
[Federal Register Volume 76, Number 28 (Thursday, February 10, 2011)]
[Notices]
[Pages 7598-7601]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-2972]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63845; File No. SR-C2-2011-003]


Self-Regulatory Organizations; C2 Options Exchange, Incorporated; 
Notice of Filing of a Proposed Rule Change Relating to Bylaw and 
Related Rule Changes

February 4, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ 
notice is hereby given that on January 27, 2011, C2 Options Exchange, 
Incorporated (``C2'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by C2. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    C2 proposes to (i) amend its Bylaws and rules to eliminate its 
office of Vice Chairman of the Board, (ii) amend its Bylaws to provide 
that the Board of Directors may establish an Advisory Board, and (iii) 
amend its Bylaws to eliminate its Audit Committee.
    The text of the proposed amendments to C2's Bylaws and the proposed 
amendments to C2's rules is available on C2's Web site at (http://www.c2exchange.com/Legal), at C2's Office of the Secretary, on the 
Commission's Web site at (http://www.sec.gov), and at the Commission's 
Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, C2 included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. C2 has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to eliminate the office 
of C2 Vice Chairman of the Board, to allow for a C2 Advisory Board, and 
to eliminate the C2 Audit Committee.
(a) Elimination of Office of Vice Chairman of the Board
    Based on the Exchange's experience since its registration as a 
national securities exchange in December, 2009 and the launch of 
trading on the Exchange in October, 2010, the Exchange believes that it 
is no longer necessary to provide for an office of Vice Chairman of the 
Board (which is an office held by one of the Exchange's Industry 
Directors). It was originally contemplated that the Vice Chairman would 
take a lead role in facilitating communication between C2 and its 
Trading Permit Holders and in coordinating the activities of Trading 
Permit Holder committees. The Exchange now believes that C2 management 
is best able to take the lead role in this regard. The Exchange also 
believes that it will continue to be able to obtain input from Trading 
Permit Holders through, among other things, direct communication with 
individual Trading Permit Holders and the ability to establish Trading 
Permit Holder committees and an Advisory Board (as proposed by this 
rule filing).
    The Exchange Bylaws will also continue to require that at least 30% 
of the directors on the C2 Board of Directors must be Industry 
Directors and that at least 20% of C2's directors must be 
Representative Directors. Representative Directors are Industry 
Directors nominated (or otherwise selected through a petition process) 
by the Industry-Director Subcommittee of the C2 Nominating and 
Governance Committee. The Industry-Director Subcommittee is composed of 
all of the Industry Directors serving on the Nominating and Governance 
Committee. C2 Trading Permit Holders may nominate alternative 
Representative Director candidates to those nominated by the Industry 
Director Subcommittee, in which case a Run-off Election is held in 
which C2's Trading Permit Holders vote to determine which candidates 
will be elected to the C2 Board of Directors to serve as Representative 
Directors. Thus, the Exchange will continue to provide for the fair 
representation of C2 Trading Permit Holders in the selection of 
directors and the administration of the Exchange consistent with 
Section 6(b)(3) of the Act.\3\
---------------------------------------------------------------------------

    \3\ 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------

    The specific proposed C2 Bylaw and rule changes related to the 
elimination of the office of Vice Chairman of Board include the 
following changes:
    Section 3.7 of the Bylaws, which describes the selection, the term, 
and roles of the Vice Chairman, is proposed to be deleted. The current 
roles of the Vice Chairman listed in Section 3.7 of the Bylaws (and how 
those roles will be performed going forward) are (i) Presiding over 
meetings of the Board of Directors in the event that the Chairman of 
the Board is absent or unable to do so (which will be addressed by 
Section 3.8(a) of the Bylaws to be re-numbered from Section 3.9(a), 
which is proposed to be amended to eliminate references to the Vice 
Chairman and which will continue to allow the Board to designate an 
Acting Chairman of the Board in the absence or inability to act of the 
Chairman, which could be the Lead Director or another director); (ii) 
unless otherwise provided in the rules or by Board resolution, 
appointing, subject to Board approval, the individuals to serve on 
Trading Permit Holder committees (which will be addressed by Section 
4.1(b) of the Bylaws, which is proposed to be amended to vest this 
appointment authority, also subject to Board approval of such 
appointments, in the Chief Executive Officer or his or her designee); 
and (iii) exercising such other powers and performing such other duties 
as are delegated to the Vice Chairman by the Board (which is not an 
item that needs to be addressed since there are no such other powers of 
duties that the Board has delegated to the Vice Chairman).
    Two additional current roles of the Vice Chairman are set forth in 
Section 5.3 of the Bylaws, which is also proposed to be deleted. Those 
roles are presiding at meetings of Trading Permit Holders and 
coordinating the activities of all Trading Permit Holder committees. 
The Exchange's expectation is that C2 management will perform these 
functions.
    Section 2.3 of the Bylaws is proposed to be amended to delete the 
Vice Chairman as one of the parties that can

