Federal Register / Vol. 75, No. 194 / Thursday, October 7, 2010 / Notices 62157 

1 In fiscal years 2007, 2008 and 2009, Dolby’s 

research and development expenses were $44.1 

million, $62.1 million and $66.7 million, 

respectively, and accounted for roughly 14.9%, 

17.6% and 18.7% of Dolby’s total expenses 

(including the cost of revenues), respectively. 

SECURITIES AND EXCHANGE 

COMMISSION 

[Investment Company Act Release No. 

29454; 812–13582] 

Dolby Laboratories, Inc.; Notice of 

Application 

October 1, 2010. 

AGENCY: Securities and Exchange 

Commission (‘‘Commission’’). 

ACTION: Notice of application under 

section 3(b)(2) of the Investment 

Company Act of 1940 (the ‘‘Act’’). 

Summary of Application: Dolby 

Laboratories, Inc. (‘‘Dolby’’) seeks an 

order under section 3(b)(2) of the Act 

declaring it to be primarily engaged in 

a business other than that of investing, 

reinvesting, owning, holding or trading 

in securities. Dolby, directly and 

through its wholly-owned subsidiaries, 

develops and delivers products and 

technologies that are used throughout 

the entertainment industry to produce a 

more immersive and enjoyable 

experience. 

Filing Date: The application was filed 

on September 26, 2008, and amended 

on April 7, 2009, April 22, 2010, and 

September 30, 2010. 

Hearing or Notification of Hearing: An 

order granting the requested relief will 

be issued unless the Commission orders 

a hearing. Interested persons may 

request a hearing by writing to the 

Commission’s Secretary and serving 

applicants with a copy of the request, 

personally or by mail. Hearing requests 

should be received by the Commission 

by 5:30 p.m. on October 26, 2010, and 

should be accompanied by proof of 

service on applicants, in the form of an 

affidavit or, for lawyers, a certificate of 

service. Hearing requests should state 

the nature of the writer’s interest, the 

reason for the request, and the issues 

contested. Persons who wish to be 

notified of a hearing may request 

notification by writing to the 

Commission’s Secretary. 

ADDRESSES: Secretary, Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549–1090. 

Applicant, 100 Potrero Avenue, San 

Francisco, CA 94103. 

FOR FURTHER INFORMATION CONTACT: Jaea 

F. Hahn, Senior Counsel, at (202) 551– 

6870, or Jennifer L. Sawin, Branch 

Chief, at (202) 551–6821 (Division of 

Investment Management, Office of 

Investment Company Regulation). 

SUPPLEMENTARY INFORMATION: The 

following is a summary of the 

application. The complete application 

may be obtained via the Commission’s 

Web site by searching for the file 

number, or applicant using the 

Company name box, at http:// 

www.sec.gov/search/search.htm or 

calling (202) 551–8090. 

Applicant’s Representations: 

1. Dolby, a Delaware corporation, 

directly and through its wholly-owned 

subsidiaries, develops and delivers 

innovative products and technologies 

that are used throughout the 

entertainment industry to produce a 

more immersive and enjoyable 

experience. Dolby generates revenue by 

licensing its technologies to 

manufacturers of consumer electronics 

products and software vendors and 

selling professional products and 

related services to entertainment 

content creators, producers and 

distributors. Dolby works across the 

global entertainment industry by 

offering products and services for 

content creators, such as studios and 

broadcasters, to encode content in 

Dolby’s formats, by licensing Dolby 

technology to consumer electronics 

manufacturers and software vendors so 

that consumers can enjoy the content 

that has been encoded in Dolby’s 

proprietary formats, and by working 

directly with standards bodies in an 

effort to have Dolby’s formats adopted 

in their specifications to ensure a 

common standard across devices and to 

improve the overall consumer 

experience. 

2. Dolby states that its business is 

highly capital intensive, highly cyclical 

and requires research and development 

of new technologies. As a result, Dolby 

represents that it maintains a substantial 

amount of cash, and various short-term 

investment securities, to run its 

operations, including research and 

development activities,1 and to be 

available for strategic acquisitions. 

