
[Federal Register: March 31, 2011 (Volume 76, Number 62)]
[Notices]               
[Page 17973-17974]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31mr11-106]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64128; File No. SR-C2-2011-003]

 
Self-Regulatory Organizations; C2 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, C2 Options Exchange, Incorporated (``C2'' 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 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 C2 submitted the original proposed rule change, 
it 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. C2 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 C2 Board of Directors approved the specific Bylaw and 
rule changes set forth in SR-C2-2011-003 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. 63845 (February 4, 
2011), 76 FR 7598 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to: (1) Eliminate its office of the Vice 
Chairman of the Board (``Vice Chairman''); (2) provide that the Board 
of Directors may establish an Advisory Board; and (3) eliminate the C2 
Audit Committee.

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\ The primary function of the Vice Chairman's 
office was to facilitate communication between the Exchange and its 
Trading Permit Holders and to coordinate the activities of Trading 
Permit Holder committees.\6\ The Exchange believes that C2 management 
is able to perform these functions and has represented that it 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).\7\
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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 7598-7599.
    \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 
7598.
    \7\ See Notice, supra note 4, 76 FR at 7598.
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B. Provision for an Advisory Board

    The Exchange proposes to adopt Section 6.1 of the Bylaws that would 
allow the Board of Directors to establish an Advisory Board which would 
advise the Office of the Chairman regarding matters of interest to 
Trading Permit Holders. According to the Exchange, this would be 
beneficial because it would provide another vehicle by which the 
Exchange management could receive advice and feedback from Trading 
Permit Holders.\8\ Under the proposal, 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 C2 Nominating and Governance Committee would 
recommend the members of any Advisory Board for approval by the Board 
of Directors.
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    \8\ See Notice, supra note 4, 76 FR at 7599.
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    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. C2 
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 7599.
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C. Elimination of Exchange Audit Committee

    C2 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 C2. Therefore, according to the 
Exchange, the CBOE Holdings Audit Committee's purview necessarily 
includes C2 and the responsibilities of the C2 Audit Committee are 
fully duplicated by the responsibilities of the CBOE Holdings Audit 
Committee.\10\ Consequently, C2 proposes that the responsibilities of 
its audit committee be performed by the CBOE Holdings Audit Committee.
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    \10\ See Notice, supra note 4, 76 FR at 7599 (noting that the C2 
Audit Committee has a more limited role focusing on: (1) C2's 
financial statements and disclosure matters, and (2) 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).
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    Although the CBOE Holdings Audit Committee would continue to have 
overall responsibility with respect to the internal audit function, the 
C2 Board of Directors would 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 Regulatory Oversight 
Committee would have the authority to review the internal audit plan 
relating to C2's regulatory

[[Page 17974]]

functions and to request at any time that C2's internal auditor conduct 
an audit relating to those functions.\11\
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    \11\ These changes would be in addition to the C2's current 
Regulatory Oversight Committee charter provision, which provides 
that the Regulatory Oversight Committee shall meet regularly with 
C2's internal auditor regarding regulatory functions. C2's 
Regulatory Oversight Committee would continue its existing practice 
of reviewing internal audits of C2's regulatory functions. See 
Notice, supra note 4, 76 FR at 7600.
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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.\12\ In 
particular, the Commission finds that the proposal is consistent with 
Section 6(b)(1) of the Act,\13\ 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.
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    \12\ 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).
    \13\ 15 U.S.C. 78f(b)(1).
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    The Commission finds that the proposed elimination of C2'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 C2 
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 C2 Board 
of Directors be Industry Directors and that at least 20% of C2's 
directors be Representative Directors.\14\ The Commission has 
previously noted that this requirement, consistent with Section 6(b)(3) 
of the Act,\15\ 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.\16\ The Commission believes that, despite 
the elimination of the office of the Vice Chairman, C2 governance 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. Further, as 
discussed below, additional opportunities for member input could result 
from the proposed Advisory Board.
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    \14\ 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. 
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 would be held in 
which C2's Trading Permit Holders would vote to determine which 
candidates would be elected to the C2 Board of Directors to serve as 
Representative Directors. See Notice, supra note 4, 76 FR at 7599.
    \15\ 15 U.S.C. 78f(b)(3).
    \16\ 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.\17\ 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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    \17\ 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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    Finally, the Commission finds that the proposed elimination of C2'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.\18\ 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.\19\ The responsibilities of the C2 Audit Committee are 
fully duplicated by the CBOE Holdings Audit Committee. Further, the C2 
Regulatory Oversight Committee has broad authority to oversee the 
adequacy and effectiveness of C2's regulatory responsibilities and is 
able to maintain oversight over internal controls in tandem with the 
CBOE Holdings Audit Committee. Accordingly, elimination of the C2 Audit 
Committee should not impact the ability of the C2 Board or the C2 
Regulatory Oversight Committee to maintain substantial and independent 
oversight of the Exchange's regulatory program.
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    \18\ See Securities Exchange Act Release No. 55293 (February 14, 
2007), 72 FR 8033 (February 22, 2007) (SR-NYSE-2006-120).
    \19\ 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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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-C2-2011-003), as modified by 
Amendment No. 1, be, and hereby is, approved.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Cathy H Ahn,
Deputy Secretary.
[FR Doc. 2011-7605 Filed 3-30-11; 8:45 am]
BILLING CODE 8011-01-P

