Self-Regulatory Organizations; International Securities Exchange, Inc.; Notice of Filing of a Proposed Rule Change Relating to Establishing ISE Stock Exchange as a Facility of International Securities Exchange, Inc., 45868-45875 [E6-13005]
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Federal Register / Vol. 71, No. 154 / Thursday, August 10, 2006 / Notices
equitable principles of trade, to remove
impediments to and perfect the
mechanism of 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
CBOE does not believe that the
proposed rule change will impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
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Because the foregoing rule does not (i)
significantly affect the protection of
investors or the public interest; (ii)
impose any significant burden on
competition; and (iii) become operative
for 30 days after the date of the filing or
such shorter time as the Commission
may designate if consistent with the
protection of investors and the public
interest, it has become effective
pursuant to section 19(b)(3)(A) of the
Act 10 and Rule 19b–4(f)(6)
thereunder.11
CBOE has requested a waiver of the
30-day operative delay. The
Commission believes, consistent with
the protection of investors and the
public interest, that such waiver will
permit CBOE to implement the
proposed rule change for the August 16,
2006 settlement date and to provide
advance notice of this change to
members prior to that date. For these
reasons, the Commission designates the
proposal to be effective and operative
upon filing with the Commission.12 At
any time within 60 days of the filing of
such proposed rule change, the
Commission may summarily abrogate
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
12 For purposes of waiving the operative date of
this proposal, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
11 17
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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:
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.13
Nancy M. Morris,
Secretary.
[FR Doc. E6–13022 Filed 8–9–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
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
Number SR–CBOE–2006–61 on the
subject line.
Paper Comments
The Exchange neither solicited nor
received comments on the proposal.
10 15
IV. Solicitation of Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
[Release No. 34–54273; File No. SR–ISE–
2006–45]
Self-Regulatory Organizations;
International Securities Exchange, Inc.;
Notice of Filing of a Proposed Rule
Change Relating to Establishing ISE
Stock Exchange as a Facility of
International Securities Exchange, Inc.
August 3, 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 July 31,
2006, the International Securities
Exchange, Inc. (‘‘ISE’’ or ‘‘Exchange’’)
All submissions should refer to File
filed with the Securities and Exchange
Number SR-CBOE–2006–61. This file
Commission (‘‘Commission’’) the
number should be included on the
subject line if e-mail is used. To help the proposed rule change as described in
Items I, II, and III below, which Items
Commission process and review your
have been prepared by the Exchange.
comments more efficiently, please use
The Commission is publishing this
only one method. The Commission will
notice to solicit comments on the
post all comments on the Commission’s
proposed rule change from interested
Internet Web site (https://www.sec.gov/
persons.
rules/sro.shtml). Copies of the
I. Self-Regulatory Organization’s
submission, all subsequent
Statement of the Terms of Substance of
amendments, all written statements
the Proposed Rule Change
with respect to the proposed rule
change that are filed with the
The ISE proposes to establish ISE
Commission, and all written
Stock Exchange (‘‘ISE Stock’’) as a
facility, as that term is defined in
communications relating to the
section 3(a)(2) of the Act,3 of the ISE.
proposed rule change between the
Commission and any person, other than ISE states that ISE Stock would
administer a fully automated
those that may be withheld from the
marketplace for the trading of equity
public in accordance with the
securities by Electronic Access
provisions of 5 U.S.C. 552, will be
Members, or EAMs, of ISE under the
available for inspection and copying in
rules of ISE. ISE Stock would be
the Commission’s Public Reference
operated by ISE Stock Exchange, LLC
section, 100 F Street, NE., Washington,
DC 20549. Copies of such filing also will (‘‘ISE Stock, LLC’’), a Delaware limited
liability company. In this filing, the
be available for inspection and copying
Exchange is submitting to the
at the principal office of the CBOE. All
Commission: the Certificate of
comments received will be posted
Formation (Exhibit 5(a)); the proposed
without change; the Commission does
Second Amended and Restated Limited
not edit personal identifying
Liability Company Agreement of ISE
information from submissions. You
Stock (‘‘LLC Agreement’’) (Exhibit 5(b));
should submit only information that
a Description of Services under the
you wish to make available publicly. All Management Agreement Exhibit 5(c));
submissions should refer to File
Rule Changes of International Securities
Number SR–CBOE–2006–61 and should Exchange (Exhibit 5(d)); Constitutional
be submitted on or before August 31,
13 17 CFR 200.30–3(a)(12).
2006.
PO 00000
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78c(a)(2).
2 17
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Federal Register / Vol. 71, No. 154 / Thursday, August 10, 2006 / Notices
Changes of International Securities
Exchange, LLC (Exhibit 5(e)). The ISE
states that the Certificate of Formation
and the LLC Agreement are the source
of ISE Stock LLC’s governance and
operating authority and, therefore,
function in a similar manner as articles
of incorporation and by-laws function
for a corporation. Certain sections of
these documents are discussed below.
The full text of Exhibit 5(a) through (e)
is available on the Commission’s Web
site at https://www.sec.gov, the Web site
of the Exchange at https://
www.iseoptions.com, at the principal
office of the Exchange, 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 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. 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
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1. Purpose
The Exchange proposes to establish
ISE Stock as a facility, as that term is
defined in section 3(a)(2) of the Act,4 of
the ISE. ISE Stock would administer a
fully automated marketplace for the
trading of equity securities by EAMs of
ISE under the rules of ISE. ISE Stock
would be operated by ISE Stock, LLC, a
Delaware limited liability company. In
this filing, the Exchange is submitting to
the Commission the Certificate of
Formation and the LLC Agreement of
ISE Stock, LLC. The Certificate of
Formation and the LLC Agreement are
the source of ISE Stock, LLC’s
governance and operating authority and,
therefore, function in a similar manner
as articles of incorporation and by-laws
function for a corporation.
The ISE is a founding and controlling
member of ISE Stock, LLC. ISE owns all
of the Class A Membership Units of ISE
Stock, LLC, representing 51% of the
voting securities of ISE Stock, LLC. In
addition to its ownership stake in ISE
Stock, LLC, ISE will enter into a
4 15
U.S.C. 78c(a)(2).
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management agreement (the
‘‘Management Agreement’’) with ISE
Stock, LLC. Pursuant to the
Management Agreement, ISE Stock, LLC
would appoint ISE as ISE Stock, LLC’s
manager (‘‘Manager’’) to perform certain
management, operational, and related
services. In particular, as Manager, ISE
would have responsibility for all
regulatory functions related to the
facility (including conducting market
surveillance for trading on ISE Stock).
Moreover, the Board of Directors of ISE
would be required to approve any
changes to the Certificate of Formation
and the LLC Agreement of ISE Stock,
LLC that are required to be filed with
the Commission pursuant to section
19(b) of the Act and Rule 19b–4
thereunder.5 ISE Stock, LLC would have
responsibility for the business
operations of the facility to the extent
those activities are not inconsistent with
the regulatory and oversight functions of
the ISE as Manager. This means that ISE
Stock, LLC would not interfere with
ISE’s self-regulatory responsibilities. ISE
is a registered ‘‘national securities
exchange’’ under Section 6 of the Act 6
and a self-regulatory organization
(‘‘SRO’’). ISE represents that it has
adequate funds to discharge all
regulatory functions related to the
facility that it proposes to undertake to
perform under the Management
Agreement and the LLC Agreement.7
In this filing, the Exchange is
submitting to the Commission the
Certificate of Formation and the LLC
Agreement of ISE Stock, LLC
specifically relating to the control and
governance of ISE Stock, LLC that
would ensure that the ISE has the
authority within ISE Stock, LLC to
maintain its responsibility for all
regulatory functions related to the ISE
Stock facility. The LLC Agreement
would ensure that the SEC and the ISE
would have regulatory authority over
investors and members of the advisory
board of ISE Stock, LLC (the ‘‘Advisory
Board’’). The Exchange will submit
separate filings to establish ISE rules
relating to listing, membership and
trading on ISE Stock. As the purpose of
this filing is to focus on only those
provisions which are directly related to
the ISE authority for all regulatory
functions of its proposed ISE Stock
5 LLC
Agreement, Section 12.1.
U.S.C. 78f.
7 Telephone conference between Michou H.M.
Nguyen, Special Counsel, Division of Market
Regulation (‘‘Division’’), Commission, and Tracy
Tang, Assistant General Counsel, Exchange, on
August 2, 2006. (clarifying that the sentence refers
to the LLC Agreement as well) (herein after referred
to as ‘‘August 2nd Telephone Conference’’). See
also LLC Agreement, Section 9.2(d).
6 15
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45869
facility, the Exchange’s discussion in
this filing will be limited to those
relevant provisions of the LLC
Agreement.
Description of LLC Membership
Interests in ISE Stock, LLC
As an LLC, ownership of ISE Stock,
LLC is represented by limited liability
company membership interests in ISE
Stock, LLC. The holders of such
membership interests are referred to as
the members (the ‘‘Members’’) of ISE
Stock, LLC. The membership interests
are divided into two classes—Class A
and Class B limited liability company
membership units (collectively, the
‘‘Units’’). The Units represent equity
interests in ISE Stock, LLC and entitle
the holders thereof to participate in
certain of ISE Stock, LLC’s allocations
and distributions. Each ‘‘Class A Unit’’
represents a limited liability company
membership interest in ISE Stock, LLC
and as a class, the holders of the Class
A Units hold fifty-one percent (51%) of
the aggregate voting rights of all
Members. Each holder of a Class A Unit
has a vote, in respect of each Class A
Unit held by such holder of record on
each matter on which holders of Units
are entitled to vote, equal to the product
of (A) 51 and (B) a fraction, whose
numerator is the number of Class A
Units then held by such holder and
whose denominator is the number of
Class A Units then held by all holders
of Class A Units.8 Currently, ISE holds
all of the Class A Units, making it a
fifty-one percent (51%) owner of ISE
Stock, LLC. Each ‘‘Class B Unit’’
represents a limited liability company
membership interest in ISE Stock, LLC.
Each holder of a Class B Unit shall have
a vote, in respect of each Class B Unit
held by such holder of record on each
matter on which holders of Class B
Units shall be entitled to vote as
specifically required by the LLC
Agreement or by the Delaware Limited
Liability Company Act (‘‘DLLCA’’), 9
equal to the product of (A) 49 and (B)
a fraction, whose numerator is the
number of Class B Units then held by
such holder and whose denominator is
the number of Class B Units then held
by all holders of Class B Units.10 There
are 49 Class B Units issued and
outstanding, held by 11 Class B Unit
holders. The ISE represents that no
Class B Unit holder owns more than 5
units.
8 LLC
Agreement, Section 3.2(a).