Dolby also states that it seeks to 

preserve capital and maintain liquidity 

by investing in short-term fixed income 

and money market investments that are 

investment grade, liquid, and that earn 

competitive market returns and provide 

a low level of credit risk in order to 

conserve capital and liquidity until the 

funds are used in Dolby’s primary 

business or businesses (‘‘Capital 

Preservation Investments’’). Dolby states 

that it does not invest in securities for 

short-term speculative purposes. 

3. Dolby also states that a significant 

portion of its assets consist of intangible 

assets, such as internally-generated 

intellectual property and other 

intangibles that may not appear on its 

balance sheet. Dolby states that because 

it holds its internally-developed 

intangible assets through wholly-owned 

subsidiaries, the value of its investment 

securities is (and likely will remain) 

well below 40% of its total assets 

(excluding Government securities and 

cash items) on an unconsolidated basis. 

Dolby states, however, that valuation of 

internally-developed intangible assets is 

difficult and inherently subjective, and 

Dolby believes that it cannot rely on the 

fact that it does not meet the definition 

of investment company found in section 

3(a)(1)(C) of the Act because third 

parties such as underwriters will not 

accept investment company status 

representations based on 

unconsolidated calculations that rely on 

Dolby’s valuations of those assets. 

Because Dolby cannot rely on the fact 

that it does not meet the definition of 

investment company found in section 

3(a)(1)(C) in circumstances requiring an 

unqualified opinion that Dolby is not an 

investment company under the Act, it 

seeks an order of the Commission 

pursuant to section 3(b)(2) of the Act. 

Applicant’s Legal Analysis: 

1. Dolby seeks an order under section 

3(b)(2) of the Act declaring that it is 

primarily engaged in a business other 

than that of investing, reinvesting, 

owning, holding or trading in securities, 

and therefore not an investment 

company as defined in the Act. 

2. Under section 3(a)(1)(C) of the Act, 

an issuer is an investment company if 

it is engaged or proposes to engage in 

the business of investing, reinvesting, 

owning, holding, or trading in 

securities, and owns or proposes to 

acquire investment securities having a 

value in excess of 40 percent of the 

value of the issuer’s total assets 

(exclusive of Government securities and 

cash items) on an unconsolidated basis. 

Section 3(a)(2) of the Act defines 

‘‘investment securities’’ to include all 

securities except Government securities, 

securities issued by employees’ 

securities companies, and securities 

issued by majority-owned subsidiaries 

of the owner which (a) are not 

investment companies, and (b) are not 

relying on the exclusions from the 

definition of investment company in 

section 3(c)(1) or 3(c)(7) of the Act. 

Dolby states that as of June 25, 2010, the 

value of its total assets on an 

unconsolidated basis (exclusive of 

Government securities and cash items) 

was approximately $7.5 billion, the 

value of Dolby’s investment securities 

(as defined in section 3(a)(2) of the Act) 

on an unconsolidated basis was 

approximately $0 and constituted 

approximately 0.0% of Dolby’s total 


jdjones on DSK8KYBLC1PROD with NOTICES
62158 Federal Register / Vol. 75, No. 194 / Thursday, October 7, 2010 / Notices 

2Rule 3a–8 under the Act provides an exemption 

for certain companies whose research and 

development expenses are a substantial percentage 

of their total expenses. Dolby does not rely on rule 

3a–8 because its research and development 

expenses have in recent years accounted for less 

than 20 percent of its total expenses (including the 

cost of revenues). 

3Tonopah Mining Company of Nevada, 26 SEC 

426, 427 (1947). 

4For purposes of determining its primary 

business, Dolby believes that consolidating its 

financial results with those of its wholly-owned 

subsidiaries presents a more accurate view of 

Dolby’s business and financial position and a more 

reliable basis for evaluating its assets and income. 

assets (exclusive of Government 

securities and cash items). 

