Document ID: SEC-2006-0060-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Board Options Exchange, Inc.
Posted Date: 2006-01-18T05:00Z

[Federal Register: January 18, 2006 (Volume 71, Number 11)]
[Notices]               
[Page 2963-2965]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18ja06-84]                         

[[Page 2963]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53092; File No. SR-CBOE-2005-105]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change Relating to the 
CBOE's Membership Rules for Foreign Member Organizations

January 10, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 7, 2005, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the CBOE. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rule regarding the 
qualifications of foreign member organizations in relation to foreign 
organizations seeking to become members of the Exchange in a lessor-
only capacity. The text of the proposed rule change appears below. 
Additions are italicized.
* * * * *

Rule 3.4. Qualifications of Foreign Member Organizations

    (a) An organization that is not organized under the laws of one of 
the states of the United States must satisfy the following requirements 
in order to be a member organization:
    (i) The organization must be a corporation or partnership organized 
under the laws of a country other than the United States with respect 
to which an information sharing agreement, memorandum of understanding, 
or treaty is in effect that provides the Securities and Exchange 
Commission with access to information concerning securities trading 
activity in that country;
    (ii) The organization must disclose to the Exchange all persons 
associated with the organization and all parents of the organization, 
through all tiers of ownership, until the ultimate individual 
beneficial owners of the organization are disclosed;
    (iii) The organization must maintain in English and at a location 
in the United States (A) the books and records of the organization that 
relate to its business on the Exchange, including, but not limited to, 
any trading records relating to trading activity on the Exchange and 
(B) any other books and records of the organization that an 
organization registered as a broker or dealer pursuant to Section 15 of 
the Exchange Act is required to maintain at a location in the United 
States;
    (iv) The organization must maintain its financial records in 
accordance with United States accounting standards;
    (v) The organization must agree to permit inspections by the 
Exchange and the Securities and Exchange Commission of the foreign 
operations of the organization related to its securities business;
    (vi) The organization must waive any applicable secrecy laws and be 
exempted from any applicable blocking statutes in the domiciliary 
jurisdiction of the organization;
    (vii) The organization must provide to the Exchange an opinion of 
legal counsel of the domiciliary jurisdiction of the organization which 
certifies that (A) there are no applicable secrecy laws or blocking 
statutes in that jurisdiction or (B) that the organization has 
effectively waived any applicable secrecy laws or is exempted from any 
applicable blocking statutes in that jurisdiction;
    (viii) Any customer of the organization that utilizes the 
organization to execute orders on the Exchange must have waived any 
applicable secrecy laws and be exempted from any applicable blocking 
statutes in the domiciliary jurisdiction of the organization;
    (ix) The organization must agree to submit to the jurisdiction of 
the Federal courts of the United States and the courts of Illinois and 
to irrevocably waive, to the fullest extent permitted by law, any 
objection which the organization may have based on venue or forum non 
conveniens with respect to any action initiated in such courts;
    (x) The organization must appoint a process agent in Illinois to 
receive, on the behalf of the organization, process which may be served 
in any legal action or proceeding;
    (xi) The organization must own its Exchange membership(s);
    (xii) The organization must be registered as a broker or dealer 
pursuant to Section 15 of the Exchange Act;
    (xiii) The organization must satisfy the foregoing requirements in 
a manner and form prescribed by the Exchange and must satisfy such 
additional requirements that the Exchange reasonably deems appropriate; 
and
    (xiv) The organization must meet the other qualification 
requirements for membership under the Constitution and Rules.

