Self-Regulatory Organizations; International Securities Exchange, Inc.; Order Granting Accelerated Approval of Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 1 Thereto Relating To Establishing ISE Stock Exchange, LLC as a Facility of the International Securities Exchange, Inc, 53728-53736 [E6-15054]
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Federal Register / Vol. 71, No. 176 / Tuesday, September 12, 2006 / Notices
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange. In particular, the Commission
finds that the proposed rule change is
consistent with Section 6(b)(5), which
requires that an exchange have rules
designed, among other things, 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, and in general to protect
investors and the public interest.6 By
incorporating the requirements of
Regulation SHO and the Short Sale
Rule, the proposed rule will contribute
to a coordinated regulatory effort to
prevent short sale fraud and
manipulation and, in so doing, will
protect investors.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.8
Nancy M. Morris,
Secretary.
[FR Doc. E6–15051 Filed 9–11–06; 8:45 am]
No. 1 thereto, and solicits comments
from interested persons on Amendment
No. 1.
BILLING CODE 8010–01–P
Acceleration
I. Introduction
On July 31, 2006, the International
Securities Exchange, Inc. (‘‘ISE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934, as amended (‘‘Act’’),1 and Rule
19b–4 thereunder,2 a proposed rule
change establishing a facility, ISE Stock
Exchange, LLC (‘‘ISE Stock’’), that
would administer a fully automated
trading system for the trading of equity
securities by Electronic Access
Members, or EAMs, of ISE under the
rules of ISE. The proposed rule change
was published for comment in the
Federal Register on August 10, 2006.3
The Commission received no comments
regarding the proposal. On August 31,
2006, ISE filed Amendment No. 1 to the
proposed rule change.4 This order
grants accelerated approval to the
proposed rule change and Amendment
The Exchange proposes to establish
ISE Stock as a facility, as that term is
defined in Section 3(a)(2) of the Act,5 of
ISE. ISE Stock would administer a fully
automated trading system for the trading
of equity securities by Electronic Access
Members, or EAMs, of ISE under the
rules of ISE. The Exchange submitted to
the Commission the Certificate of
Formation of ISE Stock and the LLC
Agreement. The Certificate of Formation
and the LLC Agreement are the source
of ISE Stock’s governance and operating
authority and, therefore, function in a
similar manner as articles of
incorporation and by-laws function for
a corporation.
ISE is a founding and controlling
member of ISE Stock. ISE owns all of
the Class A Units of ISE Stock,
representing 51% of the voting
securities of ISE Stock. In addition to its
ownership stake in ISE Stock, ISE has
entered into a management agreement
(the ‘‘Management Agreement’’) with
ISE Stock. Pursuant to the Management
Agreement, ISE Stock has appointed ISE
as ISE Stock’s manager (‘‘Manager’’) to
perform certain management,
operational, and related services. As
described in Section 8.1 of the LLC
Agreement, with limited exceptions,
ISE, as the Manager, would have the
complete and exclusive authority to
manage the operations and affairs of ISE
Stock. In addition, ISE would have
responsibility for all regulatory
functions related to the facility
(including conducting market
surveillance for trading on ISE Stock).
ISE Stock would have responsibility for
the business operations of the facility to
the extent those activities are not
inconsistent and do not interfere with
the regulatory and oversight functions of
ISE.6
The Exchange submitted to the
Commission the Certificate of Formation
and the LLC Agreement of ISE Stock
specifically relating to the control and
governance of ISE Stock that would
ensure that ISE has the authority within
ISE Stock to maintain its responsibility
for all regulatory functions related to the
ISE Stock facility.7 The LLC Agreement
The Commission finds good cause for
approving the proposed rule change
prior to the 30th day after the date of
publication of notice of filing thereof in
the Federal Register. The proposal
incorporates the provisions of
Regulation SHO and the Short Sale Rule
and will be necessary for the ISE to
trade non-option equity securities on
the ISE Stock Exchange. The Exchange’s
adoption of a rule incorporating the
provisions of Regulation SHO and the
Short Sale Rule in order to trade nonoption equity securities benefits the
investing public. The Commission does
not believe that ISE’s proposal raises
any novel regulatory issues.
Accordingly, the Commission believes
good cause exists, consistent with
Sections 6(b)(5) and 19(b) of the
Exchange Act, 15 U.S.C. 78f(b)(5) and
78s(b), to approve the proposed rule
change on an accelerated basis.
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Self-Regulatory Organizations;
International Securities Exchange, Inc.;
Order Granting Accelerated Approval
of Proposed Rule Change and Notice
of Filing and Order Granting
Accelerated Approval of Amendment
No. 1 Thereto Relating To Establishing
ISE Stock Exchange, LLC as a Facility
of the International Securities
Exchange, Inc
September 1, 2006.
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 54273
(August 3, 2006), 71 FR 45868.
4 In Amendment No. 1, ISE made changes to the
proposed rule change to reflect changes made in the
Second Amendment and Restated Limited Liability
Company Agreement (‘‘LLC Agreement’’) of ISE
Stock, and made clarifying changes to the LLC
Agreement, in part, to specifically reference ISE in
various provisions, to clarify the voting rights of
Members who have transferred Units, to clarify the
details of the exception from the voting restrictions
as they relate to International Securities Exchange
Holdings, Inc. (‘‘Holdings’’), to clarify that ISE’s
Board must determine whether any change to the
LLC Agreement must be filed with the Commission
pursuant to Section 19(b) of the Act, and to apply
the call right described in Section 9.8 of the LLC
Agreement to all Units.
1 15
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,7 that the
proposed rule change (File No. SR–ISE–
2006–42) be and hereby is approved on
an accelerated basis.
6 In
approving this rule proposal, the Commission
notes that it has also considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
7 15 U.S.C. 78s(b)(2).
16:16 Sep 11, 2006
[Release No. 34–54399; File No. SR–ISE–
2006–45]
8 17
V. Conclusion
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II. Description of the Proposal
A. Overview
5 15
U.S.C. 78c(a)(2).
Amendment No. 1 supra note 4 and LLC
Agreement, Section 6.1(d).
7 The Board of Directors of ISE would be required
to determine if any changes to the LLC Agreement
are required to be filed with the Commission
pursuant to Section 19(b) of the Act and Rule 19b–
6 See
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would ensure that the Commission and
ISE would have regulatory authority
over investors and members of the
advisory board of ISE Stock (the
‘‘Advisory Board’’).8
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B. Description of LLC Membership
Interests in ISE Stock
As a limited liability company,
ownership of ISE Stock is represented
by limited liability company
membership interests in ISE Stock. The
holders of such membership interests
are referred to as the members (the
‘‘Members’’) of ISE Stock. 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 and entitle the holders thereof to
participate in certain of ISE Stock’s
allocations and distributions. Each
‘‘Class A Unit’’ represents a limited
liability company membership interest
in ISE Stock, 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.9
Currently, ISE holds all of the Class A
Units, making it a fifty-one percent
(51%) owner of ISE Stock.
Each ‘‘Class B Unit’’ represents a
limited liability company membership
interest in ISE Stock. Each holder of a
Class B Unit has 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 10 or by the Delaware
Limited Liability Company Act
(‘‘DLLCA’’), 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
4 thereunder. See Amendment No. 1 supra note 4
and LLC Agreement, Section 12.1.
8 The Advisory Board consists of seven members,
three of which must be officers, directors, or
partners of holders of the Class A Units, and four
of which must be officers, directors, or partners of
holders of the Class B Units. See LLC Agreement,
Section 8.2(d)(iii).
9 LLC Agreement, Section 3.2(a).
10 The LLC Agreement provides holders of Class
B Units the right to vote for Class B Advisory Board
Members and to vote on certain amendments to the
LLC Agreement. See LLC Agreement, Sections
3.2(b), 8.2(d)(iii), and 12.1.
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16:16 Sep 11, 2006
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is the number of Class B Units then held
by all holders of Class B Units.11 There
are 49 Class B Units issued and
outstanding, held by 11 Class B Unit
holders. ISE represents that currently no
Class B Unit holder owns more than 5
units.
C. Management of ISE Stock
As the Manager of ISE Stock, ISE
would have the authority to make all
decisions regarding the business of ISE
Stock and matters concerning the Units,
including whether or not to authorize
distributions.12 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.13
The Manager would be responsible for
the control and management of the
business of ISE Stock, and must exercise
good faith and integrity in handling its
affairs.
Under Section 7.1 of the LLC
Agreement, other than as set forth in the
LLC Agreement or required by the
DLLCA or by the Commission, the
Members do not participate in the
management or control of ISE Stock’s
business, they do not transact any
business for ISE Stock, and they do not
have the power to act for or bind ISE
Stock. 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 14 and except as specifically
provided therein, the Manager has
exclusive and complete authority and
discretion to manage the operations and
affairs of ISE Stock and to make all
decisions regarding the business of ISE
Stock and has the power to act for or
bind ISE Stock. Any action taken by the
Manager constitutes the act of and
serves to bind ISE Stock. Further, except
as otherwise specifically provided in the
LLC Agreement, the Manager has all
rights and powers of a ‘‘manager’’ under
the DLLCA, and has all authority, rights
and powers in the management of ISE
Stock business to do any and all other
11 LLC
Agreement, Section 3.2(b).
Agreement, Section 8.1 and 8.12.
13 LLC Agreement, Section 8.7.
14 The following actions by the Manager require
the consent of two thirds of the disinterested
members of the Advisory Board: Taking an act that
would make it impossible to carry on the ordinary
business of ISE Stock; possessing ISE Stock
property for purposes other than ISE Stock business
purposes; making loans to any Member or its
Related Persons; taking an act that would subject a
Member to personal liability; or engaging in
transactions with the Manager or any Member or
any Related Person of the Manager or any other
Member on terms that are not reflective of an ‘‘arms’
length’’ transaction. See LLC Agreement, Section
8.7; see also Schedule A of the LLC Agreement.
