Self-Regulatory Organizations; International Securities Exchange, LLC; Order Granting Approval of Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 1 Relating to a Corporate Transaction in Which Its Parent, International Securities Exchange Holdings, Inc., Will Become a Wholly-Owned Indirect Subsidiary of Eurex Frankfurt AG, 71979-71986 [E7-24500]

Download as PDF Federal Register / Vol. 72, No. 243 / Wednesday, December 19, 2007 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56955; File No. SR–ISE– 2007–101] Self-Regulatory Organizations; International Securities Exchange, LLC; Order Granting Approval of Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 1 Relating to a Corporate Transaction in Which Its Parent, International Securities Exchange Holdings, Inc., Will Become a Wholly-Owned Indirect Subsidiary of Eurex Frankfurt AG December 13, 2007. I. Introduction On November 1, 2007, International Securities Exchange, LLC (‘‘Exchange’’ or ‘‘ISE’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change regarding a corporate transaction (‘‘Transaction’’) in which the ISE’s parent, International Securities Exchange Holdings, Inc. (‘‘Holdings’’), would become a whollyowned, indirect subsidiary of Eurex Frankfurt AG (‘‘Eurex Frankfurt’’). The proposed rule change was published for comment in the Federal Register on November 7, 2007.3 The Commission has received no comments on the proposal. On December 11, 2007, the Exchange filed Amendment No. 1 to the proposed rule change.4 This order approves the proposed rule change, grants accelerated approval to Amendment No. 1, and solicits comments from interested persons on Amendment No. 1. The Commission has reviewed carefully the proposed rule change and finds that it is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.5 In particular, the Commission finds that the proposed rule change is consistent with section 6(b) of the Act,6 which, 1 15 U.S.C. 78s(b)(l). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 56733 (November 1, 2007), 72 FR 62885. 4 The text of Amendment No. 1 and Exhibits 5A through 5I, which set forth certain governing documents and resolutions as proposed to be amended, are available on the Commission’s Web site (http://www.sec.gov/rules/sro/ise.shtml), at the Commission’s Public Reference Room, at the ISE, and on the ISE’s Web site (http://www.ise.com). 5 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). 6 15 U.S.C. 78f(b). mstockstill on PROD1PC66 with NOTICES 2 17 VerDate Aug<31>2005 21:40 Dec 18, 2007 Jkt 214001 among other things, requires a national securities exchange to be so organized and have the capacity to be able 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 and regulations thereunder, and the rules of the exchange. Section 6(b) of the Act also requires that the rules of the exchange be designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. A. Accelerated Approval of Amendment No. 1 The Commission, pursuant to section 19(b)(2) of the Act,7 finds good cause for approving Amendment No. 1 prior to the thirtieth day after publishing notice of Amendment No. 1 in the Federal Register. In Amendment No. 1, the ISE proposes to amend the Trust Agreement (as defined below) 8 to provide that, if there is a Material Compliance Event (as described below),9 Holdings and U.S. Exchange Holdings, Inc. (‘‘U.S. Exchange Holdings’’) would be required to promptly transfer to the Trust a majority of capital stock of Holdings that have the right by its terms to vote in the election of the board of directors of Holdings (‘‘Holdings Board’’) or on other matters (other than matters affecting the rights, preferences, or privileges of the said capital stock).10 The Commission finds this change to the Trust Agreement consistent with the Act and that it is designed to facilitate the Exchange’s ability to comply with the requirements of the Act. The Exchange also proposes to amend the Certificate of Incorporation of Holdings (‘‘Holdings Certificate’’) to provide that if a person exceeds Ownership Limit or Voting Limit (both as described below),11 then a majority of capital stock of Holdings that have the right by its terms to vote in the election of the Holdings Board or on other matters (other than matters affecting the rights, preferences, or privileges of the said capital stock) would automatically be transferred to the Trust.12 7 15 U.S.C. 78s(b)(2). See infra notes 70 to 114 and accompanying text for a discussion of a Trust proposed in context of this filing. 9 See infra notes 73 to 74 and accompanying text for a discussion of Material Compliance Event. 10 Trust Agreement, Article IV, Section 4.2(g)(ii). 11 See infra note 27 and accompanying text for a discussion of Ownership Limit and Voting Limit. 12 Proposed Holdings Certificate, Article FOURTH, Sections III(c). 71979 Further, the Exchange proposes to amend the Holdings Certificate with the Certificate of Designation of Series A Preferred Stock (‘‘Certificate of Designation’’).13 Specifically, pursuant to the Certificate of Designation, the Exchange proposes to issue 100,000 shares of Holdings Series A Preferred Stock, par value $.01 per share (‘‘Holdings Preferred’’). The Commission notes that the Exchange proposes to issue Holdings Preferred to finance, and thereby facilitate the completion of, the Transaction. The Exchange represents that Holdings Preferred is not capital stock of Holdings that have the right by its terms to vote in the election of the Holdings Board or on other matters (other than matters affecting the rights, preferences, or privileges of Holdings Preferred).14 Therefore, the Exchange represents that Holdings Preferred does not affect Ownership Limit or Voting Limit. The Certificate of Designation amends the Holdings Certificate to provide that, for so long as any shares of Holdings Preferred are outstanding, there shall be a total of three directors on the Holdings Board.15 If and when Holdings files for a reorganization or relief under bankruptcy law, approves a plan to dissolve or wind up, or fails to pay dividends of Holdings Preferred in any two consecutive calendar years, the holders of Holdings Preferred shall be entitled to appoint two additional directors to the Holdings Board.16 However, the Certificate of Designation also provides that the number of directors constituting the entire Holdings Board may not be increased until the board of directors of ISE (‘‘ISE Board’’) is notified and such change is filed with, or filed with and approved by, the Commission under the Act and rules thereunder.17 Furthermore, any change to the Certificate of Designation must be submitted to the ISE Board. If such change must be filed with, or filed with and approved by, the Commission under section 19 of the Act 18 and the rules thereunder, then such change shall not be effective until filed with, or filed with and approved by, the Commission.19 The Commission believes the changes to the Holdings Certificate are consistent with the Act and therefore finds good 8 PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 13 The Certificate of Designation was approved by the unanimous written consent of the Holdings Board on November 19, 2007. 14 Certificate of Designation, Section 5(a). 15 Certificate of Designation, Section 7. 16 Certificate of Designation, Section 5(b). 17 Id. 18 15 U.S.C. 78s. 19 Certificate of Designation, Section 8(c). E:\FR\FM\19DEN1.SGM 19DEN1 mstockstill on PROD1PC66 with NOTICES 71980 Federal Register / Vol. 72, No. 243 / Wednesday, December 19, 2007 / Notices cause to accelerate approval of these changes prior to the thirtieth day after publication in the Federal Register. The shares of Holdings Preferred do not affect Ownership Limit or Voting Limit. Further, in the event the holders of Holdings Preferred become entitled to appoint directors to the Holdings Board, the ISE must file this appointment right with the Commission pursuant to section 19 of the Act 20 and the rules thereunder. In addition, the Exchange proposes certain clarifying, conforming, technical, non-material, and nonsubstantive changes to the Purpose Section of Form 19b–4, the Holdings Certificate, and the Amended and Restated Bylaws of Holdings (‘‘Holdings Bylaws’’). Further, the Exchange proposes certain clarifying, conforming, technical, non-material, and nonsubstantive changes to Form of German Parent Corporate Resolutions (‘‘German Resolutions’’), Form of Swiss Parent Corporate Resolutions, and Form of Swiss Parent Association Resolutions (Form of Swiss Parent Corporate Resolutions and Form of Swiss Parent Association Resolutions, together referred to herein as ‘‘Swiss Resolutions,’’ and with German Resolutions, ‘‘Resolutions’’). Finally, the Exchange also makes certain clarifying, conforming, technical, non-material, and non-substantive changes to the Amended and Restated Certificate of Incorporation of U.S. Exchange Holdings, Inc. (‘‘U.S. Exchange Holdings Certificate’’), the Amended and Restated Bylaws of U.S. Exchange, Inc. (‘‘U.S. Exchange Holdings Bylaws’’), and the Trust Agreement. The changes described in the foregoing paragraph are non-substantive and technical in nature and are necessary to clarify the proposal. Therefore, they raise no new or novel issues. The Commission finds that these changes proposed in Amendment No. 1 are consistent with the Act. Further, pursuant to section 19(b)(2) of the Act,21 the Commission finds good cause to accelerate approval of these changes prior to the thirtieth day after publication in the Federal Register, because they clarify the Exchange’s rules, which should facilitate the Exchange’s compliance, and the Commission’s ability to ensure compliance, with such rules and assist members and investors in understanding the application and scope of the rules. 20 15 21 15 U.S.C. 78s. U.S.C. 78s(b)(2). VerDate Aug<31>2005 22:04 Dec 18, 2007 Jkt 214001 B. 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: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–ISE–2007–101 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–ISE–2007–101. 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 (http:// 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the ISE. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–ISE–2007–101 and should be submitted on or before January 9, 2008. II. Discussion The ISE submitted the proposed rule change in connection with a proposed Transaction in which Holdings would become a wholly-owned, indirect subsidiary of Eurex Frankfurt. Pursuant PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 to the Agreement and Plan of Merger, dated April 30, 2007 (‘‘Agreement’’), Holdings would become a whollyowned subsidiary of U.S. Exchange Holdings, which is a wholly-owned subsidiary of Eurex Frankfurt. Eurex Frankfurt is a wholly-owned subsidiary ¨ ¨ of Eurex Zurich AG (‘‘Eurex Zurich’’), which in turn is jointly owned by ¨ ¨ Deutsche Borse AG (‘‘Deutsche Borse’’) and SWX Swiss Exchange (‘‘SWX’’). SWX is owned by SWX Group, which in turn is owned by Verein SWX Swiss Exchange. Pursuant to the Agreement, the stockholders of Holdings will receive cash in exchange for their shares in Holdings. The consummation of the Transaction is subject to satisfaction of certain conditions, including the approval by the Holdings’ stockholders of the Transaction 22 and the approval of this rule change by the Commission. A. Corporate Structure The ISE, a national securities exchange and a self-regulatory organization (‘‘SRO’’), is organized as a Delaware limited liability company. The ISE will not make any changes to its governance structure in connection with the Transaction. Therefore, the ISE will continue to have a 15-member board of directors, composed of a chief executive officer, 6 industry directors elected by the members, and 8 non-industry directors elected by Holdings as the sole member of the ISE.23 Further, the ISE currently intends to have its senior management remain in place, subject to the previously-announced retirement of the ISE’s chief executive officer, as of January 1, 2008. The ISE is not proposing any amendments to its trading or regulatory rules. The ISE members, therefore, will continue to own ‘‘exchange rights’’ 24 and have the same trading and voting rights in the ISE. 1. Upstream Owners Following the Transaction, U.S. Exchange Holdings will directly own all of the common stock of Holdings. U.S. Exchange Holdings is a Delaware corporation and a wholly-owned subsidiary of Eurex Frankfurt. Eurex Frankfurt is a wholly-owned subsidiary ¨ of Eurex Zurich, which in turn is jointly 22 The stockholders of Holdings approved the Transaction at a special meeting of stockholders held on July 27, 2007. 23 Pursuant to the Agreement, on the closing of the Transaction, all members of the Holdings Board, and all members of the ISE Board who are also on the Holdings Board, will resign. Members of the ISE Board who are elected by the ISE members are not on the Holdings Board and will not resign. 24 See the ISE’s Second Amended and Restated Limited Liability Agreement, Article VI. E:\FR\FM\19DEN1.SGM 19DEN1 Federal Register / Vol. 72, No. 243 / Wednesday, December 19, 2007 / Notices mstockstill on PROD1PC66 with NOTICES ¨ owned by Deutsche Borse and SWX. SWX is owned by SWX Group, which in turn is owned by Verein SWX Swiss Exchange. Eurex Frankfurt and ¨ Deutsche Borse are stock corporations organized under the laws of the Federal ¨ Republic of Germany. Eurex Zurich, SWX, and SWX Group are stock corporations and Verein SWX Swiss Exchange is an association, all organized under the laws of the Swiss Confederation (Eurex Frankfurt, Eurex ¨ ¨ Zurich, Deutsche Borse, SWX, SWX Group, and Verein SWX Swiss Exchange, collectively referred to herein as ‘‘non-U.S. Upstream Owners,’’ and together with U.S. Exchange Holdings, ‘‘Upstream Owners’’). Therefore, following the Transaction, the non-U.S. Upstream Owners will indirectly own all of the common stock of Holdings, the sole member of the ISE, through an intermediary holding company, U.S. Exchange Holdings. The Transaction represents the first time that a national securities exchange will be controlled by non-U.S. entities. Section 19(b) of the Act and Rule 19b–4 thereunder require an SRO to file proposed rule changes with the Commission. Although the Upstream Owners are not SROs, the Resolutions,25 the U.S. Exchange Holdings Certificate, and the U.S. Exchange Holdings Bylaws are rules of an exchange if they are stated policies, practices, or interpretations (as defined in Rule 19b– 4 under the Act) of the exchange, and must therefore be filed with the Commission pursuant to section 19(b)(4) of the Act and Rule 19b–4 thereunder.26 Accordingly, the Exchange filed the Resolutions, the U.S. Exchange Holdings Certificate, and the U.S. Exchange Bylaws with the Commission. The Holdings Certificate currently provides that no person, either alone or together with its related persons, may own, directly or indirectly, more than 40% (or 20%, if the person is an Exchange member) of Holdings capital stock that has the right by its terms to vote in the election of the Holdings 25 The enumeration in the Resolutions is identical in all Resolutions. Therefore, unless otherwise specified, reference to certain enumerated resolution referred to herein applies to all Resolutions. 