the CBOE Holdings Bylaws. The 
CBOE Holdings Board would designate the members of these other 
committees and may designate a Chairman and a Vice-Chairman of each 
committee.
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    The Executive Committee would have all the powers and authority of 
the CBOE Holdings Board in the management of the business and affairs 
of CBOE Holdings, except it would not have the power or authority of 
the CBOE Holdings Board in reference to, among other things, amending 
the CBOE Holdings Certificate of Incorporation, adopting an agreement 
of merger or consolidation, approving the sale, lease or exchange of 
all or substantially all of the CBOE Holdings' property and assets, or 
approving the dissolution of CBOE Holdings or a revocation of a 
dissolution.\24\ The Executive Committee would include the Chairman of 
the Board (who would serve as the Chairman of the Executive Committee), 
the Chief Executive Officer (if a director), the Lead Director, if any, 
and such directors as the CBOE Holdings Board deems appropriate, 
provided that Executive Committee must at all times have a majority of 
independent directors.
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    \24\ See proposed Article 4.2 of the CBOE Holdings Bylaws.
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    The Nominating and Governance Committee would recommend members of 
CBOE Holdings' Executive, Audit, and Compensation Committees for 
approval by the CBOE Holdings Board.\25\ The Nominating and Governance 
Committee would consist of at least five directors, all of whom would 
be Independent Directors.\26\
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    \25\ See proposed Articles 4.2, 4.3 and 4.4 of the CBOE Holdings 
Bylaws.
    \26\ See Article 4.5 of the CBOE Holdings Bylaws. See also 
Amendment No. 1 at 6-7 (decreasing the size of the committee from 
seven to five). With the exception of the initial committee, all 
committee members would be recommended by the Nominating and 
Governance Committee for approval by the CBOE Holdings Board. See 
proposed Article 4.5 of the CBOE Holdings Bylaws. The initial 
Nominating and Governance Committee after the Restructuring 
Transaction would be selected by the CBOE Board or a committee 
thereof, consistent with the committee's composition requirements.
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    Officers of CBOE Holdings. CBOE Holdings would have a Chief 
Executive Officer, a Chief Financial Officer, a President, one or more 
Vice-Presidents (as determined by the CBOE Holdings Board), a 
Secretary, a Treasurer, and such other officers as the CBOE Holdings 
Board may determine, including an Assistant Secretary or Assistant 
Treasurer.\27\ The Chief Executive Officer would have general charge 
and supervision of the business of CBOE Holdings.\28\ Other officers 
would have the duties or powers or both set out in the CBOE Holdings 
Bylaws, as well as such other duties or powers or both as the CBOE 
Holdings Board or the Chief Executive Officer may from time to time 
prescribe.\29\
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    \27\ See proposed Article 5.1 of the CBOE Holdings Bylaws.
    \28\ See proposed Articles 5.1 and 5.2 of the CBOE Holdings 
Bylaws.
    \29\ See proposed Articles 5.3, 5.4, 5.5, 5.6 and 5.7 of the 
CBOE Holdings Bylaws.
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    The Commission finds that the proposed provisions relating to the 
CBOE Holding Board are consistent with the Act, particularly Section 
6(b)(1), which requires an exchange to be so organized and have the 
capacity to carry out the purposes of the Act.\30\ In particular, these 
provisions will assist the Exchange in fulfilling its self-regulatory 
obligations and in administering and complying with the requirements of 
the Act.
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    \30\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
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(2) Ownership and Voting Restrictions
    The proposed Certificate of Incorporation of CBOE Holdings places 
certain ownership and voting limits on the holders of CBOE Holdings 
stock and their Related Persons.\31\ These restrictions are intended to 
address the possibility that a person holding a controlling interest in 
an entity that owns an SRO could use that interest to affect the SRO's 
regulatory responsibilities.\32\
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    \31\ The term ``Related Person'' is defined in proposed Article 
Fifth(a)(ix) of the CBOE Holdings Certificate of Incorporation and 
includes, among other things, persons associated with a Trading 
Permit Holder.
    \32\ The Commission notes that CBOE has received a legal opinion 
that the proposed ownership and voting limitations, as well as the 
provisions providing for the redemption of shares held by a person 
(either alone or together with its Related Persons) in excess of the 
ownership limitation, are valid under Delaware law. See Letter from 
Richards, Layton & Finger to CBOE Holdings, Inc. dated August 15, 
2008.
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    Ownership Limitation. No person (either alone or together with its 
Related Persons) may beneficially own more than 10% of the total 
outstanding shares of CBOE Holdings stock. In the event of a public 
offering of common stock, the permissible ownership percentage 
threshold would increase from 10% to 20%.\33\ If a person, either alone 
or together with its Related Persons, exceeds these thresholds, such 
person and its Related Persons would be obligated to sell promptly, and 
CBOE Holdings would be obligated to redeem promptly, the number of 
shares of stock necessary so that such person, together with its 
Related Persons, would fall below the applicable threshold.\34\
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    \33\ See proposed Article Sixth(b) of the CBOE Holdings 
Certificate of Incorporation.
    \34\ See proposed Article Sixth(b) of the CBOE Holdings 
Certificate of Incorporation. CBOE Holdings would redeem such stock 
at a price equal to the par value of such shares of stock and to the 
extent that funds are legally available for such redemption. If 
shares of CBOE Holdings stock beneficially owned by any Person or 
its Related Persons are held of record by any other Person, this 
provision would be enforced against such record owner by requiring 
the redemption of shares of CBOE Holdings stock held by such record 
owner in a manner that would accomplish the ownership limitation 
applicable to such Person and its Related Persons. See id.

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[[Page 30085]]

    Voting Limitation. No person (either alone or together with its 
Related Persons) would be entitled to vote or cause the voting of 
shares of stock beneficially owned by that person or those Related 
Persons to the extent that those shares would represent in the 
aggregate more than 10% of the total number of votes entitled to be 
cast on any matter. Further, no person (either alone or together with 
its Related Persons) would be entitled to vote more than 10% of the 
total number of votes entitled to be cast on any matter by virtue of 
agreements entered into by that person or those Related Persons with 
other persons not to vote shares of outstanding stock. In the event a 
public offering of common stock, these permissible voting percentage 
thresholds would increase from 10% to 20%.\35\ Any attempted votes in 
the excess of such thresholds would be disregarded.\36\
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    \35\ See proposed Article Sixth(a) of the CBOE Holdings 
Certificate of Incorporation. The voting limitation does not apply 
to a solicitation of a revocable proxy by any CBOE Holdings 
stockholder on behalf of CBOE Holdings or by directors or officers 
of CBOE Holdings on behalf of CBOE Holdings or to a solicitation of 
a revocable proxy by a stockholder in accordance with Regulation 14A 
under the Act. 17 CFR 240.14A. This exception, however, would not 
apply to a solicitation by a stockholder pursuant to Rule 14a-
2(b)(2) under the Act, which permits a solicitation made otherwise 
than on behalf of CBOE Holdings where the total number of persons 
solicited is not more than 10.
    \36\ See proposed Article Sixth(a) of the CBOE Holdings 
Certificate of Incorporation. If and to the extent that shares of 
CBOE Holdings stock beneficially owned by any person or its Related 
Persons are held of record by any other person, this provision would 
be enforced against such record owner by limiting the votes entitled 
to be cast by such record owner in a manner that would accomplish 
the voting limitation applicable to such person and its Related 
Persons.
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    Waiver of Ownership or Voting Limitations. The CBOE Holdings Board 
may waive the ownership and voting limits and may impose conditions or 
restrictions by means of a resolution expressly permitting ownership or 
voting rights in excess of such limits, subject to a determination of 
the Board that: \37\
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    \37\ See proposed Articles Sixth(a) and (b) of the CBOE Holdings 
Certificate of Incorporation. Any such resolution must be filed with 
the Commission under Section 19 of the Act prior to becoming 
effective.
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     The acquisition would not impair the ability of CBOE to 
discharge its responsibilities under the Act and the rules and 
regulations thereunder and is otherwise in the best interests of CBOE 
Holdings and its stockholders and CBOE;
     The acquisition would not impair the Commission's ability 
to enforce the Act;
     Neither the person obtaining the waiver nor any of its 
Related Persons is subject to any statutory disqualification (as 
defined in Section 3(a)(39) of the Act); \38\ and
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    \38\ 15 U.S.C. 78c(a)(39).
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     For so long as CBOE Holdings directly or indirectly 
controls CBOE, neither the person obtaining the waiver nor any of its 
Related Persons is a Trading Permit Holder.\39\
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    \39\ A ``Trading Permit Holder'' is defined in Section 1.1(f) of 
the Bylaws of the Exchange as: Any individual, corporation, 
partnership, limited liability company or other entity authorized by 
the Rules that holds a Trading Permit. If a Trading Permit Holder is 
an individual, the Trading Permit Holder may also be referred to an 
``individual Trading Permit Holder.'' If a Trading Permit Holder is 
not an individual, the Trading Permit Holder may also be referred to 
as a ``TPH organization.'' A Trading Permit Holder is a ``member'' 
solely for purposes of the Act; however, one's status as a Trading 
Permit Holder does not confer on that Person any ownership interest 
in the Exchange.
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    The CBOE Holdings Board would have the right to require any person 
and its Related Persons that the Board reasonably believes to be 
subject to the voting or ownership restrictions summarized above to 
provide to CBOE Holdings complete information on all shares of CBOE 
Holdings stock that such stockholder beneficially owns, as well as any 
other information relating to the applicability to such stockholder of 
the voting and ownership requirements outlined above as may reasonably 
be requested.\40\
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    \40\ See proposed Article Sixth(d) of the CBOE Holdings 
Certificate of Incorporation.
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    In addition, any changes to the CBOE Holdings Certificate of 
Incorporation, including any change in the provision that identifies 
CBOE Holdings as the sole owner of CBOE, must be filed with and 
approved by the Commission pursuant to Section 19 of the Act before it 
could become effective.\41\ Further, pursuant to the Exchange's 
proposed Certificate of Incorporation, CBOE Holdings may not sell, 
transfer, or assign, in whole or in part, its ownership interest in 
CBOE. Any such purported action would trigger an amendment both to CBOE 
Holdings' and CBOE's governing documents, which in turn would be 
subject to consideration by the Commission pursuant to the rule filing 
procedure under Section 19 of the Act.
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    \41\ See 15 U.S.C. 78s.
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    The Commission believes that these provisions are consistent with 
the Act. These requirements are designed to minimize the potential that 
a person could improperly interfere with or restrict the ability of the 
Commission or the Exchange to effectively carry out their regulatory 
oversight under the Act.
    Members that trade on an exchange traditionally have had ownership 
interests in the exchange, particularly at mutually-held entities like 
CBOE.\42\ However, as the Commission has noted in the past, a member's 
interest in an exchange or an entity that controls an exchange could 
become so large as to cast doubt on whether the exchange can fairly and 
objectively exercise its self-regulatory responsibilities with respect 
to that member.\43\ A member that is a controlling shareholder of an 
exchange, or an entity that controls an exchange, might be tempted to 
exercise that controlling influence by directing the exchange to 
refrain from, or the exchange may hesitate to, diligently monitor and 
surveil the member's conduct or diligently enforce its rules and the 
Federal securities laws with respect to conduct by the member that 
violates such provisions. The proposed ownership and voting limitations 
for persons with an equity interest in CBOE Holdings are designed to 
limit a person's ability to obtain and exercise such a controlling 
influence.
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    \42\ With the proposed demutualization of CBOE, all registered 
national securities exchanges will have converted to or been founded 
as non-mutually held entities.
    \43\ See Securities Exchange Act Release Nos. 58375 (August 18, 
2008), 73 FR 49498 (August 21, 2008) (File No. 10-182) (order 
approving application of BATS Exchange, Inc. for registration as an 
SRO); 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (SR-
NYSE-2005-77) (order approving merger of New York Stock Exchange, 
Inc. and Archipelago, and demutualization of New York Stock 
Exchange, Inc.; 53128 (January 13, 2006), 71 FR 3550 (January 23, 
2006) (File No. 10-131); 51149 (February 8, 2005), 70 FR 7531 
(February 14, 2005) (SR-CHX-2004-26); 49718 (May 17, 2004), 69 FR 
29611 (May 24, 2004) (SR-PCX-2004-08); 49098 (January 16, 2004), 69 
FR 3974 (January 27, 2004) (SR-Phlx-2003-73); and 49067 (January 13, 
2004), 69 FR 2761 (January 20, 2004) (SR-BSE-2003-19).
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(3) Self-Regulatory Function and Oversight of CBOE
    Although CBOE Holdings will not itself carry out regulatory 
functions, its activities with respect to the operation of CBOE must be 
consistent with, and not interfere with, the Exchange's self-regulatory 
obligations. The proposed CBOE Holdings Certificate of Incorporation 
contains various provisions designed to protect the independence of the 
self-regulatory function of CBOE, enable the Exchange to operate in a 
manner that complies with the Federal securities laws,