2nd Telephone Conference (clarifying
that reference is to the DLLCA and not the Act).
10 LLC Agreement, Section 3.2(b).
9 August
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Management of ISE Stock, LLC
As the Manager, ISE would have the
authority to make all decisions
regarding the business of ISE Stock, LLC
and matters concerning the Units, such
as whether or not to authorize
distributions.11 In certain limited
circumstances, the Manager would need
the approval of two-thirds of the
disinterested members of the Advisory
Board prior to taking certain actions, as
discussed below. The Manager would be
responsible for the control and
management of the business of ISE
Stock, LLC, and must exercise good
faith and integrity in handling its
affairs.12
Under Section 7.1 of the LLC
Agreement, other than as set forth in the
LLC Agreement or required by the
DLLCA13 or by the Commission, the
Members do not participate in the
management or control of ISE Stock,
LLC’s business, they do not transact any
business for ISE Stock, LLC, and they do
not have the power to act for or bind ISE
Stock, LLC. All of those powers are
vested solely and exclusively in the
Manager. Specifically, under Section 8.1
of the LLC Agreement, subject to the
limitations provided in the LLC
Agreement and except as specifically
provided therein, the Manager shall
have exclusive and complete authority
and discretion to manage the operations
and affairs of ISE Stock, LLC and to
make all decisions regarding the
business of ISE Stock, LLC and shall
have the power to act for or bind ISE
Stock, LLC. Any action taken by the
Manager shall constitute the act of and
serve to bind ISE Stock, LLC. Further,
except as otherwise specifically
provided in the LLC Agreement, the
Manager has all rights and powers of a
‘‘manager’’ under the DLLCA, and shall
have all authority, rights and powers in
the management of ISE Stock, LLC
business to do any and all other acts and
things necessary, proper, convenient or
advisable to effectuate the purposes of
the LLC Agreement.
Under Section 8.13 of the LLC
Agreement, any replacement and
appointment of the Manager, and any
assignment of the rights and obligations
of the Manager under the Management
Agreement, shall be subject to the rule
filing process pursuant to section 19 of
the Act. ISE believes that this section
provides the Commission with the
authority to review and subject to public
comment any replacement of the
11 LLC
Agreement, Section 8.1 and 8.12.
2nd Telephone Conference (removing
language).
13 August 2nd Telephone Conference (clarifying
that reference is to the DLLCA and not the Act).
12 August
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Manager of ISE Stock which the
Commission may deem to have the
potential to affect ISE’s self-regulatory
responsibilities regarding its proposed
ISE Stock facility.
Governance of ISE Stock, LLC
Section 8.2(d)(i) of the LLC
Agreement establishes the Advisory
Board of ISE Stock, LLC as a general
advisory board and provides that the
Advisory Board will have no power or
authority to act for ISE Stock, LLC or to
otherwise participate in the ISE Stock’s
management, except for certain limited
matters. Other than the matters for
which approval of the Advisory Board
is specifically required by the LLC
Agreement, any actions taken by the
Advisory Board are advisory only and
neither the Manager nor any of its
Related Persons are required or
otherwise bound to act in accordance
with any decision, action or comments
of the Advisory Board. The Advisory
Board has no power or authority to act
for ISE Stock, LLC or to otherwise
participate in ISE Stock, LLC
management. All decisions, including
responsibility for the management of
ISE Stock, LLC, rest with the manager,
and in no event will a member of the
Advisory Board be considered a
‘‘manager’’ of ISE Stock, LLC.
Section 8.2(d)(ii) provides that the
purpose of the Advisory Board is to: (1)
Review and assess any potential
conflicts of interest that may arise
between ISE Stock, LLC, on the one
hand, and the Manager, any Member
and/or any of their respective Related
Persons,14 on the other hand (including
without limitation conflicts with respect
14 ‘‘Related Person’’ means (1) 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
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 a
‘‘Exchange Member’’ (as such term is defined in the
Constitution of ISE, a copy of which will be
provided to any member of ISE Stock upon written
request therefore), any broker or dealer with which
such ‘‘Exchange Member’’ is associated; (3) 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; and
(4) 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 Units of
ISE Stock, LLC; and the term ‘‘beneficially owned’’
and derivative or similar words shall have the
meaning set forth in Regulation 13D–G under the
Act. LLC Agreement Section 2.1 ‘‘Definitions.’’
August 2nd Telephone Conference (conforming
purpose section to text of LLC Agreement).
‘‘Person’’ means any individual, partnership,
limited liability company, association, corporation,
trust or other entity. LLC Agreement Section 2.1
‘‘Definitions.’’
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to the receipt by the Manager, or its
Related Persons, of fees for services
rendered to ISE Stock, LLC); and (2)
generally to consult with the Manager
on the ISE Stock, LLC’s progress in
achieving its business objectives.
Section 8.2(d)(iii) provides that the
Advisory Board consists of seven
members. Each Member of ISE Stock,
LLC may nominate a candidate for
election to serve on the Advisory Board.
Three members of the Advisory Board
shall be officers, directors, or partners of
holders of the Class A Units, and shall
be elected annually by a plurality of the
holders of the Class A Units voting
together as a class (each a ‘‘Class A
Advisory Board Member’’). Each Class A
Advisory Board member shall serve for
a term of one year. Four members of the
Advisory Board shall be officers,
directors, or partners of holders of the
Class B Units, and, except as provided
below, shall be elected annually by a
plurality of the holders of the Class B
Units voting together as a class (each a
‘‘Class B Advisory Board Member’’). In
any situation where an Advisory Board
Member’s job status changes, either
upon a significant change in the
employment status at the same
employer or upon a change of employer,
or if the Member employing the
Advisory Board member ceases to be a
holder of Class B Units, the Advisory
Board member must tender his or her
resignation to the Manager, which the
Manager, in consultation with the
Advisory Board, may, but need not,
accept. Notwithstanding any of the
foregoing, no Member, other than ISE,
shall have more than one representative
elected to the Advisory Board during
any term. The initial Class B Advisory
Board Members shall serve staggered
terms with (x) two of such Class B
Advisory Board Members serving two
consecutive one-year terms, and (y) the
other two of such Class B Advisory
Board Members serving three
consecutive one-year terms. Thereafter,
each Class B Advisory Board Member
shall serve for a term of one year. In no
event shall any Class B Advisory Board
Member serve more than three
consecutive one-year terms. Each Class
B Advisory Board Member will serve
until the conclusion of its one-year
term, and until such Class B Advisory
Board Member’s successor has been
elected, or re-elected as permitted under
the LLC Agreement, by a plurality of the
holders of the Class B Units voting
together as a class, except in the event
of such Class B Advisory Board
Member’s earlier death, resignation, or
termination.
Under Section 8.2(e), ISE Stock, LLC
also has advisory committees (the
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‘‘Advisory Committees’’), each
consisting of up to ten individuals who
consult with ISE Stock, LLC and assist
with the development of (1) Agency
broker trading; (2) institutional trading;
(3) technology; and (4) bulk quoting. As
with the Advisory Board, the Advisory
Committees have no power or authority
to act for ISE Stock, LLC or to otherwise
participate in management.
The ISE believes that these limitations
on the powers of the Advisory Board
and Advisory Committees of ISE Stock,
LLC will enable ISE to have complete
authority over the control the actions of
ISE Stock, LLC, especially as they relate
to regulatory responsibilities.
Under Section 8.2(d)(vii) of the LLC
Agreement, in discharging his or her
responsibilities as a member of the
Advisory Board, such member shall take
into consideration the effect that ISE
Stock LLC’s actions would have on the
ability of ISE Stock, LLC 15 to carry out
its responsibilities under the Act and
whether or not his or her actions as a
member of the Advisory Board would
cause ISE Stock, LLC to engage in
conduct that fosters and does not
interfere with ISE Stock 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.
Furthermore, in discharging his or her
responsibilities as a member of the
Advisory Board, each member shall
comply with the Federal securities laws
and the rules and regulations
thereunder and shall cooperate with ISE
and the Commission pursuant to their
respective regulatory authority and the
provisions of the LLC Agreement.
Under Section 8.2(d)(viii) of the LLC
Agreement, the Manager, in its sole
discretion, may, after appropriate notice
and opportunity for hearing, terminate
an Advisory Board member: (a) In the
event such Advisory Board member has
violated any provision of the LLC
Agreement, any Federal or state
securities law, or (b) if the Manager
determines that such action is necessary
or appropriate in the public interest or
for the protection of investors.
ISE believes that these provisions
would require all members of ISE
Stock’s Advisory Board, regardless of
15 August 2nd Telephone Conference (clarifying
that sentence relates to ISE Stock, LLC and not ISE).
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their association with ISE, to adhere to
regulatory responsibilities in that they
must comply with Federal securities
laws and the rules and regulations
promulgated thereunder, and cooperate
with the Commission and the ISE
pursuant to their regulatory authority. In
addition, all members of the Advisory
Board would be required to take into
consideration and facilitate ISE’s
responsibility to comply with the
requirements under section 6(b)(5) of
the Act.16 Members of the Advisory
Board that do not adhere to these
requirements face termination from the
ISE Stock Advisory Board and possible
sanctions by regulatory authorities.
Voting Limitations of Members
Under Section 7.11 of the LLC
Agreement, no Person (other than ISE),
either alone or together with its Related
Persons, as of any record date for the
determination of members entitled to
vote on any matter, shall be entitled to:
(i) Vote or cause the voting of Units
beneficially owned by such Person or its
Related Persons, in person or by proxy
or through any voting agreement, plan,
or arrangement, to the extent that such
Units represent in the aggregate more
than twenty percent (20%) of voting
power of the then-issued and
outstanding Units (such threshold being
hereinafter referred to as the ‘‘Voting
Limitation’’); or (ii) enter into any voting
agreement, plan, or arrangement that
would result in Units beneficially
owned by such Person or its Related
Persons, subject to such voting
agreement, plan, or arrangement not
being voted on a matter, or any proxy
relating thereto being withheld, where
the effect of that voting agreement, plan,
or arrangement would be to enable any
Person, alone or together with its
Related Persons, to exceed the Voting
Limitation. ISE Stock, LLC shall
disregard any such votes purported to
be cast in excess of the Voting
Limitation.
The limitations imposed by Sections
7.11 may be waived by the Manager, if
in its sole discretion, it consented to
expressly permit such waiver of the
Voting Limitation; and such waiver
16 August 2nd Telephone Conference (clarifying
that ISE as an SRO has the responsibilities under
6(b)(5) of the Act and not ISE Stock, LLC and
clarifying ISE’s interpretation of Section 8.2(d)(vii)
of the LLC Agreement). Section 8.2(d)(vii) of the
LLC Agreement states that Advisory Board members
shall comply with the Federal securities laws and
the rules and regulations thereunder and shall
cooperate with ISE and the Commission pursuant
to their respective regulatory authority. ISE
interprets this to mean that Advisory Board
members must take into consideration and facilitate
ISE’s responsibilities under section 6(b)(5) of the
Act.
