
[Federal Register: March 31, 2011 (Volume 76, Number 62)]
[Notices]               
[Page 17974-17977]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31mr11-107]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64127; File No. SR-CBOE-2011-010]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving Proposed Rule Change, as Modified by 
Amendment No. 1, Relating to Bylaw and Related Rule Changes

March 25, 2011.

I. Introduction

    On January 27, 2011, Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to modify its governance 
structure. On February 9, 2011, the Exchange filed

[[Page 17975]]

Amendment No. 1 to the proposed rule change.\3\ The proposed rule 
change was published for comment in the Federal Register on February 
10, 2011.\4\ The Commission received no comment letters regarding the 
proposal. This order approves 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\ At the time CBOE submitted the original proposed rule 
change, CBOE had not yet obtained formal approval from its Board of 
Directors for the specific Bylaw and rule changes set forth in this 
proposed rule change. CBOE stated that once that approval was 
obtained, the Exchange would file a technical amendment to its 
proposed rule change to reflect that approval. In Amendment No. 1, 
the Exchange notes that the CBOE Board of Directors approved the 
specific Bylaw and rule changes set forth in SR-CBOE-2011-010 on 
February 8, 2011 and stated that no further action was necessary in 
connection with its proposal. Amendment No. 1 is technical in 
nature, and the Commission is not publishing Amendment No. 1 for 
public comment.
    \4\ See Securities Exchange Act Release No. 63844 (February 4, 
2011), 76 FR 7610 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to: (1) Eliminate the CBOE Office of the Vice 
Chairman of the Board (``Vice Chairman''); (2) eliminate the CBOE 
Trading Advisory Committee and provide that the Board of Directors may 
establish an Advisory Board instead; (3) eliminate the CBOE Audit 
Committee; and (4) conform the composition requirements for the CBOE 
Board of Directors and Executive Committee to the composition 
requirements of the Board of Directors and Executive Committee of its 
affiliate C2 Options Exchange, Incorporated (``C2'').

A. Elimination of the Office of the Vice Chairman of the Board

    The Exchange proposes to amend its Bylaws to eliminate the office 
of the Vice Chairman.\5\ Historically, the Vice Chairman's primary 
function was to facilitate communication between the Exchange and its 
membership, including lessor members that owned memberships and leased 
them to trading members, and to coordinate the activities of member 
committees.\6\ According to the Exchange, the role of the Vice Chairman 
has been significantly reduced since the Exchange changed its structure 
from a membership organization to a stock corporation owned by a public 
holding company, CBOE Holdings, Inc. (``CBOE Holdings'').\7\ The 
Exchange has represented that CBOE will continue to obtain input from 
Trading Permit Holders through other channels, including direct 
communication with individual Trading Permit Holders, committees 
established by the Exchange, and through the proposed Advisory Board 
(discussed below).\8\
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    \5\ The specific proposed Bylaw and rule changes relating to the 
elimination of the Office of the Vice Chairman are discussed in 
detail in the Notice. See Notice, supra note 4, 76 FR at 7610-7611.
    \6\ Currently, the Vice Chairman is an office held by one of the 
Exchange's Industry Directors. See Notice, supra note 4, 76 FR at 
7610.
    \7\ For example, the Exchange no longer has lessor members 
because they were made stockholders as part of CBOE's restructuring, 
the Exchange's trading members became Trading Permit Holders and 
there are fewer Trading Permit Holder Committees. See id.
    \8\ See Notice, supra note 4, 76 FR at 7610.
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B. Elimination of the Trading Advisory Committee and Provision for an 
Advisory Board