3. Rule 3a–1 under the Act provides 

an exemption from the definition of 

investment company if no more than 

45% of a company’s total assets consist 

of, and not more than 45% of its net 

income over the last four quarters is 

derived from, securities other than 

Government securities, securities of 

majority-owned subsidiaries and 

primarily controlled companies. These 

percentages are determined on a 

consolidated basis with the company’s 

wholly-owned subsidiaries. Dolby states 

that it currently relies on rule 3a–1 and 

limits its investment in Capital 

Preservation Investments, investing its 

liquid capital more heavily in 

Government securities and cash items to 

ensure that its investment securities 

remain within the limits of the asset 

component of rule 3a–1’s 45% test. 

Dolby believes that limiting its Capital 

Preservation Investments to meet the 

constraints of rule 3a–1 greatly 

underutilizes Dolby’s cash management 

potential to the detriment of Dolby and 

its shareholders.2

4. Section 3(b)(2) of the Act provides 

that, notwithstanding section 3(a)(1)(C) 

of the Act, the Commission may issue 

an order declaring an issuer to be 

primarily engaged in a business or 

businesses other than that of investing, 

reinvesting, owning, holding, or trading 

in securities either directly or through 

majority-owned subsidiaries or through 

controlled companies conducting 

similar types of businesses. Dolby 

requests an order under section 3(b)(2) 

of the Act declaring that it is primarily 

engaged in a business other than that of 

investing, reinvesting, owning, holding 

or trading in securities, and therefore 

not an investment company as defined 

in the Act. 

5. In determining whether a company 

is primarily engaged in a noninvestment company business under 

section 3(b)(2), the Commission 

considers: (a) The issuer’s historical 

development; (b) its public 

representations of policy; (c) the 

activities of its officers and directors; (d) 

the nature of its present assets; and (e) 

the sources of its present income.3

a. Historical Development. Dolby 

states that since its founding in 1965, it 

has been engaged in delivering products 

and technologies that are employed 

throughout the entertainment creation, 

distribution and playback process to 

enhance the entertainment experience. 

In recent years, Dolby has expanded its 

focus on developing and delivering new 

audio and video technologies that 

enhance the entertainment experience. 

Dolby’s revenue comes almost 

exclusively from its licensing, sales and 

services of its technologies to 

manufacturers of consumer electronics 

products and software vendors. 

b. Public Representations of Policy. 

Dolby states that it has never 

represented that it is involved in any 

business other than developing and 

delivering products and technologies for 

the entertainment creation, distribution 

and playback process. Dolby asserts that 

it has consistently stated in its annual 

reports, stockholder letters, 

prospectuses, filings with the 

Commission, press releases, marketing 

materials, and website that it is engaged 

in the business of developing and 

delivering products and technology that 

improve the entertainment experience. 

Dolby states that it generally does not 

make public representations regarding 

its investment securities except as 

required by its obligation to file periodic 

reports to comply with federal securities 

laws. Dolby further states that it has 

emphasized operating results and has 

never emphasized either its investment 

income or the possibility of significant 

appreciation from its cash management 

investment strategies as a material factor 

in its business or future growth. 

c. Activities of Officers and Directors. 

Dolby states that its directors spend 

substantially all of their time as 

directors for Dolby overseeing Dolby’s 

business of developing and delivering 

products and technologies for the 

entertainment creation, distribution and 

playback process. Dolby states that its 

executive officers spend substantially 

all of their time managing Dolby’s 

business of developing and delivering 

innovative products and technologies 

that are used throughout the 

entertainment industry. Dolby’s Chief 

Financial Officer spends less than 5% of 

his time monitoring Dolby’s cash 

balances and managing short-term 

investment securities in accordance 

with Dolby’s investment policies. None 

of Dolby’s executive officers, other than 

the Chief Financial Officer, spend time 

monitoring cash balances and managing 

short-term investment securities. 