12 LLC
PO 00000
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Fmt 4703
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53729
acts and things necessary, proper,
convenient or advisable to effectuate the
purposes of the LLC Agreement. Lastly,
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, is subject to the rule filing
process pursuant to Section 19 of the
Act.
D. Governance of ISE Stock
Section 8.2(d)(i) of the LLC
Agreement establishes the Advisory
Board of ISE Stock as a general advisory
board and provides that the Advisory
Board will have no power or authority
to act for ISE Stock or to otherwise
participate in the ISE Stock’s
management, except for certain limited
matters.15 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 or to otherwise participate
in ISE Stock management. All decisions,
including responsibility for the
management of ISE Stock, rest with the
Manager, and in no event will a member
of the Advisory Board be considered a
‘‘manager’’ of ISE Stock.
Section 8.2(d)(ii) of the LLC
Agreement 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, on the
one hand, and the Manager, any
Member and/or any of their respective
Related Persons,16 on the other hand
15 See
LLC Agreement, Section 8.2(d) and 8.7.
Person’’ means (i) 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); (ii) with respect to any Person constituting an
‘‘Exchange Member’’ (as such term is defined in the
Constitution of ISE), any broker or dealer with
which such ‘‘Exchange Member’’ is associated; (iii)
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 (iv) 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 Agreement, Section 2.1
‘‘Definitions.’’
‘‘Person’’ means any individual, partnership,
limited liability company, association, corporation,
16 ‘‘Related
E:\FR\FM\12SEN1.SGM
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(including without limitation conflicts
with respect to the receipt by the
Manager, or its Related Persons, of fees
for services rendered to ISE Stock); and
(2) generally to consult with the
Manager on ISE Stock’s progress in
achieving its business objectives.
Section 8.2(d)(iii) of the LLC
Agreement provides that the Advisory
Board consists of seven members. Each
Member of ISE Stock may nominate a
candidate for election to serve on the
Advisory Board. Three members of the
Advisory Board would be officers,
directors, or partners of holders of the
Class A Units, and are to 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 would serve for a term of one
year. Four members of the Advisory
Board would be officers, directors, or
partners of holders of the Class B Units,
and, except as provided below, would
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,
would have more than one
representative elected to the Advisory
Board during any term. The initial Class
B Advisory Board Members would 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
would serve for a term of one year. In
no event would any Class B Advisory
Board Member serve more than three
consecutive one-year terms. Each Class
B Advisory Board Member would 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
trust or other entity. LLC Agreement, Section 2.1
‘‘Definitions.’’
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16:16 Sep 11, 2006
Jkt 208001
of such Class B Advisory Board
Member’s earlier death, resignation, or
termination.
Under Section 8.2(e) of the LLC
Agreement, ISE Stock also has advisory
committees (the ‘‘Advisory
Committees’’), each consisting of up to
ten individuals who consult with ISE
Stock and assist with the development
of: (i) Agency broker trading; (ii)
institutional trading; (iii) technology;
and (iv) bulk quoting. As with the
Advisory Board, the Advisory
Committees have no power or authority
to act for ISE Stock or to otherwise
participate in management.
These limitations on the powers of the
Advisory Board and Advisory
Committees of ISE Stock will enable ISE
to have complete authority over the
actions of ISE Stock, 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 must take
into consideration the effect that ISE
Stock’s actions would have on the
ability of ISE Stock and ISE 17 to carry
out their respective responsibilities
under the Act and whether or not his or
her actions as a member of the Advisory
Board would cause ISE Stock and ISE to
engage in conduct that fosters and does
not interfere with ISE Stock’s and ISE’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.18 Furthermore, in
discharging his or her responsibilities as
a member of the Advisory Board, each
member must comply with the federal
securities laws and the rules and
regulations thereunder and 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: (i) In the
event such Advisory Board member has
violated any provision of the LLC
Agreement or any federal or state
securities law; or (ii) if the Manager
17 See
E. 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, would 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 must disregard
any such votes purported to be cast in
excess of the Voting Limitation.
The limitations imposed by Section
7.11 of the LLC Agreement 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 was 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
Amendment No. 1 supra, note 4.
18 Id.
PO 00000
determines that such action is necessary
or appropriate in the public interest or
for the protection of investors.
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
ISE pursuant to their regulatory
authority. In addition, all members of
the Advisory Board would be required
to take into consideration ISE’s
responsibility to comply with the
requirements under Section 6(b)(5) of
the Act.19 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.
Frm 00082
19 See
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Amendment No. 1 supra, note 4.
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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 ISE Stock 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 ISE Stock and its
Members; (ii) 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 Commission
to enforce the Act; 20 (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).
F. 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 a twenty (20)
Percentage Interest level 21 in ISE Stock
(the ‘‘Concentration Limitation’’). Any
transfer of Units that would 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 not valid unless a waiver has been
granted by the Manager, and such
waiver may not be granted unless such
waiver is filed and approved pursuant
to the rule filing process of Section 19
of the Act.22
20 See
Amendment No. 1 supra, note 4.
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.’’
22 See LLC Agreement, Section 9.2(b).
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21 ‘‘Percentage
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16:16 Sep 11, 2006
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The limitations imposed by Sections
9.2(a) of the LLC Agreement 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 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 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).
Under Section 9.1 of the LLC
Agreement, 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 (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 not made in accordance
with the LLC Agreement shall be null
and void and of no force or effect
whatsoever. Furthermore, any transfer
of Units that results in a reduction of
ISE’s Percentage Interest level of Class A
Units or Percentage Interest level in ISE
Stock below the twenty percent (20%)
threshold is subject to the rule filing
process pursuant to Section 19 of the
Act.23
Section 9.3 of the LLC Agreement
provides that a Member may not
Transfer all or any portion of its Units
in ISE Stock 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
23 See
PO 00000
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Frm 00083
Fmt 4703
Sfmt 4703
53731
or a portion of its Units in ISE Stock to
one or more of its Permitted
Transferees 24 without the consent of the
Manager or any other Member as long as
such transfer does not otherwise violate
the LLC Agreement.25
Under Section 9.11 of the LLC
Agreement, unless a Transferee of a
Member’s Units becomes a Substituted
Member,26 such Transferee shall have
no right to obtain or require any
information or account of ISE Stock
transactions, or to inspect ISE Stock’s
books or to vote on ISE Stock matters.27
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.
G. Regulatory Jurisdiction Over
Members
Under Section 6.1(b) of the LLC
Agreement, each Member acknowledges
that to the extent that they relate to the
business of ISE Stock, 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 for purposes of
and subject to oversight pursuant to the
Act. Furthermore, the books, records,
premises, officers, directors, agents and
employees of ISE Stock shall be deemed
24 ‘‘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.’’
25 If a Member transfers all of its Units, whether
or not the transfer is to a Permitted Transferee, such
transfer must first be approved by the Manager. See
Amendment No. 1 supra, note 4 and LLC
Agreement, Section 9.3(c).
26 ‘‘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.’’
27 The Member retains the right to vote the Units.
See Amendment No. 1 supra, note 4 and LLC
Agreement, Section 9.3(b).
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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 will be kept within the U.S.28
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 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 that
have a reasonable need to know the
contents thereof; (ii) be retained in
confidence by ISE Stock and the
officers, directors, employees and agents
of ISE Stock; and (iii) not be used for
any commercial purposes.29 Nothing in
the LLC Agreement may 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 or any Member to disclose such
confidential information to the
Commission or ISE.30
Under Section 6.1(c) of the LLC
Agreement, ISE Stock, its Members, and
officers, directors, agents, and
employees of ISE Stock 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 activities
or Section 6.1 of the LLC Agreement
(except that such jurisdiction also
includes Delaware for any such matter
relating to the organizational or internal
affairs of ISE Stock), and waive, and
agree not to assert by way of motion, as
28 LLC
Agreement, Section 6.1(a).
Agreement, Section 13.1(b).
30 LLC Agreement, Section 13.1(c).
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 of
the LLC Agreement may not be enforced
in or by such courts or agency.
Under Section 6.1(d) of the LLC
Agreement, ISE Stock, its Members, the
officers, directors, agents, and
employees of ISE Stock and its Members
agree to comply with the federal
securities laws and the rules and
regulations thereunder and 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’s and ISE’s 31 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.
Section 6.1(e) of the LLC Agreement
provides that ISE Stock 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-related activities.
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 or 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
29 LLC
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31 See
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PO 00000
Amendment No. 1 supra, note 4.
Frm 00084
Fmt 4703
Sfmt 4703
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.32
H. Fair Representation of Trading
Participants
Members of (or holders of Units in)
ISE Stock are not automatically entitled
to trading privileges on the ISE Stock
trading system, nor is the purchase of
Units a pre-requisite for exercising
trading privileges on the ISE Stock
trading system. Rather, in order to
exercise trading privileges on the ISE
Stock trading system, 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 the ISE Stock trading system.
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 the ISE Stock trading system 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 system 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 the ISE Stock
trading system, trading participants will
have representation via the ISE Stock
Advisory Board.
The Exchange proposes to modify the
language in ISE Rule 312 (Limitation on
Affiliation between the Exchange and
Members) to clarify that this provision
covers not only the Exchange, but ISE
Stock as a facility of ISE, as well.
32 See Amendment No. 1 supra, note 4 and LLC
Agreement, Section 6.1(d).
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I. Reorganization Into a Holding
Company Structure
According to the Exchange, 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) (the ‘‘Reorganization’’).33
Upon the Reorganization, International
Securities Exchange, LLC will become
the registered ‘‘national securities
exchange’’ under Section 6 of the Act,
the self-regulatory organization (‘‘SRO’’)
and continue to act as Manager of ISE
Stock. ISE Holdings shall become the
holder of the Class A Units of ISE Stock.
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.