    Section 4.7 of the CBOE Bylaws currently provides for a Trading 
Advisory Committee to advise CBOE's Office of the Chairman regarding 
matters of interest to Trading Permit Holders. Section 4.7 allows the 
Board of Directors to set the number of members of the Trading Advisory 
Committee, requires that the majority of the members of the Committee 
be involved in trading either directly or indirectly through their 
firms, states that the Chairman of the Committee is the Vice Chairman 
of the Board, and the Vice Chairman appoints the other members of the 
Committee with the approval of the Board.
    In place of a Trading Advisory Committee, the Exchange proposes 
that the Board of Directors may establish an Advisory Board which would 
advise the Office of the Chairman regarding matters of interest to 
Trading Permit Holders. The Board of Directors would determine the 
number of members of the Advisory Board, the Chief Executive Officer or 
his or her designee would serve as the Chairman of an Advisory Board, 
and the CBOE Nominating and Governance Committee would recommend the 
members of any Advisory Board for approval by the Board of Directors.
    The Advisory Board would be completely advisory in nature and would 
not be vested with any Exchange decision-making authority or other 
authority to act on behalf of the Exchange. Pursuant to proposed 
Section 6.1 of the Bylaws, the Board of Directors would have the 
discretion as to whether (or not) to put an Advisory Board in place. 
CBOE has represented that the Board of Directors intends to establish 
an Advisory Board.\9\
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    \9\ See Notice, supra note 4, 76 FR at 7612.
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C. Elimination of Exchange Audit Committee

    CBOE proposes to amend its Bylaws to eliminate its Audit Committee 
because its functions are duplicative of the functions performed by the 
Audit Committee of its parent company, CBOE Holdings, Inc. (``CBOE 
Holdings'').
    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: (1) The qualifications, engagement, 
and oversight of CBOE Holdings' independent auditor; (2) CBOE Holdings' 
financial statements and disclosure matters; (3) CBOE Holdings' 
internal audit function and internal controls; and (4) CBOE Holdings' 
oversight and risk management, including compliance with legal and 
regulatory requirements. CBOE Holdings' financial statements are 
prepared on a consolidated basis that includes the financial results of 
CBOE Holdings' subsidiaries, including CBOE. Therefore, according to 
the Exchange, the CBOE Holdings Audit Committee's purview necessarily 
includes CBOE and the responsibilities of the CBOE Audit Committee are 
fully duplicated by the responsibilities of the CBOE Holdings Audit 
Committee.\10\ Consequently, CBOE proposes that the responsibilities of 
its audit committee be performed by CBOE Holdings audit committee.
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    \10\ See Notice, supra note 4, 76 FR at 7612 (noting that the 
CBOE Audit Committee has a more limited role focusing on: (1) CBOE's 
financial statements and disclosure matters, and (2) CBOE's 
oversight and risk management, including compliance with legal and 
regulatory requirements, in each case, only to the extent required 
in connection with CBOE's discharge of its obligations as a self-
regulatory organization).
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    Although the CBOE Holdings Audit Committee would continue to have 
overall responsibility with respect to the internal audit function, the 
CBOE Board of Directors would maintain its own independent oversight 
over the internal audit function with respect to CBOE regulatory 
functions through the CBOE Regulatory Oversight Committee. 
Specifically, upon elimination of the CBOE Audit Committee, the 
Regulatory Oversight Committee would have the authority to review the 
internal audit plan relating to CBOE's regulatory functions and to 
request at any time that CBOE's internal auditor conduct an audit 
relating to those functions.\11\
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    \11\ These changes would be in addition to the CBOE's current 
Regulatory Oversight Committee charter provision, which provides 
that the Regulatory Oversight Committee shall meet regularly with 
CBOE's internal auditor regarding regulatory functions. CBOE's 
Regulatory Oversight Committee would continue its existing practice 
of reviewing internal audits of CBOE's regulatory functions. See 
Notice, supra note 4, 76 FR at 7612.

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[[Page 17976]]

D. Composition Requirements for Board of Directors and Executive 
Committee

    CBOE proposes to amend its Bylaws to conform the composition 
requirements of its Board of Directors and Executive Committee to the 
composition requirements of C2 Board of Directors and Executive 
Committee. Currently, CBOE's Bylaws require that the number of Non-
Industry Directors on the CBOE Board of Directors may not be less than 
a majority of the members of the Board. Similarly, the Bylaws require 
that the majority of the directors serving on the CBOE Executive 
Committee must be Non-Industry Directors. Consistent with Sections 3.1 
and 4.2 of the C2 Bylaws, CBOE proposes to change these provisions to 
provide that in no event shall the number of Non-Industry Directors on 
the CBOE Board or CBOE Executive Committee constitute less than the 
number of Industry Directors on the Board or Executive Committee, 
respectively (excluding the Chief Executive Officer from the 
calculation of Industry Directors for such purposes).
    Under CBOE's proposal, the CBOE Bylaws would require that the 
Executive Committee include the Chairman of the Board, the Chief 
Execute 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 would the number 
of Non-Industry Directors be less than the number of Industry Directors 
serving on the Executive Committee.\12\
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    \12\ See Notice, supra note 4, 76 FR at 7613.
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    CBOE believes that having the same composition requirements for 
CBOE Holdings' two affiliated exchange subsidiaries will promote 
consistency and efficiency. CBOE and C2 currently have the same 
individuals serving on the CBOE and C2 Boards and the CBOE and C2 
Executive Committees.\13\
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    \13\ See Notice, supra note 4, 76 FR at 7613.
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III. Discussion

