Document ID: SEC-2008-1212-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2008-09-04T04:00Z

[Federal Register: September 4, 2008 (Volume 73, Number 172)]
[Notices]               
[Page 51652-51668]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04se08-67]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58425; File No. SR-CBOE-2008-88]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Relating to 
the Demutualization of Chicago Board Options Exchange, Incorporated

August 26, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ 
notice is hereby given that on August 21, 2008, the Chicago Board 
Options Exchange, Incorporated (``CBOE'' or ``Exchange'') filed with 
the Securities and Exchange Commission (the ``Commission'' or ``SEC'') 
the proposed rule change as described in Items I, II, and III below, 
which Items have been prepared by CBOE. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE is filing this proposed rule change in connection with its 
plan to restructure from a Delaware non-stock corporation to a Delaware 
stock corporation that will be a wholly owned subsidiary of CBOE 
Holdings, Inc. (``CBOE Holdings''), a holding company organized as a 
Delaware stock corporation. As part of this Restructuring Transaction, 
a Certificate of Incorporation and Bylaws will be adopted for CBOE 
Holdings.\3\ In addition, the Exchange's Certificate of Incorporation 
and Constitution will be replaced with a new Certificate of 
Incorporation and Bylaws as a result of the Restructuring Transaction. 
Finally, the Exchange's Rules will be amended to address, among other 
things, trading access to the Exchange after the Restructuring 
Transaction.\4\
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    \3\ The term ``Restructuring Transaction'' is defined in 
proposed CBOE Rule 1.1(hhh) as ``the restructuring of the Exchange 
from a non-stock corporation to a stock corporation and wholly owned 
subsidiary of CBOE Holdings, Inc.''
    \4\ The substance of the proposed rule change and its filing 
under Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)), 
and Rule 19b-4 thereunder (CFR 240.19b-4), have been approved by the 
Board of Directors of the Exchange. The Exchange must obtain, but 
has not yet obtained, formal approval from the Board of Directors of 
the Exchange, as well as approval from the membership, for the 
changes set forth in this proposed rule change. Once it has obtained 
those approvals, the Exchange plans to file a technical amendment to 
this proposed rule change to reflect those approvals. Once those 
approvals are obtained, no further action by the Exchange in 
connection with this proposed rule change will be required.
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    The text of the proposed Certificate of Incorporation of CBOE 
Holdings, the proposed Bylaws of CBOE Holdings, the proposed 
Certificate of Incorporation of the Exchange, the proposed Bylaws of 
the Exchange, the proposed amendments to the Rules of the Exchange, the 
proposed Voting Agreement between CBOE Holdings and the Exchange, and 
the proposed deletion of the Constitution of the Exchange is available 
on CBOE's Web site (http://www.cboe.org/Legal), at CBOE's Office of the 
Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, CBOE 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 these statements may be examined at the places specified in 
Item IV below. CBOE has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

Purpose
(1) The Restructuring Transaction
    CBOE is filing this proposed rule change in connection with its 
plan to restructure from a Delaware non-stock corporation owned by its 
members to a

[[Page 51653]]

Delaware stock corporation that will be a wholly owned subsidiary of 
CBOE Holdings, a holding company organized as a Delaware stock 
corporation. After the Restructuring Transaction, the owners of 
membership interests will become stockholders of CBOE Holdings through 
the conversion of their memberships into shares of common stock of CBOE 
Holdings. CBOE Holdings will hold all of the outstanding common stock 
of CBOE. CBOE will continue to function as a self-regulatory 
organization (``SRO'') and to operate its exchange business and 
facilities.
    The Restructuring Transaction will be completed through the 
following steps:
     The creation of CBOE Holdings as a first-tier, Delaware 
stock, for-profit subsidiary corporation of CBOE; and the creation of 
CBOE Merger Sub, Incorporated as a second-tier, Delaware stock, for-
profit subsidiary corporation of CBOE (CBOE Merger Sub will be a first-
tier subsidiary of CBOE Holdings).\5\
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    \5\ CBOE Holdings and CBOE Merger Sub have already been created.
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     Pursuant to the Agreement and Plan of Merger to be entered 
into in the future, CBOE Merger Sub, Incorporated will merge with and 
into CBOE, with CBOE surviving the merger as a Delaware stock, for-
profit corporation, which is referred to as the ``Merger.''
     Upon the effectiveness of the Merger, the outstanding 
stock of CBOE Merger Sub, Incorporated will be converted into common 
stock of CBOE, the memberships in CBOE existing on the date of the 
Restructuring Transaction will be converted into Class A common stock 
of CBOE Holdings (described below) and the CBOE Holdings common stock 
held by CBOE will be cancelled. As a result, CBOE Holdings will become 
the sole stockholder of CBOE and will be entitled to the exclusive 
right to receive all dividends and distributions, including proceeds 
upon liquidation, from CBOE and all associated voting rights.
     Immediately following the Merger, CBOE will dividend up to 
CBOE Holdings all of the shares or interests CBOE owns in its 
subsidiaries (CBOE Futures Exchange, LLC, Chicago Options Exchange 
Building Corporation, CBOE, LLC, CBOE II, LLC, DerivaTech Corporation, 
Market Data Express, LLC and The Options Exchange, Incorporated) other 
than CBOE Stock Exchange, LLC, making them first-tier, wholly-owned 
subsidiaries of CBOE Holdings.\6\ CBOE Stock Exchange, LLC (``CBSX'') 
will remain a facility of CBOE in which CBOE holds a 50% interest.\7\ 
CBSX is an equity trading facility of CBOE.
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    \6\ These entities engage in the following activities: CBOE 
Futures Exchange, LLC operates an electronic futures exchange; 
Chicago Options Exchange Building Corporation owns the building in 
which CBOE operates; CBOE, LLC holds a 24.01% interest in 
OneChicago, LLC, a security futures exchange; CBOE II, LLC recently 
sold its interest in HedgeStreet, Inc., a derivatives market 
regulated by the Commodity Futures Trading Commission; DerivaTech 
Corporation owns certain educational software; Market Data Express, 
LLC distributes various types of market data; and The Options 
Exchange, Incorporated currently has no assets or activities. CBOE 
is in the process of establishing CBOE Execution Services, LLC as a 
broker-dealer. CBOE Execution Services, LLC will perform various 
functions in that capacity and will be a first-tier, wholly-owned 
subsidiary of CBOE Holdings immediately following the Merger.
    \7\ The remaining 50% interest in CBSX currently is owned by 
five registered broker-dealers.
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    As part of the Restructuring Transaction, each membership in CBOE 
existing on the date of the Restructuring Transaction will be converted 
into a certain number of shares of Class A common stock of CBOE 
Holdings, divided by thirds into shares of Series A-1 common stock, 
Series A-2 common stock and Series A-3 common stock.\8\ As a result, 
the owners of CBOE memberships outstanding immediately prior to the 
Restructuring Transaction will own shares of Class A common stock of 
CBOE Holdings immediately following the Restructuring Transaction.
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    \8\ As of the effective time of the Restructuring Transaction, 
CBOE Holdings will be authorized to issue (i) a certain number of 
shares of unrestricted common stock, $0.01 par value per share, (ii) 
a certain number of shares of Class A common stock, $0.01 par value 
per share, initially divided into three series of restricted Class A 
common stock, designated Series A-1, A-2 and A-3, (iii) a certain 
number of shares of Class B non-voting common stock, $0.01 par value 
per share, initially divided into three series of Class B non-voting 
common stock, designated Series B-1, B-2 and B-3, and (iv) up to 
20,000,000 shares of preferred stock, $0.01 par value per share. The 
unrestricted common stock and the Class A common stock will have the 
same rights and privileges, except the Class A common stock will be 
subject to certain transfer restrictions. The unrestricted common 
stock will be freely transferable. The three series of Class A 
common stock will be identical, except that the transfer 
restrictions associated with each series will be of a different 
duration. The three series of Class B non-voting common stock will 
be identical, and will have no voting privileges or rights except in 
certain limited circumstances. The three series of Class B non-
voting common stock will convert into Class A common stock upon the 
public offering of CBOE Holdings Common Stock (defined for purposes 
of this rule filing as the unrestricted common stock, the Class A 
common stock and the Class B non-voting common stock). The Class B 
non-voting common stock will be issued as part of a settlement of 
certain litigation, which is discussed below. CBOE Holdings will 
have the ability to issue preferred stock and unrestricted common 
stock, including in connection with a public offering of shares of 
stock to investors who were not members of CBOE prior to the 
Restructuring Transaction and are not holders of Trading Permits in 
CBOE following the Restructuring Transaction. CBOE Holdings has no 
current intention to issue any shares of its preferred stock.
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    The Class A common stock of CBOE Holdings will represent an equity 
ownership interest in CBOE Holdings and will have traditional features 
of common stock, including equal per share dividend, voting and 
liquidation rights. This stock, however, will not provide its holders 
with physical or electronic access to CBOE and its trading facilities. 
Following the Restructuring Transaction, physical and electronic access 
to CBOE and its trading facilities will be available to individuals and 
organizations that have obtained a Trading Permit from CBOE. Trading 
Permits are described in more detail below.
    (2) Reasons for the Restructuring Transaction
    CBOE believes that changing its focus to that of a for-profit 
business, along with modifying its corporate and governance structures 
to be more like those of other for-profit businesses, will provide CBOE 
with greater flexibility to respond to the demands of a rapidly 
changing business environment. In addition, by being structured as a 
stock, for-profit corporation, CBOE will be able to pursue strategic 
opportunities to engage in business combinations and joint ventures 
with other organizations and to access capital markets in ways that are 
not available to non-stock, membership corporations. CBOE believes that 
the Restructuring Transaction will move it one step closer to achieving 
its key objectives of providing its owners a more liquid investment and 
creating a framework for a possible future public offering of CBOE 
Holdings Common Stock.
    CBOE also believes, among other things, that the restructuring of 
the Exchange will enable it to enhance its competitiveness with other 
options exchanges while preserving its ability to provide trading 
benefits and opportunities to persons with trading access to the 
Exchange.
(3) Paragraph (b) of Article Fifth of the CBOE Certificate of 
Incorporation and the Settlement of Litigation
    In connection with the Merger, the Exchange's Certificate of 
Incorporation and Constitution will be replaced by a new Certificate of 
Incorporation and Bylaws. While the content of the Exchange's new 
Certificate of Incorporation and Bylaws will be similar to the content 
of the Exchange's old Certificate of Incorporation and Constitution, 
the new Certificate of Incorporation will not contain, among other 
things, paragraph (b) of Article Fifth of the CBOE Certificate of

[[Page 51654]]

Incorporation (``Article Fifth(b)'').\9\ Article Fifth(b) provided the 
right for full members of The Board of Trade of the City of Chicago, 
Inc. (``CBOT'') to become members of CBOE without having to separately 
purchase or lease a membership.\10\
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    \9\ As a result of this change, the Exchange is proposing to 
delete CBOE Rule 3.16, which addresses certain issues related to 
Article Fifth(b).
    \10\ On January 15, 2008, the Securities and Exchange Commission 
(``SEC'' or ``Commission'') approved an interpretation of Article 
Fifth(b) (``Article Fifth(b) Interpretation'') that addressed the 
impact of the acquisition of CBOT by Chicago Mercantile Exchange 
Holdings Inc. (``CME/CBOT Transaction'') on the eligibility of 
persons to become or remain members of CBOE (``exerciser members'') 
pursuant to Article Fifth(b) (the right provided under this 
provision is sometimes referred to as the ``exercise right''). See 
Securities Exchange Act Release No. 57159 (Jan. 15, 2008), 73 FR 
3769 (Jan. 22, 2008) (order approving File No. SR-CBOE-2006-106). 
Under the Article Fifth(b) Interpretation, the consummation of the 
CME/CBOT Transaction resulted in no person any longer qualifying as 
a member of the CBOT within the meaning of Article Fifth(b) and 
therefore resulted in the elimination of any person's eligibility to 
qualify thereafter to become or remain an exerciser member of the 
Exchange.
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    Article Fifth(b) contains a provision that provides that no 
amendment may be made to it without the prior approval of not less than 
80% of (i) the regular members of the Exchange admitted pursuant to 
Article Fifth(b) and (ii) the regular members of the Exchange admitted 
other than pursuant to Article Fifth(b), each such category of members 
voting as a separate class. CBOE has received a legal opinion from its 
Delaware counsel that under Delaware law because the Restructuring 
Transaction is structured as a merger, this provision of Article 
Fifth(b) would not be triggered, and that the Merger and associated 
amendments to the Exchange's Certificate of Incorporation and 
Constitution could be effected through a simple majority vote of the 
members.
    In addition, issues related to Article Fifth(b) are subject to 
litigation in Delaware state court and the U.S. Court of Appeals for 
the District of Columbia Circuit (``DC Circuit'').\11\ A settlement has 
been reached with respect to this litigation that remains subject to 
various approvals.\12\ As a result of the settlement, the trading 
access of persons who are Temporary Members under Interpretation and 
Policy .02 of CBOE Rule 3.19 will be preserved as further described 
below. In addition, the class members in the litigation will receive 
cash and Class B non-voting common stock that will convert into Class A 
common stock upon the public offering of CBOE Holdings Common 
Stock.\13\
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    \11\ In addition to the Delaware litigation, the Commission's 
approval order of the Article Fifth(b) Interpretation has been 
appealed to the DC Circuit.
    \12\ Among other things, the appeal of the Commission's approval 
order of the Article Fifth(b) Interpretation to the DC Circuit would 
be withdrawn as part of the settlement. CBOE will keep Commission 
staff apprised regarding the status of the settlement and the legal 
proceedings related to the settlement.
    \13\ In the event of such a public offering, the Class A common 
stock will be subject to certain transfer restrictions as noted 
above.
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(4) Request for Commission Approval Under Section 15.16 of the CBSX 
Operating Agreement
    Under the CBSX Operating Agreement, CBOE is defined as one of the 
``Owners'' of CBSX. Section 15.16 of the CBSX Operating Agreement 
provides that in the event that a person acquires a 25% or greater 
interest in an Owner that owns a 20% or greater interest in CBSX, that 
person must execute an amendment to the Operating Agreement in which 
that person agrees to be a party to the Operating Agreement and to 
abide by all of the provisions of the Operating Agreement. Section 
15.16 also provides that Commission approval under Section 19 of the 
Exchange Act is required in connection with such an amendment to the 
Operating Agreement.\14\ Because CBOE owns a 50% interest in CBSX, the 
establishment of CBOE Holdings as the sole shareholder of CBOE would 
trigger this Commission approval requirement. Consistent with this 
requirement in Section 15.16 of the CBSX Operating Agreement, CBOE is 
requesting as part of this proposed rule change that the Commission 
provide such approval.
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    \14\ 15 U.S.C. 78s.
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(5) Summary of the Proposed Rule Change
    Following the Restructuring Transaction, the Exchange's new 
Certificate of Incorporation and Bylaws will be similar to the current 
Certificate of Incorporation and Constitution, except they will reflect 
CBOE's new structure as a for-profit stock corporation wholly-owned by 
CBOE Holdings. In this regard, they will be modified to, among other 
things, streamline governance and incorporate provisions required by 
the SEC in the case of for-profit exchanges. The Exchange also proposes 
to adopt a Certificate of Incorporation and Bylaws for CBOE Holdings 
that will address, among other things, the operation of the Exchange as 
an SRO in this new structure.\15\ The Rules of the Exchange also will 
be amended to reflect the use of Trading Permits to access the Exchange 
and its trading facilities and to make certain conforming changes.\16\ 
These rule changes are discussed below.
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    \15\ While certain provisions of the Certificate of 
Incorporation and Bylaws for CBOE Holdings are not related to the 
operation of the Exchange, for so long as CBOE Holdings controls 
CBOE, 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 CBOE, 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. See proposed Article Eleventh of the 
CBOE Holdings Certificate of Incorporation and proposed Article 10.2 
of the CBOE Holdings Bylaws.
    \16\ The Exchange is not proposing any significant change to its 
existing operational and trading structure in connection with the 
demutualization.
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(A) CBOE Holdings
    As mentioned above, CBOE Holdings will be the parent company and 
sole shareholder of CBOE. The Certificate of Incorporation and the 
Bylaws of CBOE Holdings will govern the activities of CBOE Holdings.
(i) CBOE Holdings Board of Directors
    After the Restructuring Transaction, the business and affairs of 
CBOE Holdings will be managed by or under the direction of its Board of 
Directors (``CBOE Holdings Board''). The CBOE Holdings Board will 
consist of between 11 and 15 directors, and except with respect to the 
initial CBOE Holdings Board, will be fixed by the CBOE Holdings Board 
from time to time.\17\ After the Restructuring Transaction, the initial 
CBOE Holdings Board will have 13 directors who will consist of the CBOE 
Holdings' Chief Executive Officer and 12 other directors.\18\ That 
initial CBOE Holdings Board will be selected by the Board of Directors 
of the Exchange existing prior to the Restructuring Transaction 
(``Prior CBOE Board'') or a committee thereof, and the composition 
requirements for the CBOE Holdings Board will be satisfied in 
connection with the selection of directors for that initial CBOE 
Holdings Board. At all times no less than two-thirds of the directors 
of CBOE Holdings will satisfy the independence requirements contained 
in the listing standards of the New York Stock Exchange (``NYSE'') and 
the independence requirements adopted by the CBOE Holdings Board, as 
may be modified and amended from time to time.\19\
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    \17\ See proposed Article Seventh(b) of the CBOE Holdings 
Certificate of Incorporation and proposed Article 3.2 of the CBOE 
Holdings Bylaws.
    \18\ See proposed Article 3.2 of the CBOE Holdings Bylaws.
    \19\ See proposed Article 3.3 of the CBOE Holdings Bylaws. At 
the time this rule filing was submitted to the Commission, the 
requirements to qualify as an ``independent director'' under the 
NYSE's listing standards were found in Sections 303A.01 and 303A.02 
of the NYSE's Listed Company Manual.