III. Discussion, Commission Findings,
and Accelerated Approval of the
Proposed Rule Change and Amendment
No. 1 Thereto
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After careful review, the Commission
finds that the proposed rule change, as
amended, is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a national securities exchange.34 In
particular, the Commission finds that
the proposed rule change, as amended,
is consistent with Section 6(b)(1) of the
Act,35 which requires a national
securities exchange to be so organized
and have the capacity to carry out the
purposes of the Act and to enforce
compliance by its members and persons
associated with its members with the
provisions of the Act, the rules or
regulations thereunder, and the rules of
the exchange. The Commission also
finds that the proposed rule change, as
amended, is consistent with Section
6(b)(3) of the Act,36 which, among other
things, requires that the rules of an
exchange ensure fair representation of
its members in the selection of its
directors and administration of its
affairs.
In addition, the Commission finds
that the proposed rule change, as
amended, is consistent with Section
33 See Securities Exchange Act Release No. 53705
(April 21, 2006), 71 FR 25260 (April 28, 2006) (SR–
ISE–2006–04).
34 In approving the proposed rule change, the
Commission has considered its impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
35 15 U.S.C. 78f(b)(1).
36 15 U.S.C. 78f(b)(3).
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16:16 Sep 11, 2006
Jkt 208001
6(b)(5) of the Act,37 which requires that
the rules of a national securities
exchange be 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.
A. ISE Stock as a Facility of the
Exchange
The Commission believes that the
proposed rule change is consistent with
Section 6(b)(1) of the Act 38 in that upon
establishing ISE Stock as an Exchange
facility and serving as manager of ISE
Stock as described above, ISE will
remain so organized, and have the
capacity to be able, to carry out the
purposes of the Act. The Commission
further believes that ISE’s proposal for
ISE to operate ISE Stock as a facility of
ISE is properly filed under Section 19(b)
of the Act and Rule 19b–4 thereunder,
and that ISE Stock is not required,
separate from ISE, to apply for
registration as a national securities
exchange pursuant to Section 6(a) of the
Act.39 In addition, the Commission
previously approved a similar structure
with respect to the operation of the
Boston Stock Exchange, Inc.40
Although ISE has contracted to
undertake the fulfillment of SRO
responsibilities under the Act and other
regulatory compliance services for ISE
Stock,41 ISE Stock is, however, still
responsible for assuring that its
activities are consistent with the Act.
Under Section 6.1(d) of the LLC
Agreement, each ISE Stock Member, its
officers, directors, agents, and
employees, agree to comply with federal
securities law; to cooperate with the
Commission and ISE pursuant to their
regulatory authority and the provisions
of the LLC Agreement; and to engage in
conduct that fosters and does not
interfere with ISE Stock or ISE’s ability
to prevent fraudulent and manipulative
acts and practices; promote just and
equitable principles of trade; foster
cooperation and coordination with
37 15
U.S.C. 78f(b)(5).
U.S.C. 78f(b)(1).
39 15 U.S.C. 78f(a).
40 See Securities Exchange Act Release No. 54364
(August 25, 2006), 71 FR 52185 (September 1, 2006)
(SR–BSE–2006–20).
41 See Item 10 of Exhibit 5(c) describing certain
services to be performed under the Management
Agreement.
38 15
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53733
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities; remove impediments to
and perfect the mechanism of a free and
open market and a national market
system; and, in general, protect
investors and the public interest.
Section 8.2(d)(vii) of the LLC Agreement
also requires each ISE Stock Advisory
Board Member to cooperate with the
Commission and ISE pursuant to the
respective authority of the Commission
and ISE. These provisions reinforce the
notion that ISE Stock, as a facility of an
Exchange, is not solely a commercial
enterprise; it is an integral part of an
SRO registered pursuant to the Act and,
as such, is subject to obligations
imposed by the Act.
These obligations endure as long as
ISE Stock is a facility of the Exchange,
regardless of the size of ISE’s ownership
interest in ISE Stock. ISE currently, and
in the future Holdings, owns a
controlling interest in ISE Stock and, in
the future, if ISE Holdings wishes to
reduce its Percentage Interest in ISE
Stock to below 20 percent,42 pursuant to
Section 9.2(d) of the LLC Agreement the
Exchange would be required to file a
proposed rule change with the
Commission under Section 19(b) of the
Act. Additionally, under Section 8.13(c)
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, must, prior to
becoming effective, have been filed
with, and approved by, the Commission.
The Commission believes that these
measures would alert the Commission
to a significant reduction of ISE’s
interest in ISE Stock or control over the
operations of ISE Stock. Such a
reduction in ownership or control could
warrant additional review of the LLC
Agreement to ensure that ISE’s
responsibilities as the SRO of the ISE
Stock facility are not compromised.
The LLC Agreement includes
additional provisions that make special
accommodations for ISE as the SRO of
the ISE Stock facility. For example,
except for several limited exceptions,43
Section 8.1 of the LLC Agreement
provides that ISE as the manager will
have ‘‘exclusive and complete authority
and discretion to manage the operations
and affairs’’ of ISE Stock. ISE has
complete access to information through
provisions such as Sections 13.1(c) of
the LLC Agreement, which allows ISE
Stock, Members, their officers, directors,
42 In this instance, interest refers to interest in ISE
Stock Class A Units or overall interest in ISE Stock.
43 See LLC Agreement, Section 8.7 for limitations.
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agents, and employees, to disclose to the
Commission or ISE confidential
information. Furthermore, Section 7.2 of
the LLC Agreement, subject to certain
exceptions, gives all of the voting rights
to Class A Units, of which ISE, and
subsequently Holdings, owns 100
percent. In addition, Section 8.2(d)(iii)
of the LLC Agreement provides that the
holder of Class A Units is entitled to
three of the seven seats on the ISE Stock
Advisory Board.
Because ISE has proposed to operate
ISE Stock as its facility, ISE’s obligations
under the Act extend to its members’
activities on ISE Stock, as well as to the
operation and administration of ISE
Stock. The Commission believes that
Section 19 of the Act affords the
Commission the ability to determine
whether ISE’s proposal is consistent
with the Act, as would a separate
application by ISE Stock to register as a
national securities exchange. More
specifically, the Commission believes
that these provisions, described above,
are consistent with the Act and enhance
the ability of ISE to carry out its selfregulatory responsibilities with respect
to its ISE Stock facility.
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B. Changes in Control of ISE
The Commission believes that the
restrictions in the LLC Agreement on
changes in control of ISE Stock and the
restrictions on the change in Manager
(the entity that controls the operations
of ISE Stock) are sufficient to enable ISE
to carry out its self-regulatory
responsibilities and should permit the
Commission to fulfill its responsibilities
under the Act.
Schedule A of the LLC Agreement
lists all ISE Stock Members, the number
of units each holds, and the percentage
of ownership in ISE Stock that such
units represent. A change to this
schedule, which is part of the LLC
Agreement (as is the case with any other
change to the LLC Agreement), would
need to be filed with the Commission if
the Board of ISE determines that it is
required under Section 19(b) of the Act
and Rule 19b–4 thereunder.44 In
addition, Section 9.2(a) and (b) of the
LLC Agreement provides that no person
(other than ISE or Holdings) 45 may
cross the 20 percent ownership
threshold without a waiver from ISE, as
manager, and such approval could not
be granted without the filing and
approval of a proposed rule change with
44 See
LLC Agreement, Section 12.1.
exception for Holdings only applies as
long as the concentration limitation provision
found in Article Fourth, Subdivision III(a) of the
ISE, Inc. Certificate of Incorporation is in place and
as long as ISE is a wholly-owned subsidiary of
Holdings.
45 This
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16:16 Sep 11, 2006
Jkt 208001
the Commission pursuant to Section
19(b) of the Act.46
As noted, ISE, and in the future
Holdings, currently owns all of the Class
A Units, and Section 7.2 of the LLC
Agreement, subject to certain
exceptions, gives all of the voting rights
to Class A Units. In addition, Section
8.2(d)(iii) of the LLC Agreement
provides that the holder of Class A
Units is entitled to three of the seven
seats on the ISE Stock Advisory Board.
If ISE, or in the future Holdings, wishes
to reduce its interest in ISE Stock to
below 20 percent,47 pursuant to Section
9.2(d) of the LLC Agreement, it would
be required to file a proposed rule
change under Section 19(b) of the Act.
As noted in the Voting Limitations
section supra, under Section 7.11 of the
LLC Agreement, no Person (other than
ISE), either alone or together with its
Related Persons, may exceed the Voting
Limitation or enter into any voting
agreement that would result in Units
beneficially owned by such Person or its
Related Persons not being voted where
the effect would be to enable any
Person, alone or together with its
Related Persons, to exceed the Voting
Limitation. The limitations imposed by
Section 7.11 of the LLC Agreement may
be waived by the Manager after such
waiver is filed with, and approved by,
the Commission under Section 19(b) of
the Act. However, such a waiver may
not be granted to Persons or Related
Persons subject to ‘‘statutory
disqualification’’ (within the meaning of
Section 3(a)(39) of the Act) or Exchange
Members (as such term is defined in the
Constitution of ISE).48
Additionally, as noted, Section 8.1 of
the LLC Agreement, with limited
exceptions, grants exclusive and
complete authority over the operations
and affairs of ISE Stock to ISE as the
Manager. Under Section 8.13(c) 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, must, prior to becoming
effective, have been filed with, and
approved by, the Commission.
In conclusion, the Commission
believes that Sections 7.2, 8.1, 8.4(a) and
(b), 8.13(c), 9.2(a), (b), and (d), and 12.1
of the LLC Agreement, together with the
requirements of Section 19(b) of the Act
46 Such a waiver may not be granted to Persons
or Related Persons subject to ‘‘statutory
disqualification’’ (within the meaning of Section
3(a)(39) of the Act) or Exchange Members (as such
term is defined in the Constitution of ISE). See LLC
Agreement, Section 9.2(c).
47 In this instance, interest refers to interest in ISE
Class A Units or overall interest in ISE Stock.