    After careful review of the proposal, the Commission finds that the 
proposed rule change, as modified by Amendment No. 1, is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\14\ In 
particular, the Commission finds that the proposal is consistent with 
Section 6(b)(1) of the Act,\15\ which requires a national securities 
exchange to be so organized and have the capacity to carry out the 
purposes of the Act and to comply, and to enforce compliance by its 
members and persons associated with its members, with the provisions of 
the Act. The Commission further finds that the proposal is consistent 
with Section 6(b)(3) of the Act \16\ 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. 
The Commission also finds that the proposal is consistent with Section 
6(b)(5) of the Act,\17\ which requires, among other things, that the 
rules of an exchange be designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
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    \14\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(1).
    \16\ 15 U.S.C. 78f(b)(3).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposed elimination of CBOE's Office 
of the Vice Chairman of the Board is consistent with the Act. As noted 
above, the Exchange believes that the role previously performed by the 
Vice Chairman of the Board can effectively be performed by CBOE 
management and the new Advisory Board. Accordingly, the Exchange seeks 
to eliminate this position to make its governance structure more 
streamlined and efficient. With respect to member input in the affairs 
of the Exchange, the Commission notes that the Exchange Bylaws will 
continue to require that at least 30% of the directors on the CBOE 
Board of Directors be Industry Directors and that at least 20% of 
CBOE's directors be Representative Directors.\18\ The Commission has 
previously noted that this requirement, consistent with Section 6(b)(3) 
of the Act,\19\ helps to ensure that an exchange's members have a voice 
in the governing body of the exchange and the corresponding exercise by 
the exchange of its self-regulatory authority, and that the exchange is 
administered in a way that is equitable to all who trade on its market 
or through its facilities.\20\ The Commission believes that, despite 
the elimination of the office of the Vice Chairman, CBOE governance 
will continue to provide for the fair representation of CBOE Trading 
Permit Holders in the selection of directors and the administration of 
the Exchange consistent with Section 6(b)(3) of the Act. Further, as 
discussed below, additional opportunities for member input could result 
from the proposed Advisory Board.
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    \18\ Representative Directors are Industry Directors nominated 
(or otherwise selected through a petition process) by the Industry-
Director Subcommittee of the CBOE Nominating and Governance 
Committee. CBOE Trading Permit Holders may nominate alternative 
Representative Director candidates to those nominated by the 
Industry Director Subcommittee, in which case a Run-off Election 
would be held in which CBOE's Trading Permit Holders would vote to 
determine which candidates would be elected to the CBOE Board of 
Directors to serve as Representative Directors. See Notice, supra 
note 4, 76 FR at 7610.
    \19\ 15 U.S.C. 78f(b)(3).
    \20\ See Securities Exchange Act Release No. 61152 (December 10, 
2009), 74 FR 66699 (December 16, 2009) (File No. 191) (approving C2 
as a national securities exchange) (``C2 Approval Order'').
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    In addition, the Commission finds that the Exchange's proposal to 
authorize an Advisory Board to advise the Office of the Chairman 
regarding matters of interest to Trading Permit Holders is consistent 
with the Act. With respect to composition, the Nominating and 
Governance Committee will recommend members of the Advisory Board for 
approval by the Board of Directors.\21\ The Commission notes that the 
new Advisory Board will be advisory in nature and will not be vested 
with decision-making authority or the authority to act on behalf of the 
Exchange. Nevertheless, the Advisory Board could serve as a 
supplemental adjunct advisory body that can provide an additional forum 
for members to be heard and provide input to Exchange management above 
and beyond the formal role played by Representative Directors discussed 
above.
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    \21\ Persons interested in being considered for a seat on an 
Advisory Board could contact the Nominating and Governance 
Committee, but the Nominating and Governance Committee would have 
sole discretion in recommending members of the Advisory Board to the 
Board of Directors for approval.
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    Further, the Commission finds that the proposed elimination of 
CBOE's audit committee is consistent with the Act. The Commission 
previously approved a structure in which certain committees of the 
board of directors of NYSE Euronext, including its audit committee, 
were authorized to perform functions for various subsidiaries, 
including the New York Stock Exchange, LLC.\22\ More recently, the 
Commission approved proposals by The NASDAQ Stock Market LLC, NASDAQ 
OMX BX, Inc., and NASDAQ OMX PHLX, Inc. to eliminate their respective 
audit committees.\23\ The responsibilities