26 See Section 3(a)(27) of the Act, 15 U.S.C. 78c(a)(27). If each of the Upstream Owners decides to change its Resolutions or governing documents, as applicable, each such Upstream Owner must submit the change to the ISE Board. If the change must be filed with, or filed with and approved by, the Commission under Section 19 of the Act and the rules thereunder, then the change shall not be effective until filed with, or filed with and approved by, the Commission. See Resolution 11, U.S. Exchange Holdings Certificate, Article SIXTEENTH, and U.S. Exchange Holdings Bylaws, Article VI, Section 9. VerDate Aug<31>2005 21:40 Dec 18, 2007 Jkt 214001 Board or on other matters (other than matters affecting the rights, preferences, or privileges of the said capital stock) (‘‘Ownership Limit’’). The Holdings Certificate also provides that no person, either alone or together with its related persons, may, directly or indirectly, vote or cause the voting of more than 20% of the Holdings capital stock that has the right by its terms to vote in the election of the Holdings Board or on other matters (other than matters affecting the rights, preferences, or privileges of the said capital stock) (‘‘Voting Limit’’).27 The ISE is not proposing to change Ownership Limit or Voting Limit. To facilitate compliance with Ownership Limit and Voting Limit, the Resolutions of the non-U.S. Upstream Owners provide that each non-U.S. Upstream Owner shall take reasonable steps necessary to cause Holdings to be in compliance with Ownership Limit and Voting Limit.28 Likewise, the U.S. Exchange Holdings Certificate provides that U.S. Exchange Holdings will take reasonable steps necessary to cause Holdings to be in compliance with Ownership Limit and Voting Limit.29 Further, the Resolutions of each of the German Upstream Owners (i.e., Eurex ¨ Frankfurt and Deutsche Borse) would require these entities to notify the ISE Board and the Trust (as described below) if any person, either alone or together with its related persons, acquires 20%, 25%, 30%, 50%, or 75% or more of the shares of stock in such company.30 Similarly, the Resolutions of each of the Swiss Upstream Owners ¨ (i.e., Eurex Zurich, SWX, SWX Group, and Verein SWX Swiss Exchange) would require these entities to notify the ISE Board and the Trust if any person, either alone or together with its related persons, acquires 20%, 331⁄3%, 45%, 50%, or 662⁄3% or more of the shares of stock or membership interest, as applicable, in such company.31 27 Holdings Certificate, Article FOURTH, Section III. The Commission previously approved Ownership Limit and Voting Limit. See Securities Exchange Act Release No. 53705 (April 21, 2006) 71 FR 25260 (April 28, 2006) (SR–ISE–2006–04) (reorganization of International Securities Exchange, Inc. into a holding company structure). 28 Resolution 4. 29 U.S. Exchange Holdings Certificate, Article THIRTEENTH. 30 German Resolution 4. The calculation of the percentage of shares would be as determined under Sections 21 and 22 of the German Securities Trading Act. 31 Swiss Resolution 4. The calculation of the percentage of shares or membership interest, as applicable, would be as determined under Section 20 of the Swiss Federal Act on Stock Exchanges and Securities Trading and Section 9 of the Swiss Federal Banking Commission’s Ordinance on Stock Exchanges and Securities Trading. PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 71981 Finally, the U.S. Exchange Holdings Certificate provides that U.S. Exchange Holdings will notify the ISE Board and the Trust if any person, either alone or together with its related persons, acquire 10%, 15%, 20%, 25%, 30%, 35%, or 40% or more of the shares in U.S. Exchange Holdings.32 The Commission finds the provisions in the Resolutions and the U.S. Exchange Holdings Certificate, requiring each Upstream Owner to take reasonable steps necessary to cause Holdings to be in compliance with Ownership Limit and Voting Limit, consistent with the Act. These provisions should minimize the potential that a person could improperly interfere with, or restrict the ability of, the Commission or the ISE to effectively carry out their regulatory oversight responsibilities under the Act. Further, the provisions in the Resolutions and the U.S. Exchange Holdings Certificate requiring notification to the ISE Board and the Trust upon acquisition of certain ownership percentage of the Upstream Owners should help facilitate the ability of the ISE to comply with its responsibilities under the Act. 2. Holdings Holdings will become a whollyowned subsidiary of U.S. Exchange Holdings. Thus, following the Transaction, Holdings will no longer be publicly traded.33 The Transaction, however, will not affect Holdings’ ownership of the ISE. After the Transaction, Holdings will continue to be the sole member of the ISE. Section 19(b) of the Act and Rule 19b–4 thereunder require an SRO to file proposed rule changes with the Commission. Although Holdings is not an SRO, certain provisions of the Holdings Certificate and the Holdings Bylaws are rules of an exchange if they are stated policies, practices, or 32 U.S. Exchange Holdings Certificate, Article THIRTEENTH. 33 The ISE proposes to make certain changes to the Holdings Certificate and the Holdings Bylaws. Specifically, the ISE proposes to: (1) Decrease the number of authorized shares of Holdings; (2) eliminate classified board structure and remove term limits for directors; (3) eliminate the requirement that there be an executive, finance and audit, corporate governance, and compensation committees; (4) decrease the affirmative vote requirement for the election of chairman and vice chairman; (5) delete the requirement that chief executive officer not engage in any other occupation during incumbency; (6) provide that chief executive officer may be removed by the Holdings Board with or without cause; (7) empower the Holdings Board to change the Holdings Certificate and the Holdings Bylaws without the approval of stockholders; and (8) permit taking of stockholder action without prior notice and by written consent. The Commission finds these changes consistent with the Act. E:\FR\FM\19DEN1.SGM 19DEN1 71982 Federal Register / Vol. 72, No. 243 / Wednesday, December 19, 2007 / Notices mstockstill on PROD1PC66 with NOTICES interpretations (as defined in Rule 19b–4 of the Act) of the exchange, and must be filed with the Commission pursuant to section 19(b)(4) of the Act and Rule 19b–4 thereunder.34 Accordingly, the ISE filed the proposed changes to the Holdings Certificate and the Holdings Bylaws with the Commission. a. Transfer of Capital Stock to Trust. As stated above, the Holdings Certificate currently provides that no person, either alone or together with its related persons, may exceed Ownership Limit or Voting Limit.35 The ISE does not propose to change Ownership Limit or Voting Limit, but does propose to add a provision in the Holdings Certificate to provide that, if a person exceeds Ownership Limit or Voting Limit, then a majority of capital stock of Holdings that have the right by its terms to vote in the election of the Holdings Board or on other matters (other than matters affecting the rights, preferences, or privileges of the said capital stock) would automatically be transferred to the Trust,36 as discussed below.37 The Commission finds these changes to the Holdings Certificate consistent with the Act. The proposed changes to the Holdings Certificate should minimize the potential that a person could improperly interfere with or restrict the ability of the Commission and the Exchange to effectively carry out their regulatory oversight responsibilities under the Act. b. Ownership of Holdings by Upstream Owners. Additionally, the ISE proposes to amend the Holdings Bylaws to allow the Upstream Owners to wholly own and vote all of the common stock of Holdings.38 Currently, the Holdings 34 See Section 3(a)(27) of the Act, 15 U.S.C. 78c(a)(27). As under the current Holdings Certificate and Holdings Bylaws any change to Holdings Certificate or Holdings Bylaws must be submitted to the ISE Board. If the change must be filed with, or filed with and approved by, the Commission under Section 19 of the Act and the rules thereunder, then the change shall not be effective until filed with, or filed with and approved by, the Commission. This requirement to submit changes to the ISE Board continues for so long as Holdings controls, directly or indirectly, the ISE. See current Holdings Certificate, Article SIXTEENTH, current Holdings Bylaws, Section 10.1, proposed Holdings Certificate, Article FOURTEENTH, and proposed Holdings Bylaws, Section 10.1. 35 See supra note 27 and accompanying text. 36 Proposed Holdings Certificate, Article FOURTH, Sections III(c). If a person were to obtain an ownership or voting interest in Holdings in excess of the Ownership Limit or Voting Limit, Holdings capital stock would be transferred to the Trust automatically by operation of law. See Section 202(c)(4) of the Delaware General Corporation Law. 37 See infra notes 70 to 114 and accompanying text. 38 Proposed Holdings Bylaws, Section 11.1. VerDate Aug<31>2005 21:40 Dec 18, 2007 Jkt 214001 Certificate provides that the Holdings Board may waive Ownership Limit and Voting Limit pursuant to an amendment to the Holdings Bylaws.39 In connection with the adoption of such amendment, the Holdings Board must adopt a resolution determining that the amendment will not impair the ability of Holdings and the ISE to discharge the ISE’s responsibilities under the Act and the rules and regulations thereunder, is in the best interests of Holdings, its stockholders, and the ISE, and will not impair the Commission’s ability to enforce the Act.40 Further, the Holdings Board must determine that in waiving a person’s Ownership Limit or Voting Limit such person and its related persons are not subject to any ‘‘statutory disqualification’’ 41 and are not Exchange members. Pursuant to the Holdings Certificate, the Holdings Board approved an amendment to the Holdings Bylaws to allow ownership and voting of all of the common stock of Holdings by the Upstream Owners. The Holdings Board determined that waiver of Ownership Limit and Voting Limit with respect to the Upstream Owners will not impair the ability of Holdings and the ISE to discharge the ISE’s responsibilities under the Act and the rules and regulations thereunder, that such waiver is in the best interests of Holdings, its stockholders, and the ISE, and will not impair the Commission’s ability to enforce the Act, and that neither the Upstream Owners nor any of its related persons are subject to any statutory disqualification or is an Exchange member. Therefore, the Exchange proposes that the Upstream Owners wholly own and vote all of the common stock of Holdings upon the consummation of the Transaction. The Commission believes it is consistent with the Act to allow the Upstream Owners to wholly own and vote all of the common stock of Holdings. The Exchange represents that neither the Upstream Owners nor any of its related persons is subject to any statutory disqualification or is an Exchange member. Moreover, each of the Upstream Owners has provided that it will take reasonable steps necessary to cause Holdings to be in compliance with Ownership Limit and Voting Limit. As discussed below, each of the 39 Holdings Certificate, Article FOURTH, Sections III(a)(i) and III(b)(i). Such amendment to Holdings Bylaws must be filed with and approved by the Commission under Section 19(b) of the Act and become effective thereunder. 40 Holdings Certificate, Article FOURTH, Sections III(a)(i)(B) and III(b)(i). 41 See Section 3(a)(39) of the Act, 15 U.S.C. 78c(a)(39). PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 Upstream Owners will adopt certain provisions designed to maintain the independence of the ISE’s selfregulatory functions in its Resolutions or governing documents, as applicable. Accordingly, the Commission believes that the acquisition of ownership and exercise of voting control of Holdings by the Upstream Owners will not impair the ability of the Commission or the ISE to discharge their respective responsibilities under the Act. B. Relationship of Upstream Owners and the ISE; Jurisdiction Over Upstream Owners Although the Upstream Owners will not carry out regulatory functions, the activities of each of the Upstream Owners with respect to the operation of the ISE must be consistent with, and not interfere with, the ISE’s self-regulatory obligations. The Resolutions, the U.S. Exchange Holdings Certificate, and the U.S. Exchange Holdings Bylaws include certain provisions that are designed to maintain the independence of the ISE’s self-regulatory functions, enable the ISE to operate in a manner that complies with the U.S. federal securities laws, including the objectives and requirements of sections 6(b) and 19(g) of the Act,42 and facilitate the ability of the ISE and the Commission to fulfill their regulatory and oversight obligations under the Act. For example, the Upstream Owners provide that each such Upstream Owners will comply with the U.S. federal securities laws and the rules and regulations thereunder and shall cooperate with the Commission and the ISE.43 Also, each board member, officer, and employee of the Upstream Owners, in discharging his or her responsibilities, shall comply with the U.S. federal securities laws and the rules and regulations thereunder, cooperate with the Commission, and cooperate with the ISE.44 In discharging his or her responsibilities as a board member of the Upstream Owners, each such member must, to the fullest extent permitted by applicable law, take into consideration the effect that the actions of the Upstream Owners would have on the ability of the ISE to carry out its 42 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g). 1 and U.S. Exchange Holdings Certificate, Article ELEVENTH. 44 Resolutions 7(a) and 8(a) and U.S. Exchange Holdings Certificate, Article TENTH. The Resolutions also provide that each non-U.S. Upstream Owner will take reasonable steps necessary to cause each person who becomes a board member of the non-U.S. Upstream Owner after consummation of the Transaction to agree in writing to certain matters included in the Resolutions. See Resolution 7. 