[[Page 7599]]

call a special meeting of the stockholders. This Section will continue 
to permit special meetings of the stockholders to be called by either 
the Chairman of the Board or a majority of the Board.
    Section 3.9(b) of the Bylaws is proposed to be re-numbered as 
Section 3.8(b) and to be amended to delete how the office of Vice 
Chairman is filled in the event of a vacancy in that office.
    Section 3.12 of the Bylaws is proposed to be re-numbered as Section 
3.11 and to be amended to delete the Vice Chairman as one of the 
parties that can call a special meeting of the Board of Directors. This 
Section will continue to permit special meetings of the Board to be 
called by either the Chairman of the Board or the Secretary upon the 
written request of any four directors.
    In a related change, Section 4.1(b) of the Bylaws is proposed to be 
amended to vest the authority to remove a member of an Exchange 
committee (i.e., a non-Board committee) in the Chief Executive Officer 
or his or her designee, subject to the approval of the Board. This 
authority was previously vested with the Board itself. The Exchange is 
proposing to vest this authority with the Chief Executive Officer or 
his or her designee in order to have consistency with the proposed 
Exchange committee appointment authority which, as is described above, 
is also proposed to be vested in the Chief Executive Officer or his or 
her designee, subject to the approval of the Board.
    Section 4.2 of the Bylaws is proposed to be amended to delete the 
Vice Chairman as one of the required members of the C2 Executive 
Committee. Section 4.2 will continue to require that the Executive 
Committee include the Chairman of the 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 in no event shall the number of 
Non-Industry Directors constitute less than the number of Industry 
Directors serving on the Executive Committee (excluding the Chief 
Executive Officer from the calculation of Industry Directors for such 
purpose).\4\
---------------------------------------------------------------------------

    \4\ C2's Executive Committee generally does not make a decision 
unless there is a need for a C2 Board-level decision between C2 
Board meetings due to the time sensitivity of the matter. In 
addition, in situations when the Executive Committee does make a 
decision between C2 Board meetings, the C2 Board is generally aware 
ahead of time of the potential that the Executive Committee may need 
to make the decision. The C2 Board is fully informed of any decision 
made by the Executive Committee at its next meeting and can always 
decide to review that decision and take a different action. C2's 
affiliate Chicago Board Options Exchange, Incorporated (``CBOE'') 
previously noted the foregoing to the Commission with respect to 
CBOE's Executive Committee (see Footnote 87 of Exchange Act Release 
No. 62158 (May 24, 2010), 75 FR 30082 (May 28, 2010) (SR-CBOE-2008-
88)) and the same is true with respect to C2's Executive Committee.
---------------------------------------------------------------------------