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45871
shall have been filed with, and
approved by, the Commission under
section 19(b) of the Act and shall have
become effective thereunder. In granting
a waiver, the Manager must have
determined that: (i) The exercise of such
voting rights or the entering of such
agreement, plan or other arrangement,
as applicable, by such Person, either
alone or together with its Related
Persons, will not impair the ability of
the ISE Stock, LLC and ISE, as the
manager, to carry out its functions and
responsibilities, including, but not
limited to, under the Act, is otherwise
in the best interests of the ISE Stock,
LLC and its Members; (ii) such voting
rights by such Person, either alone or
together with its Related Persons, will
not impair the ability of the Commission
to enforce the Act; (iii) neither such
Person nor its Related Persons are
subject to any applicable ‘‘statutory
disqualification’’ (within the meaning of
section 3(a)(39) of the Act); and (iv)
neither such Person nor its Related
Persons is an ‘‘Exchange Member’’ (as
such term is defined in the Constitution
of ISE).
The ISE believes that these provisions
will prevent any Person from exercising
undue control over ISE Stock, LLC and
will protect the ability of ISE, as well as
other investors, to exercise their full
ownership rights. By specifically
imposing a Voting Limitation on any
Person that owns Units which represent
in the aggregate more than twenty
percent (20%) of the voting power then
entitled to be cast, ISE would ensure
that it is in all cases, able to maintain
proper control over the exercise of its
regulatory function in relation to ISE
Stock, LLC, and is not subject to
influence that may be adverse to its
regulatory responsibilities from any
Person who may own a substantial
number of the outstanding Units. This
provision and other related provisions
relating to notice and rule filing
requirements with respect to any Person
who acquires certain Percentage
Interest 17 levels in ISE Stock would
17 ‘‘Percentage Interest’’ shall mean (i) As of any
time when the number of outstanding Class B Units
does not exceed 49, (x) with respect to the Class B
Units one percent (1%) (or fraction thereof) as to
each Unit (or fraction thereof) held by such holder
of Class B Units and (y) as to the holders of Class
A Units, in the aggregate, 100% less the aggregate
Percentage Interest of holders of Class B Units as
of such time; and as to each holder of a Class A
Unit, the product of (x) the aggregate Percentage
Interest of all holders of Class A Units and (y) a
fraction, whose numerator is the number of Class
A Units then held by such holder and whose
denominator is the number of Class A Units then
held by all holders of Class A Units; and (ii) as of
any time when the number of outstanding Class B
Units exceeds 49, as to each holder of a Class A
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serve to protect the integrity of ISE’s
self-regulatory responsibilities.
Ownership Limitations of Members and
Changes in Ownership
rwilkins on PROD1PC61 with NOTICES
Under Section 9.2(a) of the LLC
Agreement, no Person (other than ISE),
either alone or together with its Related
Persons, at any time, may own, directly
or indirectly, of record or beneficially,
an aggregate amount of Units which
would result in more than twenty
percent (20%) Percentage Interest level
in ISE Stock, LLC (the ‘‘Concentration
Limitation’’). Any transfer of Units that
result in the acquisition and holding by
any Person, alone or together with its
Related Persons, of an aggregate
Percentage Interest level which crosses
the threshold level of twenty percent
(20%) is subject to the rule filing
process pursuant to Section 19 of the
Act. Furthermore, any transfer of Units
that results in a reduction of ISE’s
Percentage Interest level of Class A
Units or Precentage Interest level in ISE
Stock, LLC below the twenty percent
(20%) threshold is subject to the rule
filing process pursuant to section 19 of
the Act.18
The limitations imposed by Sections
9.2(a) may be waived by the Manager, if
in its sole discretion, it consented to
expressly permit such waiver of the
Concentration Limitation; and such
waiver shall have been filed with, and
approved by, the Commission under
section 19(b) of the Act and shall have
become effective thereunder. In granting
a waiver, the Manager must have
determined that: (i) Such beneficial
ownership of Units by such Person,
either alone or together with its Related
Persons, will not impair the ability of
ISE Stock, LLC and the Manager to carry
out its functions and responsibilities,
including but not limited to, under the
Act, is otherwise in the best interests of
ISE Stock, LLC and its Members; (ii)
such beneficial ownership of Units by
such Person, either alone or together
with its Related Persons, will not impair
the ability of the Commission to enforce
the Act; (iii) neither such Person nor its
Related Persons are subject to any
applicable ‘‘statutory disqualification’’
(within the meaning of Section 3(a)(39)
of the Act); and (iv) neither such Person
nor its Related Persons is an ‘‘Exchange
Unit or Class B Unit, the percentage equivalent of
a fraction whose numerator is the number of Units
held by such holder and whose denominator is the
aggregate number of Units outstanding. LLC
Agreement Section 2.1 ‘‘Definitions.’’
18 Telephone conference between Michou H.M.
Nguyen, Special Counsel, Division, Commission,
and Tracy Tang, Assistant General Counsel,
Exchange, on August 1, 2006. See also LLC
Agreement, Section 9.2(d).
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21:27 Aug 09, 2006
Jkt 208001
Member’’ (as such term is defined in the
Constitution of ISE).
ISE believes that these provisions
provide the Commission with the
authority to review and subject to public
comment any substantial transfer of
ownership which the Commission may
deem to have the potential to affect the
ISE’s self-regulatory responsibilities
regarding its proposed ISE Stock
facility.
Under Section 9.1, no Member may
sell, assign, pledge or in any manner
dispose of or create or suffer the
creation of a security interest in or any
encumbrance on all or a portion of its
Units in the Company (the commission
of any such act being referred to as a
‘‘Transfer’’, any person who effects a
Transfer being referred to as a
‘‘Transferor’’ and any person to whom a
Transfer is effected being referred to as
a ‘‘Transferee’’) except in accordance
with the terms and conditions set forth
in Article 9 of the LLC Agreement. Any
Transfer or purported Transfer of a Unit
in ISE Stock, LLC not made in
accordance with the LLC Agreement
shall be null and void and of no force
or effect whatsoever.
Section 9.3 provides that a Member
may not Transfer all or any portion of
its Units in ISE Stock, LLC to any
Person without the consent of the
Manager, which consent may be given
or withheld in the Manager’s sole
discretion; provided, that, subject to
Section 9.10 of the LLC Agreement, a
Member may transfer all or a portion of
its Units in ISE Stock, LLC to one or
more of its Permitted Transferees 19
without the consent of the Manager or
any other Member.20
19 ‘‘Permitted Transferee’’ means, with respect to
another Person, (i) Any Person directly or indirectly
owning, controlling or holding with power to vote
80% or more of the outstanding voting securities of
and equity or beneficial interests in such other
Person, (ii) any Person 80% or more of whose
outstanding voting securities and equity or
beneficial interests are directly or indirectly owned,
controlled or held with power to vote by such other
Person, (iii) any Person 80% or more of whose
outstanding voting securities and equity or other
beneficial interests are directly or indirectly owned,
controlled or held with power to vote by a Person
directly or indirectly owning, controlling or holding
with power to vote 80% or more of the outstanding
voting securities and equity or other beneficial
interests of such other Person with whom affiliate
status is being tested, (iv) any Family Members or
Family Trusts of such Person and (v) any Member.
LLC Agreement Section 2.1 ‘‘Definitions.’’
‘‘Family Members’’ means, with respect to any
natural Person, such Person’s spouse, children,
parents and lineal descendants of such Person’s
parents. LLC Agreement Section 2.1 ‘‘Definitions.’’
‘‘Family Trusts’’ means, with respect to any
natural Person, a trust benefiting solely such Person
or the Family Members of such Person. LLC
Agreement Section 2.1 ‘‘Definitions.’’
20 If a Member transfers all of its Unit, whether
or not the transfer is to a Related Person, such
PO 00000
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Fmt 4703
Sfmt 4703
Under Section 9.11, unless a
Transferee of a Member’s Units becomes
a Substituted Member,21 such
Transferee shall have no right to obtain
or require any information or account of
ISE Stock, LLC transactions, or to
inspect ISE Stock, LLC’s books or to
vote on ISE Stock, LLC matters.
Furthermore, any successor or
Transferee under the LLC Agreement
shall be subject to and bound by the
LLC Agreement as if originally a party
to the LLC Agreement.
ISE believes that these transfer
restrictions, together with the Voting
Limitation and Concentration
Limitation, are adequately 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, and more importantly, that
may be adverse to ISE’s regulatory
oversight responsibilities. Moreover, ISE
believes that these provisions serve to
protect the integrity of ISE’s and the
Commission’s regulatory oversight
responsibilities and allows the
Commission to review, and subject to
public notice and comment, the
acquisition of substantial ownership or
voting power by any Member.
Regulatory Jurisdiction Over Members
Under Section 6.1(b), each Member
acknowledges that to the extent that
they relate to the business of ISE Stock,
LLC, the books, records, premises,
officers, directors, agents and employees
of Members shall be deemed to be the
books, records, premises, officers,
directors, agents and employees of ISE
Stock, LLC for purposes of and subject
to oversight pursuant to the Act.
Furthermore,22 the books, records,
premises, officers, directors, agents and
employees of ISE Stock, LLC shall be
deemed to be the books, records,
premises, officers, directors, agents and
employees of ISE for purposes of and
subject to oversight pursuant to the Act.
In addition, the books and records of
ISE Stock, LLC will be kept within the
U.S.23
transfer must first be approved by the Manager.
Telephone conference between Michou H.M.
Nguyen, Special Counsel, Division, Commission,
and Tracy Tang, Assistant General Counsel,
Exchange, on August 1, 2006 (clarifying the
additional restriction on transfers applicable when
all of a Member’s interest is purported to be
transferred). See also LLC Agreement, Section
9.3(c).
21 ‘‘Substituted Member’’ means any Person
admitted to the Company as a substituted Member
pursuant to the provisions of Article 9. LLC
Agreement Section 2.1 ‘‘Definitions.’’
22 August 2nd Telephone Conference (conforming
purpose section to text of LLC Agreement).
