
[Federal Register Volume 76, Number 245 (Wednesday, December 21, 2011)]
[Notices]
[Pages 79252-79254]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32602]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65980; File No. SR-CBOE-2011-099]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval to a Proposed Rule Change, as 
Modified by Amendment No. 1 Thereto, Concerning Industry Directors and 
the Nomination of Representative Directors

December 15, 2011.

I. Introduction

    On October 21, 2011, the Chicago Board Options Exchange, 
Incorporated (``Exchange'' or ``CBOE'') 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 amend its Bylaws concerning 
Industry Directors and the nomination of Representative Directors and 
to make conforming changes to the CBOE Certificate of Incorporation and 
the Voting Agreement between CBOE and CBOE Holdings, Inc. (``CBOE 
Holdings''). On November 1, 2011, the Exchange submitted a technical 
amendment (``Amendment No. 1'') to the proposed rule change.\3\ On 
November 9, 2011, the proposed rule change was published for comment in 
the Federal Register.\4\ The Commission received no comments on the 
proposed rule change. This order grants approval to the 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\ As provided in the instructions to Form 19b-4, the Exchange 
noted in Item 2 of its filing that it needed to obtain, but had not 
yet obtained, formal approval from its Board of Directors for the 
Bylaw, Certificate of Incorporation, and Voting Agreement changes 
set forth in this proposed rule change. The Exchange also noted that 
it needed to obtain, but had not yet obtained, approval from CBOE 
Holdings, the Exchange's sole stockholder, of the changes to the 
Certificate of Incorporation and Voting Agreement. The Exchange 
stated that once these approvals were obtained, it would file a 
technical amendment to this proposed rule change to reflect these 
approvals. Amendment No. 1 reflected that the requisite approvals 
were obtained on November 1, 2011, and represented that no further 
action in connection with this proposed rule change was required. In 
addition, Amendment No. 1 contained the Exchange's consent to an 
extension of time for Commission consideration of this proposed rule 
change for an additional thirty-five days after November 1, 2011 
(the filing date of this amendment).
    \4\ See Securities Exchange Act Release No. 65682 (November 3, 
2011), 76 FR 69780 (``Notice'').
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II. Description of the Proposed Rule Change

(a) Elimination of 30% Industry Director Requirement

    Currently, the Exchange's Bylaws contain a requirement that its 
Board of Directors be composed of at least 30% Industry Directors.\5\ 
The Exchange proposed to amend its Bylaws to eliminate this 
requirement. In its Notice, the Exchange said that this change was 
intended to give it flexibility as it evaluates the composition of its 
Board in the future.\6\ CBOE also proposed a conforming change to amend 
Section 4.4 of its Bylaws to delete the clause that requires the 
Nominating and Governance Committee (``NGC'') to consist of both 
Industry and Non-Industry Directors.
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    \5\ See Section 3.1 of the Exchange's Bylaws. The term 
``Industry Directors'' is defined in this Section.
    \6\ See Notice, supra note 4, at 69781.
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(b) Nomination of Representative Directors

