Self-Regulatory Organizations; International Securities Exchange, Inc.; Notice of Filing of Proposed Rule Change Relating to Its Proposal To Reorganize From Its Current Structure Into a Holding Company Structure, 13875-13882 [E6-3855]
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Federal Register / Vol. 71, No. 52 / Friday, March 17, 2006 / Notices
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For the Commission by the Division of
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Nancy M. Morris,
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[FR Doc. E6–3901 Filed 3–16–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53450; File No. SR–ISE–
2006–04]
Self-Regulatory Organizations;
International Securities Exchange, Inc.;
Notice of Filing of Proposed Rule
Change Relating to Its Proposal To
Reorganize From Its Current Structure
Into a Holding Company Structure
March 8, 2006.
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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 January
12, 2006, the International Securities
Exchange, Inc. (‘‘ISE, Inc.’’) 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 ISE, Inc. The
Exchange filed Amendment No. 1 to the
proposed rule change on March 3, 2006,
and withdrew Amendment No. 1 on
March 3, 2006. On March 3, 2006, the
Exchange filed Amendment No. 2.3 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
ISE, Inc. is proposing to reorganize
from its current structure into a holding
company structure as more fully
described below. The text of the
proposed rule change is available on
11 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Partial Amendment No. 2 dated March 3,
2006 (‘‘Amendment No. 2’’).
1 15
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ISE, Inc.’s Web site (https://
www.iseoptions.com), at the principal
office of ISE, Inc., and at the
Commission’s Public Reference Room.
The text of Exhibit 5 of the proposed
rule change, as well as Amendment No.
2, is also available on the Commission’s
Web site (https://www.sec.gov/rules/
sro.shtml).
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, ISE,
Inc. 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. ISE, Inc. 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
ISE, Inc. proposes to reorganize from
the current structure of ISE, Inc., a
Delaware corporation, into a holding
company structure (the
‘‘Reorganization’’).4 A holding
company, International Securities
Exchange Holdings, Inc., a Delaware
corporation (‘‘ISE Holdings’’), and its
wholly owned subsidiary, International
Securities Exchange, LLC, a Delaware
limited liability company (‘‘ISE, LLC’’),
have been formed in contemplation of
the Reorganization. Consummation of
the Reorganization is conditioned upon
4 For a discussion of ISE, Inc.’s current capital
stock and governance structure, see Securities
Exchange Act Release No. 51029 (January 12, 2005),
70 FR 3233 (January 21, 2005) (SR–ISE–2004–29)
(relating to the approval of certain amendments to
ISE, Inc.’s Certificate of Incorporation, Constitution,
and ISE Rules in connection with ISE, Inc.’s initial
public offering) (‘‘IPO Order’’). In connection with
the initial public offering. ISE, Inc. filed a
registration statement on Form S–1 with the
Commission (File No. 333–117145).
This proposed rule change includes: (a) The
deletion of the Amended and Restated Certificate of
Incorporation of ISE, Inc. (‘‘ISE, Inc. Amended
Certificate’’) and Amended and Restated
Constitution of ISE, Inc. (‘‘ISE, Inc. Amended
Constitution’’); (b) the proposed Certificate of
Incorporation of International Securities Exchange
Holdings, Inc. (‘‘Holdings Certificate‘‘); (c) the
proposed Bylaws of International Securities
Exchange Holdings, Inc. (‘‘Holdings Bylaws‘‘); (d)
the proposed Limited Liability Company Agreement
of International Securities Exchange, LLC (‘‘LLC
Agreement‘‘); (e) the proposed Constitution of
International Securities Exchange, LLC (‘‘LLC
Constitution’’); and (f) certain proposed
amendments to the Rules of ISE, Inc. (the ‘‘ISE
Rules‘‘) to reflect the Reorganization.
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satisfaction of certain conditions,
including approval of the
Reorganization by the Commission.5
After satisfaction of these conditions,
ISE, Inc. will merge into ISE, LLC, with
ISE, LLC as the surviving entity of the
merger (the ‘‘Merger’’). In the Merger:
(1) Each outstanding share of Class A
Common Stock will be converted into
one share of ISE Holdings common
stock, par value $.01 per share (‘‘ISE
Holdings Common Stock’’);
(2) Each outstanding share of Series
B–1 Common Stock will be converted
into one PMM Right (‘‘PMM Right’’).
Each PMM Right provides the holder
with (a) the right to vote on the election
of the PMM Directors of ISE, LLC,6 (b)
the right to vote on any change in,
amendment or modification of, the Core
Rights 7 or the definition of Core Rights,
and (c) the predicate to obtaining the
trading rights and privileges associated
with each PMM Right as set forth in the
LLC Constitution and ISE Rules for a
PMM;
(3) Each outstanding share of Series
B–2 Common Stock will be converted
into one CMM Right (‘‘CMM Right’’).
Each CMM Right provides the holder
with (a) the right to vote on the election
of the CMM Directors,8 (b) the right to
vote on any change in, amendment or
modification of, the Core Rights or the
definition of Core Rights, and (c) the
predicate to obtaining the trading rights
and privileges of each CMM Right as set
5 ISE, Inc. has received a private letter ruling from
the Internal Revenue Service Relating to the
treatment of the proposed Reorganization under
U.S. Federal tax law with respect to ISE, Inc., its
stockholders, and ISE Holdings. The ruleing
provides assurances that the Reorganization and
related transactions will not result in any material
taxes to the holders of shares of ISE, Inc. Class A
Common Stock, par value $.01 per share (‘‘Class A
Common Stock’’), ISE, Inc. Class B Common Stock,
Series B–1, par value $.01 per share (‘‘Series B–1
Common Stock’’), ISE, Inc. Class B Common Stock,
Series B–2, par value $.01 per share (‘‘Aeries B–2
Common Stock’’), or ISE, Inc. Class B Common
Stock, Series B–3, par value $.01 per share (‘‘Series
B–3 Common Stock’’ and together with the Series
B–1 Common Stock and Series B–2 Common Stock,
the ‘‘Class B Common Stock’’). See Internal
Revenue Service PLR–135357–04 (November 17,
2004.
6 ‘‘PMM Directors’’ as defined in Section 3.2(b) of
proposed LLC Constitution means two directors,
who must be officers, directors, or partners of
Primary Market Makers (‘‘PMM’s’’), elected by a
plurality vote of the holders of the PMM Rights
voting together as a class.
7 ‘‘Core Rights’’ as defined in Section 2.2 of
proposed LLC Agreement means any increase in the
number of authorized PMM Rights or CMM Rights.
8 ‘‘CMM Directors’’ as defined in Section 3.2(b) of
proposed LLC Constitution means two directors,
who must be officers, directors, or partners of
Competitive Market Makers (‘‘CMMs’’), elected by
a plurality vote of the holders of the CMM Rights
voting together as a class.
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forth in the LLC Constitution and ISE
Rules for a CMM; and
(4) Each share of Series B–3 Common
Stock will be converted into one EAM
Right (‘‘EAM Right’’ and together with
the PMM Rights and CMM Rights, the
‘‘Exchange Rights’’). Each EAM Right
provides the holder thereof with (a) the
right to vote on the election of the EAM
Directors 9 and (b) the predicate to
obtaining the trading rights and
privileges of such EAM Right as set
forth in the LLC Constitution and ISE
Rules for an EAM.
As a result of the Merger, the holders
of shares of Class A Common Stock will
become stockholders of ISE Holdings
and holders of Series B–1 Common
Stock, Series B–2 Common Stock, and
Series B–3 Common Stock will become
holders of PMM Rights, CMM Rights,
and EAM Rights, respectively, in ISE,
LLC, as further described below.
Effectively, ISE Holdings will become
the sole equity owner of ISE, LLC, and
the shares of ISE Holdings Common
Stock will in turn be publicly held.
Furthermore, upon consummation of
the Merger, the percentage of the
outstanding shares of ISE Holdings
Common Stock held after the Merger by
each holder of Class A Common Stock
will be identical to the percentage of
Class A Common Stock that such holder
held prior to the Merger. The percentage
of Exchange Rights held after the Merger
by each holder of Class B Common
Stock will also be identical to the
percentage of Class B Common Stock
that such holder held prior to the
Merger, giving effect to the particular
series of Class B Common Stock and
class of Exchange Rights held and to be
held by such holder.
ISE, Inc. represents that, currently, no
Person, either alone or together with its
Related Persons, owns more than 40
percent of the outstanding shares of any
class or series of stock of ISE, Inc., and
no member, either alone or together
with its Related Persons, owns more
than 20 percent of the outstanding
shares of any class or series of stock of
ISE, Inc.10 Accordingly, ISE, Inc. has no
9 ‘‘EAM Directors’’ as defined in Section 3.2(b) of
proposed LLC Constitution means two directors,
who must be officers, directors, or partners of
Electronic Access Members (‘‘EAMs’’) elected by a
plurality vote of the holders of the EAM Rights
voting together as a class. The PMM Directors,
CMM Directors, and EAM Directors are collectively
referred to as the ‘‘Exchange Directors.’’
10 ‘‘Person’’ means an individual, partnership
(general or limited), joint stock company,
corporation, limited liability company, trust or
unincorporated organization, or any governmental
entity or agency or political subdivision thereof. See
ISE, Inc. Amended Certificate, Article Fourth,
Subdivision III. Currently, ‘‘Related Person’’ means
(1) With respect to any Person, all ‘‘affiliates’’ and
‘‘associates’’ of such Person (as such terms are
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reason to believe that the
Reorganization, as detailed above, will
result in any large concentrations of
ownership or voting power by ISE, Inc.’s
current stockholders or members. In
addition, ISE, Inc. represents that it will
continue to have a trading concentration
limit and a 20% member ownership
limit.11
a. Description of ISE, LLC
i. General
ISE, LLC will be a wholly owned
subsidiary of ISE Holdings. As the sole
LLC member of ISE, LLC, ISE Holdings
will have sole voting control over ISE,
LLC, except for certain matters relating
to Exchange Rights.12 Specifically, as
defined in Rule 12b–2 under the Act); (2) with
respect to any Person constituting an exchange
member (as defined in the ISE, Inc. Amended
Constitution), any broker or dealer with which such
Exchange Member is associated; and (3) any two or
more Persons that have any agreement,
arrangement, or understanding (whether or not in
writing) to act together for the purpose of acquiring,
voting, holding, or disposing of shares of the capital
stock of ISE, Inc. See ISE, Inc. Amended Certificate,
Article Fourth, Subdivision III. ISE, Inc. proposes
to modify the definition of ‘‘Related Persons’’ in
connection with the Reorganization to also include,
with respect to any Person, any executive officer (as
defined under Rule 3b–7 under the Act), director,
general partner, manager, or managing member, as
applicable, and, with respect to any Person that is
an executive officer (as defined under Rule 3b–7
under the Act), director, general partner, manager,
or managing member of a company, corporation, or
similar entity, such company, corporation, or entity,
as applicable. See proposed Holdings Certificate,
Article Fourth, Subdivision III.
11 For the member trading oncentration limit, see
ISE Rule 303(b), which will continue to exist after
the Reorganization, and proposed LLC Agreement,
Section 6.5. ISE, Inc. proposes to modify Section
6.5(a) of proposed LLC Agreement to include
lessees of Exchange Rights and to clarify that
holders and lessees of Exchange Rights also may not
exercise any of the non-trading rights associated
with more than 20% of such Exchange Rights. ISE,
Inc. also notes that the Commission is in the
process of reviewing issues relating to new
ownership structures of self-regulatory
organizations (‘‘SROs’’) and has proposed rules
relating to the ownership of SROs, including
imposing limitations on member ownership of an
SRO or facility of an SRO. See Securities Exchange
Act Release No. 50699 (November 18, 2004), 69 FR
71126 (December 8, 2004).
ISE, Inc. also notes that the Commission recently
approved a separate proposal to amend ISE Rule
303 to increase the 20% member trading
concentration limit to 30% for PMMs only,
provided that in approving any PMM to exercise the
trading privileges associated with more than 20%
of the PMMs, the board of directors of ISE, Inc. (the
‘‘ISE, Inc. Board’’) will not approve any
arrangement in which the PMM would gain
ownership or voting rights in excess of those
permitted under the ISE, Inc. Amended Certificate
or ISE, Inc. Amended Constitution. See Securities
Exchange Act Release No. 53271 (February 10,
2006), 71 FR 8625 (February 17, 2006). See also
Amendment No. 2, supra note 3.
12 The proposed LLC Agreement only permits
ISE, LLC to have one LLC member at any given
time, and assignment of the sole LLC member
interest is subject to Commission approval.
Proposed LLC Agreement, Sections 2.1, 3.1, and 7.1.
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noted below, the composition of and
qualifications for the Board of Directors
of ISE, LLC (the ‘‘LLC Board’’) will be
the same as they are for the ISE, Inc.
