AO 2008-21: Solicitation of members of corporation's wholly owned mercantile exchanges for PAC contributions

CME Group, Inc. may solicit voluntary contributions to its separate segregated fund from certain categories of individual members of two of its wholly owned subsidiaries, the Chicago Board of Trade (CBOT) and New York Mercantile Exchange (NYMEX), regardless of whether such members own shares of stock in the parent corporation. CME Group, Inc. may also solicit individual members of its third wholly owned mercantile exchange, the Chicago Mercantile Exchange (CME), but only in their capacity as stockholders in CME Group, Inc.

Background

As a result of recent mergers, CME, CBOT and NYMEX are now wholly owned subsidiaries of CME Group, Inc. Some, but not all, of the members of each of the three exchanges own stock in CME Group, Inc., the parent corporation. CME Group, Inc. plans to solicit the members of the exchanges who qualify as CME Group, Inc. stockholders for voluntary contributions to its separate segregated fund, CME Group, Inc. PAC (the PAC). CME Group, Inc. also wishes to solicit certain categories of members of the exchanges who are not CME Group, Inc. stockholders for contributions to its PAC.

The Federal Election Campaign Act (the Act) and Commission regulations detail the types of persons who may be solicited for contributions to separate segregated funds such as the PAC. 2 U.S.C. §441b(b) (4); 11 CFR 114.1(j). This solicitable class includes a corporation's stockholders, executive and administrative personnel, and their family members. 2 U.S.C. §441b(b)(4)(A) (i); 11 CFR 114.1(j). A membership organization is membership-based rather than stockholder-based. The solicitable class of an incorporated membership organization includes its members—as defined by the Act and Commission regulations—and its executive and administrative personnel and their families. 2 U.S.C. §441b(b)(4)(C); 11 CFR 114.1(e)(1), (2) and (3). Commission regulations also define any corporation's solicitable class to include the executive and administrative personnel, and their families, of its subsidiaries or other affiliates. 11 CFR 114.5(g)(1).

Analysis

Based on these legal principles, CME Group, Inc.'s situation can be broken down into four questions, discussed below.

Do CME, CBOT and/or NYMEX qualify as membership organizations that have "members" under the Act and Commission regulations? Commission regulations define a membership organization as a "trade association, cooperative, [or] corporation without capital stock" that:

• Is composed of members, some or all of whom are vested with the power and authority to operate or administer the organization, pursuant to the organization’s articles, bylaws, constitution or other formal organizational documents;
• Expressly states the qualifications and requirements for membership in its articles, bylaws, constitution or other formal organizational documents;
• Makes its articles, bylaws, constitution or other formal organizational documents available to its members upon request;
• Expressly solicits persons to become members;
• Expressly acknowledges the acceptance of membership, such as by sending a membership card or including the member’s name on a membership newsletter list; and
• Is not organized primarily for the purpose of influencing the nomination for election, or election, of any individual to federal office. 11 CFR 114.1(e)(1) and 100.134(e).

CME has issued capital stock and, as a result, is not a membership organization under Commission regulations. CBOT and NYMEX, however, are both corporations without capital stock and also meet the six criteria for being a membership organization.

CBOT and NYMEX meet the first criterion because they are made up of members, at least some of whom are vested with the power and authority to govern the organizations. Both organizations are governed by CME Group, Inc.'s 33-member Board of Directors, and each is entitled to designate members to serve as voting members on the Board. The Board serves as the highest governing body for each exchange and is empowered to make policy for both.

CBOT and NYMEX meet the

second and third criteria because they have rulebooks that expressly state the qualifications for membership, CBOT posts these rules on its web site, and NYMEX makes them available on its web site and upon request. They meet the fourth requirement because both expressly solicit membership by advertising the benefits of membership on their respective web sites and inviting applications, and they meet the fifth requirement because they formally acknowledge an individual's membership through detailed procedures for applying for and approving membership. In addition, both exchanges provide jackets or badges to new members that permit access to the trading floor. Finally, CBOT and NYMEX were organized to operate as trading organizations and not primarily for the purpose of influencing federal elections, thus meeting the sixth criterion.

Having determined that CBOT and NYMEX are membership organizations, the next issue is to determine which persons within those organizations are members under the Act and, thus, may be solicited for contributions to the PAC. Under Commission regulations the term "members" includes all persons who currently satisfy the membership requirements of a membership organization, affirmatively accept the membership organization's invitation to become a member and:

• Have a significant financial attachment to the organization, such as a significant investment or ownership stake; or
• Pay membership dues at least annually of a specific, predetermined amount; or
• Have a significant organizational attachment that includes affirmation of membership on at least an annual basis and direct participatory rights in the organization's governance.

On a case-by-case basis, the Commission may also determine that individuals who do not precisely satisfy the above requirements nevertheless qualify as members, provided that such individuals demonstrate a "relatively enduring and independently significant financial or organizational attachment to the organization." 11 CFR 114.1(e)(3) and 100.134(g).

CME Group, Inc. asked whether the following categories of individuals qualify as members of the exchanges:

• Outright owners of seats, including owners who lease their seats to others (lessors);
• Owners of seats who temporarily transfer their memberships to others (temporary transferors); and
• Certain individuals who do not own seats, but who hold them and exercise membership rights associated with them on behalf of others (temporary transferees).

