Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing of Proposed Rule Change Relating to Changes to the ISE Stock Exchange Governing Documents in Connection with ISE's Purchase of Equity Interests in Direct Edge Holdings, Inc., 67909-67916 [E8-27157]
Download as PDF
<![CDATA[
Federal Register / Vol. 73, No. 222 / Monday, November 17, 2008 / Notices
be linked to the publication of specific
technical specifications.
Finally, SIFMA suggested that the
non-tape reporting proposal be
implemented approximately six months
following implementation of the
executing party trade reporting
structure.59 FINRA responded that
SIFMA did not provide any reason why
the system changes necessary to comply
with both aspects of the proposed rule
change could not be made and tested
simultaneously and reiterated its
position that 180 days should provide
sufficient time to make all necessary
systems changes.60
obligation in these circumstances, while
still affording the parties flexibility to
enter into agreements to shift the trade
reporting obligation, when appropriate,
at the parties’ discretion. The proposed
rule change should help to ensure that
the member with the trade reporting
obligation is the party that knows the
material terms and details of the
transaction. Therefore, the Commission
believes that this will help increase
overall compliance with trade reporting
rules and increase the amount of
accurate trade information available to
FINRA.
IV. Discussion
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities association.61 In particular,
the Commission believes the proposal is
consistent with Section 15A(b)(6) of the
Act,62 which requires, among other
things, that the Association’s rules be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, and, in general, to protect
investors and the public interest. The
Commission believes that FINRA
adequately addressed the comments
raised in response to the notice of this
proposed rule change.
The primary purpose of this proposed
rule change is to modify the rules
governing trade reporting in OTC equity
transactions by replacing the current
market maker-based trade reporting
framework with an ‘‘executing party’’
framework and by requiring that any
member with the trade reporting
obligation under FINRA rules that is
acting in a riskless principal or agency
capacity on behalf of one or more other
members, submit non-tape reports to
FINRA, as necessary, to identify such
other member(s) as a party to the trade.
B. Non-Tape Reporting Proposal
jlentini on PROD1PC65 with NOTICES
A. Trade Reporting Structure
The Commission believes that
FINRA’s proposal to require that for
transactions between members, the
‘‘executing party’’ would report the
trade to FINRA and for transactions
between a member and a non-member
or customer, the member would report
the trade, establishes an objective
standard for determining the reporting
SIFMA Letter, supra, note 5.
FINRA Letter, supra note 10.
61 In approving this rule proposal, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
62 15 U.S.C. 78o–3(b)(6).
FINRA has also proposed to require
that any member with the obligation to
report a trade under FINRA rules that is
acting in a riskless principal or agency
capacity on behalf of one or more other
members submit to FINRA one or more
non-tape reports identifying such other
member(s) as a party to the transaction,
if such other member is not identified
on the initial trade report or a report
submitted to FINRA to reflect the
offsetting leg of a riskless principal
transactions. The Commission believes
that this proposed requirement will help
to modernize FINRA’s rules to adapt to
the increase in trades involving riskless
principal transactions. The proposed
changes should help to ensure that
FINRA staff is able to create a complete,
accurate audit trail through the
execution of trades. The Commission
believes that the information proposed
to be collected by FINRA is an
appropriate supplement to that already
collected pursuant to FINRA’s OATS
requirements and will assist FINRA in
automated surveillance to ensure
compliance with various customer
protection and market integrity rules.63
C. Implementation
In its response to comments, FINRA
stated that it intended to implement the
proposed rule change at least 180 days
from the date of this approval order.64
For purposes of clarity, in Amendment
No. 2, FINRA requested that the
proposed rule change be implemented
180 days from the date of this approval
order. The Commission believes that
this is an appropriate time frame for
members to prepare to comply with the
proposed rules.
59 See
60 See
VerDate Aug<31>2005
18:18 Nov 14, 2008
Jkt 217001
63 With respect to the Commenters’ concerns that
this proposed rule change should be reviewed as a
fee filing, the Commission agrees with FINRA that
this is a matter of contract and is not the subject
of this proposed rule change.
64 See FINRA Letter, supra note 10.
PO 00000
Frm 00075
Fmt 4703
Sfmt 4703
67909
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,65 that the
proposed rule change (SR–FINRA–
2008–011), as amended, is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.66
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–27141 Filed 11–14–08; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–58918; File No. SR–ISE–
2008–85]
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Notice of Filing of Proposed Rule
Change Relating to Changes to the ISE
Stock Exchange Governing
Documents in Connection with ISE’s
Purchase of Equity Interests in Direct
Edge Holdings, Inc.
