[Federal Register Volume 75, Number 121 (Thursday, June 24, 2010)]
[Notices]
[Pages 36144-36147]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-15281]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62323; File No. SR-C2-2010-002]
Self-Regulatory Organizations; C2 Options Exchange, Incorporated;
Order Granting Approval of a Proposed Rule Change Relating to the
Corporate Restructuring of C2 in Connection With the Demutualization of
the Chicago Board Options Exchange, Incorporated
June 17, 2010.
I. Introduction
On May 14, 2010, pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ C2
Options Exchange, Incorporated (``C2'') filed with the Securities and
Exchange Commission (``Commission'') a proposed rule change relating to
its corporate structure in connection with the plan of its parent
company, the Chicago Board Options Exchange, Incorporated (``CBOE''),
to restructure from a Delaware non-stock corporation to a Delaware
stock corporation that would be a wholly-owned subsidiary of CBOE
Holdings, Inc. (``CBOE Holdings''), a holding company organized as a
Delaware stock corporation (``CBOE Demutualization'').\3\ The proposed
rule change was published for comment in the Federal Register on May
25, 2010.\4\ The Commission received no comments on the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 62158 (May 24,
2010), 75 FR 30082 (May 28, 2010) (SR-CBOE-2008-88) (order approving
the CBOE Demutualization).
\4\ See Securities Exchange Act Release No. 62118 (May 18,
2010), 75 FR 29375.
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II. Discussion and Commission Findings
After careful review of the proposal, 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.\5\ In particular, as discussed in more detail
below, the Commission finds that the proposed rule change is consistent
with Section 6(b) of the Act \6\ in general, and furthers the
objectives of Section 6(b)(1) of the Exchange Act,\7\ in particular, in
that it enables C2 to be so organized as to have the capacity to be
able 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, the rules and regulations thereunder, and
the rules of C2. The Commission also finds that this filing furthers
the objectives of Section 6(b)(5) of the Act insofar as it would result
in an exchange governance structure designed 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, in general, to protect
investors and the public interest.\8\ In particular, the Commission
believes that the Certificate of Incorporation and Bylaws of CBOE
Holdings and C2 are designed to protect and maintain the integrity of
the self-regulatory functions of C2 and to allow it to carry out it
regulatory responsibilities under the Act.
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\5\ In approving the proposed rule change, the Commission has
considered its impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\6\ 15 U.S.C. 78f.
\7\ 15 U.S.C. 78f(b)(1).
\8\ 15 U.S.C. 78f(b)(5).
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C2 is currently a wholly-owned subsidiary of CBOE.\9\ When the
corporate restructuring in connection with the CBOE Demutualization is
complete, CBOE will become a wholly-owned subsidiary of CBOE Holdings.
At the same time, C2 has proposed to become a wholly-owned subsidiary
CBOE Holdings by having CBOE dividend-up to CBOE Holdings all of the
shares of C2.\10\ Consequently, after the corporate restructuring in
connection with the CBOE Demutualization is completed, CBOE Holdings
would hold all of the outstanding common stock of both C2 and CBOE, as
well as certain other entities that are currently
[[Page 36145]]
subsidiaries of CBOE.\11\ C2 and CBOE, however, would continue to be
separately registered national securities exchanges under Section 6 of
the Act \12\ and would continue to operate their exchange businesses
and facilities.
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\9\ See Securities Exchange Act Release No. 61152 (December 10,
2009), 74 FR 66699 (December 16, 2009) (File No. 10-191) (order
approving the application of C2 for registration as a national
securities exchange). See also Securities Exchange Act Release No.
61140 (December 10, 2009), 74 FR 67294 (December 18, 2009) (SR-CBOE-
2009-048) (order approving a proposed rule change regarding
authority over C2 Options Exchange, Incorporated).
\10\ After the restructuring, the owners of membership interests
in CBOE will become stockholders of CBOE Holdings through the
conversion of their memberships into shares of common stock of CBOE
Holdings. In addition, members of the settlement class in the
lawsuit brought by The Board of Trade of the City of Chicago, Inc.,
its parent company, CME Group, Inc., and a class of individuals
(collectively, the ``CBOT Parties'') against CBOE and CBOE's board
of directors will become stockholders of CBOE Holdings. CME Group
Inc. et al. v. CBOE Inc. et al., Civil Action No. 2369-VCN (Filed
Aug. 23, 2006). CBOE entered into a Stipulation of Settlement
(``Stipulation'') on August 20, 2008 with the CBOT Parties to
resolve this lawsuit. The Stipulation and amendments to it can be
found at (http://www.cboe.org/Legal/).