43 Resolution E:\FR\FM\19DEN1.SGM 19DEN1 Federal Register / Vol. 72, No. 243 / Wednesday, December 19, 2007 / Notices mstockstill on PROD1PC66 with NOTICES responsibilities under the Act.45 In addition, each of the Upstream Owners, its board members, officers and employees shall give due regard to the preservation of the independence of the self-regulatory function of the ISE.46 Further, the non-U.S. Upstream Owners (along with their respective board members, officers, and employees) and U.S. Exchange Holdings agree to keep confidential, to the fullest extent permitted by applicable law, all confidential information pertaining to the self-regulatory function of the ISE, including, but not limited to, confidential information regarding disciplinary matters, trading data, trading practices, and audit information, contained in the books and records of the ISE and not use such information for any commercial 47 purposes.48 In addition, books and records of the nonU.S. Upstream Owners related to the activities of the ISE will at all times be made available for, and books and records of U.S. Exchange Holdings will be subject at all times to, inspection and copying by the Commission and the ISE.49 Books and records of U.S. Exchange Holdings related to the activities of the ISE will be maintained within the U.S. 50 Moreover, for so long as each of the Upstream Owners directly or indirectly controls the ISE, the books, records, officers, directors (or equivalent), and employees of each of the Upstream Owners shall be deemed to be the books, records, officers, directors, and employees of the ISE.51 Finally, for so long as U.S. Exchange Holdings directly or indirectly controls the ISE, premises of U.S. Exchange Holdings will be deemed premises of the ISE.52 To the extent involved in the activities of the ISE, each of the nonU.S. Upstream Owners, its board members, officers, and employees irrevocably submit to the jurisdiction of the U.S. federal courts and the Commission for purposes of any action arising out of, or relating to, the 45 Resolution 7(f) and U.S. Exchange Holdings Certificate, Article TENTH. 46 Resolutions 5, 7(d), and 8(d) and U.S. Exchange Holdings Certificate, Article TWELFTH. 47 The Commission believes that any nonregulatory use of such information would be for a commercial purpose. 48 Resolutions 6, 7(e), and 8(e) and U.S. Exchange Holdings Certificate, Article FOURTEENTH. 49 Resolution 3 and U.S. Exchange Holdings Certificate, Article FIFTEENTH. 50 U.S. Exchange Holdings Certificate, Article FIFTEENTH. 51 Resolutions 3 and 8(c) and U.S. Exchange Holdings Certificate, Article FIFTEENTH. 52 U.S. Exchange Holdings Certificate, Article FIFTEENTH. VerDate Aug<31>2005 21:40 Dec 18, 2007 Jkt 214001 activities of the ISE.53 Likewise, U.S. Exchange Holdings, its officers and directors, and employees whose principal place of business and residence is outside of the U.S., to the extent such directors, officers, or employees are involved in the activities of the ISE, irrevocably submit to the jurisdiction of the U.S. federal courts and the Commission for purposes of any action arising out of, or relating to, the activities of the ISE.54 Each of the Upstream Owners and Holdings acknowledges that it is responsible for referring possible violations of the Act, the rules and regulations thereunder, and ISE rules to the ISE. In addition, the ISE represents that there will be an explicit agreement among the Upstream Owners, Holdings, and the ISE to provide adequate funding for the ISE’s regulatory responsibilities. Finally, the Resolutions, the U.S. Exchange Holdings Certificate, and the U.S. Exchange Holdings Bylaws require that any change to the Resolutions (including any action by the non-U.S. Upstream Owners that would have the effect of changing the Resolutions), the U.S. Exchange Holdings Certificate, or the U.S. Exchange Holdings Bylaws must be submitted to the ISE Board. If such change must be filed with, or filed with and approved by, the Commission under Section 19 of the Act 55 and the rules thereunder, then such change shall not be effective until filed with, or filed with and approved by, the Commission.56 This requirement to submit changes to the ISE Board continues for so long as the non-U.S. Upstream Owners or U.S. Exchange Holdings, as applicable, directly or indirectly, control the ISE. With respect to Swiss Upstream Owners, each Swiss Resolutions provides that, where necessitated by Swiss law, the Swiss Upstream Owner will provide information related to the activities of the ISE, including books and records of such owner related to the activities of the ISE, to the Commission promptly through the Swiss Federal Banking Commission (‘‘SFBC’’). Moreover, oral exchanges between each Swiss Upstream Owner and the Commission related to the activities of the ISE will include the participation of the SFBC.57 Swiss law designed to protect Swiss sovereignty raises concerns about the 53 Resolutions 2, 7(b), and 8(b). Exchange Holdings Bylaws, Section 16. 55 15 U.S.C. 78s. 56 Resolution 11, U.S. Exchange Holdings Certificate, Article SIXTEENTH, and U.S. Exchange Bylaws, Section 9. 57 Swiss Resolutions 1, 3(b), 6, 7(a), 7(e), 8(a), 8(e), and 9. 54 U.S. PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 71983 ability of the Swiss Upstream Owners to provide the Commission with direct access to information, including books and records, related to the activities of the ISE.58 In order not to run afoul of Swiss law and to facilitate the Transaction, the Commission and the SFBC have developed a procedure (‘‘Procedure’’) under which the SFBC undertakes to serve as a conduit for unfiltered delivery of books and records of the Swiss Upstream Owners related to the activities of the ISE.59 Pursuant to the Procedure, where necessitated by Swiss law, if the Commission or the staff makes a request to any of the Swiss Upstream Owners for information related to the activities of the ISE, including books and records related to the activities of the ISE, the SFBC shall deliver to the Commission or the staff, without delay, any responsive information provided to the SFBC by the Swiss Upstream Owners. Written requests for information, including book and records, related to the activities of the ISE shall be made by the Commission or the staff directly to the Swiss Upstream Owners, and the SFBC will be copied on any such requests. Moreover, an SFBC staff member shall participate in any oral exchanges between the Commission or the staff and any of the Swiss Upstream Owners.60 Notwithstanding this Procedure, the Swiss Upstream Owners would remain fully responsible for meeting all of their obligations as owners of a U.S. securities exchange. The Commission finds that these provisions of the Resolutions, the U.S. Exchange Holdings Certificate, and the U.S. Exchange Holdings Bylaws are consistent with the Act. These provisions are intended to assist the ISE 58 See Art. 271 of Swiss penal code, ‘‘Prohibited acts for a foreign state,’’ which states, in part: ‘‘Whoever, without being authorized, performs acts for a foreign state on Swiss territory that are reserved to an authority or an official, whoever performs such acts for a foreign party or another foreign organization, whoever aids and abets such acts, shall be punished with imprisonment and, in serious cases, sentenced to the penitentiary.’’ 59 Application of the Procedure would be limited to issues arising in the context of the Transaction and the Commission’s oversight of the ISE. Information-sharing and cooperation between the Commission and the SFBC in securities enforcement matters will continue to be governed by the letters of cooperation between the Commission and the SFBC. 60 The Procedure is designed to ensure that the delivery of books and records to the Commission is not delayed. Therefore, the Commission’s requests for books and records would be sent directly to the Swiss Upstream Owners and would not be subject to filtering or substantive review by the SFBC. In addition, the SFBC has agreed to pass to the Commission without delay and without substantive review materials provided by the Swiss Upstream Owners that are responsive to the Commission’s requests for information. E:\FR\FM\19DEN1.SGM 19DEN1 71984 Federal Register / Vol. 72, No. 243 / Wednesday, December 19, 2007 / Notices mstockstill on PROD1PC66 with NOTICES in fulfilling its self-regulatory obligations and in administering and complying with the requirements of the Act. The Commission notes that while the Resolutions do not provide that books and records of non-U.S. Upstream Owners related to the activities of the ISE will be maintained within the U.S., such books and records are deemed to be the books and records of the ISE, and the non-U.S. Upstream Owners have committed in the Resolutions to make available, at all times, such books and records for inspection and copying by the Commission and the ISE.61 As discussed below,62 the failure of a nonU.S. Upstream Owner to adhere to this commitment would be a Material Compliance Event under the Trust, which would require the Trustees to take certain actions, including (after a Cure Period) the exercise of a Call Option for the transfer of a majority of capital stock of Holdings that have the right by its terms to vote in the election of the Holdings Board or on other matters (other than matters affecting the rights, preferences, or privileges of the said capital stock). Because the non-U.S. Upstream Owners lose control over the ISE if one or more of them fails to make its books and records available to the Commission and the ISE, there is a strong incentive for them to do so. Moreover, if a non-U.S. Upstream Owner fails to make its books and records available to the Commission, the Commission could bring an action under, among other provisions, section 17 of the Act 63 and Rule 17a–1(b) thereunder 64 against the ISE pursuant to section 19(h) of the Act.65 The Commission believes that the non-U.S. Upstream Owners’ representations and commitments, together with the Trustees’ and the Commission’s authority, will allow the ISE to meet its obligations under section 17 of the Act and the rules thereunder. The Commission also notes that, for the Swiss Upstream Owners, the SFBC will serve as a conduit for the delivery of information related to the activities of the ISE. The Commission’s usual practice is to have direct access to books and records related to the activities of a U.S. securities exchange. However, subject to the condition that the Swiss Upstream Owners will promptly deliver such information to the Commission, 61 See supra notes 49 and 51 and accompanying text. 62 See infra notes 73 to 74 and 83 to 94 and accompanying text. 63 15 U.S.C. 78q. 64 17 CFR 240.17a–1(b). 65 15 U.S.C. 78s(h). See also infra notes 67 to 69 and accompanying text. VerDate Aug<31>2005 21:40 Dec 18, 2007 Jkt 214001 coupled with the fact that under ISE rules all trading records of the ISE are required to be maintained in the U.S.,66 the Commission believes that the provisions of the Swiss Resolutions related to the Commission’s access to books and records through the SFBC should not result in a level of access materially different from that agreed to by other entities that control U.S. securities exchanges. Finally, the Commission notes that under section 20(a) of the Act,67 any person with a controlling interest in the ISE shall be jointly and severally liable with and to the same extent that the ISE 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. In addition, section 20(e) of the Act 68 creates aiding and abetting liability for any person who knowingly provides substantial assistance to another person in violation of any provision of the Act or rule thereunder. Further, section 21C of the Act 69 authorizes the Commission to enter a cease-and-desist order against any person who has been ‘‘a cause of’’ a violation of any provision of the Act through an act or omission that the person knew or should have known would contribute to the violation. These provisions are applicable to the dealings of the Upstream Owners with the ISE. C. Trust The ISE proposes to implement a Delaware statutory trust (‘‘Trust’’), pursuant to a Trust Agreement (‘‘Trust Agreement’’) among Holdings, U.S. Exchange Holdings, trustees (‘‘Trustees’’), and a Delaware trustee. The Trust would serve two general purposes.70 First, as described above,71 the ISE proposes that the Trust would hold capital stock of Holdings in the event that a person obtains ownership or voting interest in Holdings in excess of Ownership Limit or Voting Limit.72 Second, the ISE proposes to implement the Trust to hold capital stock of Holdings in the event of a Material Compliance Event.73 A ‘‘Material Compliance Event’’ is defined under the 66 ISE Second Amended and Restated Limited Liability Agreement, Article IV, Section 4.1. 67 15 U.S.C. 78t(a). 68 15 U.S.C. 78t(e). 69 15 U.S.C. 78u–3. 70 The term of the Trust is perpetual, provided that Holdings controls, directly or indirectly, the ISE. See Trust Agreement, Article II, Section 2.6. 71 See supra notes 35 to 37 and accompanying text. 72 Trust Agreement, Article IV, Section 4.1. 73 Trust Agreement, Article IV, Section 4.2. PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 Trust Agreement as any state of facts, development, event, circumstance, condition, occurrence, or effect that results in the failure of any of the nonU.S. Upstream Owners to adhere to its respective commitments under the Resolutions in any material respect.74 The Trust holds a call option (‘‘Call Option’’) over Holdings capital stock, which may be exercised if a Material Compliance Event has occurred and continues to be in effect. The Trustees shall have exclusive and complete authority to carry out the Trust purpose.75 The Trustees will be persons who are independent of the Upstream Owners, Holdings, the ISE, and their affiliates,76 are not subject to any statutory disqualification,77 are of high repute and have experience and expertise in, or knowledge of, the securities industry, regulation and/or corporate governance, are independent to such a degree that they can be entrusted to resist undue pressures, and are not unacceptable to the Commission staff.78 The Trustees would be required under the terms of the Trust Agreement to vote any capital stock of Holdings held by the Trust consistent with the public interests of the markets operated by the ISE.79 As discussed above, section 19(b) of the Act and Rule 19b–4 thereunder require an SRO to file a proposed rule change with the Commission. Although the Trust is not an SRO, certain provisions of the Trust Agreement are rules of an exchange if they are stated policies, practice, or interpretations, as defined in Rule 19b–4 under the Act,80 and must therefore be filed with the Commission pursuant to section 19(b)(4) of the Act 81 and Rule 19b–4 thereunder. Accordingly, the Exchange has filed the Trust Agreement with the Commission. 