[Federal Register Volume 64, Number 205 (Monday, October 25, 1999)]
[Notices]
[Pages 57499-57502]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27715]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-4206; File No. SR-CBOE-99-43]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change and Notice of Filing and Accelerated Approval of Amendment Nos.
1, 2, and 3 to the Proposed Rule Change by the Chicago Board Options
Exchange, Inc. To amend Its Constitution Pertaining to Corporate
Governance
October 18, 1999.
I. Introduction
On August 6, 1999, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange
Commission (``SEC'' or ``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 certain provisions of
its constitution pertaining to the governance of the Exchange. The
proposed rule change was published in the Federal Register on September
7,
[[Page 57500]]
1999.\3\ On September 24, 1999, the Exchange submitted an amendment to
the proposed rule change.\4\ On September 28, 1999, the Exchange
submitted a second amendment to the proposed rule change.\5\ The
Exchange also submitted an amendment on October 15, 1999.\6\ The
Commission did not receive any comments on the proposed rule change.
This order approves the proposed rule change and approves on an
accelerated basis and solicits comment on Amendment Nos. 1, 2, and 3 to
the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 41791 (August 25, 1999),
64 FR 48682.
\4\ Letter from Debora Barnes, Senior Attorney, CBOE, to Richard
Strasser, Division of Market Regulation (``Division''), SEC, dated
September 23, 1999 (``Amendment No. 1''). Amendment No. 1 contained
grammatical changes to the proposed rule language and contained a
chart describing the composition of CBOE's Board of Directors during
the transition period when the proposed changes are implemented.
\5\ Letter from Debora Barnes, Senior Attorney, CBOE, to Richard
Strasser, Division, SEC, dated September 24, 1999 (``Amendment No.
2''). Amendment No. 2 made further grammatical corrections to the
proposed rule language.
\6\ Letter from Arthur B. Reinstein, Assistant General Counsel,
CBOE, to Richard Strasser, Assistant Director, Division, SEC, dated
October 14, 1999 (``Amendment No. 3''). In Amendment No. 3, the
Exchange proposes to amend CBOE Rule 8.80(b)(1), which provides for
the composition and election of the MTS Appointments Committee
(``MTS Committee''). Amendment No. 3 reflects changes proposed by
the Exchange in an earlier filing submitted to the Commission for
approval. See Securities Exchange Act Release No. 41325 (April 22,
1999), 64 FR 23691 (May 3, 1999) (File No. SR-CBOE-98-54).
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II. Description of the Proposed Rule Change
A. Board of Directors
The proposed rule change would alter the composition of the
Exchange's Board of Directors (``Board''). For example, CBOE proposes
to increase the number of public representatives on the Board from four
to eight. In addition, CBOE proposes to add a seat on the Board to
represent owner/lessor members.\7\
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\7\ An owner/lessor member includes those members that own a
CBOE membership but are not actively engaged in business as a
broker-dealer. These owner/lessors are also referred to as ``passive
lessors.''
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To accommodate these new Board members, CBOE proposes other changes
to the composition of the Board. For example, the proposal would
increase the total size of the Board from 21 to 23 directors. In
addition, the number of floor directors on the Board would be reduced
from six to four and the president of the Exchange, who is currently a
member of the Board, will no longer be a Board member.
The number of off-floor firm directors and at-large directors will
remain unchanged at six and three, respectively. In addition, the
Chairman of the Exchange will continue to serve as a director.
Directors will continue to be elected for three-year terms, with
all categories of directors to be elected by the members of the
Exchange.\8\ During the transition, each director currently serving on
the Board will be permitted to complete their current terms of office.
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\8\ Currently, public directors are appointed by the Chairman of
the Exchange.