[[Page 30086]]

including the objectives of Sections 6(b) and 19(g) of the Act, 
facilitate the ability of the Exchange and the Commission to fulfill 
their regulatory and oversight obligations under the Act.
    For example, the proposed CBOE Holdings Certificate of 
Incorporation contains a provision requiring each director of the CBOE 
Holdings Board to take into consideration the effect that CBOE 
Holdings' actions would have on CBOE's ability to carry out its 
responsibilities under the Act.\44\ Similarly, for so long as CBOE 
Holdings controls CBOE, each officer, director, and employee of CBOE 
Holdings must give due regard to the preservation of the independence 
of the self-regulatory function of CBOE and to its obligations under 
the Act and such persons are prohibited from taking any actions that 
they reasonably should have known would interfere with the effectuation 
of any decisions by the Board of Directors of CBOE (``CBOE Board'') 
relating to CBOE's regulatory functions, including disciplinary 
matters, or would adversely affect CBOE's ability to carry out its 
responsibilities under the Act.\45\
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    \44\ See proposed Article Sixteenth(d) of the CBOE Holdings 
Certificate of Incorporation.
    \45\ See proposed Article Sixteenth(c) of the CBOE Holdings 
Certificate of Incorporation.
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    Further, the proposed CBOE Holdings Certificate of Incorporation 
provides that CBOE Holdings, its directors, officers, agents, and 
employees irrevocably submit to the jurisdiction of the U.S. Federal 
courts, the Commission, and CBOE and CBOE Holdings, its directors, 
officers, agents, and employees, would waive any claims or defenses 
that they are not personally subject to the jurisdiction of the 
Commission, as well as any defenses relating to inconvenient forum, 
improper venue, or jurisdiction.\46\ Further, so long as CBOE Holdings 
controls CBOE, the books, records, premises, officers, directors, and 
employees of CBOE Holdings would be deemed to be the books, records, 
premises, officers, directors, and employees of CBOE for purposes of 
and subject to oversight pursuant to the Act to the extent that they 
relate to CBOE.\47\
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    \46\ See proposed Article Fourteenth of the CBOE Holdings 
Certificate of Incorporation.
    \47\ The books and records of CBOE Holdings relating to the 
exchange business of CBOE would be subject at all times to 
inspection and copying by the Commission and CBOE. See id. In 
addition, the CBOE Holdings Bylaws provide that the books of CBOE 
Holdings must be kept within the United States. See proposed Section 
1.3 of the CBOE Holdings Bylaws.
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    In addition, all confidential information pertaining to the self-
regulatory function of CBOE (including but not limited to disciplinary 
matters, trading data, trading practices, and audit information) 
contained in the books and records of CBOE that comes into the 
possession of CBOE Holdings: (1) Could not be made available to any 
persons other than to those officers, directors, employees and agents 
of CBOE Holdings that have a reasonable need to know the contents 
thereof; (2) would be retained in confidence by CBOE Holdings and the 
officers, directors, employees and agents of CBOE Holdings; and (3) 
could not be used for any commercial purposes.\48\
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    \48\ Notwithstanding this restriction, nothing in the CBOE 
Holdings Certificate of Incorporation would be interpreted so as to 
limit or impede the rights of the Commission or CBOE to access and 
examine such confidential information or to limit or impede the 
ability of any officers, directors, employees or agents of CBOE 
Holdings to disclose such confidential information to the Commission 
or CBOE. See proposed Article Fifteenth of the CBOE Holdings 
Certificate of Incorporation.
---------------------------------------------------------------------------

    The proposed CBOE Holdings Certificate of Incorporation also 
requires CBOE Holdings to take reasonable steps to cause its directors, 
officers, and employees, prior to accepting such position with CBOE 
Holdings, to consent in writing to the applicability to them of Article 
Fourteenth, Article Fifteenth, and Sections (c) and (d) of Article 
Sixteenth of the CBOE Holdings Certificate of Incorporation, as 
applicable, with respect to their activities related to CBOE.\49\ In 
addition, CBOE Holdings would take reasonable steps necessary to cause 
its agents, prior to accepting such a position with CBOE Holdings, to 
be subject to the same provisions, as applicable, with respect to their 
activities related to CBOE.\50\
---------------------------------------------------------------------------

    \49\ See proposed Article Sixteenth(b) of the CBOE Holdings 
Certificate of Incorporation.
    \50\ See id.
---------------------------------------------------------------------------

    In addition, for so long as CBOE Holdings controls CBOE, CBOE 
Holdings would be required to submit to the CBOE Board any proposed 
amendment to or repeal of any provision of the CBOE Holdings 
Certificate of Incorporation or CBOE Holdings Bylaws and to file such 
with the Commission before it may become effective.\51\
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    \51\ See proposed Article Eleventh of the CBOE Holdings 
Certificate of Incorporation and proposed Article 10.2 of the CBOE 
Holdings Bylaws.
---------------------------------------------------------------------------

    The Commission finds that the proposed governing documents for CBOE 
Holdings, discussed above, are designed to protect the independence of 
the self-regulatory function of CBOE and clarify the Commission's and 
CBOE's jurisdiction with respect to CBOE Holdings in a manner 
consistent with the Act. Accordingly, these provisions should help 
ensure CBOE Holdings' attention to the self-regulatory obligations of 
CBOE and facilitate the ability of CBOE to effectively carry out its 
regulatory responsibilities under the Act.
    The Commission notes that under Section 20(a) of the Act,\52\ any 
person with a controlling interest in CBOE would be jointly and 
severally liable with and to the same extent that CBOE is liable under 
any provision of the Act, unless the controlling person acted in good 
faith and did not directly or indirectly induce the act or acts 
constituting the violation or cause of action. In addition, Section 
20(e) of the Act,\53\ creates aiding and abetting liability for any 
person who knowingly provides substantial assistance to another person 
in violation of any provision of the Act or rule thereunder. Further, 
Section 21C of the Act \54\ authorizes the Commission to enter a cease-
and-desist order against any person who has been ``a cause of'' a 
violation of any provision of the Act through an act or omission that 
the person knew or should have known would contribute to the violation. 
These provisions are applicable to CBOE Holdings' dealings with CBOE.
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78t(a).
    \53\ 15 U.S.C. 78t(e).
    \54\ 15 U.S.C. 78u-3.
---------------------------------------------------------------------------

C. CBOE

    Following the Restructuring Transaction, CBOE would become a 
Delaware for-profit stock corporation wholly-owned by CBOE Holdings. 
CBOE would issue a total of 1,000 shares of common stock, all of which 
would be owned by CBOE Holdings.\55\ CBOE would continue to be 
registered as a national securities exchange under Section 6 of the Act 
and, accordingly, would continue to be an SRO responsible for enforcing 
compliance by its members (i.e., Trading Permit Holders) with the 
Federal securities laws and with CBOE Rules.\56\ Likewise, CBOE would 
continue as a participant and voting member in the following national 
market system plans: The Options Price Reporting Authority Plan, the 
Consolidated Tape Association, the Consolidated Quotation Plan, the 
Nasdaq Unlisted Trading Privileges Plan, the Options Order Protection 
and Locked/Crossed Market Plan, the Options Regulatory Surveillance

[[Page 30087]]

Authority Plan, and the Options Listing Procedures Plan.\57\
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    \55\ Any sale, transfer or assignment by CBOE Holdings of any 
shares of CBOE common stock would require an amendment to the 
proposed CBOE Certificate of Incorporation and consequently would be 
subject to prior approval by the Commission pursuant to the rule 
filing procedure under Section 19 of the Act (15 U.S.C. 78s). See 
proposed Article Fourth of the CBOE Certificate of Incorporation.
    \56\ 15 U.S.C. 78f.
    \57\ These plans are joint industry plans entered into by SROs 
for the purpose of providing for, respectively, (i) last sale and 
quotation reporting in options and equities, (ii) intermarket 
options trading, (iii) the joint surveillance, investigation and 
detection of insider trading on the options exchanges, and (iv) the 
listing of standardized options.
---------------------------------------------------------------------------