November 7, 2008.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on November 7, 2008, the International
Securities Exchange, LLC (the
‘‘Exchange’’ or ‘‘ISE’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes, among other
things, to merge the ISE Stock Exchange,
LLC (‘‘ISE Stock’’), a Delaware limited
liability company, with and into Maple
Merger Sub, LLC (‘‘Maple Merger Sub’’),
a Delaware limited liability company
and a wholly owned subsidiary of Direct
Edge Holdings LLC (‘‘Direct Edge’’),
with Maple Merger Sub being the
surviving entity. As part of the same
transaction, International Securities
Exchange Holdings, Inc. (‘‘ISE
Holdings’’) will purchase equity
interests in Direct Edge such that after
the transactions contemplated by the
65 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
66 17
E:\FR\FM\17NON1.SGM
17NON1
67910
Federal Register / Vol. 73, No. 222 / Monday, November 17, 2008 / Notices
merger and purchase, ISE Holdings will
have a 31.54% equity interest in Direct
Edge. Currently, ISE Stock operates a
marketplace for the trading of U.S. cash
equities by Equity Electronic Access
Members (‘‘Equity EAMs’’) of ISE under
the rules of ISE, as a facility, as that term
is defined in Section 3(a)(2) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) 3 of ISE (the
‘‘Facility’’). ISE proposes that, following
the closing of the transaction and the
merger of ISE Stock into Maple Merger
Sub, Maple Merger Sub will operate the
Facility.4 Maple Merger Sub will be
wholly-owned by Direct Edge, a
Delaware limited liability company.
ISE is a registered national securities
exchange under Section 6 of the
Exchange Act and a self-regulatory
organization (‘‘SRO’’). As a facility of
ISE, the Facility is subject to regulation
by ISE and oversight by the
Commission. ISE represents that
following the transactions described
above, it will continue to have adequate
funds to discharge all regulatory
functions related to the Facility.5 ISE
will also enter into a Regulatory
Services Agreement with Maple Merger
Sub. In this filing, the Exchange is
submitting to the SEC: (i) The Certificate
of Formation and the Limited Liability
Company Agreement of Maple Merger
Sub (‘‘LLC Agreement’’) which
specifically relates to the control and
governance of Maple Merger Sub and
helps to ensure that ISE has the
authority over Maple Merger Sub to
maintain ISE’s responsibility for all
regulatory functions related to the
Facility; (ii) the Third Amended and
Restated Limited Liability Company
Operating Agreement of Direct Edge
Holdings LLC (‘‘DE Operating
Agreement’’); (iii) amendments to the
ISE Holdings Certificate of
Incorporation and Bylaws; and (iv)
amendments to ISE Rules 312 and 2108.
As the primary purpose of this rule
filing is to focus on those provisions
that are directly related to ISE’s ability
to perform its regulatory responsibility
with respect to the Facility following
the transactions described above, the
Exchange’s discussion in this filing will
3 15
U.S.C. 78c(a)(2).
Edge is planning to file two Form 1
Applications to own and operate two national
securities exchanges. If the Commission approves
the Form 1 Applications, the Facility will cease
operations.
5 Maple Merger Sub will not be entitled to any
revenue generated in connection with penalties,
fines, and regulatory fees that may be assessed by
ISE against Equity EAMs in connection with trading
on ISE Stock. Rather, all regulatory fines, penalties
and fees assessed against and paid by ISE members
to ISE in connection with trading on ISE Stock shall
remain with ISE.
jlentini on PROD1PC65 with NOTICES
4 Direct
VerDate Aug<31>2005
18:18 Nov 14, 2008
Jkt 217001
be limited to those relevant provisions
of the LLC Agreement and the DE
Operating Agreement. The text of the
proposed rule change is available on the
Exchange’s Web site https://www.ise.com
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of, and basis for,
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
self-regulatory organization has
prepared summaries, set forth in
Sections A, B and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes, among other
things, to merge ISE Stock with and into
Maple Merger Sub, a wholly owned
subsidiary of Direct Edge, with Maple
Merger Sub being the surviving entity.