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B. Qualifications of Directors and Officers
The proposed rule change also clarifies certain requirements
applicable to specific categories of directors and officers. For
example, in addition to the current requirement that floor directors be
primarily engaged in business on the floor of the Exchange, the
proposal specifies floor directors must be ``on a seat'' (i.e., acting
in the capacity of a member by actively trading securities) in
connection with their floor activity. In addition, the proposal
clarifies the current requirement that a floor director must own or
control a membership by specifying that a floor director may own a
membership indirectly through an interest in a corporation,
partnership, limited liability company, trust, or other entity that
owns one or more memberships directly. A floor director with such
indirect control, however, must have the sole and exclusive right to
vote the membership and control its sale, and must possess all of the
risks and rewards of a direct owner of at least 50% interest in a
membership.
The proposed rule change also specifies an additional requirement
for the Vice-Chairman of the Exchange, who is also the Chairman of the
Executive Committee.\9\ The proposal would require the Vice-Chairman of
the Exchange to be primarily engaged in business on the floor of the
Exchange. The current constitution requires only that the Vice-Chairman
own a CBOE membership.
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\9\ The Exchange Committee is responsible for managing the
business and affairs of the Exchange.
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C. Nominating Committee
The proposed rule change would increase the size of the Nominating
Committee from seven to ten members to accommodate adding
representatives of retail firms, lessors and the public. The Nominating
Committee is the Exchange committee that determines which candidates
are qualified for election to the Board and other Exchange committees.
As proposed, the Nominating Committee will consist of four floor
members (except during the transition years, when the number of floor
directors will first be six and then five), two members who represent
firms that primarily conduct a public customer business, two members
who are lessors of their memberships (at least one of whom must be a
``passive'' lessor),\10\ and two public members.
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\10\ See supra note 6.
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All members of the Nominating Committee will be elected by the
membership and will serve three-year terms.\11\ The Nominating
Committee that will serve with respect to the 1999 annual election
meeting shall include two lessor members, two firm members, and two
public members. The Chairman of the Executive Committee, with the
approval of the Board, shall appoint these new committee members for
the 1999 annual election meeting. Thereafter, the new committee members
shall be elected in the same process as other Nominating Committee
members.
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\11\ During the transition period, some members may be elected
for shorter terms.
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The Nominating Committee will judge the qualifications of all
candidates for election to the Board or the Nominating Committee that
are nominated by that Committee. The Executive Committee will judge the
qualifications of candidates who are nominated by petition.
D. Other Changes
The proposed rule change also would modify the timetable for
various election matters that are specified in the constitution. For
example, the Exchange proposes to advance the time by which the
Chairman of the Executive Committee (the Vice-Chairman of the Exchange)
is selected by a few weeks to enable the Vice-Chairman to complete the
process of selecting chairpersons of various Exchange committees by the
end of the year. In addition, CBOE proposes to move the annual meeting
of members from the second Monday in December to the third Friday in
November. Finally, petitions for nominations of candidates for the
Board or the Nominating Committee would be required to be submitted by
the Monday preceding the first Friday in November, instead of the
current November 15 deadline.
The proposed rule change also would delete those provisions that
refer to ``special members'' because there are no longer members in
this category. Finally, the proposal contains conforming amendments
made necessary by the proposal's substantive changes.
[[Page 57501]]
E. CBOE Rule 8.80(b)(1)
In Amendment No. 3, the Exchange proposes to amend CBOE Rule 8.80,
which, among other things, governs the composition and election of the
Modified Trading System (``MTS'') Committee.\12\ The MTS Committee
governs the Exchange's designated primary market maker (``DPM'')
program. The changes proposed in Amendment No. 3 were originally
submitted by the CBOE in File No. SR-CBOE-98-54.\13\
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\12\ See Amendment No. 3, supra note 6.
\13\ See Securities Exchange Act Release No. 41325 (April 22,
1999), 64 FR 23691 (May 3, 1999).
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The proposed changes to Rule 8.80(b)(1) provide for the election of
MTS Committee members, which are currently appointed by the Nominating
Committee with the approval of the Board. The election procedures
proposed would be the same as those used for the election of the
Exchange's directors. Accordingly, the election process would begin in
October of each year when the Nominating Committee selects nominees to
fill expiring terms and vacancies. The proposal also provides that MTS
Committee members will serve three-year terms, which is an increase
from the current two-year terms requirement. The Exchange proposes to
add Amendment No. 3 to this proposal because of the election process
time-line.