\11\ These subsidiaries are: CBOE Futures Exchange, LLC, which
operates an electronic futures exchange; Chicago Options Exchange
Building Corporation, which owns the building in which CBOE
operates; CBOE, LLC, which holds a 24.01% interest in OneChicago,
LLC, a security futures exchange; CBOE II, LLC, which has no assets
or activities; DerivaTech Corporation, which owns certain
educational software; Market Data Express, LLC, which distributes
various types of market data; and The Options Exchange,
Incorporated, which currently has no assets or activities.
\12\ 15 U.S.C. 78f.
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The Commission recently approved C2's registration as a national
securities exchange and, in that context, approved C2's Certificate of
Incorporation and Bylaws.\13\ In connection with its currently proposed
corporate restructuring, C2 does not propose any significant changes to
these governing documents but does propose, as discussed further below,
to make certain changes to its Certificate of Incorporation to effect
the change of ownership of C2 from CBOE to CBOE Holdings, to clarify
certain aspects of C2's Bylaws as a result of this transfer of
ownership, and to make certain ministerial changes to C2's Certificate
of Incorporation and Bylaws.
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\13\ See Securities Exchange Act Release No. 61152, supra note
9.
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CBOE Holdings
As mentioned above, C2 is now proposing a corporate restructuring
that would transfer ownership of C2 from CBOE to CBOE Holdings. C2 is
not proposing any changes to the governing documents of CBOE Holdings,
which already contemplate the ownership by CBOE Holdings of one or more
self-regulatory organizations (``SRO'') (e.g., CBOE and C2) (the
``Regulated Securities Exchange Subsidiaries'').\14\ Consequently, CBOE
Holdings' Certificate of Incorporation and Bylaws approved by the
Commission in connection with the CBOE Demutualization will continue to
govern the activities of CBOE Holdings.
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\14\ See infra note 15 (discussing the term ``Regulated
Securities Exchange Subsidiary'').
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Although CBOE Holdings is not itself an SRO, its activities with
respect to the operation of any SRO subsidiary, including C2, must be
consistent with, and must not interfere with, the self-regulatory
obligations of that SRO subsidiary. To this end, certain provisions of
CBOE Holdings' Certificate of Incorporation and the Bylaws are designed
to ensure that C2, though a wholly-owned subsidiary of CBOE Holdings,
is able to maintain the independence of its self-regulatory function
and operate unencumbered in a manner that complies with the federal
securities laws, and, along with the Commission, is able to fulfill its
regulatory and oversight obligations under the Act.
Specifically, the Certificate of Incorporation of CBOE Holdings
provides that CBOE Holdings, its officers, directors, employees, and
agents must irrevocably submit to the jurisdiction of the United States
federal courts, the Commission, and the Regulated Securities Exchange
Subsidiaries \15\ for the purposes of any suit, action or proceeding
pursuant to the United States federal securities laws, and the rules
and regulations thereunder, commenced or initiated by the Commission
arising out of, or relating to, the Regulated Securities Exchange
Subsidiaries' activities.\16\ Further, so long as CBOE Holdings
controls any Regulated Securities Exchange Subsidiaries, the books,
records, premises, officers, directors, and employees of CBOE Holdings
is deemed to be the books, records, premises, officers, directors, and
employees of the Regulated Securities Exchange Subsidiary for purposes
of and subject to oversight pursuant to the Act to the extent that they
relate to the business of such Regulated Securities Exchange
Subsidiary.\17\ In addition, all confidential information pertaining to
the self-regulatory function of Regulated Securities Exchange
Subsidiaries contained in the books and records of an exchange that
comes into the possession of CBOE Holdings must not be made available
to any persons other than to those officers, directors, employees and
agents of CBOE Holdings that have a reasonable need to know the
contents thereof, be retained in confidence by CBOE Holdings and the
officers, directors, employees and agents of CBOE Holdings, and not be
used for any commercial purposes.\18\ CBOE Holdings Certificate of
Incorporation also contains a provision requiring each director of the
CBOE Holdings board to take into consideration the effect that CBOE
Holdings' actions would have on CBOE's ability to carry out its
responsibilities under the Act.\19\ Pursuant to the CBOE Holdings
Certificate of Incorporation, for so long as CBOE Holdings controls any
Regulated Securities Exchange Subsidiary, each officer, director and
employee of CBOE Holdings must give due regard to the preservation of
the independence of the self-regulatory function of the Regulated
Securities Exchange Subsidiaries and to their obligations under the
Exchange Act.\20\ Finally, CBOE Holdings Certificate of Incorporation
provides that for so long as CBOE Holdings controls any Regulated
Securities Exchange Subsidiary, before any amendment, alteration or
repeal of any provision of the Certificate of Incorporation and Bylaws
of CBOE Holdings becomes effective, such amendment, alteration or
repeal will be submitted to the board of directors of each Regulated
Securities Exchange Subsidiary, and if such amendment, alteration or
repeal must be filed with or filed with and approved by the Commission,
then such amendment, alteration or repeal will not become effective
until filed with or filed with and approved by the Commission, as the
case may be.\21\
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\15\ ``Regulated Securities Exchange Subsidiary'' means any
national securities exchange controlled, directly or indirectly, by
the Corporation, including, but not limited to CBOE. See Article
Fifth(xi) of the CBOE Holdings Certificate of Incorporation. Thus,
C2 as a registered national securities exchange would fit within the
definition of a Regulated Securities Exchange Subsidiary.