As part of the same transaction, ISE
Holdings will purchase equity interests
in Direct Edge such that after the
transactions contemplated by the merger
and purchase, ISE Holdings will have a
31.54% equity interest in Direct Edge.
Currently, ISE Stock operates the
Facility, however, ISE proposes that,
following the closing of the transaction
and the merger of ISE Stock into Maple
Merger Sub, Maple Merger Sub will
operate the Facility.
ISE is an SRO, and as a facility of ISE,
the Facility is subject to regulation by
ISE and oversight by the SEC. ISE
represents that following the
transactions described above, it will
continue to have adequate funds to
discharge all regulatory functions
related to the Facility.6 ISE will also
enter into a Regulatory Services
Agreement with Maple Merger Sub. In
this filing, the Exchange is submitting to
the Commission: (i) The Certificate of
Formation and LLC Agreement which
6 Maple Merger Sub will not be entitled to any
revenue generated in connection with penalties,
fines, and regulatory fees that may be assessed by
ISE against Equity EAMs in connection with trading
on ISE Stock. Rather, all regulatory fines, penalties
and fees assessed against and paid by ISE members
to ISE in connection with trading on ISE Stock shall
remain with ISE.
PO 00000
Frm 00076
Fmt 4703
Sfmt 4703
specifically relates to the control and
governance of Maple Merger Sub and
helps to ensure that ISE has the
authority over Maple Merger Sub to
maintain ISE’s responsibility for all
regulatory functions related to the
Facility; (ii) the DE Operating
Agreement; (iii) amendments to the ISE
Holdings Certificate of Incorporation
and Bylaws; and (iv) amendments to ISE
Rules 312 and 2108. As the primary
purpose of this rule filing is to focus on
those provisions that are directly related
to ISE’s ability to perform its regulatory
responsibility with respect to the
Facility following the transactions
described above, the Exchange’s
discussion in this filing will be limited
to those relevant provisions of the LLC
Agreement and the DE Operating
Agreement.
Maple Merger Sub
As a limited liability company,
ownership of Maple Merger Sub is
represented by limited liability
membership interests in Maple Merger
Sub. Maple Merger Sub has only one
owner, Direct Edge (the ‘‘Sole
Member’’).
Governance of Maple Merger Sub
Pursuant to Section 4.1 of the LLC
Agreement, Maple Merger Sub will be
managed by the Sole Member. As noted
above, ISE will have regulatory
responsibility over Maple Merger Sub
and the Facility. Subject to the foregoing
and the provisions of Section 1.6 as
described below, as the Sole Member,
Direct Edge will have the authority to
make all decisions regarding the
business of Maple Merger Sub. The Sole
Member is responsible for the control
and management of the business of
Maple Merger Sub.
Under Section 4.1 of the LLC
Agreement, subject to the limitations
provided in the LLC Agreement and
except as specifically provided therein,
the Sole Member shall have exclusive
and complete authority and discretion
to manage the operations and affairs of
Maple Merger Sub and to make all
decisions regarding the business of
Maple Merger Sub and shall have the
power to act for or bind Maple Merger
Sub. Any action taken by the Sole
Member shall constitute the act of and
serve to bind Maple Merger Sub.
The provisions contained in Section
1.6 of the LLC Agreement ensure that
ISE has the information regarding Maple
Merger Sub and the Facility necessary to
carry out its regulatory responsibilities.
Specifically, Section 1.6 provides that,
so long as Maple Merger Sub operates
the Facility, in the event that ISE, in its
sole discretion, reasonably and in good
E:\FR\FM\17NON1.SGM
17NON1
Federal Register / Vol. 73, No. 222 / Monday, November 17, 2008 / Notices
jlentini on PROD1PC65 with NOTICES
faith, determines that any action,
transaction, or aspect of an action or
transaction, is necessary or appropriate
for, or interferes with, the performance
or fulfillment of ISE’s regulatory
functions or its responsibilities under
the Exchange Act or such action,
transaction, or aspect of an action or
transaction is specifically required by
the SEC, (i) no such action, transaction,
or aspect of an action or transaction
shall be authorized, undertaken or
effective, without ISE’s prior approval
and (ii) ISE shall have the sole and
exclusive right to direct that any such
necessary or appropriate action, as it
may reasonably and in good faith
determine in its sole discretion be taken
or transaction be undertaken by or on
behalf of Maple Merger Sub without
regard to any other party in any
capacity.