23 LLC Agreement, Section 6.1(a).
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rwilkins on PROD1PC61 with NOTICES
Section 13.1(a) of the LLC Agreement
generally provides that a Member may
not disclose any confidential
information of ISE Stock or of any other
Members to any persons, except as
expressly provided by the LLC
Agreement. However, Section 13.1(a)
provides exceptions for, among other
things, disclosure required by the
Federal securities laws and any other
applicable self-regulatory organization,
or in response to a request by the
Commission pursuant to the Act or by
ISE. In addition, confidential
information pertaining to the selfregulatory function of ISE (including but
not limited to disciplinary matters,
trading data, trading practices and audit
information) contained in the books and
records of ISE Stock, LLC shall: (i) Not
be made available to any persons (other
than as provided in the next sentence)
other than to those officers, directors,
employees, and agents of ISE Stock, LLC
that have a reasonable need to know the
contents thereof; (ii) be retained in
confidence by ISE Stock, LLC and the
officers, directors, employees and agents
of ISE Stock, LLC; and (iii) not be used
for any commercial purposes.24 Nothing
in the LLC Agreement shall be
interpreted as to limit or impede the
rights of the Commission or ISE to
access and examine such confidential
information pursuant to the Federal
securities laws and the rules and
regulations thereunder, or to limit or
impede the ability of any Member or
any officers, directors, employees or
agents of ISE Stock, LLC or any Member
to disclose such confidential
information to the Commission or ISE.25
ISE believes that these provisions
would help to ensure access to ISE’s
books and records by the Commission,
and would help enable the Commission
to carry out its regulatory
responsibilities regarding ISE.26
Under Section 6.1(c) of the LLC
Agreement, ISE Stock, LLC, its
Members, and officers, directors, agents,
and employees of ISE Stock, LLC and its
Members irrevocably submit to the
jurisdiction of the U.S. Federal courts,
the Commission and ISE, for the
purposes of any suit, action or
proceeding pursuant to the U.S. Federal
securities laws, the rules or regulations
thereunder, directly arising out of, or
relating to, ISE Stock, LLC activities or
Section 6.1 of the LLC Agreement
(except that such jurisdictions shall also
include Delaware for any such matter
24 LLC
Agreement, Section 13.1(b).
25 LLC Agreement, Section 13.1(c). August 2nd
Telephone Conference (conforming purpose section
to text of LLC Agreement).
26 August 2nd Telephone Conference (conforming
purpose section to text of LLC Agreement).
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21:27 Aug 09, 2006
Jkt 208001
relating to the organizational or internal
affairs of ISE Stock, LLC), and hereby
waives, and agrees not to assert by way
of motion, as a defense or otherwise in
any such suit, action or proceeding, any
claims that it is not personally subject
to the jurisdiction of the Commission,
that the suit, action or proceeding is an
inconvenient forum or that the venue of
the suit, action or proceeding is
improper, or that the subject matter
hereof may not be enforced in or by
such courts or agency.27
Under Section 6.1(d) of the LLC
Agreement, ISE Stock, LLC, its
Members, the officers, directors, agents,
and employees of ISE Stock, LLC and its
Members agree to comply with the
Federal securities laws and the rules
and regulations thereunder and shall
cooperate with ISE and the Commission
pursuant to their respective regulatory
authority and the provisions of the LLC
Agreement; and to engage in conduct
that fosters and does not interfere with
ISE Stock, 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.28
Section 6.1(e) provides that ISE Stock,
LLC and each Member shall take such
action as is necessary to ensure that its
respective officers, directors, agents, and
employees consent in writing to the
application to them of the applicable
provisions of Section 6.1 with respect to
their ISE Stock, LLC-related activities.29
The Exchange believes that these
provisions will serve as notice to
Members that they will be subject to the
jurisdiction of the U.S. Federal courts,
the Commission and the ISE. While
Members may represent a diverse group
of business interests, the ISE believes
that it is imperative that regulatory
cooperation is assured from all
Members, regardless of each Member’s
business location, country of domicile
or other circumstance which the
Commission may deem to have the
potential to be adverse to the regulatory
responsibilities and interests of the ISE,
the Commission, or the U.S. Federal
27 Telephone conference between Michou H.M.
Nguyen, Special Counsel, Division, Commission,
and Tracy Tang, Assistant General Counsel,
Exchange, on August 1, 2006 (conforming purpose
section to text of LLC Agreement).
28 Id.
29 Id.
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Fmt 4703
Sfmt 4703
45873
courts. Accordingly, these provisions
ensure that, should an occasion arise
which requires regulatory cooperation
or jurisdictional submission from ISE
Stock, LLC or a Member, it will be
forthcoming and uncontested.
Under Section 7.1(b) of the LLC
Agreement, the Manager, may, after
appropriate notice and opportunity for
hearing, suspend or terminate a
Member’s voting privilege or
membership: (i) In the event such
Member has violated a provision of this
Agreement, any Federal or state
securities law, (ii) such Member or its
Related Persons are subject to any
applicable ‘‘statutory disqualification’’
(within the meaning of section 3(a)(39)
of the Act); or (iii) if the Manager
determines that such action is necessary
or appropriate in the public interest or
for the protection of investors.
ISE believes that this provision would
require Members, regardless of the
nature of their association with ISE, to
adhere to regulatory responsibilities in
that they must comply with Federal
securities laws and the rules and
regulations thereunder, and cooperate
with the Commission and ISE pursuant
to their regulatory authority or face
severe consequences such as
termination of voting rights or
ownership. In addition, Members would
be required to take into consideration
and facilitate ISE’s and ISE Stock’s
ability to comply with the requirements
under section 6(b)(5) of the Act.30
Fair Representation of Trading
Participants, or EAMs
The Exchange believes that the ISE
Stock corporate structure assures the
fair representation of its members, or
trading participants, in the selection of
its directors and administration of its
affairs, and satisfies Commission
requirements in that one or more
directors shall be representative of
issuers and investors and not be
associated with a member of the
exchange, broker, or dealer.
The Exchange notes that Members of
(or holders of Units in) ISE Stock, LLC
are not automatically entitled to trading
privileges on ISE Stock, nor is the
purchase of Units a pre-requisite for
30 August 2nd Telephone Conference (clarifying
that ISE as an SRO has the responsibilities under
6(b)(5) of the Act and not ISE Stock, LLC and
clarifying ISE’s interpretation of Section 6.1(d) of
the LLC Agreement). Section 6.1(d) of the LLC
Agreement states that Members shall comply with
the Federal securities laws and the rules and
regulations thereunder and shall cooperate with ISE
and the Commission pursuant to their respective
regulatory authority. ISE interprets this to mean that
Members must take into consideration and facilitate
ISE’s responsibilities under section 6(b)(5) of the
Act.
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exercising trading privileges on ISE
Stock. Rather, in order to exercise
trading privileges on ISE Stock, a
broker-dealer must be an approved EAM
of ISE. There is only one type of EAM
membership for both options trading on
ISE and equities trading on ISE Stock.
When an applicant is approved under
ISE rules as an EAM, the member is
issued one share of Class B Common
Stock, Series B–3 (a ‘‘B–3 Share’’).
Under the ISE Constitution, holders of
B–3 Shares, or EAMs, have the right to
elect two members (the ‘‘B–3 Directors’’)
of the Board of Directors of ISE (the ‘‘ISE
Board’’). Nominees for election to the
ISE Board to serve as Industry Directors,
including B–3 Directors, are currently
made by the Exchange’s Nominating
Committee, which is not a committee of
the ISE Board, and is comprised of
representatives of the holders of each
series of Class B Common Stock.
Stockholders also may nominate
Industry Director candidates for election
to the ISE Board by petition.
Accordingly, since trading participants
on ISE Stock must be EAMs, and since
EAMs have the right to elect B–3
Directors of the ISE Board, the Exchange
believes that ISE Stock trading
participants are fairly represented on
the ISE Board. Additionally, as a result
of ISE’s stated strategy of selling Units
to entities that will support trading on
ISE Stock, trading participants will have
representation via the ISE Stock, LLC
Advisory Board.
The Exchange proposes to modify the
language in Rule 312 (Limitation on
Affiliation between the Exchange and
Members) to clarify that this provision
covers not only the Exchange, but the
ISE Stock Exchange LLC, as a facility of
the ISE, as well.
rwilkins on PROD1PC61 with NOTICES
Reorganization Into a Holding
Company Structure
Finally, the Exchange notes that it
intends to reorganize into a holding
company structure on September 1,
2006, in the manner described in
Securities Exchange Act Release No.
53705 (April 21, 2006) (SR–ISE–2006–
04) (the ‘‘Reorganization’’).31 Upon the
Reorganization, International Securities
Exchange, LLC shall become the
registered ‘‘national securities
exchange’’ under section 6 of the Act,
the SRO and Manager of ISE Stock, LLC.
International Securities Exchange
Holdings, Inc. (‘‘ISE Holdings’’) shall
become the holder of the Class A Units
of ISE Stock, LLC.
31 See Securities Exchange Act Release No. 53705
(April 21, 2006), 71 FR 25260 (April 28, 2006) (SR–
ISE–2006–04).
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21:27 Aug 09, 2006
Jkt 208001
Prior to the Reorganization, the
provisions relating to, among other
things, ownership and voting
limitations (and exceptions therefrom)
are applicable to ISE, as the holder of
the Class A Units. Upon the
Reorganization, those same provisions
are applicable to ISE Holdings, as the
holder of the Class A Units. The
Exchange believes that applying the
exceptions to the ownership and voting
limitations to ISE Holdings following
the Reorganization is (i) Reasonable, as
International Securities Exchange, LLC,
the SRO, will be a wholly-owned
subsidiary of ISE Holdings, and (ii)
consistent with the provisions of the
LLC Agreement that prevent any Person
from exercising undue control over ISE
Stock, LLC, as the Certificate of
Incorporation and by-laws of ISE
Holdings include substantially similar
ownership and voting limitations (see,
for example, Article Fourth, Subdivision
III(a) and (b) of the ISE Holdings
Certificate of Incorporation).
2. Statutory Basis
ISE believes the proposal is consistent
with the requirements of the Act and the
rules and regulations promulgated
thereunder that are applicable to a
national securities exchange, and in
particular, with section 6(b) of the Act.32
ISE believes that the proposal is
consistent with section 6(b)(5) of the
Act 33 in that it is designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, 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. In particular, the ISE
believes that the proposal is designed to
enable it to promote competition in the
trading of equity securities through
establishing a new marketplace.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The Exchange has not solicited, and
does not intend to solicit, comments on
this proposed rule change. The
Exchange has not received any
32 15
33 15
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
Frm 00110
Fmt 4703
Sfmt 4703
unsolicited written comments on this
proposal from members, participants, or
others.
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 longer 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 Exchange 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
Number SR–ISE–2006–45 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE, Washington, DC
20549–1090.
All submissions should refer to File
Number SR–ISE–2006–45. 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 Commission’s
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
available for inspection and copying in
the Commission’s Public Reference
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Room. Copies of the filing also will be
available for inspection and copying at
the principal office of the Exchange. 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–2006–45 and should be
submitted on or before August 31, 2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.34
Nancy M. Morris,
Secretary.