    Currently, the Exchange Bylaws state that at least 20% of CBOE's 
directors must be Representative Directors.\7\ As described in Section 
3.2 of the Bylaws, candidates for Representative Director positions are 
nominated by the Industry Director Subcommittee of the NGC.\8\ In 
addition, CBOE Trading Permit Holders may nominate alternative 
candidates (in addition to those nominated by the Industry Director 
Subcommittee) for election to the Representative Director positions via 
a petition process. In such case, a run-off election is held, in which 
CBOE's Trading Permit Holders vote to determine which candidates will 
be elected to the CBOE Board of Directors to serve as Representative 
Directors.
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    \7\ See Section 3.1 of Exchange Bylaws. The term 
``Representative Directors'' is defined in Section 3.2 of the 
Exchange Bylaws.
    \8\ The Industry Director Subcommittee is composed of all of the 
Industry Directors serving on the NGC.
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    As proposed, the Exchange Bylaws will continue to require that at 
least 20% of CBOE's directors must be Representative Directors. 
However, the Exchange proposed to amend its Bylaws to revise the 
nomination process for the Representative Directors. First, the 
Exchange proposed to eliminate the requirement in Section 3.2 that the 
Representative Directors must be Industry Directors to reflect the fact 
that the other change it proposed with respect to Industry Directors 
could result in the Board potentially not having Industry Directors. 
Second, the Exchange proposed to incorporate into the Bylaws the 
concept of a Representative Director Nominating Body (``RDNB'').\9\ 
Under proposed Section 1.1(k), RDNB would mean the current Industry 
Director Subcommittee of the NGC if there are at least two Industry 
Directors on the Exchange's NGC and would mean the Trading Permit 
Holders Subcommittee of the Advisory Board if the NGC has fewer than 
two Industry Directors. The RDNB would nominate the Representative 
Directors in accordance with the current provisions of proposed Section 
3.2 of the Bylaws, and therefore would perform the functions currently 
performed by the Industry Director Subcommittee.
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    \9\ See proposed new Bylaws definition 1.1(k) and the proposed 
changes to Sections 4.4 and 6.1 of the Bylaws.
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    In addition, CBOE proposed to amend Section 3.2 of the Bylaws with 
regard to the time period by which the Representative Director nominees 
are announced via circular to the Trading Permit Holders, as well as 
the deadline for Trading Permit Holders to nominate alternative 
candidates via petition, and the timing of any run-off election. CBOE 
proposed to amend these deadlines in order to provide it with 
additional flexibility to complete the process for determining nominees 
at an earlier point in time. The Exchange did not propose to change the 
timeframes between the milestones in the process. In addition, CBOE 
intends the new timelines to allow it to synchronize the Exchange's 
nomination process to that of CBOE Holdings.
    The NGC will continue to be bound to accept and nominate the 
Representative Director nominees recommended by the RDNB, provided

[[Page 79253]]

that the Representative Director nominees are not opposed by a petition 
candidate. If such Representative Director nominees are opposed by a 
petition candidate, then the Nominating and Governance Committee shall 
be bound to accept and nominate the Representative Director nominees 
who receive the most votes pursuant to a run-off election.\10\
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    \10\ See Section 3.1 of the Exchange Bylaws.
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(c) Amendments Relating to the Advisory Board

    Currently, Section 6.1 of the Exchange Bylaws provides that the 
Board may establish an Advisory Board which shall advise the Office of 
the Chairman regarding matters of interest to Trading Permit Holders. 
The Exchange proposed to amend Section 6.1 of the Bylaws to provide 
that the Exchange ``will'' (as opposed to ``may'') have an Advisory 
Board, which shall advise the Board of Directors in addition to the 
Office of the Chairman regarding matters that impact Trading Permit 
Holders. CBOE also proposed to amend Section 6.1 of its Bylaws to 
expressly provide that at least two members of the Advisory Board shall 
be Trading Permit Holders or persons associated with Trading Permit 
Holders.

(d) Amendment to Certificate of Incorporation and Voting Agreement

    Finally, CBOE proposed to make conforming changes to its 
Certificate of Incorporation and the Voting Agreement between it and 
its parent company, CBOE Holdings, to replace the references to the 
Industry Director Subcommittee with the new term Representative 
Director Nominating Body. It also proposed to make non-substantive 
changes to the Voting Agreement.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\11\ In particular, the Commission finds that the proposed 
rule change is consistent with: (1) Section 6(b)(1) of the Act,\12\ 
which requires a national securities exchange to be so organized and 
have the capacity to carry out the purposes of the Act and to enforce 
compliance by its members and persons associated with its members with 
the provisions of the Act; (2) Section 6(b)(3) of the Act,\13\ which 
requires that the rules of a national securities exchange assure the 
fair representation of its members in the selection of its directors 
and administration of its affairs, and provide that one or more 
directors shall be representative of issuers and investors and not be 
associated with a member of the exchange, broker, or dealer (the ``fair 
representation requirement''); and (3) Section 6(b)(5) of the Act,\14\ 
in that it is designed, among other things, 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 a national market system; and, in 
general, to protect investors and the public interest.
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    \11\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(1).
    \13\ 15 U.S.C. 78f(b)(3).
    \14\ 15 U.S.C. 78f(b)(5).
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(a) Elimination of 30% Industry Director Requirement and Fair 
Representation