48 See LLC Agreement, Section 7.11(c).
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and Rule 19b–4 thereunder, provide the
Commission with sufficient authority
over changes in control of ISE to enable
the Commission to carry out its
regulatory oversight responsibilities
with respect to ISE and the ISE Stock
facility.
C. Regulatory Jurisdiction Over ISE
Stock and Its Members
The Commission believes that the
terms of the LLC Agreement provide the
Commission and ISE with sufficient
regulatory jurisdiction over the
controlling parties and Members to
carry out their respective
responsibilities under the Act. In
Section 6.1(b) of the LLC Agreement,
each Member acknowledges that, to the
extent that they are related to the
business of ISE Stock, the books,
records, premises, officers, directors,
agents, and employees of the Member
are deemed to be the books, records,
premises, officers, directors, agents, and
employees of ISE for the purpose of and
subject to oversight pursuant to the Act.
Furthermore, the books, records,
premises, officers, directors, agents, and
employees of ISE Stock are deemed to
be the books, records, premises, officers,
directors, agents, and employees of ISE.
This provision would enable the
Commission to exercise its authority
under Section 19(h)(4) 49 of the Act with
respect to the officers, directors, agents,
and employees of all Members, since all
such officers, directors, agents, and
employees, and officers, directors,
agents, and employees of ISE Stock, to
the extent that they are acting in matters
related to ISE Stock activities, would be
deemed to be the officers, directors,
agents, and employees of ISE itself.
Furthermore, the books and records of
any ISE Member, to the extent that they
are related to ISE Stock activities, are
subject to the Commission’s
examination authority under Section
17(b)(1) of the Act,50 as these records
would be deemed to be the records of
ISE itself.
In addition, in Section 6.1(c) of the
LLC Agreement, ISE Stock, its Members,
its officers, directors, agents, and
employees, and the officers, directors,
49 15 U.S.C. 78s(h)(4). Section 19(h)(4) authorizes
the Commission, by order, to remove from office or
censure any officer or director of a national
securities exchange if it finds, after notice and an
opportunity for hearing, that such officer or director
has: (i) Willfully violated any provision of the Act
or the rules and regulations thereunder, or the rules
of a national securities exchange; (ii) willfully
abused his or her authority; or (iii) without
reasonable justification or excuse, failed to enforce
compliance with any such provision by a member
or person associated with a member of the national
securities exchange.
50 15 U.S.C. 78q(b)(1).
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agents, and employees of its Members
irrevocably submit to the jurisdiction of
the Commission, for the purposes of any
suit, action or proceeding pursuant to
the U.S. federal securities laws and the
rules or regulations thereunder, arising
out of or relating to ISE Stock activities.
In addition, ISE Stock, its Members, and
each officer, director, agent, and
employee of ISE and its Members, must
waive as a defense or otherwise in any
such suit, action, or proceeding, any
claim that it is not personally subject to
the jurisdiction of the Commission; that
the suit, action or proceeding is an
inconvenient forum; that the venue is
improper; or that the subject matter of
the suit, action, or proceeding may not
be enforced by such courts or agency.51
Moreover, pursuant to Section 6.1(e) of
the LLC Agreement, ISE Stock and each
Member are required to take such action
as is necessary to ensure that ISE Stock
and its Member’s officers, directors,
agents, and employees consent to the
application of these requirements with
respect to their ISE Stock-related
activities. Finally, under Section 6.1(d)
of the LLC Agreement, ISE Stock, and its
Members, officers, directors, agents, and
employees, and the officer, directors,
agents, and employees of its Members
agrees to cooperate with the
Commission and ISE pursuant to their
respective regulatory authority.
The Commission also notes that, even
in the absence of these provisions of the
LLC Agreement, Section 20(a) of the
Act 52 provides that any person with a
controlling interest in ISE Stock would
be jointly and severally liable with and
to the same extent that ISE Stock is
liable under any provision of the Act,
unless the controlling person acted in
good faith and did not directly or
indirectly induce the act or acts
constituting the violation or cause of
action.
The Commission believes that,
together, these provisions grant the
Commission sufficient jurisdictional
authority over ISE Stock and its
Members. Moreover, ISE is required to
enforce compliance with these
provisions because they are ‘‘rules of the
exchange’’ within the meaning of
Section 3(a)(27) of the Act.53 A failure
on the part of ISE to enforce its rules
could result in suspension or revocation
of registration under Section 19(h)(1) of
the Act.54
51 See
LLC Agreement, Section 6.1(c).
U.S.C. 78t(a).
53 15 U.S.C. 78c(a)(27).
54 15 U.S.C. 78s(h)(1).
52 15
VerDate Aug<31>2005
16:16 Sep 11, 2006
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D. Restrictions on ISE Stock Members
The Commission believes that the
restriction on voting trust agreements in
Section 7.11(a) of the LLC Agreement is
reasonable and consistent with the Act.
In the absence of such a provision,
unaffiliated parties could act in concert
and evade the LLC Agreement’s
provisions regarding changes in control
of ISE Stock. In addition, the LLC
Agreement treats as belonging to a
single person any ISE Stock Units held
by affiliated parties of the person.55 A
voting trust agreement would not
necessarily be inconsistent with the Act,
but any Members (other than ISE or, in
the future, Holdings) wishing to
establish a voting trust agreement first
would need the consent of the
Manager,56 a consent that may not be
given unless the Manager files a
proposed rule change, thus affording the
Commission an opportunity to review
the matter.
In addition, the Commission believes
that the ownership concentration limit
described above, which prohibits a
person (other than ISE or in the future
Holdings) along with a related person
from owning directly or indirectly more
than 20 percent of the outstanding units
of ISE Stock 57 absent a waiver, and
would apply to those persons trading on
the ISE Stock trading system, together
with the provision that restricts the
ability of Members to vote interests in
excess of 20 percent, absent a waiver,58
are reasonable and consistent with the
Act.59 Moreover, Exchange members (as
defined in the ISE Constitution) would
be prohibited from owning more than 20
percent. It is common for members who
trade on an exchange to have ownership
interests in the exchange. However, a
member’s interest could become so large
as to cast doubt on whether the
exchange can fairly and objectively
exercise its self-regulatory
responsibilities with respect to that
55 See
LLC Agreement, Sections 9.2(a).
a waiver may not be granted to any
Person or Related Person subject to ‘‘statutory
disqualification’’ (within the meaning of Section
3(a)(39) of the Act) or any Person or Related Person
who are Exchange Members (as such term is
defined in the Constitution of ISE). See LLC
Agreement, Sections 7.11(c).
57 See LLC Agreement, Section 9.2(a).
58 Neither the voting nor ownership limitation
waiver may be granted to any Person or Related
Person subject to ‘‘statutory disqualification’’
(within the meaning of Section 3(a)(39) of the Act)
or any Person or Related Person who are Exchange
Members (as such term is defined in the
Constitution of ISE). See LLC Agreement, Sections
9.2(c) and 7.11(c).
59 The Commission believes that this provision
would require ISE Stock to aggregate the interest of
Members in ISE Stock and any indirect interest in
ISE Stock through Members’ interest in Holdings.
See LLC Agreement, Section 9.2(a).
56 Such
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
53735
member. A member that is also a
controlling shareholder of an exchange
or its facility might be tempted to
exercise that controlling influence by
directing the exchange to refrain from
diligently surveilling the member’s
conduct or from punishing any conduct
that violates the rules of the exchange or
the federal securities laws. An exchange
also might be reluctant to surveil and
enforce its rules zealously against a
member that controls and has a large
economic interest in the Exchange.
E. Accelerated Approval of Proposed
Rule Change and Amendment No. 1
The Commission finds good cause for
approving this proposed rule change,
and Amendment No. 1 thereto, before
the thirtieth day after the publication of
notice thereof in the Federal Register
pursuant to Section 19(b)(2) of the
Act.60 The proposed rule change was
published for a full comment period and
no comments were received. In
addition, the Commission notes that the
proposed rule change, as amended, is
substantially similar to the structure
previously approved by the
Commission.61 That proposal was also
published for a full comment period and
the Commission received no comments
on the proposal. Furthermore,
accelerating approval of this proposed
rule change, as amended, should benefit
investors by permitting ISE to establish,
without undue delay, an additional
venue for the trading of equity securities
for market participants, thereby
increasing competition and efficiency.
Lastly, the Commission believes that
Amendment No. 1 serves to clarify and
enhance the proposal. For these reasons,
the Commission therefore finds good
cause exists to accelerate approval of the
proposed rule change, and Amendment
No. 1 thereto.62
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning Amendment No.
1, including whether Amendment No. 1
is consistent with the Act. Comments
may be submitted by any of the
following methods:
60 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2)
of the Act, the Commission may not approve any
proposed rule change, or amendment thereto, prior
to the thirtieth day after the date of publication of
the notice thereof, unless the Commission finds
good cause for so doing.
61 See Securities Exchange Act Release No. 54364
(August 25, 2006), 71 FR 52185 (September 1, 2006)
(SR–BSE–2006–20).
62 15 U.S.C. 78s(b)(2).
E:\FR\FM\12SEN1.SGM
12SEN1
53736
Federal Register / Vol. 71, No. 176 / Tuesday, September 12, 2006 / Notices
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,
Station Place, 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
Room. Copies of such 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 Amendment
No. 1 of File Number SR–ISE–2006–45
and should be submitted on or before
October 3, 2006.
sroberts on PROD1PC70 with NOTICES
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,63 that the
proposed rule change (SR–ISE–2006–45)
and Amendment No. 1 thereto are
approved on an accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.64
Nancy M. Morris,
Secretary.
[FR Doc. E6–15054 Filed 9–11–06; 8:45 am]
64 17
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
VerDate Aug<31>2005
16:16 Sep 11, 2006
Sentencing Guidelines for United
States Courts
United States Sentencing
Commission.
ACTION: Notice of a temporary,
emergency amendment to sentencing
guidelines, policy statements, and
commentary.