Board, and ISE Holdings will have the
sole right to vote on the election of a
majority of the members of the LLC
Board. In general, however, the
management and administration of ISE,
LLC will be carried out by the LLC
Board and by the executive officers of
ISE, LLC, who will be appointed by the
LLC Board.13 In addition, to further
preserve the autonomy of ISE, LLC, all
meetings of the LLC Board pertaining to
the self-regulatory function of ISE, LLC
(including disciplinary matters) or to
the structure of the market in which ISE,
LLC regulates will be closed to all
persons other than the LLC Board and
officers, staff, counsel, or other advisors
of ISE, LLC whose participation is
necessary or appropriate to the proper
discharge of ISE, LLC’s regulatory
functions and any representative of the
Commission. No members of the Board
of Directors of ISE Holdings (the
‘‘Holdings Board’’) who are not also LLC
Board members and no officers, staff,
counsel, or advisors of ISE Holdings
who are not also officers, staff, counsel,
or advisors of ISE, LLC will be allowed
to participate in such meetings.14
ii. Exchange Operations
ISE, LLC will operate as a registered
‘‘national securities exchange’’ under
Section 6 of the Act 15 and will maintain
ISE, Inc.’s current regulatory authority
over its members.16 All persons using
ISE, LLC as an exchange will continue
to be subject to the current ISE Rules, as
proposed to be modified herein in order
to reflect the Reorganization.17 ISE, LLC
will continue to carry out the statutory
responsibilities to enforce compliance of
its members with the provisions of the
Federal securities laws and ISE Rules.18
ISE Holdings will not have any voting rights with
respect to the Core Rights, the election of Exchange
Directors, or any other matters relating to the
Exchange Rights, such as the eligibility and
approval of persons to own, transfer or lease
Exchange Rights, rulemaking, supervision of
entities holding Exchange Rights, and the like.
Proposed LLC Agreement, Section 2.2.
13 Proposed LLC Constitution, Section 5.1(a). See
also proposed LLC Agreement, Section 5.1.
14 Proposed LLC Constitution, Section 3.2(d).
15 15 U.S.C. 78f.
16 For purposes of the Act, the holders or lessees
of Exchange Rights will be deemed ‘‘members’’ of
ISE, LLC.
17 ISE, Inc. is proposing to amend the ISE Rules
to, among other things, change references to ‘‘Class
B common stock,’’ ‘‘Class B stockholders,’’
‘‘shares,’’ and similar or derivative words to
‘‘Exchange Rights,’’ ‘‘Exchange Rights holders,’’ and
‘‘Rights’’ and the like.
18 In addition, in discharging his or her
responsibilities as a member of the LLC Board, each
director shall take into consideration the effect that
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ISE, LLC will continue to be required to
approve any changes to ISE Rules and
governing documents of ISE, LLC and to
file any such changes with the
Commission pursuant to Section 19(b)
of the Act and Rule 19b–4 thereunder.19
In addition, ISE, LLC is proposing to
adopt a new ISE Rule 312, which will
provide that, without prior Commission
approval, ISE, LLC or any entity with
which it is affiliated shall not, directly
or indirectly through one or more
intermediaries, acquire or maintain an
ownership interest in a Member or nonmember owner, and a Member or nonmember owner shall not be or become
an affiliate of ISE, LLC or an affiliate of
any affiliate of ISE, LLC. Nothing in the
new ISE Rule 312 will prohibit a
Member or non-member owner from
acquiring or holding any equity interest
in ISE Holdings, Inc. that is permitted
by the Holdings Certificate or prohibit
any Member from being or becoming an
affiliate of ISE, LLC or an affiliate of any
affiliate of ISE, LLC solely by reason of
any officer, director, or partner of such
Member being or becoming an Exchange
Director pursuant to the LLC
Constitution.20
All confidential information
pertaining to the self-regulatory function
of ISE, LLC (including but not limited
to disciplinary matters, trading data,
trading practices, and audit information)
contained in books and records of ISE,
LLC shall: (1) Not be made available to
any persons (other than as provided
below) other than to those officers,
directors, employees, and agents of ISE,
LLC that have a reasonable need to
know the contents thereof; (2) be
retained in confidence by ISE, LLC and
the officers, directors, employees, and
agents of ISE, LLC; and (3) not be used
for any commercial purposes. Nothing
in the LLC Agreement shall be
interpreted to limit or impede the rights
his or her actions would have on the ability of ISE,
LLC to carry out its responsibilities under the Act
and on the ability of ISE, LLC to engage in conduct
that fosters and does not interfere with ISE, LLC’s
ability to prevent fraudulent and manipulative acts
and practices, to promote just and equitable
principles of trade, to foster cooperation and
coordination with persons engaged in regulating,
clearing, settling, processing information with
respect to, and facilitating transactions in securities,
to remove impediments to and perfect the
mechanisms of a free and open market and a
national market system, and in general, to protect
investors and the public interest. In discharging his
or her responsibilities as a member of the LLC
Board, each director also shall comply with the
Federal securities laws and rules and regulations
thereunder and cooperate with the Commission.
Proposed LLC Agreement, Section 5.1(b).
19 15 U.S.C. 78s(b) and 17 CFR 240.19b–4.
20 The term ‘‘Member,’’ as proposed to be defined
in ISE Rule 100, means an organization that has
been approved to exercise trading rights associated
with Exchange Rights.
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of the Commission to access and
examine such confidential information
pursuant to the Federal securities laws
and rules and regulations thereunder or
to limit or impede the ability of any
officers, directors, employees, or agents
of ISE, LLC to disclose such confidential
information to the Commission.21
As the registered SRO, ISE, LLC will
continue to have ultimate responsibility
for the administration and enforcement
of the rules governing its options
business operations. The regulatory
relationship that ISE, Inc. currently
maintains with the National Association
of Securities Dealers (‘‘NASD’’) will not
be affected by the Reorganization, and
ISE, LLC, as the successor-in-interest to
ISE, Inc., will continue to have the same
regulatory relationship with the
NASD.22 The Reorganization will not
affect the current disciplinary process.
ISE, LLC’s disciplinary process will be
the same as the process for ISE, Inc. and
will continue to be governed by the
Business Conduct Committee, which is
comprised of members.23 All decisions
with respect to the listing and delisting
of options and related products will
continue to be made in accordance with
ISE Rules.
ISE, Inc. currently is a participant in
various national market system plans,
including the Options Price Reporting
Authority, which provides options price
reporting, and the Options Intermarket
Linkage Plan, which addresses
intermarket options trading. After the
Reorganization, ISE, LLC proposes to
continue to participate in these plans
and have a representative serve on the
committees overseeing these plans.
iii. Organization, Management and
Governance of ISE, LLC
Since ISE, LLC will be the surviving
entity in the Merger, the LLC Agreement
and the LLC Constitution will function
as the charter and bylaws of the
surviving entity. ISE, Inc. represents
that the provisions of the LLC
Agreement and LLC Constitution are
substantively the same as the current
ISE, Inc. Amended Certificate and ISE,
Inc. Amended Constitution,
respectively, insofar as exchange
21 Proposed
LLC Agreement, Section 4.1(b).
Securities Exchange Act Release No. 4781
(May 14, 2003), 68 FR 27869 (May 21, 2003)
(approving an agreement pursuant to Rule 17d–2 of
the Act between the NASD and ISE, Inc.).
23 Currently, the Chief Regulatory Officer of ISE,
Inc. authorizes the institution of disciplinary
actions, and ISE, Inc., with the assistance of the
NASD staff, if appropriate, conducts disciplinary
proceedings before the Business Conduct
Committee. Decisions of the Business Conduct
Committee may be appealed to the Committee for
Review of ISE, Inc., which is composed of directors
of ISE, Inc.
22 See
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operations and structure and corporate
governance are concerned.24 ISE, LLC
will continue to have a similar
interpretation regarding the payment of
‘‘dividends’’ to ‘‘stockholders,’’ except
that the interpretation will relate to
distributions to the sole LLC member
and holders of Exchange Rights.
Specifically, ISE, LLC will interpret ISE
Rules to require that any revenue it
receives from regulatory fees or
penalties will be segregated and applied
to fund the legal, regulatory, and
surveillance operations of ISE, LLC and
will not be used to pay distributions to
the sole LLC member or holders of
Exchange Rights, except in the event of
liquidation of ISE, LLC, in which case
the sole LLC member will be entitled to
the distribution of ISE, LLC’s remaining
assets.25
As is the case currently with respect
to the ISE, Inc. Board, the LLC Board
will be comprised of 15 members,26
eight of whom will be Non-Industry
Directors 27 elected by ISE Holdings as
the sole LLC member, six of whom will
be Exchange Directors elected by a
plurality of the holders of the Exchange
Rights, and the Chief Executive Officer
24 See IPO Order, supra note 4. In addition, while
the ISE, Inc. Amended Constitution currently only
requires that no officers may be holders of shares
of Class B Common Stock or affiliated with an
exchange member, ISE, LLC will require that no
officers or employees of ISE, LLC may be holders
of Exchange Rights or affiliated with an Exchange
Member. Proposed LLC Constitution, Section 4.5.
ISE, Inc. also is codifying its current practice of
prohibiting the transfer or lease of fractional
portions of any Exchange Rights. Proposed LLC
Constitution, Sections 12.1, 12.2, and 12.4.
25 See Securities Exchange Act Release No. 45803
(April 23, 2002), 67 FR 21306 (April 30, 2002)
(adopting this interpretation in connection with
ISE, Inc.’s demutualization).
26 ISE, Inc. proposes that the number of members
of the LLC Board may only be changed by the LLC
Board with the approval of the affirmative vote of
the holders of two-thirds of the then outstanding
Exchange Rights. Proposed LLC Constitution,
Section 3.2. Currently, the number of ISE, Inc.
Board members can only be changed by the ISE,
Inc. Board with the approval of the affirmative vote
of the holders of two-thirds of the voting power of
the then outstanding shares of Class A Common
Stock. ISE, Inc. Amended Certificate, Article
Seventh.
27 ‘‘Non-Industry Director’’ means a director that
meets the requirements of ‘‘non-industry
representative.’’ Proposed LLC Constitution,
Section 3.2(b). The term ‘‘non-industry
representative’’ means any person who would not
be considered an ‘‘industry representative,’’ as well
as (i) a person affiliated with a broker or dealer that
operates solely to assist the securities-related
activities of the business of non-member affiliates
or (ii) an employee of an entity that is affiliated with
a broker or dealer that does not account for a
material portion of the revenues of the consolidated
entity and who is primarily engaged in the business
of the non-member entity. Proposed LLC
Constitution, Section 13.1(w). These definitions are
the same as the current definitions. See ISE, Inc.
Amended Constitution, Sections 3.2(b) and 14.1(q).
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of ISE, LLC.28 Each year, the
Nominating Committee, which is not a
committee of the LLC Board, will
nominate the Exchange Directors, and
the Corporate Governance Committee,
which is a committee of the LLC Board,
will nominate the Non-Industry
Directors.29 Holders of Exchange Rights
also may nominate Exchange Directors
by petition.30 The initial members of the
LLC Board were the individuals serving
as directors of ISE, Inc. on the date of
formation of ISE, LLC.31 Similar to the
manner of election of the current ISE,
Inc. Board, at the first annual meeting of
the sole LLC member and holders of
Exchange Rights and at each subsequent
annual meeting, ISE Holdings will elect
the Non-Industry Directors, and holders
of Exchange Rights will elect the
Exchange Directors, to serve until the
next annual meeting or until their
successors are elected and qualified.32
The Chairman of the LLC Board is a
Non-Industry Director who is elected by
the LLC Board. Each director of ISE,
LLC holds office for a term of two years,
except the Chief Executive Officer of
ISE, LLC who holds office for a term of
one year or such earlier time as such
person no longer serves as Chief
Executive Officer. The directors, other
than the Chief Executive Officer, are
divided into two classes, designated as
Class I and Class II directors. At each
annual meeting, the successors of the
class of directors whose term expires at
that meeting will be elected to hold
office for a term expiring at the annual
meeting held in the second year
28 Proposed LLC Agreement, Section 5.2 and
proposed LLC Constitution, Section 3.2(b). Pursuant
to Section 4.6 of proposed LLC Constitution, the
Chief Executive Officer of ISE, LLC is elected by the
LLC Board and will be nominated by the LLC Board
for a directorship by virtue of his or her office.
29 See proposed LLC Constitution, Section 3.10.
See also ISE, Inc. Amended Constitution, Section
3.10.
30 ISE, Inc. represents that the petition process
following the Reorganization will be substantially
similar to the petition process in place currently for
ISE, Inc., except that petitions submitted for
nominees for Exchange Directors of ISE, LLC will
not be required to contain all the information that
is required to be disclosed pursuant to Regulation
14A under the Act since ISE, LLC will not be
subject to the proxy requirements under the Act. In
addition, for purposes of determining whether a
person has been nominated for election by petition
by the requisite percentage set forth in the proposed
LLC Constitution, no Exchange Member, alone or
together with its affiliates, may account for more
than fifty percent (50%) of the signatures of the
holders of outstanding Exchange Rights of the series
entitled to elect such person, and any such
signatures by such Exchange Member, alone or
together with its affiliates, in excess of such fifty
percent (50%) limitation shall be disregarded. Id.
31 The current directors of ISE, LLC are the same
directors of ISE, Inc. immediately following the
2005 Annual Meeting of Stockholders of ISE, Inc.
32 See proposed LLC Constitution, Section 3.2(c).
See also Amendment No. 2, supra note 3.
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following the year of their election and
until their successors are elected and
qualified. If there is a vacancy on the
LLC Board, the vacancy will be filled by
the LLC Board, and the person chosen
to fill the vacancy will serve until the
expiration of the term of office of the
class to which such person was elected.