    The Commission believes that the Exchange's proposal to eliminate 
the requirement that its Board of Directors be composed of at least 30% 
Industry Directors is consistent with Section 6(b) of the Act,\15\ 
including Section 6(b)(3) of the Act.\16\ Even if the Exchange's Board 
might not someday include directors who technically qualify as Industry 
Directors, or the number of such directors is otherwise reduced below 
current levels,\17\ the Exchange's proposal would not impact its 
current process to ensure fair representation of its Trading Permit 
Holders in the selection of its directors and administration of its 
affairs as required by Section 6(b)(3) of the Act.\18\ Specifically, at 
all times, at least 20% of the directors serving on the Board will be 
Representative Directors nominated (or otherwise selected through the 
petition process) with the input of Trading Permit Holders (or persons 
associated with Trading Permit Holders) as provided in the proposed 
Section 3.2 of the Bylaws.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(3). This Section requires that the rules 
of a national securities exchange assure the fair representation of 
its members in the selection of its directors and administration of 
its affairs, and provide that one or more directors shall be 
representative of issuers and investors and not be associated with a 
member of the exchange, broker, or dealer.
    \17\ In the Notice, the Exchange stated that it has not made a 
determination as to whether it will reduce (or eliminate) the number 
of directors on its Board who qualify as an Industry Director and 
that it recognizes the importance of having directors who have 
industry expertise and knowledge (whether those directors are 
Industry Directors or Non-Industry Directors). See Notice, supra 
note 4, at 69781.
    \18\ 15 U.S.C. 78f(b)(3).
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    The Commission has previously approved proposals in which an 
exchange's board of directors was composed of all or nearly all non-
industry directors where the process was nevertheless designed to 
comply with the ``fair representation'' requirement in the selection 
and election of directors.\19\
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    \19\ See, e.g., Securities Exchange Act Release No. 48946 
(December 17, 2003), 68 FR 74678 (December 24, 2003) (approving SR-
NYSE-2003-34).
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(b) Nomination of Representative Directors and Fair Representation

    As proposed, the Exchange Bylaws will continue to require that at 
least 20% of CBOE's directors must be Representative Directors. 
However, in light of the changes that the Exchange proposed to the 
composition of the Board, the Exchange revised the nomination process 
for the Representative Directors. First, the Exchange proposed to 
incorporate into the Bylaws the concept of a RDNB,\20\ which would mean 
the current Industry Director Subcommittee of the NGC if there are at 
least two Industry Directors on the Exchange's NGC or the Trading 
Permit Holders Subcommittee of the Advisory Board if the NGC has less 
than two Industry Directors. Second, the Exchange proposed to eliminate 
the requirement in Section 3.2 that the Representative Directors must 
be Industry Directors.\21\ In addition, CBOE proposed to amend Section 
3.2 of the Bylaws with regard to the time period by which the 
Representative Director nominees are announced via circular to the 
Trading Permit Holders, as well as the deadline for Trading Permit 
Holders to nominate alternative candidates via petition, and the timing 
of any run-off election.\22\
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    \20\ See supra note 9 and accompanying text.
    \21\ In the Notice, the Exchange explained that it proposed this 
change because it is possible that at some point in the future 
CBOE's Board may not have Industry Directors serving on it. See 
Notice, supra note 4, at 69781.
    \22\ In the Notice, the Exchange explained that it proposed this 
change because it would provide the Exchange, the NGC, and the RDNB 
with additional flexibility and enable the exchange to complete the 
process for determining its nominees for Representative Director 
positions at an earlier point in time without changing the time 
period, as well as synchronize CBOE's nomination process with the 
nomination process of its parent company, CBOE Holdings. See Notice, 
supra note 4, at 69782.
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    The Commission believes that the Exchange's proposed changes to the 
nomination process for the Representative Directors are consistent with 
Section 6(b) of the Act,\23\ including