    Section 5.1 of the Bylaws is proposed to be amended to delete the 
Vice Chairman as one of the required officers of the Exchange.
    The title of Chapter XVI of the Exchange's rules is proposed to be 
shortened from ``Summary Suspension by Chairman of the Board or Vice 
Chairman of the Board'' to ``Summary Suspension'' in order to eliminate 
the reference to the Vice Chairman. The text of Chapter XVI is not 
proposed to be revised and would continue to incorporate by reference 
the summary suspension rules contained in Chapter XVI of the CBOE rules 
as they may be in effect from time to time.
(b) Addition of Advisory Board Provision
    The Exchange proposes to provide in new proposed Section 6.1 of the 
Bylaws that the Board of Directors may establish an Advisory Board 
which shall advise the Office of the Chairman regarding matters of 
interest to Trading Permit Holders. The Exchange believes that the 
ability to establish such a body is beneficial in that it allows the 
Exchange to establish an additional vehicle for Exchange management to 
receive advice from the perspective of Trading Permit Holders and 
regarding matters that impact Trading Permit Holders
    Under proposed Section 6.1 of the Bylaws, it is proposed that the 
Board of Directors shall determine the number of members of an Advisory 
Board, that the Chief Executive Officer or his or her designee shall 
serve as the Chairman of an Advisory Board, and that the C2 Nominating 
and Governance Committee shall recommend the members of an Advisory 
Board for approval by the Board of Directors.
    The Advisory Board would be completely advisory in nature and not 
be vested with any Exchange decision-making authority or other 
authority to act on behalf of the Exchange. Although proposed Section 
6.1 of the Bylaws provides the Board of Directors with the discretion 
of whether or not to put in place an Advisory Board, it is the current 
intention of the Board of Directors to establish an Advisory Board.
(c) Elimination of Exchange Audit Committee
    The Exchange proposes to eliminate its Audit Committee because its 
functions are duplicative of the functions of the Audit Committee of 
its parent company, CBOE Holdings, Inc. (``CBOE Holdings'').
    Under its charter, the CBOE Holdings Audit Committee has broad 
authority to assist the CBOE Holdings Board of Directors in discharging 
its responsibilities relating to, among other things, (i) the 
qualifications, engagement, and oversight of CBOE Holdings' independent 
auditor, (ii) CBOE Holdings' financial statements and disclosure 
matters, (iii) CBOE Holdings' internal audit function and internal 
controls, and (iv) CBOE Holdings' oversight and risk management, 
including compliance with legal and regulatory requirements. Because 
CBOE Holdings' financial statements are prepared on a consolidated 
basis that includes the financial results of CBOE Holdings' 
subsidiaries, including C2, the CBOE Holdings Audit Committee's purview 
necessarily includes C2. The CBOE Holdings Audit Committee is composed 
of at least three CBOE Holdings directors, all of whom must be 
independent within the meaning given to that term in the CBOE Holdings 
Bylaws and Corporate Governance Guidelines and Rule 10A-3 under the 
Act.\5\ All CBOE Holdings Audit Committee members must be financially 
literate (or become financially literate within a reasonable period of 
time after appointment to the Committee), and at least one member of 
the Committee must be an ``audit committee financial expert'' as 
defined by the Commission.
---------------------------------------------------------------------------

    \5\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

    By contrast, the C2 Audit Committee has a more limited role, 
focused solely on C2. Under its charter, the primary functions of the 
C2 Audit Committee are focused on (i) C2's financial statements and 
disclosure matters and (ii) C2's oversight and risk management, 
including compliance with legal and regulatory requirements, in each 
case, only to the extent required in connection with C2's discharge of 
its obligations as a self-regulatory organization. However, to the 
extent that the C2 Audit Committee reviews financial statements and 
disclosure matters, its activities are duplicative of the activities of 
the CBOE Holdings Audit Committee, which is also charged with review of 
financial statements and disclosure matters. Similarly, the CBOE 
Holdings Audit Committee has general responsibility for oversight and 
risk management, including compliance with legal and regulatory 
requirements, for CBOE Holdings and all of its subsidiaries, including 
C2. Thus, the

[[Page 7600]]

responsibilities of the C2 Audit Committee are fully duplicated by the 
responsibilities of the CBOE Holdings Audit Committee. Accordingly, C2 
is proposing to delete Section 4.3 of the C2 Bylaws which provides for 
the C2 Audit Committee and to delete a reference to the C2 Audit 
Committee in Section 4.1(a) of the C2 Bylaws (which lists the required 
C2 Board committees).
    Although the CBOE Holdings Audit Committee has and will continue to 
have overall responsibilities with respect to the internal audit 
function, the C2 Board of Directors will still maintain its own 
independent oversight over the internal audit function with respect to 
C2 regulatory functions through the C2 Regulatory Oversight Committee. 
Specifically, upon elimination of the C2 Audit Committee, the charter 
of the C2 Regulatory Oversight Committee will be amended to provide 
that the Regulatory Oversight Committee will review all internal audits 
relating to C2's regulatory functions and that the Regulatory Oversight 
Committee will have the authority to review the internal audit plan 
with respect to C2's regulatory functions and to request at any time 
that C2's internal auditor conduct an audit relating to those 
functions. These changes are in addition to the current C2 Regulatory 
Oversight Committee charter provision which provides that the 
Regulatory Oversight Committee shall meet regularly with C2's internal 
auditor regarding regulatory functions and are consistent with the 
Regulatory Oversight Committee's existing practice of reviewing 
internal audits of C2's regulatory functions.
    C2 believes that its proposal to eliminate its Audit Committee is 
substantially similar to prior actions by other securities exchanges 
with parent company audit committees to eliminate their exchange-level 
audit committees.\6\
---------------------------------------------------------------------------