\16\ See Article Fourteen of the CBOE Holdings Certificate of
Incorporation.
\17\ The books and records of CBOE Holdings relating to the
business of a Regulated Securities Exchange Subsidiary is subject at
all times to inspection and copying by the Commission and the
Regulated Securities Exchange Subsidiary. See Article Fifteen of the
CBOE Holdings Certificate of Incorporation. In addition, the CBOE
Holdings Bylaws provide that the books of CBOE Holdings must be kept
within the United States. See Section 1.3 of the CBOE Holdings
Bylaws.
\18\ Notwithstanding this restriction, nothing in the CBOE
Holdings Certificate of Incorporation is to be interpreted so as to
limit or impede the rights of the Commission or CBOE to access and
examine such confidential information or to limit or impede the
ability of any officers, directors, employees or agents of CBOE
Holdings to disclose such confidential information to the Commission
or CBOE. See Article Fifteen of the CBOE Holdings Certificate of
Incorporation.
\19\ See Article Sixteen(d) of the CBOE Holdings Certificate of
Incorporation.
\20\ See Article Sixteen(c) of the CBOE Holdings Certificate of
Incorporation.
\21\ See Article Eleven of the CBOE Holdings Certificate of
Incorporation and Section 10.2 of the CBOE Holdings Bylaws.
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In approving the CBOE Demutualization and permitting CBOE Holdings
to wholly own CBOE, the Commission noted that the governing documents
of CBOE Holdings are designed to facilitate Regulated Securities
Exchange Subsidiaries' ability to fulfill their self-regulatory
obligations and are, therefore, consistent with the Act.\22\ C2's
proposal to become a wholly-owned subsidiary of CBOE Holdings is
identical to the SRO ownership structure the Commission approved in the
CBOE Demutualization
[[Page 36146]]
and does not raise any new regulatory issues. Consistent with its
approval of the CBOE Demutualization, the Commission similarly believes
that the governing documents of CBOE Holdings are designed to protect
the independence of the self-regulatory function of a wholly-owned C2,
enable C2 to operate in a manner that complies with the Federal
securities laws, and facilitate the ability of C2 and the Commission to
fulfill their regulatory and oversight obligations under the Act.\23\
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\22\ See supra note 3.
\23\ The Commission also notes that the Certificate of
Incorporation of CBOE Holdings places certain ownership and voting
limits on the holders of CBOE Holdings stock and their Related
Persons. These restrictions are intended to address the possibility
that a person holding a controlling interest in an SRO could use
that interest to affect the SRO's regulatory responsibilities under
the Act. In particular, these restrictions provide that no person,
either alone or together with its Related Persons, may own directly
or indirectly more than 10% of the CBOE Holdings or more than 20% in
the event a public offering of the CBOE Holdings. Further, no
person, either alone or together with its Related Persons, will be
entitled to vote more than 10% of the CBOE Holdings common interest
or more than 20% in the event a public offering of the CBOE
Holdings. See Article Six(a) and (b) of the CBOE Holdings
Certificate of Incorporation.
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C2
Although CBOE Holdings would replace CBOE as the parent company and
sole shareholder of C2, C2 would continue to be registered as a
national securities exchange under Section 6 of the Exchange Act. In
this respect, certain provisions of C2's Certificate of Incorporation
and Bylaws are designed to enable C2 to carry out the purposes of the
Act and to comply and enforce compliance by its members and persons
associated with its members with all applicable rules and
regulations.\24\
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\24\ For example, C2's current board composition is designed to
be comparable to the board compositions the Commission has approved
for other SROs. Namely, the number of Non-Industry Directors on C2
board must equal or exceed the sum of the number of Industry
Directors and the number of Industry Directors must equal or exceed
30% of the board. Further, at least 20% of the directors on the
board must be nominated (or otherwise selected by a petition of C2
members) by the Industry-Director Subcommittee of the Nominating and
Governance Committee (such directors, ``Representative Directors'').