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[[Page 51655]]

    The CBOE Holdings Board will appoint one of the directors on the 
CBOE Holdings Board to serve as Chairman of the CBOE Holdings 
Board.\20\ The CBOE Holdings Bylaws do not restrict the Chief Executive 
Officer of CBOE Holdings from serving in this role.\21\ The CBOE 
Holdings Board also may appoint an independent director to serve as 
Lead Director, who will perform such duties and possess such powers as 
the CBOE Holdings Board may from time to time prescribe.\22\ The CBOE 
Holdings Board will be a classified board with staggered terms of 
office, consisting of two classes of directors, each of which will 
serve for two-year terms.\23\ There is no limit on the number of terms 
a director may serve on the CBOE Holdings Board.
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    \20\ See proposed Article 3.6 of the CBOE Holdings Bylaws.
    \21\ See proposed Article 5.1 of the CBOE Holdings Bylaws.
    \22\ See proposed Article 3.7 of the CBOE Holdings Bylaws.
    \23\ See proposed Article 3.2 of the CBOE Holdings Bylaws. With 
regard to the initial CBOE Holdings Board, the initial term of the 
Class I directors will end with the first annual stockholders 
meeting to be held by CBOE Holdings following the Restructuring 
Transaction, and the initial term of the Class II directors will end 
with the second annual stockholders meeting following the 
Restructuring Transaction. The CBOE Holdings Board is authorized to 
assign members of the CBOE Holdings Board already in office to such 
classes at the time the classification becomes effective.
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    Except with respect to the initial CBOE Holdings Board, the CBOE 
Holdings Board or a committee thereof each year will nominate 
candidates for the class of directors standing for election at the CBOE 
Holdings annual meeting of shareholders.\24\ In this regard, the 
Nominating and Governance Committee, which is described below, will 
nominate candidates for the CBOE Holdings Board. Each holder of CBOE 
Holdings voting stock will be entitled to one vote for each share of 
voting stock he or she holds, except as otherwise provided by the 
General Corporation Law of the State of Delaware (``DGCL'') or the 
Certificate of Incorporation or Bylaws of CBOE Holdings.\25\ At each 
annual meeting of the shareholders of CBOE Holdings at which a quorum 
is present, the individuals receiving a plurality of the votes cast 
will be elected directors of CBOE Holdings.\26\
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    \24\ See proposed Article 2.11 of the CBOE Holdings Bylaws. 
Subject to certain conditions, stockholders also have the right 
under this provision to nominate persons for the CBOE Holdings 
Board.
    \25\ See proposed Article 2.8 of the CBOE Holdings Bylaws.
    \26\ See proposed Article 2.10 of the CBOE Holdings Bylaws. 
Except as otherwise provided by law or the Certificate of 
Incorporation or Bylaws of CBOE Holdings, the holders of a majority 
in voting power of the shares of the capital stock of CBOE Holdings 
issued and outstanding and entitled to vote at the meeting (after 
taking into account the effect of any reduction of the number of 
shares entitled to vote as a result of the voting limitations 
imposed by Article Sixth of the Certificate of Incorporation of CBOE 
Holdings, if any), present in person or represented by proxy, will 
constitute a quorum for the transaction of business. See proposed 
Article 2.6 of the CBOE Holdings Bylaws. The voting limitations in 
Article Sixth are discussed below.
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(ii) Committees of CBOE Holdings
    CBOE Holdings will have an Executive Committee, an Audit Committee, 
a Compensation Committee, a Nominating and Governance Committee, as 
well as such other committees that the CBOE Holdings Board 
establishes.\27\ The Nominating and Governance Committee will consist 
of at least seven directors, all of whom will be Independent Directors 
and be recommended by the Nominating and Governance Committee for 
approval by the CBOE Holdings Board.\28\ The initial Nominating and 
Governance Committee after the Restructuring Transaction will be 
selected by the Prior CBOE Board or a committee thereof, and the 
composition requirements for the Nominating and Governance Committee 
will be satisfied in connection with the selection of members of the 
initial Nominating and Governance Committee. Members of the Executive, 
Audit, and Compensation Committees of CBOE Holdings will be recommended 
by the Nominating and Governance Committee for approval by the CBOE 
Holdings Board.\29\
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    \27\ See proposed Article 4.1 of the CBOE Holdings Bylaws. The 
CBOE Holdings Board will designate the members of these other 
committees and may designate a Chairman and a Vice-Chairman thereof.
    \28\ See proposed Article 4.5 of the CBOE Holdings Bylaws.
    \29\ See proposed Articles 4.2, 4.3 and 4.4 of the CBOE Holdings 
Bylaws.
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    The Executive Committee will have and may exercise all the powers 
and authority of the CBOE Holdings Board in the management of the 
business and affairs of CBOE Holdings, except it will not have the 
power or authority of the CBOE Holdings Board in reference to, among 
other things, amending the CBOE Holdings Certificate of Incorporation, 
adopting an agreement of merger or consolidation, approving the sale, 
lease or exchange of all or substantially all of the CBOE Holdings' 
property and assets, or approving the dissolution of CBOE Holdings or a 
revocation of a dissolution.\30\ The Audit, Compensation, and 
Nominating and Governance Committees will have such duties and may 
exercise such authority as may be prescribed by the CBOE Holdings Board 
and their respective Charters as adopted by resolution of the CBOE 
Holdings Board.\31\
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    \30\ See proposed Article 4.2 of the CBOE Holdings Bylaws.
    \31\ See proposed Articles 4.3, 4.4 and 4.5 of the CBOE Holdings 
Bylaws.
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(iii) Officers of CBOE Holdings
    The officers of CBOE Holdings will be the Chief Executive Officer, 
a Chief Financial Officer, a President, one or more Vice-Presidents 
(the number thereof to be determined by the CBOE Holdings Board), a 
Secretary, a Treasurer, and such other officers as the CBOE Holdings 
Board may determine, including an Assistant Secretary or Assistant 
Treasurer.\32\ The CBOE Holdings Board by an affirmative vote of the 
majority of the board will appoint the Chief Executive Officer of CBOE 
Holdings, who will have general charge and supervision of the business 
of the CBOE Holdings.\33\ In general, the other officers of CBOE 
Holdings will have the duties or powers or both set out in the CBOE 
Holdings Bylaws, as well as such other duties or powers or both as the 
CBOE Holdings Board or the Chief Executive Officer may from time to 
time prescribe.\34\
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    \32\ See proposed Article 5.1 of the CBOE Holdings Bylaws. A 
``Trading Permit Holder'' is defined in Section 1.1(f) of the Bylaws 
of the Exchange as: ``any individual, corporation, partnership, 
limited liability company or other entity authorized by the Rules 
that holds a Trading Permit. If a Trading Permit Holder is an 
individual, the Trading Permit Holder may also be referred to an 
`individual Trading Permit Holder.' If a Trading Permit Holder is 
not an individual, the Trading Permit Holder may also be referred to 
as a `TPH organization.' A Trading Permit Holder is a `member' 
solely for purposes of the Act; however, one's status as a Trading 
Permit Holder does not confer on that Person any ownership interest 
in the Exchange.''
    \33\ See proposed Articles 5.1 and 5.2 of the CBOE Holdings 
Bylaws.
    \34\ See proposed Articles 5.3, 5.4, 5.5, 5.6 and 5.7 of the 
CBOE Holdings Bylaws.
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(iv) Shareholder Restrictions
    In addition to the restrictions on the ability of certain CBOE 
Holdings stockholders to transfer their shares prior to and after an 
initial public offering if such an offering were to occur, the 
Certificate of Incorporation of CBOE Holdings places certain ownership 
and voting limits on the holders of CBOE Holdings stock and their 
Related Persons.\35\ 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

[[Page 51656]]

Exchange Act.\36\ In particular, these restrictions provide that:
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    \35\ The term ``Related Person'' is defined in proposed Article 
Fifth(a)(ix) of the CBOE Holdings Certificate of Incorporation and 
includes, among other things, persons associated with a Trading 
Permit Holder.
    \36\ In 2004, the Commission proposed rules that were designed 
to address conflicts of interest relating to for-profit SROs. See, 
e.g., Securities Exchange Act Release No. 50699 (Nov. 18, 2004), 69 
FR 71126 (Dec. 8, 2004).
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Ownership
     No person (either alone or together with its Related 
Persons) may beneficially own shares of stock representing in the 
aggregate more than 10% of the total outstanding shares of CBOE 
Holdings stock; provided, that, in the event a public offering of 
common stock is completed, the ownership percentage that a person is 
permitted to beneficially own will increase from 10% to 20% of the 
total outstanding shares of CBOE Holdings stock; \37\ and
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    \37\ See proposed Article Sixth(b) of the CBOE Holdings 
Certificate of Incorporation.
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     In the event that a person, either alone or together with 
its Related Persons, beneficially owns shares of stock representing 
more than 10% of the outstanding shares of stock (or, in the event that 
a public offering of common stock has been completed, 20% of the 
outstanding shares of stock), such person and its Related Persons will 
be obligated to sell promptly, and CBOE Holdings will be obligated to 
redeem promptly, at a price equal to the par value of such shares of 
stock and to the extent that funds are legally available for such 
redemption, that number of shares of stock necessary so that such 
person, together with its Related Persons, will beneficially own shares 
of stock representing in the aggregate no more than 10% of the 
outstanding shares of stock (or, in the event that a public offering of 
common stock has been completed, 20% of the outstanding shares of 
stock), after taking into account that such repurchased shares will 
become treasury shares and will no longer be deemed to be 
outstanding.\38\
---------------------------------------------------------------------------

    \38\ See proposed Article Sixth(b) of the CBOE Holdings 
Certificate of Incorporation. If and to the extent that shares of 
CBOE Holdings stock beneficially owned by any person or its Related 
Persons are held of record by any other person, this provision will 
be enforced against such record owner by requiring the redemption of 
shares of CBOE Holdings stock held by such record owner in a manner 
that will accomplish the ownership limitation applicable to such 
person and its Related Persons.
---------------------------------------------------------------------------

Voting
     No person (either alone or together with its Related 
Persons) will be entitled to vote or cause the voting of shares of 
stock beneficially owned by that person or those Related Persons to the 
extent that those shares would represent in the aggregate more than 10% 
of the total number of votes entitled to be cast on any matter, and no 
person (either alone or together with its Related Persons) will be 
entitled to vote more than 10% of the total number of votes entitled to 
be cast on any matter by virtue of agreements entered into by that 
person or those Related Persons with other persons not to vote shares 
of outstanding stock; provided, that, in the event a public offering of 
common stock is completed, the voting percentage that any person is 
permitted to control, whether through beneficial ownership or other 
agreement, will increase from 10% to 20% of the total number of votes 
entitled to be cast on any matter; \39\ and
---------------------------------------------------------------------------

    \39\ See proposed Article Sixth(a) of the CBOE Holdings 
Certificate of Incorporation. The voting limitation does not apply 
to a solicitation of a revocable proxy by any CBOE Holdings 
stockholder on behalf of CBOE Holdings or by directors or officers 
of CBOE Holdings on behalf of CBOE Holdings or to a solicitation of 
a revocable proxy by a stockholder in accordance with Regulation 14A 
under the Exchange Act. 17 CFR 240.14A. This exception, however, 
would not apply to a solicitation by a stockholder pursuant to Rule 
14a-2(b)(2) under the Exchange Act, which permits a solicitation 
made otherwise than on behalf of CBOE Holdings where the total 
number of persons solicited is not more than 10.
---------------------------------------------------------------------------