    CBOE's current Certificate of Incorporation, Constitution (which 
would be replaced by the proposed Bylaws), and selected rules are 
proposed to be amended to reflect, among other things, CBOE's status as 
wholly-owned subsidiary of CBOE Holdings.
(1) CBOE Board and Committees
    The business and affairs of CBOE would continue to be managed under 
the direction of the CBOE Board. The CBOE Board would be composed of 
between 11 and 23 directors as fixed by the CBOE Board from time to 
time.\58\ The initial CBOE Board would be composed of the 22 
individuals who are the directors of CBOE immediately prior to the 
Restructuring Transaction.\59\ Thus, the CBOE Board following the 
Restructuring Transaction would be composed of CBOE's Chief Executive 
Officer, twelve Non-Industry \60\ Directors, and ten Industry \61\ 
Directors.\62\
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    \58\ See Amendment No. 1 at 7. See also proposed Article 
Fifth(b) of the CBOE Certificate of Incorporation and proposed 
Section 3.1 of the CBOE Bylaws.
    \59\ See Amendment No. 1 at 7.
    \60\ A ``Non-Industry Director'' would be defined as a person 
who is not an Industry Director. See proposed Section 3.1 of the 
CBOE Bylaws.
    \61\ See Notice, supra 4, 73 FR at 51658, n.58.
    \62\ See proposed Article Fifth(b) of the Amended and Restated 
Certificate of Incorporation and proposed Section 3.1 of the CBOE 
Bylaws. In comparison, the current CBOE Board has 23 directors, 
consisting of eleven public directors, eleven directors from the 
industry, and the Chairman of the Board (who is the CEO of CBOE). 
See Notice, supra note 4, 73 FR at 51658 (discussing the composition 
of the current CBOE Board).
---------------------------------------------------------------------------

    The number of Non-Industry Directors and Industry Directors may be 
increased from time to time by resolution of the CBOE Board, but the 
number of Industry Directors could not constitute less than 30% of the 
CBOE Board and in no event would the number of Non-Industry Directors 
constitute less than a majority of the CBOE Board.\63\ In addition, at 
least 20% of the directors must be Industry Directors nominated (or 
otherwise selected through the petition process) by the Industry-
Director Subcommittee (directors selected through this process are 
referred to as ``Representative Directors'').\64\ Directors would serve 
for one-year terms ending on the annual meeting following the meeting 
at which such directors were elected.\65\
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    \63\ At all times, at least one Non-Industry Director would be a 
Non-Industry Director exclusive of the exceptions provided for in 
proposed Section 3.1 of the CBOE Bylaws and would have no material 
business relationship with a broker or dealer or the Exchange or any 
of its affiliates. See proposed Section 3.1 of the CBOE Bylaws.
    \64\ See proposed Section 3.1 of the CBOE Bylaws.
    \65\ See Amendment No. 1 at 9-10.
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    The CBOE Board would appoint one of its directors to serve as 
Chairman, which could be the Chief Executive Officer of CBOE.\66\ Each 
year following the annual election of the directors, the CBOE Board 
would select, from among the Industry Directors, a Vice Chairman of the 
CBOE Board to serve for a term of one year.\67\ The CBOE Board also may 
appoint one of the Non-Industry Directors to serve as Lead Director, 
who would perform such duties and possess such powers as the CBOE Board 
may from time to time prescribe.\68\
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    \66\ See proposed Section 3.6 of the CBOE Bylaws. See also 
proposed Section 5.1(a) of the CBOE Bylaws (concerning the ability 
of the CEO to serve as Chairman of the CBOE Board).
    \67\ See proposed Section 3.7 of the CBOE Bylaws. The Vice 
Chairman would: (i) Preside over the meetings of the CBOE Board in 
the event the Chairman of the Board is absent or unable to do so, 
(ii) serve as chair the Trading Advisory Committee, (iii) except as 
otherwise provided in the Rules or resolution of the CBOE Board, 
appoint, subject to the approval of the CBOE Board, the individuals 
to serve on all Trading Permit Holder committees established in the 
Rules or by resolution of the Board, and (iv) exercise such other 
powers and perform such other duties as are delegated to the Vice 
Chairman of the Board by the CBOE Board.
    \68\ See proposed Section 3.8 of the CBOE Bylaws. The CBOE Board 
currently has a Lead Director, and as provided in proposed Section 
3.8 of the CBOE Bylaws, CBOE has the ability to continue the 
practice after the Restructuring Transaction.
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(2) Nomination and Election of Directors
    Qualified individuals would be nominated for election to the CBOE 
Board by CBOE's Nominating and Governance Committee.\69\ The committee 
would consist of at least seven directors, with a majority being Non-
Industry Directors,\70\ all of whom would be recommended by the then-
serving Nominating and Governance Committee for approval by the Board. 
The initial Nominating and Governance Committee after the Restructuring 
Transaction would be selected by the CBOE Board or a committee thereof, 
consistent with the applicable proposed compositional requirements.\71\
---------------------------------------------------------------------------

    \69\ See id. In performing this function, the Nominating and 
Governance Committee would determine, subject to review by the 
Board, whether a director candidate satisfies the applicable 
qualifications for election as a director, and the decision of that 
committee shall, subject to review, if any, by the Board, be final. 
See proposed Section 3.1 of the CBOE Bylaws. CBOE anticipates that 
the Nominating and Governance Committee would use director 
questionnaires in connection with determining the qualifications of 
director candidates. See Notice, supra note 4, 73 FR at 51659, n.74.
    \70\ See proposed Section 4.5 of the CBOE Bylaws.
    \71\ The composition of the proposed new Nominating and 
Governance Committee differs from the composition of CBOE's current 
Nominating Committee in that the current Nominating Committee 
consists of a majority of ``industry'' members and is not tasked 
with responsibility for governance issues. In addition, the current 
Nominating Committee is not a committee of the current CBOE Board, 
but rather is a separate committee elected by the voting members of 
the Exchange. See Section 4.1 of the current CBOE Constitution.
---------------------------------------------------------------------------

    Industry-Director Subcommittee. The Industry-Director Subcommittee 
of the Nominating and Governance Committee, composed of all of the 
Industry Directors then serving on the Nominating and Governance 
Committee, would be responsible for recommending a number of 
Representative Directors that equals 20% of the total number of 
directors serving on the CBOE Board.\72\ The subcommittee would provide 
a mechanism for Trading Permits Holders to provide input with respect 
to nominees for the Representative Directors. The subcommittee would 
also issue a circular to Trading Permit Holders identifying the 
Representative Director nominees.\73\
---------------------------------------------------------------------------

    \72\ See proposed Section 3.2 of the CBOE Bylaws. If 20% of the 
directors then serving on the CBOE Board is not a whole number, such 
number of Representative Directors would be rounded up to the next 
whole number. See proposed Section 3.2 of the CBOE Bylaws. Industry 
Directors not selected by the Industry-Director Subcommittee would 
be selected by the Nominating and Governance Committee. See proposed 
Section 3.2 of the CBOE Bylaws.
    \73\ See id.
---------------------------------------------------------------------------

    The proposed Nominating and Governance Committee would be bound to 
accept and nominate the Representative Directors recommended by the 
Industry-Director Subcommittee, provided that the Representative 
Directors so nominated by the Industry-Director Subcommittee are not 
opposed by a petition candidate. If such Representative Directors are 
opposed by a petition candidate, then the Nominating and Governance 
Committee would be bound to accept and nominate the Representative 
Directors who receive the most votes pursuant to a ``Run-off 
Election,'' as described below.\74\
---------------------------------------------------------------------------

    \74\ See id.
---------------------------------------------------------------------------

    Petition Process. Trading Permit Holders may nominate alternative 
candidates for election to the Representative Director positions by 
submitting a petition signed by individuals representing not less than 
10% of the total outstanding Trading Permits at that time. If one or 
more valid petitions are received, a Run-off Election would be held. In 
any Run-off

[[Page 30088]]

Election, each Trading Permit Holder would have one vote for each 
Representative Director position; provided, however, that no Trading 
Permit Holder, either alone or together with its affiliates, may 
account for more than 20% of the votes cast for a candidate. Any votes 
cast by a Trading Permit Holder, either alone or together with its 
affiliates, in excess of this 20% limitation would be disregarded.\75\
---------------------------------------------------------------------------

    \75\ See proposed Section 3.1 of the CBOE Bylaws. In any Run-off 
Election, Trading Permits representing one-third of the total 
outstanding Trading Permits entitled to vote, when present in person 
or represented by proxy, would constitute a quorum for purposes of 
the Run-off Election. See id.
---------------------------------------------------------------------------

    The winner(s) of the Run-off Election would be nominated as the 
Representative Director(s) by the Nominating and Governance Committee 
for that year. In addition, CBOE and CBOE Holdings have entered into a 
Voting Agreement pursuant to which CBOE Holdings has committed to vote 
in favor of the Representative Directors recommended by the Nominating 
and Governance Committee.\76\
---------------------------------------------------------------------------

    \76\ CBOE included the proposed Voting Agreement as Exhibit 5F 
to its proposed rule change.
---------------------------------------------------------------------------

    The Commission believes that the requirements in the proposed CBOE 
Bylaws that 20% of the CBOE Board be Representative Directors and the 
means by which they are chosen by members provides for the fair 
representation of members in the selection of directors and the 
administration of the Exchange consistent with the requirements of 
Section 6(b)(3) of the Act.\77\ As the Commission has previously noted, 
this requirement helps to ensure that members have a voice in the use 
of the SRO's self-regulatory authority, and that an exchange is 
administered in a way that is equitable to all those who trade on its 
market or through its facilities.\78\
---------------------------------------------------------------------------

    \77\ 15 U.S.C. 78f(b)(3).
    \78\ See, e.g., Securities Exchange Act Release Nos. 58375 
(August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10-182) 
(``BATS Exchange Registration Order''); 53128 (January 13, 2006), 71 
FR 3550 (January 23, 2006) (File No. 10-131) (``Nasdaq Exchange 
Registration Order'').
---------------------------------------------------------------------------

    The Commission has previously stated its belief that the inclusion 
of public, non-industry representatives on exchange oversight bodies is 
critical to an exchange's ability to protect the public interest.\79\ 
Further, public non-industry representatives help to ensure that no 
single group of market participants has the ability to disadvantage 
other market participants through the exchange governance process. The 
Commission believes that public directors can provide unique, unbiased 
perspectives, which should enhance the ability of the CBOE Board to 
address issues in a non-discriminatory fashion and foster the integrity 
of the Exchange.\80\ The Commission also believes that the proposed 
CBOE Board satisfies the requirements in Section 6(b)(3) of the 
Act,\81\ which requires that one or more directors be representative of 
issuers and investors and not be associated with a member of the 
exchange, or with a broker or dealer. In particular, at least one Non-
Industry Director would be a Non-Industry Director exclusive of any 
exceptions and would have no material business relationship with a 
broker or dealer or the Exchange or any of its affiliates.
---------------------------------------------------------------------------