1. Operation of the Trust The Trust will operate pursuant to the Trust Agreement. The ISE proposes that, pursuant to the Trust Agreement, if a person exceeds Ownership Limit or Voting Limit then a majority of capital stock of Holdings that have the right by its terms to vote in the election of the 74 Trust Agreement, Article I, Section 1.1. The Trust Agreement also would provide that the term Material Compliance Event would apply with respect to the Resolutions of any future upstream owner of Holdings. See Trust Agreement, Article I, Section 1.1, definition of ‘‘Affected Affiliate.’’ 75 Trust Agreement, Article III, Section 3.2(a). 76 For a more complete list of the independence requirement, see Trust Agreement, Article III, Section 3.2(a). 77 See supra note 41. 78 Trust Agreement, Article III, Section 3.2(a). 79 Trust Agreement, Article II, Section 2.3(b). 80 17 CFR 240.19b–4. 81 15 U.S.C. 78s(b). E:\FR\FM\19DEN1.SGM 19DEN1 Federal Register / Vol. 72, No. 243 / Wednesday, December 19, 2007 / Notices mstockstill on PROD1PC66 with NOTICES Holdings Board or on other matters (other than matters affecting the rights, preferences, or privileges of the said capital stock) would automatically be transferred to the Trust.82 Further, the Trust Agreement provides that upon becoming aware of facts, developments, events, circumstances, conditions, occurrences, or effects that could reasonably be expected to result in the occurrence of a Material Compliance Event, the Trustees would be required to meet promptly and, within 5 business days of that meeting, make a determination of whether or not a Material Compliance Event has occurred.83 After making a determination that a Material Compliance Event has occurred, and prior to any exercise of the Call Option, the Trustees would provide written notice to the non-U.S. Upstream Owners and to the Commission of the occurrence of the Material Compliance Event, which notice would provide for 60 calendar days in which to address the Material Compliance Event (‘‘Cure Period’’).84 The Trust Agreement provides that, during the Cure Period, the Trustees would consult with the boards of directors (or equivalent) of the ISE, Holdings, and the non-U.S. Upstream Owners, and with the Commission to consider alternatives to the exercise of the Call Option.85 After such consultation, if the Trustees determine that the Material Compliance Event has not been addressed, they would provide written notice to the boards of directors (or equivalent) of the ISE, Holdings, and the non-U.S. Upstream Owners that they have determined to exercise the Call Option.86 If the Trust were to exercise the Call Option, it would deliver a written notice to Holdings and U.S. Exchange Holdings, promptly after the end of the Cure Period, that the Trust has determined to exercise the Call Option in accordance with the terms of the Trust Agreement.87 Subsequently, Holdings and U.S. Exchange Holdings would be required to promptly transfer to the Trust a majority of capital stock of Holdings that have the right by its terms to vote in the election of the Holdings Board or on other matters (other than matters affecting the rights, 82 Trust Agreement, Article IV, Section 4.1(c). See also proposed Holdings Certificate, Article FOURTH, Sections III(c). 83 Trust Agreement, Article IV, Section 4.2(b). 84 Trust Agreement, Article IV, Section 4.2(c). 85 Trust Agreement, Article IV, Section 4.2(d)(i). 86 Trust Agreement, Article IV, Section 4.2(d)(ii). 87 Trust Agreement, Article IV, Section 4.2(g)(i). VerDate Aug<31>2005 21:40 Dec 18, 2007 Jkt 214001 preferences, or privileges of the said capital stock).88 U.S. Exchange Holdings would have the right to reacquire shares of the capital stock of Holdings held by the Trust.89 If shares were contributed to the Trust because of a violation of Ownership Limit or Voting Limit, U.S. Exchange Holdings would have the right to reacquire such shares if the violation of Ownership Limit or Voting Limit, as applicable, is waived by the Holdings Board and approved by the Commission or if the violation no longer exists.90 Likewise, if shares were transferred to the Trust because of a Material Compliance Event, U.S. Exchange Holdings would have the right to reacquire such shares if the Material Compliance Event is no longer continuing or, notwithstanding the continuation of a Material Compliance Event, the Trustees determine that the retention of such shares by the Trust could not reasonably be expected to address the continuing Material Compliance Event.91 Further, if directed by U.S. Exchange Holdings, the Trust would sell capital stock of Holdings held by the Trust to any person whose ownership or voting would not violate Ownership Limit or Voting Limit and who is not a non-U.S. Upstream Owner with respect to which a Material Compliance Event has occurred and is continuing.92 Upon a sale of such shares, the net proceeds of the sale would be paid to U.S. Exchange Holdings.93 Moreover, while any shares of the capital stock of Holdings are held by the Trust, U.S. Exchange Holdings, as the Trust beneficiary, would continue to receive the economic benefit of such shares.94 2. Relationship of the Trust and the ISE; Jurisdiction Over the Trust Although the Trust itself will not carry out regulatory functions, its activities must be consistent with, and not interfere with, the ISE’s selfregulatory obligations. The Trust 88 Trust 89 Trust Agreement, Article IV, Section 4.2(g)(ii). Agreement, Article IV, Sections 4.1(f) and 4.2(h). 90 For example, the violation of Ownership Limit or Voting Limit, as applicable, may no longer exist if the person causing the violation sells his or her interest such that the person no longer exceeds Ownership Limit or Voting Limit. 91 If the Trustees determine the retention could not reasonably be expected to address any continuing Material Compliance Event, such determination would not be effective unless it is filed with, or filed with and approved by, the Commission under Section 19 of the Act and the rules thereunder. See Trust Agreement, Article IV, Section 4.2(h)(ii). 92 Trust Agreement, Article IV, Section 4.3(a). 93 Id. 94 Trust Agreement, Article IV, Section 4.3. PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 71985 Agreement includes certain provisions that are designed to maintain the independence of the ISE’s selfregulatory functions from the Trust, enable the ISE to operate in a manner that complies with the U.S. federal securities laws, including the objectives and requirements of sections 6(b) and 19(g) of the Act, and facilitate the ability of the ISE and the Commission to fulfill their regulatory and oversight obligations under the Act.95 For example, under the Trust Agreement, the Trust shall comply with the U.S. federal securities laws and the rules and regulations thereunder, and shall cooperate with the Commission and the ISE.96 Also, each Trustee, Delaware trustee, officer, and employee of the Trust shall comply with the U.S. federal securities laws and the rules and regulations thereunder, cooperate with the Commission the ISE.97 In addition, each Trustee, Delaware trustee, officer, and employee of the Trust, to the fullest extent permitted by applicable law, shall take into consideration the effect that the Trust’s actions would have on the ability of Holdings and the ISE to discharge their respective responsibilities under the Act.98 The Trust, Trustees, Delaware trustee, officers, and employees of the Trust shall give due regard to the preservation of the independence of the selfregulatory function of the ISE and shall not take any action that would interfere with the effectuation of any decision by the ISE Board relating to its regulatory responsibilities or that would interfere with the ability of the ISE to carry out its responsibilities under the Act.99 The Trust, Trustees, Delaware trustee, officers, and employees of the Trust whose principal place of business and residence is outside of the U.S. irrevocably submit to the jurisdiction of the U.S. federal courts and the Commission with respect to activities relating to the ISE.100 In addition, the Trust’s books and records shall be subject at all times to inspection and copying by the Commission, the ISE (provided that such books and records are related to the operation or administration of the ISE), and Holdings.101 The Trust’s books and records related to the ISE shall be maintained within the U.S.102 Further, for so long as the Trust directly or 95 Trust Agreement, Articles V, VI, and VIII. Agreement, Article V, Section 5.3(a). 97 Trust Agreement, Article V, Section 5.2(a). 98 Trust Agreement, Article V, Section 5.1(a). 99 Trust Agreement, Article V, Section 5.1(b). 100 Trust Agreement, Article V, Section 5.4. 101 Trust Agreement, Article VI, Section 6.3. 102 Trust Agreement, Article VI, Section 6.1(b). 96 Trust E:\FR\FM\19DEN1.SGM 19DEN1 71986 Federal Register / Vol. 72, No. 243 / Wednesday, December 19, 2007 / Notices indirectly controls the ISE, the books, records, premises, officers, Trustees, Delaware trustee, and employees of the Trust shall be deemed to be the books, records, premises, officers, Trustees, Delaware trustee, and employees of the ISE for purposes of and subject to oversight pursuant to the Act.103 The Trust agrees to keep confidential, to the fullest extent permitted by applicable law, all confidential information pertaining to the self-regulatory function of the ISE (including, without limitation, disciplinary matters, trading data, trading practices, and audit information) contained in the books and records of the ISE and not use such information for any commercial 104 purposes.105 The Trust Agreement requires that it may only be amended with prior written approval of the Commission, as and to the extent required under the Act.106 Further, for so long as Holdings or the Trust shall control, directly or indirectly, the ISE, any changes to the Trust must be submitted to the ISE Board. If the change must be filed with, or filed with and approved by, the Commission under section 19 of the Act 107 and the rules thereunder, then the change shall not be effective until filed with, or filed with and approved by, the Commission.108 The Commission finds that the Trust Agreement is designed to enable the ISE to operate in a manner that complies with the federal securities laws, including the objectives and requirements of sections 6(b) and 19(g) of the Act,109 facilitate the ability of the ISE and the Commission to fulfill their regulatory and oversight obligations under the Act,110 and are consistent with the provisions other entities that directly or indirectly own or control an SRO have instituted and that have been approved by the Commission.111 The mstockstill on PROD1PC66 with NOTICES 103 Id. 104 The Commission believes that any nonregulatory use of such information would be for a commercial purpose. 105 Trust Agreement, Article VI, Section 6.1(a). The Trust Agreement states that none of its provisions shall be interpreted so as to limit or impede (1) the rights of the Commission or the ISE to have access to and examine such confidential information pursuant to the U.S. federal securities laws and the rules and regulations thereunder, or (2) the ability of any Trustees, Delaware trustee, officers, directors, employees, or agents of Holdings or the Trust to disclose such confidential information to the Commission or the ISE. See Trust Agreement, Article VI, Section 6.2. 106 Trust Agreement, Article VIII, Section 8.2. 107 15 U.S.C. 78s. 108 Trust Agreement, Article VIII, Section 8.2. 109 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g). 110 Trust Agreement, Articles V, VI, and VIII. 111 See, e.g., Securities Exchange Act Release Nos. 55293 (February 14, 2007), 72 FR 8033 (February VerDate Aug<31>2005 21:40 Dec 18, 2007 Jkt 214001 Commission finds that the Trust’s provisions are consistent with the Act and that they are designed to facilitate the Exchange’s ability to comply with the requirements of the Act. Under section 20(a) of the Act,112 any person with a controlling interest in the ISE shall be jointly and severally liable with and to the same extent that the ISE 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. In addition, section 20(e) of the Act 113 creates aiding and abetting liability for any person who knowingly provides substantial assistance to another person in violation of any provision of the Act or rule thereunder. Further, section 21C of the Act 114 authorizes the Commission to enter a cease-and-desist order against any person who has been ‘‘a cause of’’ a violation of any provision of the Act through an act or omission that the person knew or should have known would contribute to the violation. These provisions are applicable to the Trust and all other entities controlling the ISE. III. Conclusion For the foregoing reasons, the Commission finds that the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange.115 It is therefore ordered, pursuant to section 19(b)(2) of the Act 116 that the proposed rule change (SR–ISE–2007– 101) is approved, and Amendment No. 1 is approved on an accelerated basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.117 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–24500 Filed 12–18–07; 8:45 am] BILLING CODE 8011–01–P 22, 2007) (SR–NYSE–2006–120) (merger of NYSE Group, Inc. and Euronext N.V.) and 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (SR–NYSE–2005–77) (merger of New York Stock Exchange, Inc. and Archipelago Holdings, Inc.). 112 15 U.S.C. 78t(a). 113 15 U.S.C. 78t(e). 114 15 U.S.C. 78u–3. 115 The Commission’s approval of the proposed rule change based on the Exchange’s representation that the Resolutions will be signed by the Upstream Owners before or at the closing of the Transaction. 116 15 U.S.C. 78s(b)(2). 117 17 CFR 200.30–3(a)(12). PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56956; File No. SR–ISE– 2007–110] Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing of Proposed Rule Change Relating to the $1 Strike Pilot Program December 13, 2007. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on November 14, 2007, the International Securities Exchange, LLC (‘‘ISE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change ISE proposes to expand the $1 Strike Pilot Program (‘‘Pilot Program’’) and requests permanent approval of the Pilot Program. The text of the proposed rule change is available at the Exchange, the Commission’s Public Reference Room, and http://www.ise.com. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of the proposed rule change is to expand the Pilot Program and to request permanent approval of 1 15 2 17 E:\FR\FM\19DEN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 19DEN1