     In the event that a person, either alone or together with 
its Related Persons, is entitled to vote or cause the voting of shares 
representing in the aggregate more than 10% (or, in the event that a 
public offering of common stock has been completed, 20%) of the total 
number of votes entitled to be cast on any matter (including if it and 
its Related Persons possess this voting power by virtue of agreements 
entered into with other persons not to vote shares of stock), then such 
person, either alone or together with its Related Persons, will not be 
entitled to vote or cause the voting of these shares of stock to the 
extent that such shares represent in the aggregate more than 10% (or, 
in the event that a public offering of common stock has been completed, 
20%) of the total number of votes entitled to be cast on any matter, 
and any such votes purported to be cast in excess of this percentage 
will be disregarded.\40\
---------------------------------------------------------------------------

    \40\ See proposed Article Sixth(a) of the CBOE Holdings 
Certificate of Incorporation. If and to the extent that shares of 
CBOE Holdings stock beneficially owned by any person or its Related 
Persons are held of record by any other person, this provision will 
be enforced against such record owner by limiting the votes entitled 
to be cast by such record owner in a manner that will accomplish the 
voting limitation applicable to such person and its Related Persons.
---------------------------------------------------------------------------

    The CBOE Holdings Board of Directors may waive the provisions 
regarding ownership and voting limits by a resolution expressly 
permitting ownership or voting rights in excess of such limits (which 
resolution must be filed with and approved by the SEC prior to being 
effective), subject to a determination of the Board that: \41\
---------------------------------------------------------------------------

    \41\ See proposed Articles Sixth(a) and (b) of the CBOE Holdings 
Certificate of Incorporation.
---------------------------------------------------------------------------

     The acquisition of beneficial ownership in excess of the 
ownership limits or the exercise of voting rights in excess of the 
voting limits will not impair the ability of CBOE to discharge its 
responsibilities under the Exchange Act and the rules and regulations 
under the Exchange Act and is otherwise in the best interests of CBOE 
Holdings and its stockholders and CBOE;
     The acquisition of beneficial ownership in excess of the 
ownership limits or the exercise of voting rights in excess of the 
voting limits will not impair the SEC's ability to enforce the Exchange 
Act;
     Neither the person obtaining the waiver nor any of its 
Related Persons is subject to any statutory disqualification (as 
defined in Section 3(a)(39) of the Exchange Act) if such person is 
seeking to obtain a waiver above the applicable ownership or voting 
percentage level; \42\ and
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78c(a)(39).
---------------------------------------------------------------------------

     For so long as CBOE Holdings directly or indirectly 
controls CBOE, neither the person obtaining the waiver nor any of its 
Related Persons is a Trading Permit Holder if such person is seeking to 
obtain a waiver above the applicable ownership or voting percentage 
level.
    In making these determinations, the CBOE Holdings Board may impose 
conditions and restrictions on the relevant stockholder and its Related 
Persons that it deems necessary, appropriate or desirable in 
furtherance of the objectives of the Exchange Act and the governance of 
CBOE Holdings.\43\
---------------------------------------------------------------------------

    \43\ See proposed Articles Sixth(a) and (b) of the CBOE Holdings 
Certificate of Incorporation.
---------------------------------------------------------------------------

    The CBOE Holdings Certificate of Incorporation also provides that 
the CBOE Holdings Board has the right to require any person and its 
Related Persons that the Board reasonably believes (i) to be subject to 
the voting or ownership restrictions summarized above, (ii) to 
beneficially own shares of CBOE Holdings stock entitled to vote on any 
matter in excess of the ownership restrictions discussed above, or 
(iii) to beneficially own an aggregate of 5% or more of the then 
outstanding shares of CBOE Holdings stock entitled to vote on any 
matter, which ownership has not been reported to CBOE Holdings, to 
provide to CBOE Holdings complete information as to all shares of the 
stock that such stockholder beneficially owns,

[[Page 51657]]

as well as any other information relating to the applicability to such 
stockholder of the voting and ownership requirements outlined above as 
may reasonably be requested.\44\
---------------------------------------------------------------------------

    \44\ See proposed Article Sixth(d) of the CBOE Holdings 
Certificate of Incorporation.
---------------------------------------------------------------------------

    CBOE has received a legal opinion that the foregoing ownership and 
voting rights limitations, as well as the provisions providing for the 
redemption of shares held by a person (either alone or together with 
its Related Persons) in excess of the ownership limitation, are valid 
under Delaware law.
(v) Self-Regulatory Function and Oversight
    The CBOE Holdings Certificate of Incorporation contains various 
provisions designed to protect the independence of the self-regulatory 
function of CBOE and to make clear the Commission's and CBOE's 
jurisdiction with respect to CBOE Holdings. For example, pursuant to 
the CBOE Holdings Certificate of Incorporation, for so long as CBOE 
Holdings controls CBOE, each officer, director and employee of CBOE 
Holdings must give due regard to the preservation of the independence 
of the self-regulatory function of CBOE and to its obligations under 
the Exchange Act.\45\ In addition, these persons are specifically 
prohibited from taking any actions that they reasonably should have 
known would interfere with the effectuation of any decisions by the 
Board of Directors of CBOE (``CBOE Board'') relating to CBOE's 
regulatory functions, including disciplinary matters, or would 
adversely affect CBOE's ability to carry out its responsibilities under 
the Exchange Act.\46\
---------------------------------------------------------------------------

    \45\ See proposed Article Sixteenth(c) of the CBOE Holdings 
Certificate of Incorporation.
    \46\ Id.
---------------------------------------------------------------------------

    The CBOE Holdings Certificate of Incorporation also contains a 
specific requirement that to the fullest extent permitted by applicable 
law, all confidential information pertaining to the self-regulatory 
function of CBOE (including but not limited to disciplinary matters, 
trading data, trading practices and audit information) contained in the 
books and records of CBOE that comes into the possession of CBOE 
Holdings will: (1) 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; (2) be retained in 
confidence by CBOE Holdings and the officers, directors, employees and 
agents of CBOE Holdings; and (3) not be used for any commercial 
purposes.\47\ The CBOE Holdings Certificate of Incorporation also 
provides that for so long as CBOE Holdings controls CBOE, the books, 
records, premises, officers, directors and employees of CBOE Holdings 
will be deemed to be the books, records, premises, officers, directors 
and employees of CBOE for purposes of and subject to oversight pursuant 
to the Act, but only to the extent that such books, records, premises, 
officers, directors and employees of CBOE Holdings relate to the 
exchange business of CBOE.\48\
---------------------------------------------------------------------------

    \47\ Notwithstanding this restriction, nothing in the CBOE 
Holdings Certificate of Incorporation will be interpreted so as to 
limit or impede the rights of the SEC or CBOE to access and examine 
such confidential information pursuant to the federal securities 
laws and the rules and regulations thereunder, or to limit or impede 
the ability of any officers, directors, employees or agents of CBOE 
Holdings to disclose such confidential information to the SEC or 
CBOE. See proposed Article Fifteenth of the CBOE Holdings 
Certificate of Incorporation.
    \48\ The books and records related to the exchange business of 
CBOE will be subject at all times to inspection and copying by the 
SEC and CBOE. Id. In addition, the CBOE Holdings Bylaws provide that 
the books of CBOE Holdings must be kept within the United States. 
See proposed Section 1.3 of the CBOE Holdings Bylaws.
---------------------------------------------------------------------------

    Further, the CBOE Holdings Certificate of Incorporation provides 
that CBOE Holdings will take reasonable steps necessary to cause its 
directors, officers and employees, prior to accepting such a position 
with CBOE Holdings, to consent in writing to the applicability to them 
of Article Fourteenth, Article Fifteenth and Sections (c) and (d) of 
Article Sixteenth of the CBOE Holdings Certificate of Incorporation, as 
applicable, with respect to their activities related to CBOE.\49\ In 
addition, CBOE Holdings will take reasonable steps necessary to cause 
its agents, prior to accepting such a position with CBOE Holdings, to 
be subject to the provisions of Article Fourteenth, Article Fifteenth 
and Sections (c) and (d) of Article Sixteenth of the CBOE Holdings 
Certificate of Incorporation, as applicable, with respect to their 
activities related to CBOE.
---------------------------------------------------------------------------

    \49\ See proposed Article Sixteenth(b) of the CBOE Holdings 
Certificate of Incorporation.
---------------------------------------------------------------------------

    The CBOE Holdings Certificate of Incorporation also provides that 
CBOE Holdings, its directors, officers, agents and employees, 
irrevocably submit to the jurisdiction of the U.S. federal courts, the 
SEC, and CBOE, for the purposes of any suit, action or proceeding 
pursuant to U.S. federal securities laws or the rules or regulations 
thereunder, commenced or initiated by the SEC arising out of, or 
relating to, CBOE's activities.\50\ Further, the Certificate of 
Incorporation provides that CBOE Holdings, its directors, officers, 
agents and employees, waive, and agree not to assert by way of motion, 
as a defense or otherwise in any such suit, action or proceeding, any 
claims that they are not personally subject to the jurisdiction of the 
SEC, that the suit, action or proceeding is an inconvenient forum or 
that the venue of the suit, action or proceeding is improper, or that 
the subject matter thereof may not be enforced in or by such courts or 
agency.\51\
---------------------------------------------------------------------------

    \50\ See proposed Article Fourteenth of the CBOE Holdings 
Certificate of Incorporation.
    \51\ Id.
---------------------------------------------------------------------------

    In addition, the CBOE Holdings Certificate of Incorporation and 
Bylaws provide that, before any amendment or repeal of any provision of 
the Certificate of Incorporation and Bylaws of CBOE Holdings becomes 
effective, such amendment or repeal will be submitted to the Board of 
Directors of CBOE, and if such amendment or repeal must be filed with 
or filed with and approved by the Commission, then such amendment or 
repeal will not become effective until filed with or filed with and 
approved by the Commission, as the case may be.\52\ The CBOE Holdings 
Certificate of Incorporation also contains a provision that requires 
each director of the Board of CBOE Holdings to take into consideration 
the effect that CBOE Holdings' actions would have on CBOE's ability to 
carry out its responsibilities under the Exchange Act.\53\
---------------------------------------------------------------------------

    \52\ See proposed Article Eleventh of the CBOE Holdings 
Certificate of Incorporation and proposed Article 10.2 of the CBOE 
Holdings Bylaws.
    \53\ See proposed Article Sixteenth(d) of the CBOE Holdings 
Certificate of Incorporation.
---------------------------------------------------------------------------

(B) CBOE
    Following the demutualization, CBOE will become a Delaware for-
profit stock corporation that will be wholly-owned by CBOE Holdings. 
CBOE will issue a total of 1,000 shares of common stock, all of which 
will be owned by CBOE Holdings immediately following the 
demutualization transaction.\54\ CBOE, not CBOE Holdings, will continue 
to be the entity registered as a national securities exchange under 
Section 6 of the Exchange Act and, accordingly, CBOE will continue to 
be an SRO.\55\ The proposed CBOE Certificate of Incorporation, Bylaws 
and Rules will govern the activities of CBOE. CBOE's

[[Page 51658]]

current Certificate of Incorporation, Constitution (which will be 
replaced by the proposed Bylaws) and Rules are proposed to be amended 
to reflect, among other things, CBOE's status as wholly-owned 
subsidiary of CBOE Holdings, its management by the CBOE Board and its 
designated officers, and its self-regulatory responsibilities under 
Section 6 of the Exchange Act.\56\
---------------------------------------------------------------------------

    \54\ Any sale, transfer or assignment by CBOE Holdings of any 
shares of CBOE common stock will require an amendment to the 
proposed CBOE Certificate of Incorporation and consequently will be 
subject to prior approval by the Commission pursuant to the rule 
filing procedure under Section 19 of the Act (15 U.S.C. 78s). See 
proposed Article Fourth of the CBOE Certificate of Incorporation.
    \55\ 15 U.S.C. 78f.
    \56\ Id.
---------------------------------------------------------------------------

(i) CBOE Board of Directors
    After the Restructuring Transaction, the business and affairs of 
CBOE will be managed by or under the direction of the CBOE Board. The 
CBOE Board will consist of between 11 and 15 directors, and except with 
respect to the initial board of 13 directors as discussed below, will 
be fixed by the CBOE Board from time to time.\57\ After the 
Restructuring Transaction, the CBOE Board will be reduced from 23 
directors to 13 directors. This initial CBOE Board will have 13 
directors who will consist of the CBOE's Chief Executive Officer, seven 
Non-Industry Directors and five Industry Directors.\58\ The initial 
CBOE Board will be selected by the Prior CBOE Board or a committee 
thereof, and the composition requirements for the CBOE Board will be 
satisfied in connection with the selection of directors for the initial 
CBOE Board. It is anticipated that the same individuals will be on the 
CBOE Holdings Board and the CBOE Board immediately following the 
Restructuring Transaction.
---------------------------------------------------------------------------

    \57\ See proposed Article Fifth(b) of the CBOE Certificate of 
Incorporation and proposed Section 3.1 of the CBOE Bylaws.
    \58\ See proposed Section 3.1 of the CBOE Bylaws. A ``Non-
Industry Director'' is defined as a person who is not an Industry 
Director. An ``Industry Director'' is defined as any director who 
(i) is a holder of a Trading Permit or otherwise subject to 
regulation by the Exchange; (ii) is a broker-dealer or an officer, 
director or employee of a broker-dealer or has been in any such 
capacity within the prior three years; (iii) is, or was within the 
prior three years, associated with an entity that is affiliated with 
a broker-dealer whose revenues account for a material portion of the 
consolidated revenues of the entities with which the broker-dealer 
is affiliated; (iv) has a material ownership interest in a broker-
dealer and has investments in broker-dealers that account for a 
material portion of the director's net worth; (v) has a consulting 
or employment relationship with or has provided professional 
services to the Exchange or any of its affiliates or has had such a 
relationship or has provided such services within the prior three 
years; or (vi) provides, or has provided within the prior three 
years, professional or consulting services to a broker-dealer, or to 
an entity with a 50% or greater ownership interest in a broker-
dealer whose revenues account for a material portion of the 
consolidated revenues of the entities with which the broker-dealer 
is affiliated, and the revenue from all such professional or 
consulting services accounts for a material portion of either the 
revenues received by the director or the revenues received by the 
director's firm or partnership. Notwithstanding the foregoing, a 
director will not be deemed to be an ``Industry Director'' solely 
because either (A) the person is or was within the prior three years 
an outside director of a broker-dealer or an outside director of an 
entity that is affiliated with a broker-dealer, provided that the 
broker-dealer is not a holder of a Trading Permit or otherwise 
subject to regulation by the Exchange, or (B) the person is or was 
within the prior three years associated with an entity that is 
affiliated with a broker-dealer whose revenues do not account for a 
material portion of the consolidated revenues of the entities with 
which the broker-dealer is affiliated, provided that the broker-
dealer is not a holder of a Trading Permit or otherwise subject to 
regulation by the Exchange. At all times, at least one Non-Industry 
Director will be a Non-Industry Director exclusive of the exceptions 
provided for in the immediately preceding sentence and will have no 
material business relationship with a broker or dealer or the 
Exchange or any of its affiliates. For purposes of proposed Section 
3.1 of the CBOE Bylaws, an ``outside director'' is a director of an 
entity who is not an employee or officer (or any person occupying a 
similar status or performing similar functions) of such entity. The 
CBOE Board or the Nominating and Governance Committee will make all 
of the foregoing materiality determinations. In addition, in 
determining under (iii), (vi) and (B) above whether a broker-
dealer's revenues account for a material portion of the consolidated 
revenues of the entities with which the broker-dealer is affiliated, 
the revenues of the broker-dealer will be compared with the 
consolidated revenues of all of the entities affiliated with the 
broker-dealer as well as the broker-dealer (i.e., all of the 
entities in the broker-dealer's corporate family, inclusive of the 
broker-dealer). A director will qualify as a Non-Industry Director 
only so long as such director meets the requirements for that 
position.
---------------------------------------------------------------------------