No Exchange Director may serve more
than three consecutive terms, and, after
a two-year hiatus, may be eligible to
serve as an Exchange Director again.33
ISE, LLC will have a Finance & Audit
Committee, a Corporate Governance
Committee, and a Compensation
Committee, all of which will be
governed by charters.34 As is currently
the case with respect to ISE, Inc. and its
shares of Class B Common Stock, ISE,
LLC will require ownership of an
Exchange Right as a predicate to
obtaining the trading rights and
privileges associated with such
Exchange Right.35 Holders of PMM and
CMM Rights will be entitled to the same
Core Rights to which the holders of
Series B–1 Common Stock and Series B–
2 Common Stock are entitled with
respect to ISE, Inc.36
ISE, LLC will have officers, including
a President and Chief Executive Officer,
Chief Operating Officer, Chief Financial
Officer, Chief Information Officer, Chief
Regulatory Officer, and Chief Marketing
Officer, who will manage the business
and affairs of ISE, LLC, subject to the
oversight of the LLC Board and, in some
cases, the approval of ISE Holdings as
the sole LLC member.37 The initial
officers of ISE, LLC will be the
individuals currently serving as the
officers of ISE, Inc.
The organizational documents of ISE,
LLC will differ from the ISE, Inc.’s
organizational documents in several
notable respects. Because ISE, LLC is
not a corporation and has limited
33 Proposed LLC Constitution, Section 3.2(e). ISE,
Inc. did not impose term limits on Non-Industry
Directors, and ISE, LLC does not propose to do so,
though the ISE, LLC Corporate Governance
Committee may determine whether and how to
provide for such term limits at a later time.
34 Proposed LLC Constitution, Sections 5.4, 5.5
and 5.6. ISE, Inc. proposes that the LLC Board may
designate additional committees by resolution
passed by a majority of the whole LLC Board.
Proposed LLC Constitution, Section 5.1. Currently,
the ISE, Inc. Board may designate additional
committees by a resolution of a majority of a
quorum. ISE, Inc. Amended Constitution, Section
5.1
35 ISE, Inc. Amended Certificate, Article Fourth,
Subdivision II(b)(ii) and proposed LLC Agreement,
Section 6.2.
36 ISE, Inc. Amended Certificate, Article Fourth,
Subdivision II(b)(v)(B) and proposed LLC
Agreement, Section 6.3(b).
37 Under Delaware law, certain events such as a
sale of all or substantially all of the assets, merger,
or liquidation of ISE, LLC may require the approval
of ISE Holdings.
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liability members instead of
stockholders, ISE Holdings and
Exchange Right holders will not have
voting, dividend, and liquidation rights
typically associated with common stock
under state corporate law.38 For
example, the LLC Act does not
statutorily confer the same or similar
voting rights on limited liability
members as are conferred to
stockholders, pursuant to the Delaware
General Corporation Law. Accordingly,
following the Reorganization, the sole
LLC member and the Exchange Right
holders will not statutorily be entitled to
vote on certain items with respect to
which the holders of Class A and Class
B Common Stock would have had a
voting right (i.e., an increase or decrease
in the aggregate number of authorized
shares of Class A or Class B Common
Stock, a change in par value, and any
alteration or change in the powers,
preferences, or special rights of the
shares so as to affect them adversely).
ISE, Inc. notes that some of these
items are irrelevant in the context of a
wholly-owned limited liability company
(e.g., the notion of par value and certain
Class A holder voting rights that instead
will be relevant at the ISE Holdings
level), but where still relevant and
practical, ISE, Inc. has attempted to
preserve in proposed LLC Agreement
and proposed LLC Constitution certain
rights of the holders of Class B Common
Stock following the Reorganization. As
a result, holders of Exchange Rights will
continue to be entitled to vote with
respect to the Core Rights (that is, any
increase in the number of PMM Rights
or CMM Rights to be approved by
holders of a majority of PMM Rights,
voting as a separate class, and CMM
Rights, voting as a separate class) and
with respect to any amendments that
would alter or change the powers,
preferences, or special rights of one or
more series of Exchange Rights so as to
affect them adversely (to be approved by
holders of a majority of Exchange Rights
entitled to vote thereon).39
Also, since ISE, LLC will have ISE
Holdings as its sole LLC member, ISE,
Inc. deems certain of the antitakeover
38 Because Exchange Rights will not have ‘‘par
value’’ following the Reorganization, holders of
EAMs also will not be entitled to a return of the
$0.01 par value per share upon withdrawal from
ISE, LLC. Additionally, the holders of Exchange
Rights will not be ‘‘members’’ of ISE, LLC for
purposes of the Delaware Limited Liability
Company Act (the ‘‘LLC Act’’). Proposed LLC
Agreement, Section 6.1.
39 The sole LLC member will have a similar right
to approve amendments to the proposed LLC
Constitution if such amendments would alter or
change the powers, preferences, or special rights of
the sole LLC member so as to affect it adversely.
Proposed LLC Agreement, Section 8.1 and proposed
LLC Constitution, Section 10.1.
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provisions in the ISE, Inc.
organizational documents less necessary
for ISE, LLC. Specifically, ISE, LLC’s
organizational documents will not: (1)
Deny the right of ISE Holdings to call a
special meeting; (2) require ‘‘advance
notice’’ of ISE Holdings’’ or Exchange
Right holders’ proposals; (3) except as
described herein, impose an ownership
or voting limitation on ISE Holdings (or
any corrective mechanism with respect
to any ownership limitation); 40 or (4)
require any super-majority votes with
respect to certain significant matters,
such as mergers.41
b. Description of ISE Holdings
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i. General
ISE Holdings will be governed by the
Holdings Certificate and the Holdings
Bylaws. ISE Holdings will not cause
ISE, LLC to be operated in a manner
inconsistent with ISE, LLC’s regulatory
and oversight functions.42 The Holdings
Certificate and Holdings Bylaws, as well
as the LLC Agreement and LLC
Constitution, are intended to ensure that
the Reorganization will not unduly
40 ISE, Inc. notes that ownership and voting
limitations will not be relevant to a wholly owned
subsidiary of a holding company, although ISE
Holdings itself will have substantially the same
ownership and voting limitations that ISE, Inc.
currently has, as described below. Additionally, as
stated earlier, ISE, LLC will continue to have a
trading concentration limit and 20% member
ownership limit pursuant to ISE Rule 303(b), except
as described herein, and proposed LLC Agreement,
Section 6.5. See supra note 11 for a discussion of
certain modifications to ISE Rule 303(b) approved
in a separate rule filing by the Commission. See also
Amendment No. 2, supra note 3.
41 For the text of the current antitakeover
provisions, see ISE, Inc. Amended Certificate,
Article Eighth and ISE, Inc. Amended Constitution,
Section 2.2 (pertaining to calling a special meeting);
ISE, Inc. Amended Constitution, Section 2.7
(pertaining to ‘‘advance notice’’ provisions); ISE,
Inc. Amended Certificate, Article Fourth,
Subdivision III (pertaining to ownership and voting
limitations); and ISE, Inc. Amended Certificate,
Article Seventh (pertaining to super-majority votes).
In addition, because ISE, LLC will be a whollyowned subsidiary of ISE Holdings, and ISE
Holdings will be entitled to elect a majority of the
LLC Board, it is deemed less necessary to allow the
sole LLC member to amend the proposed LLC
Constitution (currently, ISE, Inc. stockholders
representing at least a majority of the voting power
may amend the ISE, Inc. Amended Constitution).
However, the sole LLC member has the right to
approve amendments to proposed LLC Constitution
if such amendments would alter or change the
powers, preferences, or special rights of the sole
LLC member so as to affect it adversely. For the text
of the current power to amend the ISE, Inc.
Amended Constitution, see ISE, Inc. Amended
Constitution, Section 11.1. For the text of the
proposed power to amend the LLC Constitution, see
proposed LLC Constitution, Section 10.1.
42 In particular, ISE Holdings, its officers,
directors, and employees will give due regard to the
preservation of the independence of the selfregulatory function of ISE, LLC and will not
interfere with the effectuation of any decision by
the LLC Board relating to such function. Proposed
Holdings Bylaws, Section 1.5.
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interfere with or restrict the ability of
ISE, LLC or the Commission to
effectively carry out their respective
regulatory oversight responsibilities
under the Act and generally to enable
ISE, LLC to operate in a manner that
complies with the Federal securities
laws, including furthering the objectives
of Section 6(b)(5) of the Act.43 In
addition, ISE Holdings and its officers,
directors, employees, and agents will be
required to submit to the jurisdiction of
the U.S. Federal courts, the
Commission, and ISE, LLC for the
purposes of any suit, action, or
proceeding, pursuant to the U.S. Federal
securities laws and the rules or
regulations thereunder arising out of, or
relating to, the activities of ISE, LLC and
will waive any claims of inconvenient
forum or improper venue.44
The ISE Holdings Common Stock will
have the traditional features of common
stock, including voting, dividend, and
liquidation rights.45 Except as described
below, the holders of ISE Holdings
Common Stock will be entitled to vote
on all matters submitted to the
stockholders for a vote, and, except as
discussed below, each holder will have
one vote per share of ISE Holdings
Common Stock owned.46 As discussed
further below, holders of ISE Holdings
Common Stock will be subject to
substantially the same ownership and
voting limitations with respect to ISE
Holdings Common Stock to which the
holders of Class A Common Stock
currently are subject.
ii. Organization, Management and
Governance of ISE Holdings
ISE Holdings will be governed under
the direction of the Holdings Board. The
number of directors shall be fixed by
resolution of the Holdings Board and is
expected to be nine immediately
following the Reorganization.47 Each
year, the Corporate Governance
Committee of ISE Holdings will
nominate candidates for election as
directors for the class of directors
standing for election at the ISE Holdings
annual meeting of stockholders.48 As
required by the New York Stock
U.S.C. 78f(b)(5).
Holdings Bylaws, Section 1.4. ISE
Holdings and its officers, directors, employees, and
agents will also maintain an agent for service of
process in the U.S. Id.
45 ISE Holdings will be authorized to pay
dividends to the stockholders of ISE Holdings as
and when declared by the Holdings Board.
46 ISE Holdings may issue preferred stock in the
future, the terms of which will be determined by
the Holdings Board.
47 The Holdings Board is currently comprised of
two directors; one is the Chief Executive Officer of
ISE, Inc., and the other is the Secretary of ISE, Inc.
48 Proposed Holdings Bylaws, Section 3.10(c).
13879
Exchange, Inc. (the ‘‘NYSE’’), where the
Class A Common Stock currently trades
and where ISE, Inc. intends that the ISE
Holdings Common Stock will be listed
and traded, a majority of the directors of
ISE Holdings must be deemed
‘‘independent’’ within the meaning of
the NYSE’s listing standards.49 The
directors of ISE Holdings, other than the
Chief Executive Officer of ISE Holdings,
will be divided into two classes and will
be elected by a plurality of the votes cast
by stockholders at each annual meeting
of stockholders at which a quorum is
present.50 The directors will serve
staggered two-year terms, with the term
of office of one class expiring each
year.51 The Chief Executive Officer will
hold office for a term of one year or such
earlier time as such person no longer
serves as Chief Executive Officer.52 The
Chairman of the Holdings Board will be
elected by the Holdings Board. If there
is a vacancy on the Holdings Board, the
vacancy will be filled by the Holdings
Board, and the person elected to fill the
vacancy will serve until the expiration
of the term of office of the class to
which such person was elected.53
ISE Holdings will have officers,
including a President and Chief
Executive Officer, Chief Operating
Officer, Chief Financial Officer, Chief
Information Officer, General Counsel,
and Chief Marketing Officer, who will
manage the business and affairs of ISE
Holdings, subject to the oversight of the
Holdings Board. The initial officers of
ISE Holdings will be the individuals
currently serving as officers of ISE, Inc.
ISE Holdings will have a Board
Executive Committee, Finance & Audit
Committee, Compensation Committee,
and a Corporate Governance Committee.
The Finance & Audit, Compensation,
and Corporate Governance committees
will be governed by charters that
comply with the NYSE’s listing
standards.
The Holdings Certificate and Holdings
Bylaws will contain substantially the
same ownership limitations (including
the same corrective mechanisms), voting
limitations, and antitakeover
provisions 54 that are contained in the
43 15
44 Proposed
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49 Section 303A of the NYSE Listed Company
Manual.
50 Proposed Holdings Certificate, Article Fifth.
51 Id. ISE, Inc. represents that it will address term
limits, if any, in ISE Holdings’ Corporate
Governance Principles to be adopted in connection
with the Reorganization.