    \6\ See, e.g., Exchange Act Release No. 60276 (July 9, 2009), 74 
FR 34840 (July 17, 2009) (File No. NASDAQ-2009-042).
---------------------------------------------------------------------------

(d) Miscellaneous Non-Substantive Bylaw Changes
    In addition to the changes set forth above, the Exchange proposes 
to make the following non-substantive changes to the Bylaws.
    First, the Exchange proposes to amend the title of the Bylaws from 
``Amended and Restated Bylaws of C2 Options Exchange, Incorporated'' to 
``Second Amended and Restated Bylaws of C2 Options Exchange, 
Incorporated'' since the Exchange is making the Bylaw changes proposed 
by this rule filing through as second amendment and restatement of its 
Bylaws.
    Second, the Exchange is proposing to re-number various sections of 
the Bylaws to eliminate gaps in the numbering of the Bylaw sections 
resulting from the proposed deletion of certain of the Bylaw sections 
as described above.
    Third, the Exchange proposes to make a clarifying change to Section 
3.2 of the Bylaws to change a reference to the Industry-Director 
Subcommittee of the Nominating and Governance Committee from 
``committee'' to ``Subcommittee.''
    Fourth, the Exchange proposes to delete some out-dated provisions 
from the Bylaws. Specifically, the Exchange proposes to delete a 
paragraph of Section 3.2 of the Bylaws which describes the initial 
election process for Representative Directors following the 
commencement of trading on the Exchange and which has already been 
completed. Similarly, the Exchange proposes to delete provisions in 
Section 4.1 of the Bylaws and Section 4.4 of the Bylaws (to be re-
numbered from Section 4.5) regarding the initial appointment of the 
Nominating and Governance Committee and the initial appointment of 
other Board committees since these appointments have already occurred.
(e) Effectiveness of Changes
    The Exchange proposes to make effective the proposed Bylaw and rule 
changes related to the elimination of the Vice Chairman of the Board 
that are described in subsection (a)(1) of Item 3 of this rule filing 
on the date of the annual election of C2 directors in 2011 (which is 
anticipated to occur in May 2011). The Exchange proposes to make 
effective these changes at that time because the current term of the 
Vice Chairman expires on that date and this will permit the current 
Vice Chairman to serve out his current term of office.
    The Exchange proposes to make effective all of the other changes 
proposed by this rule filing at the time that the Commission approves 
this rule filing. These changes include those relating to the addition 
of an Advisory Board provision and to the elimination of the C2 Audit 
Committee as well as the miscellaneous non-substantive Bylaw changes, 
all of which are described in subsections (a)(2)-(a)(4) of Item 3 of 
this rule filing.
2. Statutory Basis
    For the reasons set forth above, C2 believes that this filing is 
consistent with Section 6(b) of the Act,\7\ in general, and furthers 
the objectives of Section 6(b)(1) of the Act \8\ and Section 6(b)(5) of 
the Act \9\ in particular, in that (i) it enables C2 to be so organized 
as to have the capacity to be able to carry out the purposes of the Act 
and to comply, and to enforce compliance by its Trading Permit Holders 
and persons associated with its Trading Permit Holders, with the 
provisions of the Act, the rules and regulations thereunder, and the 
rules of C2 and (ii) to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of, a free and open market 
and, in general, to protect investors and the public interest. 
Specifically, the proposed changes will streamline, make more 
efficient, and improve C2's governance structure by eliminating the 
position of Vice Chairman of the Board which C2 no longer believes is 
necessary; by adding a Bylaw provision that the Board of Directors may 
establish an Advisory Board, which C2 views as a useful vehicle that 
the Board may utilize to receive input from the perspective of Trading 
Permit Holders and with respect to matters of interest to Trading 
Permit Holders; and by eliminating the C2 Audit Committee, which C2 
believes is duplicative of the CBOE Holdings Audit Committee and which 
change will allow C2 directors to focus their attention on matters 
falling directly within the purview of the C2 Board of Directors.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(1).
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    C2 does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory

[[Page 7601]]

organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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-C2-2011-003 on the subject line.

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-C2-2011-003. 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 Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-C2-2011-003 and should be 
submitted on or before March 3, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-2972 Filed 2-9-11; 8:45 am]
BILLING CODE 8011-01-P