As of September 25, 2009, Dolby had 

approximately 1,135 employees in 

locations throughout the world, 

consisting of 388 employees in sales and 

marketing, 421 employees in products 

and technology (including 345 

employees in research and 

development) and 326 employees in 

general and administrative functions. In 

addition to the Chief Financial Officer, 

only three employees spend a small 

portion of time on matters relating to the 

management of Dolby’s investment 

securities: The Vice President, Tax and 

Treasury spends less than 10% of his 

time on investment matters. The 

Director of Treasury spends about onethird of her time on investment matters 

and the Treasury Manager spends 

approximately 20% of his time on 

investment matters. 

d. Nature of Assets. Dolby states that 

as of June 25, 2010, the value of its 

investment securities (as defined in 

section 3(a)(2) of the Act) was 

approximately $411 million, which 

constituted approximately 39.2% of its 

total assets on a consolidated basis 

(exclusive of Government securities and 

cash items) in accordance with rule 3a– 

1.4 Dolby states that its investments in 

‘‘investment securities’’ that are not 

Capital Preservation Instruments will be 

no more than 10 percent of its total 

assets (other than Government securities 

and cash items) on a consolidated basis. 

Dolby further states that it owns, 

through its wholly-owned subsidiaries, 

a significant amount of intangible assets, 

including internally-developed 

intellectual property. Dolby states that 

notwithstanding the value of its 

internally-developed intellectual 

property to its business, that value is not 

recorded on Dolby’s consolidated 

balance sheet as it is not treated as an 

asset under Generally Accepted 

Accounting Principles. Dolby also states 

that the asset tests used in connection 

with sections 3(a)(1)(C), 3(b)(1) and 

3(b)(2) of the Act and rule 3a–1 under 

the Act thus significantly understate the 

relative value of Dolby’s internallydeveloped intellectual property assets 

and significantly overstate the relative 

value of investment securities. 

e. Sources of Income and Revenue. 

Dolby states that for the four fiscal 

quarters ended June 25, 2010, most of 

Dolby’s net income before taxes was 

generated by its operating activities. At 

the end of the third quarter of fiscal 

2010, Dolby had net income of $405 

million for the last four fiscal quarters 

combined, of which net investment 

income was $8 million or 2% of income 

before taxes. Dolby states that the 

overwhelming majority of its income is 


jdjones on DSK8KYBLC1PROD with NOTICES
Federal Register / Vol. 75, No. 194 / Thursday, October 7, 2010 / Notices 62159 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 15 U.S.C. 78s(b)(3)(A)(iii). 

4 17 CFR 240.19b–4(f)(6). 

5See Exchange Act Release No. 61152 (Dec. 10, 

2009), 74 FR 66699 (Dec. 16, 2009). 

operating income generated by its 

licensing and products and services 

sales activities. 

6. Dolby thus asserts that it satisfies 

the standards for an order under section 

3(b)(2) of the Act. 

Applicant’s Conditions: 

Dolby agrees that any order granted 

pursuant to the application will be 

subject to the following conditions: 

1. Dolby will continue to allocate and 

utilize its accumulated cash and 

investment securities for bona fide 

business purposes. 

2. Dolby will refrain from investing or 

trading in securities for short-term 

speculative purposes. 

For the Commission, by the Division of 

Investment Management, under delegated 

authority. 

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–25292 Filed 10–6–10; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–63021; File No. SR–C2– 

2010–004] 

Self-Regulatory Organizations; C2 

Options Exchange, Incorporated; 

Notice of Filing and Immediate 

Effectiveness of Proposed Rule 

Change To Adopt Certain Rule 

Language Contained in CBOE Rules 

September 30, 2010. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on 

September 22, 2010, C2 Options 

Exchange, Incorporated (‘‘Exchange’’ or 

‘‘C2’’) filed with the Securities and 

Exchange Commission (the 

‘‘Commission’’) the proposed rule 

change as described in Items I and II 

below, which Items have been prepared 

by the Exchange. The Exchange filed the 

proposal as a ‘‘non-controversial’’ 

proposed rule change pursuant to 

Section 19(b)(3)(A)(iii) of the Act 3 and 

Rule 19b–4(f)(6) thereunder.4 The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to adopt 

certain rules in place at the Chicago 

Board Options Exchange, Incorporated 

(‘‘CBOE’’). The text of the proposed rule 

change is available on the Exchange’s 

Web site (http://www.cboe.org/Legal), at 

the Exchange’s Office of the Secretary, 

at the Commission’s Public Reference 

Room, and on the Commission’s Web 

site at http://www.sec.gov. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, C2 

included statements concerning the 

purpose of and basis for the proposed 

rule change and discussed any 

comments it received on the proposed 

rule change. The text of those 

statements may be examined at the 

places specified in Item IV below. The 

Exchange has prepared summaries, set 

forth in Sections A, B, and C below, of 

the most significant parts of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