52 Id.
53 Proposed Holdings Bylaws, Section 3.3.
54 The antitakeover provisions relate to such
things as special meetings of stockholders, required
stockholder vote with respect to certain actions, and
advance notice of stockholder proposals (including
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ISE, Inc. Amended Certificate and ISE,
Inc. Amended Constitution.55 If a
Person, either alone or with its Related
Persons,56 beneficially owns shares of
stock of ISE Holdings in violation of the
relevant ownership limitation, ISE
Holdings will apply substantially the
same corrective procedures that were
approved by the Commission in
connection with ISE, Inc.’s initial public
offering.57 ISE, Inc. believes that the
ownership and voting limitations will
prevent any stockholder or group of
stockholders acting together from
exercising undue control over the
operation of ISE, LLC.58 Specifically,
ISE, Inc. believes that these ownership
and voting limitations are designed to
prohibit any Person, either alone or with
its Related Persons, from having the
power to control a substantial number of
outstanding votes entitled to be cast on
any matter without Commission review
and, more importantly, that may be
adverse to ISE, LLC’s or the
Commission’s regulatory oversight
responsibilities. ISE, Inc. also believes
that these provisions serve to protect the
integrity of ISE, LLC’s and the
Commission’s regulatory oversight
responsibilities and allow the
Commission to review, and subject to
public notice and comment, the
acquisition of substantial ownership or
voting power by any stockholder or
group of stockholders.
iii. Exchange-Related Matters
sroberts on PROD1PC70 with NOTICES
Pursuant to the Holdings Certificate,
in discharging his or her responsibilities
as a member of the Holdings Board,
each director shall take into
consideration the effect that ISE
Holdings’s actions would have on the
ability of ISE, LLC to carry out its
responsibilities under the Act and on
the nomination of directors). Proposed Holdings
Bylaws, Article II.
55 See IPO Order, supra note 4. For the sake of
clarity, ISE, Inc. notes that the Special Trustee (as
defined in the ISE, Inc. Amended Certificate and
proposed Holdings Certificate) who holds the
Excess Shares (as defined in the ISE, Inc. Amended
Certificate and proposed Holdings Certificate) is
currently ISE, Inc. and, after the Reorganization,
will be ISE Holdings and that in each instance, ISE,
Inc. and ISE Holdings can also appoint a special
trustee who is unaffiliated with it or any Person or
Related Person owning Excess Shares. ISE, Inc.
Amended Certificate, Article Fourth, Subdivision
III(c)(ii) and proposed Holdings Certificate, Article
Fourth, Subdivision III(c)(ii).
56 See supra note 10.
57 See supra note 4 (implementing corrective
procedures relating to the ownership limitations)
and ISE, Inc. Amended Certificate, Article Fourth,
Subdivision III(c) (setting forth the corrective
procedures relating to the ownership limitations).
58 ISE, Inc. also believes that, much like the 20%
member ownership limitation, the 20% voting
limitation cannot be waived by the Holdings Board
with respect to members.
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the ability of ISE, LLC and ISE Holdings
to engage in conduct that fosters and
does not interfere with ISE, LLC’s and
ISE Holdings’ ability to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanisms of a free
and open market and a national market
system, and, in general, to protect
investors and the public interest.59 In
addition, in discharging his or her
responsibilities as a member of the
Holdings Board, each director shall
comply with the Federal securities laws
and rules and regulations thereunder
and cooperate with ISE, LLC and the
Commission.60 Furthermore, in
discharging his or her responsibilities as
an officer or employee of ISE Holdings,
each officer or employee shall comply
with the Federal securities laws and
rules and regulations thereunder and
shall cooperate with ISE, LLC and the
Commission.61
Moreover, for so long as ISE Holdings
controls, directly or indirectly, ISE, LLC,
each officer, director, and employee of
ISE Holdings shall give due regard to
the preservation of the independence of
the self-regulatory function of ISE, LLC
and to ISE, LLC’s obligations under the
Act and the rules thereunder, including,
without limitation, Section 6(b) of the
Act 62 and shall not take any actions
which he or she knows or reasonably
should have known would interfere
with the effectuation of any decisions by
the LLC Board relating to ISE, LLC’s
regulatory functions (including
disciplinary matters) or which would
adversely affect the ability of ISE, LLC
to carry out ISE, LLC’s responsibilities
under the Act.63
ISE, Inc. believes that these provisions
would help ensure that directors,
officers, and employees of ISE Holdings
are cognizant of, and take into account,
when carrying out their duties and
responsibilities as directors, officers,
and employees of ISE Holdings, the fact
59 Proposed
Holdings Certificate, Article Twelfth.
60 Id.
61 Id.
62 15
U.S.C. 78f(b).
Holdings Bylaws, Section 1.5. ISE
Holdings also will take reasonable steps necessary
to cause its officers, directors, and employees prior
to accepting a position as such to consent in writing
to the applicability to them of Article Twelfth,
Article Thirteenth and Article Fourteenth of
proposed Holdings Certificate and Sections 1.4 and
1.5 of proposed Holdings Bylaws, as applicable,
with respect to their activities related to ISE, LLC.
Proposed Holdings Bylaws, Section 1.6.
63 Proposed
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that ISE Holdings would operate an
exchange that is subject to regulatory
oversight by the Commission and that
the ISE, LLC is required to be operated
in compliance with Federal securities
laws. ISE, Inc. believes that these
provisions also would help ensure that
the Commission is able to effectively
fulfill its regulatory obligations with
respect to ISE, LLC.
Pursuant to the Holdings Certificate
and Holdings Bylaws, for so long as ISE
Holdings controls, directly or indirectly,
ISE, LLC, any amendment to the
Holdings Certificate and Holdings
Bylaws must be submitted by the
Holdings Board to the LLC Board and,
if the LLC Board determines that such
amendment is required, under Section
19 of the Act 64 and the rules
promulgated thereunder, to be filed
with, or filed with and approved by, the
Commission before such amendment
may be effective under Section 19 of the
Act and the rules promulgated
thereunder, then such amendment shall
not be filed with the Secretary of State
of the State of Delaware until filed with,
or filed and approved by, the
Commission, as the case may be.65 In
short, if the LLC Board determines that
an amendment to the Holdings
Certificate and Holdings Bylaws must be
filed with, or filed with and approved
by, the Commission as a proposed rule
change pursuant to Section 19 of the Act
and Rule 19b–4 thereunder,66 such
amendment will not become effective
until it becomes effective pursuant to
the Rule 19b–4 filing process.
ISE, Inc. believes that these provisions
would help to preserve the ability of
ISE, LLC to carry out its regulatory
responsibilities under the Act and
would help to provide the Commission
with the ability to review and subject to
public notice and comment any changes
in proposed Holdings Certificate and
proposed Holdings Bylaws that could
have the potential to affect ISE, LLC’s
and the Commission’s regulatory
responsibilities regarding ISE, LLC.
Pursuant to proposed Holdings
Certificate, all confidential information
pertaining to the self-regulatory function
of ISE, LLC (including but not limited
to disciplinary matters, trading data,
trading practices, and audit information)
contained in books and records of ISE,
LLC that shall come into the possession
of ISE Holdings shall: (1) Not be made
available to any Persons (other than as
provided below) other than to those
64 15
U.S.C. 78s.
Holdings Certificate, Article
Sixteenth and proposed Holdings Bylaws, Section
10.1.
66 15 U.S.C. 78s and 17 CFR 19b–4.
65 Proposed
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officers, directors, employees, and
agents of ISE Holdings that have a
reasonable need to know the contents
thereof; (2) be retained in confidence by
ISE Holdings and the officers, directors,
employees, and agents of ISE Holdings;
and (3) not be used for any commercial
purposes. Nothing in the Holdings
Certificate shall be interpreted to limit
or impede the rights of the Commission
to access and examine such confidential
information pursuant to the Federal
securities laws and rules and
regulations thereunder or to limit or
impede the ability of any officers,
directors, employees, or agents of ISE
Holdings to disclose such confidential
information to the Commission.67
For so long as ISE Holdings controls,
directly or indirectly, ISE, LLC, the
books, records, premises, officers,
directors, and employees of ISE
Holdings shall be deemed to be the
books, records, premises, officers,
directors, and employees of ISE, LLC for
purposes of and subject to oversight
pursuant to the Act but only to the
extent they relate to the exchange
business of ISE, LLC.68 In addition, the
books and records of ISE, LLC and ISE
Holdings will be kept within the U.S.69
ISE, Inc. believes that these provisions
would help to ensure access to ISE
Holdings’ books and records by the
Commission and, to the extent ISE
Holdings’ books and records relate to
the operation or administration of ISE,
LLC, would help enable the
Commission to carry out its regulatory
responsibilities regarding ISE, LLC.
Pursuant to proposed Holdings
Certificate, ISE Holdings shall comply
with the Federal securities laws and
rules and regulations thereunder and
shall cooperate with ISE, LLC and the
Commission, pursuant to their
respective regulatory authority.70 In
addition, ISE Holdings shall take
reasonable steps necessary to cause its
agents to cooperate with ISE, LLC and
the Commission, pursuant to their
respective regulatory authority with
respect to such agents’ activities related
to ISE, LLC.71 ISE, Inc. believes that
these provisions would help to ensure
that ISE Holdings will not interfere with
the Commission’s regulatory
responsibilities by ensuring that ISE
Holdings will comply with Federal
securities laws, cooperates with ISE,
LLC and the Commission pursuant to
67 Proposed Holdings Certificate, Article
Thirteenth.
68 Proposed Holdings Certificate, Article
Fourteenth.
69 Proposed Holdings Bylaws, Section 1.3.
70 Proposed Holdings Certificate, Article
Fifteenth.
71 Id.
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their respective regulatory authority,
and takes reasonable steps to ensure that
its agents do not interfere with the
Commission’s ability to carry out its
regulatory responsibilities.
ISE, Inc. believes that the
Reorganization will permit ISE, LLC to
continue ISE, Inc.’s current function as
a national securities exchange while its
corporate parent, ISE Holdings, may,
through greater organizational
flexibility, facilitate access to capital
markets, promote new business
opportunities, facilitate future
acquisitions and the formation of
strategic alliances, and create a
framework for future growth.
2. Statutory Basis
ISE, Inc. believes that the proposed
rule change is consistent with the
requirements of the Act and the rules
and regulations thereunder that are
applicable to a national securities
exchange and, in particular, with the
requirements of Section 6(b) of the
Act.72 The Exchange believes that the
proposal is consistent with the
requirement under Section 6(b)(1) of the
Act 73 that an exchange be so organized
and has the capacity to be able to carry
out the purposes of the Act and to
comply, and (subject to any rule or
order of the Commission pursuant to
Section 17(d) 74 or 19(g)(2) 75 of the Act)
to enforce compliance by its members
and persons associated with its
members, with the provisions of the
Act, the rules and regulations
thereunder, and the rules of the
exchange. ISE, Inc. also believes this
proposed rule change furthers the
objective of Section 6(b)(5) of the Act 76
that an exchange have rules that, among
other things, are designed to remove
impediments to and perfect the
mechanism for a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
ISE, Inc. believes that the proposed
rule change does not impose any burden
on competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
ISE, Inc. has not solicited, and does
not intend to solicit, comments on this
72 15 U.S.C. 78f(b). See also Amendment No. 2,
supra note 3.
73 15 U.S.C. 78f(b)(1).
74 15 U.S.C. 78q(d).
75 15 U.S.C. 78s(g)(2).
76 15 U.S.C. 78f(b)(5).
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13881
proposed rule change. ISE, Inc. has not
received any unsolicited written
comments from members or other
interested parties.
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 other 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 self-regulatory
organization consents, the Commission
will:
A. By order approve the 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 https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
No. SR–ISE–2006–04 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
Station Place, 100 F Street, NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–ISE–2006–04. 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 Commissions
Internet Web site (https://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
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13882
Federal Register / Vol. 71, No. 52 / Friday, March 17, 2006 / Notices
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of such filing also will be
available for inspection and copying at
the principal office of the ISE. 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–ISE–2006–04 and should be
submitted by April 7, 2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.77
Nancy M. Morris,
Secretary.
[FR Doc. E6–3855 Filed 3–16–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53472; File No. SR–NYSE–
2006–18]
Self-Regulatory Organizations; New
York Stock Exchange, LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Relating to
Rule 104, Dealings by Specialists
March 13, 2006.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 8,
2006, the New York Stock Exchange,
LLC (‘‘NYSE’’ or the ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Exchange filed the proposal as a ‘‘noncontroversial’’ rule change pursuant to
Section 19(b)(3)(A) of the Act 3 and Rule
19b–4(f)(6) thereunder,4 upon filing
with the Commission.5 The Commission
is publishing this notice to solicit
comments on the proposed rule change
from interested persons.
77 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6).
5 The NYSE has asked the Commission to waive
the 5-day pre-filing notice requirement and the 30day operative delay. See Section 19(b)(3)(A) of the
Act, and Rule 19b–4(f)(6)(iii) thereunder. 15 U.S.C.
78s(b)(1), 17 CFR 240.19b–4(f)(6)(iii).
sroberts on PROD1PC70 with NOTICES
1 15
VerDate Aug<31>2005
16:52 Mar 16, 2006
Jkt 208001
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
NYSE Rules 104.12 and .13 concerning
investment accounts and investment
positions in specialty securities for
securities issued by the Exchange. The
text of the proposed rule change is
available on NYSE’s Web site, https://
www.nyse.com, at NYSE’s principal
office, and at the Commission’s Public
Reference Room.
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
Exchange included statements
concerning the purpose of and basis for
the proposed rule change. The text of
these statements may be examined at
the places specified in Item IV below.
The Exchange 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
NYSE Rule 104 (Dealings by
Specialists) governs specialists’ dealings
in their specialty securities. Trades
conducted by a specialist in specialty
securities are effected in the specialist’s
dealer account. Under NYSE Rule
104.12, a specialist may assign part of
his or her dealer account position to an
investment account, provided that such
assignment does not create a short
position in the specialist’s dealer
account.