AGENCY:
SUMMARY: Pursuant to section 1(c) of the
Stop Counterfeiting in Manufactured
Goods Act, Public Law 109–181, the
Commission hereby gives notice of a
temporary, emergency amendment to
the sentencing guidelines, policy
statements, and commentary. This
notice sets forth the temporary,
emergency amendment and the reason
for amendment.
DATE: The Commission has specified an
effective date of September 12, 2006, for
the emergency amendment.
FOR FURTHER INFORMATION CONTACT:
Michael Courlander, Public Affairs
Officer, Telephone: (202) 502–4590.
SUPPLEMENTARY INFORMATION: The
Commission must promulgate a
temporary, emergency amendment to
implement the directive in section 1(c)
of the Stop Counterfeiting in
Manufactured Goods Act, Public Law
109–181, by September 12, 2006. The
statutory deadline for the promulgation
of the temporary, emergency
amendment, in conjunction with the
Commission’s public meeting schedule
(the promulgation of such amendments
must occur in a public meeting), made
it impracticable to publish a proposed
temporary, emergency amendment in
the Federal Register in order to provide
an opportunity for public comment, and
to publish the promulgated amendment
not less than 30 days before the effective
date. The Commission therefore had
good cause not to publish a proposed
amendment before the specified
effective date and not to publish the
promulgated amendment 30 days or
more before such date. See 5 U.S.C.
553(b), (d)(3).
The temporary, emergency
amendment set forth in this notice also
may be accessed through the
Commission’s Web site at https://
www.ussc.gov.
Authority: 28 U.S.C. 994(a), (o), (p), (x);
section 1(c) of Public Law 109–181.
Ricardo H. Hinojosa,
Chair.
Amendment: The Commentary to
§ 2B5.3 captioned ‘‘Application Notes’’
is amended in Note 2(A) by adding at
the end the following:
BILLING CODE 8010–01–P
63 15
UNITED STATES SENTENCING
COMMISSION
Jkt 208001
PO 00000
Frm 00088
Fmt 4703
Sfmt 4703
(vii) A case under 18 U.S.C. § 2318 or
§ 2320 that involves a counterfeit label,
patch, sticker, wrapper, badge, emblem,
medallion, charm, box, container, can, case,
hangtag, documentation, or packaging of any
type or nature (I) that has not been affixed
to, or does not enclose or accompany a good
or service; and (II) which, had it been so
used, would appear to a reasonably informed
purchaser to be affixed to, enclosing or
accompanying an identifiable, genuine good
or service. In such a case, the ’infringed item’
is the identifiable, genuine good or service.
Reason for Amendment: This
amendment implements the emergency
directive in section 1(c) of the Stop
Counterfeiting in Manufactured Goods
Act, Public Law 109–181. The directive,
which requires the Commission to
promulgate an amendment under
emergency amendment authority by
September 12, 2006, instructs the
Commission to ‘‘review, and if
appropriate, amend the Federal
sentencing guidelines and policy
statements applicable to persons
convicted of any offense under section
2318 or 2320 of title 18, United States
Code * * *.’’ The directive further
provides that the Commission shall:
determine whether the definition of
‘‘infringement amount’’ set forth in
application note 2 of section 2B5.3 of the
Federal sentencing guidelines is adequate to
address situations in which the defendant
has been convicted of one of the offenses
[under section 2318 or 2320 of title 18,
United States Code,] and the item in which
the defendant trafficked was not an
infringing item but rather was intended to
facilitate infringement, such as an anticircumvention device, or the item in which
the defendant trafficked was infringing and
also was intended to facilitate infringement
in another good or service, such as a
counterfeit label, documentation, or
packaging, taking into account cases such as
U.S. v. Sung, 87 F.3d 194 (7th Cir. 1996).
The emergency amendment adds
subdivision (vii) to Application Note
2(A) of § 2B5.3 (Criminal Infringement
of Copyright or Trademark) to provide
that the infringement amount is based
on the retail value of the infringed item
in a case under 18 U.S.C. 2318 or 2320
that involves a counterfeit label, patch,
sticker, wrapper, badge, emblem,
medallion, charm, box, container, can,
case, hangtag, documentation, or
packaging of any type or nature (I) that
has not been affixed to, or does not
enclose or accompany a good or service;
and (II) which, had it been so used,
would appear to a reasonably informed
purchaser to be affixed to, enclosing or
accompanying an identifiable, genuine
good or service. In such a case, the
E:\FR\FM\12SEN1.SGM
12SEN1
]]>Agencies
[Federal Register Volume 71, Number 176 (Tuesday, September 12, 2006)]
[Notices]
[Pages 53728-53736]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-15054]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54399; File No. SR-ISE-2006-45]
Self-Regulatory Organizations; International Securities Exchange,
Inc.; Order Granting Accelerated Approval of Proposed Rule Change and
Notice of Filing and Order Granting Accelerated Approval of Amendment
No. 1 Thereto Relating To Establishing ISE Stock Exchange, LLC as a
Facility of the International Securities Exchange, Inc
September 1, 2006.
I. Introduction
On July 31, 2006, the International Securities Exchange, Inc.
(``ISE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934, as amended (``Act''),\1\ and Rule 19b-
4 thereunder,\2\ a proposed rule change establishing a facility, ISE
Stock Exchange, LLC (``ISE Stock''), that would administer a fully
automated trading system for the trading of equity securities by
Electronic Access Members, or EAMs, of ISE under the rules of ISE. The
proposed rule change was published for comment in the Federal Register
on August 10, 2006.\3\ The Commission received no comments regarding
the proposal. On August 31, 2006, ISE filed Amendment No. 1 to the
proposed rule change.\4\ This order grants accelerated approval to the
proposed rule change and Amendment No. 1 thereto, and solicits comments
from interested persons on Amendment No. 1.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 54273 (August 3,
2006), 71 FR 45868.
\4\ In Amendment No. 1, ISE made changes to the proposed rule
change to reflect changes made in the Second Amendment and Restated
Limited Liability Company Agreement (``LLC Agreement'') of ISE
Stock, and made clarifying changes to the LLC Agreement, in part, to
specifically reference ISE in various provisions, to clarify the
voting rights of Members who have transferred Units, to clarify the
details of the exception from the voting restrictions as they relate
to International Securities Exchange Holdings, Inc. (``Holdings''),
to clarify that ISE's Board must determine whether any change to the
LLC Agreement must be filed with the Commission pursuant to Section
19(b) of the Act, and to apply the call right described in Section
9.8 of the LLC Agreement to all Units.
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II. Description of the Proposal
A. Overview
The Exchange proposes to establish ISE Stock as a facility, as that
term is defined in Section 3(a)(2) of the Act,\5\ of ISE. ISE Stock
would administer a fully automated trading system for the trading of
equity securities by Electronic Access Members, or EAMs, of ISE under
the rules of ISE. The Exchange submitted to the Commission the
Certificate of Formation of ISE Stock and the LLC Agreement. The
Certificate of Formation and the LLC Agreement are the source of ISE
Stock's governance and operating authority and, therefore, function in
a similar manner as articles of incorporation and by-laws function for
a corporation.
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78c(a)(2).
---------------------------------------------------------------------------
ISE is a founding and controlling member of ISE Stock. ISE owns all
of the Class A Units of ISE Stock, representing 51% of the voting
securities of ISE Stock. In addition to its ownership stake in ISE
Stock, ISE has entered into a management agreement (the ``Management
Agreement'') with ISE Stock. Pursuant to the Management Agreement, ISE
Stock has appointed ISE as ISE Stock's manager (``Manager'') to perform
certain management, operational, and related services. As described in
Section 8.1 of the LLC Agreement, with limited exceptions, ISE, as the
Manager, would have the complete and exclusive authority to manage the
operations and affairs of ISE Stock. In addition, ISE would have
responsibility for all regulatory functions related to the facility
(including conducting market surveillance for trading on ISE Stock).
ISE Stock would have responsibility for the business operations of the
facility to the extent those activities are not inconsistent and do not
interfere with the regulatory and oversight functions of ISE.\6\
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\6\ See Amendment No. 1 supra note 4 and LLC Agreement, Section
6.1(d).
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The Exchange submitted to the Commission the Certificate of
Formation and the LLC Agreement of ISE Stock specifically relating to
the control and governance of ISE Stock that would ensure that ISE has
the authority within ISE Stock to maintain its responsibility for all
regulatory functions related to the ISE Stock facility.\7\ The LLC
Agreement
[[Page 53729]]
would ensure that the Commission and ISE would have regulatory
authority over investors and members of the advisory board of ISE Stock
(the ``Advisory Board'').\8\
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\7\ The Board of Directors of ISE would be required to determine
if any changes to the LLC Agreement are required to be filed with
the Commission pursuant to Section 19(b) of the Act and Rule 19b-4
thereunder. See Amendment No. 1 supra note 4 and LLC Agreement,
Section 12.1.
\8\ The Advisory Board consists of seven members, three of which
must be officers, directors, or partners of holders of the Class A
Units, and four of which must be officers, directors, or partners of
holders of the Class B Units. See LLC Agreement, Section
8.2(d)(iii).
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B. Description of LLC Membership Interests in ISE Stock
As a limited liability company, ownership of ISE Stock is
represented by limited liability company membership interests in ISE
Stock. The holders of such membership interests are referred to as the
members (the ``Members'') of ISE Stock. 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 and entitle the holders thereof to
participate in certain of ISE Stock's allocations and distributions.
Each ``Class A Unit'' represents a limited liability company membership
interest in ISE Stock, 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.\9\ Currently, ISE
holds all of the Class A Units, making it a fifty-one percent (51%)
owner of ISE Stock.
---------------------------------------------------------------------------
\9\ LLC Agreement, Section 3.2(a).
---------------------------------------------------------------------------
Each ``Class B Unit'' represents a limited liability company
membership interest in ISE Stock. Each holder of a Class B Unit has 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 \10\ or by the Delaware
Limited Liability Company Act (``DLLCA''), 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.\11\ There are 49 Class
B Units issued and outstanding, held by 11 Class B Unit holders. ISE
represents that currently no Class B Unit holder owns more than 5
units.
