[Federal Register Volume 76, Number 245 (Wednesday, December 21, 2011)]
[Notices]
[Pages 79252-79254]
From the Federal Register Online via the Government Publishing 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