[FR Doc. E6–13005 Filed 8–9–06; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54270; File No. SR–ISE–
2006–34]
Self-Regulatory Organizations;
International Securities Exchange, Inc.;
Notice of Filing and Immediate
Effectiveness of Proposed Rule
Change and Amendment No. 1 Thereto
Relating to Rule 1406, Regulatory
Cooperation
August 3, 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 May 31,
2006, the International Securities
Exchange, Inc. (‘‘Exchange’’ or ‘‘ISE’’)
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. On July
7, 2006, ISE filed Amendment No. 1 to
the proposed rule change. The Exchange
filed the proposed rule change as a
‘‘non-controversial’’ rule change under
Rule 19b–4(f)(6) under the Act,3 which
rendered the proposal effective upon
filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change, as amended, from interested
persons.
rwilkins on PROD1PC61 with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend ISE
Rule 1406, Regulatory Cooperation, to
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 17 CFR 240.19b–4(f)(6).
1 15
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21:27 Aug 09, 2006
Jkt 208001
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 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. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant aspects of such
statements.
BILLING CODE 8010–01–P
34 17
clarify that the Exchange may contract
with another self-regulatory
organization (‘‘SRO’’) for the
performance of certain regulatory
functions. The text of the proposed rule
change is available on ISE’s Web site,
https://www.iseoptions.com, at ISE’s
Office of the Secretary, and at the
Commission’s Public Reference Room.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
ISE Rule 1406 allows the Exchange to
enter into agreements with domestic
and foreign SROs, associations and
contract markets and the regulators of
such markets for the exchange of
information and other regulatory
purposes. The Exchange proposes to
amend ISE Rule 1406 to specify that the
Exchange may contract with another
SRO for the performance of certain of
ISE’s regulatory functions.4 ISE states
that such regulatory services agreements
could enhance ISE’s ability to carry out
its regulatory obligations under the Act.
This rule change would have
immediate applicability with respect to
a regulatory services agreement (‘‘RSA’’)
between ISE, the Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’), and
other options markets participating in
the Options Regulatory Surveillance
Authority national market system plan
(‘‘ORSA’’). ISE has determined that to
best discharge its SRO responsibilities,
it will contract with CBOE, which is
subject to Commission oversight
pursuant to sections 6 and 19 of the
Act,5 for CBOE to provide certain
regulatory services to ISE, as set forth in
4 The Exchange states that the proposed rule
change is identical to rule changes recently adopted
by other options markets. See, e.g., Securities
Exchange Act Release No. 53832 (May 18, 2006), 71
FR 30007 (May 24, 2006) (SR–CBOE–2006–46).
5 15 U.S.C. 78f and 15 U.S.C. 78s.
PO 00000
Frm 00111
Fmt 4703
Sfmt 4703
45875
the ORSA RSA. In performing services
under the ORSA RSA, CBOE will be
operating pursuant to the statutory SRO
responsibilities of ISE under Sections 6
and 19, as well as performing for itself
its own SRO responsibilities.
According to the proposed rule
change, ISE remains an SRO registered
under Section 6 of the Act 6 under any
agreement for regulatory services with
another SRO and, therefore, continues
to have statutory authority and
responsibility for enforcing compliance
by its members, and persons associated
with its members, with the Act, the
rules thereunder, and the rules of the
Exchange. The proposed rule change
specifically states that any action taken
by another SRO, or its employees or
authorized agents, operating on behalf
of ISE pursuant to a regulatory services
agreement with ISE, will be deemed an
action taken by ISE. Under any
agreement for regulatory services with
another SRO, ISE retains ultimate
responsibility for performance of its
SRO duties, and the proposed rule
change states that ISE shall retain
ultimate legal responsibility for, and
control of, its SRO responsibilities.
2. Statutory Basis
The Exchange believes that the
proposed rule change furthers the
objectives of section 6(b)(5) of the Act,7
in that it is designed 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 mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest. In
particular, the proposal specifies in the
Exchange’s rules that the Exchange may
enter into regulatory services
agreements, which the ISE believes
could enhance the Exchange’s
regulatory program.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
6 15
7 15
E:\FR\FM\10AUN1.SGM
U.S.C. 78f.
U.S.C. 78f(b)(5).
10AUN1
]]>Agencies
[Federal Register Volume 71, Number 154 (Thursday, August 10, 2006)]
[Notices]
[Pages 45868-45875]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-13005]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54273; File No. SR-ISE-2006-45]
Self-Regulatory Organizations; International Securities Exchange,
Inc.; Notice of Filing of a Proposed Rule Change Relating to
Establishing ISE Stock Exchange as a Facility of International
Securities Exchange, Inc.
August 3, 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 July 31, 2006, the International Securities Exchange, Inc. (``ISE''
or ``Exchange'') 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 the Exchange. 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.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The ISE proposes to establish ISE Stock Exchange (``ISE Stock'') as
a facility, as that term is defined in section 3(a)(2) of the Act,\3\
of the ISE. ISE states that ISE Stock would administer a fully
automated marketplace for the trading of equity securities by
Electronic Access Members, or EAMs, of ISE under the rules of ISE. ISE
Stock would be operated by ISE Stock Exchange, LLC (``ISE Stock,
LLC''), a Delaware limited liability company. In this filing, the
Exchange is submitting to the Commission: the Certificate of Formation
(Exhibit 5(a)); the proposed Second Amended and Restated Limited
Liability Company Agreement of ISE Stock (``LLC Agreement'') (Exhibit
5(b)); a Description of Services under the Management Agreement Exhibit
5(c)); Rule Changes of International Securities Exchange (Exhibit
5(d)); Constitutional
[[Page 45869]]
Changes of International Securities Exchange, LLC (Exhibit 5(e)). The
ISE states that the Certificate of Formation and the LLC Agreement are
the source of ISE Stock LLC's governance and operating authority and,
therefore, function in a similar manner as articles of incorporation
and by-laws function for a corporation. Certain sections of these
documents are discussed below. The full text of Exhibit 5(a) through
(e) is available on the Commission's Web site at https://www.sec.gov,
the Web site of the Exchange at https://www.iseoptions.com, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
---------------------------------------------------------------------------
\3\ 15 U.S.C. 78c(a)(2).
---------------------------------------------------------------------------
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 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. 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
The Exchange proposes to establish ISE Stock as a facility, as that
term is defined in section 3(a)(2) of the Act,\4\ of the ISE. ISE Stock
would administer a fully automated marketplace for the trading of
equity securities by EAMs of ISE under the rules of ISE. ISE Stock
would be operated by ISE Stock, LLC, a Delaware limited liability
company. In this filing, the Exchange is submitting to the Commission
the Certificate of Formation and the LLC Agreement of ISE Stock, LLC.
The Certificate of Formation and the LLC Agreement are the source of
ISE Stock, LLC's governance and operating authority and, therefore,
function in a similar manner as articles of incorporation and by-laws
function for a corporation.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78c(a)(2).
---------------------------------------------------------------------------
The ISE is a founding and controlling member of ISE Stock, LLC. ISE
owns all of the Class A Membership Units of ISE Stock, LLC,
representing 51% of the voting securities of ISE Stock, LLC. In
addition to its ownership stake in ISE Stock, LLC, ISE will enter into
a management agreement (the ``Management Agreement'') with ISE Stock,
LLC. Pursuant to the Management Agreement, ISE Stock, LLC would appoint
ISE as ISE Stock, LLC's manager (``Manager'') to perform certain
management, operational, and related services. In particular, as
Manager, ISE would have responsibility for all regulatory functions
related to the facility (including conducting market surveillance for
trading on ISE Stock). Moreover, the Board of Directors of ISE would be
required to approve any changes to the Certificate of Formation and the
LLC Agreement of ISE Stock, LLC that are required to be filed with the
Commission pursuant to section 19(b) of the Act and Rule 19b-4
thereunder.\5\ ISE Stock, LLC would have responsibility for the
business operations of the facility to the extent those activities are
not inconsistent with the regulatory and oversight functions of the ISE
as Manager. This means that ISE Stock, LLC would not interfere with
ISE's self-regulatory responsibilities. ISE is a registered ``national
securities exchange'' under Section 6 of the Act \6\ and a self-
regulatory organization (``SRO''). ISE represents that it has adequate
funds to discharge all regulatory functions related to the facility
that it proposes to undertake to perform under the Management Agreement
and the LLC Agreement.\7\
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\5\ LLC Agreement, Section 12.1.
\6\ 15 U.S.C. 78f.
\7\ Telephone conference between Michou H.M. Nguyen, Special
Counsel, Division of Market Regulation (``Division''), Commission,
and Tracy Tang, Assistant General Counsel, Exchange, on August 2,
2006. (clarifying that the sentence refers to the LLC Agreement as
well) (herein after referred to as ``August 2nd Telephone
Conference''). See also LLC Agreement, Section 9.2(d).
---------------------------------------------------------------------------
In this filing, the Exchange is submitting to the Commission the
Certificate of Formation and the LLC Agreement of ISE Stock, LLC
specifically relating to the control and governance of ISE Stock, LLC
that would ensure that the ISE has the authority within ISE Stock, LLC
to maintain its responsibility for all regulatory functions related to
the ISE Stock facility. The LLC Agreement would ensure that the SEC and
the ISE would have regulatory authority over investors and members of
the advisory board of ISE Stock, LLC (the ``Advisory Board''). The
Exchange will submit separate filings to establish ISE rules relating
to listing, membership and trading on ISE Stock. As the purpose of this
filing is to focus on only those provisions which are directly related
to the ISE authority for all regulatory functions of its proposed ISE
Stock facility, the Exchange's discussion in this filing will be
limited to those relevant provisions of the LLC Agreement.
Description of LLC Membership Interests in ISE Stock, LLC
As an LLC, ownership of ISE Stock, LLC is represented by limited
liability company membership interests in ISE Stock, LLC. The holders
of such membership interests are referred to as the members (the
``Members'') of ISE Stock, LLC. The membership interests are divided
into two classes--Class A and Class B limited liability company
membership units (collectively, the ``Units''). The Units represent
equity interests in ISE Stock, LLC and entitle the holders thereof to
participate in certain of ISE Stock, LLC's allocations and
distributions. Each ``Class A Unit'' represents a limited liability
company membership interest in ISE Stock, LLC and as a class, the
holders of the Class A Units hold fifty-one percent (51%) of the
aggregate voting rights of all Members. Each holder of a Class A Unit
has a vote, in respect of each Class A Unit held by such holder of
record on each matter on which holders of Units are entitled to vote,
equal to the product of (A) 51 and (B) a fraction, whose numerator is
the number of Class A Units then held by such holder and whose
denominator is the number of Class A Units then held by all holders of
Class A Units.\8\ Currently, ISE holds all of the Class A Units, making
it a fifty-one percent (51%) owner of ISE Stock, LLC. Each ``Class B
Unit'' represents a limited liability company membership interest in
ISE Stock, LLC. Each holder of a Class B Unit shall have a vote, in
respect of each Class B Unit held by such holder of record on each
matter on which holders of Class B Units shall be entitled to vote as
specifically required by the LLC Agreement or by the Delaware Limited
Liability Company Act (``DLLCA''), \9\ equal to the product of (A) 49
and (B) a fraction, whose numerator is the number of Class B Units then
held by such holder and whose denominator is the number of Class B
Units then held by all holders of Class B Units.\10\ There are 49 Class
B Units issued and outstanding, held by 11 Class B Unit holders. The
ISE represents that no Class B Unit holder owns more than 5 units.