    \79\ See, e.g., Regulation of Exchanges and Alternative Trading 
Systems, Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844 (December 22, 1998) (``Regulation ATS Release'').
    \80\ See, e.g., BATS Exchange Registration Order and Nasdaq 
Exchange Registration Order, supra note 78, 73 FR at 49501 and 71 FR 
at 3553, respectively.
    \81\ 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------

(3) Committees of CBOE
    In addition to the Nominating and Governance Committee discussed 
above, CBOE would have an Executive Committee, an Audit Committee, a 
Compensation Committee, a Regulatory Oversight Committee, and such 
other standing and special committees as may be approved by the CBOE 
Board. Except as may be otherwise provided in the CBOE Bylaws, the 
Board would have the authority to remove committee members.\82\
---------------------------------------------------------------------------

    \82\ See proposed Section 4.1(a) of the CBOE Bylaws.
---------------------------------------------------------------------------

    Director Committees. Director candidates for CBOE's Executive, 
Audit, and Compensation Committees would be recommended by the 
Nominating and Governance Committee for approval by the CBOE Board.\83\ 
The Audit Committee and the Compensation Committee would each consist 
of at least three directors, all of whom would be Non-Industry 
Directors.\84\ The Regulatory Oversight Committee, which would be 
charged with overseeing the independence and integrity of the 
regulatory functions of the Exchange, would consist of at least three 
directors,\85\ all of whom would be Non-Industry Directors recommended 
by the Non-Industry Directors on the Nominating and Governance 
Committee for approval by the Board.\86\ The Executive Committee \87\ 
would consist of the Chairman and Vice Chairman of the CBOE Board, the 
Chief Executive Officer (if a director), the Lead Director (if any), at 
least one Representative Director, and such other number of directors 
that the Board deems appropriate, provided that at all times the 
majority of the directors serving on the Executive Committee are Non-
Industry Directors.\88\
---------------------------------------------------------------------------

    \83\ See proposed Sections 4.2, 4.3 and 4.4 of the CBOE Bylaws. 
The selection and composition of the Nominating and Governance 
Committee is discussed above.
    \84\ See proposed Section 4.3 of the CBOE Bylaws (Audit 
Committee) and Section 4.4 of the CBOE Bylaws (Compensation 
Committee).
    \85\ See Amendment No. 1 at 11 (changing the number of directors 
required from four to three to allow for greater flexibility in the 
designation of the committee).
    \86\ See proposed Section 4.6 of the CBOE Bylaws.
    \87\ CBOE noted that its current Executive Committee (as well as 
the proposed new Executive Committee) generally does not make a 
decision unless there is a need for a CBOE Board-level decision 
between CBOE Board meetings due to the time sensitivity of the 
matter. See Notice, supra note 4, 73 FR at 51660-61. In addition, in 
situations when the current Executive Committee does make a decision 
between CBOE Board meetings, CBOE noted that the CBOE Board is 
generally aware ahead of time of the potential that the Executive 
Committee may need to make the decision. See id. CBOE notes that the 
current CBOE Board is, and after the Restructuring Transaction would 
continue to be, fully informed of any decision made by the current 
(and new) Executive Committee at its next meeting and can always 
decide to review that decision and take different action. See id.
    \88\ See proposed Section 4.2 of the CBOE Bylaws. If the Vice 
Chairman is a Representative Director, the requirement to have at 
least one Representative Director on the new Executive Committee 
would be satisfied by the Vice Chairman's participation on that 
committee. The Executive Committee would have all the powers and 
authority of the CBOE Board in the management of the business and 
affairs of CBOE, except it would not have the power and authority of 
the Board to, among others: (i) Approve or adopt or recommend to the 
stockholders any action or matter (other than the election or 
removal of directors) expressly required by Delaware law to be 
submitted to stockholders for approval, including without 
limitation, amending the proposed CBOE Certificate of Incorporation, 
adopting an agreement of merger or consolidation, approving a sale, 
lease or exchange of all or substantially all of CBOE's property and 
assets, or approval of a dissolution of CBOE or revocation of a 
dissolution, or (ii) adopt, alter, amend or repeal any bylaw of 
CBOE. See proposed Section 4.2 of the CBOE Bylaws.
---------------------------------------------------------------------------

    Member Committees. In addition to these CBOE Board-level 
committees, CBOE would have certain Exchange-level committees, 
including a Trading Advisory Committee and such other committees as may 
be provided from time to time.\89\ The proposed Trading Advisory 
Committee would advise the Office of the Chairman regarding matters of 
interest to Trading Permit Holders.\90\ The majority of the

[[Page 30089]]

committee would be individuals involved in trading either directly or 
through their firms. The Vice Chairman would serve as the Chairman of 
the committee and would appoint, with the approval of the CBOE Board, 
the other members of the committee. The proposed Trading Advisory 
Committee would serve as the replacement for CBOE's current Floor 
Directors Committee, which advises CBOE regarding trading and floor-
related issues.
---------------------------------------------------------------------------

    \89\ See proposed Section 4.1(b) of the CBOE Bylaws. ``Exchange 
committees'' refers to committees that are not solely composed of 
directors from the CBOE Board. Except as may be otherwise provided 
in the CBOE Bylaws, the rules or the resolution of the CBOE Board 
establishing any such other committee, the Vice Chairman of the 
Board, with the approval of the CBOE Board, would appoint the 
members of such Exchange committees (other than the committees of 
the CBOE Board) and may designate, with the approval of the Board, a 
Chairman and a Vice-Chairman thereof.
    \90\ See proposed Section 4.7 of the CBOE Bylaws.
---------------------------------------------------------------------------

    In addition, CBOE would continue to maintain a Business Conduct 
Committee (``BCC''), which would remain involved with the hearing of 
disciplinary matters.\91\ CBOE is not proposing any material changes to 
the structure or function of the BCC.\92\
---------------------------------------------------------------------------

    \91\ See CBOE Rule 2.1(a). See also infra II.D (discussing the 
BCC).
    \92\ See Notice, supra note 4, 73 FR at 51663.
---------------------------------------------------------------------------

    The Commission believes that the compositional requirements with 
respect to the committees discussed above are designed to ensure that 
members are protected from unfair, unfettered actions by the Exchange 
pursuant to its rules, and that, in general, the Exchange is 
administered in a way that is equitable to all those who trade on its 
market or through its facilities. The Commission believes that the 
proposed compositional balance of these CBOE committees is consistent 
with the Section 6(b)(3) of the Act, because it provides for the fair 
representation of Trading Permit Holders in the administration of the 
affairs of CBOE.
(4) Filling of Vacancies and Removal for Cause
    Any vacancy in the CBOE Board could be filled by vote of a majority 
of the directors then in office or by a sole remaining director, 
provided such new director qualifies for the category in which the 
vacancy exists.\93\ In the event the CBOE Board needs to fill a vacancy 
in a Representative Director position, the Industry-Director 
Subcommittee of the Nominating and Governance Committee would either 
(i) recommend an individual to the CBOE Board to be elected to fill 
such vacancy or (ii) provide a list of recommended individuals to the 
CBOE Board from which the Board shall elect the individual to fill such 
vacancy.\94\ In addition, the proposed CBOE Bylaws provide that no 
Representative Director may be removed from office at any time except 
for cause.\95\
---------------------------------------------------------------------------

    \93\ See proposed Section 3.5(a) of the CBOE Bylaws.
    \94\ See proposed Section 3.5(b) of the CBOE Bylaws. Any 
individual recommended by the Industry-Director Subcommittee to fill 
the vacancy of a Representative Director position must qualify as an 
Industry Director.
    \95\ See proposed Section 3.4(c) of the CBOE Bylaws.
---------------------------------------------------------------------------

(5) Officers of CBOE
    CBOE would have a Chief Executive Officer, a Vice Chairman, a 
President, a Chief Financial Officer, one or more Vice-Presidents, a 
Secretary, a Treasurer, and such other officers as the CBOE Board may 
determine, including an Assistant Secretary and Assistant 
Treasurer.\96\ In general, the officers would have the duties and 
powers set forth in the CBOE Bylaws, as well as such other duties or 
powers or both as the CBOE Board or, as applicable, the Chief Executive 
Officer may from time to time prescribe.\97\
---------------------------------------------------------------------------

    \96\ See proposed Section 5.1(a) of the CBOE Bylaws.
    \97\ See proposed Sections 5.3, 5.4, 5.5, 5.6, 5.7 and 5.8 of 
the CBOE Bylaws. A few notable differences concerning CBOE's 
officers following the Restructuring Transaction include the 
following: (1) The Chief Executive Officer may, but would not have 
to, be a director or the Chairman of the CBOE Board; (2) the CBOE 
Board, as opposed to the membership, would select the Vice Chairman; 
and (3) the position of Chief Financial Officer would be formally 
incorporated into the CBOE Bylaws.
---------------------------------------------------------------------------

    Contrary to the current CBOE Constitution,\98\ the proposed CBOE 
Bylaws would not restrict an officer from being a Trading Permit Holder 
or a person associated with a Trading Permit Holder or a broker or a 
dealer in securities or commodities or an associated person of such 
broker or dealer. The Exchange notes that there are other protections 
in place that limit the potential conflicts between the Exchange as an 
SRO and Trading Permit Holders, including, among other things, the 
existence of a Regulatory Oversight Committee as a committee of the 
Board that consists solely of Non-Industry Directors.\99\
---------------------------------------------------------------------------

    \98\ See Section 8.1(b) of the current CBOE Constitution.
    \99\ See Notice, supra note 4, 73 FR at 51662.
---------------------------------------------------------------------------

    The Commission finds that this proposed change consistent with the 
Act, including Section 6(b)(2) of the Act,\100\ which requires that a 
national securities exchange have rules that provide that any 
registered broker or dealer may become a member. The Commission finds 
that there are sufficient safeguards in place to limit potential 
conflicts of interest between the Exchange as an SRO and Trading Permit 
Holders.
---------------------------------------------------------------------------

    \100\ 15 U.S.C. 78f(b)(2).
---------------------------------------------------------------------------