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\10\ The LLC Agreement provides holders of Class B Units the
right to vote for Class B Advisory Board Members and to vote on
certain amendments to the LLC Agreement. See LLC Agreement, Sections
3.2(b), 8.2(d)(iii), and 12.1.
\11\ LLC Agreement, Section 3.2(b).
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C. Management of ISE Stock
As the Manager of ISE Stock, ISE would have the authority to make
all decisions regarding the business of ISE Stock and matters
concerning the Units, including whether or not to authorize
distributions.\12\ 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.\13\ The Manager would
be responsible for the control and management of the business of ISE
Stock, and must exercise good faith and integrity in handling its
affairs.
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\12\ LLC Agreement, Section 8.1 and 8.12.
\13\ LLC Agreement, Section 8.7.
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Under Section 7.1 of the LLC Agreement, other than as set forth in
the LLC Agreement or required by the DLLCA or by the Commission, the
Members do not participate in the management or control of ISE Stock's
business, they do not transact any business for ISE Stock, and they do
not have the power to act for or bind ISE Stock. 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 \14\ and except as specifically provided therein,
the Manager has exclusive and complete authority and discretion to
manage the operations and affairs of ISE Stock and to make all
decisions regarding the business of ISE Stock and has the power to act
for or bind ISE Stock. Any action taken by the Manager constitutes the
act of and serves to bind ISE Stock. Further, except as otherwise
specifically provided in the LLC Agreement, the Manager has all rights
and powers of a ``manager'' under the DLLCA, and has all authority,
rights and powers in the management of ISE Stock business to do any and
all other acts and things necessary, proper, convenient or advisable to
effectuate the purposes of the LLC Agreement. Lastly, 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, is subject to the rule filing
process pursuant to Section 19 of the Act.
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\14\ The following actions by the Manager require the consent of
two thirds of the disinterested members of the Advisory Board:
Taking an act that would make it impossible to carry on the ordinary
business of ISE Stock; possessing ISE Stock property for purposes
other than ISE Stock business purposes; making loans to any Member
or its Related Persons; taking an act that would subject a Member to
personal liability; or engaging in transactions with the Manager or
any Member or any Related Person of the Manager or any other Member
on terms that are not reflective of an ``arms' length'' transaction.
See LLC Agreement, Section 8.7; see also Schedule A of the LLC
Agreement.
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D. Governance of ISE Stock
Section 8.2(d)(i) of the LLC Agreement establishes the Advisory
Board of ISE Stock as a general advisory board and provides that the
Advisory Board will have no power or authority to act for ISE Stock or
to otherwise participate in the ISE Stock's management, except for
certain limited matters.\15\ 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 or to otherwise participate in ISE Stock management. All
decisions, including responsibility for the management of ISE Stock,
rest with the Manager, and in no event will a member of the Advisory
Board be considered a ``manager'' of ISE Stock.
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\15\ See LLC Agreement, Section 8.2(d) and 8.7.
---------------------------------------------------------------------------
Section 8.2(d)(ii) of the LLC Agreement 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, on the one
hand, and the Manager, any Member and/or any of their respective
Related Persons,\16\ on the other hand
[[Page 53730]]
(including without limitation conflicts with respect to the receipt by
the Manager, or its Related Persons, of fees for services rendered to
ISE Stock); and (2) generally to consult with the Manager on ISE
Stock's progress in achieving its business objectives.
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\16\ ``Related Person'' means (i) 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); (ii) with
respect to any Person constituting an ``Exchange Member'' (as such
term is defined in the Constitution of ISE), any broker or dealer
with which such ``Exchange Member'' is associated; (iii) 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 (iv) 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
Agreement, Section 2.1 ``Definitions.''
``Person'' means any individual, partnership, limited liability
company, association, corporation, trust or other entity. LLC
Agreement, Section 2.1 ``Definitions.''
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Section 8.2(d)(iii) of the LLC Agreement provides that the Advisory
Board consists of seven members. Each Member of ISE Stock may nominate
a candidate for election to serve on the Advisory Board. Three members
of the Advisory Board would be officers, directors, or partners of
holders of the Class A Units, and are to 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 would serve for a term of one year. Four members of the
Advisory Board would be officers, directors, or partners of holders of
the Class B Units, and, except as provided below, would 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, would have more than one representative elected to the Advisory
Board during any term. The initial Class B Advisory Board Members would
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 would serve
for a term of one year. In no event would any Class B Advisory Board
Member serve more than three consecutive one-year terms. Each Class B
Advisory Board Member would 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) of the LLC Agreement, ISE Stock also has
advisory committees (the ``Advisory Committees''), each consisting of
up to ten individuals who consult with ISE Stock and assist with the
development of: (i) Agency broker trading; (ii) institutional trading;
(iii) technology; and (iv) bulk quoting. As with the Advisory Board,
the Advisory Committees have no power or authority to act for ISE Stock
or to otherwise participate in management.
These limitations on the powers of the Advisory Board and Advisory
Committees of ISE Stock will enable ISE to have complete authority over
the actions of ISE Stock, 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
must take into consideration the effect that ISE Stock's actions would
have on the ability of ISE Stock and ISE \17\ to carry out their
respective responsibilities under the Act and whether or not his or her
actions as a member of the Advisory Board would cause ISE Stock and ISE
to engage in conduct that fosters and does not interfere with ISE
Stock's and ISE'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.\18\ Furthermore, in discharging his or her responsibilities
as a member of the Advisory Board, each member must comply with the
federal securities laws and the rules and regulations thereunder and
cooperate with ISE and the Commission pursuant to their respective
regulatory authority and the provisions of the LLC Agreement.
---------------------------------------------------------------------------
\17\ See Amendment No. 1 supra, note 4.
\18\ Id.
---------------------------------------------------------------------------
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: (i) In the event such
Advisory Board member has violated any provision of the LLC Agreement
or any federal or state securities law; or (ii) if the Manager
determines that such action is necessary or appropriate in the public
interest or for the protection of investors.
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 ISE pursuant to their regulatory
authority. In addition, all members of the Advisory Board would be
required to take into consideration ISE's responsibility to comply with
the requirements under Section 6(b)(5) of the Act.\19\ 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.
---------------------------------------------------------------------------
\19\ See Amendment No. 1 supra, note 4.
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E. 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, would 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
must disregard any such votes purported to be cast in excess of the
Voting Limitation.
The limitations imposed by Section 7.11 of the LLC Agreement 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
was 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
[[Page 53731]]
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 ISE Stock 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 ISE Stock and its
Members; (ii) 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 Commission to enforce the Act; \20\ (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).
---------------------------------------------------------------------------
\20\ See Amendment No. 1 supra, note 4.
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F. 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 a twenty (20)
Percentage Interest level \21\ in ISE Stock (the ``Concentration
Limitation''). Any transfer of Units that would 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 not valid unless
a waiver has been granted by the Manager, and such waiver may not be
granted unless such waiver is filed and approved pursuant to the rule
filing process of Section 19 of the Act.\22\
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\21\ ``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.''
\22\ See LLC Agreement, Section 9.2(b).
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The limitations imposed by Sections 9.2(a) of the LLC Agreement 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 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 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).
Under Section 9.1 of the LLC Agreement, 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 (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 not made in
accordance with the LLC Agreement shall be null and void and of no
force or effect whatsoever. Furthermore, any transfer of Units that
results in a reduction of ISE's Percentage Interest level of Class A
Units or Percentage Interest level in ISE Stock below the twenty
percent (20%) threshold is subject to the rule filing process pursuant
to Section 19 of the Act.\23\
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\23\ See LLC Agreement, Section 9.2(d).
---------------------------------------------------------------------------
Section 9.3 of the LLC Agreement provides that a Member may not
Transfer all or any portion of its Units in ISE Stock 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 to one or more of its Permitted
Transferees \24\ without the consent of the Manager or any other Member
as long as such transfer does not otherwise violate the LLC
Agreement.\25\
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\24\ ``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.''
\25\ If a Member transfers all of its Units, whether or not the
transfer is to a Permitted Transferee, such transfer must first be
approved by the Manager. See Amendment No. 1 supra, note 4 and LLC
Agreement, Section 9.3(c).
---------------------------------------------------------------------------
Under Section 9.11 of the LLC Agreement, unless a Transferee of a
Member's Units becomes a Substituted Member,\26\ such Transferee shall
have no right to obtain or require any information or account of ISE
Stock transactions, or to inspect ISE Stock's books or to vote on ISE
Stock matters.\27\ 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.
---------------------------------------------------------------------------
\26\ ``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.''
\27\ The Member retains the right to vote the Units. See
Amendment No. 1 supra, note 4 and LLC Agreement, Section 9.3(b).
---------------------------------------------------------------------------
G. Regulatory Jurisdiction Over Members
Under Section 6.1(b) of the LLC Agreement, each Member acknowledges
that to the extent that they relate to the business of ISE Stock, 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 for purposes of and
subject to oversight pursuant to the Act. Furthermore, the books,
records, premises, officers, directors, agents and employees of ISE
Stock shall be deemed
[[Page 53732]]
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 will be kept
within the U.S.\28\
---------------------------------------------------------------------------
\28\ LLC Agreement, Section 6.1(a).
---------------------------------------------------------------------------
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 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 that have a
reasonable need to know the contents thereof; (ii) be retained in
confidence by ISE Stock and the officers, directors, employees and
agents of ISE Stock; and (iii) not be used for any commercial
purposes.\29\ Nothing in the LLC Agreement may 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 or any Member to disclose such
confidential information to the Commission or ISE.\30\
---------------------------------------------------------------------------
\29\ LLC Agreement, Section 13.1(b).
\30\ LLC Agreement, Section 13.1(c).