[[Page 79254]]

Section 6(b)(3) of the Act.\24\ As discussed above, currently the 
Exchange satisfies the fair representation requirement by having on its 
Board at least 20% Representative Directors. As a result of the 
proposed changes to the composition of the Board, the NGC could have 
fewer than two Industry Directors, in which case the Industry Director 
Subcommittee would not be formed.\25\ Under this scenario, the RDNB 
would be the Trading Permit Holders Subcommittee of the Advisory Board 
(consisting of at least two members who are Trading Permit Holders (or 
persons associated with Trading Permit Holders)) \26\ and would provide 
a mechanism for Trading Permit Holders to have input with respect to 
the nominees for Representative Directors. Pursuant to Bylaws Section 
6.1, members of the Advisory Board are recommended by the NGC for 
approval by the Board. The proposed change leaves intact the current 
process to nominate and elect Representative Directors, but is intended 
to accommodate the need for member input in the nomination of 
Representative Director candidates in the event that the Board does not 
contain a sufficient number of Industry Directors to empanel the 
Industry Director Subcommittee.
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    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(3). This Section requires that the rules 
of a national securities exchange assure the fair representation of 
its members in the selection of its directors and administration of 
its affairs, and provide that one or more directors shall be 
representative of issuers and investors and not be associated with a 
member of the exchange, broker, or dealer.
    \25\ See Section 4.4 of the Exchange Bylaws.
    \26\ See infra note 29 and accompanying text.
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    Further, with respect to the proposed changes to the time period by 
which the Representative Director nominees are announced via circular 
to the Trading Permit Holders, as well as the deadline for Trading 
Permit Holders to nominate alternative candidates via petition, and the 
timing of any run-off election, the Commission believes that such 
changes generally preserve the current schedule with respect to the 
various milestones in the process, while allowing the Exchange to shift 
slightly the start of the process. Further, the Commission notes that 
the proposed provision specifically provides that ``[i]n no event shall 
the annual meeting date each year be prior to the completion of the 
process for the nomination of the Representative Directors for that 
annual meeting as set forth in Sections 3.1 and 3.2.'' \27\
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    \27\ See Section 2.2 of the Exchange Bylaws.
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(c) Amendments Relating to the Advisory Board and Fair Representation

    As stated above, the Exchange proposed to amend Section 6.1 of the 
Bylaws to provide that the Exchange ``will'' (as opposed to ``may'') 
have an Advisory Board, which shall advise the Board of Directors in 
addition to the Office of the Chairman regarding matters that impact 
Trading Permit Holders.\28\ CBOE also proposed to amend Section 6.1 of 
its Bylaws to expressly provide that at least two members of the 
Advisory Board shall be Trading Permit Holders or persons associated 
with Trading Permit Holders.\29\ By providing for the mandatory 
establishment of the Advisory Board and for the mandatory inclusion of 
at least two Trading Permit Holders or persons associated with Trading 
Permit Holders in the Advisory Board, the Exchange's proposal is 
designed to facilitate the provision of input by industry members and 
Trading Permit Holders into the selection of its directors and 
administration of its affairs, consistent with Section 6(b)(3) of the 
Act.\30\
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    \28\ In the Notice, the Exchange explained that it recently 
established an Advisory Board. See Notice, supra note 4, at 69781.
    \29\ In the Notice, the Exchange noted that the Advisory Board 
provides a mechanism for Trading Permit Holders to provide industry 
feedback to CBOE's Chairman and CEO, Executive Vice Chairman, 
President and Lead Director, all of whom are members of the Advisory 
Board, consistent with Section 6(b)(3) of the Act. See Notice, supra 
note 4, at 69781.
    \30\ 15 U.S.C. 78f(b)(3).
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change 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,\31\ that the proposed rule change (SR-CBOE-2011-099), as modified 
by Amendment No. 1, be and hereby is approved.
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    \31\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32602 Filed 12-20-11; 8:45 am]
BILLING CODE 8011-01-P