    This initial CBOE Board will be smaller than the Prior CBOE Board 
and will have a majority of public directors (i.e., Non-Industry 
Directors). In comparison, as indicated above, the Prior CBOE Board has 
23 directors. Eleven of these directors are Public Directors,\59\ two 
are At-Large Directors,\60\ four are Floor Directors,\61\ one is a 
Lessor Director,\62\ four are Off-Floor Directors,\63\ and one is the 
Chairman of the Board (who is also the Chief Executive Officer of the 
Exchange).\64\ Thus, the Prior CBOE Board consists of eleven public 
directors, eleven directors from the industry, and the Chairman of the 
Board.\65\
---------------------------------------------------------------------------

    \59\ See Section 6.1 of the current Constitution of the 
Exchange. A ``Public Director'' is a non-member who is not a broker-
dealer or person affiliated with a broker-dealer.
    \60\ Id. For purposes of Class II of the Prior CBOE Board, an 
``At-Large Director'' is a person who functions as a member in any 
recognized capacity either individually or on behalf of a member 
organization, who is a CBSX Permit holder or an executive officer of 
a CBSX Permit holder, or who is an Interim Trading Permit holder or 
executive officer of an Interim Trading Permit holder. For purposes 
of Class III of the Prior CBOE Board, an ``At-Large Director'' is a 
member who functions as a member in any recognized capacity either 
individually or on behalf of a member organization.
    \61\ Id. A ``Floor Director'' is a member who directly or 
indirectly owns and controls a membership and is primarily engaged 
in business on the floor of the Exchange in the capacity of a 
member.
    \62\ Id. The ``Lessor Director'' is a person who directly or 
indirectly owns and controls a membership with respect to which s/he 
acts solely as lessor and who is not actively engaged in business as 
a broker-dealer or as a person associated with a broker-dealer as 
those terms are defined in the Exchange Act.
    \63\ Id. An ``Off-Floor Director'' is an executive officer of a 
member organization that primarily conducts a non-member public 
customer business and who is not individually engaged in business on 
the Exchange floor.
    \64\ See Sections 6.1 and 8.2 of the current Constitution of the 
Exchange.
    \65\ Unlike the Prior CBOE Board, the Chairman of the CBOE Board 
after the Restructuring Transaction will be defined as an Industry 
Director.
---------------------------------------------------------------------------

    After the Restructuring Transaction, the number of Non-Industry 
Directors and Industry Directors on the CBOE Board may be increased 
from time to time by resolution adopted by the CBOE Board, but in no 
event will the number of Industry Directors constitute less than 30% of 
the members of the CBOE Board and in no event will the number of Non-
Industry Directors constitute less than a majority of the members of 
the CBOE Board.\66\ In addition, at all times at least 20% of directors 
serving on the CBOE Board shall be Industry Directors nominated (or 
otherwise selected through the petition process) by the Industry-
Director Subcommittee (directors selected through this process are 
referred to as ``Representative Directors'').\67\ This nomination 
process is described below.
---------------------------------------------------------------------------

    \66\ See proposed Section 3.1 of the CBOE Bylaws.
    \67\ Id.
---------------------------------------------------------------------------

    The CBOE Board will appoint one of the directors on the CBOE Board 
to serve as Chairman of the CBOE Board.\68\ The CBOE Bylaws do not 
restrict the Chief Executive Officer of CBOE from serving in this 
role.\69\ Each year following the annual election of the directors, the 
CBOE Board will select, from among the Industry Directors, a Vice 
Chairman of the CBOE Board to serve for a term of one year and until a 
successor is elected or appointed and qualified.\70\ The CBOE Board 
also may appoint one of the Non-Industry Directors to serve as Lead 
Director, who will perform such duties and possess such powers as the 
CBOE Board may

[[Page 51659]]

from time to time prescribe.\71\ The CBOE Board will continue to be a 
classified board with staggered terms of office, however, the CBOE 
Board will consist of two classes of directors, each of which serve for 
two years, as opposed to the current board that consists of three 
classes of directors, each of which serve for terms of three years.\72\ 
There is no limit on the number of terms a director may serve on the 
CBOE Board.
---------------------------------------------------------------------------

    \68\ See proposed Section 3.6 of the CBOE Bylaws.
    \69\ See proposed Section 5.1(a) of the CBOE Bylaws.
    \70\ See proposed Section 3.7 of the CBOE Bylaws. The Vice 
Chairman will: (i) Preside over the meetings of the CBOE Board in 
the event the Chairman of the Board is absent or unable to do so, 
(ii) serve as chair the Trading Advisory Committee, (iii) except as 
otherwise provided in the Rules or resolution of the CBOE Board, 
appoint, subject to the approval of the CBOE Board, the individuals 
to serve on all Trading Permit Holder committees established in the 
Rules or by resolution of the Board, and (iv) exercise such other 
powers and perform such other duties as are delegated to the Vice 
Chairman of the Board by the CBOE Board.
    \71\ See proposed Section 3.8 of the CBOE Bylaws. The Prior CBOE 
Board currently has a Lead Director, and as provided in proposed 
Section 3.8 of the CBOE Bylaws, CBOE has the ability to continue the 
practice after the Restructuring Transaction.
    \72\ See proposed Section 3.1 of the CBOE Bylaws. With regard to 
the initial CBOE Board, the initial term of the Class I directors 
will end with the first annual stockholders meeting to be held by 
CBOE following the Restructuring Transaction, and the initial term 
of the Class II directors will end with the second annual 
stockholders meeting following the Restructuring Transaction. Class 
I directors will initially consist of the Chief Executive Officer, 
three Non-Industry Directors and two Industry Directors (one of whom 
is a Representative Director (as described below). Class II 
directors will initially consist of four Non-Industry Directors and 
three Industry Directors (two of whom are Representative Directors). 
The CBOE Board is authorized to assign members of the Board already 
in office to such classes at the time the classification becomes 
effective.
---------------------------------------------------------------------------

(ii) Nomination and Election of Directors
    The Nominating and Governance Committee of CBOE will consist of at 
least seven directors, including both Industry Directors and Non-
Industry Directors, and will at all times have a majority of directors 
that are Non-Industry Directors.\73\ All members of the committee will 
be recommended by the Nominating and Governance Committee for approval 
by the Board. The initial Nominating and Governance Committee after the 
Restructuring Transaction will be selected by the Prior CBOE Board or a 
committee thereof, and the composition requirements for the Nominating 
and Governance Committee will be satisfied in connection with the 
selection of members of the initial Nominating and Governance 
Committee. Subject to the discussion below, the Nominating and 
Governance Committee will have the authority to nominate individuals 
for election to the CBOE Board.\74\
---------------------------------------------------------------------------

    \73\ See proposed Section 4.5 of the CBOE Bylaws.
    \74\ Id. In performing this function, the Nominating and 
Governance Committee will determine, subject to review by the Board, 
whether a director candidate satisfies the applicable qualifications 
for election as a director, and the decision of that committee 
shall, subject to review, if any, by the Board, be final. See 
proposed Section 3.1 of the CBOE Bylaws. It is anticipated that the 
Nominating and Governance Committee will use director questionnaires 
in connection with determining the qualifications of director 
candidates.
---------------------------------------------------------------------------

    The composition of the new Nominating and Governance Committee 
under the CBOE Bylaws is different than the composition of the current 
Nominating Committee under the Constitution of the Exchange.\75\ In 
particular, the current Nominating Committee is composed of ten 
members. Eight of these members are from the industry and two of these 
members are from the public. Thus, unlike the new Nominating and 
Governance Committee, the current Nominating Committee consists of a 
majority of members from the industry.
---------------------------------------------------------------------------

    \75\ See Section 4.1 of the current Constitution of the 
Exchange. The current Nominating Committee, as the name suggests, 
only has responsibility for nominations. This is different than the 
responsibilities of the new Nominating and Governance Committee, 
which will have authority with respect to nominations as well as 
governance issues.
---------------------------------------------------------------------------

    In addition, the process for selecting the new Nominating and 
Governance Committee, which is described below, is different than the 
process for selecting the current Nominating Committee. In this regard, 
the current Nominating Committee is not a committee of the Prior CBOE 
Board, but rather a separate committee elected by the voting members of 
the Exchange.
    After the Restructuring Transaction, the new Nominating and 
Governance Committee will be bound to accept and nominate the 
Representative Directors recommended by the Industry-Director 
Subcommittee (described below), provided that the Representative 
Directors so nominated by the Industry-Directorbcommittee are not 
opposed by a petition candidate (described below).\76\ If such 
Representative Directors are opposed by a petition candidate then the 
Nominating and Governance Committee will be bound to accept and 
nominate the Representative Directors who receive the most votes 
pursuant to a Run-Off Election (described below).\77\ In addition, CBOE 
and CBOE Holdings will enter into a Voting Agreement pursuant to which 
CBOE Holdings will agree to vote in favor of the Representative 
Directors recommended by the Nominating and Governance Committee.\78\
---------------------------------------------------------------------------

    \76\ See proposed Section 3.1 of the CBOE Bylaws.
    \77\ Id.
    \78\ The proposed Voting Agreement is attached as Exhibit 5F to 
this proposed rule change.
---------------------------------------------------------------------------

    The Industry-Director Subcommittee of the Nominating and Governance 
Committee will recommend a number of Industry Directors (i.e., 
Representative Directors) that equals 20% of the total number of 
directors serving on the CBOE Board, provided that if 20% of the 
directors then serving on the CBOE Board is not a whole number, such 
number of Representative Directors will be rounded up to the next whole 
number.\79\ Industry Directors not selected by the Industry-Director 
Subcommittee will be selected by the Nominating and Governance 
Committee.\80\ The Industry-Director Subcommittee will consist of all 
of the Industry Directors then serving on the Nominating and Governance 
Committee.\81\
---------------------------------------------------------------------------

    \79\ See proposed Section 3.2 of the CBOE Bylaws. This section 
addresses the fair representation requirement for members in Section 
6(b)(3) of the Exchange Act. 15 U.S.C. 78f(b)(3).
    \80\ See proposed Section 3.2 of the CBOE Bylaws.
    \81\ Id.
---------------------------------------------------------------------------

    The Industry-Director Subcommittee will provide a mechanism for 
Trading Permits Holders to provide input to the Industry-Director 
Subcommittee with respect to nominees for the Representative 
Directors.\82\ The Industry Director-Subcommittee will issue a circular 
to the Trading Permit Holders identifying the Representative Director 
nominees selected by the committee not later than January 15th, or the 
first business day thereafter if January 15th is not a business 
day.\83\
---------------------------------------------------------------------------

    \82\ Id.
    \83\ Id.
---------------------------------------------------------------------------

    Holders of Trading Permits may nominate alternative candidates for 
election to the Representative Director positions to be elected in a 
given year by submitting a petition signed by individuals representing 
not less than 10% of the total outstanding Trading Permits at that 
time.\84\ The names of all Representative Director nominees recommended 
by the Industry-Director Subcommittee and those selected pursuant to a 
valid and timely petition will, immediately following their selection, 
be given to the Secretary who will promptly issue a circular to all of 
the Trading Permit Holders identifying all such Representative Director 
candidates.\85\
---------------------------------------------------------------------------

    \84\ Id.
    \85\ Id.
---------------------------------------------------------------------------

    If one or more valid petitions are received, the Secretary will 
issue a circular to all of the Trading Permit Holders identifying those 
individuals nominated for Representative Director by the Industry-
Director Subcommittee and those individuals nominated for 
Representative Director through the petition process as well as of the 
time and date of a run-off election to determine which individuals will 
be nominated as Representative Director(s) by the Nominating and 
Governance Committee (the ``Run-off Election'').\86\ In any Run-off 
Election, each holder of a Trading Permit will have one vote with

[[Page 51660]]

respect to each Trading Permit held by such Trading Permit Holder for 
each Representative Director position to be filled that year; provided, 
however, that no holder of Trading Permits, either alone or together 
with its affiliates, may account for more than 20% of the votes cast 
for a candidate, and any votes cast by a holder of Trading Permits, 
either alone or together with its affiliates, in excess of this 20% 
limitation shall be disregarded.\87\ The Secretary will issue a 
circular to all of the Trading Permit Holders setting forth the results 
of the Run-off Election.\88\ The number of individual Representative 
Director nominees equal to the number of Representative Director 
positions to be filled that year receiving the largest number of votes 
in the Run-off Election (after taking into account the voting 
limitation set forth above) will be the persons approved by the Trading 
Permit Holders to be nominated as the Representative Director(s) by the 
Nominating and Governance Committee for that year.
---------------------------------------------------------------------------

    \86\ Id.
    \87\ In any Run-off Election, Trading Permits representing one-
third of the total outstanding Trading Permits entitled to vote, 
when present in person or represented by proxy, will constitute a 
quorum for purposes of the Run-off Election. Id.
    \88\ Id.
---------------------------------------------------------------------------

(iii) Committees of CBOE
    In addition to the Nominating and Governance Committee discussed 
above, CBOE will have the following CBOE Board committees: An Executive 
Committee, an Audit Committee, a Compensation Committee, a Regulatory 
Oversight Committee and such other standing and special committees as 
may be approved by the CBOE Board.\89\ Except as may be otherwise 
provided in the CBOE Bylaws or as may be otherwise provided for from 
time to time by resolution of the CBOE Board, the Board may, at any 
time, with or without cause, remove any member of any such committees 
of the Board.\90\
---------------------------------------------------------------------------

    \89\ See proposed Section 4.1(a) of the CBOE Bylaws.
    \90\ Id.
---------------------------------------------------------------------------