---------------------------------------------------------------------------
Under Section 6.1(c) of the LLC Agreement, ISE Stock, its Members,
and officers, directors, agents, and employees of ISE Stock 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 activities or Section 6.1 of the LLC Agreement (except that such
jurisdiction also includes Delaware for any such matter relating to the
organizational or internal affairs of ISE Stock), and waive, and agree
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 of the LLC
Agreement may not be enforced in or by such courts or agency.
Under Section 6.1(d) of the LLC Agreement, ISE Stock, its Members,
the officers, directors, agents, and employees of ISE Stock and its
Members agree to comply with the federal securities laws and the rules
and regulations thereunder and 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's and ISE's \31\ 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.
---------------------------------------------------------------------------
\31\ See Amendment No. 1 supra, note 4.
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Section 6.1(e) of the LLC Agreement provides that ISE Stock 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-related activities.
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 or 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.\32\
---------------------------------------------------------------------------
\32\ See Amendment No. 1 supra, note 4 and LLC Agreement,
Section 6.1(d).
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H. Fair Representation of Trading Participants
Members of (or holders of Units in) ISE Stock are not automatically
entitled to trading privileges on the ISE Stock trading system, nor is
the purchase of Units a pre-requisite for exercising trading privileges
on the ISE Stock trading system. Rather, in order to exercise trading
privileges on the ISE Stock trading system, 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 the ISE Stock trading
system. 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 the ISE Stock
trading system 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 system 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 the ISE Stock trading
system, trading participants will have representation via the ISE Stock
Advisory Board.
The Exchange proposes to modify the language in ISE Rule 312
(Limitation on Affiliation between the Exchange and Members) to clarify
that this provision covers not only the Exchange, but ISE Stock as a
facility of ISE, as well.
[[Page 53733]]
I. Reorganization Into a Holding Company Structure
According to the Exchange, 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) (the
``Reorganization'').\33\ Upon the Reorganization, International
Securities Exchange, LLC will become the registered ``national
securities exchange'' under Section 6 of the Act, the self-regulatory
organization (``SRO'') and continue to act as Manager of ISE Stock. ISE
Holdings shall become the holder of the Class A Units of ISE Stock.
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.
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\33\ See Securities Exchange Act Release No. 53705 (April 21,
2006), 71 FR 25260 (April 28, 2006) (SR-ISE-2006-04).
---------------------------------------------------------------------------
III. Discussion, Commission Findings, and Accelerated Approval of the
Proposed Rule Change and Amendment No. 1 Thereto
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\34\ In particular, the Commission finds that the
proposed rule change, as amended, is consistent with Section 6(b)(1) of
the Act,\35\ which requires a national securities exchange to be so
organized and have the capacity to carry out the purposes of the Act
and to enforce compliance by its members and persons associated with
its members with the provisions of the Act, the rules or regulations
thereunder, and the rules of the exchange. The Commission also finds
that the proposed rule change, as amended, is consistent with Section
6(b)(3) of the Act,\36\ which, among other things, requires that the
rules of an exchange ensure fair representation of its members in the
selection of its directors and administration of its affairs.
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\34\ In approving the proposed rule change, the Commission has
considered its impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\35\ 15 U.S.C. 78f(b)(1).
\36\ 15 U.S.C. 78f(b)(3).
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In addition, the Commission finds that the proposed rule change, as
amended, is consistent with Section 6(b)(5) of the Act,\37\ which
requires that the rules of a national securities exchange be 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.
---------------------------------------------------------------------------
\37\ 15 U.S.C. 78f(b)(5).
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A. ISE Stock as a Facility of the Exchange
The Commission believes that the proposed rule change is consistent
with Section 6(b)(1) of the Act \38\ in that upon establishing ISE
Stock as an Exchange facility and serving as manager of ISE Stock as
described above, ISE will remain so organized, and have the capacity to
be able, to carry out the purposes of the Act. The Commission further
believes that ISE's proposal for ISE to operate ISE Stock as a facility
of ISE is properly filed under Section 19(b) of the Act and Rule 19b-4
thereunder, and that ISE Stock is not required, separate from ISE, to
apply for registration as a national securities exchange pursuant to
Section 6(a) of the Act.\39\ In addition, the Commission previously
approved a similar structure with respect to the operation of the
Boston Stock Exchange, Inc.\40\
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\38\ 15 U.S.C. 78f(b)(1).
\39\ 15 U.S.C. 78f(a).
\40\ See Securities Exchange Act Release No. 54364 (August 25,
2006), 71 FR 52185 (September 1, 2006) (SR-BSE-2006-20).
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Although ISE has contracted to undertake the fulfillment of SRO
responsibilities under the Act and other regulatory compliance services
for ISE Stock,\41\ ISE Stock is, however, still responsible for
assuring that its activities are consistent with the Act. Under Section
6.1(d) of the LLC Agreement, each ISE Stock Member, its officers,
directors, agents, and employees, agree to comply with federal
securities law; to cooperate with the Commission and ISE pursuant to
their regulatory authority and the provisions of the LLC Agreement; and
to engage in conduct that fosters and does not interfere with ISE Stock
or ISE's ability to prevent fraudulent and manipulative acts and
practices; promote just and equitable principles of trade; foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities; remove impediments to and
perfect the mechanism of a free and open market and a national market
system; and, in general, protect investors and the public interest.
Section 8.2(d)(vii) of the LLC Agreement also requires each ISE Stock
Advisory Board Member to cooperate with the Commission and ISE pursuant
to the respective authority of the Commission and ISE. These provisions
reinforce the notion that ISE Stock, as a facility of an Exchange, is
not solely a commercial enterprise; it is an integral part of an SRO
registered pursuant to the Act and, as such, is subject to obligations
imposed by the Act.
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\41\ See Item 10 of Exhibit 5(c) describing certain services to
be performed under the Management Agreement.
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These obligations endure as long as ISE Stock is a facility of the
Exchange, regardless of the size of ISE's ownership interest in ISE
Stock. ISE currently, and in the future Holdings, owns a controlling
interest in ISE Stock and, in the future, if ISE Holdings wishes to
reduce its Percentage Interest in ISE Stock to below 20 percent,\42\
pursuant to Section 9.2(d) of the LLC Agreement the Exchange would be
required to file a proposed rule change with the Commission under
Section 19(b) of the Act. Additionally, under Section 8.13(c) 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, must, prior to becoming effective, have been
filed with, and approved by, the Commission. The Commission believes
that these measures would alert the Commission to a significant
reduction of ISE's interest in ISE Stock or control over the operations
of ISE Stock. Such a reduction in ownership or control could warrant
additional review of the LLC Agreement to ensure that ISE's
responsibilities as the SRO of the ISE Stock facility are not
compromised.
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\42\ In this instance, interest refers to interest in ISE Stock
Class A Units or overall interest in ISE Stock.
---------------------------------------------------------------------------
The LLC Agreement includes additional provisions that make special
accommodations for ISE as the SRO of the ISE Stock facility. For
example, except for several limited exceptions,\43\ Section 8.1 of the
LLC Agreement provides that ISE as the manager will have ``exclusive
and complete authority and discretion to manage the operations and
affairs'' of ISE Stock. ISE has complete access to information through
provisions such as Sections 13.1(c) of the LLC Agreement, which allows
ISE Stock, Members, their officers, directors,
[[Page 53734]]
agents, and employees, to disclose to the Commission or ISE
confidential information. Furthermore, Section 7.2 of the LLC
Agreement, subject to certain exceptions, gives all of the voting
rights to Class A Units, of which ISE, and subsequently Holdings, owns
100 percent. In addition, Section 8.2(d)(iii) of the LLC Agreement
provides that the holder of Class A Units is entitled to three of the
seven seats on the ISE Stock Advisory Board.
---------------------------------------------------------------------------
\43\ See LLC Agreement, Section 8.7 for limitations.
---------------------------------------------------------------------------
Because ISE has proposed to operate ISE Stock as its facility,
ISE's obligations under the Act extend to its members' activities on
ISE Stock, as well as to the operation and administration of ISE Stock.
The Commission believes that Section 19 of the Act affords the
Commission the ability to determine whether ISE's proposal is
consistent with the Act, as would a separate application by ISE Stock
to register as a national securities exchange. More specifically, the
Commission believes that these provisions, described above, are
consistent with the Act and enhance the ability of ISE to carry out its
self-regulatory responsibilities with respect to its ISE Stock
facility.
B. Changes in Control of ISE
The Commission believes that the restrictions in the LLC Agreement
on changes in control of ISE Stock and the restrictions on the change
in Manager (the entity that controls the operations of ISE Stock) are
sufficient to enable ISE to carry out its self-regulatory
responsibilities and should permit the Commission to fulfill its
responsibilities under the Act.
Schedule A of the LLC Agreement lists all ISE Stock Members, the
number of units each holds, and the percentage of ownership in ISE
Stock that such units represent. A change to this schedule, which is
part of the LLC Agreement (as is the case with any other change to the
LLC Agreement), would need to be filed with the Commission if the Board
of ISE determines that it is required under Section 19(b) of the Act
and Rule 19b-4 thereunder.\44\ In addition, Section 9.2(a) and (b) of
the LLC Agreement provides that no person (other than ISE or Holdings)
\45\ may cross the 20 percent ownership threshold without a waiver from
ISE, as manager, and such approval could not be granted without the
filing and approval of a proposed rule change with the Commission
pursuant to Section 19(b) of the Act.\46\
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\44\ See LLC Agreement, Section 12.1.
\45\ This exception for Holdings only applies as long as the
concentration limitation provision found in Article Fourth,
Subdivision III(a) of the ISE, Inc. Certificate of Incorporation is
in place and as long as ISE is a wholly-owned subsidiary of
Holdings.
\46\ Such a waiver may not be granted to Persons or Related
Persons subject to ``statutory disqualification'' (within the
meaning of Section 3(a)(39) of the Act) or Exchange Members (as such
term is defined in the Constitution of ISE). See LLC Agreement,
Section 9.2(c).