(6) Self-Regulatory Function and Oversight
    As noted above, following the Restructuring Transaction, CBOE would 
continue to be registered as a national securities exchange under 
Section 6 of the Act and thus would continue to be an SRO.\101\ As an 
SRO, CBOE is obligated to carry out its statutory responsibilities, 
including enforcing compliance by Trading Permit Holders with the 
provisions of the Federal securities laws and the rules of CBOE. In 
addition, CBOE would continue to be required to file with the 
Commission, pursuant to Section 19(b) of the Act \102\ and Rule 19b-4 
thereunder,\103\ any proposed changes to its rules and governing 
documents.
---------------------------------------------------------------------------

    \101\ 15 U.S.C. 78f.
    \102\ 15 U.S.C. 78s(b).
    \103\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The proposed CBOE Certificate of Incorporation contains various 
provisions designed to protect the self-regulatory functions of CBOE in 
light of the proposed new corporate structure. For example, each 
director would be required to take into consideration the effect that 
his or her actions would have on CBOE's ability to carry out its 
responsibilities under the Act.\104\ The proposed CBOE Certificate of 
Incorporation also includes provisions designed to protect confidential 
information pertaining to the self-regulatory function of the 
Exchange.\105\
---------------------------------------------------------------------------

    \104\ See proposed Article Fifth(d) of the CBOE Certificate of 
Incorporation.
    \105\ See proposed Article Eleventh of the CBOE Certificate of 
Incorporation.
---------------------------------------------------------------------------

    In addition, proposed CBOE Rule 2.51 requires that any revenue CBOE 
receives from regulatory fees or penalties would only be applied to 
fund the legal, regulatory, and surveillance operations of the Exchange 
and would not be used to pay dividends to CBOE Holdings, except in the 
event of liquidation of CBOE, in which case CBOE Holdings would be 
entitled to the distribution of CBOE's remaining assets.\106\
---------------------------------------------------------------------------

    \106\ See Notice, supra note 4, 73 FR at 51662, and Amendment 
No. 1 at 14 (codifying this provision in proposed Rule 2.51).
---------------------------------------------------------------------------

    The Commission believes that the Exchange's proposed provisions 
concerning the self-regulatory function of CBOE are consistent with the 
Act, particularly, with Section 6(b)(1), which requires an Exchange to 
be so organized and have the capacity to carry out the purposes of the 
Act.\107\ In particular, CBOE's proposed governing documents are 
designed to assist the Exchange in fulfilling its self-regulatory 
obligations and in administering and complying with the requirements of 
the Act.
---------------------------------------------------------------------------

    \107\ See 15 U.S.C. 78f(b)(1).

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[[Page 30090]]

(7) Paragraph (b) of Article Fifth of the CBOE Certificate of 
Incorporation
    While the content of the Exchange's new Certificate of 
Incorporation and Bylaws would be similar to the content of the 
Exchange's old Certificate of Incorporation and Constitution, the new 
Certificate of Incorporation would not include, among other things, 
paragraph (b) of Article Fifth of the current CBOE Certificate of 
Incorporation (``Article Fifth(b)'').\108\ Article Fifth(b) provides 
the right for full members of The Board of Trade of the City of 
Chicago, Inc. (``CBOT'') to become members of CBOE without having 
separately to purchase or lease a membership.\109\
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    \108\ As a result of this change, the Exchange is proposing to 
delete CBOE Rule 3.16, which addresses certain issues related to 
Article Fifth(b).
    \109\ On January 15, 2008, the Commission approved an 
interpretation of Article Fifth(b) (``Article Fifth(b) 
Interpretation'') that addressed the impact of the acquisition of 
CBOT by Chicago Mercantile Exchange Holdings Inc. (``CME/CBOT 
Transaction'') on the eligibility of persons to become or remain 
members of CBOE (``exerciser members'') pursuant to Article Fifth(b) 
(the right provided under this provision is sometimes referred to as 
the ``exercise right''). See Securities Exchange Act Release No. 
57159 (January 15, 2008), 73 FR 3769 (January 22, 2008) (order 
approving File No. SR-CBOE-2006-106). Under that interpretation, the 
consummation of the CME/CBOT Transaction resulted in no person any 
longer qualifying as a member of the CBOT within the meaning of 
Article Fifth(b) and therefore resulted in the elimination of any 
person's eligibility to qualify thereafter to become or remain an 
exerciser member of the Exchange.
---------------------------------------------------------------------------

    Article Fifth(b) further provides that no amendment may be made to 
it without the prior approval of not less than 80% of both (i) the 
regular members of the Exchange admitted pursuant to Article Fifth(b) 
and (ii) the regular members of the Exchange admitted other than 
pursuant to Article Fifth(b), with each category voting as a separate 
class. CBOE has received a legal opinion from its Delaware counsel that 
under Delaware law, because the Restructuring Transaction is structured 
as a merger, this provision of Article Fifth(b) would not be triggered 
and the demutualization and related amendments to the Exchange's 
governing documents could be effected through a simple majority vote of 
members.\110\
---------------------------------------------------------------------------

    \110\ See Letter from Richards, Layton & Finger to Chicago Board 
Options Exchange, Incorporated dated August 20, 2008.
---------------------------------------------------------------------------

    In approving this proposal, the Commission is relying on CBOE's 
representation that its approach is appropriate under Delaware State 
law. The Commission is also relying on CBOE's letter of counsel that 
concludes that the Restructuring Transaction constitutes a merger and 
thus does not require the 80% vote contemplated in Article Fifth(b). 
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 changes.

D. Disciplinary Matters and Trading and Disciplinary Rule Changes

    An exchange must be organized and have the capacity to carry out 
the purposes of the Act. Specifically, an exchange must be able to 
enforce compliance by its members and persons associated with its 
members with Federal securities laws and the rules of the 
exchange.\111\ CBOE's current process for the hearing of disciplinary 
matters, and the rules governing that process, would remain 
substantively unchanged after the Restructuring Transaction. Under CBOE 
Rule 17.6(a), the hearing of a disciplinary matter currently is 
conducted by one or more members of the BCC. It has been the BCC's 
general practice to use three-person BCC hearing panels that include 
both industry and public representation, and CBOE is not proposing to 
change this process following demutualization.\112\ Consistent with 
CBOE Rule 17.9, any decision of a BCC hearing panel that is not 
composed of at least a majority of the BCC is reviewed by the full BCC.
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    \111\ See 15 U.S.C. 78f(b)(1).
    \112\ See Notice, supra note 4, 73 FR at 51661.
---------------------------------------------------------------------------

    In addition, the current process for the review of appeals of 
disciplinary actions, and the rules governing that process, would 
remain substantively unchanged. Under current Rule 17.10(b), the CBOE 
Board is vested with the authority to review appeals of disciplinary 
actions. The CBOE Board may appoint a committee of the Board composed 
of at least 3 directors to review the appeal, but the decision of that 
committee must be ratified by the CBOE Board. Thus, after the 
Restructuring Transaction, Trading Permit Holders would have a say in 
the review of such appeals through their representation on the CBOE 
Board.\113\
---------------------------------------------------------------------------

    \113\ As CBOE previously noted, it has been the CBOE Board's 
general practice to appoint a cross-section of directors to the CBOE 
Board committees that review appeals of disciplinary actions. See 
Notice, supra note 4, 73 FR at 51662. These committees usually 
consist of a floor or at-large director, an off-floor director, and 
a public director. See id. CBOE is not proposing to change this 
general practice and would expect that CBOE Board committees that 
review disciplinary decision appeals after the Restructuring 
Transaction would generally consist of an Industry Director who or 
whose firm is engaged in trading on the Exchange, an Industry 
Director whose firm is significantly engaged in conducting a 
securities business with public customers, and a Non-Industry 
Director. See id.
---------------------------------------------------------------------------

    The current process for the review of proposed trading and 
disciplinary rules also would remain unchanged. Since the CBOE Board 
would continue to be responsible for approving rule changes, including 
changes to trading and disciplinary rules,\114\ Trading Permit Holders 
would have a voice in the review of these rules through their 
representation on the CBOE Board. In addition, the proposed Trading 
Advisory Committee, which would replace the existing Floor Directors 
Committee, would assume that prior committee's responsibility for the 
review of many of CBOE's proposed rule changes (particularly trading 
rules) in an advisory capacity. Accordingly, the Trading Advisory 
Committee would provide a mechanism for Trading Permit Holders to 
provide input on trading rules.
---------------------------------------------------------------------------

    \114\ See proposed Section 10.1 of the CBOE Bylaws.
---------------------------------------------------------------------------

    The Commission finds that the Exchange's amended By-Laws and rules 
concerning its disciplinary and oversight programs are consistent with 
the Act, including the requirements of Sections 6(b)(6)\115\ of the 
Act, which requires the rules of an exchange to provide for the 
appropriate discipline of its members and persons associated with 
members for violations of the Federal securities laws and exchange 
rules, and Section 6(b)(7),\116\ which requires the rules of an 
exchange to provide a fair procedure for the disciplining of members 
and persons associated with members, in that they are designed to 
provide fair procedures for the disciplining of members and persons 
associated with members. The Commission further finds that the proposal 
is designed to provide the Exchange with the ability to comply, and 
with the authority to enforce compliance by its members and persons 
associated with its members, with the provisions of the Act, the rules 
and regulations thereunder, and the rules of Exchange.\117\
---------------------------------------------------------------------------

    \115\ 15 U.S.C. 78f(b)(6).
    \116\ 15 U.S.C. 78f(b)(7).
    \117\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

E. Trading Permits

    Prior to the Restructuring Transaction, Exchange memberships 
provided trading access to the Exchange. After the Restructuring 
Transaction, ``Trading Permits'' would provide trading access to the 
Exchange.\118\ A person or entity

[[Page 30091]]

that holds a Trading Permit would be referred to as a ``Trading Permit 
Holder.'' \119\ Trading Permit Holders would meet the definition of 
``member'' in Section 3(a)(3)(A) of the Act.\120\ As members under the 
Act, Trading Permit Holders and their nominees would be subject to the 
regulatory jurisdiction of the Exchange, including the Exchange's 
disciplinary jurisdiction under Chapter XVII of the CBOE Rules.\121\
---------------------------------------------------------------------------