    With regard to the Prior CBOE Board, it also has an Executive 
Committee, an Audit Committee, a Compensation Committee, and a 
Regulatory Oversight Committee. The current Executive Committee 
consists of the Chairman of the Prior CBOE Board, the Vice Chairman of 
that Board, and four other persons who are directors (each of which is 
appointed by the Vice Chairman with the approval of the Prior CBOE 
Board).\91\ At least 50% of the members of that committee (excluding 
the Chairman) are Public Directors. The current Audit Committee 
consists of at least three directors appointed by the Chairman of the 
Prior CBOE Board with the approval of that Board, the exact number to 
be determined from time to time by that Board.\92\ At least 50% of the 
members of that committee are Public Directors. The current 
Compensation Committee consists of the Vice Chairman of the Prior CBOE 
Board, the Lessor Director, the Chairman of the Financial Planning 
Committee (a committee of the Exchange), one or more Off-Floor 
Directors, and such number of Public Directors that will constitute at 
least 50% of the members of that committee.\93\ The Off-Floor 
Director(s) and the Public Directors are appointed to that committee by 
the Chairman of the Prior CBOE Board with the approval of that Board. 
The current Regulatory Oversight Committee consists of at least four 
directors, all of whom are Public Directors.\94\ The members of that 
committee are appointed by the Chairman of the Prior CBOE Board with 
the approval of that Board.
---------------------------------------------------------------------------

    \91\ See Section 7.2 of the current Constitution of the 
Exchange.
    \92\ See Section 7.3 of the current Constitution of the 
Exchange.
    \93\ See Section 7.4 of the current Constitution of the 
Exchange.
    \94\ The current Regulatory Oversight Committee was created by a 
charter.
---------------------------------------------------------------------------

    After the Restructuring Transaction, members on the new Executive, 
Audit, and Compensation Committees of CBOE will be recommended by the 
Nominating and Governance Committee for approval by the CBOE Board.\95\ 
The new Executive Committee will consist of the Chairman of the CBOE 
Board, the Chief Executive Officer (if a director), the Vice Chairman 
of the CBOE Board, the Lead Director (if any), at least one 
Representative Director and such other number of directors that the 
Board deems appropriate, provided that at all times the majority of the 
directors serving on the Executive Committee are Non-Industry 
Directors.\96\ CBOE notes that if the Vice Chairman is a Representative 
Director, the requirement to have at least one Representative Director 
on the new Executive Committee will be satisfied by the Vice Chairman's 
participation on that committee. The new Audit Committee will consist 
of at least three directors, all of whom will be Non-Industry 
Directors.\97\ The new Compensation Committee will consist of at least 
three directors, all of whom must be Non-Industry Directors.\98\ The 
new Regulatory Oversight Committee will consist of at least four 
directors, all of whom shall be Non-Industry Directors and all of whom 
shall be recommended by the Non-Industry Directors on the Nominating 
and Governance Committee for approval by the Board.\99\
---------------------------------------------------------------------------

    \95\ See proposed Sections 4.2, 4.3 and 4.4 of the CBOE Bylaws. 
The selection and composition of the Nominating and Governance 
Committee is discussed above.
    \96\ See proposed Section 4.2 of the CBOE Bylaws.
    \97\ See proposed Section 4.3 of the CBOE Bylaws.
    \98\ See proposed Section 4.4 of the CBOE Bylaws.
    \99\ See proposed Section 4.6 of the CBOE Bylaws.
---------------------------------------------------------------------------

    The new Executive Committee will have and may exercise all the 
powers and authority of the CBOE Board in the management of the 
business and affairs of CBOE, except it will not have the power and 
authority of the Board to (i) approve or adopt or recommend to the 
stockholders any action or matter (other than the election or removal 
of directors) expressly required by Delaware law to be submitted to 
stockholders for approval, including without limitation, amending the 
proposed CBOE Certificate of Incorporation, adopting an agreement of 
merger or consolidation, approving a sale, lease or exchange of all or 
substantially all of CBOE's property and assets, or approval of a 
dissolution of CBOE or revocation of a dissolution, or (ii) adopt, 
alter, amend or repeal any bylaw of CBOE.\100\
---------------------------------------------------------------------------

    \100\ See proposed Section 4.2 of the CBOE Bylaws.
---------------------------------------------------------------------------

    Although the current Executive Committee (as well as the new 
Executive Committee) generally can act in the place of the CBOE Board, 
the practice of the current Executive Committee has been that it 
generally does not make a decision unless there is a need for a CBOE 
Board-level decision between CBOE Board meetings due to the time 
sensitivity of the matter. In addition, in situations when the current 
Executive Committee does make a decision between CBOE Board meetings, 
the CBOE Board is generally aware ahead of time of the potential that 
the Executive Committee may need to make the decision. This is the case 
because oftentimes the decision relates to a time-sensitive issue that 
is discussed by the CBOE Board at a CBOE Board meeting, but that is not 
yet ripe for decision, and the CBOE Board is advised that the Executive 
Committee may need to make a decision on the issue prior to the next 
CBOE Board meeting. It is expected that the foregoing practices will 
continue with the new Executive Committee. However, with a smaller CBOE 
Board after the Restructuring Transaction (13 directors versus 23 
directors), it likely will be easier to convene the CBOE Board on short 
notice and there may be less of a need than there is today for the new

[[Page 51661]]

Executive Committee to make decisions. It may also be easier for the 
CBOE Board to act by unanimous written consent. In any event, the CBOE 
Board is, and after the Restructuring Transaction will be, fully 
informed of any decision made by the current (and new) Executive 
Committee at its next meeting and can always decide to review that 
decision and take different action.
    The new Audit, Compensation, and Nominating and Governance 
Committees will have such duties and may exercise such authority as may 
be prescribed by the CBOE Board and their respective Charters as 
adopted by resolution of the Board.\101\ Similarly, the new Regulatory 
Oversight Committee will have such duties and may exercise such 
authority as may be prescribed by resolution of the Board, the CBOE 
Bylaws or the Rules of the Exchange.\102\ In general, the new 
Regulatory Oversight Committee will be charged with overseeing the 
independence and integrity of the regulatory functions of the Exchange.
---------------------------------------------------------------------------

    \101\ See proposed Sections 4.3, 4.4 and 4.5 of the CBOE Bylaws.
    \102\ See proposed Section 4.6 of the CBOE Bylaws.
---------------------------------------------------------------------------

    In addition to these CBOE Board committees, CBOE will have as 
Exchange committees a Trading Advisory Committee and such other 
committees as may be provided in the CBOE Bylaws or the Rules or as may 
be from time to time created by the CBOE Board.\103\ The Trading 
Advisory Committee will advise the Office of the Chairman regarding 
matters of interest to Trading Permit Holders.\104\ It will consist of 
such number of members as set by the CBOE Board of Directors from time 
to time. The majority of the members of the Trading Advisory Committee 
will be individuals involved in trading either directly or through 
their firms. The Vice Chairman will be the Chairman of the Trading 
Advisory Committee and will appoint, with the approval of the CBOE 
Board, the other members of the committee.
---------------------------------------------------------------------------

    \103\ See proposed Section 4.1(b) of the CBOE Bylaws. ``Exchange 
committees'' refers to committees that are not solely composed of 
directors from the CBOE Board. Except as may be otherwise provided 
in the CBOE Bylaws, the Rules or the resolution of the CBOE Board 
establishing any such other committee, the Vice Chairman of the 
Board, with the approval of the CBOE Board, will appoint the members 
of such Exchange committees (other than the committees of the CBOE 
Board) and may designate, with the approval of the Board, a Chairman 
and a Vice-Chairman thereof. Except as may be otherwise provided in 
the Bylaws or the Rules, the CBOE Board may, at any time, with or 
without cause, remove any member of any such Exchange committees.
    \104\ See proposed Section 4.7 of the CBOE Bylaws.
---------------------------------------------------------------------------

    The Trading Advisory Committee essentially will serve as a 
replacement for the current Floor Directors Committee, which advises 
the Prior CBOE Board and the Office of the Chairman of that Board 
regarding trading and floor-related issues. The Floor Directors 
Committee consists of those directors of the Prior CBOE Board who are 
primarily engaged in business on the floor of the Exchange (whether 
serving as Floor Directors or At-Large Directors), the Lessor Director 
as a non-voting member of that committee, and such other persons as may 
be appointed as voting or nonvoting members of that committee by the 
Vice Chairman of the Prior CBOE Board with the approval of that 
Board.\105\
---------------------------------------------------------------------------

    \105\ See Section 7.5 of the current Constitution of the 
Exchange.
---------------------------------------------------------------------------

    The Exchange also will continue to have as an Exchange committee 
after the Restructuring Transaction the Business Conduct Committee 
(``BCC''), the functions of which are described below.\106\ With regard 
to the composition of the current BCC, the Prior CBOE Board determines 
the number of members of the committee. In selecting members of that 
committee, the intent is to pick individuals who represent a broad 
cross section of the membership of the Exchange as well as individuals 
who represent the public. It is anticipated that the make-up of the BCC 
will be the same after the Restructuring Transaction.
---------------------------------------------------------------------------

    \106\ See CBOE Rule 2.1(a).
---------------------------------------------------------------------------

(iv) Filling of Vacancies and Removal for Cause
    Any vacancy in the CBOE Board, however occurring, including a 
vacancy resulting from an increase in the number of directors, may be 
filled by vote of a majority of the directors then in office, although 
less than a quorum, or by a sole remaining director, provided such new 
director qualifies for the category in which the vacancy exists.\107\ A 
director elected to fill a vacancy will hold office until the next 
annual meeting of stockholders, subject to the election and 
qualification of his or her successor and to his or her earlier death, 
resignation or removal.\108\ In the event the CBOE Board fills a 
vacancy resulting from a Representative Director position becoming 
vacant prior to the expiration of such Representative Director's term, 
or resulting from the creation of an additional Representative Director 
position required by an increase in the size of the CBOE Board, the 
Industry-Director Subcommittee of the Nominating and Governance 
Committee will either (i) recommend an individual to the CBOE Board to 
be elected to fill such vacancy or (ii) provide a list of recommended 
individuals to the CBOE Board from which the Board shall elect the 
individual to fill such vacancy.\109\
---------------------------------------------------------------------------

    \107\ See proposed Section 3.5(a) of the CBOE Bylaws.
    \108\ Id.
    \109\ See proposed Section 3.5(b) of the CBOE Bylaws. Any 
individual recommended by the Industry-Director Subcommittee to fill 
the vacancy of a Representative Director position must qualify as an 
Industry Director.
---------------------------------------------------------------------------

    In addition, the CBOE Bylaws provide that no director may be 
removed from office by a vote of the stockholders at any time except 
for cause.\110\ For purposes of this provision, ``cause'' means only 
(i) a breach of a director's duty of loyalty to CBOE (as a corporation) 
or its stockholders, (ii) acts or omissions not in good faith or which 
involve intentional misconduct or a knowing violation of law, or (iii) 
transactions from which a director derived an improper personal 
benefit. Any director may be removed for cause by the holders of a 
majority of the shares of stock then entitled to be voted at an 
election of directors.
---------------------------------------------------------------------------

    \110\ See proposed Section 3.4(c) of the CBOE Bylaws.
---------------------------------------------------------------------------

(v) Disciplinary Matters and Trading and Disciplinary Rule Changes
    The current process for the hearing of disciplinary matters, and 
the rules governing that process, will remain substantively unchanged 
after the Restructuring Transaction. Under CBOE Rule 17.6(a), the 
hearing of a disciplinary matter currently is conducted by one or more 
members of the BCC. As indicated above, the BCC currently consists of 
industry and public representatives. It has been the BCC's general 
practice to use three-person BCC hearing panels that include both 
industry and public representation. CBOE is not proposing to change 
this process following demutualization. Consistent with CBOE Rule 17.9, 
any decision of a BCC hearing panel that is not composed of at least a 
majority of the BCC is reviewed by the full BCC.
    In addition, the current process for the review of appeals of 
disciplinary actions, and the rules governing that process, will remain 
substantively unchanged after the Restructuring Transaction. Under CBOE 
Rule 17.10(b), the CBOE Board is the body vested with the authority to 
review appeals of disciplinary actions. The CBOE Board may appoint a 
committee of the Board composed of at least 3 directors to review the 
appeal, but the decision of that committee must be ratified by the CBOE 
Board. Thus, after the Restructuring Transaction, Trading Permit 
Holders will have a say in the

[[Page 51662]]

review of such appeals by virtue of their representation on the CBOE 
Board, as discussed above.\111\
---------------------------------------------------------------------------

    \111\ Prior to Restructuring Transaction, it has been the CBOE 
Board's general practice to appoint a cross-section of directors to 
the CBOE Board committees that review appeals of disciplinary 
actions. These committees usually consist of a floor or at-large 
director, an off-floor director, and a public director. CBOE is not 
proposing to change this general practice and would expect that CBOE 
Board committees that review disciplinary decision appeals after the 
Restructuring Transaction would generally consist of an Industry 
Director who or whose firm is engaged in trading on the Exchange, an 
Industry Director whose firm is significantly engaged in conducting 
a securities business with public customers, and a Non-Industry 
Director.
---------------------------------------------------------------------------

    The current process for the review of proposed trading and 
disciplinary rules also will remain substantively unchanged after the 
Restructuring Transaction. Under proposed Section 10.1 of the CBOE 
Bylaws, the CBOE Board will continue to be the body that is tasked with 
approving rule changes, including changes to trading and disciplinary 
rules. Thus, Trading Permit Holders will have a voice in the review of 
these rules by virtue of their representation on the CBOE Board. In 
addition, the current Floor Directors Committee reviews many of CBOE's 
rule changes in an advisory capacity, particularly trading rules, but 
the Floor Directors Committee has no decision-making authority with 
regard to rule changes. After the Restructuring Transaction, the 
Trading Advisory Committee, which is described above, will essentially 
take the place of the Floor Directors Committee.\112\ It is expected 
that the Trading Advisory Committee will perform the same rule review 
function in an advisory capacity that has been performed by the Floor 
Directors Committee. Accordingly, the Trading Advisory Committee also 
will provide a mechanism for Trading Permit Holders to provide input on 
trading rules.
---------------------------------------------------------------------------

    \112\ A majority of the Trading Advisory Committee will be 
composed of individuals involved in trading either directly or 
through their firms.
---------------------------------------------------------------------------

(vi) Officers of CBOE
    The officers of CBOE will be a Chief Executive Officer, a Vice 
Chairman, a President, a Chief Financial Officer, one or more Vice-
Presidents (the number thereof to be determined by the CBOE Board of 
Directors), a Secretary, a Treasurer, and such other officers as the 
Board may determine, including an Assistant Secretary and Assistant 
Treasurer.\113\ The CBOE Board by an affirmative vote of the majority 
of the Board will appoint the Chief Executive Officer of CBOE, who will 
have general charge and supervision of the business of CBOE.\114\ In 
general, the other officers of CBOE will have the duties or powers or 
both set out in the CBOE Bylaws, as well as such other duties or powers 
or both as the CBOE Board or the Chief Executive Officer may from time 
to time prescribe.\115\
---------------------------------------------------------------------------