[[Page 17977]]

of the CBOE Audit Committee are fully duplicated by the CBOE Holdings 
Audit Committee. Further, the CBOE Regulatory Oversight Committee has 
broad authority to oversee the adequacy and effectiveness of CBOE's 
regulatory responsibilities and is able to maintain oversight over 
internal controls in tandem with the CBOE Holdings Audit Committee. 
Accordingly, elimination of the CBOE Audit Committee should not impact 
the ability of the CBOE Board or the CBOE Regulatory Oversight 
Committee to maintain substantial and independent oversight of the 
Exchange's regulatory program.
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    \22\ See Securities Exchange Act Release No. 55293 (February 14, 
2007), 72 FR 8033 (February 22, 2007) (SR-NYSE-2006-120).
    \23\ See Securities Exchange Act Release Nos. 60276 (July 9, 
2009), 74 FR 34840 (July 17, 2009) (SR-NASDAQ-2009-042), 60247 (July 
17, 2009), 74 FR 33495 (July 13, 2009) (SR-BX-2009-021), and 60687 
(September 18, 2009), 74 FR 49060 (September 25, 2009) (SR-Phlx-
2009-59).
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    Finally, the Commission finds that the proposed changes to the 
compositional requirements for the CBOE Board of Directors and 
Executive Committee are consistent with the Act. The Commission notes 
these proposed changes are designed to align CBOE's compositional 
requirements with those of its affiliated exchange, which were 
previously approved by the Commission.\24\ In addition, the change is 
similar to the treatment of ``Staff Governors'' that the Commission 
previously approved for another self-regulatory organization.\25\
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    \24\ See C2 Approval Order, supra note 20, 74 FR at 66701-66702 
(noting that ``requirement that the number of Non-Industry Directors 
equal or exceed the number of Industry Directors on the Board is 
designed to assure the inclusion of a significant non-industry 
presence in the governance of the Exchange, which the Commission 
believes is a critical element in the Exchange's ability to protect 
the public interest.'').
    \25\ See Securities Exchange Act Release No. 44280 (May 8, 
2001), 66 FR 26892 (May 15, 2001) (SR-NASD-2001-06)(approving 
amendment to NASD By-Laws to allow for the treatment of Staff 
Governors as ``neutral'' for purposes of Industry/Non-Industry 
balancing on the NASD Board of Governors).
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    Though, as revised, the Executive Committee would not have 20% of 
its members that are elected by Permit Holders (as the Board is 
required to have), CBOE has represented that the role of its Executive 
Committee does not involve it routinely acting in place of the Board. 
Rather, CBOE represented that its 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.\26\ In addition, in situations when the Executive Committee 
does make a decision between CBOE Board meetings, the CBOE Board is 
generally aware ahead of time of the potential that the Executive 
Committee may need to make the decision. The CBOE 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.\27\ Accordingly, the CBOE Board, including the 
Representative Directors, will continue to have final say on any matter 
considered by the Executive Committee.
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    \26\ See Notice, supra note 4, 76 FR at 7613, n.6.
    \27\ CBOE previously noted the foregoing to the Commission and 
has represented that it continues to be the case. See Securities 
Exchange Act Release No. 62158 (May 24, 2010), 75 FR 30082, n.87 
(May 28, 2010) (SR-CBOE-2008-88), see also Notice, supra note 4, 76 
FR at 7613, n.6.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change (SR-CBOE-2011-010), as modified 
by Amendment No. 1, be, and hereby is, approved.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Cathy H Ahn,
Deputy Secretary.
[FR Doc. 2011-7604 Filed 3-30-11; 8:45 am]
BILLING CODE 8011-01-P