Additionally, Section 1.6(b) provides
that ISE shall receive notice of planned
or proposed changes to Maple Merger
Sub (but not to include changes relating
solely to one or more of the following:
marketing, administrative matters,
personnel matters, social or teambuilding events, meetings of members,
communications with members,
finance, market research, real property,
equipment, furnishings, personal
property, intellectual property,
insurance, contracts unrelated to the
operation of the Facility and de minimis
items) and the Facility. Any such
changes must be affirmatively approved
by ISE prior to implementation.
Section 4.1 of the LLC Agreement
contains limitations on the authority of
the Sole Member. Specifically, Section
4.1 provides that notwithstanding any
contrary provision of the LLC
Agreement, and subject always to ISE’s
rights to act under Section 1.6, all
actions taken by the Sole Member shall
be governed by and subject to Sections
7.3(a) 7 and 7.7 of the DE Operating
Agreement, which are discussed in
detail below.
7 Section 7.3(a) of the DE Operating Agreement
provides, that subject to Section 7.3(b), the Board
may constitute any officer of Direct Edge as the
Direct Edge’s proxy, with power of substitution, to
vote the equity of any subsidiary of Direct Edge and
to exercise, on behalf of Direct Edge, any and all
rights and powers incident to the ownership of that
equity, including the authority to execute and
deliver proxies, waivers and consents. Subject to
Sections 7.3(b) and 7.7, in the absence of specific
action by the Direct Edge Board, the Chief Executive
Officer shall have authority to represent Direct Edge
and to vote, on behalf of Direct Edge, the equity of
other Persons, both domestic and foreign, held by
Direct Edge. Subject to Sections 7.3(b) and 7.7, the
Chief Executive Officer shall also have the authority
to exercise any and all rights incident to the
ownership of that equity, including the authority to
execute and deliver proxies, waivers and consents.
VerDate Aug<31>2005
18:18 Nov 14, 2008
Jkt 217001
Voting Limitations of Members
Under Section 4.4 of the LLC
Agreement, no Person 8 (other than the
Sole Member), either alone or together
with its Related Persons,9 as of any
record date for the determination of
members entitled to vote on any matter,
shall be entitled to: (i) Vote or cause the
voting of Common Interests, as defined
in the LLC Agreement, beneficially
owned by such Person or its Related
Persons, in person or by proxy or
through any voting agreement, plan, or
arrangement, to the extent that such
Common Interests represent in the
aggregate more than twenty percent
(20%) of voting power of the thenissued and outstanding Common
Interests (such threshold being
hereinafter referred to as the ‘‘Voting
Limitation’’); or (ii) enter into any voting
agreement, plan, or arrangement that
would result in Common Interests
beneficially owned by such Person or its
Related Persons, subject to such voting
agreement, plan, or arrangement not
being voted on a matter, or any proxy
relating thereto being withheld, where
the effect of that voting agreement, plan,
or arrangement would be to enable any
Person, alone or together with its
Related Persons, to exceed the Voting
Limitation. Maple Merger Sub shall
disregard any such votes purported to
be cast in excess of the Voting
Limitation.
The limitations imposed by Section
4.4 may be waived if both the Sole
Member and ISE each consent to
expressly permit such waiver of the
Voting Limitation; and such waiver
shall have been filed with, and
approved by, the Commission under
8 ‘‘Person’’ means any individual, partnership,
limited liability company, association, corporation,
trust, or other entity. LLC Agreement Section 2.1
‘‘Definitions’’.
9 ‘‘Related Person’’ means (i) with respect to any
Person, any executive officer (as defined under Rule
3b–7 under the Exchange Act), director, general
partner, manager or managing member, as
applicable, and all ‘‘affiliates’’ and ‘‘associates’’ of
such Person (as such terms are defined in Rule 12b–
2 under the Exchange Act); (ii) with respect to any
Person constituting an ‘‘Exchange Member’’ (as
such term is defined in the Constitution of the ISE
LLC, a copy of which will be provided to any
member of Maple Merger Sub upon written request
therefore), any broker or dealer with which such
Exchange Member is associated; (iii) with respect to
any Person that is an executive officer (as defined
under Rule 3b–7 under the Exchange Act), director,
general partner, manager or managing member of a
company, corporation or similar entity, such
company, corporation or entity, as applicable; and
(iv) any two or more Persons that have any
agreement, arrangement or understanding (whether
or not in writing) to act together for the purpose of
acquiring, voting, holding or disposing of Common
Interests; and the term ‘‘beneficially owned’’ and
derivative or similar words shall have the meaning
set forth in Regulation 13D–G under the Exchange
Act. LLC Agreement Section 2.1 ‘‘Definitions’’.