    \113\ See proposed Section 5.1(a) of the CBOE Bylaws.
    \114\ See proposed Sections 5.1(a) and 5.2 of the CBOE Bylaws.
    \115\ See proposed Sections 5.3, 5.4, 5.5, 5.6, 5.7 and 5.8 of 
the CBOE Bylaws.
---------------------------------------------------------------------------

    These officers essentially will be the same as the current officers 
of the Exchange. For instance, the Exchange currently has a Chief 
Executive Officer, who also serves as Chairman of the Prior CBOE Board. 
After the Restructuring Transaction, the Chief Executive Officer may, 
but does not have to, be a director or the Chairman of the CBOE Board. 
The Exchange also currently has a Vice Chairman, although the current 
Vice Chairman is elected by the membership.\116\ After the 
Restructuring Transaction, the CBOE Board will select the Vice Chairman 
from among the Industry Directors serving on the CBOE Board.\117\ In 
addition, the Exchange currently has a Chief Financial Officer. This 
position, however, is not specified in the Constitution of the 
Exchange. After the Restructuring Transaction, this position will be 
formally incorporated into the CBOE Bylaws.\118\
---------------------------------------------------------------------------

    \116\ See Section 8.1(a) of the current Constitution of the 
Exchange.
    \117\ See proposed Section 3.7 of the CBOE Bylaws.
    \118\ See proposed Section 5.5 of the CBOE Bylaws.
---------------------------------------------------------------------------

    The CBOE Bylaws would not restrict an officer from being a Trading 
Permit Holder or a person associated with a Trading Permit Holder, or a 
broker or a dealer in securities or commodities or an associated person 
of such broker or dealer. This is a change from the current 
Constitution of the Exchange, which restricts an officer from being a 
member or affiliated with a member or a broker or a dealer in 
securities or commodities.\119\ The Exchange is proposing this change 
because there are other protections in place that limit the potential 
conflicts between the Exchange as a self-regulator and Trading Permit 
Holders, including, among other things, the existence of a Regulatory 
Oversight Committee as a committee of the Board that consists solely of 
Non-Industry Directors.
---------------------------------------------------------------------------

    \119\ See Section 8.1(b) of the current Constitution of the 
Exchange.
---------------------------------------------------------------------------

(vii) Self-Regulatory Function and Oversight
    As noted above, following the demutualization CBOE will continue to 
be registered as a national securities exchange under Section 6 of the 
Exchange Act and thus will continue to be an SRO.\120\ As an SRO, CBOE 
will be obligated to carry out its statutory responsibilities, 
including enforcing compliance by Trading Permit Holders with the 
provisions of the federal securities laws and the rules of CBOE. 
Further, CBOE will retain the responsibility to administer and enforce 
the rules that govern the activities of CBOE and its Trading Permit 
Holders. In addition, CBOE will continue to be required to file with 
the Commission, pursuant to Section 19(b) of the Exchange Act \121\ and 
Rule 19b-4 thereunder,\122\ any changes to its rules and governing 
documents.
---------------------------------------------------------------------------

    \120\ 15 U.S.C. 78f.
    \121\ 15 U.S.C. 78s(b).
    \122\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The proposed CBOE Certificate of Incorporation contains various 
provisions designed to protect the self-regulatory functions of CBOE in 
light of the new structure of the Exchange. For instance, the proposed 
CBOE Certificate of Incorporation contains a provision that requires 
each director of the CBOE Board to take into consideration the effect 
that his or her action would have on CBOE's ability to carry out its 
responsibilities under the Exchange Act.\123\ The proposed CBOE 
Certificate of Incorporation also contains provisions designed to 
protect confidential information pertaining to the self-regulatory 
function of the Exchange.\124\
---------------------------------------------------------------------------

    \123\ See proposed Article Fifth(d) of the CBOE Certificate of 
Incorporation.
    \124\ See proposed Article Eleventh of the CBOE Certificate of 
Incorporation.
---------------------------------------------------------------------------

    In addition, CBOE will interpret its Rules to require that any 
revenue it receives from regulatory fees or penalties will be applied 
to fund the legal, regulatory, and surveillance operations of the 
Exchange and will not be used to pay dividends to CBOE Holdings, except 
in the event of liquidation of CBOE, in which case CBOE Holdings will 
be entitled to the distribution of CBOE's remaining assets.
(viii) National Market System Plans
    CBOE currently is a participant in the following national market 
system (``NMS'') plans: the Options Price Reporting Authority Plan 
(``OPRA Plan''), the Consolidated Tape Association (``CTA''), the 
Consolidated Quotation Plan (``CQ Plan''), the Nasdaq Unlisted Trading 
Privileges Plan (``Nasdaq UTP Plan''), the Options Intermarket Linkage 
Plan, the Options Regulatory Surveillance Authority Plan (``ORSA 
Plan''), and the Options Listing Procedures Plan (``OLPP''). These 
plans are joint industry plans entered into by

[[Page 51663]]

SROs for the purpose of providing for (i) last sale and quotation 
reporting in options and equities, (ii) intermarket options trading, 
(iii) the joint surveillance, investigation and detection of insider 
trading on the options exchanges, and (iv) the listing of standardized 
options. Following the completion of the demutualization, CBOE, in its 
continuing role as the SRO, will continue to serve as the voting member 
of these NMS plans, and a representative of CBOE will continue to serve 
as CBOE's representative with respect to dealing with these plans.
(C) Trading Permits
    As part of the Restructuring Transaction, the rules of the Exchange 
will be amended to reflect the way in which trading access will be 
granted to the Exchange. Prior to the Restructuring Transaction, 
Exchange memberships provided trading access to the Exchange. After the 
Restructuring Transaction, Trading Permits will provide trading access 
to the Exchange.
    ``Trading Permits'' are defined as licenses issued by the Exchange 
that grant the holders or the holders' nominee the right to access the 
Exchange or one or more of its facilities for the purpose of effecting 
transactions in securities traded on the Exchange without the services 
of another person acting as broker, and otherwise to access the 
Exchange or its facilities for purposes of trading or reporting 
transactions or transmitting orders or quotations in securities traded 
on the Exchange, or to engage in other activities that, under the 
Rules, may only be engaged in by holders of Trading Permits, provided 
that the holder or the holder's nominee, as applicable, satisfies any 
applicable qualification requirements to exercise those rights.\125\ A 
Trading Permit will not convey any ownership interest in the Exchange, 
will only be available through the Exchange, and will be subject to the 
terms and conditions set forth in proposed Rule 3.1.
---------------------------------------------------------------------------

    \125\ See proposed CBOE Rule 1.1(ggg).
---------------------------------------------------------------------------

    As a result of the new structure of the Exchange after the 
Restructuring Transaction in which ownership will be separated from 
trading access, the Exchange is proposing to replace the term 
``member'' throughout the rules with the term ``Trading Permit 
Holder.'' \126\ As indicated above, the term ``Trading Permit Holder'' 
will be defined as any individual, corporation, partnership, limited 
liability company or other entity authorized by the Rules that holds a 
Trading Permit.\127\ Holders of Trading Permits will meet the 
definition of ``member'' in Section 3(a)(3)(A) of the Exchange 
Act.\128\ One's status as a Trading Permit Holder, however, does not 
confer on that person any ownership interest in the Exchange.\129\ As 
members under the Exchange Act, Trading Permit Holders and their 
nominees will be subject to the regulatory jurisdiction of the 
Exchange, including without limitation the Exchange's disciplinary 
jurisdiction under Chapter XVII of the Rules.\130\
---------------------------------------------------------------------------

    \126\ This change will cause a significant number of the 
Exchange's rules to be amended. In connection with this rule filing, 
this change will be made in the rules in Chapters I-III, as well as 
CBOE Rule 8.3. The Exchange also will make this change in its forms. 
Because of the length of this rule filing and the fact that the 
substantive changes to the Exchange's rules regarding trading access 
are covered by this filing, the Exchange is proposing to submit a 
companion filing to change the term ``member'' to ``Trading Permit 
Holder'' in the remainder of the Exchange's rules, as well as to 
make certain conforming changes. Subject to Commission approval of 
this filing, the Exchange expects that this companion filing will be 
filed upon that approval.
    \127\ See proposed Section 1.1(f) of the CBOE Bylaws and 
proposed CBOE Rule 1.1(gg).
    \128\ 15 U.S.C. 78c(a)(3)(A). As described in Section (4)(B)(ii) 
above (Nomination and Election of Directors), the selection process 
for Representative Directors for the CBOE Board addresses the fair 
representation requirement for members in Section 6(b)(3) of the 
Exchange Act. 15 U.S.C. 78f(b)(3).
    \129\ See proposed Section 1.1(f) of the CBOE Bylaws and 
proposed CBOE Rule 1.1(gg).
    \130\ See proposed CBOE Rule 3.1(a)(iii).
---------------------------------------------------------------------------

(i) General Features of Trading Permits
    The Exchange will have the authority to issue different types of 
Trading Permits that allow holders to trade one or more products 
authorized for trading on the Exchange, and to act in one or more 
trading functions authorized by the Rules.\131\ Trading Permits will be 
for terms as shall be determined by the Exchange from time to 
time.\132\ It is currently anticipated that the Exchange will offer 
Trading Permits for terms of one month, three months and a year, 
although these terms may be changed in the future. Prior to the 
Restructuring Transaction, the Exchange will announce in a circular the 
types and terms of Trading Permits that the Exchange has determined to 
issue.
---------------------------------------------------------------------------

    \131\ See proposed CBOE Rule 3.1(a)(iv).
    \132\ Id.
---------------------------------------------------------------------------

    Trading Permits will be subject to such fees and charges as are 
established by the Exchange from time to time pursuant to Rule 2.20 and 
the Exchange Fee Schedule.\133\ The Exchange will file proposed rule 
changes under Section 19(b) of the Exchange Act,\134\ including, as 
applicable, Section 19(b)(3)(A)(ii),\135\ to establish and change the 
fees for the types of Trading Permits it has determined to issue. The 
entire fee for a Trading Permit will be due and payable in accordance 
with the Exchange Fee Schedule. A TPH organization holding a Trading 
Permit will be responsible for paying all fees and charges for that 
Trading Permit.\136\ In addition, an individual holding a Trading 
Permit will be responsible for paying all fees and charges for that 
Trading Permit.
---------------------------------------------------------------------------

    \133\ See proposed CBOE Rule 3.1(a)(v).
    \134\ 15 U.S.C. 78s(b).
    \135\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \136\ A ``TPH organization'' refers to an organization that 
holds a Trading Permit, and is the replacement term for ``member 
organizations.'' See proposed Section 1.1(f) of the CBOE Bylaws and 
proposed CBOE Rule 1.1(gg).
---------------------------------------------------------------------------

    The Exchange will have the authority to limit or reduce the number 
of any type of Trading Permit it has determined to issue.\137\ 
Notwithstanding this general authority, in the event the Exchange 
imposes such a limitation or reduction, the Exchange will be prohibited 
from eliminating or reducing the ability to trade one or more 
product(s) of a person currently trading such product(s), and will be 
prohibited from eliminating or reducing the ability to act in one or 
more trading function(s) of a person currently acting in such trading 
function(s), unless the Exchange is permitted to do so pursuant to a 
rule filing submitted to Commission under Section 19(b) of the Exchange 
Act.\138\ The Exchange will announce in a circular any limitation or 
reduction in the number of Trading Permits it determines to impose.
---------------------------------------------------------------------------

    \137\ See proposed CBOE Rule 3.1(a)(vi).
    \138\ 15 U.S.C. 78s(b). In addition, in no event will the 
Exchange act in a manner under this provision that does not comply 
with the provisions of Section 6(c)(4) of the Act (15 U.S.C. 
78(c)(4)). See proposed CBOE Rule 3.1(a)(vi). As noted in a letter 
submitted by the Exchange to the SEC in connection with SR-CBOE-
2006-106, CBOE has been unable to locate records that reflect with 
certainty the number of CBOE memberships on May 1, 1975. See Letter 
dated November 2, 2007 from Joanne Moffic-Silver, Executive Vice 
President, General Counsel and Corporate Secretary, CBOE, to Richard 
Holley III, Senior Special Counsel, Division of Market Regulation, 
SEC (http://www.sec.gov/comments/sr-cboe-2006-106/cboe2006106-
161.pdf). The closest date to May 1, 1975 for which CBOE has been 
able to locate records that CBOE believes can be relied upon to 
establish this information is June 30, 1975. Specifically, CBOE has 
financial statements as of June 30, 1975, the end of its then fiscal 
year, which set forth this information as of that date. The number 
of CBOE memberships on June 30, 1975 was 1,025.
---------------------------------------------------------------------------

    The Exchange also will have the authority to increase the number of 
any type of Trading Permit it has determined to issue by issuing 
additional Trading Permits of that type, and will announce in a 
circular any such increase.\139\ In addition, the Exchange will have 
the authority, pursuant to a rule filing submitted to the

[[Page 51664]]

Commission under Section 19(b) of the Act,\140\ to establish objective 
standards that must be met to be issued, or to have renewed, a Trading 
Permit.\141\
---------------------------------------------------------------------------

    \139\ See proposed CBOE Rule 3.1(a)(vii).
    \140\ 15 U.S.C. 78s(b).
    \141\ See proposed CBOE Rule 3.1(a)(viii). The Exchange also has 
included a savings clause in Rule 3.1 that provides that 
notwithstanding Rule 3.1, as well as Rule 3.1A (which addresses the 
issuance of Trading Permits to current members), nothing in those 
rules will eliminate or restrict the Exchange's authority to delist 
any product or to take any action (remedial or otherwise) under the 
Exchange Act, the Bylaws and the Rules, including without limitation 
the Exchange's authority to take disciplinary or market performance 
actions against a person with respect to which the Exchange has 
jurisdiction under the Exchange Act, the Bylaws and the Rules. See 
proposed CBOE Rule 3.1(a)(ix).
---------------------------------------------------------------------------

    Trading Permits will only be issued by the Exchange and cannot be 
leased or transferred to any person under any circumstances, except in 
the following situations.\142\ In this regard, a TPH organization may 
change the designation of the nominee in respect of each Trading Permit 
it holds in a form and manner prescribed by the Exchange.\143\ In 
addition, a Trading Permit Holder may, with the prior written consent 
of the Exchange, transfer a Trading Permit to a TPH organization or to 
an organization approved to be a TPH organization: (A) Which is an 
affiliate; or (B) which continues substantially the same business 
without regard to the form of the transaction used to achieve such 
continuation, e.g., merger, sale of substantially all assets, 
reincorporation, reorganization or the like.\144\ For example, this 
provision would allow the Exchange to approve a transfer of a Trading 
Permit from an individual or TPH organization to an affiliated TPH 
organization of that individual or TPH organization.
---------------------------------------------------------------------------