Additionally, NYSE Rule 104.12
prohibits the assignment to the
investment account of any position or
part thereof that was purchased on
nonstabilizing ticks, i.e., a ‘‘plus’’ tick
(at a price higher than the last trade) or
‘‘zero plus tick’’ (higher than the last
different trade). In order to assign a
position to an investment account, a
specialist’s purchases in that security
must be at least 75% stabilizing for that
day and the calendar week
encompassing the purchase of that
security.
Similarly, positions in the dealer
account are netted with positions in an
investment account. Thus, if the
specialist is short in the dealer account,
but has a long position in the
investment account that exceeds the
short dealer position, the specialist is
considered to be net long. In that
PO 00000
Frm 00077
Fmt 4703
Sfmt 4703
situation, a specialist may not liquidate
the short dealer account position by
purchasing on a plus tick; nor may the
specialist purchase on a zero plus tick
more than 50% of the stock that is being
offered in the market at that time, and,
in no event may the specialist purchase
the final 100 shares offered.
NYSE Rule 104.13 requires that
transactions effected in specialty stocks
for the accounts of specified persons
affiliated with or related to a specialist
must be for investment purposes and
executed in accordance with certain
restrictions relating to the price at
which transactions may take place,
known as ‘‘tick’’ restrictions. The
accounts specified in the rule include
accounts of employees or parties active
in the business of the specialist, the
spouse or children residing in the same
household as a specialist or person
active in the specialist business, and
any approved person (individual or
entity in a control relationship) of the
specialist, other than an approved
person entitled to an exemption
pursuant to NYSE Rule 98 (Restrictions
on an Approved Person Associated with
a Specialist’s Member Organization).
NYSE-Archipelago Merger. The
merger of NYSE and Archipelago
Holdings, Inc. has received Commission
approval and was completed on March
7, 2006.6 Trading in the common stock
of the newly-formed, publicly-traded
holding company NYSE Group, Inc. on
the Exchange will commence on March
8, 2006, under the symbol ‘‘NYX.’’
Under the terms of the merger,
members of the Exchange, i.e.,
seatholders on the NYSE, will receive
shares of NYX stock in exchange for
their membership interests. In certain
circumstances, where the purchase of an
Exchange membership was the subject
of a financing arrangement with the
member organization a seat holder was
associated with, the member
organization will be eligible to receive
the NYX shares being exchanged for a
membership. These NYX shares will be
held in a special account separate from
the specialist’s dealer and investment
accounts.
The NYX shares received as a result
of this exchange will be subject to
transfer restrictions set forth in the
amended and restated Certificate of
Incorporation of NYSE Group, Inc.
These transfer restrictions prohibit any
direct or indirect assignment, sale,
exchange, transfer, tender or any other
disposition of NYX shares. Except as
otherwise provided in Article IV,
6 See Securities Exchange Act Release No. 53382
(February 27, 2006), 71 FR 11251 (March 6, 2006)
(SR–NYSE–2005–77).
E:\FR\FM\17MRN1.SGM
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]]>Agencies
[Federal Register Volume 71, Number 52 (Friday, March 17, 2006)]
[Notices]
[Pages 13875-13882]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-3855]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53450; File No. SR-ISE-2006-04]
Self-Regulatory Organizations; International Securities Exchange,
Inc.; Notice of Filing of Proposed Rule Change Relating to Its Proposal
To Reorganize From Its Current Structure Into a Holding Company
Structure
March 8, 2006.
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 January 12, 2006, the International Securities Exchange, Inc.
(``ISE, Inc.'') 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 ISE, Inc. The Exchange
filed Amendment No. 1 to the proposed rule change on March 3, 2006, and
withdrew Amendment No. 1 on March 3, 2006. On March 3, 2006, the
Exchange filed Amendment No. 2.\3\ 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.
\3\ See Partial Amendment No. 2 dated March 3, 2006 (``Amendment
No. 2'').
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
ISE, Inc. is proposing to reorganize from its current structure
into a holding company structure as more fully described below. The
text of the proposed rule change is available on ISE, Inc.'s Web site
(https://www.iseoptions.com), at the principal office of ISE, Inc., and
at the Commission's Public Reference Room. The text of Exhibit 5 of the
proposed rule change, as well as Amendment No. 2, is also available on
the Commission's Web site (https://www.sec.gov/rules/sro.shtml).
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, ISE, Inc. 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. ISE, Inc. 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
ISE, Inc. proposes to reorganize from the current structure of ISE,
Inc., a Delaware corporation, into a holding company structure (the
``Reorganization'').\4\ A holding company, International Securities
Exchange Holdings, Inc., a Delaware corporation (``ISE Holdings''), and
its wholly owned subsidiary, International Securities Exchange, LLC, a
Delaware limited liability company (``ISE, LLC''), have been formed in
contemplation of the Reorganization. Consummation of the Reorganization
is conditioned upon satisfaction of certain conditions, including
approval of the Reorganization by the Commission.\5\ After satisfaction
of these conditions, ISE, Inc. will merge into ISE, LLC, with ISE, LLC
as the surviving entity of the merger (the ``Merger''). In the Merger:
---------------------------------------------------------------------------
\4\ For a discussion of ISE, Inc.'s current capital stock and
governance structure, see Securities Exchange Act Release No. 51029
(January 12, 2005), 70 FR 3233 (January 21, 2005) (SR-ISE-2004-29)
(relating to the approval of certain amendments to ISE, Inc.'s
Certificate of Incorporation, Constitution, and ISE Rules in
connection with ISE, Inc.'s initial public offering) (``IPO
Order''). In connection with the initial public offering. ISE, Inc.
filed a registration statement on Form S-1 with the Commission (File
No. 333-117145).
This proposed rule change includes: (a) The deletion of the
Amended and Restated Certificate of Incorporation of ISE, Inc.
(``ISE, Inc. Amended Certificate'') and Amended and Restated
Constitution of ISE, Inc. (``ISE, Inc. Amended Constitution''); (b)
the proposed Certificate of Incorporation of International
Securities Exchange Holdings, Inc. (``Holdings Certificate``); (c)
the proposed Bylaws of International Securities Exchange Holdings,
Inc. (``Holdings Bylaws``); (d) the proposed Limited Liability
Company Agreement of International Securities Exchange, LLC (``LLC
Agreement``); (e) the proposed Constitution of International
Securities Exchange, LLC (``LLC Constitution''); and (f) certain
proposed amendments to the Rules of ISE, Inc. (the ``ISE Rules``) to
reflect the Reorganization.
\5\ ISE, Inc. has received a private letter ruling from the
Internal Revenue Service Relating to the treatment of the proposed
Reorganization under U.S. Federal tax law with respect to ISE, Inc.,
its stockholders, and ISE Holdings. The ruleing provides assurances
that the Reorganization and related transactions will not result in
any material taxes to the holders of shares of ISE, Inc. Class A
Common Stock, par value $.01 per share (``Class A Common Stock''),
ISE, Inc. Class B Common Stock, Series B-1, par value $.01 per share
(``Series B-1 Common Stock''), ISE, Inc. Class B Common Stock,
Series B-2, par value $.01 per share (``Aeries B-2 Common Stock''),
or ISE, Inc. Class B Common Stock, Series B-3, par value $.01 per
share (``Series B-3 Common Stock'' and together with the Series B-1
Common Stock and Series B-2 Common Stock, the ``Class B Common
Stock''). See Internal Revenue Service PLR-135357-04 (November 17,
2004.
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(1) Each outstanding share of Class A Common Stock will be
converted into one share of ISE Holdings common stock, par value $.01
per share (``ISE Holdings Common Stock'');
(2) Each outstanding share of Series B-1 Common Stock will be
converted into one PMM Right (``PMM Right''). Each PMM Right provides
the holder with (a) the right to vote on the election of the PMM
Directors of ISE, LLC,\6\ (b) the right to vote on any change in,
amendment or modification of, the Core Rights \7\ or the definition of
Core Rights, and (c) the predicate to obtaining the trading rights and
privileges associated with each PMM Right as set forth in the LLC
Constitution and ISE Rules for a PMM;
---------------------------------------------------------------------------
\6\ ``PMM Directors'' as defined in Section 3.2(b) of proposed
LLC Constitution means two directors, who must be officers,
directors, or partners of Primary Market Makers (``PMM's''), elected
by a plurality vote of the holders of the PMM Rights voting together
as a class.
\7\ ``Core Rights'' as defined in Section 2.2 of proposed LLC
Agreement means any increase in the number of authorized PMM Rights
or CMM Rights.
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(3) Each outstanding share of Series B-2 Common Stock will be
converted into one CMM Right (``CMM Right''). Each CMM Right provides
the holder with (a) the right to vote on the election of the CMM
Directors,\8\ (b) the right to vote on any change in, amendment or
modification of, the Core Rights or the definition of Core Rights, and
(c) the predicate to obtaining the trading rights and privileges of
each CMM Right as set
[[Page 13876]]
forth in the LLC Constitution and ISE Rules for a CMM; and
---------------------------------------------------------------------------
\8\ ``CMM Directors'' as defined in Section 3.2(b) of proposed
LLC Constitution means two directors, who must be officers,
directors, or partners of Competitive Market Makers (``CMMs''),
elected by a plurality vote of the holders of the CMM Rights voting
together as a class.
---------------------------------------------------------------------------
(4) Each share of Series B-3 Common Stock will be converted into
one EAM Right (``EAM Right'' and together with the PMM Rights and CMM
Rights, the ``Exchange Rights''). Each EAM Right provides the holder
thereof with (a) the right to vote on the election of the EAM Directors
\9\ and (b) the predicate to obtaining the trading rights and
privileges of such EAM Right as set forth in the LLC Constitution and
ISE Rules for an EAM.
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\9\ ``EAM Directors'' as defined in Section 3.2(b) of proposed
LLC Constitution means two directors, who must be officers,
directors, or partners of Electronic Access Members (``EAMs'')
elected by a plurality vote of the holders of the EAM Rights voting
together as a class. The PMM Directors, CMM Directors, and EAM
Directors are collectively referred to as the ``Exchange
Directors.''
---------------------------------------------------------------------------
As a result of the Merger, the holders of shares of Class A Common
Stock will become stockholders of ISE Holdings and holders of Series B-
1 Common Stock, Series B-2 Common Stock, and Series B-3 Common Stock
will become holders of PMM Rights, CMM Rights, and EAM Rights,
respectively, in ISE, LLC, as further described below. Effectively, ISE
Holdings will become the sole equity owner of ISE, LLC, and the shares
of ISE Holdings Common Stock will in turn be publicly held.
Furthermore, upon consummation of the Merger, the percentage of the
outstanding shares of ISE Holdings Common Stock held after the Merger
by each holder of Class A Common Stock will be identical to the
percentage of Class A Common Stock that such holder held prior to the
Merger. The percentage of Exchange Rights held after the Merger by each
holder of Class B Common Stock will also be identical to the percentage
of Class B Common Stock that such holder held prior to the Merger,
giving effect to the particular series of Class B Common Stock and
class of Exchange Rights held and to be held by such holder.
ISE, Inc. represents that, currently, no Person, either alone or
together with its Related Persons, owns more than 40 percent of the
outstanding shares of any class or series of stock of ISE, Inc., and no
member, either alone or together with its Related Persons, owns more
than 20 percent of the outstanding shares of any class or series of
stock of ISE, Inc.\10\ Accordingly, ISE, Inc. has no reason to believe
that the Reorganization, as detailed above, will result in any large
concentrations of ownership or voting power by ISE, Inc.'s current
stockholders or members. In addition, ISE, Inc. represents that it will
continue to have a trading concentration limit and a 20% member
ownership limit.\11\
---------------------------------------------------------------------------
\10\ ``Person'' means an individual, partnership (general or
limited), joint stock company, corporation, limited liability
company, trust or unincorporated organization, or any governmental
entity or agency or political subdivision thereof. See ISE, Inc.
Amended Certificate, Article Fourth, Subdivision III. Currently,
``Related Person'' means (1) With respect to any Person, all
``affiliates'' and ``associates'' of such Person (as such terms are
defined in Rule 12b-2 under the Act); (2) with respect to any Person
constituting an exchange member (as defined in the ISE, Inc. Amended
Constitution), any broker or dealer with which such Exchange Member
is associated; and (3) any two or more Persons that have any
agreement, arrangement, or understanding (whether or not in writing)
to act together for the purpose of acquiring, voting, holding, or
disposing of shares of the capital stock of ISE, Inc. See ISE, Inc.
Amended Certificate, Article Fourth, Subdivision III. ISE, Inc.
proposes to modify the definition of ``Related Persons'' in
connection with the Reorganization to also include, with respect to
any Person, any executive officer (as defined under Rule 3b-7 under
the Act), director, general partner, manager, or managing member, as
applicable, and, with respect to any Person that is an executive
officer (as defined under Rule 3b-7 under the Act), director,
general partner, manager, or managing member of a company,
corporation, or similar entity, such company, corporation, or
entity, as applicable. See proposed Holdings Certificate, Article
Fourth, Subdivision III.