See Section 3.1 of the C2 Bylaws. For definitions of ``Non-Industry
Directors'' and ``Industry Directors,'' see Section 3.1 of the C2
Bylaws. For the definition of ``Industry-Director Subcommittee of
the Nominating and Governance Committee,'' see Section 3.2 of the C2
Bylaws. Further, C2 has a Regulatory Oversight Committee (``ROC'')
that monitors its regulatory operations. See Section 4.6 of C2
Bylaws.
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As noted above, C2 does not propose any significant changes to its
governing documents but does propose to make certain changes to its
Certificate of Incorporation to effect the change of ownership of C2
from CBOE to CBOE Holdings, to clarify certain aspects of C2's Bylaws
as a result of this transfer of ownership, and to make certain
ministerial changes to C2's Certificate of Incorporation and Bylaws.
Namely, C2 proposes to amend its Certificate of Incorporation in
connection with the transfer of ownership of all of the common stock of
C2 from CBOE to CBOE Holdings and to require Commission approval if
CBOE Holdings sells, transfers, or assigns any shares of C2 common
stock.\25\ In addition, C2 proposes a number of other changes to
reflect and generally conform to the most recent version of the
corresponding governing documents of CBOE that were approved by the
Commission in connection with the CBOE Demutualization. These changes
include amending C2's Bylaws to provide that all directors of the C2
board would serve one-year terms, rather than staggered two-year terms
\26\ and to remove a reference to electing a class of directors; \27\
amending its Bylaws to provide that Representative Directors (as
opposed to any Director) may be removed for cause by the holders of a
majority of the shares of stock then entitled to vote at an election of
directors; \28\ and amending its Bylaws to provide that the C2
Regulatory Oversight Committee would consist of at least three
directors instead of at least four directors.\29\ Finally, because the
rules of C2 use terms from the CBOE rules, and also incorporate by
reference certain CBOE rules, C2 also proposes to make minor, non-
substantive changes to its rules to reflect the changes in terminology
and other technical changes that CBOE plans to make to its rules in
connection with the CBOE Demutualization.\30\
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\25\ See Article Four of the C2 Certificate of Incorporation. In
addition, C2 proposes to delete Article Twelve of the Certificate of
Incorporation because it is no longer necessary.
\26\ See Section 3.1 of the C2 Bylaws. Further, C2 proposes to
delete the second sentence of Section 3.1, which provides that
``[t]he Board shall initially consist of 23 directors, including the
Chief Executive Officer, twelve Non-Industry Directors and ten
Industry Directors,'' because the initial board of directors of C2
has already been appointed. C2 also proposes to change the reference
to the ``Board of the Corporation'' in Section 3.1 to the ``Board''
and to delete a reference in the last sentence of the first
paragraph regarding the initial C2 Board, because that Board has
already been appointed.
\27\ See Section 3.2 of the C2 Bylaws. C2 would no longer have
different classes of directors.
\28\ See Section 3.4(c) of the C2 Bylaws. C2 also proposes to
amend Section 3.4(c) to replace a reference to ``SEC'' with
``Securities and Exchange Commission (``SEC'').'' In addition, C2
proposes to move a reference to ``Representative Directors''
(described below) in the first sentence of the seventh paragraph of
Section 3.1 of the C2 Bylaws to clarify the intent of that sentence.
\29\ See Section 4.6 of the C2 Bylaws. C2 also proposes to amend
Section 5.8 of the Bylaws to modify the responsibilities of the
Treasurer of C2. Specifically, C2 is proposing to delete the second
sentence in Section 5.8, which reads ``[i]n addition, the Treasurer
shall perform such duties and have such powers that are incident to
the office of Treasurer, including without limitation the duty to
keep and be responsible for all funds of the Corporation,'' to make
this section consistent with the Treasurer provision in CBOE's post-
demutualization Bylaws.