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 national securities exchange.\14\
In particular, the Commission believes that the proposal is consistent
with Section 6(b)(3) of the Act.\15\
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\14\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f)
\15\ 15 U.S.C. 78f(b)(3).
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One of the requirements of Section 6(b)(3) of the Act provides that
one or more directors of an exchange shall be representative of issuers
and investors and not be associated with a member of the exchange,
broker, or dealer. The Commission has consistently stated its belief
that representation of the public on exchange oversight committees that
have decision-making authority is critical to ensuring that the
exchange works to protect the public interest.\16\ Further, public
representation helps to ensure that no single group of investors has
the ability to systematically disadvantage other market participants
through the exchange governance process.
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\16\ See, e.g., Securities Exchange Act Release No. 40760
(December 8, 1998), 63 FR 70844 (December 22, 1998).
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The proposed rule change amends the composition of the Board by
increasing the number of public directors from four to eight. As a
result, public directors will compromise nearly 35 percent of the
Board, compared to the current 19 percent public representation. The
Commission believes that this increase should substantially increase
the public's voice on CBOE's Board, which is consistent with Section
6(b)(3) of the Act.\17\ Public directors should bring knowledge of the
interests of investors to the governance of the Exchange and provide a
balance to the composition of the Board. They should possess a unique
perspective, which should enhance the ability of the Board to address
exchange issues in a non-discriminatory fashion.
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\17\ The Commission notes that currently the American Stock
Exchange, National Association of Securities Dealers and its
subsidiaries, and the Chicago Stock Exchange each have composed
their boards so that industry directors do not out number the
remaining directors. In addition, the Pacific Exchange, PCX Equities
and the International Securities Exchange (``ISE'') have each filed
proposals that provide for the composition of their boards to
include at least 50 percent public representation. See File No. SR-
PCX-99-33 (proposing to amend the constitution of the Pacific
Exchange); SR-PCX-99-39 (proposing to establish PCX Equities); and
Securities Exchange Act Release No. 41439 (May 24, 1999), 64 FR
29867 (June 1, 1999) (the ISE application for exchange status).
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In addition to increasing the number of public directors on the
Board, the proposal adds two public members to the Nominating
Committee. By adding public members to the Nominating Committee, the
proposal should help to ensure that a fair and broad cross-section of
members and the public are represented in the administration of the
affairs of the Exchange.
The second requirement of Section 6(b)(3) of the Act \18\ states
that the rules of an exchange must assure a fair representation of its
members in the selection of its directors and administration of its
affairs This requirement seeks to ensure that an exchange is
administered in a way that is equitable to all market members and
participants. A registered exchange is not solely a commercial
enterprise. It has significant regulatory responsibilities with respect
to its members, such as the responsibility to act fairly in
adjudicating disciplinary proceedings against members. Therefore, the
statute seeks to ensure that members' interests are adequately
represented and protected.
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\18\ 15 U.S.C. 78f(b)(3).
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The proposed rule change provides for the election for public
directors. Currently, public directors are appointed by the Chairman of
the Board and approved by the full Board. Public directors will now go
through the full nominating and election process. This amendment
provides members with agreater role in the administration of the
Exchange and allows them to have a greater impact on the composition of
their governing body.
The composition of the Board was further amended by the proposal to
include the owner/lessor member community. Currently, approximately 85
percent of CBOE's memberships are leased.\19\ By including lessor
directors on the Board, the CBOE recognizes this large segment of its
member population and provides it with a greater voice in the
administration of the Exchange's affairs.
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\19\ Telephone call between Debra Barnes, Senior Attorney, CBOE
and Kelly Riley, Attorney, SEC, on October 7, 1999. As of September
30, 1999, CBOE and 931 memberships of which 794 are leased.