    \142\ See proposed CBOE Rule 3.1(d)(i).
    \143\ See proposed CBOE Rule 3.1(d)(ii).
    \144\ Id.
---------------------------------------------------------------------------

(ii) Issuance of Trading Permits
    In connection with the Restructuring Transaction, Trading Permits 
will be issued automatically to each current member of the Exchange 
that has the ability to trade. In this regard, prior to the date of the 
Restructuring Transaction, a person who is, or is treated the same as, 
a ``member'' of the Exchange under Sections 1.1 and 2.1 of the 
Constitution of the Exchange may submit a post-Restructuring 
Transaction trading application to the Exchange in accordance with such 
procedures as shall be established by the Exchange.\145\ Provided the 
applicant is in good standing as of the date of the Restructuring 
Transaction, complies with the application procedures established by 
the Exchange and pays any applicable fees, the Exchange in connection 
with the Restructuring Transaction will issue to the applicant, as 
applicable, a Trading Permit in respect of: (A) Each membership not 
subject to an effective lease as of the date of the Restructuring 
Transaction that is owned by the applicant; (B) each membership that is 
leased as a lessee by the applicant as of the date of the Restructuring 
Transaction; (C) each trading permit issued by the Exchange prior to 
the Restructuring Transaction that is held by the applicant, provided 
that in the case of a CBSX trading permit, the Exchange shall issue a 
Trading Permit in respect of the CBSX trading permit that only provides 
the right to effect transactions on the CBSX; \146\ and (D) each 
Temporary Membership that is held by such applicant.\147\ As the 
foregoing indicates, persons who are Temporary Members under 
Interpretation and Policy .02 of CBOE Rule 3.19 will be guaranteed 
Trading Permits in connection with the Restructuring Transaction, 
provided they comply with the requirements noted above. In addition, 
persons who are issued Trading Permits as set forth above will have the 
ability pursuant to those Trading Permits to continue after the 
Restructuring Transaction trading any product, and acting in any 
trading function, that those persons traded, or acted in, at the time 
of the Restructuring Transaction.\148\
---------------------------------------------------------------------------

    \145\ See proposed CBOE Rule 3.1A(a).
    \146\ Holders of CBSX trading permits and holders of Interim 
Trading Permits will be issued Trading Permits pursuant to this 
provision. CBOE Rule 3.26, which currently provides for the issuance 
of CBSX trading permits, will be deleted as part of this rule filing 
because all Trading Permits after the Restructuring Transaction will 
be issued under proposed CBOE Rule 3.1. For the same reason, CBOE 
Rule 3.27, which currently provides for the issuance of Interim 
Trading Permits, also will be deleted as part of this rule filing.
    \147\ A person who was eligible to receive Trading Permit(s) 
pursuant to this provision but who failed to comply with the 
application or other requirements, must submit an application for a 
Trading Permit as described below and must go through the approval 
process to hold a Trading Permit to be eligible to receive a Trading 
Permit. See proposed CBOE Rule 3.1A(c).
    \148\ This guarantee is subject to the provision noted above 
that provides that notwithstanding Rule 3.1, as well as Rule 3.1A, 
nothing in those rules will eliminate or restrict the Exchange's 
authority to delist any product or to take any action (remedial or 
otherwise) under the Exchange Act, the Bylaws and the Rules, 
including without limitation the Exchange's authority to take 
disciplinary or market performance actions against a person with 
respect to which the Exchange has jurisdiction under the Exchange 
Act, the Bylaws and the Rules. See proposed CBOE Rule 3.1(a)(ix). In 
addition, this guarantee is subject to the continuing satisfaction 
of any applicable qualification requirements, as well as to the 
Exchange's ability discussed above to limit or reduce the number of 
any type of Trading Permit pursuant to a rule filing with the 
Commission. See proposed CBOE Rules 3.1A(a) and 3.1(a)(vi).
---------------------------------------------------------------------------

    At the time of Restructuring Transaction and afterwards, Trading 
Permits also will be issued after an application process. Persons who 
are seeking trading access to the Exchange for the first time, as well 
as current Trading Permit Holders seeking to hold additional Trading 
Permits, would need to go through this application process. Only a 
person approved to hold a Trading Permit (a ``Qualified Person'') is 
eligible to submit an application for a Trading Permit.\149\
---------------------------------------------------------------------------

    \149\ See proposed CBOE Rule 3.1(b)(i). The Exchange is not 
proposing to substantively change the current process to become a 
``member'' of the Exchange, which after the Restructuring 
Transaction will be the process to become a ``Trading Permit 
Holder.'' See, e.g., CBOE Rule 3.9.
---------------------------------------------------------------------------

    We expect that this application process will be a simple process 
that generally will involve notifying the Exchange of the type, term 
and number of Trading Permits that a Qualified Person would like to 
receive.\150\ To be eligible to be issued a type of Trading Permit, a 
Qualified Person must have satisfied the application requirements for 
that type of Trading Permit. In addition, to be eligible to use a type 
of Trading Permit, a Qualified Person must satisfy all requirements 
related to that type of Trading Permit.
---------------------------------------------------------------------------

    \150\ Id.
---------------------------------------------------------------------------

    From time to time, the Exchange in its discretion may determine to 
make available one or more of a type of Trading Permit through (i) a 
process in which Trading Permits will be issued to Qualified Persons by 
a random lottery (``Random Lottery Process''), or (ii) a process in 
which Trading Permits will be issued to Qualified Persons based on the 
order in time that such Qualified Persons applied for such Trading 
Permits (``Order in Time Process'').\151\ The number of Trading Permits 
that the Exchange determines to make available is referred to as the 
``issuance number.'' In connection with an issuance of such Trading 
Permits, and notwithstanding an application for a greater number of 
such Trading Permits, a Qualified Person and any affiliated Qualified 
Person will be eligible to receive no more than the greater of 10 such 
Trading Permits or 20% of the issuance number of such Trading Permits.
---------------------------------------------------------------------------

    \151\ See proposed CBOE Rule 3.1(b)(iii). The Exchange also will 
have the authority to modify these processes or to establish any 
other objective process to issue Trading Permits pursuant to a rule 
filing submitted to the Commission under Section 19(b) of the Act. 
15 U.S.C. 78s(b).
---------------------------------------------------------------------------

    This limit, however, will not apply in the event the issuance 
number of such Trading Permits exceeds the demand for such Trading 
Permits.\152\ In such a situation, Trading Permits will be made

[[Page 51665]]

available through the Order in Time Process. Qualified Persons applying 
for Trading Permits in this situation will be automatically issued such 
permits until the number of permits issued equals the issuance number.
---------------------------------------------------------------------------

    \152\ Id.
---------------------------------------------------------------------------

    In the event the demand for Trading Permits exceeds the issuance 
number, Trading Permits will be made available through the Random 
Lottery Process or the Order in Time Process.\153\ In such a situation, 
the Exchange in its discretion may maintain a waiting list to be used 
to issue Trading Permits pursuant to the Order in Time Process.\154\ If 
the Exchange maintains a waiting list, Qualified Persons will be placed 
on that waiting list based on the order in time that such persons 
submitted applications, and such persons may at any time voluntarily 
withdraw from that waiting list. A person on the waiting list also may 
submit a notification to the Exchange to adjust the number of Trading 
Permits that such person would like to receive at any time prior to an 
announcement of an issuance of such Trading Permits. Persons on the 
waiting list will be issued Trading Permits based on the order in time 
they were placed on the waiting list.
---------------------------------------------------------------------------

    \153\ Id.
    \154\ See proposed CBOE Rule 3.1(b)(ii).
---------------------------------------------------------------------------

(iii) Termination, Change and Renewal of Trading Permits.
    A Trading Permit Holder seeking to terminate that holder's Trading 
Permit must notify the Exchange, prior to the deadline announced by the 
Exchange in a circular and in a form and manner prescribed by the 
Exchange, that the holder is terminating that Trading Permit at the end 
of its term.\155\ In addition, a Trading Permit Holder seeking to 
replace that holder's Trading Permit with a different Trading Permit 
must file with the Exchange, prior to the deadline announced by the 
Exchange in a circular, an application for that different Trading 
Permit pursuant to the application process described above.\156\ In the 
event a Trading Permit Holder does not take either of the foregoing 
actions with respect to a Trading Permit, the Exchange will 
automatically renew that Trading Permit for the same term as the 
expiring term.\157\ In renewing that Trading Permit, the Exchange will 
have the authority to issue one or more Trading Permits that represent 
the same or more trading right(s) as the expiring permit.\158\
---------------------------------------------------------------------------

    \155\ See proposed CBOE Rule 3.1(c)(i).
    \156\ See proposed CBOE Rule 3.1(c)(ii).
    \157\ See proposed CBOE Rule 3.1(c)(iii). This automatic renewal 
provision will not limit the Exchange's authority to limit or reduce 
the number of any type of Trading Permit.
    \158\ Id. To the extent the Exchange determines to issue one or 
more Trading Permits that represent the same or more trading 
right(s) as an expiring Trading Permit, the Exchange will provide 
all holders of that type of expiring Trading Permit with the new 
Trading Permit(s).\
---------------------------------------------------------------------------

    In addition, a Trading Permit Holder seeking to hold an additional 
Trading Permit must file with the Exchange an application for that 
Trading Permit pursuant to the application process described 
above.\159\ To change the term of a Trading Permit at the end of its 
current term to a longer or shorter term currently offered by the 
Exchange, a Trading Permit Holder must notify the Exchange of that 
holder's desire to change the term prior to the deadline announced by 
the Exchange in a circular and in a form and manner prescribed by the 
Exchange.\160\ Such a change will be effective only at the end of the 
current term of the Trading Permit.
---------------------------------------------------------------------------

    \159\ See proposed CBOE Rule 3.1(c)(iv).
    \160\ See proposed CBOE Rule 3.1(c)(v).
---------------------------------------------------------------------------

(iv) Tier Appointments
    The Exchange is proposing to amend CBOE Rule 8.3 to provide for a 
new type of appointment called a ``tier appointment.'' A ``tier 
appointment'' is an appointment to trade one or more options classes 
that must be held by a Market-Maker to be eligible to trade the options 
class or options classes subject to that appointment.\161\ A Market-
Maker that seeks to trade an options class or options classes subject 
to a tier appointment must submit an application for that tier 
appointment in accordance with, and subject to the same terms and 
conditions as, the application process for Trading Permits as described 
above. Notwithstanding this application requirement, in the event a 
current member of the Exchange at the time of the Restructuring 
Transaction is trading an options class with respect to which the 
Exchange is establishing a tier appointment, the Exchange in connection 
with the Restructuring Transaction will issue to that member such a 
tier appointment provided that the Exchange is notified by that member 
of that member's desire to hold such a tier appointment.\162\
---------------------------------------------------------------------------

    \161\ See proposed CBOE Rule 8.3(e).
    \162\ See proposed CBOE 3.1A(b).
---------------------------------------------------------------------------

    Tier appointments will be in addition to the current appointment 
cost process set forth in CBOE Rule 8.3, which will remain unchanged in 
connection with the Restructuring Transaction. In general, under that 
process, the number of memberships owned or leased by a Market-Maker 
serves as the basis for determining the number/types of options classes 
that the Market-Maker can trade. In this regard, each membership held 
by a Market-Maker has an appointment credit of 1.0, and each option 
listed on the Exchange has an assigned appointment cost. Under that 
process, for example, a Market-Maker with one membership could trade 
options on the Nasdaq 100 Index, which has an appointment cost of .50, 
and options on the CBOE Volatility Index, which also has an appointment 
cost of .50.
    Issuance of tier appointments will be in accordance with, and 
subject to the same terms and conditions as, the issuance processes for 
Trading Permits as described above (i.e., the Random Lottery Process or 
the Order in Time Process).\163\ A Market-Maker that is issued a tier 
appointment must designate to the Exchange the Trading Permit with 
which that tier appointment is associated, and may designate no more 
than one tier appointment per Trading Permit. A tier appointment will 
be for the same term as the Trading Permit with which the tier 
appointment is associated. Termination, change, renewal, and transfer 
of tier appointments will be in accordance with, and subject to the 
same terms and conditions as, the processes for Trading Permits as 
described above. In this regard, for example, if a holder of tier 
appointment does not notify the Exchange that the holder is terminating 
that tier appointment and does not file an application to replace that 
tier appointment, that tier appointment will be renewed along with its 
associated Trading Permit for the same term as the expiring term of 
that Trading Permit.
---------------------------------------------------------------------------

    \163\ See proposed CBOE Rule 8.3(e).
---------------------------------------------------------------------------

    Tier appointments will be subject to such fees and charges as are 
established by the Exchange from time to time pursuant to Rule 2.20 and 
the Exchange Fee Schedule. The Exchange will file proposed rule changes 
under Section 19(b) of the Exchange Act,\164\ including, as applicable, 
Section 19(b)(3)(A)(ii),\165\ to establish and change the fees for tier 
appointments. In accordance with, and subject to same terms and 
conditions as, the processes for Trading Permits as described above, 
the Exchange will have the authority with respect to any type of tier 
appointment it has determined to establish to limit or reduce the 
number of that type of tier appointment, to increase the number of that 
type of tier appointment, and to establish objective standards to be 
issued, or to have

[[Page 51666]]

renewed, that type of tier appointment.\166\
---------------------------------------------------------------------------

    \164\ 15 U.S.C. 78s(b).
    \165\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \166\ The Exchange also has included a savings clause in 
proposed Rule 8.3 that provides that notwithstanding the rule, 
nothing in it will eliminate or restrict the Exchange's authority to 
delist any product or to take any action (remedial or otherwise) 
under the Exchange Act, the Bylaws and the Rules, including without 
limitation the Exchange's authority to take disciplinary or market 
performance actions against a person with respect to which the 
Exchange has jurisdiction under the Exchange Act, the Bylaws and the 
Rules. Id.
---------------------------------------------------------------------------

(D) Other Changes to the Rules
(i) Chapter I of the Rules
    As mentioned above, the Exchange is proposing to replace the term 
``member'' with ``Trading Permit Holder'' throughout the Exchange's 
rules. Thus, references to the terms member and membership in Chapters 
I will be replaced.\167\ For instance, in Rule 1.1(f) and throughout 
the rules, the term ``Clearing Member'' will be replaced with 
``Clearing Trading Permit Holder.'' \168\
---------------------------------------------------------------------------