    \118\ See proposed CBOE Rule 1.1(ggg) (defining Trading Permit). 
``Trading Permits'' would be defined as licenses issued by the 
Exchange that grant the holders or the holders' nominee the right to 
access the Exchange or one or more of its facilities for the purpose 
of effecting transactions in securities traded on the Exchange 
without the services of another person acting as broker, and 
otherwise to access the Exchange or its facilities for purposes of 
trading or reporting transactions or transmitting orders or 
quotations in securities traded on the Exchange, or to engage in 
other activities that, under CBOE rules, may only be engaged in by 
holders of Trading Permits, provided that the holder or the holder's 
nominee, as applicable, satisfies any applicable qualification 
requirements to exercise those rights.
    \119\ See proposed Section 1.1(f) of the CBOE Bylaws (defining 
Trading Permit Holder) and proposed CBOE Rule 1.1(gg) (defining 
Trading Permit Holder). A ``Trading Permit Holder'' could be an 
individual, corporation, partnership, limited liability company, or 
other entity authorized by the CBOE rules to hold a permit.
    \120\ 15 U.S.C. 78c(a)(3)(A). As described in Section II.C.2 
above (Nomination and Election of Directors), the selection process 
for Representative Directors for the CBOE Board addresses the fair 
representation requirement for members contained in Section 6(b)(3) 
of the Act. 15 U.S.C. 78f(b)(3). See also supra note 39 (defining 
``Trading Permit Holder'').
    \121\ See proposed CBOE Rule 3.1(a)(iii).
---------------------------------------------------------------------------

    A Trading Permit would not convey any ownership interest in the 
Exchange, would only be available through the Exchange, and would be 
subject to the terms and conditions set forth in proposed CBOE Rule 
3.1. As a result of the Exchange's proposed new structure in which 
ownership would be separated from trading access, the Exchange is 
planning to propose separately to replace the term ``member'' 
throughout its rules with the term ``Trading Permit Holder.'' \122\
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    \122\ This change will cause a significant number of the 
Exchange's rules to be amended. The Exchange intends to submit a 
separate filing to change the term ``member'' to ``Trading Permit 
Holder'' in the remainder of its rules and forms, as well as to make 
certain other related conforming changes.
---------------------------------------------------------------------------

(1) Features of Trading Permits
    The Exchange would have the authority to issue different types of 
Trading Permits that allow holders thereof to trade one or more 
products authorized for trading on the Exchange and to act in one or 
more authorized trading functions. Trading Permits would be for set 
terms specified by the Exchange.\123\ The Exchange expects initially to 
offer Trading Permits for terms of one month, three months, and one 
year, and would announce in a circular the types of permits it has 
determined to offer.\124\ Trading Permits would be subject to such fees 
and charges as are established by the Exchange from time to time.\125\
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    \123\ See proposed CBOE Rule 3.1(a)(iv).
    \124\ See Notice, supra note 4, 73 FR at 51663.
    \125\ See proposed CBOE Rule 3.1(a)(v). The Exchange would be 
required to file proposed rule changes under Section 19(b) of the 
Act, 15 U.S.C. 78s(b), including, as applicable, Section 
19(b)(3)(A)(ii), 15 U.S.C. 78s(b)(3)(A)(ii), to establish or change 
the fees for the types of Trading Permits it determines to issue.
---------------------------------------------------------------------------

    The Exchange would have the authority to increase the number of any 
type of Trading Permit it has determined to issue.\126\ The Exchange 
also would have the authority to limit or reduce the number of any type 
of Trading Permit it has determined to issue,\127\ although the 
Exchange would be prohibited from eliminating or reducing the ability 
to trade one or more product(s) of a person currently trading such 
product(s) and would be prohibited from eliminating or reducing the 
ability to act in one or more trading function(s) of a person currently 
acting in such trading function(s), unless the Exchange is permitted to 
do so pursuant to a rule filing submitted to Commission under Section 
19(b) of the Act.\128\ The Exchange would announce in a circular any 
limitation or reduction in the number of Trading Permits it seeks to 
impose. In addition, the Exchange would have the authority, pursuant to 
a rule filing submitted to the Commission under Section 19(b) of the 
Act,\129\ to establish objective standards that must be met to obtain 
or renew a Trading Permit.\130\
---------------------------------------------------------------------------

    \126\ See proposed CBOE Rule 3.1(a)(vii).
    \127\ See proposed CBOE Rule 3.1(a)(vi). The Exchange would only 
be permitted to limit or reduce the number of any type of Trading 
Permit in a manner that complies with Section 6(c)(4) of the Act (15 
U.S.C. 78f(c)(4)). See proposed CBOE Rule 3.1(a)(vi). The Exchange 
would retain the authority to take any action (remedial or 
otherwise) under the Act, the Bylaws, and the Rules. For example, 
the Exchange would continue to have the authority to take 
disciplinary action against a person over which the Exchange has 
jurisdiction. See proposed CBOE Rule 3.1(a)(ix).
    As noted in a letter submitted by the Exchange to the Commission 
in connection with SR-CBOE-2006-106, CBOE has been unable to locate 
records that reflect with certainty the number of CBOE memberships 
on May 1, 1975. See Letter from Joanne Moffic-Silver, Executive Vice 
President, General Counsel and Corporate Secretary, CBOE, to Richard 
Holley III, Senior Special Counsel, Division of Market Regulation, 
Commission, dated November 2, 2007 (http://www.sec.gov/comments/sr-
cboe-2006-106/cboe2006106-161.pdf). The closest date to May 1, 1975 
for which CBOE has been able to locate records that CBOE believes 
can be relied upon to establish this information is June 30, 1975. 
Specifically, CBOE has financial statements as of June 30, 1975, the 
end of its then fiscal year, which set forth this information as of 
that date. The number of CBOE memberships on June 30, 1975 was 
1,025.
    \128\ 15 U.S.C. 78s(b).
    \129\ 15 U.S.C. 78s(b).
    \130\ See proposed CBOE Rule 3.1(a)(viii). Rule 3.1 provides 
that notwithstanding Rule 3.1 and Rule 3.1A (which addresses the 
issuance of Trading Permits to current members) nothing in those 
rules would eliminate or restrict the Exchange's authority to delist 
any product or to take any action under the Act, the Bylaws and the 
Rules. See proposed CBOE Rule 3.1(a)(ix).
---------------------------------------------------------------------------

    Trading Permits could not be leased or transferred to any person 
except that an organization holding a Trading Permit may change the 
designation of the nominee in respect of each Trading Permit it holds 
or a Trading Permit Holder may, with the prior written consent of the 
Exchange, transfer a Trading Permit to a Trading Permit Holder 
organization or to an organization approved to be a TPH organization 
which is an affiliate or which continues substantially the same 
business without regard to the form of the transaction used to achieve 
such continuation.\131\
---------------------------------------------------------------------------

    \131\ See proposed CBOE Rule 3.1(d)(ii).
---------------------------------------------------------------------------

(2) Issuance of Trading Permits
    In connection with the Restructuring Transaction, each current 
member of the Exchange that has the ability to trade would be eligible 
to receive a Trading Permit. Specifically, provided such person submits 
a post-Restructuring Transaction trading application to the 
Exchange,\132\ is in good standing as of the date of the Restructuring 
Transaction, complies with the application procedures established by 
the Exchange, and pays any applicable fees, the Exchange would issue to 
such person a Trading Permit in respect of: (A) Each membership not 
subject to an effective lease as of the date of the Restructuring 
Transaction that is owned by the applicant; (B) each membership that is 
leased as a lessee by the applicant as of the date of the Restructuring 
Transaction; (C) each trading permit issued by the Exchange prior to 
the Restructuring Transaction that is held by the applicant,\133\ 
provided that in the case of a CBSX trading permit, the Exchange would 
issue a Trading Permit in respect of the CBSX trading permit that only 
provides the right to effect transactions on the CBSX; \134\ and (D) 
each Temporary

[[Page 30092]]

Membership held pursuant to Interpretation and Policy .02 of CBOE Rule 
3.19.\135\ Trading Permits also would be available, pursuant to an 
application process, to persons seeking trading access to the Exchange 
for the first time, as well as persons seeking to obtain additional 
Trading Permits.
---------------------------------------------------------------------------

    \132\ See proposed CBOE Rule 3.1A(a).
    \133\ See Securities Exchange Act Release No. 58178 (July 17, 
2008), 73 FR 42634 (July 22, 2008) (SR-CBOE-2008-40) (approving 
issuance of 50 Interim Trading Permits ``ITPs''). Pursuant to Rule 
3.27, the Exchange was authorized to issue ITPs to address the 
demand for trading access to the Exchange to the extent that a 
shortage exists from time to time in the number of transferable 
Exchange memberships available for lease.
    \134\ CBOE Rule 3.26, which currently provides for the issuance 
of CBSX trading permits, would be deleted as part of this rule 
filing because all Trading Permits after the Restructuring 
Transaction would be issued under proposed CBOE Rule 3.1. For the 
same reason, CBOE Rule 3.27, which currently provides for the 
issuance of Interim Trading Permits, also would be deleted.
    \135\ A person who was eligible to receive Trading Permit(s) 
pursuant to any of these provisions but who failed to comply with 
the application or other requirements must submit an application for 
a new Trading Permit and must go through the approval process to 
hold a Trading Permit. See proposed CBOE Rule 3.1A(c).
---------------------------------------------------------------------------

    Persons who are issued Trading Permits as set forth above would 
have the ability pursuant to those Trading Permits to continue trading 
any product, and acting in any trading function, that those persons 
traded, or acted in, at the time of the Restructuring Transaction.\136\
---------------------------------------------------------------------------

    \136\ This guarantee is subject to Rule 3.1(a)(iv), which 
provides that nothing in Rules 3.1 or 3.1A would eliminate or 
restrict the Exchange's authority to delist any product or to take 
any action (remedial or otherwise) under the Act, the Bylaws, and 
the Rules, including without limitation the Exchange's authority to 
take disciplinary or market performance actions against a person 
with respect to which the Exchange has jurisdiction under the Act, 
the Bylaws, and the Rules. See supra note 130. In addition, this 
guarantee is subject to the continuing satisfaction of any 
applicable qualification requirements, as well as to the Exchange's 
ability discussed above to limit or reduce the number of any type of 
Trading Permit pursuant to a rule filing with the Commission. See 
proposed CBOE Rules 3.1A(a) and 3.1(a)(vi).
---------------------------------------------------------------------------

    The Exchange would have the ability to issue one or more types of 
Trading Permits through either a random lottery process or an order in 
time process.\137\ In connection with an issuance of such Trading 
Permits, a Qualified Person \138\ and any affiliated Qualified Person 
would be eligible to receive no more than the greater of 10 such 
Trading Permits or 20% of the number of Trading Permits issued at any 
given time.\139\ This limit, however, would not apply in the event the 
number of permits to be issued exceeds the demand for such permits, in 
which case permits would be made available through the order in time 
process.\140\
---------------------------------------------------------------------------