---------------------------------------------------------------------------
\8\ LLC Agreement, Section 3.2(a).
\9\ August 2nd Telephone Conference (clarifying that reference
is to the DLLCA and not the Act).
\10\ LLC Agreement, Section 3.2(b).
---------------------------------------------------------------------------
[[Page 45870]]
Management of ISE Stock, LLC
As the Manager, ISE would have the authority to make all decisions
regarding the business of ISE Stock, LLC and matters concerning the
Units, such as whether or not to authorize distributions.\11\ In
certain limited circumstances, the Manager would need the approval of
two-thirds of the disinterested members of the Advisory Board prior to
taking certain actions, as discussed below. The Manager would be
responsible for the control and management of the business of ISE
Stock, LLC, and must exercise good faith and integrity in handling its
affairs.\12\
---------------------------------------------------------------------------
\11\ LLC Agreement, Section 8.1 and 8.12.
\12\ August 2nd Telephone Conference (removing language).
---------------------------------------------------------------------------
Under Section 7.1 of the LLC Agreement, other than as set forth in
the LLC Agreement or required by the DLLCA\13\ or by the Commission,
the Members do not participate in the management or control of ISE
Stock, LLC's business, they do not transact any business for ISE Stock,
LLC, and they do not have the power to act for or bind ISE Stock, LLC.
All of those powers are vested solely and exclusively in the Manager.
Specifically, under Section 8.1 of the LLC Agreement, subject to the
limitations provided in the LLC Agreement and except as specifically
provided therein, the Manager shall have exclusive and complete
authority and discretion to manage the operations and affairs of ISE
Stock, LLC and to make all decisions regarding the business of ISE
Stock, LLC and shall have the power to act for or bind ISE Stock, LLC.
Any action taken by the Manager shall constitute the act of and serve
to bind ISE Stock, LLC. Further, except as otherwise specifically
provided in the LLC Agreement, the Manager has all rights and powers of
a ``manager'' under the DLLCA, and shall have all authority, rights and
powers in the management of ISE Stock, LLC business to do any and all
other acts and things necessary, proper, convenient or advisable to
effectuate the purposes of the LLC Agreement.
---------------------------------------------------------------------------
\13\ August 2nd Telephone Conference (clarifying that reference
is to the DLLCA and not the Act).
---------------------------------------------------------------------------
Under Section 8.13 of the LLC Agreement, any replacement and
appointment of the Manager, and any assignment of the rights and
obligations of the Manager under the Management Agreement, shall be
subject to the rule filing process pursuant to section 19 of the Act.
ISE believes that this section provides the Commission with the
authority to review and subject to public comment any replacement of
the Manager of ISE Stock which the Commission may deem to have the
potential to affect ISE's self-regulatory responsibilities regarding
its proposed ISE Stock facility.
Governance of ISE Stock, LLC
Section 8.2(d)(i) of the LLC Agreement establishes the Advisory
Board of ISE Stock, LLC as a general advisory board and provides that
the Advisory Board will have no power or authority to act for ISE
Stock, LLC or to otherwise participate in the ISE Stock's management,
except for certain limited matters. Other than the matters for which
approval of the Advisory Board is specifically required by the LLC
Agreement, any actions taken by the Advisory Board are advisory only
and neither the Manager nor any of its Related Persons are required or
otherwise bound to act in accordance with any decision, action or
comments of the Advisory Board. The Advisory Board has no power or
authority to act for ISE Stock, LLC or to otherwise participate in ISE
Stock, LLC management. All decisions, including responsibility for the
management of ISE Stock, LLC, rest with the manager, and in no event
will a member of the Advisory Board be considered a ``manager'' of ISE
Stock, LLC.
Section 8.2(d)(ii) provides that the purpose of the Advisory Board
is to: (1) Review and assess any potential conflicts of interest that
may arise between ISE Stock, LLC, on the one hand, and the Manager, any
Member and/or any of their respective Related Persons,\14\ on the other
hand (including without limitation conflicts with respect to the
receipt by the Manager, or its Related Persons, of fees for services
rendered to ISE Stock, LLC); and (2) generally to consult with the
Manager on the ISE Stock, LLC's progress in achieving its business
objectives.
---------------------------------------------------------------------------
\14\ ``Related Person'' means (1) 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 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 a ``Exchange Member'' (as such
term is defined in the Constitution of ISE, a copy of which will be
provided to any member of ISE Stock upon written request therefore),
any broker or dealer with which such ``Exchange Member'' is
associated; (3) 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; and (4) 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 Units of ISE Stock, LLC; and the term ``beneficially
owned'' and derivative or similar words shall have the meaning set
forth in Regulation 13D-G under the Act. LLC Agreement Section 2.1
``Definitions.'' August 2nd Telephone Conference (conforming purpose
section to text of LLC Agreement).
``Person'' means any individual, partnership, limited liability
company, association, corporation, trust or other entity. LLC
Agreement Section 2.1 ``Definitions.''
---------------------------------------------------------------------------
Section 8.2(d)(iii) provides that the Advisory Board consists of
seven members. Each Member of ISE Stock, LLC may nominate a candidate
for election to serve on the Advisory Board. Three members of the
Advisory Board shall be officers, directors, or partners of holders of
the Class A Units, and shall be elected annually by a plurality of the
holders of the Class A Units voting together as a class (each a ``Class
A Advisory Board Member''). Each Class A Advisory Board member shall
serve for a term of one year. Four members of the Advisory Board shall
be officers, directors, or partners of holders of the Class B Units,
and, except as provided below, shall be elected annually by a plurality
of the holders of the Class B Units voting together as a class (each a
``Class B Advisory Board Member''). In any situation where an Advisory
Board Member's job status changes, either upon a significant change in
the employment status at the same employer or upon a change of
employer, or if the Member employing the Advisory Board member ceases
to be a holder of Class B Units, the Advisory Board member must tender
his or her resignation to the Manager, which the Manager, in
consultation with the Advisory Board, may, but need not, accept.
Notwithstanding any of the foregoing, no Member, other than ISE, shall
have more than one representative elected to the Advisory Board during
any term. The initial Class B Advisory Board Members shall serve
staggered terms with (x) two of such Class B Advisory Board Members
serving two consecutive one-year terms, and (y) the other two of such
Class B Advisory Board Members serving three consecutive one-year
terms. Thereafter, each Class B Advisory Board Member shall serve for a
term of one year. In no event shall any Class B Advisory Board Member
serve more than three consecutive one-year terms. Each Class B Advisory
Board Member will serve until the conclusion of its one-year term, and
until such Class B Advisory Board Member's successor has been elected,
or re-elected as permitted under the LLC Agreement, by a plurality of
the holders of the Class B Units voting together as a class, except in
the event of such Class B Advisory Board Member's earlier death,
resignation, or termination.
Under Section 8.2(e), ISE Stock, LLC also has advisory committees
(the
[[Page 45871]]
``Advisory Committees''), each consisting of up to ten individuals who
consult with ISE Stock, LLC and assist with the development of (1)
Agency broker trading; (2) institutional trading; (3) technology; and
(4) bulk quoting. As with the Advisory Board, the Advisory Committees
have no power or authority to act for ISE Stock, LLC or to otherwise
participate in management.
The ISE believes that these limitations on the powers of the
Advisory Board and Advisory Committees of ISE Stock, LLC will enable
ISE to have complete authority over the control the actions of ISE
Stock, LLC, especially as they relate to regulatory responsibilities.
Under Section 8.2(d)(vii) of the LLC Agreement, in discharging his
or her responsibilities as a member of the Advisory Board, such member
shall take into consideration the effect that ISE Stock LLC's actions
would have on the ability of ISE Stock, LLC \15\ to carry out its
responsibilities under the Act and whether or not his or her actions as
a member of the Advisory Board would cause ISE Stock, LLC to engage in
conduct that fosters and does not interfere with ISE Stock 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. Furthermore,
in discharging his or her responsibilities as a member of the Advisory
Board, each member shall comply with the Federal securities laws and
the rules and regulations thereunder and shall cooperate with ISE and
the Commission pursuant to their respective regulatory authority and
the provisions of the LLC Agreement.
---------------------------------------------------------------------------
\15\ August 2nd Telephone Conference (clarifying that sentence
relates to ISE Stock, LLC and not ISE).
---------------------------------------------------------------------------
Under Section 8.2(d)(viii) of the LLC Agreement, the Manager, in
its sole discretion, may, after appropriate notice and opportunity for
hearing, terminate an Advisory Board member: (a) In the event such
Advisory Board member has violated any provision of the LLC Agreement,
any Federal or state securities law, or (b) if the Manager determines
that such action is necessary or appropriate in the public interest or
for the protection of investors.
ISE believes that these provisions would require all members of ISE
Stock's Advisory Board, regardless of their association with ISE, to
adhere to regulatory responsibilities in that they must comply with
Federal securities laws and the rules and regulations promulgated
thereunder, and cooperate with the Commission and the ISE pursuant to
their regulatory authority. In addition, all members of the Advisory
Board would be required to take into consideration and facilitate ISE's
responsibility to comply with the requirements under section 6(b)(5) of
the Act.\16\ Members of the Advisory Board that do not adhere to these
requirements face termination from the ISE Stock Advisory Board and
possible sanctions by regulatory authorities.
---------------------------------------------------------------------------
\16\ August 2nd Telephone Conference (clarifying that ISE as an
SRO has the responsibilities under 6(b)(5) of the Act and not ISE
Stock, LLC and clarifying ISE's interpretation of Section
8.2(d)(vii) of the LLC Agreement). Section 8.2(d)(vii) of the LLC
Agreement states that Advisory Board members shall comply with the
Federal securities laws and the rules and regulations thereunder and
shall cooperate with ISE and the Commission pursuant to their
respective regulatory authority. ISE interprets this to mean that
Advisory Board members must take into consideration and facilitate
ISE's responsibilities under section 6(b)(5) of the Act.