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As noted, ISE, and in the future Holdings, currently owns all of
the Class A Units, and Section 7.2 of the LLC Agreement, subject to
certain exceptions, gives all of the voting rights to Class A Units. In
addition, Section 8.2(d)(iii) of the LLC Agreement provides that the
holder of Class A Units is entitled to three of the seven seats on the
ISE Stock Advisory Board. If ISE, or in the future Holdings, wishes to
reduce its interest in ISE Stock to below 20 percent,\47\ pursuant to
Section 9.2(d) of the LLC Agreement, it would be required to file a
proposed rule change under Section 19(b) of the Act.
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\47\ In this instance, interest refers to interest in ISE Class
A Units or overall interest in ISE Stock.
---------------------------------------------------------------------------
As noted in the Voting Limitations section supra, under Section
7.11 of the LLC Agreement, no Person (other than ISE), either alone or
together with its Related Persons, may exceed the Voting Limitation or
enter into any voting agreement that would result in Units beneficially
owned by such Person or its Related Persons not being voted where the
effect would be to enable any Person, alone or together with its
Related Persons, to exceed the Voting Limitation. The limitations
imposed by Section 7.11 of the LLC Agreement may be waived by the
Manager after such waiver is filed with, and approved by, the
Commission under Section 19(b) of the Act. However, such a waiver may
not be granted to Persons or Related Persons subject to ``statutory
disqualification'' (within the meaning of Section 3(a)(39) of the Act)
or Exchange Members (as such term is defined in the Constitution of
ISE).\48\
---------------------------------------------------------------------------
\48\ See LLC Agreement, Section 7.11(c).
---------------------------------------------------------------------------
Additionally, as noted, Section 8.1 of the LLC Agreement, with
limited exceptions, grants exclusive and complete authority over the
operations and affairs of ISE Stock to ISE as the Manager. Under
Section 8.13(c) 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, must, prior to becoming
effective, have been filed with, and approved by, the Commission.
In conclusion, the Commission believes that Sections 7.2, 8.1,
8.4(a) and (b), 8.13(c), 9.2(a), (b), and (d), and 12.1 of the LLC
Agreement, together with the requirements of Section 19(b) of the Act
and Rule 19b-4 thereunder, provide the Commission with sufficient
authority over changes in control of ISE to enable the Commission to
carry out its regulatory oversight responsibilities with respect to ISE
and the ISE Stock facility.
C. Regulatory Jurisdiction Over ISE Stock and Its Members
The Commission believes that the terms of the LLC Agreement provide
the Commission and ISE with sufficient regulatory jurisdiction over the
controlling parties and Members to carry out their respective
responsibilities under the Act. In Section 6.1(b) of the LLC Agreement,
each Member acknowledges that, to the extent that they are related to
the business of ISE Stock, the books, records, premises, officers,
directors, agents, and employees of the Member are deemed to be the
books, records, premises, officers, directors, agents, and employees of
ISE for the purpose of and subject to oversight pursuant to the Act.
Furthermore, the books, records, premises, officers, directors, agents,
and employees of ISE Stock are deemed to be the books, records,
premises, officers, directors, agents, and employees of ISE. This
provision would enable the Commission to exercise its authority under
Section 19(h)(4) \49\ of the Act with respect to the officers,
directors, agents, and employees of all Members, since all such
officers, directors, agents, and employees, and officers, directors,
agents, and employees of ISE Stock, to the extent that they are acting
in matters related to ISE Stock activities, would be deemed to be the
officers, directors, agents, and employees of ISE itself. Furthermore,
the books and records of any ISE Member, to the extent that they are
related to ISE Stock activities, are subject to the Commission's
examination authority under Section 17(b)(1) of the Act,\50\ as these
records would be deemed to be the records of ISE itself.
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\49\ 15 U.S.C. 78s(h)(4). Section 19(h)(4) authorizes the
Commission, by order, to remove from office or censure any officer
or director of a national securities exchange if it finds, after
notice and an opportunity for hearing, that such officer or director
has: (i) Willfully violated any provision of the Act or the rules
and regulations thereunder, or the rules of a national securities
exchange; (ii) willfully abused his or her authority; or (iii)
without reasonable justification or excuse, failed to enforce
compliance with any such provision by a member or person associated
with a member of the national securities exchange.
\50\ 15 U.S.C. 78q(b)(1).
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In addition, in Section 6.1(c) of the LLC Agreement, ISE Stock, its
Members, its officers, directors, agents, and employees, and the
officers, directors,
[[Page 53735]]
agents, and employees of its Members irrevocably submit to the
jurisdiction of the Commission, for the purposes of any suit, action or
proceeding pursuant to the U.S. federal securities laws and the rules
or regulations thereunder, arising out of or relating to ISE Stock
activities. In addition, ISE Stock, its Members, and each officer,
director, agent, and employee of ISE and its Members, must waive as a
defense or otherwise in any such suit, action, or proceeding, any claim
that it is not personally subject to the jurisdiction of the
Commission; that the suit, action or proceeding is an inconvenient
forum; that the venue is improper; or that the subject matter of the
suit, action, or proceeding may not be enforced by such courts or
agency.\51\ Moreover, pursuant to Section 6.1(e) of the LLC Agreement,
ISE Stock and each Member are required to take such action as is
necessary to ensure that ISE Stock and its Member's officers,
directors, agents, and employees consent to the application of these
requirements with respect to their ISE Stock-related activities.
Finally, under Section 6.1(d) of the LLC Agreement, ISE Stock, and its
Members, officers, directors, agents, and employees, and the officer,
directors, agents, and employees of its Members agrees to cooperate
with the Commission and ISE pursuant to their respective regulatory
authority.
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\51\ See LLC Agreement, Section 6.1(c).
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The Commission also notes that, even in the absence of these
provisions of the LLC Agreement, Section 20(a) of the Act \52\ provides
that any person with a controlling interest in ISE Stock would be
jointly and severally liable with and to the same extent that ISE Stock
is liable under any provision of the Act, unless the controlling person
acted in good faith and did not directly or indirectly induce the act
or acts constituting the violation or cause of action.
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\52\ 15 U.S.C. 78t(a).
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The Commission believes that, together, these provisions grant the
Commission sufficient jurisdictional authority over ISE Stock and its
Members. Moreover, ISE is required to enforce compliance with these
provisions because they are ``rules of the exchange'' within the
meaning of Section 3(a)(27) of the Act.\53\ A failure on the part of
ISE to enforce its rules could result in suspension or revocation of
registration under Section 19(h)(1) of the Act.\54\
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\53\ 15 U.S.C. 78c(a)(27).
\54\ 15 U.S.C. 78s(h)(1).
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D. Restrictions on ISE Stock Members
The Commission believes that the restriction on voting trust
agreements in Section 7.11(a) of the LLC Agreement is reasonable and
consistent with the Act. In the absence of such a provision,
unaffiliated parties could act in concert and evade the LLC Agreement's
provisions regarding changes in control of ISE Stock. In addition, the
LLC Agreement treats as belonging to a single person any ISE Stock
Units held by affiliated parties of the person.\55\ A voting trust
agreement would not necessarily be inconsistent with the Act, but any
Members (other than ISE or, in the future, Holdings) wishing to
establish a voting trust agreement first would need the consent of the
Manager,\56\ a consent that may not be given unless the Manager files a
proposed rule change, thus affording the Commission an opportunity to
review the matter.
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\55\ See LLC Agreement, Sections 9.2(a).
\56\ Such a waiver may not be granted to any Person or Related
Person subject to ``statutory disqualification'' (within the meaning
of Section 3(a)(39) of the Act) or any Person or Related Person who
are Exchange Members (as such term is defined in the Constitution of
ISE). See LLC Agreement, Sections 7.11(c).
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In addition, the Commission believes that the ownership
concentration limit described above, which prohibits a person (other
than ISE or in the future Holdings) along with a related person from
owning directly or indirectly more than 20 percent of the outstanding
units of ISE Stock \57\ absent a waiver, and would apply to those
persons trading on the ISE Stock trading system, together with the
provision that restricts the ability of Members to vote interests in
excess of 20 percent, absent a waiver,\58\ are reasonable and
consistent with the Act.\59\ Moreover, Exchange members (as defined in
the ISE Constitution) would be prohibited from owning more than 20
percent. It is common for members who trade on an exchange to have
ownership interests in the exchange. However, a member's interest could
become so large as to cast doubt on whether the exchange can fairly and
objectively exercise its self-regulatory responsibilities with respect
to that member. A member that is also a controlling shareholder of an
exchange or its facility might be tempted to exercise that controlling
influence by directing the exchange to refrain from diligently
surveilling the member's conduct or from punishing any conduct that
violates the rules of the exchange or the federal securities laws. An
exchange also might be reluctant to surveil and enforce its rules
zealously against a member that controls and has a large economic
interest in the Exchange.
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\57\ See LLC Agreement, Section 9.2(a).
\58\ Neither the voting nor ownership limitation waiver may be
granted to any Person or Related Person subject to ``statutory
disqualification'' (within the meaning of Section 3(a)(39) of the
Act) or any Person or Related Person who are Exchange Members (as
such term is defined in the Constitution of ISE). See LLC Agreement,
Sections 9.2(c) and 7.11(c).
\59\ The Commission believes that this provision would require
ISE Stock to aggregate the interest of Members in ISE Stock and any
indirect interest in ISE Stock through Members' interest in
Holdings. See LLC Agreement, Section 9.2(a).
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E. Accelerated Approval of Proposed Rule Change and Amendment No. 1
The Commission finds good cause for approving this proposed rule
change, and Amendment No. 1 thereto, before the thirtieth day after the
publication of notice thereof in the Federal Register pursuant to
Section 19(b)(2) of the Act.\60\ The proposed rule change was published
for a full comment period and no comments were received. In addition,
the Commission notes that the proposed rule change, as amended, is
substantially similar to the structure previously approved by the
Commission.\61\ That proposal was also published for a full comment
period and the Commission received no comments on the proposal.
Furthermore, accelerating approval of th