    \137\ See proposed CBOE Rule 3.1(b)(iii). The Exchange also 
would have the authority to modify these processes or to establish 
any other objective process to issue Trading Permits pursuant to a 
rule filing submitted to the Commission under Section 19(b) of the 
Act (15 U.S.C. 78s(b)).
    The Exchange in its discretion may maintain a waiting list to be 
used to issue Trading Permits pursuant to the order in time process. 
See proposed CBOE Rule 3.1(b)(ii). If the Exchange maintains a 
waiting list, Qualified Persons would be placed on that waiting list 
based on the order in time that such persons submitted applications, 
and such persons may at any time voluntarily withdraw from that 
waiting list. A person on the waiting list would be permitted to 
adjust the number of Trading Permits that such person would like to 
receive at any time prior to an announcement of an issuance of such 
Trading Permits.
    \138\ See proposed CBOE Rule 8.1(b)(i) (defining Qualified 
Person).
    \139\ See proposed CBOE Rule 3.1(b)(iii).
    \140\ See id.
---------------------------------------------------------------------------

    The Exchange would automatically renew a Trading Permit for the 
same term as the expiring term,\141\ unless, with advance notice to the 
Exchange and in a form and manner prescribed by the Exchange, the 
holder seeks to terminate the permit \142\ or seeks to change the type 
of Trading Permit held.\143\
---------------------------------------------------------------------------

    \141\ See proposed CBOE Rule 3.1(c)(iii). In renewing a Trading 
Permit, the Exchange would have the authority to issue one or more 
Trading Permits that represent the same or more trading right(s) as 
the expiring permit. See proposed CBOE Rule 3.1(c)(ii). To the 
extent the Exchange determines to issue one or more Trading Permits 
that represent the same or more trading right(s) as an expiring 
Trading Permit, the Exchange would provide all holders of that type 
of expiring Trading Permit with the new Trading Permit(s).
    \142\ See proposed CBOE Rule 3.1(c)(i).
    \143\ See proposed CBOE Rule 3.1(c)(ii).
---------------------------------------------------------------------------

    The Commission finds that the proposed CBOE rules governing the 
nature and issuance of Trading Permits are consistent with the Act, 
including Section 6(b)(2) of the Act,\144\ which requires that a 
national securities exchange have rules that provide that any 
registered broker or dealer may become a member and any person may 
become associated with an exchange member.\145\ The Commission notes 
that pursuant to Section 6(c) of the Act,\146\ an exchange must deny 
membership to non-registered broker-dealers and registered broker-
dealers that do not satisfy certain standards, such as financial 
responsibility or operational capacity.
---------------------------------------------------------------------------

    \144\ 15 U.S.C. 78f(b)(2).
    \145\ See, e.g., BATS Exchange Registration Order and Nasdaq 
Exchange Registration Order, supra, note 78, 73 FR at 59502 and 71 
FR at 3555, respectively.
    \146\ 15 U.S.C. 78f(c).
---------------------------------------------------------------------------

(3) Tier Appointments
    The Exchange has proposed a new type of appointment called a ``tier 
appointment'' for a market-maker seeking to trade one or more options 
classes.\147\ Tier appointments would be subject to an application 
process similar to the process applicable for Trading Permits (i.e., 
the random lottery or order in time processes).\148\ Notwithstanding 
this application requirement, in the event a current member of the 
Exchange at the time of the Restructuring Transaction is trading an 
options class with respect to which the Exchange is establishing a tier 
appointment, the Exchange in connection with the Restructuring 
Transaction would issue to that member such tier appointment, provided 
that the Exchange is notified of that member's desire to hold such a 
tier appointment.\149\ Tier appointments would be in addition to the 
current appointment cost process set forth in CBOE Rule 8.3, which 
would remain unchanged.\150\
---------------------------------------------------------------------------

    \147\ See proposed CBOE Rule 8.3.
    \148\ See proposed CBOE Rule 8.3(e).
    \149\ See proposed CBOE 3.1A(b).
    \150\ In general, under that process, the number of memberships 
owned or leased by a market-maker serves as the basis for 
determining the number/types of options classes that the market-
maker can trade. In this regard, each membership held by a market-
maker has an appointment credit of 1.0, and each option listed on 
the Exchange has an assigned appointment cost. Under that process, 
for example, a market-maker with one membership could trade options 
on the Nasdaq 100 Index, which has an appointment cost of .50, and 
options on the CBOE Volatility Index, which also has an appointment 
cost of .50. See Notice, supra note 4, 73 FR at 51665.
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    Market-makers would be required to designate a Trading Permit with 
which a tier appointment would be associated and could designate no 
more than one tier appointment per Trading Permit.\151\ Tier 
appointments would be for the same term as the Trading Permit with 
which the tier appointment is associated. Termination, change, renewal, 
and transfer of tier appointments would be subject to the same terms 
and conditions as the processes for Trading Permits.\152\ The Exchange 
would have the authority to establish, increase, limit, or reduce the 
number of a type of tier appointment and to establish objective 
standards for a market-maker to be issued, or to have renewed, a 
particular type of tier appointment.\153\ Tier appointments would be 
subject to such fees and charges as are established by the Exchange 
from time to time.\154\
---------------------------------------------------------------------------

    \151\ See proposed CBOE Rule 8.3(e).
    \152\ For example, if a holder of a tier appointment does not 
notify the Exchange that the holder wants to terminate that tier 
appointment and does not file an application to replace that tier 
appointment, that tier appointment would be renewed along with its 
associated Trading Permit for the same term as the expiring term of 
that Trading Permit.
    \153\ See proposed Rule 8.3 that provides that notwithstanding 
the rule, nothing therein would eliminate or restrict the Exchange's 
authority to delist any product or to take any action under the Act, 
the Bylaws and the Rules. The application process and issuance of 
tier appointments as specified in Rule 8.3 would be in accordance 
with, and subject to the same terms and conditions as, the issuance 
process set forth for Trading Permits in Rule 3.1(b). Termination, 
change, renewal, and transfer of tier appointments would be in 
accordance with, and subject to the same terms and conditions as, 
the process set forth for Trading Permits in Rule 3.1(c) and (d). If 
it seeks to limit or reduce the number of a type of tier 
appointment, or establish other objective standards governing 
issuance and/or renewal of a particular type of tier appointment, 
the Exchange first would need to file with the Commission a proposed 
rule change under Section 19(b) of the Act, 15 U.S.C. 78s(b).
    \154\ The Exchange would be required to file proposed rule 
changes under Section 19(b) of the Act, 15 U.S.C. 78s(b), including, 
as applicable, Section 19(b)(3)(A)(ii), 15 U.S.C. 78s(b)(3)(A)(ii), 
to establish and change the fees for the types of Trading Permits it 
has determined to issue.

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

[[Page 30093]]

    The Commission finds that the proposed CBOE rules governing tier 
appointments are consistent with the Act, including Section 6(b)(2) of 
the Act,\155\ which requires that a national securities exchange have 
rules that provide that any registered broker or dealer may become a 
member. In particular, the proposal would preserve the existing 
appointments of current CBOE market-makers, and any new or expanded 
tier appointments would be allocated in accordance with, and subject to 
the same terms and conditions as, the issuance process set forth for 
Trading Permits in Rule 3.1(b). To the extent the Exchange seeks to 
limit or reduce any type of tier appointment, the Commission notes that 
the Exchange would need to do so in an equitable and not unfairly 
discriminatory manner and file any such proposal with the Commission 
pursuant to Section 19 of the Act.
---------------------------------------------------------------------------

    \155\ 15 U.S.C. 78f(b)(2).
---------------------------------------------------------------------------

F. Other Changes to the Rules

(1) Chapter I of the Rules
    The Exchange has proposed amended definitions in Chapter I to 
reflect the use of Trading Permits.\156\ The Exchange also proposed a 
definition of its new ``TPH Department,'' \157\ which would serve as 
the successor to CBOE's Membership Department and would continue the 
functions of that department, such as processing applications for 
Trading Permits. The Commission finds the proposed changes to Chapter I 
of CBOE's rules to be consistent with the Act as they are necessary to 
update the terms used in the rules and would assist Trading Permit 
Holders and the public in understanding the application and scope of 
CBOE's rules.
---------------------------------------------------------------------------

    \156\ For example, the Exchange proposed to delete the terms 
``Lessor'' and ``Lessee'' (since these concepts would not exist 
after the Restructuring Transaction) and added proposed definitions 
of ``person,'' ``Trading Permit,'' and ``Trading Permit Holder.'' 
See proposed CBOE Rules 1.1(ff) and (gg). A ``person'' would be 
defined as an individual, partnership (general or limited), joint 
stock company, corporation, limited liability company, trust or 
unincorporated organization, or any governmental entity or agency or 
political subdivision thereof.
    \157\ See proposed CBOE Rule 1.1(iii) (defining TPH Department).
---------------------------------------------------------------------------

(2) Chapter II of the Rules
    CBOE has proposed several clarifying amendments to CBOE Rule 2.1, 
including limiting its scope to Exchange committees (i.e., committees 
that are not solely composed of CBOE directors) and clarifying the 
manner of appointment to such committees to reflect the fact that the 
Vice Chairman of the Board, with the approval of the CBOE Board, would 
appoint the chairmen and members of committees (other than the BCC) 
\158\ unless otherwise provided by the rules of CBOE or by the CBOE 
Board.\159\ CBOE has also proposed to streamline the process for 
filling vacancies on Exchange committees (other than the BCC) \160\ and 
would provide that a majority would generally constitute a quorum for 
committee meetings.\161\ The proposed revision would also clarify that 
committees could take all types of actions, not only ``informal'' 
actions, pursuant to written consent.\162\
---------------------------------------------------------------------------

    \158\ After the Restructuring Transaction, the President, with 
approval of the Board, would continue to have the authority to 
appoint members to the Business Conduct Committee. See proposed CBOE 
Rules 2.1(a). See also Notice, supra note 4, 73 FR at 51666.
    \159\ See proposed CBOE Rule 2.1(a).
    \160\ See id.
    \161\ See proposed CBOE Rule 2.1(b).
    \162\ See proposed CBOE Rule 2.1(b).
---------------------------------------------------------------------------

