99-27715. 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 ...  

  • [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]
    
    
    -----------------------------------------------------------------------
    
    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.
    ---------------------------------------------------------------------------
    
        \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).
    ---------------------------------------------------------------------------
    
    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\
    ---------------------------------------------------------------------------
    
        \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.''
    ---------------------------------------------------------------------------
    
        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.
    ---------------------------------------------------------------------------
    
        \8\ Currently, public directors are appointed by the Chairman of 
    the Exchange.
    ---------------------------------------------------------------------------
    
    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.
    ---------------------------------------------------------------------------
    
        \9\ The Exchange Committee is responsible for managing the 
    business and affairs of the Exchange.
    ---------------------------------------------------------------------------
    
    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.
    ---------------------------------------------------------------------------
    
        \10\ See supra note 6.
    ---------------------------------------------------------------------------
    
        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.
    ---------------------------------------------------------------------------
    
        \11\ During the transition period, some members may be elected 
    for shorter terms.
    ---------------------------------------------------------------------------
    
        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\
    ---------------------------------------------------------------------------
    
        \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).
    ---------------------------------------------------------------------------
    
        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\
    ---------------------------------------------------------------------------
    
        \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).
    ---------------------------------------------------------------------------
    
        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.
    ---------------------------------------------------------------------------
    
        \16\ See, e.g., Securities Exchange Act Release No. 40760 
    (December 8, 1998), 63 FR 70844 (December 22, 1998).
    ---------------------------------------------------------------------------
    
        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.
    ---------------------------------------------------------------------------
    
        \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).
    ---------------------------------------------------------------------------
    
        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.
    ---------------------------------------------------------------------------
    
        \18\ 15 U.S.C. 78f(b)(3).
    ---------------------------------------------------------------------------
    
        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.
    ---------------------------------------------------------------------------
    
        \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.
    ---------------------------------------------------------------------------
    
        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\
    ---------------------------------------------------------------------------
    
        \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.
    ---------------------------------------------------------------------------
    
        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\
    ---------------------------------------------------------------------------
    
        \21\ The Commission notes that an owner/lessor of multiple seats 
    might qualify under more than one category of director.
    ---------------------------------------------------------------------------
    
        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.
    ---------------------------------------------------------------------------
    
        \22\ See supra note 6.
        \23\ 15 U.S.C. 78f(b)(3).
        \24\ 15 U.S.C. 78s(b).
    ---------------------------------------------------------------------------
    
    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).
    ---------------------------------------------------------------------------
    
        For the Commission, by the Division of Market Regulation, 
    pursuant to delegated authority.\26\
    ---------------------------------------------------------------------------
    
        \26\ 17 CFR 200.40-3(a)(12).
    ---------------------------------------------------------------------------
    
    Margaret H. McFarland,
    Deputy Secretary.
    [FR Doc. 99-27715 Filed 10-22-99; 8:45 am]
    BILLING CODE 8010-01-M
    
    
    

Document Information

Published:
10/25/1999
Department:
Securities and Exchange Commission
Entry Type:
Notice
Document Number:
99-27715
Pages:
57499-57502 (4 pages)
Docket Numbers:
Release No. 34-4206, File No. SR-CBOE-99-43
PDF File:
99-27715.pdf