---------------------------------------------------------------------------
Voting Limitations of Members
Under Section 7.11 of the LLC Agreement, no Person (other than
ISE), either alone or together with its Related Persons, as of any
record date for the determination of members entitled to vote on any
matter, shall be entitled to: (i) Vote or cause the voting of Units
beneficially owned by such Person or its Related Persons, in person or
by proxy or through any voting agreement, plan, or arrangement, to the
extent that such Units represent in the aggregate more than twenty
percent (20%) of voting power of the then-issued and outstanding Units
(such threshold being hereinafter referred to as the ``Voting
Limitation''); or (ii) enter into any voting agreement, plan, or
arrangement that would result in Units beneficially owned by such
Person or its Related Persons, subject to such voting agreement, plan,
or arrangement not being voted on a matter, or any proxy relating
thereto being withheld, where the effect of that voting agreement,
plan, or arrangement would be to enable any Person, alone or together
with its Related Persons, to exceed the Voting Limitation. ISE Stock,
LLC shall disregard any such votes purported to be cast in excess of
the Voting Limitation.
The limitations imposed by Sections 7.11 may be waived by the
Manager, if in its sole discretion, it consented to expressly permit
such waiver of the Voting Limitation; and such waiver shall have been
filed with, and approved by, the Commission under section 19(b) of the
Act and shall have become effective thereunder. In granting a waiver,
the Manager must have determined that: (i) The exercise of such voting
rights or the entering of such agreement, plan or other arrangement, as
applicable, by such Person, either alone or together with its Related
Persons, will not impair the ability of the ISE Stock, LLC and ISE, as
the manager, to carry out its functions and responsibilities,
including, but not limited to, under the Act, is otherwise in the best
interests of the ISE Stock, LLC and its Members; (ii) such voting
rights by such Person, either alone or together with its Related
Persons, will not impair the ability of the Commission to enforce the
Act; (iii) neither such Person nor its Related Persons are subject to
any applicable ``statutory disqualification'' (within the meaning of
section 3(a)(39) of the Act); and (iv) neither such Person nor its
Related Persons is an ``Exchange Member'' (as such term is defined in
the Constitution of ISE).
The ISE believes that these provisions will prevent any Person from
exercising undue control over ISE Stock, LLC and will protect the
ability of ISE, as well as other investors, to exercise their full
ownership rights. By specifically imposing a Voting Limitation on any
Person that owns Units which represent in the aggregate more than
twenty percent (20%) of the voting power then entitled to be cast, ISE
would ensure that it is in all cases, able to maintain proper control
over the exercise of its regulatory function in relation to ISE Stock,
LLC, and is not subject to influence that may be adverse to its
regulatory responsibilities from any Person who may own a substantial
number of the outstanding Units. This provision and other related
provisions relating to notice and rule filing requirements with respect
to any Person who acquires certain Percentage Interest \17\ levels in
ISE Stock would
[[Page 45872]]
serve to protect the integrity of ISE's self-regulatory
responsibilities.
---------------------------------------------------------------------------
\17\ ``Percentage Interest'' shall mean (i) As of any time when
the number of outstanding Class B Units does not exceed 49, (x) with
respect to the Class B Units one percent (1%) (or fraction thereof)
as to each Unit (or fraction thereof) held by such holder of Class B
Units and (y) as to the holders of Class A Units, in the aggregate,
100% less the aggregate Percentage Interest of holders of Class B
Units as of such time; and as to each holder of a Class A Unit, the
product of (x) the aggregate Percentage Interest of all holders of
Class A Units and (y) a fraction, whose numerator is the number of
Class A Units then held by such holder and whose denominator is the
number of Class A Units then held by all holders of Class A Units;
and (ii) as of any time when the number of outstanding Class B Units
exceeds 49, as to each holder of a Class A Unit or Class B Unit, the
percentage equivalent of a fraction whose numerator is the number of
Units held by such holder and whose denominator is the aggregate
number of Units outstanding. LLC Agreement Section 2.1
``Definitions.''
---------------------------------------------------------------------------
Ownership Limitations of Members and Changes in Ownership
Under Section 9.2(a) of the LLC Agreement, no Person (other than
ISE), either alone or together with its Related Persons, at any time,
may own, directly or indirectly, of record or beneficially, an
aggregate amount of Units which would result in more than twenty
percent (20%) Percentage Interest level in ISE Stock, LLC (the
``Concentration Limitation''). Any transfer of Units that result in the
acquisition and holding by any Person, alone or together with its
Related Persons, of an aggregate Percentage Interest level which
crosses the threshold level of twenty percent (20%) is subject to the
rule filing process pursuant to Section 19 of the Act. Furthermore, any
transfer of Units that results in a reduction of ISE's Percentage
Interest level of Class A Units or Precentage Interest level in ISE
Stock, LLC below the twenty percent (20%) threshold is subject to the
rule filing process pursuant to section 19 of the Act.\18\
---------------------------------------------------------------------------
\18\ Telephone conference between Michou H.M. Nguyen, Special
Counsel, Division, Commission, and Tracy Tang, Assistant General
Counsel, Exchange, on August 1, 2006. See also LLC Agreement,
Section 9.2(d).
---------------------------------------------------------------------------
The limitations imposed by Sections 9.2(a) may be waived by the
Manager, if in its sole discretion, it consented to expressly permit
such waiver of the Concentration Limitation; and such waiver shall have
been filed with, and approved by, the Commission under section 19(b) of
the Act and shall have become effective thereunder. In granting a
waiver, the Manager must have determined that: (i) Such beneficial
ownership of Units by such Person, either alone or together with its
Related Persons, will not impair the ability of ISE Stock, LLC and the
Manager to carry out its functions and responsibilities, including but
not limited to, under the Act, is otherwise in the best interests of
ISE Stock, LLC and its Members; (ii) such beneficial ownership of Units
by such Person, either alone or together with its Related Persons, will
not impair the ability of the Commission to enforce the Act; (iii)
neither such Person nor its Related Persons are subject to any
applicable ``statutory disqualification'' (within the meaning of
Section 3(a)(39) of the Act); and (iv) neither such Person nor its
Related Persons is an ``Exchange Member'' (as such term is defined in
the Constitution of ISE).
ISE believes that these provisions provide the Commission with the
authority to review and subject to public comment any substantial
transfer of ownership which the Commission may deem to have the
potential to affect the ISE's self-regulatory responsibilities
regarding its proposed ISE Stock facility.
Under Section 9.1, no Member may sell, assign, pledge or in any
manner dispose of or create or suffer the creation of a security
interest in or any encumbrance on all or a portion of its Units in the
Company (the commission of any such act being referred to as a
``Transfer'', any person who effects a Transfer being referred to as a
``Transferor'' and any person to whom a Transfer is effected being
referred to as a ``Transferee'') except in accordance with the terms
and conditions set forth in Article 9 of the LLC Agreement. Any
Transfer or purported Transfer of a Unit in ISE Stock, LLC not made in
accordance with the LLC Agreement shall be null and void and of no
force or effect whatsoever.
Section 9.3 provides that a Member may not Transfer all or any
portion of its Units in ISE Stock, LLC to any Person without the
consent of the Manager, which consent may be given or withheld in the
Manager's sole discretion; provided, that, subject to Section 9.10 of
the LLC Agreement, a Member may transfer all or a portion of its Units
in ISE Stock, LLC to one or more of its Permitted Transferees \19\
without the consent of the Manager or any other Member.\20\
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\19\ ``Permitted Transferee'' means, with respect to another
Person, (i) Any Person directly or indirectly owning, controlling or
holding with power to vote 80% or more of the outstanding voting
securities of and equity or beneficial interests in such other
Person, (ii) any Person 80% or more of whose outstanding voting
securities and equity or beneficial interests are directly or
indirectly owned, controlled or held with power to vote by such
other Person, (iii) any Person 80% or more of whose outstanding
voting securities and equity or other beneficial interests are
directly or indirectly owned, controlled or held with power to vote
by a Person directly or indirectly owning, controlling or holding
with power to vote 80% or more of the outstanding voting securities
and equity or other beneficial interests of such other Person with
whom affiliate status is being tested, (iv) any Family Members or
Family Trusts of such Person and (v) any Member. LLC Agreement
Section 2.1 ``Definitions.''
``Family Members'' means, with respect to any natural Person,
such Person's spouse, children, parents and lineal descendants of
such Person's parents. LLC Agreement Section 2.1 ``Definitions.''
``Family Trusts'' means, with respect to any natural Person, a
trust benefiting solely such Person or the Family Members of such
Person. LLC Agreement Section 2.1 ``Definitions.''
\20\ If a Member transfers all of its Unit, whether or not the
transfer is to a Related Person, such transfer must first be
approved by the Manager. Telephone conference between Michou H.M.
Nguyen, Special Counsel, Division, Commission, and Tracy Tang,
Assistant General Counsel, Exchange, on August 1, 2006 (clarifying
the additional restriction on transfers applicable when all of a
Member's interest is purported to be transferred). See also LLC
Agreement, Section 9.3(c).
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Under Section 9.11, unless a Transferee of a Member's Units becomes
a Substituted Member,\21\ such Transferee shall have no right to obtain
or require any information or account of ISE Stock, LLC transactions,
or to inspect ISE Stock, LLC's books or to vote on ISE Stock, LLC
matters. Furthermore, any successor or Transferee under the LLC
Agreement shall be subject to and bound by the LLC Agreement as if
originally a party to the LLC Agreement.
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\21\ ``Substituted Member'' means any Person admitted to the
Company as a substituted Member pursuant to the provisions of
Article 9. LLC Agreement Section 2.1 ``Definitions.''
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ISE believes that these transfer restrictions, together with the
Voting Limitation and Concentration Limitation, are adequately 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, and more importantly, that may be
adverse to ISE's regulatory oversight responsibilities. Moreover, ISE
believes that these provisions serve to protect the integrity of ISE's
and the Commission's regulatory oversight responsibilities and allows
the Commission to review, and subject to public notice and comment, the
acquisition of substantial ownership or voting power by any Member.
Regulatory Jurisdiction Over Members
Under Section 6.1(b), each Member acknowledges that to the extent
that they relate to the business of ISE Stock, LLC, the books, records,
premises, officers, directors, agents and employees of Members shall be
deemed to be the books, records, premises, officers, directors, agents
and employees of ISE Stock, LLC for purposes of and subject to
oversight pursuant to the Act. Furthermore,\22\ the books, records,
premises, officers, directors, agents and employees of ISE Stock, LLC
shall be deemed to be the books, records, premises, officers,
directors, agents and employees of ISE for purposes of and subject to
oversight pursuant to the Act. In addition, the books and records of
ISE Stock, LLC will be kept within the U.S.\23\
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\22\ August 2nd Telephone Conference (conforming purpose section
to text of LLC Agreement).