\11\ For the member trading oncentration limit, see ISE Rule
303(b), which will continue to exist after the Reorganization, and
proposed LLC Agreement, Section 6.5. ISE, Inc. proposes to modify
Section 6.5(a) of proposed LLC Agreement to include lessees of
Exchange Rights and to clarify that holders and lessees of Exchange
Rights also may not exercise any of the non-trading rights
associated with more than 20% of such Exchange Rights. ISE, Inc.
also notes that the Commission is in the process of reviewing issues
relating to new ownership structures of self-regulatory
organizations (``SROs'') and has proposed rules relating to the
ownership of SROs, including imposing limitations on member
ownership of an SRO or facility of an SRO. See Securities Exchange
Act Release No. 50699 (November 18, 2004), 69 FR 71126 (December 8,
2004).
ISE, Inc. also notes that the Commission recently approved a
separate proposal to amend ISE Rule 303 to increase the 20% member
trading concentration limit to 30% for PMMs only, provided that in
approving any PMM to exercise the trading privileges associated with
more than 20% of the PMMs, the board of directors of ISE, Inc. (the
``ISE, Inc. Board'') will not approve any arrangement in which the
PMM would gain ownership or voting rights in excess of those
permitted under the ISE, Inc. Amended Certificate or ISE, Inc.
Amended Constitution. See Securities Exchange Act Release No. 53271
(February 10, 2006), 71 FR 8625 (February 17, 2006). See also
Amendment No. 2, supra note 3.
---------------------------------------------------------------------------
a. Description of ISE, LLC
i. General
ISE, LLC will be a wholly owned subsidiary of ISE Holdings. As the
sole LLC member of ISE, LLC, ISE Holdings will have sole voting control
over ISE, LLC, except for certain matters relating to Exchange
Rights.\12\ Specifically, as noted below, the composition of and
qualifications for the Board of Directors of ISE, LLC (the ``LLC
Board'') will be the same as they are for the ISE, Inc. Board, and ISE
Holdings will have the sole right to vote on the election of a majority
of the members of the LLC Board. In general, however, the management
and administration of ISE, LLC will be carried out by the LLC Board and
by the executive officers of ISE, LLC, who will be appointed by the LLC
Board.\13\ In addition, to further preserve the autonomy of ISE, LLC,
all meetings of the LLC Board pertaining to the self-regulatory
function of ISE, LLC (including disciplinary matters) or to the
structure of the market in which ISE, LLC regulates will be closed to
all persons other than the LLC Board and officers, staff, counsel, or
other advisors of ISE, LLC whose participation is necessary or
appropriate to the proper discharge of ISE, LLC's regulatory functions
and any representative of the Commission. No members of the Board of
Directors of ISE Holdings (the ``Holdings Board'') who are not also LLC
Board members and no officers, staff, counsel, or advisors of ISE
Holdings who are not also officers, staff, counsel, or advisors of ISE,
LLC will be allowed to participate in such meetings.\14\
---------------------------------------------------------------------------
\12\ The proposed LLC Agreement only permits ISE, LLC to have
one LLC member at any given time, and assignment of the sole LLC
member interest is subject to Commission approval. Proposed LLC
Agreement, Sections 2.1, 3.1, and 7.1. ISE Holdings will not have
any voting rights with respect to the Core Rights, the election of
Exchange Directors, or any other matters relating to the Exchange
Rights, such as the eligibility and approval of persons to own,
transfer or lease Exchange Rights, rulemaking, supervision of
entities holding Exchange Rights, and the like. Proposed LLC
Agreement, Section 2.2.
\13\ Proposed LLC Constitution, Section 5.1(a). See also
proposed LLC Agreement, Section 5.1.
\14\ Proposed LLC Constitution, Section 3.2(d).
---------------------------------------------------------------------------
ii. Exchange Operations
ISE, LLC will operate as a registered ``national securities
exchange'' under Section 6 of the Act \15\ and will maintain ISE,
Inc.'s current regulatory authority over its members.\16\ All persons
using ISE, LLC as an exchange will continue to be subject to the
current ISE Rules, as proposed to be modified herein in order to
reflect the Reorganization.\17\ ISE, LLC will continue to carry out the
statutory responsibilities to enforce compliance of its members with
the provisions of the Federal securities laws and ISE Rules.\18\
[[Page 13877]]
ISE, LLC will continue to be required to approve any changes to ISE
Rules and governing documents of ISE, LLC and to file any such changes
with the Commission pursuant to Section 19(b) of the Act and Rule 19b-4
thereunder.\19\
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78f.
\16\ For purposes of the Act, the holders or lessees of Exchange
Rights will be deemed ``members'' of ISE, LLC.
\17\ ISE, Inc. is proposing to amend the ISE Rules to, among
other things, change references to ``Class B common stock,'' ``Class
B stockholders,'' ``shares,'' and similar or derivative words to
``Exchange Rights,'' ``Exchange Rights holders,'' and ``Rights'' and
the like.
\18\ In addition, in discharging his or her responsibilities as
a member of the LLC Board, each director shall take into
consideration the effect that his or her actions would have on the
ability of ISE, LLC to carry out its responsibilities under the Act
and on the ability of ISE, LLC to engage in conduct that fosters and
does not interfere with ISE, LLC's ability to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanisms of a
free and open market and a national market system, and in general,
to protect investors and the public interest. In discharging his or
her responsibilities as a member of the LLC Board, each director
also shall comply with the Federal securities laws and rules and
regulations thereunder and cooperate with the Commission. Proposed
LLC Agreement, Section 5.1(b).
\19\ 15 U.S.C. 78s(b) and 17 CFR 240.19b-4.
---------------------------------------------------------------------------
In addition, ISE, LLC is proposing to adopt a new ISE Rule 312,
which will provide that, without prior Commission approval, ISE, LLC or
any entity with which it is affiliated shall not, directly or
indirectly through one or more intermediaries, acquire or maintain an
ownership interest in a Member or non-member owner, and a Member or
non-member owner shall not be or become an affiliate of ISE, LLC or an
affiliate of any affiliate of ISE, LLC. Nothing in the new ISE Rule 312
will prohibit a Member or non-member owner from acquiring or holding
any equity interest in ISE Holdings, Inc. that is permitted by the
Holdings Certificate or prohibit any Member from being or becoming an
affiliate of ISE, LLC or an affiliate of any affiliate of ISE, LLC
solely by reason of any officer, director, or partner of such Member
being or becoming an Exchange Director pursuant to the LLC
Constitution.\20\
---------------------------------------------------------------------------
\20\ The term ``Member,'' as proposed to be defined in ISE Rule
100, means an organization that has been approved to exercise
trading rights associated with Exchange Rights.
---------------------------------------------------------------------------
All confidential information pertaining to the self-regulatory
function of ISE, LLC (including but not limited to disciplinary
matters, trading data, trading practices, and audit information)
contained in books and records of ISE, LLC shall: (1) Not be made
available to any persons (other than as provided below) other than to
those officers, directors, employees, and agents of ISE, LLC that have
a reasonable need to know the contents thereof; (2) be retained in
confidence by ISE, LLC and the officers, directors, employees, and
agents of ISE, LLC; and (3) not be used for any commercial purposes.
Nothing in the LLC Agreement shall be interpreted to limit or impede
the rights of the Commission to access and examine such confidential
information pursuant to the Federal securities laws and rules and
regulations thereunder or to limit or impede the ability of any
officers, directors, employees, or agents of ISE, LLC to disclose such
confidential information to the Commission.\21\
---------------------------------------------------------------------------
\21\ Proposed LLC Agreement, Section 4.1(b).
---------------------------------------------------------------------------
As the registered SRO, ISE, LLC will continue to have ultimate
responsibility for the administration and enforcement of the rules
governing its options business operations. The regulatory relationship
that ISE, Inc. currently maintains with the National Association of
Securities Dealers (``NASD'') will not be affected by the
Reorganization, and ISE, LLC, as the successor-in-interest to ISE,
Inc., will continue to have the same regulatory relationship with the
NASD.\22\ The Reorganization will not affect the current disciplinary
process. ISE, LLC's disciplinary process will be the same as the
process for ISE, Inc. and will continue to be governed by the Business
Conduct Committee, which is comprised of members.\23\ All decisions
with respect to the listing and delisting of options and related
products will continue to be made in accordance with ISE Rules.
---------------------------------------------------------------------------
\22\ See Securities Exchange Act Release No. 4781 (May 14,
2003), 68 FR 27869 (May 21, 2003) (approving an agreement pursuant
to Rule 17d-2 of the Act between the NASD and ISE, Inc.).
\23\ Currently, the Chief Regulatory Officer of ISE, Inc.
authorizes the institution of disciplinary actions, and ISE, Inc.,
with the assistance of the NASD staff, if appropriate, conducts
disciplinary proceedings before the Business Conduct Committee.
Decisions of the Business Conduct Committee may be appealed to the
Committee for Review of ISE, Inc., which is composed of directors of
ISE, Inc.
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ISE, Inc. currently is a participant in various national market
system plans, including the Options Price Reporting Authority, which
provides options price reporting, and the Options Intermarket Linkage
Plan, which addresses intermarket options trading. After the
Reorganization, ISE, LLC proposes to continue to participate in these
plans and have a representative serve on the committees overseeing
these plans.
iii. Organization, Management and Governance of ISE, LLC
Since ISE, LLC will be the surviving entity in the Merger, the LLC
Agreement and the LLC Constitution will function as the charter and
bylaws of the surviving entity. ISE, Inc. represents that the
provisions of the LLC Agreement and LLC Constitution are substantively
the same as the current ISE, Inc. Amended Certificate and ISE, Inc.
Amended Constitution, respectively, insofar as exchange operations and
structure and corporate governance are concerned.\24\ ISE, LLC will
continue to have a similar interpretation regarding the payment of
``dividends'' to ``stockholders,'' except that the interpretation will
relate to distributions to the sole LLC member and holders of Exchange
Rights. Specifically, ISE, LLC will interpret ISE Rules to require that
any revenue it receives from regulatory fees or penalties will be
segregated and applied to fund the legal, regulatory, and surveillance
operations of ISE, LLC and will not be used to pay distributions to the
sole LLC member or holders of Exchange Rights, except in the event of
liquidation of ISE, LLC, in which case the sole LLC member will be
entitled to the distribution of ISE, LLC's remaining assets.\25\
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\24\ See IPO Order, supra note 4. In addition, while the ISE,
Inc. Amended Constitution currently only requires that no officers
may be holders of shares of Class B Common Stock or affiliated with
an exchange member, ISE, LLC will require that no officers or
employees of ISE, LLC may be holders of Exchange Rights or
affiliated with an Exchange Member. Proposed LLC Constitution,
Section 4.5. ISE, Inc. also is codifying its current practice of
prohibiting the transfer or lease of fractional portions of any
Exchange Rights. Proposed LLC Constitution, Sections 12.1, 12.2, and
12.4.
\25\ See Securities Exchange Act Release No. 45803 (April 23,
2002), 67 FR 21306 (April 30, 2002) (adopting this interpretation in
connection with ISE, Inc.'s demutualization).
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As is the case currently with respect to the ISE, Inc. Board, the
LLC Board will be comprised of 15 members,\26\ eight of whom will be
Non-Industry Directors \27\ elected by ISE Holdings as the sole LLC
member, six of whom will be Exchange Directors elected by a plurality
of the holders of the Exchange Rights, and the Chief Executive Officer
[[Page 13878]]
of ISE, LLC.\28\ Each year, the Nominating Committee, which is not a
committee of the LLC Board, will nominate the Exchange Directors, and
the Corporate Governance Committee, which is a committee of the LLC
Board, will nominate the Non-Industry Directors.\29\ Holders of
Exchange Rights also may nominate Exchange Directors by petition.\30\
The initial members of the LLC Board were the individuals serving as
directors of ISE, Inc. on the date of formation of ISE, LLC.\31\
Similar to the manner of election of the current ISE, Inc. Board, at
the first annual meeting of the sole LLC member and holders of Exchange
Rights and at each subsequent annual meeting, ISE Holdings will elect
the Non-Industry Directors, and holders of Exchange Rights will elect
the Exchange Directors, to serve until the next annual meeting or until
their successors are elected and qualified.\32\ The Chairman of the LLC
Board is a Non-Industry Director who is elected by the LLC Board. Each
director of ISE, LLC holds office for a term of two years, except the
Chief Executive Officer of ISE, LLC who holds office for a term of one
year or such earlier time as such person no longer serves as Chief
Executive Officer. The directors, other than the Chief Executive
Officer, are divided into two classes, designated as Class I and Class
II directors. At each annual meeting, the successors of the class of
directors whose term expires at that meeting will be elected to hold
office for a term expiring at the annual meeting held in the second
year following the year of their election and until their successors
are elected and qualified. If there is a vacancy on the LLC Board, the
vacancy will be filled by the LLC Board, and the person chosen to fill
the vacancy will serve until the expiration of the term of office of
the class to which such person was elected. No Exchange Director may
serve more than three consecutive terms, and, after a two-year hiatus,
may be eligible to serve as an Exchange Director again.\33\
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\26\ ISE, Inc. proposes that the number of members of the LLC
Board may only be changed by the LLC Board with the approval of the
affirmative vote of the holders of two-thirds of the then
outstanding Exchange Rights. Proposed LLC Constitution, Section 3.2.
Currently, the number of ISE, Inc. Board members can only be changed
by the ISE, Inc. Board with the approval of the affirmative vote of
the holders of two-thirds of the voting power of the then
outstanding shares of Class A Common Stock. ISE, Inc. Amended
Certificate, Article Seventh.