In 2009, C2 was registered as a 

national securities exchange under 

Section 6 of the Exchange Act.5 C2 has 

yet to commence trading options, 

however a launch is anticipated in 

October 2010. The purpose of this filing 

is to modify certain C2 rules to match 

changes that have been made to 

corresponding CBOE rules, and to also 

adopt certain provisions from CBOE 

Rules 3.1 and 8.3 regarding trading 

permits and market maker 

appointments, respectively. 

The Exchange proposes to amend 

Rule 1.1 to adopt the definitions of the 

terms ‘‘Professional’’ and ‘‘Voluntary 

Professional’’ in a substantially similar 

manner as they have recently been 

adopted for use on CBOE. Thus, C2 will 

allow users that fall into the customer 

range to elect to have orders treated, for 

purposes of certain C2 rules, as broker 

dealers. Further, when a person or 

entity that is not a broker-dealer places 

more than 390 orders per day on average 

during a calendar month for its own 

beneficial account(s), such person will 

be deemed a ‘‘Professional’’ under the 

Rules and will be treated in the same 

manner as a broker-dealer for purposes 

of certain designated C2 rules. 

The Exchange proposes to amend 

Rule 3.1 to allow C2 to establish 

different types and terms of trading 

permits, and to establish guidelines and 

standards governing the Exchange’s 

authority regarding these trading 

permits. The proposed changes merely 

adopt certain language contained in 

CBOE Rule 3.1. 

The Exchange also proposes to amend 

Interpretation .03 to Rule 3.5 to expand 

the ability of the Exchange to waive the 

requirement to conduct a hearing under 

Rule 3.5 if the Exchange intends to grant 

a Permit Holder’s application to 

continue holding a Trading Permit or an 

associated person’s application for 

continued association with a Permit 

Holder. 

The Exchange also proposes to modify 

Rule 6.10 regarding order types to (i) 

make clear that the Exchange has the 

flexibility to make order types available 

on a class-by-class basis (this language 

is identical to language contained in 

CBOE Rule 6.53); (ii) add the 

Intermarket Sweep Order (identical to 

the CBOE version); add the AIM Sweep 

Order (identical to the CBOE version); 

add the Sweep and AIM Order 

(identical to the CBOE version); and add 

the C2-Only Order (identical to the 

CBOE version except it is called C2- 

Only instead of CBOE-Only). 

The Exchange also proposes to amend 

Rule 6.32 regarding trading pauses to 

conform Rule 6.32 to comparable rules 

on CBOE and other exchanges. 

The Exchange also proposes to amend 

Rule 8.2 to adopt language from CBOE 

Rule 8.3 (Appointment of MarketMakers) to provide a structure for C2 

Market-Makers to register in option 

classes. As proposed, approved C2 

Market-Makers will receive an option 

class registration credit of 1.0. Like on 

CBOE, a Market-Maker can use that 

credit to register in option classes (each 

class will have a designated registration 

cost). For now, C2 is designating every 

option traded on C2, except SPX, VIX, 

OEX, DJX, and XSP, to have a 

registration cost of .001 (with that cost 

structure, C2 Market-Makers should be 

able to register in every option class 

anticipated to be listed on C2, except for 

the specific classes listed above, with 

the registration credit of 1.0). If C2 

determines to commence trading of 

SPX, VIX, OEX, DJX, and XSP options, 

it will file a proposed rule change to 

adopt registration costs for those 

products. 

Lastly, the Exchange proposes to 

amend C2 Chapter 24 to clarify that 

CBOE Rule 24.20 (SPX Combination 

Orders) shall not apply to C2. CBOE 

Rule 24.20 relates to open-outcry 

trading of SPX combos on CBOE and is 

therefore not applicable to C2. 


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