\23\ LLC Agreement, Section 6.1(a).
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[[Page 45873]]
Section 13.1(a) of the LLC Agreement generally provides that a
Member may not disclose any confidential information of ISE Stock or of
any other Members to any persons, except as expressly provided by the
LLC Agreement. However, Section 13.1(a) provides exceptions for, among
other things, disclosure required by the Federal securities laws and
any other applicable self-regulatory organization, or in response to a
request by the Commission pursuant to the Act or by ISE. In addition,
confidential information pertaining to the self-regulatory function of
ISE (including but not limited to disciplinary matters, trading data,
trading practices and audit information) contained in the books and
records of ISE Stock, LLC shall: (i) Not be made available to any
persons (other than as provided in the next sentence) other than to
those officers, directors, employees, and agents of ISE Stock, LLC that
have a reasonable need to know the contents thereof; (ii) be retained
in confidence by ISE Stock, LLC and the officers, directors, employees
and agents of ISE Stock, LLC; and (iii) not be used for any commercial
purposes.\24\ Nothing in the LLC Agreement shall be interpreted as to
limit or impede the rights of the Commission or ISE to access and
examine such confidential information pursuant to the Federal
securities laws and the rules and regulations thereunder, or to limit
or impede the ability of any Member or any officers, directors,
employees or agents of ISE Stock, LLC or any Member to disclose such
confidential information to the Commission or ISE.\25\
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\24\ LLC Agreement, Section 13.1(b).
\25\ LLC Agreement, Section 13.1(c). August 2nd Telephone
Conference (conforming purpose section to text of LLC Agreement).
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ISE believes that these provisions would help to ensure access to
ISE's books and records by the Commission, and would help enable the
Commission to carry out its regulatory responsibilities regarding
ISE.\26\
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\26\ August 2nd Telephone Conference (conforming purpose section
to text of LLC Agreement).
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Under Section 6.1(c) of the LLC Agreement, ISE Stock, LLC, its
Members, and officers, directors, agents, and employees of ISE Stock,
LLC and its Members irrevocably submit to the jurisdiction of the U.S.
Federal courts, the Commission and ISE, for the purposes of any suit,
action or proceeding pursuant to the U.S. Federal securities laws, the
rules or regulations thereunder, directly arising out of, or relating
to, ISE Stock, LLC activities or Section 6.1 of the LLC Agreement
(except that such jurisdictions shall also include Delaware for any
such matter relating to the organizational or internal affairs of ISE
Stock, LLC), and hereby waives, and agrees not to assert by way of
motion, as a defense or otherwise in any such suit, action or
proceeding, any claims that it is not personally subject to the
jurisdiction of the Commission, that the suit, action or proceeding is
an inconvenient forum or that the venue of the suit, action or
proceeding is improper, or that the subject matter hereof may not be
enforced in or by such courts or agency.\27\
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\27\ Telephone conference between Michou H.M. Nguyen, Special
Counsel, Division, Commission, and Tracy Tang, Assistant General
Counsel, Exchange, on August 1, 2006 (conforming purpose section to
text of LLC Agreement).
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Under Section 6.1(d) of the LLC Agreement, ISE Stock, LLC, its
Members, the officers, directors, agents, and employees of ISE Stock,
LLC and its Members agree to comply with the Federal securities laws
and the rules and regulations thereunder and shall cooperate with ISE
and the Commission pursuant to their respective regulatory authority
and the provisions of the LLC Agreement; and to engage in conduct that
fosters and does not interfere with ISE Stock, 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.\28\
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\28\ Id.
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Section 6.1(e) provides that ISE Stock, LLC and each Member shall
take such action as is necessary to ensure that its respective
officers, directors, agents, and employees consent in writing to the
application to them of the applicable provisions of Section 6.1 with
respect to their ISE Stock, LLC-related activities.\29\
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\29\ Id.
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The Exchange believes that these provisions will serve as notice to
Members that they will be subject to the jurisdiction of the U.S.
Federal courts, the Commission and the ISE. While Members may represent
a diverse group of business interests, the ISE believes that it is
imperative that regulatory cooperation is assured from all Members,
regardless of each Member's business location, country of domicile or
other circumstance which the Commission may deem to have the potential
to be adverse to the regulatory responsibilities and interests of the
ISE, the Commission, or the U.S. Federal courts. Accordingly, these
provisions ensure that, should an occasion arise which requires
regulatory cooperation or jurisdictional submission from ISE Stock, LLC
or a Member, it will be forthcoming and uncontested.
Under Section 7.1(b) of the LLC Agreement, the Manager, may, after
appropriate notice and opportunity for hearing, suspend or terminate a
Member's voting privilege or membership: (i) In the event such Member
has violated a provision of this Agreement, any Federal or state
securities law, (ii) such Member or its Related Persons are subject to
any applicable ``statutory disqualification'' (within the meaning of
section 3(a)(39) of the Act); or (iii) if the Manager determines that
such action is necessary or appropriate in the public interest or for
the protection of investors.
ISE believes that this provision would require Members, regardless
of the nature of their association with ISE, to adhere to regulatory
responsibilities in that they must comply with Federal securities laws
and the rules and regulations thereunder, and cooperate with the
Commission and ISE pursuant to their regulatory authority or face
severe consequences such as termination of voting rights or ownership.
In addition, Members would be required to take into consideration and
facilitate ISE's and ISE Stock's ability to comply with the
requirements under section 6(b)(5) of the Act.\30\
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\30\ August 2nd Telephone Conference (clarifying that ISE as an
SRO has the responsibilities under 6(b)(5) of the Act and not ISE
Stock, LLC and clarifying ISE's interpretation of Section 6.1(d) of
the LLC Agreement). Section 6.1(d) of the LLC Agreement states that
Members shall comply with the Federal securities laws and the rules
and regulations thereunder and shall cooperate with ISE and the
Commission pursuant to their respective regulatory authority. ISE
interprets this to mean that Members must take into consideration
and facilitate ISE's responsibilities under section 6(b)(5) of the
Act.
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Fair Representation of Trading Participants, or EAMs
The Exchange believes that the ISE Stock corporate structure
assures the fair representation of its members, or trading
participants, in the selection of its directors and administration of
its affairs, and satisfies Commission requirements in that one or more
directors shall be representative of issuers and investors and not be
associated with a member of the exchange, broker, or dealer.
The Exchange notes that Members of (or holders of Units in) ISE
Stock, LLC are not automatically entitled to trading privileges on ISE
Stock, nor is the purchase of Units a pre-requisite for
[[Page 45874]]
exercising trading privileges on ISE Stock. Rather, in order to
exercise trading privileges on ISE Stock, a broker-dealer must be an
approved EAM of ISE. There is only one type of EAM membership for both
options trading on ISE and equities trading on ISE Stock. When an
applicant is approved under ISE rules as an EAM, the member is issued
one share of Class B Common Stock, Series B-3 (a ``B-3 Share''). Under
the ISE Constitution, holders of B-3 Shares, or EAMs, have the right to
elect two members (the ``B-3 Directors'') of the Board of Directors of
ISE (the ``ISE Board''). Nominees for election to the ISE Board to
serve as Industry Directors, including B-3 Directors, are currently
made by the Exchange's Nominating Committee, which is not a committee
of the ISE Board, and is comprised of representatives of the holders of
each series of Class B Common Stock. Stockholders also may nominate
Industry Director candidates for election to the ISE Board by petition.
Accordingly, since trading participants on ISE Stock must be EAMs, and
since EAMs have the right to elect B-3 Directors of the ISE Board, the
Exchange believes that ISE Stock trading participants are fairly
represented on the ISE Board. Additionally, as a result of ISE's stated
strategy of selling Units to entities that will support trading on ISE
Stock, trading participants will have representation via the ISE Stock,
LLC Advisory Board.
The Exchange proposes to modify the language in Rule 312
(Limitation on Affiliation between the Exchange and Members) to clarify
that this provision covers not only the Exchange, but the ISE Stock
Exchange LLC, as a facility of the ISE, as well.
Reorganization Into a Holding Company Structure
Finally, the Exchange notes that it intends to reorganize into a
holding company structure on September 1, 2006, in the manner described
in Securities Exchange Act Release No. 53705 (April 21, 2006) (SR-ISE-
2006-04) (the ``Reorganization'').\31\ Upon the Reorganization,
International Securities Exchange, LLC shall become the registered
``national securities exchange'' under section 6 of the Act, the SRO
and Manager of ISE Stock, LLC. International Securities Exchange
Holdings, Inc. (``ISE Holdings'') shall become the holder of the Class
A Units of ISE Stock, LLC.
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\31\ See Securities Exchange Act Release No. 53705 (April 21,
2006), 71 FR 25260 (April 28, 2006) (SR-ISE-2006-04).
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Prior to the Reorganization, the provisions relating to, among
other things, ownership and voting limitations (and exceptions
therefrom) are applicable to ISE, as the holder of the Class A Units.
Upon the Reorganization, those same provisions are applicable to ISE
Holdings, as the holder of the Class A Units. The Exchange believes
that applying the exceptions to the ownership and voting limitations to
ISE Holdings following the Reorganization is (i) Reasonable, as
International Securities Exchange, LLC, the SRO, will be a wholly-owned
subsidiary of ISE Holdings, and (ii) consistent with the provisions of
the LLC Agreement that prevent any Person from exercising undue control
over ISE Stock, LLC, as the Certificate of Incorporation and by-laws of
ISE Holdings include substantially similar ownership and voting
limitations (see, for example, Article Fourth, Subdivision III(a) and
(b) of the ISE Holdings Certificate of Incorporation).
2. Statutory Basis
ISE believes the proposal is consistent with the requirements of
the Act and the rules and regulations promulgated thereunder that are
applicable to a national securities exchange, and in particular, with
section 6(b) of the Act.\32\ ISE believes that the proposal is
consistent with section 6(b)(5) of the Act \33\ in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, 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.
In particular, the ISE believes that the proposal is designed to enable
it to promote competition in the trading of equity securities through
establishing a new marketplace.
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\32\ 15 U.S.C. 78f(b).
\33\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments on this proposal from members,
participants, or others.
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 longer 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 Exchange 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 Number SR-ISE-2006-45 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2006-45. 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 Commission's 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 available for inspection
and copying in the Commission's Public Reference
[[Page 45875]]
Room. Copies of the filing also will be available for inspection and
copying at the principal office of the Exchange. 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-2006-45 and should be submitted on
or before August 31, 2006.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-13005 Filed 8-9-06; 8:45 am]
BILLING CODE 8010-01-P