    \167\ References to these terms also will be replaced in 
Chapters II and III and CBOE Rule 8.3 as part of this rule filing, 
and in the remaining rules as part of the companion filing noted 
above.
    \168\ In this regard, any change to a defined term in Chapter I 
will be reflected in Chapters II and III and CBOE Rule 8.3 as part 
of this rule filing, and in the remaining rules as part of the 
companion filing noted above.
---------------------------------------------------------------------------

    In addition, the Exchange has amended the definitions in Chapter I 
to reflect the use of Trading Permits. In this regard, for instance, 
the terms ``Lessor'' and ``Lessee'' have been deleted because these 
concepts will not exist after the Restructuring Transaction. In their 
place, the Exchange has added the definitions of ``person'' and 
``Trading Permit Holder.'' \169\ A person is defined as an individual, 
partnership (general or limited), joint stock company, corporation, 
limited liability company, trust or unincorporated organization, or any 
governmental entity or agency or political subdivision thereof, and a 
Trading Permit Holder is defined by reference to the definition of that 
term in Section 1.1 of the CBOE Bylaws. The Exchange also has added a 
definition of ``Restructuring Transaction'' to reflect the point in 
time at which Trading Permits will be issued.\170\
---------------------------------------------------------------------------

    \169\ See proposed CBOE Rules 1.1(ff) and (gg).
    \170\ See supra note 3.
---------------------------------------------------------------------------

    Further, the Exchange has added a definition of ``Trading Permit,'' 
which is discussed above, and a definition of ``TPH Department.'' \171\ 
The TPH Department is defined as the department or division of the 
Exchange (which may be referred to by the Exchange from time to time by 
a name other than the TPH Department) that has the functions set forth 
in the rules for the TPH Department. The TPH Department will serve as 
the successor to the current Membership Department and will continue 
the functions of that department, such as processing applications for 
Trading Permits (instead of applications for membership). The 
definition is drafted in this manner to give the Exchange the 
flexibility to call the department something other than the TPH 
Department in the future without having the amend the rules.
---------------------------------------------------------------------------

    \171\ See proposed CBOE Rule 1.1(iii) for the definition of TPH 
Department.
---------------------------------------------------------------------------

    The Exchange also has made technical changes to certain definitions 
in Chapter I that do not change the substance of these definitions. For 
example, the Exchange has amended the term ``Executive Officer'' to 
clarify that the term refers to an executive officer of a TPH 
organization.\172\ In addition, the Exchange has amended the definition 
of ``Good Standing'' to provide that the term means ``that a Trading 
Permit Holder or associated person is not delinquent respecting 
Exchange fees or other charges and is not suspended or barred from 
being a Trading Permit Holder or from being associated with a Trading 
Permit Holder.'' \173\
---------------------------------------------------------------------------

    \172\ See proposed CBOE Rule 1.1(h).
    \173\ See proposed CBOE Rule 1.1(jj).
---------------------------------------------------------------------------

(ii) Chapter II of the Rules
    CBOE Rule 2.1(a) will be amended to limit its scope to Exchange 
committees (i.e., committees that are not solely composed of CBOE Board 
directors) and to modify the manner of appointment to such committees. 
Prior to the Restructuring Transaction, the Rules generally provided 
that except as may be otherwise provided in the Constitution or the 
rules, the Vice Chairman of the Board, with the approval of the CBOE 
Board, would appoint the chairmen and members of committees (other than 
the Business Conduct Committee) to serve for terms expiring at the 
first regular meeting of the Board of Directors of the next calendar 
year. After the Restructuring Transaction, the Rules will be amended to 
provide that the Vice Chairman of the Board, with the approval of the 
CBOE Board, will appoint the chairmen and members of Exchange 
committees (other than the Business Conduct Committee), with the 
exception that if a different manner of appointment is specified for 
any specific committee under the CBOE Bylaws, the rules or a resolution 
of the CBOE Board establishing that committee, that different manner of 
appointment will be followed. After the Restructuring Transaction, the 
President, with approval of the Board, will continue to have the 
authority to appoint members of the Business Conduct Committee.
    CBOE Rule 2.1(a) also has been amended to streamline the process 
for filling vacancies. In this regard, the Vice Chairman of the Board, 
with the approval of the CBOE Board, would fill vacancies on Exchange 
committees (other than the Business Conduct Committee), unless a 
different process is specified for any specific committee under the 
CBOE Bylaws, the Rules or a resolution of the CBOE Board establishing 
that committee. Similarly, the President, with approval of the CBOE 
Board, would fill vacancies on the Business Conduct Committee.
    CBOE Rule 2.1(b) has been amended to provide a definition of quorum 
for committee meetings. In this regard, absent a different provision in 
the CBOE Bylaws, the Rules, a committee charter or a CBOE Board 
resolution related to a specific committee, a majority of members of a 
committee shall constitute a quorum. This is consistent with current 
Exchange practice for determining a quorum for committee meetings. This 
rule also has been amended to delete the reference to ``informally'' in 
the last sentence so that it now provides that ``[c]ommittees may act 
by written consent of all of the members of the committee.'' This 
change was made because committees can take all types of actions 
pursuant to written consent, and not just ``informal'' actions.
    Further, CBOE Rules 2.1(d) and 2.2 have been amended to clarify 
certain aspects of the authority of the CBOE Board. With regard to CBOE 
Rule 2.1(d), the Exchange is proposing to clarify in the first sentence 
of that provision that each committee will have such other powers and 
duties as may be delegated to it by the CBOE Board in a committee 
charter or otherwise. The Exchange also is proposing to move the second 
sentence of that provision into a new paragraph (e) of CBOE Rule 2.1 
and to modify that sentence so that it provides that each Exchange 
committee is subject to the control and supervision of the CBOE Board. 
The Exchange is limiting this provision to Exchange committees because 
the CBOE Board's relationship to CBOE Board committees is governed by 
specific delegations of authority under the CBOE Bylaws, applicable 
committee charters and Delaware law.
    With regard to CBOE Rule 2.2, the Exchange is clarifying that the 
CBOE Board has the authority to review, modify, suspend or overrule any 
and all actions (or inactions) of any committee, officer, 
representative or designee of the

[[Page 51667]]

Exchange taken (or not taken) pursuant to the rules; provided that the 
CBOE Board acts in accordance with any review procedures set forth in 
Chapters XVII, XVIII and XIX of the Rules, to the extent applicable to 
actions (or inactions) under those Chapters. The Exchange is making 
this change to CBOE Rule 2.2 to clarify that consistent with the 
general rule under Delaware law, the CBOE Board has the authority to 
review actions taken (or actions not taken) by committees, officers, 
representatives and designees of the Exchange pursuant to the rules. At 
the same time, the Exchange has included language that provides that 
the processes related to CBOE Board review (if any) set forth in 
Chapters XVII, XVIII and XIX of the rules will be followed. In other 
words, to the extent a particular process is not set forth in the rules 
(such as the ones in Chapters XVII, XVIII and XIX), the CBOE Board will 
have the authority to review actions taken (or actions not taken) 
pursuant to the rules by committees, officers, representative and 
designees of the Exchange.
    Finally, conforming changes have been made to the rules in Chapter 
II to reflect the use of Trading Permits. For instance, CBOE Rule 2.23 
has been amended to clarify that the Exchange will have the authority 
to suspend or revoke a Trading Permit in the event the holder of that 
permit does not pay any amounts due to the Exchange. In addition, 
references to the term ``dues'' have been deleted in CBOE Rules 2.20, 
2.22 and 2.23 because this term generally refers to payments made by 
members in a membership organization.\174\
---------------------------------------------------------------------------

    \174\ This change also has been made to other rules in Chapters 
I-III. See, e.g., CBOE Rule 1.1(jj).
---------------------------------------------------------------------------

(iii) Chapter III of the Rules
    Conforming changes throughout Chapter III will be made to reflect 
the operation of Trading Permits. For example, the Rules relating to 
the sale, transfer and lease of memberships, and to the member death 
benefit will be deleted based on the operation of Trading Permits.\175\ 
In addition, CBOE Rule 3.1 will be deleted and replaced with a new Rule 
3.1 (discussed above) that addresses Trading Permits. The prior version 
of Rule 3.1 was designed to, among other things, ensure that 
memberships were used for trading on the Exchange. This requirement 
will no longer be necessary in connection with the use of Trading 
Permits.
---------------------------------------------------------------------------

    \175\ In this regard, CBOE Rules 3.12, 3.13, 3.14, 3.15, 3.24 
and 3.25 will be deleted. One of the rules to be deleted, Rule 
3.14(d), describes the rights of membership owners and grantees in 
Authorization to Sell arrangements. Persons in these arrangements 
should be aware that the Authorization to Sell process will 
terminate in connection with the Restructuring Transaction and that 
the Exchange will no longer have any involvement in these 
arrangements. In addition, persons in these arrangements should 
consider the impact, if any, the Restructuring Transaction (i.e., 
the conversion of memberships into Class A common stock in CBOE 
Holdings) might have on the collateral in these arrangements.
---------------------------------------------------------------------------

    The qualifications to be a member or member organization, and the 
application process to become a member, will be the same after the 
Restructuring Transaction with modifications to reflect the use of 
Trading Permits.\176\ For example, the Exchange is proposing to amend 
CBOE Rule 3.3 to condense the description of the requirements that an 
organization must meet to become a TPH organization, but is not 
substantively changing these requirements.
---------------------------------------------------------------------------

    \176\ See, e.g., CBOE Rules 3.2 and 3.3.
---------------------------------------------------------------------------

    The Exchange also is making technical changes to certain rules in 
Chapter III that do not change the substance of these rules. For 
instance, the Exchange is proposing to amend Rule 3.5 to clarify that 
the Exchange will have the authority to deny or condition persons from 
becoming or being associated with Trading Permit Holders under the 
circumstances that are already set forth in that rule. In addition, the 
Exchange is making similar changes to CBOE Rule 3.18 to clarify the 
Exchange's authority when a Trading Permit Holder or a person 
associated with a Trading Permit Holder becomes subject to a statutory 
disqualification. Further, the Exchange is amending CBOE Rule 3.10 to 
clarify when Trading Permit Holder status will become effective, and is 
amending CBOE Rule 3.11 to clarify that the Exchange will announce such 
effectiveness in the Exchange Bulletin.
    In addition, because an individual will be able to hold a Trading 
Permit in his or her name, the process for designating nominees for 
Trading Permits in CBOE Rule 3.8 will be amended to require a TPH 
organization that has an associated person who is an individual holder 
of a Trading Permit to designate that individual as the nominee for 
that Trading Permit.\177\ Moreover, references to the concept of 
registering a membership for a member organization will be deleted in 
Rule 3.8 because that concept will have no application once Trading 
Permits are used to provide trading access to the Exchange.\178\ 
Further, the Exchange is streamlining the process of designating 
nominees for TPH organizations that have multiple Trading Permits in 
their name. Currently, a member organization that has multiple 
memberships in its name can designate the same individual to be the 
nominee for those memberships, except that for each membership used for 
trading in open outcry on the trading floor, the member organization 
must designate a different individual to be the nominee for each of 
those memberships. As modified, CBOE Rule 3.8(a)(ii) will allow TPH 
organizations to designate the same individual to be the nominee for 
Trading Permits held in its name, including Trading Permits used for 
trading in open outcry on the trading floor.
---------------------------------------------------------------------------

    \177\ See CBOE Rule 3.8(a).
    \178\ The Exchange also is making this change to other rules in 
Chapters I-III and to CBOE Rule 8.3 as part of this rule filing, and 
in the remaining rules as part of the companion filing noted above.
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    The Exchange also is deleting the requirement in CBOE Rule 3.7(g) 
that a member keep and maintain a current copy of the Constitution and 
rules in a readily accessible place, and that a member organization 
that is approved to do business with the public make the Constitution 
and rules available for examination by customers. Because the Exchange 
is required to maintain a copy of its governing documents and rules 
online, the Exchange believes that this requirement is no longer 
necessary.
    Finally, the Exchange is amending CBOE Rule 3.9 to, among other 
things, delete the requirement that the Exchange post notices of 
applications on the Exchange Bulletin Board.\179\ As trading on the 
Exchange becomes more electronic and remote from the Exchange, the use 
of a physical bulletin board at the Exchange to notify persons is 
outdated.\180\ Despite this change, persons will still receive notice 
of applications because the Exchange will continue to be required to 
post them in the Exchange Bulletin.
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    \179\ See CBOE Rule 3.9(e).
    \180\ The Exchange also is making this change to other rules in 
Chapters I-III as part of this rule filing, and in the remaining 
rules as part of the companion filing noted above. CBOE Rule 8.3 is 
not affected by this change.
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Statutory Basis
    For the reasons set forth above, the Exchange believes that this 
filing is consistent with Section 6(b) of the Exchange Act,\181\ in 
general, and furthers the objectives of Section 6(b)(1) of the Exchange 
Act,\182\ in particular, in that it enables the Exchange to be so 
organized as to have the capacity to be able to carry out the purposes 
of the Exchange Act and to comply, and to enforce compliance by its 
Exchange members and persons associated with its Exchange members, with 
the

[[Page 51668]]

provisions of the Exchange Act, the rules and regulations thereunder, 
and the rules of the Exchange. The Exchange also believes that this 
filing furthers the objectives of Section 6(b)(5) of the Exchange Act 
because the rules summarized herein would create a governance and 
regulatory structure that is 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.\183\ Among other things, the 
Certificate of Incorporation and Bylaws of CBOE Holdings and CBOE are 
designed to protect and maintain the integrity of the SRO functions of 
CBOE, and to allow it to carry out its regulatory responsibilities 
under the Exchange Act.
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    \181\ 15 U.S.C. 78f(b).
    \182\ 15 U.S.C. 78f(b)(1).
    \183\ 15 U.S.C. 78f(b)(5).
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    In addition, the Exchange believes that this filing is consistent 
with the requirements of Section 6(b)(3) of the Exchange Act that the 
rules of the exchange assure a fair representation of its members in 
the selection of its directors and administration of its affairs and 
provide that one or more directors shall be representative of issuers 
and investors and not be associated with a member of the exchange, 
broker, or dealer.\184\ As described above, the CBOE Bylaws provide a 
process for Trading Permit Holders to select members of the CBOE Board 
(i.e., Representative Directors). The CBOE Bylaws also require that a 
majority of directors on the CBOE Board be Non-Industry Directors.
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    \184\ 15 U.S.C. 78f(b)(3).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents,\185\ the Commission will:
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    \185\ The Commission notes that the Exchange has consented to an 
extension of time for Commission consideration of the proposed rule 
change. See Item 6 of CBOE's Form 19b-4 submission.
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    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2008-88 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2008-88. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the CBOE. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2008-88 and should be 
submitted on or before September 25, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\186\
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    \186\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-20464 Filed 9-3-08; 8:45 am]

BILLING CODE 8010-01-P