\27\ ``Non-Industry Director'' means a director that meets the
requirements of ``non-industry representative.'' Proposed LLC
Constitution, Section 3.2(b). The term ``non-industry
representative'' means any person who would not be considered an
``industry representative,'' as well as (i) a person affiliated with
a broker or dealer that operates solely to assist the securities-
related activities of the business of non-member affiliates or (ii)
an employee of an entity that is affiliated with a broker or dealer
that does not account for a material portion of the revenues of the
consolidated entity and who is primarily engaged in the business of
the non-member entity. Proposed LLC Constitution, Section 13.1(w).
These definitions are the same as the current definitions. See ISE,
Inc. Amended Constitution, Sections 3.2(b) and 14.1(q).
\28\ Proposed LLC Agreement, Section 5.2 and proposed LLC
Constitution, Section 3.2(b). Pursuant to Section 4.6 of proposed
LLC Constitution, the Chief Executive Officer of ISE, LLC is elected
by the LLC Board and will be nominated by the LLC Board for a
directorship by virtue of his or her office.
\29\ See proposed LLC Constitution, Section 3.10. See also ISE,
Inc. Amended Constitution, Section 3.10.
\30\ ISE, Inc. represents that the petition process following
the Reorganization will be substantially similar to the petition
process in place currently for ISE, Inc., except that petitions
submitted for nominees for Exchange Directors of ISE, LLC will not
be required to contain all the information that is required to be
disclosed pursuant to Regulation 14A under the Act since ISE, LLC
will not be subject to the proxy requirements under the Act. In
addition, for purposes of determining whether a person has been
nominated for election by petition by the requisite percentage set
forth in the proposed LLC Constitution, no Exchange Member, alone or
together with its affiliates, may account for more than fifty
percent (50%) of the signatures of the holders of outstanding
Exchange Rights of the series entitled to elect such person, and any
such signatures by such Exchange Member, alone or together with its
affiliates, in excess of such fifty percent (50%) limitation shall
be disregarded. Id.
\31\ The current directors of ISE, LLC are the same directors of
ISE, Inc. immediately following the 2005 Annual Meeting of
Stockholders of ISE, Inc.
\32\ See proposed LLC Constitution, Section 3.2(c). See also
Amendment No. 2, supra note 3.
\33\ Proposed LLC Constitution, Section 3.2(e). ISE, Inc. did
not impose term limits on Non-Industry Directors, and ISE, LLC does
not propose to do so, though the ISE, LLC Corporate Governance
Committee may determine whether and how to provide for such term
limits at a later time.
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ISE, LLC will have a Finance & Audit Committee, a Corporate
Governance Committee, and a Compensation Committee, all of which will
be governed by charters.\34\ As is currently the case with respect to
ISE, Inc. and its shares of Class B Common Stock, ISE, LLC will require
ownership of an Exchange Right as a predicate to obtaining the trading
rights and privileges associated with such Exchange Right.\35\ Holders
of PMM and CMM Rights will be entitled to the same Core Rights to which
the holders of Series B-1 Common Stock and Series B-2 Common Stock are
entitled with respect to ISE, Inc.\36\
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\34\ Proposed LLC Constitution, Sections 5.4, 5.5 and 5.6. ISE,
Inc. proposes that the LLC Board may designate additional committees
by resolution passed by a majority of the whole LLC Board. Proposed
LLC Constitution, Section 5.1. Currently, the ISE, Inc. Board may
designate additional committees by a resolution of a majority of a
quorum. ISE, Inc. Amended Constitution, Section 5.1
\35\ ISE, Inc. Amended Certificate, Article Fourth, Subdivision
II(b)(ii) and proposed LLC Agreement, Section 6.2.
\36\ ISE, Inc. Amended Certificate, Article Fourth, Subdivision
II(b)(v)(B) and proposed LLC Agreement, Section 6.3(b).
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ISE, LLC will have officers, including a President and Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer,
Chief Information Officer, Chief Regulatory Officer, and Chief
Marketing Officer, who will manage the business and affairs of ISE,
LLC, subject to the oversight of the LLC Board and, in some cases, the
approval of ISE Holdings as the sole LLC member.\37\ The initial
officers of ISE, LLC will be the individuals currently serving as the
officers of ISE, Inc.
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\37\ Under Delaware law, certain events such as a sale of all or
substantially all of the assets, merger, or liquidation of ISE, LLC
may require the approval of ISE Holdings.
---------------------------------------------------------------------------
The organizational documents of ISE, LLC will differ from the ISE,
Inc.'s organizational documents in several notable respects. Because
ISE, LLC is not a corporation and has limited liability members instead
of stockholders, ISE Holdings and Exchange Right holders will not have
voting, dividend, and liquidation rights typically associated with
common stock under state corporate law.\38\ For example, the LLC Act
does not statutorily confer the same or similar voting rights on
limited liability members as are conferred to stockholders, pursuant to
the Delaware General Corporation Law. Accordingly, following the
Reorganization, the sole LLC member and the Exchange Right holders will
not statutorily be entitled to vote on certain items with respect to
which the holders of Class A and Class B Common Stock would have had a
voting right (i.e., an increase or decrease in the aggregate number of
authorized shares of Class A or Class B Common Stock, a change in par
value, and any alteration or change in the powers, preferences, or
special rights of the shares so as to affect them adversely).
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\38\ Because Exchange Rights will not have ``par value''
following the Reorganization, holders of EAMs also will not be
entitled to a return of the $0.01 par value per share upon
withdrawal from ISE, LLC. Additionally, the holders of Exchange
Rights will not be ``members'' of ISE, LLC for purposes of the
Delaware Limited Liability Company Act (the ``LLC Act''). Proposed
LLC Agreement, Section 6.1.
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ISE, Inc. notes that some of these items are irrelevant in the
context of a wholly-owned limited liability company (e.g., the notion
of par value and certain Class A holder voting rights that instead will
be relevant at the ISE Holdings level), but where still relevant and
practical, ISE, Inc. has attempted to preserve in proposed LLC
Agreement and proposed LLC Constitution certain rights of the holders
of Class B Common Stock following the Reorganization. As a result,
holders of Exchange Rights will continue to be entitled to vote with
respect to the Core Rights (that is, any increase in the number of PMM
Rights or CMM Rights to be approved by holders of a majority of PMM
Rights, voting as a separate class, and CMM Rights, voting as a
separate class) and with respect to any amendments that would alter or
change the powers, preferences, or special rights of one or more series
of Exchange Rights so as to affect them adversely (to be approved by
holders of a majority of Exchange Rights entitled to vote thereon).\39\
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\39\ The sole LLC member will have a similar right to approve
amendments to the proposed LLC Constitution if such amendments would
alter or change the powers, preferences, or special rights of the
sole LLC member so as to affect it adversely. Proposed LLC
Agreement, Section 8.1 and proposed LLC Constitution, Section 10.1.
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Also, since ISE, LLC will have ISE Holdings as its sole LLC member,
ISE, Inc. deems certain of the antitakeover
[[Page 13879]]
provisions in the ISE, Inc. organizational documents less necessary for
ISE, LLC. Specifically, ISE, LLC's organizational documents will not:
(1) Deny the right of ISE Holdings to call a special meeting; (2)
require ``advance notice'' of ISE Holdings'' or Exchange Right holders'
proposals; (3) except as described herein, impose an ownership or
voting limitation on ISE Holdings (or any corrective mechanism with
respect to any ownership limitation); \40\ or (4) require any super-
majority votes with respect to certain significant matters, such as
mergers.\41\
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\40\ ISE, Inc. notes that ownership and voting limitations will
not be relevant to a wholly owned subsidiary of a holding company,
although ISE Holdings itself will have substantially the same
ownership and voting limitations that ISE, Inc. currently has, as
described below. Additionally, as stated earlier, ISE, LLC will
continue to have a trading concentration limit and 20% member
ownership limit pursuant to ISE Rule 303(b), except as described
herein, and proposed LLC Agreement, Section 6.5. See supra note 11
for a discussion of certain modifications to ISE Rule 303(b)
approved in a separate rule filing by the Commission. See also
Amendment No. 2, supra note 3.
\41\ For the text of the current antitakeover provisions, see
ISE, Inc. Amended Certificate, Article Eighth and ISE, Inc. Amended
Constitution, Section 2.2 (pertaining to calling a special meeting);
ISE, Inc. Amended Constitution, Section 2.7 (pertaining to ``advance
notice'' provisions); ISE, Inc. Amended Certificate, Article Fourth,
Subdivision III (pertaining to ownership and voting limitations);
and ISE, Inc. Amended Certificate, Article Seventh (pertaining to
super-majority votes). In addition, because ISE, LLC will be a
wholly-owned subsidiary of ISE Holdings, and ISE Holdings will be
entitled to elect a majority of the LLC Board, it is deemed less
necessary to allow the sole LLC member to amend the proposed LLC
Constitution (currently, ISE, Inc. stockholders representing at
least a majority of the voting power may amend the ISE, Inc. Amended
Constitution). However, the sole LLC member has the right to approve
amendments to proposed LLC Constitution if such amendments would
alter or change the powers, preferences, or special rights of the
sole LLC member so as to affect it adversely. For the text of the
current power to amend the ISE, Inc. Amended Constitution, see ISE,
Inc. Amended Constitution, Section 11.1. For the text of the
proposed power to amend the LLC Constitution, see proposed LLC
Constitution, Section 10.1.
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b. Description of ISE Holdings
i. General
ISE Holdings will be governed by the Holdings Certificate and the
Holdings Bylaws. ISE Holdings will not cause ISE, LLC to be operated in
a manner inconsistent with ISE, LLC's regulatory and oversight
functions.\42\ The Holdings Certificate and Holdings Bylaws, as well as
the LLC Agreement and LLC Constitution, are intended to ensure that the
Reorganization will not unduly interfere with or restrict the ability
of ISE, LLC or the Commission to effectively carry out their respective
regulatory oversight responsibilities under the Act and generally to
enable ISE, LLC to operate in a manner that complies with the Federal
securities laws, including furthering the objectives of Section 6(b)(5)
of the Act.\43\ In addition, ISE Holdings and its officers, directors,
employees, and agents will be required to submit to the jurisdiction of
the U.S. Federal courts, the Commission, and ISE, LLC for the purposes
of any suit, action, or proceeding, pursuant to the U.S. Federal
securities laws and the rules or regulations thereunder arising out of,
or relating to, the activities of ISE, LLC and will waive any claims of
inconvenient forum or improper venue.\44\
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\42\ In particular, ISE Holdings, its officers, directors, and
employees will give due regard to the preservation of the
independence of the self-regulatory function of ISE, LLC and will
not interfere with the effectuation of any decision by the LLC Board
relating to such function. Proposed Holdings Bylaws, Section 1.5.
\43\ 15 U.S.C. 78f(b)(5).
\44\ Proposed Holdings Bylaws, Section 1.4. ISE Holdings and its
officers, directors, employees, and agents will also maintain an
agent for service of process in the U.S. Id.
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The ISE Holdings Common Stock will have the traditional features of
common stock, including voting, dividend, and liquidation rights.\45\
Except as described below, the holders of ISE Holdings Common Stock
will be entitled to vote on all matters submitted to the stockholders
for a vote, and, except as discussed below, each holder will have one
vote per share of ISE Holdings Common Stock owned.\46\ As discussed
further below, holders of ISE Holdings Common Stock will be subject to
substantially the same ownership and voting limitations with respect to
ISE Holdings Common Stock to which the holders of Class A Common Stock
currently are subject.
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\45\ ISE Holdings will be authorized to pay dividends to the
stockholders of ISE Holdings as and when declared by the Holdings
Board.
\46\ ISE Holdings may issue preferred stock in the future, the
terms of which will be determined by the Holdings Board.
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ii. Organization, Management and Governance of ISE Holdings
ISE Holdings will be governed under the direction of the Holdings
Board. The number of directors shall be fixed by resolution of the
Holdings Board and is expected to be nine immediately following the
Reorganization.\47\ Each year, the Corporate Governance Committee of
ISE Holdings will nominate candidates for election as directors for the
class of directors standing for election at the ISE Holdings annual
meeting of stockholders.\48\ As required by the New York Stock
Exchange, Inc. (the ``NYSE''), where the Class A Common Stock currently
trades and where ISE, Inc. intends that the ISE Holdings Common Stock
will be listed and traded, a majority of the directors of ISE Holdings
must be deemed ``independent'' within the meaning of the NYSE's listing
standards.\49\ The directors of ISE Holdings, other than the Chief
Executive Officer of ISE Holdings, will be divided into two classes and
will be elected by a plurality of the votes cast by stockholders at
each annual meeting of stockholders at which a quorum is present.\50\
The directors will serve staggered two-year terms, with the term of
office of one class expiring each year.\51\ The Chief Executive Officer
will hold office for a term of one year or such earlier time as such
person no longer serves as Chief Executive Officer.\52\ The Chairman of
the Holdings Board will be elected by the Holdings Board. If there is a
vacancy on the Holdings Board, the vacancy will be filled by the
Holdings Board, and the person elected to fill the vacancy will serve
until the expiration of the term of office of the class to which such
person was elected.\53\
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\47\ The Holdings Board is currently comprised of two directors;
one is the Chief Executive Officer of ISE, Inc., and the other is
the Secretary of ISE, Inc.