* * * Interpretations and Policies

    .01 For purposes of eligibility for membership, an entity organized 
as a limited liability company under the laws of a country other than 
the United States shall be deemed a corporation, its members shall be 
deemed principal shareholders, and its members with management 
responsibility and its managers shall be deemed executive officers.
    .02 A foreign member organization that is approved to act solely as 
a lessor is not required to comply with Rules 3.4(a)(iii)(B) and 
3.4(a)(xii).
* * * * *

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

    In its filing with the Commission, the 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. The 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Pursuant to CBOE Rule 3.4, ``Qualifications of Foreign Member 
Organizations,'' an organization that is not organized under the laws 
of one of the states of the United States (``foreign member 
organization'') must satisfy, among other things, the requirements set 
forth in CBOE Rule 3.4 in order to become a CBOE member. The purpose of 
this proposed rule change is to amend CBOE Rule 3.4 to exempt a foreign 
member organization that is approved by the Exchange to act solely as a 
lessor from the requirements set forth in: (i) CBOE Rule 3.4(a)(xii), 
which requires a foreign member organization to be registered as a 
broker or dealer pursuant to Section 15 of the Act; and (ii) CBOE Rule 
3.4(a)(iii)(B), which requires a foreign member organization to 
maintain, in English and at a location in

[[Page 2964]]

the United States, any books and records of the foreign member 
organization that an organization registered as a broker or dealer 
pursuant to Section 15 of the Act is required to maintain at a location 
in the United States.
    CBOE member organizations, whether organized under the laws of one 
of the states of the United States (``U.S. member organizations'') or 
otherwise, that are approved to act solely as lessors have no trading 
functions on the Exchange. In other words, the sole business function 
that may be performed by a U.S. member organization or a foreign member 
organization approved to act solely as a lessor is to lease the CBOE 
membership it owns to another Exchange member, which member would be 
required to be a registered broker-dealer that has been approved for 
membership under the CBOE's membership rules.
    The foreign member organization application requirements set forth 
in CBOE Rule 3.4 apply equally to all foreign member organizations, 
whether or not the foreign member organization is applying to act 
solely as a lessor. In contrast, the application requirements for U.S. 
member organizations, as set forth in CBOE Rule 3.3, ``Qualifications 
and Membership Statuses of Member Organizations,'' distinguish, in 
certain cases, between organizations applying as lessor-only members 
and other member organizations. Specifically, CBOE Rule 3.3(a)(ii) 
requires U.S. member organizations to be registered as a broker or 
dealer pursuant to Section 15 of the Exchange Act, except that a U.S. 
member organization that is approved to act solely as a lessor is not 
required to comply with that requirement. The effect of the disparate 
treatment between foreign member organizations, as set forth in CBOE 
Rule 3.4, and U.S. member organizations, as set forth in CBOE Rule 3.3, 
is that a U.S. member organization that is approved by the Exchange to 
act solely as a lessor is not required to register as a broker or 
dealer, while a foreign member organization that is approved to act 
solely as a lessor is required to register as a broker or dealer 
pursuant to Section 15 of the Act.
    The Exchange believes that a foreign member organization that is 
approved by the Exchange to act solely as a lessor should not be 
required to register as a broker or dealer. In this regard, the 
Exchange has received a no-action letter from the staff of the 
Commission that supports the notion that persons not engaging in 
securities activities for which broker or dealer registration is 
required (i.e., a lessor) would not be required to register as a broker 
or dealer merely because that person has acquired and leased a 
membership on the Exchange.\3\ Because foreign member organizations 
approved to act solely as lessors conduct no activities on the Exchange 
that would otherwise require them to register as a broker or dealer, 
the Exchange believes that it is appropriate not to require them to do 
so.
---------------------------------------------------------------------------

    \3\ See letter from Jeffrey L. Steele, Assistant Chief Counsel, 
Division of Market Regulation, Commission, to Arne R. Rode, 
Associate General Counsel, CBOE, dated Jan. 3, 1980.
---------------------------------------------------------------------------