Agencies

[Federal Register Volume 72, Number 243 (Wednesday, December 19, 2007)]
[Notices]
[Pages 71979-71986]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-24500]



[[Page 71979]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56955; File No. SR-ISE-2007-101]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Granting Approval of Proposed Rule Change and Notice of 
Filing and Order Granting Accelerated Approval to Amendment No. 1 
Relating to a Corporate Transaction in Which Its Parent, International 
Securities Exchange Holdings, Inc., Will Become a Wholly-Owned Indirect 
Subsidiary of Eurex Frankfurt AG

December 13, 2007.

I. Introduction

    On November 1, 2007, International Securities Exchange, LLC 
(``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change regarding a corporate transaction 
(``Transaction'') in which the ISE's parent, International Securities 
Exchange Holdings, Inc. (``Holdings''), would become a wholly-owned, 
indirect subsidiary of Eurex Frankfurt AG (``Eurex Frankfurt''). The 
proposed rule change was published for comment in the Federal Register 
on November 7, 2007.\3\ The Commission has received no comments on the 
proposal.
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    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 56733 (November 1, 
2007), 72 FR 62885.
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    On December 11, 2007, the Exchange filed Amendment No. 1 to the 
proposed rule change.\4 \This order approves the proposed rule change, 
grants accelerated approval to Amendment No. 1, and solicits comments 
from interested persons on Amendment No. 1.
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    \4\ The text of Amendment No. 1 and Exhibits 5A through 5I, 
which set forth certain governing documents and resolutions as 
proposed to be amended, are available on the Commission's Web site 
(http://www.sec.gov/rules/sro/ise.shtml), at the Commission's Public 
Reference Room, at the ISE, and on the ISE's Web site (http://
www.ise.com).
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    The Commission has reviewed carefully the proposed rule change and 
finds that it is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\5\ In particular, the Commission finds that the proposed rule 
change is consistent with section 6(b) of the Act,\6\ which, among 
other things, requires a national securities exchange to be so 
organized and have the capacity to be able 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 and 
regulations thereunder, and the rules of the exchange. Section 6(b) of 
the Act also requires that the rules of the exchange be designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.
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    \5\ 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).
    \6\ 15 U.S.C. 78f(b).
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A. Accelerated Approval of Amendment No. 1

    The Commission, pursuant to section 19(b)(2) of the Act,\7\ finds 
good cause for approving Amendment No. 1 prior to the thirtieth day 
after publishing notice of Amendment No. 1 in the Federal Register. In 
Amendment No. 1, the ISE proposes to amend the Trust Agreement (as 
defined below) \8\ to provide that, if there is a Material Compliance 
Event (as described below),\9\ Holdings and U.S. Exchange Holdings, 
Inc. (``U.S. Exchange Holdings'') would be required to promptly 
transfer to the Trust a majority of capital stock of Holdings that have 
the right by its terms to vote in the election of the board of 
directors of Holdings (``Holdings Board'') or on other matters (other 
than matters affecting the rights, preferences, or privileges of the 
said capital stock).\10\ The Commission finds this change to the Trust 
Agreement consistent with the Act and that it is designed to facilitate 
the Exchange's ability to comply with the requirements of the Act.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78s(b)(2).
    \8 \ See infra notes 70 to 114 and accompanying text for a 
discussion of a Trust proposed in context of this filing.
    \9\ See infra notes 73 to 74 and accompanying text for a 
discussion of Material Compliance Event.
    \10\ Trust Agreement, Article IV, Section 4.2(g)(ii).
---------------------------------------------------------------------------

    The Exchange also proposes to amend the Certificate of 
Incorporation of Holdings (``Holdings Certificate'') to provide that if 
a person exceeds Ownership Limit or Voting Limit (both as described 
below),\11\ then a majority of capital stock of Holdings that have the 
right by its terms to vote in the election of the Holdings Board or on 
other matters (other than matters affecting the rights, preferences, or 
privileges of the said capital stock) would automatically be 
transferred to the Trust.\12\
---------------------------------------------------------------------------

    \11\ See infra note 27 and accompanying text for a discussion of 
Ownership Limit and Voting Limit.
    \12\ Proposed Holdings Certificate, Article FOURTH, Sections 
III(c).
---------------------------------------------------------------------------

    Further, the Exchange proposes to amend the Holdings Certificate 
with the Certificate of Designation of Series A Preferred Stock 
(``Certificate of Designation'').\13\ Specifically, pursuant to the 
Certificate of Designation, the Exchange proposes to issue 100,000 
shares of Holdings Series A Preferred Stock, par value $.01 per share 
(``Holdings Preferred''). The Commission notes that the Exchange 
proposes to issue Holdings Preferred to finance, and thereby facilitate 
the completion of, the Transaction.
---------------------------------------------------------------------------

    \13\ The Certificate of Designation was approved by the 
unanimous written consent of the Holdings Board on November 19, 
2007.
---------------------------------------------------------------------------

    The Exchange represents that Holdings Preferred is not capital 
stock of Holdings that have the right by its terms to vote in the 
election of the Holdings Board or on other matters (other than matters 
affecting the rights, preferences, or privileges of Holdings 
Preferred).\14\ Therefore, the Exchange represents that Holdings 
Preferred does not affect Ownership Limit or Voting Limit.
---------------------------------------------------------------------------

    \14\ Certificate of Designation, Section 5(a).
---------------------------------------------------------------------------

    The Certificate of Designation amends the Holdings Certificate to 
provide that, for so long as any shares of Holdings Preferred are 
outstanding, there shall be a total of three directors on the Holdings 
Board.\15\ If and when Holdings files for a reorganization or relief 
under bankruptcy law, approves a plan to dissolve or wind up, or fails 
to pay dividends of Holdings Preferred in any two consecutive calendar 
years, the holders of Holdings Preferred shall be entitled to appoint 
two additional directors to the Holdings Board.\16\ However, the 
Certificate of Designation also provides that the number of directors 
constituting the entire Holdings Board may not be increased until the 
board of directors of ISE (``ISE Board'') is notified and such change 
is filed with, or filed with and approved by, the Commission under the 
Act and rules thereunder.\17\ Furthermore, any change to the 
Certificate of Designation must be submitted to the ISE Board. If such 
change must be filed with, or filed with and approved by, the 
Commission under section 19 of the Act \18\ and the rules thereunder, 
then such change shall not be effective until filed with, or filed with 
and approved by, the Commission.\19\
---------------------------------------------------------------------------

    \15\ Certificate of Designation, Section 7.
    \16\ Certificate of Designation, Section 5(b).
    \17\ Id.
    \18\ 15 U.S.C. 78s.
    \19\ Certificate of Designation, Section 8(c).
---------------------------------------------------------------------------

    The Commission believes the changes to the Holdings Certificate are 
consistent with the Act and therefore finds good

[[Page 71980]]

cause to accelerate approval of these changes prior to the thirtieth 
day after publication in the Federal Register. The shares of Holdings 
Preferred do not affect Ownership Limit or Voting Limit. Further, in 
the event the holders of Holdings Preferred become entitled to appoint 
directors to the Holdings Board, the ISE must file this appointment 
right with the Commission pursuant to section 19 of the Act \20\ and 
the rules thereunder.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78s.
---------------------------------------------------------------------------

    In addition, the Exchange proposes certain clarifying, conforming, 
technical, non-material, and non-substantive changes to the Purpose 
Section of Form 19b-4, the Holdings Certificate, and the Amended and 
Restated Bylaws of Holdings (``Holdings Bylaws''). Further, the 
Exchange proposes certain clarifying, conforming, technical, non-
material, and non-substantive changes to Form of German Parent 
Corporate Resolutions (``German Resolutions''), Form of Swiss Parent 
Corporate Resolutions, and Form of Swiss Parent Association Resolutions 
(Form of Swiss Parent Corporate Resolutions and Form of Swiss Parent 
Association Resolutions, together referred to herein as ``Swiss 
Resolutions,'' and with German Resolutions, ``Resolutions''). Finally, 
the Exchange also makes certain clarifying, conforming, technical, non-
material, and non-substantive changes to the Amended and Restated 
Certificate of Incorporation of U.S. Exchange Holdings, Inc. (``U.S. 
Exchange Holdings Certificate''), the Amended and Restated Bylaws of 
U.S. Exchange, Inc. (``U.S. Exchange Holdings Bylaws''), and the Trust 
Agreement.
    The changes described in the foregoing paragraph are non-
substantive and technical in nature and are necessary to clarify the 
proposal. Therefore, they raise no new or novel issues. The Commission 
finds that these changes proposed in Amendment No. 1 are consistent 
with the Act. Further, pursuant to section 19(b)(2) of the Act,\21\ the 
Commission finds good cause to accelerate approval of these changes 
prior to the thirtieth day after publication in the Federal Register, 
because they clarify the Exchange's rules, which should facilitate the 
Exchange's compliance, and the Commission's ability to ensure 
compliance, with such rules and assist members and investors in 
understanding the application and scope of the rules.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

B. 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:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-ISE-2007-101 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090. All submissions should refer to File Number 
SR-ISE-2007-101. 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 (http://
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, 100 F Street, NE., Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the ISE. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-ISE-2007-101 and should be submitted on or before 
January 9, 2008.

II. Discussion

    The ISE submitted the proposed rule change in connection with a 
proposed Transaction in which Holdings would become a wholly-owned, 
indirect subsidiary of Eurex Frankfurt. Pursuant to the Agreement and 
Plan of Merger, dated April 30, 2007 (``Agreement''), Holdings would 
become a wholly-owned subsidiary of U.S. Exchange Holdings, which is a 
wholly-owned subsidiary of Eurex Frankfurt. Eurex Frankfurt is a 
wholly-owned subsidiary of Eurex Z[uuml]rich AG (``Eurex 
Z[uuml]rich''), which in turn is jointly owned by Deutsche B[ouml]rse 
AG (``Deutsche B[ouml]rse'') and SWX Swiss Exchange (``SWX''). SWX is 
owned by SWX Group, which in turn is owned by Verein SWX Swiss 
Exchange.
    Pursuant to the Agreement, the stockholders of Holdings will 
receive cash in exchange for their shares in Holdings. The consummation 
of the Transaction is subject to satisfaction of certain conditions, 
including the approval by the Holdings' stockholders of the Transaction 
\22\ and the approval of this rule change by the Commission.
---------------------------------------------------------------------------

    \22\ The stockholders of Holdings approved the Transaction at a 
special meeting of stockholders held on July 27, 2007.
---------------------------------------------------------------------------

A. Corporate Structure

    The ISE, a national securities exchange and a self-regulatory 
organization (``SRO''), is organized as a Delaware limited liability 
company. The ISE will not make any changes to its governance structure 
in connection with the Transaction. Therefore, the ISE will continue to 
have a 15-member board of directors, composed of a chief executive 
officer, 6 industry directors elected by the members, and 8 non-
industry directors elected by Holdings as the sole member of the 
ISE.\23\ Further, the ISE currently intends to have its senior 
management remain in place, subject to the previously-announced 
retirement of the ISE's chief executive officer, as of January 1, 2008.
---------------------------------------------------------------------------

    \23\ Pursuant to the Agreement, on the closing of the 
Transaction, all members of the Holdings Board, and all members of 
the ISE Board who are also on the Holdings Board, will resign. 
Members of the ISE Board who are elected by the ISE members are not 
on the Holdings Board and will not resign.
---------------------------------------------------------------------------

    The ISE is not proposing any amendments to its trading or 
regulatory rules. The ISE members, therefore, will continue to own 
``exchange rights'' \24\ and have the same trading and voting rights in 
the ISE.
---------------------------------------------------------------------------

    \24\ See the ISE's Second Amended and Restated Limited Liability 
Agreement, Article VI.
---------------------------------------------------------------------------

1. Upstream Owners
    Following the Transaction, U.S. Exchange Holdings will directly own 
all of the common stock of Holdings. U.S. Exchange Holdings is a 
Delaware corporation and a wholly-owned subsidiary of Eurex Frankfurt. 
Eurex Frankfurt is a wholly-owned subsidiary of Eurex Z[uuml]rich, 
which in turn is jointly

[[Page 71981]]

owned by Deutsche B[ouml]rse and SWX. SWX is owned by SWX Group, which 
in turn is owned by Verein SWX Swiss Exchange. Eurex Frankfurt and 
Deutsche B[ouml]rse are stock corporations organized under the laws of 
the Federal Republic of Germany. Eurex Z[uuml]rich, SWX, and SWX Group 
are stock corporations and Verein SWX Swiss Exchange is an association, 
all organized under the laws of the Swiss Confederation (Eurex 
Frankfurt, Eurex Z[uuml]rich, Deutsche B[ouml]rse, SWX, SWX Group, and 
Verein SWX Swiss Exchange, collectively referred to herein as ``non-
U.S. Upstream Owners,'' and together with U.S. Exchange Holdings, 
``Upstream Owners''). Therefore, following the Transaction, the non-
U.S. Upstream Owners will indirectly own all of the common stock of 
Holdings, the sole member of the ISE, through an intermediary holding 
company, U.S. Exchange Holdings. The Transaction represents the first 
time that a national securities exchange will be controlled by non-U.S. 
entities.
    Section 19(b) of the Act and Rule 19b-4 thereunder require an SRO 
to file proposed rule changes with the Commission. Although the 
Upstream Owners are not SROs, the Resolutions,\25\ the U.S. Exchange 
Holdings Certificate, and the U.S. Exchange Holdings Bylaws are rules 
of an exchange if they are stated policies, practices, or 
interpretations (as defined in Rule 19b-4 under the Act) of the 
exchange, and must therefore be filed with the Commission pursuant to 
section 19(b)(4) of the Act and Rule 19b-4 thereunder.\26\ Accordingly, 
the Exchange filed the Resolutions, the U.S. Exchange Holdings 
Certificate, and the U.S. Exchange Bylaws with the Commission.
---------------------------------------------------------------------------

