Nancy M Morris
Secretary, Securities and Exchange Commission
Re: File No. SR-CBOE-2006-106
I am strongly opposed to the CBOE’s proposed rule change on several grounds. By way of background, in 1977, I purchased a CBOE membership and traded as an active Floor member of the CBOE. In 1980, I sold my CBOE seat and purchased a CBOT Full membership, exercised my CBOE rights, and continued to trade on the CBOE floor for several years before moving full time to the CBOT. For several years thereafter I maintained my CBOE membership and continued to pay membership fees and dues to the CBOE. Since 1985, I have leased out my Full Membership almost exclusively to CBOE traders, including my current lessee.
At the inception of the CBOE, there were 2 anticipated categories of members: CBOT exercisers and, from 1972 through about 1975, purchasers of Treasury (Charter) memberships from the CBOE. Purchasers of CBOE Treasury seats understood, by contract, that these memberships were sold by the CBOE at favorable price levels (presumably below expected value) but came with several obligations, chief among which were: 1) a requirement that these charter members actively make markets in their designated option classes and 2) the likelihood that CBOT members would exercise their CBOE trading privileges to compete on the CBOE trading floor and participate in any distributions and in the equity of the CBOE. When these original Treasury memberships were later resold in the secondary market, purchasers, such as myself in 1977, understood that the CBOE memberships remained subject to dilution from CBOT exercisers.
CBOE Charter Provisions and Letter Agreements Paragraph b of Article 5th of the CBOE’s Certificate of Incorporation defines the CBOT exercise rights, and this provision was clarified by several subsequent Letter Agreements between the CBOE and CBOT, ostensibly to avoid the possibility of CBOT memberships being divided into parts, separating the CBOE trading rights from the CBOT trading rights. The CBOE’s initial stated intent was to avoid the possible creation of 2 separate, divisible trading rights on each of the Exchanges.
After the CBOT considered demutualization and issuance of shares, the CBOE next sought to prevent CBOT members from retaining CBOE exercise rights if they were to dilute the constitution of their original memberships through CBOT share sales. These potential concerns were addressed by the requirement that Full CBOT members must hold all issued shares as well as their CBOT Exchange membership in order to exercise their CBOE rights.
CBOE’s Bad Faith
While the CBOE’s concerns up to this point may have had some equitable justification, by means of CBOE’s proposed Rule Change, the CBOE is now engaged in a transparent attempt to unlawfully, and unilaterally extinguish CBOT Full Members’ rights. The CBOE’s assertion that the merger of the CBOT and the CME through the vehicle of CME Holdings should terminate the CBOT members’ trading rights at the CBOE is disingenuous at best, and at a minimum, premature since the merger has not yet occurred. A CBOT Full Member who retains his CBOT exchange membership and the stock of a successor in interest/ exchange merger partner should be deemed to be in exactly the same posture pre and post merger. The structure of a holding company of 2 exchanges doesn’t alter the holding company’s principal function; i.e. operating commodity exchanges. Further, the CBOE’s Board of Directors and Management have a fiduciary duty to its members, CBOT exercise members, and potential CBOE members through Full Member CBOT exercise rights. The CBOE’s unilateral termination of the CBOT Exercise Rights effective December 11, 2006 displays bad faith and a serious breach of its fiduciary obligation. As the owner of a leased Full CBOT membership to dues paying CBOE traders for many years, my rights to equitable distribution from the CBOE should be no different than that of a lessor of CBOE membership to another CBOE trader.
Denial of CBOE Request
The SEC should disapprove the CBOE’s Rule Change Request in order to not reward them for their obvious bad faith. The CBOE’s Rule Change Request should be denied because this change is admittedly based on the CBOE’s unilateral reinterpretation of Article Fifth, paragraph b and the subsequent letter agreements. Any reinterpretation of Contracts should be determined in a Court of appropriate jurisdiction and not before the Commission. The CBOE is merely attempting to bypass the judicial process and misuse the SEC’s regulatory authority. As I’m sure you are aware, litigation to resolve the contractual issues has been instituted in Delaware, which would be a more appropriate forum.
There is only one theme that describes all of the CBOE’s actions: GREED. The CBOE has and apparently intends to continue to use every effort and every argument possible to eliminate the rights of CBOT Full Members to any possible future distribution from or participation in the CBOE, whether in violation of its Charter, subsequent agreements, common understandings from the time of the CBOE’s inception, whether contrary to equitable principles, and whether in bad faith and in breach of fiduciary obligations.
Therefore, the CBOE’s request SHOULD BE DENIED.