Federal Register: NOTICES Self-Regulatory Organizations; Proposed Rule Changes:: 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

SECURITIES AND EXCHANGE COMMISSION

Securities and Exchange Commission

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

NOTICE: NOTICES

ACTION: Self-Regulatory Organizations; Proposed Rule Changes:

SUBJECT CATEGORY: 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

DOCUMENT SUMMARY: August 26, 2008.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ``Act'' or ``Exchange Act''),\1\ and Rule 19b4 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.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b4.
I. SelfRegulatory 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 nonstock 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\
\3\ The term ``Restructuring Transaction'' is defined in proposed CBOE Rule 1.1(hhh) as ``the restructuring of the Exchange from a nonstock 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 19b4 thereunder (CFR 240.19b4), 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.

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. SelfRegulatory 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. SelfRegulatory 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 nonstock corporation owned by its members to a
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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 selfregulatory 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 firsttier, Delaware stock, forprofit subsidiary corporation of CBOE; and the creation of CBOE Merger Sub, Incorporated as a secondtier, Delaware stock, for profit subsidiary corporation of CBOE (CBOE Merger Sub will be a first tier subsidiary of CBOE Holdings).\5\
\5\ CBOE Holdings and CBOE Merger Sub have already been created.

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 firsttier, whollyowned 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.
\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 brokerdealer. CBOE Execution Services, LLC will perform various functions in that capacity and will be a firsttier, whollyowned subsidiary of CBOE Holdings immediately following the Merger. \7\ The remaining 50% interest in CBSX currently is owned by five registered brokerdealers.

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 A1 common stock, Series A2 common stock and Series A3 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. \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 A1, A2 and A3, (iii) a certain number of shares of Class B nonvoting common stock, $0.01 par value per share, initially divided into three series of Class B nonvoting common stock, designated Series B1, B2 and B3, 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 nonvoting 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 nonvoting common stock). The Class B nonvoting 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.

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 forprofit business, along with modifying its corporate and governance structures to be more like those of other forprofit 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, forprofit 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 nonstock, 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\
\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. SRCBOE2006106). 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.

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 nonvoting common stock that will convert into Class A common stock upon the public offering of CBOE Holdings Common Stock.\13\
\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.
(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.
\14\ 15 U.S.C. 78s.

(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 forprofit stock corporation whollyowned 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 forprofit 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.
\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.

(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 twothirds 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\
\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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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 twoyear terms.\23\ There is no limit on the number of terms a director may serve on the CBOE Holdings Board.
\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.

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\
\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.

(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\
\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 ViceChairman 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.

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\
\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.

(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 VicePresidents (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\
\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.

(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
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Exchange Act.\36\ In particular, these restrictions provide that: \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 forprofit SROs. See, e.g., Securities Exchange Act Release No. 50699 (Nov. 18, 2004), 69 FR 71126 (Dec. 8, 2004).
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
\37\ See proposed Article Sixth(b) of the CBOE Holdings Certificate of Incorporation.

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 14a2(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,
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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) SelfRegulatory Function and Oversight

The CBOE Holdings Certificate of Incorporation contains various provisions designed to protect the independence of the selfregulatory 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 selfregulatory 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 selfregulatory 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 whollyowned 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 whollyowned subsidiary of CBOE Holdings, its management by the CBOE Board and its designated officers, and its selfregulatory 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 NonIndustry 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 brokerdealer or an officer, director or employee of a brokerdealer 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 brokerdealer whose revenues account for a material portion of the consolidated revenues of the entities with which the brokerdealer is affiliated; (iv) has a material ownership interest in a broker dealer and has investments in brokerdealers 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 brokerdealer, 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 brokerdealer 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 brokerdealer or an outside director of an entity that is affiliated with a brokerdealer, provided that the brokerdealer 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 brokerdealer whose revenues do not account for a material portion of the consolidated revenues of the entities with which the brokerdealer 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 NonIndustry Director will be a NonIndustry 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 brokerdealer is affiliated, the revenues of the brokerdealer will be compared with the consolidated revenues of all of the entities affiliated with the brokerdealer as well as the brokerdealer (i.e., all of the entities in the brokerdealer's corporate family, inclusive of the brokerdealer). A director will qualify as a NonIndustry 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., NonIndustry Directors). In comparison, as indicated above, the Prior CBOE Board has 23 directors. Eleven of these directors are Public Directors,\59\ two are AtLarge Directors,\60\ four are Floor Directors,\61\ one is a Lessor Director,\62\ four are OffFloor 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 nonmember who is not a broker dealer or person affiliated with a brokerdealer.
\60\ Id. For purposes of Class II of the Prior CBOE Board, an ``AtLarge 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 ``AtLarge 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 brokerdealer or as a person associated with a brokerdealer as those terms are defined in the Exchange Act.
\63\ Id. An ``OffFloor Director'' is an executive officer of a member organization that primarily conducts a nonmember 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 NonIndustry 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 NonIndustry 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 NonIndustry Directors and two Industry Directors (one of whom is a Representative Director (as described below). Class II directors will initially consist of four NonIndustry 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 NonIndustry 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 IndustryDirector Subcommittee (described below), provided that the Representative Directors so nominated by the IndustryDirectorbcommittee 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 RunOff 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 IndustryDirector 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 IndustryDirector Subcommittee will be selected by the Nominating and Governance Committee.\80\ The IndustryDirector 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 IndustryDirector Subcommittee will provide a mechanism for Trading Permits Holders to provide input to the IndustryDirector Subcommittee with respect to nominees for the Representative Directors.\82\ The Industry DirectorSubcommittee 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 IndustryDirector 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 runoff election to determine which individuals will be nominated as Representative Director(s) by the Nominating and Governance Committee (the ``Runoff Election'').\86\ In any Runoff 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 Runoff 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 Runoff 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 Runoff 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 Runoff 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