\30\ For example, CBOE is replacing the term ``member'' (or
variations of it) with the term ``Trading Permit Holder'' (or
variations of it) throughout its rulebook in connection with its
demutualization. Similarly, C2 proposes to replace references in its
rules to a CBOE ``member'' with the term ``CBOE Trading Permit
Holder'' (or ``Trading Permit Holder'' in certain instances where
there is a direct cross-reference to CBOE rules). Further, C2
proposes to adopt in C2 Rule 1.1 the term ``CBOE Trading Permit,''
which is defined as a ``Trading Permit'' as such term is defined in
CBOE's Bylaws and rules, and the term ``CBOE Trading Permit
Holder,'' which is defined as a ``Trading Permit Holder'' as such
term is defined in CBOE's Bylaws and rules. C2 also proposes to
replace the term CBOE ``membership'' with the term ``CBOE Trading
Permit'' (or ``Trading Permit'' in certain instances where there is
a direct cross-reference to CBOE rules) and a CBOE ``Clearing
Member'' (or variations of it) with the term ``Clearing Trading
Permit Holder.'' In addition, C2 proposes to make a few minor, non-
substantive fixes to its rules. For example, C2 proposes to replace
references to a C2 ``member'' in its rules with the term ``Permit
Holder'' or ``Participant'' (which both have the same meaning under
C2 rules). C2 also proposes to delete a reference in C2 Rule 3.3(b)
regarding member organizations not registered as broker-dealers,
because C2 does not have such organizations (i.e., all Permit
Holders of C2 are required to be registered as broker-dealers). In
addition, C2 proposes to fix some of the cross-references in its
rules to CBOE rules.
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C2 currently has in place a voting agreement with CBOE in which
CBOE agrees to vote in favor of those individuals nominated by C2's
Nominating and Governance Committee for election as C2 Representative
Directors. After the demutualization, CBOE Holdings, and not CBOE,
would be the sole stockholder of C2. Accordingly, C2 has proposed to
enter into a new voting agreement with CBOE Holdings that similarly
would require CBOE Holding to vote in favor of those individuals
nominated by C2's Nominating and Governance Committee for election as
C2 Representative Directors. In addition, C2 proposes to add a
provision in the voting agreement to reflect the ``for cause'' removal
standard for Representative Directors in C2's Bylaws, as discussed
above.
The Commission notes that changes proposed by C2 in its governing
documents and rules are mostly technical in nature. Further, the
Commission notes that C2's proposed amendment to require the removal of
Representative Directors, rather than any director, for cause by the
holders of a majority of the shares of stock is consistent with
provisions approved by the Commission for other SROs'
[[Page 36147]]
governing documents.\31\ Moreover, as the ROC would continue to be
composed solely of Non-Industry Directors, the Commission does not
believe C2's proposal to decreased size of the committee compromises
its ability to monitor the adequacy and effectiveness of C2's
regulatory program. Finally, the Commission believes that a new voting
agreement, as proposed by C2, is appropriate to ensure that C2 meet its
statutory obligation to provide for the fair representation of its
members in the administration of C2.\32\ As the Commission has
previously noted in the context of other exchange governance proposals,
this requirement 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.\33\
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\31\ See, e.g., Section 7 of the Amended and Restated By-Laws of
BATS Exchange, Inc. and Section 7 of the Amended and Restated Bylaws
of EDGX Exchange, Inc.
\32\ Section 6(b)(3) of the Act, 15 U.S.C. 78f(b)(3).
\33\ See, e.g., Securities Exchange Act Release Nos. 53128
(January 13, 2006), 71 FR 3550, 3553 (January 23, 2006) (File No.
10-131); 53382 (February 27, 2006), 71 FR 11251, 11259 (March 6,
2006) (File No. SR-NYSE-2005-77); and 58375 (August 18, 2008), 73 FR
49498, 49501 (August 21, 2008) (File No. 10-182).
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III. Conclusion
For the foregoing reasons, the Commission believes that the
proposed rule changes in connection with the transfer of ownership of
C2 from CBOE to CBOE Holdings is consistent with the Act and that C2
will be so organized and have the capacity to be able to carry out the
purposes of the Act. The provisions in the applicable governing
documents, discussed above, should minimize the potential that any
person could interfere with or restrict the ability of C2 or the
Commission to effectively carry out their respective regulatory
oversight responsibilities. Further, the Commission notes that CBOE
Holding has undertaken to ensure and maintain the regulatory
independence of C2 to enable C2 to operate in a manner that complies
with the federal securities laws, including the objectives of Sections
6(b) of the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\34\ that the proposed rule change (SR-C2-2010-002) be, and it
hereby is, approved.
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\34\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
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\35\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-15281 Filed 6-23-10; 8:45 am]
BILLING CODE 8010-01-P