The value of a seat on CBOT or NYMEX has typically ranged between $500,000 and $1.5 million. Thus, outright owners of a seat, who currently satisfy the membership requirements of an exchange and have affirmatively accepted that membership, have either paid a substantial amount for the seat or have been given a seat having substantial value. The Commission has specifically recognized such an ownership stake in a stock or commodity exchange as a significant "investment or ownership stake," and hence a significant financial attachment. Therefore, outright owners of a seat are members.

Seat owners who lease their seats are also members. CBOT and NYMEX lessors retain beneficial ownership of the seat because they can unilaterally decide to terminate the lease and sell the seat. The retention of beneficial ownership and exclusive rights of alienation in the seats indicates that lessors retain their significant financial attachments to their respective exchanges during the lease period.

CBOT and NYMEX also allow individuals who own seats to temporarily transfer their memberships to other individuals, subject to certain conditions. These temporary transferors are members of their respective exchanges for the purposes of the Act and Commission regulations, even if the exchanges do not consider the transferors to be members during the transfer period. While they cannot exercise most of the prerogatives of membership associated with seat ownership during the transfer period, they may regain those prerogatives at any time by revoking the transfer. Thus, they are in effect "temporarily retired" or "temporarily inactive" members. Accordingly, they demonstrate "relatively enduring and independently significant financial" ties to the exchanges sufficient to qualify them as members.

Finally, the request asks about two types of temporary transferees. CBOT has members, known as member-firm transferees, who are not lessees but rather hold seats through transfer from a member firm. In NYMEX, there are individuals, known as conferring members, who qualify for membership in the exchange, but who essentially hold their memberships on behalf of member firms. Although these classes of transferees do not own their seats, they must apply for membership in the exchanges through the same processes that member-owners undergo. In affirmatively accepting such membership, member-firm transferees and conferring members agree to abide by, and are bound by, the rules of their respective exchanges and are subject to significant penalties from the exchange. Penalties range from warning letters and reprimands to substantial monetary penalties and suspension or expulsion from the exchange. Although member-firm transferees and conferring members do not own their seats, the exchanges' rulebooks show that they are current, fully-functioning trading members, having significant privileges in the trading of options contracts, futures contracts and/or commodities contracts and earn their livelihoods, at least in part, through such trading privileges. The fact that they are personally liable for violations of the membership rules and that their livelihoods, in terms of trading privileges, are dependent upon their continued status in the exchange suffices as a significant financial attachment despite the absence of an ownership interest. See AOs 1997-5 and 1995-2. Thus, both types of temporary transferees are members of their respective exchanges under the Act and Commission regulations.

Are the individual members of CME stockholders and therefore solicitable? Under the Act and Commission regulations the individual members of CME are stockholders. A stockholder is defined as someone who has:

• A vested beneficial interest in stock;
• The power to direct how that stock shall be voted, if it is voting stock; and
• The right to receive dividends.

Individuals acquiring seats in CME automatically own one share of Class B stock in CME Group, Inc.(1) Therefore, the first condition of qualification as a stockholder under the regulation is met. Individuals holding seats in CME have regular and special voting rights associated with their shares of stock, and they have the right to receive dividends. They also have the right to receive value for the share in the event of CME Group, Inc.’s liquidation. Therefore, the second and third criteria of stockholder status are also satisfied.

Are the three exchanges affiliated with CME Group, Inc.? Committees, including separate segregated funds, that are established, financed, maintained or controlled by the same corporation, person or group of persons, including any parent, subsidiary, branch, department or local unit thereof, are affiliated. 2 U.S.C. §441a(a)(5); 11 CFR 100.5(g)(2) and 110.3(a)(l)(ii). As wholly owned subsidiaries, CME, CBOT and NYMEX are affiliated with CME Group, Inc.

Are the members or stockholders of the three exchanges part of CME Group, Inc.'s solicitable class? As holders of Class B stock in CME Group, Inc., the individual members of CME are solicitable by CME Group, Inc. 2 U.S.C. §441b(b)(4)(A)(i) and 11 CFR 114.1(j). With respect to the categories of members of CBOT and NYMEX, the Commission has concluded in previous advisory opinions that a corporation may solicit all individuals within the solicitable classes of its subsidiaries or other affiliates. See AOs 2005-17, 2003-28 and 2001-18. Although CME Group, Inc. is a corporation and CBOT and NYMEX are membership organizations, the Commission has previously affirmed that this difference is not an obstacle to permissible solicitation. See AO 2005-17.

Because CBOT and NYMEX are affiliated with CME Group, Inc., and are incorporated membership organizations with solicitable members, any SSF established by either of the exchanges could transfer without limit its federally permissible contributions, received from its own members, to CME Group, Inc. PAC. It follows that CME Group, Inc. may solicit the solicitable members of CBOT and NYMEX for contributions to CME Group, Inc. PAC. AO 2005-17.

Conclusion

CME Group, Inc. may solicit voluntary contributions to the PAC from the following categories of members of CBOT and NYMEX regardless of whether such members hold stock in CME Group, Inc.:

• Outright owners of seats on the exchanges, including owners who lease their seats to others;
• Owners of seats who temporarily transfer their memberships to others; and
• Certain individuals who do not own seats, but who hold them and exercise membership rights associated with them on behalf of others.

Because individual members of CME qualify as stockholders of CME Group, Inc., CME Group, Inc. may also solicit contributions to the PAC from those individuals.

AO 2008-21: Date Issued: February 13, 2009; Length: 12 pages.