    Further, CBOE has proposed to clarify certain aspects of the 
authority of the CBOE Board over committees, including a clarification 
that the CBOE Board may delegate powers and duties to the committees 
and that each Exchange committee is subject to the control and 
supervision of the CBOE Board.\163\ CBOE proposed to clarify that the 
CBOE Board has the authority to review, modify, suspend, or overrule 
any and all actions of any committee, officer, representative, or 
designee of the Exchange taken pursuant to the rules in accordance with 
any applicable review procedures specified in the rules.\164\ Finally, 
CBOE proposed conforming changes to the rules in Chapter II to reflect 
the use of the term Trading Permits.\165\
---------------------------------------------------------------------------

    \163\ See proposed CBOE Rules 2.1(d) and 2.1(e).
    \164\ See proposed CBOE Rule 2.2.
    \165\ For example, references to the term ``dues'' have been 
deleted in CBOE Rules 2.20, 2.22, and 2.23 because this term 
generally refers to payments made by members in a membership 
organization. This change also has been made to other rules in 
Chapters I-III. See, e.g., CBOE Rule 1.1(jj).
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    The Commission finds that the proposed changes to Chapter II of 
CBOE's rules are consistent with the Act in that they clarify the 
operation of Exchange committees and the authority of the CBOE Board 
and also update the terms used in the rules to reflect the proposed 
Restructuring Transaction, therein clarifying the application and scope 
of CBOE's rules.
(3) Chapter III of the Rules
    CBOE has proposed conforming changes to certain rules in Chapter 
III to reflect the change from memberships to Trading Permits without 
changing the substance of these rules.\166\ In addition, the process 
for designating nominees for Trading Permits in CBOE Rule 3.8 would be 
amended to require an organization to designate as its nominee an 
associated person who is an individual holder of a Trading Permit.\167\ 
Further, the Exchange proposes to streamline the process of designating 
nominees for organizations that have multiple Trading Permits in their 
name. As modified, CBOE Rule 3.8(a)(ii) would allow organizations to 
designate the same individual to be the nominee for Trading Permits 
held in its name, including Trading Permits used for trading in open 
outcry on the trading floor.\168\
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    \166\ For example, rules relating to the sale, transfer, and 
lease of memberships, and to the member death benefit would be 
deleted, because they would not be applicable to Trading Permits. 
See, e.g., CBOE Rules 3.12-3.15. CBOE Rules 3.24 (regarding member 
death benefit) and 3.25 (regarding transfer of memberships in trust) 
would also be deleted. In addition, CBOE Rule 3.1, which was 
designed to, among other things, ensure that memberships were used 
for trading on the Exchange, would be replaced with a new version as 
this requirement would not be necessary in the context of Trading 
Permits that, unlike memberships, are directly linked to having a 
trading function on the Exchange. Other conforming changes are being 
proposed to CBOE Rules 3.2 and 3.3 (relating to the qualifications 
to be a member or member organization, and the application process 
to become a member; 3.5 (relating to the authority of the Exchange 
to deny or condition persons from becoming or being associated with 
Trading Permit Holders); 3.18 (regarding statutory 
disqualification); and Rule 3.10 (regarding status of Trading Permit 
Holders).
    \167\ See CBOE Rule 3.8(a). References to registering a 
membership for a member organization would be deleted because that 
concept would have no application once Trading Permits are used to 
provide trading access to the Exchange. See proposed CBOE Rule 3.8. 
The Exchange also would make this change to other rules in Chapters 
I-III and to CBOE Rule 8.3. See Notice, supra note 4, 73 FR at 
51667, n.180.
    \168\ Under the existing rule, a member organization that has 
multiple memberships in its name can designate the same individual 
to be the nominee for those memberships, except that for each 
membership used for trading in open outcry on the trading floor, the 
member organization must designate a different individual to be the 
nominee for each of those memberships.
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    The Exchange also is deleting the requirement in CBOE Rule 3.7(g) 
that a member keep and maintain a current copy of the CBOE Constitution 
and rules in a readily accessible place and available for examination 
by customers. CBOE believes that, because it is required to maintain a 
copy of its governing documents and rules online, this requirement is 
no longer necessary.\169\ Finally, the Exchange is amending CBOE Rule 
3.9 to, among other things, delete the requirement that the Exchange 
post notices of applications on the Exchange Bulletin

[[Page 30094]]

Board, as it believes that use of a physical bulletin board at the 
Exchange to notify persons is outdated in the era of electronic and 
remote trading.\170\
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    \169\ See Notice, supra note 4, 73 FR at 51667.
    \170\ The information would continue to be published in the 
electronic Exchange Bulletin. See CBOE Rule 3.9(e). The Exchange 
also would post notices of the effectiveness of Trading Permit 
Holder status or approval of a trading function in the Exchange 
Bulletin. See proposed CBOE Rule 3.11.
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G. Request for Commission Approval Under Section 15.16 of the CBSX 
Operating Agreement

    Under the CBSX Operating Agreement, CBOE is defined as one of the 
``Owners'' of CBSX. Section 15.16 of the CBSX Operating Agreement 
provides that, in the event that a person acquires a 25% or greater 
interest in an Owner that owns a 20% or greater interest in CBSX, that 
person must execute an amendment to the Operating Agreement in which 
that person agrees to be a party to the Operating Agreement and to 
abide by all of the provisions of the Operating Agreement. Section 
15.16 also provides that Commission approval under Section 19 of the 
Act is required in connection with such an amendment to the Operating 
Agreement.\171\ Because CBOE owns a 50% interest in CBSX, the 
establishment of CBOE Holdings as the sole shareholder of CBOE would 
trigger this Commission approval requirement. Consistent with this 
requirement in Section 15.16 of the CBSX Operating Agreement, CBOE has 
requested as part of this proposed rule change that the Commission 
provide such approval.
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    \171\ 15 U.S.C. 78s.
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    The provision in the CBSX Operating Agreement requiring Commission 
approval of an amendment to the CBSX Operating Agreement to effectuate 
a change in control was designed to involve the Commission and CBOE in 
assessing the potential conflicts of control that could arise. In the 
case of the Restructuring Transaction, CBOE would become wholly-owned 
by CBOE Holdings. However, as discussed in detail above, CBOE Holdings 
would be subject to a number of conditions designed to protect the 
regulatory independence of CBOE in recognition of its status as an SRO. 
Accordingly, the Commission finds that the amendment to the CBSX 
Operating Agreement with respect to the change in control of CBOE in 
connection with the Restructuring Transaction is consistent with the 
Act.

H. Accelerated Approval

    CBOE has asked the Commission to grant accelerated approval of the 
proposal, as modified by Amendment No. 1. As set forth below, the 
Commission finds good cause for approving the proposal, as modified by 
Amendment No. 1, prior to the thirtieth day after publishing notice of 
Amendment No. 1 in the Federal Register.\172\
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    \172\ 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2) of the 
Act, the Commission may not approve any proposed rule change, or 
amendment thereto, prior to the thirtieth day after the date of 
publication of notice thereof, unless the Commission finds good 
cause for so doing.
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    In Amendment No. 1, CBOE proposed the following modifications to 
the proposed CBOE Holdings governing documents: (1) Issuance of a 
single class of common stock of CBOE Holdings, rather than different 
series of common stock as was originally proposed; (2) minor revisions 
to the transfer restrictions on common stock; (3) incorporation of the 
term ``Regulated Securities Exchange Subsidiary,'' rather than 
``CBOE,'' to accommodate the potential future ownership of more than 
one national securities exchange by CBOE Holdings; (4) requiring that 
shares of stock issued in connection with the Restructuring Transaction 
be recorded on the books and records of CBOE Holdings only in the name 
of the owner of the shares to ensure compliance with the transfer 
restrictions; (5) changes to the size of the CBOE Holdings Board and 
term of its Directors; (6) defer for one year the date of the first 
annual meeting of CBOE Holdings stockholders, and thus the first 
election of post-Restructuring Transaction directors; (7) changes to 
the content of the notice stockholders must submit in connection with 
director nominations or stockholder requests to bring matters before 
the annual stockholder meeting; (8) the ability to set separate record 
dates for stockholder notice of a stockholder meeting and for voting 
purposes; (9) specify that two-thirds of CBOE Holdings directors must 
satisfy the independence requirements contained in the listing 
standards of either NYSE or The Nasdaq Stock Market; (10) modify the 
``for cause'' removal standard applicable to directors in light of the 
change to one-year terms for directors; (11) delete the requirement 
that at least one director on the CBOE Holdings Compensation Committee 
be the beneficial owner of CBOE Holdings stock; (12) changes to the 
size of the CBOE Holdings Nominating and Governance Committee; and (13) 
make certain technical, non-substantive wording changes.
    In addition, Amendment No. 1 proposes the following changes to the 
proposed CBOE governing documents: (1) Changes to the size of the CBOE 
Board and term of its Directors; (2) defer for one year the date of the 
first annual meeting of CBOE stockholders, and thus the first election 
of post-Restructuring Transaction directors; (3) modify the ``for 
cause'' removal standard applicable to directors in light of the change 
to one-year terms for directors; (4) delete the requirement that at 
least one director on the CBOE Compensation Committee be the beneficial 
owner of CBOE Holdings stock; (5) change the requisite number of 
directors on the Regulatory Oversight Committee from four to three; (6) 
revise the provision dealing with the duties and powers of the CBOE 
Treasurer to make the provision the same as a similar provision set 
forth in the CBOE Holdings corporate documents; and (7) correct non-
substantive typographical errors.
    Finally, Amendment No. 1 seeks to make the following changes to the 
proposed CBOE Rules: (1) Adopt a rule governing the permissible uses of 
regulatory revenues; and (2) make certain changes to reflect 
intervening proposed rule changes that have been submitted since CBOE 
filed its proposal.
    The Commission believes that the changes contained in Amendment No. 
1 are consistent with the Act. The Commission notes that the changes 
proposed in Amendment No. 1 are either not material or are otherwise 
responsive to the concerns of the Commission and do not raise any 
regulatory concerns. In addition, the Commission notes that the initial 
proposed rule change was published for comment with a comment period 
ending on September 25, 2008 and the Commission did not receive any 
comments on the proposal. Accordingly, the Commission finds that good 
cause exists for approving the proposed rule change, as amended, on an 
accelerated basis, pursuant to Section 19(b)(2) of the Act.\173\
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    \173\ 15 U.S.C. 78s(b)(2).
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2008-88 on the subject line.

[[Page 30095]]

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2008-88. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the CBOE. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2008-88 and should be 
submitted on or before June 18, 2010.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\174\ that the proposed rule change (SR-CBOE-2008-88), as modified 
by Amendment No. 1, be and hereby is approved on an accelerated basis.
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    \174\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-12936 Filed 5-27-10; 8:45 am]
BILLING CODE 8010-01-P