    \25\ The enumeration in the Resolutions is identical in all 
Resolutions. Therefore, unless otherwise specified, reference to 
certain enumerated resolution referred to herein applies to all 
Resolutions.
    \26\ See Section 3(a)(27) of the Act, 15 U.S.C. 78c(a)(27). If 
each of the Upstream Owners decides to change its Resolutions or 
governing documents, as applicable, each such Upstream Owner must 
submit the change to the ISE Board. If the change must be filed 
with, or filed with and approved by, the Commission under Section 19 
of the Act and the rules thereunder, then the change shall not be 
effective until filed with, or filed with and approved by, the 
Commission. See Resolution 11, U.S. Exchange Holdings Certificate, 
Article SIXTEENTH, and U.S. Exchange Holdings Bylaws, Article VI, 
Section 9.
---------------------------------------------------------------------------

    The Holdings Certificate currently provides that no person, either 
alone or together with its related persons, may own, directly or 
indirectly, more than 40% (or 20%, if the person is an Exchange member) 
of Holdings capital stock that has the right by its terms to vote in 
the election of the Holdings Board or on other matters (other than 
matters affecting the rights, preferences, or privileges of the said 
capital stock) (``Ownership Limit''). The Holdings Certificate also 
provides that no person, either alone or together with its related 
persons, may, directly or indirectly, vote or cause the voting of more 
than 20% of the Holdings capital stock that has the right by its terms 
to vote in the election of the Holdings Board or on other matters 
(other than matters affecting the rights, preferences, or privileges of 
the said capital stock) (``Voting Limit'').\27\ The ISE is not 
proposing to change Ownership Limit or Voting Limit.
---------------------------------------------------------------------------

    \27\ Holdings Certificate, Article FOURTH, Section III. The 
Commission previously approved Ownership Limit and Voting Limit. See 
Securities Exchange Act Release No. 53705 (April 21, 2006) 71 FR 
25260 (April 28, 2006) (SR-ISE-2006-04) (reorganization of 
International Securities Exchange, Inc. into a holding company 
structure).
---------------------------------------------------------------------------

    To facilitate compliance with Ownership Limit and Voting Limit, the 
Resolutions of the non-U.S. Upstream Owners provide that each non-U.S. 
Upstream Owner shall take reasonable steps necessary to cause Holdings 
to be in compliance with Ownership Limit and Voting Limit.\28\ 
Likewise, the U.S. Exchange Holdings Certificate provides that U.S. 
Exchange Holdings will take reasonable steps necessary to cause 
Holdings to be in compliance with Ownership Limit and Voting Limit.\29\
---------------------------------------------------------------------------

    \28\ Resolution 4.
    \29\ U.S. Exchange Holdings Certificate, Article THIRTEENTH.
---------------------------------------------------------------------------

    Further, the Resolutions of each of the German Upstream Owners 
(i.e., Eurex Frankfurt and Deutsche B[ouml]rse) would require these 
entities to notify the ISE Board and the Trust (as described below) if 
any person, either alone or together with its related persons, acquires 
20%, 25%, 30%, 50%, or 75% or more of the shares of stock in such 
company.\30\ Similarly, the Resolutions of each of the Swiss Upstream 
Owners (i.e., Eurex Z[uuml]rich, SWX, SWX Group, and Verein SWX Swiss 
Exchange) would require these entities to notify the ISE Board and the 
Trust if any person, either alone or together with its related persons, 
acquires 20%, 33\1/3\%, 45%, 50%, or 66\2/3\% or more of the shares of 
stock or membership interest, as applicable, in such company.\31\ 
Finally, the U.S. Exchange Holdings Certificate provides that U.S. 
Exchange Holdings will notify the ISE Board and the Trust if any 
person, either alone or together with its related persons, acquire 10%, 
15%, 20%, 25%, 30%, 35%, or 40% or more of the shares in U.S. Exchange 
Holdings.\32\
---------------------------------------------------------------------------

    \30\ German Resolution 4. The calculation of the percentage of 
shares would be as determined under Sections 21 and 22 of the German 
Securities Trading Act.
    \31\ Swiss Resolution 4. The calculation of the percentage of 
shares or membership interest, as applicable, would be as determined 
under Section 20 of the Swiss Federal Act on Stock Exchanges and 
Securities Trading and Section 9 of the Swiss Federal Banking 
Commission's Ordinance on Stock Exchanges and Securities Trading.
    \32\ U.S. Exchange Holdings Certificate, Article THIRTEENTH.
---------------------------------------------------------------------------

    The Commission finds the provisions in the Resolutions and the U.S. 
Exchange Holdings Certificate, requiring each Upstream Owner to take 
reasonable steps necessary to cause Holdings to be in compliance with 
Ownership Limit and Voting Limit, consistent with the Act. These 
provisions should minimize the potential that a person could improperly 
interfere with, or restrict the ability of, the Commission or the ISE 
to effectively carry out their regulatory oversight responsibilities 
under the Act. Further, the provisions in the Resolutions and the U.S. 
Exchange Holdings Certificate requiring notification to the ISE Board 
and the Trust upon acquisition of certain ownership percentage of the 
Upstream Owners should help facilitate the ability of the ISE to comply 
with its responsibilities under the Act.
2. Holdings
    Holdings will become a wholly-owned subsidiary of U.S. Exchange 
Holdings. Thus, following the Transaction, Holdings will no longer be 
publicly traded.\33\ The Transaction, however, will not affect 
Holdings' ownership of the ISE. After the Transaction, Holdings will 
continue to be the sole member of the ISE.
---------------------------------------------------------------------------

    \33\ The ISE proposes to make certain changes to the Holdings 
Certificate and the Holdings Bylaws. Specifically, the ISE proposes 
to: (1) Decrease the number of authorized shares of Holdings; (2) 
eliminate classified board structure and remove term limits for 
directors; (3) eliminate the requirement that there be an executive, 
finance and audit, corporate governance, and compensation 
committees; (4) decrease the affirmative vote requirement for the 
election of chairman and vice chairman; (5) delete the requirement 
that chief executive officer not engage in any other occupation 
during incumbency; (6) provide that chief executive officer may be 
removed by the Holdings Board with or without cause; (7) empower the 
Holdings Board to change the Holdings Certificate and the Holdings 
Bylaws without the approval of stockholders; and (8) permit taking 
of stockholder action without prior notice and by written consent. 
The Commission finds these changes consistent with the Act.
---------------------------------------------------------------------------

    Section 19(b) of the Act and Rule 19b-4 thereunder require an SRO 
to file proposed rule changes with the Commission. Although Holdings is 
not an SRO, certain provisions of the Holdings Certificate and the 
Holdings Bylaws are rules of an exchange if they are stated policies, 
practices, or

[[Page 71982]]

interpretations (as defined in Rule 19b-4 of the Act) of the exchange, 
and must be filed with the Commission pursuant to section 19(b)(4) of 
the Act and Rule 19b-4 thereunder.\34\ Accordingly, the ISE filed the 
proposed changes to the Holdings Certificate and the Holdings Bylaws 
with the Commission.
---------------------------------------------------------------------------

    \34\ See Section 3(a)(27) of the Act, 15 U.S.C. 78c(a)(27). As 
under the current Holdings Certificate and Holdings Bylaws any 
change to Holdings Certificate or Holdings Bylaws must be submitted 
to the ISE Board. If the change must be filed with, or filed with 
and approved by, the Commission under Section 19 of the Act and the 
rules thereunder, then the change shall not be effective until filed 
with, or filed with and approved by, the Commission. This 
requirement to submit changes to the ISE Board continues for so long 
as Holdings controls, directly or indirectly, the ISE. See current 
Holdings Certificate, Article SIXTEENTH, current Holdings Bylaws, 
Section 10.1, proposed Holdings Certificate, Article FOURTEENTH, and 
proposed Holdings Bylaws, Section 10.1.
---------------------------------------------------------------------------

    a. Transfer of Capital Stock to Trust. As stated above, the 
Holdings Certificate currently provides that no person, either alone or 
together with its related persons, may exceed Ownership Limit or Voting 
Limit.\35\ The ISE does not propose to change Ownership Limit or Voting 
Limit, but does propose to add a provision in the Holdings Certificate 
to provide that, if a person exceeds Ownership Limit or Voting Limit, 
then a majority of capital stock of Holdings that have the right by its 
terms to vote in the election of the Holdings Board or on other matters 
(other than matters affecting the rights, preferences, or privileges of 
the said capital stock) would automatically be transferred to the 
Trust,\36\ as discussed below.\37\
---------------------------------------------------------------------------

    \35\ See supra note 27 and accompanying text.
    \36\ Proposed Holdings Certificate, Article FOURTH, Sections 
III(c). If a person were to obtain an ownership or voting interest 
in Holdings in excess of the Ownership Limit or Voting Limit, 
Holdings capital stock would be transferred to the Trust 
automatically by operation of law. See Section 202(c)(4) of the 
Delaware General Corporation Law.
    \37\ See infra notes 70 to 114 and accompanying text.
---------------------------------------------------------------------------

    The Commission finds these changes to the Holdings Certificate 
consistent with the Act. The proposed changes to the Holdings 
Certificate should minimize the potential that a person could 
improperly interfere with or restrict the ability of the Commission and 
the Exchange to effectively carry out their regulatory oversight 
responsibilities under the Act.
    b. Ownership of Holdings by Upstream Owners. Additionally, the ISE 
proposes to amend the Holdings Bylaws to allow the Upstream Owners to 
wholly own and vote all of the common stock of Holdings.\38\ Currently, 
the Holdings Certificate provides that the Holdings Board may waive 
Ownership Limit and Voting Limit pursuant to an amendment to the 
Holdings Bylaws.\39\ In connection with the adoption of such amendment, 
the Holdings Board must adopt a resolution determining that the 
amendment will not impair the ability of Holdings and the ISE to 
discharge the ISE's responsibilities under the Act and the rules and 
regulations thereunder, is in the best interests of Holdings, its 
stockholders, and the ISE, and will not impair the Commission's ability 
to enforce the Act.\40\ Further, the Holdings Board must determine that 
in waiving a person's Ownership Limit or Voting Limit such person and 
its related persons are not subject to any ``statutory 
disqualification'' \41\ and are not Exchange members.
---------------------------------------------------------------------------

    \38\ Proposed Holdings Bylaws, Section 11.1.
    \39\ Holdings Certificate, Article FOURTH, Sections III(a)(i) 
and III(b)(i). Such amendment to Holdings Bylaws must be filed with 
and approved by the Commission under Section 19(b) of the Act and 
become effective thereunder.
    \40\ Holdings Certificate, Article FOURTH, Sections III(a)(i)(B) 
and III(b)(i).
    \41\ See Section 3(a)(39) of the Act, 15 U.S.C. 78c(a)(39).
---------------------------------------------------------------------------

    Pursuant to the Holdings Certificate, the Holdings Board approved 
an amendment to the Holdings Bylaws to allow ownership and voting of 
all of the common stock of Holdings by the Upstream Owners. The 
Holdings Board determined that waiver of Ownership Limit and Voting 
Limit with respect to the Upstream Owners will not impair the ability 
of Holdings and the ISE to discharge the ISE's responsibilities under 
the Act and the rules and regulations thereunder, that such waiver is 
in the best interests of Holdings, its stockholders, and the ISE, and 
will not impair the Commission's ability to enforce the Act, and that 
neither the Upstream Owners nor any of its related persons are subject 
to any statutory disqualification or is an Exchange member. Therefore, 
the Exchange proposes that the Upstream Owners wholly own and vote all 
of the common stock of Holdings upon the consummation of the 
Transaction.
    The Commission believes it is consistent with the Act to allow the 
Upstream Owners to wholly own and vote all of the common stock of 
Holdings. The Exchange represents that neither the Upstream Owners nor 
any of its related persons is subject to any statutory disqualification 
or is an Exchange member. Moreover, each of the Upstream Owners has 
provided that it will take reasonable steps necessary to cause Holdings 
to be in compliance with Ownership Limit and Voting Limit. As discussed 
below, each of the Upstream Owners will adopt certain provisions 
designed to maintain the independence of the ISE's self-regulatory 
functions in its Resolutions or governing documents, as applicable. 
Accordingly, the Commission believes that the acquisition of ownership 
and exercise of voting control of Holdings by the Upstream Owners will 
not impair the ability of the Commission or the ISE to discharge their 
respective responsibilities under the Act.