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To accommodate the new owner/lessor director and the additional
public directors, the proposal decreases the number of floor directors
on the Board from six to four. The Commission finds that in light of
the amount of lessor members and the public interest served by adding
public directors this reduction is reasonable.\20\
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\20\ Upon approval of this proposal and the subsequent elections
to implement these changes, the Board will consist of eight public
directors, six off-floor firm directors, four floor directors, three
at-large directors, one owner/lessor director, and the Chairman of
the Board.
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The qualifications of floor directors also were amended by the
proposed rule change. Floor directors will be required to be ``on a
seat'' (i.e., acting in the capacity of a member by actively trading
securities) to be qualified for a director position. This new
requirement, in addition to the current requirement that floor
directors be primarily engaged in business on the floor of the
Exchange, should ensure that floor members' interests are adequately
supported. This new requirement should ensure that floor directors have
a full appreciation and understanding of the issues that are of concern
to floor members.\21\
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\21\ The Commission notes that an owner/lessor of multiple seats
might qualify under more than one category of director.
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The qualifications of the Vice-Chairman of the Board were also
clarified to explicitly require that the Vice-Chairman be primarily
engaged in business on the floor of the Exchange. By adding this
requirement, the Vice-Chairman should be equipped with an in-depth
knowledge of the business of the Exchange, which will enable him or her
to make decisions and implement
[[Page 57502]]
policies that are in the best interest of the Exchange and its members.
The proposal also amended the composition of the Nominating
Committee to include representatives of retail firms, lessors and the
public. Floor members will continue to be represented. The new
composition should provide the differing member communities with a
voice in the candidates presented for election to the Board and other
Exchange committees, which should ensure that a fair cross-section of
qualified candidates are presented to members for election. By
providing a balanced committee that is composed of the diverse member
constituencies of the Exchange, the proposal should prevent the
discriminatory exclusion of qualified candidates.
Finally, the Commission finds good cause to accelerate approval of
Amendment Nos. 1, 2, and 3 to the proposed rule change prior to the
thirtieth day after publication in the Federal Register. Amendment Nos.
1 and 2 proposed grammatical changes to the original filing. As
Amendment Nos. 1 and 2 were merely technical in nature and do not raise
any novel issues of regulatory concern, the Commission finds good cause
to accelerate their approval.
Amendment No. 2 provides for the election of MTS Committee members,
which are currently appointed by the Nominating Committee. The MTS
Committee is charged with governing the DPM program on the floor of the
Exchange. By allowing members to elect the members of this committee,
the amendment enables Exchange members to be more actively involved in
the administration of the Exchange. Moreover, the Commission finds that
extending the MTS Committee members' terms of office to three years
should enhance continuity in the application of Exchange rules and
policies and should increase the expertise of the MTS Committee in
addressing issues related to the DPM program. The Commission finds good
cause to accelerate Amendment No. 3 because the election process for
the Exchange is scheduled to begin in October and the Commission
believes that it would be beneficial for members to elect the new MTS
Committee members in the 1999 election. Further, the Commission notes
that the proposed changes were published for public comment in the
Federal Register and that no comments were received on the proposed
changes.\22\ Therefore, the Commission believes that good cause exists,
consistent with Section 6(b)(3) of the Act \23\ and Section 19(b) \24\
of the Act, to approve Amendment Nos. 1, 2, and 3 on an accelerated
basis.
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\22\ See supra note 6.
\23\ 15 U.S.C. 78f(b)(3).
\24\ 15 U.S.C. 78s(b).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment Nos. 1, 2, and 3, including whether
Amendment Nos. 1, 2, and 3 are consistent with the Act. Persons making
written submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW, Washington,
DC 20549-0609. 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 inspection and
copying in the Commission's Public Reference Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the CBOE. All submissions should refer to File No.
SR-CBOE-99-43 and should be submitted by November 15, 1999.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\25\ that the amended proposed rule change (SR-CBOE-99-43) is
approved.
\25\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.40-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-27715 Filed 10-22-99; 8:45 am]
BILLING CODE 8010-01-M