\48\ Proposed Holdings Bylaws, Section 3.10(c).
\49\ Section 303A of the NYSE Listed Company Manual.
\50\ Proposed Holdings Certificate, Article Fifth.
\51\ Id. ISE, Inc. represents that it will address term limits,
if any, in ISE Holdings' Corporate Governance Principles to be
adopted in connection with the Reorganization.
\52\ Id.
\53\ Proposed Holdings Bylaws, Section 3.3.
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ISE Holdings will have officers, including a President and Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer,
Chief Information Officer, General Counsel, and Chief Marketing
Officer, who will manage the business and affairs of ISE Holdings,
subject to the oversight of the Holdings Board. The initial officers of
ISE Holdings will be the individuals currently serving as officers of
ISE, Inc.
ISE Holdings will have a Board Executive Committee, Finance & Audit
Committee, Compensation Committee, and a Corporate Governance
Committee. The Finance & Audit, Compensation, and Corporate Governance
committees will be governed by charters that comply with the NYSE's
listing standards.
The Holdings Certificate and Holdings Bylaws will contain
substantially the same ownership limitations (including the same
corrective mechanisms), voting limitations, and antitakeover provisions
\54\ that are contained in the
[[Page 13880]]
ISE, Inc. Amended Certificate and ISE, Inc. Amended Constitution.\55\
If a Person, either alone or with its Related Persons,\56\ beneficially
owns shares of stock of ISE Holdings in violation of the relevant
ownership limitation, ISE Holdings will apply substantially the same
corrective procedures that were approved by the Commission in
connection with ISE, Inc.'s initial public offering.\57\ ISE, Inc.
believes that the ownership and voting limitations will prevent any
stockholder or group of stockholders acting together from exercising
undue control over the operation of ISE, LLC.\58\ Specifically, ISE,
Inc. believes that these ownership and voting limitations are designed
to prohibit any Person, either alone or with its Related Persons, from
having the power to control a substantial number of outstanding votes
entitled to be cast on any matter without Commission review and, more
importantly, that may be adverse to ISE, LLC's or the Commission's
regulatory oversight responsibilities. ISE, Inc. also believes that
these provisions serve to protect the integrity of ISE, LLC's and the
Commission's regulatory oversight responsibilities and allow the
Commission to review, and subject to public notice and comment, the
acquisition of substantial ownership or voting power by any stockholder
or group of stockholders.
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\54\ The antitakeover provisions relate to such things as
special meetings of stockholders, required stockholder vote with
respect to certain actions, and advance notice of stockholder
proposals (including the nomination of directors). Proposed Holdings
Bylaws, Article II.
\55\ See IPO Order, supra note 4. For the sake of clarity, ISE,
Inc. notes that the Special Trustee (as defined in the ISE, Inc.
Amended Certificate and proposed Holdings Certificate) who holds the
Excess Shares (as defined in the ISE, Inc. Amended Certificate and
proposed Holdings Certificate) is currently ISE, Inc. and, after the
Reorganization, will be ISE Holdings and that in each instance, ISE,
Inc. and ISE Holdings can also appoint a special trustee who is
unaffiliated with it or any Person or Related Person owning Excess
Shares. ISE, Inc. Amended Certificate, Article Fourth, Subdivision
III(c)(ii) and proposed Holdings Certificate, Article Fourth,
Subdivision III(c)(ii).
\56\ See supra note 10.
\57\ See supra note 4 (implementing corrective procedures
relating to the ownership limitations) and ISE, Inc. Amended
Certificate, Article Fourth, Subdivision III(c) (setting forth the
corrective procedures relating to the ownership limitations).
\58\ ISE, Inc. also believes that, much like the 20% member
ownership limitation, the 20% voting limitation cannot be waived by
the Holdings Board with respect to members.
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iii. Exchange-Related Matters
Pursuant to the Holdings Certificate, in discharging his or her
responsibilities as a member of the Holdings Board, each director shall
take into consideration the effect that ISE Holdings's actions would
have on the ability of ISE, LLC to carry out its responsibilities under
the Act and on the ability of ISE, LLC and ISE Holdings to engage in
conduct that fosters and does not interfere with ISE, LLC's and ISE
Holdings' ability to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to and
facilitating transactions in securities, to remove impediments to and
perfect the mechanisms of a free and open market and a national market
system, and, in general, to protect investors and the public
interest.\59\ In addition, in discharging his or her responsibilities
as a member of the Holdings Board, each director shall comply with the
Federal securities laws and rules and regulations thereunder and
cooperate with ISE, LLC and the Commission.\60\ Furthermore, in
discharging his or her responsibilities as an officer or employee of
ISE Holdings, each officer or employee shall comply with the Federal
securities laws and rules and regulations thereunder and shall
cooperate with ISE, LLC and the Commission.\61\
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\59\ Proposed Holdings Certificate, Article Twelfth.
\60\ Id.
\61\ Id.
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Moreover, for so long as ISE Holdings controls, directly or
indirectly, ISE, LLC, each officer, director, and employee of ISE
Holdings shall give due regard to the preservation of the independence
of the self-regulatory function of ISE, LLC and to ISE, LLC's
obligations under the Act and the rules thereunder, including, without
limitation, Section 6(b) of the Act \62\ and shall not take any actions
which he or she knows or reasonably should have known would interfere
with the effectuation of any decisions by the LLC Board relating to
ISE, LLC's regulatory functions (including disciplinary matters) or
which would adversely affect the ability of ISE, LLC to carry out ISE,
LLC's responsibilities under the Act.\63\
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\62\ 15 U.S.C. 78f(b).
\63\ Proposed Holdings Bylaws, Section 1.5. ISE Holdings also
will take reasonable steps necessary to cause its officers,
directors, and employees prior to accepting a position as such to
consent in writing to the applicability to them of Article Twelfth,
Article Thirteenth and Article Fourteenth of proposed Holdings
Certificate and Sections 1.4 and 1.5 of proposed Holdings Bylaws, as
applicable, with respect to their activities related to ISE, LLC.
Proposed Holdings Bylaws, Section 1.6.
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ISE, Inc. believes that these provisions would help ensure that
directors, officers, and employees of ISE Holdings are cognizant of,
and take into account, when carrying out their duties and
responsibilities as directors, officers, and employees of ISE Holdings,
the fact that ISE Holdings would operate an exchange that is subject to
regulatory oversight by the Commission and that the ISE, LLC is
required to be operated in compliance with Federal securities laws.
ISE, Inc. believes that these provisions also would help ensure that
the Commission is able to effectively fulfill its regulatory
obligations with respect to ISE, LLC.
Pursuant to the Holdings Certificate and Holdings Bylaws, for so
long as ISE Holdings controls, directly or indirectly, ISE, LLC, any
amendment to the Holdings Certificate and Holdings Bylaws must be
submitted by the Holdings Board to the LLC Board and, if the LLC Board
determines that such amendment is required, under Section 19 of the Act
\64\ and the rules promulgated thereunder, to be filed with, or filed
with and approved by, the Commission before such amendment may be
effective under Section 19 of the Act and the rules promulgated
thereunder, then such amendment shall not be filed with the Secretary
of State of the State of Delaware until filed with, or filed and
approved by, the Commission, as the case may be.\65\ In short, if the
LLC Board determines that an amendment to the Holdings Certificate and
Holdings Bylaws must be filed with, or filed with and approved by, the
Commission as a proposed rule change pursuant to Section 19 of the Act
and Rule 19b-4 thereunder,\66\ such amendment will not become effective
until it becomes effective pursuant to the Rule 19b-4 filing process.
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\64\ 15 U.S.C. 78s.
\65\ Proposed Holdings Certificate, Article Sixteenth and
proposed Holdings Bylaws, Section 10.1.
\66\ 15 U.S.C. 78s and 17 CFR 19b-4.
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ISE, Inc. believes that these provisions would help to preserve the
ability of ISE, LLC to carry out its regulatory responsibilities under
the Act and would help to provide the Commission with the ability to
review and subject to public notice and comment any changes in proposed
Holdings Certificate and proposed Holdings Bylaws that could have the
potential to affect ISE, LLC's and the Commission's regulatory
responsibilities regarding ISE, LLC.
Pursuant to proposed Holdings Certificate, all confidential
information pertaining to the self-regulatory function of ISE, LLC
(including but not limited to disciplinary matters, trading data,
trading practices, and audit information) contained in books and
records of ISE, LLC that shall come into the possession of ISE Holdings
shall: (1) Not be made available to any Persons (other than as provided
below) other than to those
[[Page 13881]]
officers, directors, employees, and agents of ISE Holdings that have a
reasonable need to know the contents thereof; (2) be retained in
confidence by ISE Holdings and the officers, directors, employees, and
agents of ISE Holdings; and (3) not be used for any commercial
purposes. Nothing in the Holdings Certificate shall be interpreted to
limit or impede the rights of the Commission to access and examine such
confidential information pursuant to the Federal securities laws and
rules and regulations thereunder or to limit or impede the ability of
any officers, directors, employees, or agents of ISE Holdings to
disclose such confidential information to the Commission.\67\
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\67\ Proposed Holdings Certificate, Article Thirteenth.
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For so long as ISE Holdings controls, directly or indirectly, ISE,
LLC, the books, records, premises, officers, directors, and employees
of ISE Holdings shall be deemed to be the books, records, premises,
officers, directors, and employees of ISE, LLC for purposes of and
subject to oversight pursuant to the Act but only to the extent they
relate to the exchange business of ISE, LLC.\68\ In addition, the books
and records of ISE, LLC and ISE Holdings will be kept within the
U.S.\69\ ISE, Inc. believes that these provisions would help to ensure
access to ISE Holdings' books and records by the Commission and, to the
extent ISE Holdings' books and records relate to the operation or
administration of ISE, LLC, would help enable the Commission to carry
out its regulatory responsibilities regarding ISE, LLC.
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\68\ Proposed Holdings Certificate, Article Fourteenth.
\69\ Proposed Holdings Bylaws, Section 1.3.
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Pursuant to proposed Holdings Certificate, ISE Holdings shall
comply with the Federal securities laws and rules and regulations
thereunder and shall cooperate with ISE, LLC and the Commission,
pursuant to their respective regulatory authority.\70\ In addition, ISE
Holdings shall take reasonable steps necessary to cause its agents to
cooperate with ISE, LLC and the Commission, pursuant to their
respective regulatory authority with respect to such agents' activities
related to ISE, LLC.\71\ ISE, Inc. believes that these provisions would
help to ensure that ISE Holdings will not interfere with the
Commission's regulatory responsibilities by ensuring that ISE Holdings
will comply with Federal securities laws, cooperates with ISE, LLC and
the Commission pursuant to their respective regulatory authority, and
takes reasonable steps to ensure that its agents do not interfere with
the Commission's ability to carry out its regulatory responsibilities.
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\70\ Proposed Holdings Certificate, Article Fifteenth.
\71\ Id.
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ISE, Inc. believes that the Reorganization will permit ISE, LLC to
continue ISE, Inc.'s current function as a national securities exchange
while its corporate parent, ISE Holdings, may, through greater
organizational flexibility, facilitate access to capital markets,
promote new business opportunities, facilitate future acquisitions and
the formation of strategic alliances, and create a framework for future
growth.
2. Statutory Basis
ISE, Inc. believes that the proposed rule change is consistent with
the requirements of the Act and the rules and regulations thereunder
that are applicable to a national securities exchange and, in
particular, with the requirements of Section 6(b) of the Act.\72\ The
Exchange believes that the proposal is consistent with the requirement
under Section 6(b)(1) of the Act \73\ that an exchange be so organized
and has the capacity to be able to carry out the purposes of the Act
and to comply, and (subject to any rule or order of the Commission
pursuant to Section 17(d) \74\ or 19(g)(2) \75\ of the Act) to enforce
compliance by its members and persons associated with its members, with
the provisions of the Act, the rules and regulations thereunder, and
the rules of the exchange. ISE, Inc. also believes this proposed rule
change furthers the objective of Section 6(b)(5) of the Act \76\ that
an exchange have rules that, among other things, are designed to remove
impediments to and perfect the mechanism for a free and open market and
a national market system, and, in general, to protect investors and the
public interest.
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\72\ 15 U.S.C. 78f(b). See also Amendment No. 2, supra note 3.
\73\ 15 U.S.C. 78f(b)(1).
\74\ 15 U.S.C. 78q(d).
\75\ 15 U.S.C. 78s(g)(2).
\76\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
ISE, Inc. believes that the proposed rule change does not impose
any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
ISE, Inc. has not solicited, and does not intend to solicit,
comments on this proposed rule change. ISE, Inc. has not received any
unsolicited written comments from members or other interested parties.
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 other 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 self-regulatory organization consents, the Commission will:
A. By order approve the 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 https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File No. SR-ISE-2006-04 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2006-04. 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 Commissions Internet Web site (https://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
[[Page 13882]]
available for inspection and copying in the Commission's Public
Reference Room. Copies of such filing also will be available for
inspection and copying at the principal office of the ISE. 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-ISE-2006-04 and should be
submitted by April 7, 2006.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\77\
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\77\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-3855 Filed 3-16-06; 8:45 am]
BILLING CODE 8010-01-P