B. Relationship of Upstream Owners and the ISE; Jurisdiction Over 
Upstream Owners

    Although the Upstream Owners will not carry out regulatory 
functions, the activities of each of the Upstream Owners with respect 
to the operation of the ISE must be consistent with, and not interfere 
with, the ISE's self-regulatory obligations. The Resolutions, the U.S. 
Exchange Holdings Certificate, and the U.S. Exchange Holdings Bylaws 
include certain provisions that are designed to maintain the 
independence of the ISE's self-regulatory functions, enable the ISE to 
operate in a manner that complies with the U.S. federal securities 
laws, including the objectives and requirements of sections 6(b) and 
19(g) of the Act,\42\ and facilitate the ability of the ISE and the 
Commission to fulfill their regulatory and oversight obligations under 
the Act.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g).
---------------------------------------------------------------------------

    For example, the Upstream Owners provide that each such Upstream 
Owners will comply with the U.S. federal securities laws and the rules 
and regulations thereunder and shall cooperate with the Commission and 
the ISE.\43\ Also, each board member, officer, and employee of the 
Upstream Owners, in discharging his or her responsibilities, shall 
comply with the U.S. federal securities laws and the rules and 
regulations thereunder, cooperate with the Commission, and cooperate 
with the ISE.\44\ In discharging his or her responsibilities as a board 
member of the Upstream Owners, each such member must, to the fullest 
extent permitted by applicable law, take into consideration the effect 
that the actions of the Upstream Owners would have on the ability of 
the ISE to carry out its

[[Page 71983]]

responsibilities under the Act.\45\ In addition, each of the Upstream 
Owners, its board members, officers and employees shall give due regard 
to the preservation of the independence of the self-regulatory function 
of the ISE.\46\
---------------------------------------------------------------------------

    \43\ Resolution 1 and U.S. Exchange Holdings Certificate, 
Article ELEVENTH.
    \44\ Resolutions 7(a) and 8(a) and U.S. Exchange Holdings 
Certificate, Article TENTH. The Resolutions also provide that each 
non-U.S. Upstream Owner will take reasonable steps necessary to 
cause each person who becomes a board member of the non-U.S. 
Upstream Owner after consummation of the Transaction to agree in 
writing to certain matters included in the Resolutions. See 
Resolution 7.
    \45\ Resolution 7(f) and U.S. Exchange Holdings Certificate, 
Article TENTH.
    \46\ Resolutions 5, 7(d), and 8(d) and U.S. Exchange Holdings 
Certificate, Article TWELFTH.
---------------------------------------------------------------------------

    Further, the non-U.S. Upstream Owners (along with their respective 
board members, officers, and employees) and U.S. Exchange Holdings 
agree to keep confidential, to the fullest extent permitted by 
applicable law, all confidential information pertaining to the self-
regulatory function of the ISE, including, but not limited to, 
confidential information regarding disciplinary matters, trading data, 
trading practices, and audit information, contained in the books and 
records of the ISE and not use such information for any commercial \47\ 
purposes.\48\ In addition, books and records of the non-U.S. Upstream 
Owners related to the activities of the ISE will at all times be made 
available for, and books and records of U.S. Exchange Holdings will be 
subject at all times to, inspection and copying by the Commission and 
the ISE.\49\ Books and records of U.S. Exchange Holdings related to the 
activities of the ISE will be maintained within the U.S. \50\ Moreover, 
for so long as each of the Upstream Owners directly or indirectly 
controls the ISE, the books, records, officers, directors (or 
equivalent), and employees of each of the Upstream Owners shall be 
deemed to be the books, records, officers, directors, and employees of 
the ISE.\51\ Finally, for so long as U.S. Exchange Holdings directly or 
indirectly controls the ISE, premises of U.S. Exchange Holdings will be 
deemed premises of the ISE.\52\
---------------------------------------------------------------------------

    \47\ The Commission believes that any non-regulatory use of such 
information would be for a commercial purpose.
    \48\ Resolutions 6, 7(e), and 8(e) and U.S. Exchange Holdings 
Certificate, Article FOURTEENTH.
    \49\ Resolution 3 and U.S. Exchange Holdings Certificate, 
Article FIFTEENTH.
    \50\ U.S. Exchange Holdings Certificate, Article FIFTEENTH.
    \51\ Resolutions 3 and 8(c) and U.S. Exchange Holdings 
Certificate, Article FIFTEENTH.
    \52\ U.S. Exchange Holdings Certificate, Article FIFTEENTH.
---------------------------------------------------------------------------

    To the extent involved in the activities of the ISE, each of the 
non-U.S. Upstream Owners, its board members, officers, and employees 
irrevocably submit to the jurisdiction of the U.S. federal courts and 
the Commission for purposes of any action arising out of, or relating 
to, the activities of the ISE.\53\ Likewise, U.S. Exchange Holdings, 
its officers and directors, and employees whose principal place of 
business and residence is outside of the U.S., to the extent such 
directors, officers, or employees are involved in the activities of the 
ISE, irrevocably submit to the jurisdiction of the U.S. federal courts 
and the Commission for purposes of any action arising out of, or 
relating to, the activities of the ISE.\54\
---------------------------------------------------------------------------

    \53\ Resolutions 2, 7(b), and 8(b).
    \54\ U.S. Exchange Holdings Bylaws, Section 16.
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    Each of the Upstream Owners and Holdings acknowledges that it is 
responsible for referring possible violations of the Act, the rules and 
regulations thereunder, and ISE rules to the ISE. In addition, the ISE 
represents that there will be an explicit agreement among the Upstream 
Owners, Holdings, and the ISE to provide adequate funding for the ISE's 
regulatory responsibilities.
    Finally, the Resolutions, the U.S. Exchange Holdings Certificate, 
and the U.S. Exchange Holdings Bylaws require that any change to the 
Resolutions (including any action by the non-U.S. Upstream Owners that 
would have the effect of changing the Resolutions), the U.S. Exchange 
Holdings Certificate, or the U.S. Exchange Holdings Bylaws must be 
submitted to the ISE Board. If such change must be filed with, or filed 
with and approved by, the Commission under Section 19 of the Act \55\ 
and the rules thereunder, then such change shall not be effective until 
filed with, or filed with and approved by, the Commission.\56\ This 
requirement to submit changes to the ISE Board continues for so long as 
the non-U.S. Upstream Owners or U.S. Exchange Holdings, as applicable, 
directly or indirectly, control the ISE.
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    \55\ 15 U.S.C. 78s.
    \56\ Resolution 11, U.S. Exchange Holdings Certificate, Article 
SIXTEENTH, and U.S. Exchange Bylaws, Section 9.
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    With respect to Swiss Upstream Owners, each Swiss Resolutions 
provides that, where necessitated by Swiss law, the Swiss Upstream 
Owner will provide information related to the activities of the ISE, 
including books and records of such owner related to the activities of 
the ISE, to the Commission promptly through the Swiss Federal Banking 
Commission (``SFBC''). Moreover, oral exchanges between each Swiss 
Upstream Owner and the Commission related to the activities of the ISE 
will include the participation of the SFBC.\57\
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    \\ 57 Swiss Resolutions 1, 3(b), 6, 7(a), 7(e), 8(a), 8(e), and 
9.
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    Swiss law designed to protect Swiss sovereignty raises concerns 
about the ability of the Swiss Upstream Owners to provide the 
Commission with direct access to information, including books and 
records, related to the activities of the ISE.\58\ In order not to run 
afoul of Swiss law and to facilitate the Transaction, the Commission 
and the SFBC have developed a procedure (``Procedure'') under which the 
SFBC undertakes to serve as a conduit for unfiltered delivery of books 
and records of the Swiss Upstream Owners related to the activities of 
the ISE.\59\
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    \58\ See Art. 271 of Swiss penal code, ``Prohibited acts for a 
foreign state,'' which states, in part: ``Whoever, without being 
authorized, performs acts for a foreign state on Swiss territory 
that are reserved to an authority or an official, whoever performs 
such acts for a foreign party or another foreign organization, 
whoever aids and abets such acts, shall be punished with 
imprisonment and, in serious cases, sentenced to the penitentiary.''
    \59\ Application of the Procedure would be limited to issues 
arising in the context of the Transaction and the Commission's 
oversight of the ISE. Information-sharing and cooperation between 
the Commission and the SFBC in securities enforcement matters will 
continue to be governed by the letters of cooperation between the 
Commission and the SFBC.
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    Pursuant to the Procedure, where necessitated by Swiss law, if the 
Commission or the staff makes a request to any of the Swiss Upstream 
Owners for information related to the activities of the ISE, including 
books and records related to the activities of the ISE, the SFBC shall 
deliver to the Commission or the staff, without delay, any responsive 
information provided to the SFBC by the Swiss Upstream Owners. Written 
requests for information, including book and records, related to the 
activities of the ISE shall be made by the Commission or the staff 
directly to the Swiss Upstream Owners, and the SFBC will be copied on 
any such requests. Moreover, an SFBC staff member shall participate in 
any oral exchanges between the Commission or the staff and any of the 
Swiss Upstream Owners.\60\ Notwithstanding this Procedure, the Swiss 
Upstream Owners would remain fully responsible for meeting all of their 
obligations as owners of a U.S. securities exchange.
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    \60\ The Procedure is designed to ensure that the delivery of 
books and records to the Commission is not delayed. Therefore, the 
Commission's requests for books and records would be sent directly 
to the Swiss Upstream Owners and would not be subject to filtering 
or substantive review by the SFBC. In addition, the SFBC has agreed 
to pass to the Commission without delay and without substantive 
review materials provided by the Swiss Upstream Owners that are 
responsive to the Commission's requests for information.
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    The Commission finds that these provisions of the Resolutions, the 
U.S. Exchange Holdings Certificate, and the U.S. Exchange Holdings 
Bylaws are consistent with the Act. These provisions are intended to 
assist the ISE

[[Page 71984]]

in fulfilling its self-regulatory obligations and in administering and 
complying with the requirements of the Act.
    The Commission notes that while the Resolutions do not provide that 
books and records of non-U.S. Upstream Owners related to the activities 
of the ISE will be maintained within the U.S., such books and records 
are deemed to be the books and records of the ISE, and the non-U.S. 
Upstream Owners have committed in the Resolutions to make available, at 
all times, such books and records for inspection and copying by the 
Commission and the ISE.\61\ As discussed below,\62\ the failure of a 
non-U.S. Upstream Owner to adhere to this commitment would be a 
Material Compliance Event under the Trust, which would require the 
Trustees to take certain actions, including (after a Cure Period) the 
exercise of a Call Option for the transfer of a majority of capital 
stock of Holdings that have the right by its terms to vote in the 
election of the Holdings Board or on other matters (other than matters 
affecting the rights, preferences, or privileges of the said capital 
stock). Because the non-U.S. Upstream Owners lose control over the ISE 
if one or more of them fails to make its books and records available to 
the Commission and the ISE, there is a strong incentive for them to do 
so. Moreover, if a non-U.S. Upstream Owner fails to make its books and 
records available to the Commission, the Commission could bring an 
action under, among other provisions, section 17 of the Act \63\ and 
Rule 17a-1(b) thereunder \64\ against the ISE pursuant to section 19(h) 
of the Act.\65\ The Commission believes that the non-U.S. Upstream 
Owners' representations and commitments, together with the Trustees' 
and the Commission's authority, will allow the ISE to meet its 
obligations under section 17 of the Act and the rules thereunder.
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    \61\ See supra notes 49 and 51 and accompanying text.
    \62\ See infra notes 73 to 74 and 83 to 94 and accompanying 
text.
    \63\ 15 U.S.C. 78q.
    \64\ 17 CFR 240.17a-1(b).
    \65\ 15 U.S.C. 78s(h). See also infra notes 67 to 69 and 
accompanying text.
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    The Commission also notes that, for the Swiss Upstream Owners, the 
SFBC will serve as a conduit for the delivery of information related to 
the activities of the ISE. The Commission's usual practice is to have 
direct access to books and records related to the activities of a U.S. 
securities exchange. However, subject to the condition that the Swiss 
Upstream Owners will promptly deliver such information to the 
Commission, coupled with the fact that under ISE rules all trading 
records of the ISE are required to be maintained in the U.S.,\66\ the 
Commission believes that the provisions of the Swiss Resolutions 
related to the Commission's access to books and records through the 
SFBC should not result in a level of access materially different from 
that agreed to by other entities that control U.S. securities 
exchanges.
    Finally, the Commission notes that under section 20(a) of the 
Act,\67\ any person with a controlling interest in the ISE shall be 
jointly and severally liable with and to the same extent that the ISE 
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. In addition, 
section 20(e) of the Act \68\ creates aiding and abetting liability for 
any person who knowingly provides substantial assistance to another 
person in violation of any provision of the Act or rule thereunder. 
Further, section 21C of the Act \69\ authorizes the Commission to enter 
a cease-and-desist order against any person who has been ``a cause of'' 
a violation of any provision of the Act through an act or omission that 
the person knew or should have known would contribute to the violation. 
These provisions are applicable to the dealings of the Upstream Owners 
with the ISE.
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    \66\ ISE Second Amended and Restated Limited Liability 
Agreement, Article IV, Section 4.1.
    \67\ 15 U.S.C. 78t(a).
    \68\ 15 U.S.C. 78t(e).
    \69\ 15 U.S.C. 78u-3.
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C. Trust