    U.S. member organizations that are approved to act solely as 
lessors are generally subject to the same application requirements as 
other member organizations. The only distinctions that currently exist 
for these organizations are the exemptions set forth in CBOE Rule 
3.3(a)(ii), as stated above, and the exemption from the Exchange's 
orientation and testing requirements.\4\ Thus, for example, the 
Exchange would conduct an investigation of a foreign organization 
applying to be approved to act solely as a lessor in accordance with 
CBOE Rule 3.9, ``Application Procedures and Approval or Disapproval.'' 
Furthermore, the additional application requirements set forth in CBOE 
Rule 3.4 for foreign member organizations, other than those that are 
proposed to be revised in this filing, would ensure that the Exchange 
would have both access to the information it would need to review the 
foreign member organization's application for membership and, if 
necessary, the requisite jurisdiction to litigate matters related to 
the foreign member organization's business on the Exchange. The 
Exchange also notes that CBOE Rule 3.6(b) requires each associated 
person of a member organization that is required to be disclosed on 
Form BD as a direct owner or executive officer to submit an application 
to the Exchange for approval to become associated with the member 
organization in that capacity. CBOE Rule 3.6(b) also provides that if 
the member organization is not required to be a registered broker-
dealer, an application to become associated with the member 
organization in the applicable capacity is required of each associated 
person of the organization that would be required to be disclosed on 
Form BD as a direct owner or executive officer in the event that the 
organization was a registered broker-dealer. Therefore, the Exchange 
would have the ability, through the associated person application 
process, to examine the senior persons in charge of the foreign member 
organization to ensure that those that are not qualified under the CBOE 
rules and the Act to be associated with a CBOE member are not 
associated with the foreign member organization.
---------------------------------------------------------------------------

    \4\ See CBOE Rule 3.9(g). The Exchange's testing and orientation 
requirements apply to members required to have authorized trading 
functions. Members approved to act solely as lessors are not 
permitted to have authorized trading functions.
---------------------------------------------------------------------------

    Because the foreign member organization approved by the Exchange to 
act solely as a lessor would be conducting activities that would 
otherwise not require it to be registered as a broker or dealer, the 
Exchange also believes that the requirement set forth in CBOE Rule 
3.4(a)(iii)(B) imposes obligations on the foreign member organization 
that do not reflect its activities on the Exchange. As noted above, 
CBOE Rule 3.4(a)(iii)(B) currently requires a foreign member 
organization approved solely as a lessor to maintain, in English and at 
a location in the United States, any books and records of the 
organization that an organization registered as a broker or dealer 
pursuant to Section 15 of the Act is required to maintain at a location 
in the United States. The Exchange believes that if the only activities 
conducted by the foreign member organization on the Exchange relate to 
its lease activities, the provisions set forth in CBOE Rule 
3.4(a)(iii)(A), which require the foreign member organization to 
maintain, in English and at a location in the United States, the books 
and records of the organization that relate to its business on the 
Exchange, should ensure that the Exchange will have the ability to have 
access to adequate information with respect to the foreign member 
organization.
2. Statutory Basis
    The proposed rule change implements certain application standards 
for foreign member organizations that are approved to act solely as 
lessors that currently exist for U.S. member organizations approved to 
act solely as lessors, while still allowing for the Exchange to obtain 
the information it needs to determine whether the Exchange's membership 
qualifications are satisfied. Therefore, the Exchange believes the 
proposed rule change is consistent with the Act and the rules and 
regulations under the Act applicable to a national securities exchange 
and, in particular, the requirements of Section 6(b) of the Act.\5\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \6\ requirements that the rules of 
an exchange be designed to

[[Page 2965]]

promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change does not 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, the Commission will:
    (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-2005-105 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.

All submissions should refer to File Number SR-CBOE-2005-105. 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. Copies of the filing 
also will be available for inspection and copying at the principal 
office of the Exchange. 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-2005-105 and should be submitted on or before February 8, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
---------------------------------------------------------------------------

    \7\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
 [FR Doc. E6-465 Filed 1-17-06; 8:45 am]

BILLING CODE 8010-01-P