## Facts

- The Chicago Board Options Exchange, Inc. (CBOE) operated as a national securities exchange subject to the Securities Exchange Act of 1934’s self-regulatory requirements.
- CBOE members could act as market makers (trading for their own accounts), floor brokers (agents executing customer orders for commissions), or board brokers (agents with exclusive appointments to maintain the public limit order book for specified option classes).
- The public limit order book contained customer limit orders that could not be executed immediately if the market price did not match the limit price.
- Board brokers were private members who earned income from executing orders in their assigned classes and from fees paid by floor brokers for priority treatment of certain limit orders at the same price.
- CBOE proposed a rule change to abolish private board brokers and replace them with exchange employees called order book officials (OBOs), compensated at fixed rates by CBOE.
- CBOE asserted the employee OBO model would give the exchange greater operational control over limit-order services, especially during floor congestion, and allow staffing and class assignments to be adjusted as needed.
- The SEC, acting under Exchange Act § 19(b), published notice of the proposed rule change and solicited written comments.
- The Board Brokers Association (BBA), representing affected board brokers, submitted written objections arguing the proposal conflicted with the Exchange Act, restrained competition, discriminated against board brokers, and required more formal procedures.
- After considering the written record, the SEC approved the rule amendments, finding improved efficiency and investor-protection benefits and concluding the change would not stifle competition (or that any competitive effects were justified by the statutory objectives).

## Issues

1. Whether the SEC was required under Exchange Act § 19(b) and the APA to conduct an evidentiary hearing rather than decide the proposal on notice-and-comment written submissions.
2. Whether the SEC lawfully determined that replacing board brokers with salaried OBOs was consistent with the Exchange Act’s standards for exchange rules, including fair trading, investor protection, and competition.
3. Whether the SEC’s findings supporting approval were supported by substantial evidence for purposes of judicial review.

## Decision

- The Seventh Circuit denied the petition for review and upheld the SEC’s order approving the CBOE rule change.
- The court held the SEC satisfied applicable procedures by providing notice and an opportunity for comment and deciding on the written record.
- The court held the SEC’s conclusion that the change served Exchange Act objectives, including its assessment of competition and efficiency, was supported by substantial evidence and was not unlawful.

## Legal Principles

- SEC approval of an exchange rule change under Exchange Act § 19(b) is evaluated as rulemaking; notice-and-comment procedures may be sufficient absent a statutory requirement for trial-type hearings.
- Courts review SEC factual findings and policy judgments under a deferential substantial-evidence standard and do not reweigh the agency’s market-structure assessments if the record supports a rational basis.
- The Exchange Act does not guarantee preservation of particular exchange member roles or revenue arrangements; the SEC may approve structural changes that disadvantage some members if the rules reasonably further statutory goals such as efficient market operation, fair trading, and investor protection, and any competitive effects are justified in that balance.

## Conclusion

The court upheld the SEC’s approval of CBOE’s replacement of private board brokers with salaried order book officials, concluding that informal notice-and-comment procedures were adequate and that the SEC’s determinations regarding efficiency, competition, and investor protection were supported by substantial evidence and within the agency’s discretion.


Belenke v. Sec. & Exch. Comm’n, 606 F.2d 193 (7th Cir. 1979)