    The ISE proposes to implement a Delaware statutory trust 
(``Trust''), pursuant to a Trust Agreement (``Trust Agreement'') among 
Holdings, U.S. Exchange Holdings, trustees (``Trustees''), and a 
Delaware trustee. The Trust would serve two general purposes.\70\ 
First, as described above,\71\ the ISE proposes that the Trust would 
hold capital stock of Holdings in the event that a person obtains 
ownership or voting interest in Holdings in excess of Ownership Limit 
or Voting Limit.\72\ Second, the ISE proposes to implement the Trust to 
hold capital stock of Holdings in the event of a Material Compliance 
Event.\73\ A ``Material Compliance Event'' is defined under the Trust 
Agreement as any state of facts, development, event, circumstance, 
condition, occurrence, or effect that results in the failure of any of 
the non-U.S. Upstream Owners to adhere to its respective commitments 
under the Resolutions in any material respect.\74\ The Trust holds a 
call option (``Call Option'') over Holdings capital stock, which may be 
exercised if a Material Compliance Event has occurred and continues to 
be in effect.
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    \70\ The term of the Trust is perpetual, provided that Holdings 
controls, directly or indirectly, the ISE. See Trust Agreement, 
Article II, Section 2.6.
    \71\ See supra notes 35 to 37 and accompanying text.
    \72\ Trust Agreement, Article IV, Section 4.1.
    \73\ Trust Agreement, Article IV, Section 4.2.
    \74\ Trust Agreement, Article I, Section 1.1. The Trust 
Agreement also would provide that the term Material Compliance Event 
would apply with respect to the Resolutions of any future upstream 
owner of Holdings. See Trust Agreement, Article I, Section 1.1, 
definition of ``Affected Affiliate.''
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    The Trustees shall have exclusive and complete authority to carry 
out the Trust purpose.\75\ The Trustees will be persons who are 
independent of the Upstream Owners, Holdings, the ISE, and their 
affiliates,\76\ are not subject to any statutory disqualification,\77\ 
are of high repute and have experience and expertise in, or knowledge 
of, the securities industry, regulation and/or corporate governance, 
are independent to such a degree that they can be entrusted to resist 
undue pressures, and are not unacceptable to the Commission staff.\78\ 
The Trustees would be required under the terms of the Trust Agreement 
to vote any capital stock of Holdings held by the Trust consistent with 
the public interests of the markets operated by the ISE.\79\
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    \75\ Trust Agreement, Article III, Section 3.2(a).
    \76\ For a more complete list of the independence requirement, 
see Trust Agreement, Article III, Section 3.2(a).
    \77\ See supra note 41.
    \78\ Trust Agreement, Article III, Section 3.2(a).
    \79\ Trust Agreement, Article II, Section 2.3(b).
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    As discussed above, section 19(b) of the Act and Rule 19b-4 
thereunder require an SRO to file a proposed rule change with the 
Commission. Although the Trust is not an SRO, certain provisions of the 
Trust Agreement are rules of an exchange if they are stated policies, 
practice, or interpretations, as defined in Rule 19b-4 under the 
Act,\80\ and must therefore be filed with the Commission pursuant to 
section 19(b)(4) of the Act \81\ and Rule 19b-4 thereunder. 
Accordingly, the Exchange has filed the Trust Agreement with the 
Commission.
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    \80\ 17 CFR 240.19b-4.
    \81\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

1. Operation of the Trust
    The Trust will operate pursuant to the Trust Agreement. The ISE 
proposes that, pursuant to the Trust Agreement, if a person exceeds 
Ownership Limit or Voting Limit then a majority of capital stock of 
Holdings that have the right by its terms to vote in the election of 
the

[[Page 71985]]

Holdings Board or on other matters (other than matters affecting the 
rights, preferences, or privileges of the said capital stock) would 
automatically be transferred to the Trust.\82\
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    \82\ Trust Agreement, Article IV, Section 4.1(c). See also 
proposed Holdings Certificate, Article FOURTH, Sections III(c).
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    Further, the Trust Agreement provides that upon becoming aware of 
facts, developments, events, circumstances, conditions, occurrences, or 
effects that could reasonably be expected to result in the occurrence 
of a Material Compliance Event, the Trustees would be required to meet 
promptly and, within 5 business days of that meeting, make a 
determination of whether or not a Material Compliance Event has 
occurred.\83\ After making a determination that a Material Compliance 
Event has occurred, and prior to any exercise of the Call Option, the 
Trustees would provide written notice to the non-U.S. Upstream Owners 
and to the Commission of the occurrence of the Material Compliance 
Event, which notice would provide for 60 calendar days in which to 
address the Material Compliance Event (``Cure Period'').\84\
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    \83\ Trust Agreement, Article IV, Section 4.2(b).
    \84\ Trust Agreement, Article IV, Section 4.2(c).
---------------------------------------------------------------------------

    The Trust Agreement provides that, during the Cure Period, the 
Trustees would consult with the boards of directors (or equivalent) of 
the ISE, Holdings, and the non-U.S. Upstream Owners, and with the 
Commission to consider alternatives to the exercise of the Call 
Option.\85\ After such consultation, if the Trustees determine that the 
Material Compliance Event has not been addressed, they would provide 
written notice to the boards of directors (or equivalent) of the ISE, 
Holdings, and the non-U.S. Upstream Owners that they have determined to 
exercise the Call Option.\86\
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    \85\ Trust Agreement, Article IV, Section 4.2(d)(i).
    \86\ Trust Agreement, Article IV, Section 4.2(d)(ii).
---------------------------------------------------------------------------

    If the Trust were to exercise the Call Option, it would deliver a 
written notice to Holdings and U.S. Exchange Holdings, promptly after 
the end of the Cure Period, that the Trust has determined to exercise 
the Call Option in accordance with the terms of the Trust 
Agreement.\87\ Subsequently, Holdings and U.S. Exchange Holdings would 
be required to promptly transfer to the Trust a majority of capital 
stock of Holdings that have the right by its terms to vote in the 
election of the Holdings Board or on other matters (other than matters 
affecting the rights, preferences, or privileges of the said capital 
stock).\88\
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    \87\ Trust Agreement, Article IV, Section 4.2(g)(i).
    \88\ Trust Agreement, Article IV, Section 4.2(g)(ii).
---------------------------------------------------------------------------

    U.S. Exchange Holdings would have the right to reacquire shares of 
the capital stock of Holdings held by the Trust.\89\ If shares were 
contributed to the Trust because of a violation of Ownership Limit or 
Voting Limit, U.S. Exchange Holdings would have the right to reacquire 
such shares if the violation of Ownership Limit or Voting Limit, as 
applicable, is waived by the Holdings Board and approved by the 
Commission or if the violation no longer exists.\90\ Likewise, if 
shares were transferred to the Trust because of a Material Compliance 
Event, U.S. Exchange Holdings would have the right to reacquire such 
shares if the Material Compliance Event is no longer continuing or, 
notwithstanding the continuation of a Material Compliance Event, the 
Trustees determine that the retention of such shares by the Trust could 
not reasonably be expected to address the continuing Material 
Compliance Event.\91\
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    \89\ Trust Agreement, Article IV, Sections 4.1(f) and 4.2(h).
    \90\ For example, the violation of Ownership Limit or Voting 
Limit, as applicable, may no longer exist if the person causing the 
violation sells his or her interest such that the person no longer 
exceeds Ownership Limit or Voting Limit.
    \91\ If the Trustees determine the retention could not 
reasonably be expected to address any continuing Material Compliance 
Event, such determination would not be effective unless it is filed 
with, or filed with and approved by, the Commission under Section 19 
of the Act and the rules thereunder. See Trust Agreement, Article 
IV, Section 4.2(h)(ii).
---------------------------------------------------------------------------

    Further, if directed by U.S. Exchange Holdings, the Trust would 
sell capital stock of Holdings held by the Trust to any person whose 
ownership or voting would not violate Ownership Limit or Voting Limit 
and who is not a non-U.S. Upstream Owner with respect to which a 
Material Compliance Event has occurred and is continuing.\92\ Upon a 
sale of such shares, the net proceeds of the sale would be paid to U.S. 
Exchange Holdings.\93\ Moreover, while any shares of the capital stock 
of Holdings are held by the Trust, U.S. Exchange Holdings, as the Trust 
beneficiary, would continue to receive the economic benefit of such 
shares.\94\
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    \92\ Trust Agreement, Article IV, Section 4.3(a).
    \93\ Id.
    \94\ Trust Agreement, Article IV, Section 4.3.
---------------------------------------------------------------------------

2. Relationship of the Trust and the ISE; Jurisdiction Over the Trust
    Although the Trust itself will not carry out regulatory functions, 
its activities must be consistent with, and not interfere with, the 
ISE's self-regulatory obligations. The Trust Agreement includes certain 
provisions that are designed to maintain the independence of the ISE's 
self-regulatory functions from the Trust, enable the ISE to operate in 
a manner that complies with the U.S. federal securities laws, including 
the objectives and requirements of sections 6(b) and 19(g) of the Act, 
and facilitate the ability of the ISE and the Commission to fulfill 
their regulatory and oversight obligations under the Act.\95\
---------------------------------------------------------------------------

    \95\ Trust Agreement, Articles V, VI, and VIII.
---------------------------------------------------------------------------

    For example, under the Trust Agreement, the Trust shall comply with 
the U.S. federal securities laws and the rules and regulations 
thereunder, and shall cooperate with the Commission and the ISE.\96\ 
Also, each Trustee, Delaware trustee, officer, and employee of the 
Trust shall comply with the U.S. federal securities laws and the rules 
and regulations thereunder, cooperate with the Commission the ISE.\97\ 
In addition, each Trustee, Delaware trustee, officer, and employee of 
the Trust, to the fullest extent permitted by applicable law, shall 
take into consideration the effect that the Trust's actions would have 
on the ability of Holdings and the ISE to discharge their respective 
responsibilities under the Act.\98\ The Trust, Trustees, Delaware 
trustee, officers, and employees of the Trust shall give due regard to 
the preservation of the independence of the self-regulatory function of 
the ISE and shall not take any action that would interfere with the 
effectuation of any decision by the ISE Board relating to its 
regulatory responsibilities or that would interfere with the ability of 
the ISE to carry out its responsibilities under the Act.\99\ The Trust, 
Trustees, Delaware trustee, officers, and employees of the Trust whose 
principal place of business and residence is outside of the U.S. 
irrevocably submit to the jurisdiction of the U.S. federal courts and 
the Commission with respect to activities relating to the ISE.\100\
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    \96\ Trust Agreement, Article V, Section 5.3(a).
    \97\ Trust Agreement, Article V, Section 5.2(a).
    \98\ Trust Agreement, Article V, Section 5.1(a).
    \99\ Trust Agreement, Article V, Section 5.1(b).
    \100\ Trust Agreement, Article V, Section 5.4.
---------------------------------------------------------------------------

    In addition, the Trust's books and records shall be subject at all 
times to inspection and copying by the Commission, the ISE (provided 
that such books and records are related to the operation or 
administration of the ISE), and Holdings.\101\ The Trust's books and 
records related to the ISE shall be maintained within the U.S.\102\ 
Further, for so long as the Trust directly or

[[Page 71986]]

indirectly controls the ISE, the books, records, premises, officers, 
Trustees, Delaware trustee, and employees of the Trust shall be deemed 
to be the books, records, premises, officers, Trustees, Delaware 
trustee, and employees of the ISE for purposes of and subject to 
oversight pursuant to the Act.\103\ The Trust agrees to keep 
confidential, to the fullest extent permitted by applicable law, all 
confidential information pertaining to the self-regulatory function of 
the ISE (including, without limitation, disciplinary matters, trading 
data, trading practices, and audit information) contained in the books 
and records of the ISE and not use such information for any commercial 
\104\ purposes.\105\
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    \101\ Trust Agreement, Article VI, Section 6.3.
    \102\ Trust Agreement, Article VI, Section 6.1(b).
    \103\ Id.
    \104\ The Commission believes that any non-regulatory use of 
such information would be for a commercial purpose.
    \105\ Trust Agreement, Article VI, Section 6.1(a). The Trust 
Agreement states that none of its provisions shall be interpreted so 
as to limit or impede (1) the rights of the Commission or the ISE to 
have access to and examine such confidential information pursuant to 
the U.S. federal securities laws and the rules and regulations 
thereunder, or (2) the ability of any Trustees, Delaware trustee, 
officers, directors, employees, or agents of Holdings or the Trust 
to disclose such confidential information to the Commission or the 
ISE. See Trust Agreement, Article VI, Section 6.2.
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    The Trust Agreement requires that it may only be amended with prior 
written approval of the Commission, as and to the extent required under 
the Act.\106\ Further, for so long as Holdings or the Trust shall 
control, directly or indirectly, the ISE, any changes to the Trust must 
be submitted to the ISE Board. If the change must be filed with, or 
filed with and approved by, the Commission under section 19 of the Act 
\107\ and the rules thereunder, then the change shall not be effective 
until filed with, or filed with and approved by, the Commission.\108\
    The Commission finds that the Trust Agreement is designed to enable 
the ISE to operate in a manner that complies with the federal 
securities laws, including the objectives and requirements of sections 
6(b) and 19(g) of the Act,\109\ facilitate the ability of the ISE and 
the Commission to fulfill their regulat