PO 00000
Frm 00077
Fmt 4703
Sfmt 4703
67911
Section 19(b) of the Exchange Act and
shall have become effective thereunder.
In granting a waiver, both the Sole
Member and ISE must have determined
that: (i) The exercise of such voting
rights or the entering of such agreement,
plan or other arrangement, as
applicable, by such Person, either alone
or together with its Related Persons, will
not impair the ability of Maple Merger
Sub and ISE to carry out its functions
and responsibilities, including, but not
limited to, under the Exchange Act and
is otherwise in the best interests of the
Maple Merger Sub, its Members 10 and
ISE; (ii) such voting rights by such
Person, either alone or together with its
Related Persons, will not impair the
ability of the Commission to enforce the
Exchange Act; (iii) neither such Person
nor its Related Persons are subject to
any applicable ‘‘statutory
disqualification’’ (within the meaning of
Section 3(a)(39) of the Exchange Act);
and (iv) neither such Person nor its
Related Persons is an ‘‘Exchange
Member’’ (as such term is defined in the
Constitution of ISE).
By specifically imposing a Voting
Limitation on any Person that, either
alone or together with its Related
Persons, owns Common Interests that
represent in the aggregate more than
twenty percent (20%) of the voting
power then entitled to be cast, ISE is
ensuring that it is in all cases able to
maintain proper control over the
exercise of its regulatory function in
relation to Maple Merger Sub, and is not
subject to influence that may be adverse
to its regulatory responsibilities from
any Person that may control a
substantial amount of the outstanding
votes entitled to be cast on any matter.
This provision and other related
provisions relating to notice and rule
filing requirements with respect to any
Person that acquires certain Percentage
Interest 11 levels in Maple Merger Sub
will serve to protect the integrity of
ISE’s self-regulatory responsibilities and
the SEC’s oversight responsibilities.
Ownership Limitations of Members and
Changes in Ownership
Under Section 7.2(a) of the LLC
Agreement, no Person (other than the
Sole Member), either alone or together
with its Related Persons, at any time,
may own, directly or indirectly, of
10 ‘‘Member(s)’’ means the Sole Member and all
Additional Members admitted pursuant to Section
4.3(a). LLC Agreement Section 2.1 ‘‘Definitions’’.
11 ‘‘Percentage Interest’’ shall mean, with respect
to any Member, the ratio of the number of Common
Interests held by such Member to the total of all of
the issued and outstanding Common Interests,
expressed as a percentage. LLC Agreement Section
2.1 ‘‘Definitions’’.
E:\FR\FM\17NON1.SGM
17NON1
jlentini on PROD1PC65 with NOTICES
67912
Federal Register / Vol. 73, No. 222 / Monday, November 17, 2008 / Notices
record or beneficially, an aggregate
amount of Common Interests which
would result in more than twenty
percent (20%) Percentage Interest level
in Maple Merger Sub (the
‘‘Concentration Limitation’’).
Section 7.2(b) states that the
Concentration Limitation shall apply to
each Person (other than the Sole
Member) unless and until: (i) Such
Person shall have delivered to the Sole
Member and ISE a notice in writing, not
less than 45 days (or such shorter period
as the Sole Member and ISE shall
expressly consent to) prior to the
acquisition of any Common Interests
that would cause such Person (either
alone or together with its Related
Persons) to exceed the Concentration
Limitation, of such Person’s intention to
acquire such ownership; (ii) the Sole
Member and ISE shall each have
consented to expressly permit such
ownership; and (iii) such waiver shall
have been filed with, and approved by,
the SEC under Section 19(b) of the
Exchange Act and shall have become
effective thereunder.
Section 7.2(c) states that in exercising
their discretion under Section 7.2(b), the
Sole Member and ISE shall have
determined that (i) such beneficial
ownership of Common Interests by such
Person, either alone or together with its
Related Persons, will not impair the
ability of the Maple Merger Sub and ISE
to carry out its functions and
responsibilities, including but not
limited to, under the Exchange Act and
is otherwise in the best interests of the
Maple Merger Sub, its Members and
ISE; (ii) such beneficial ownership of
Common Interests by such Person,
either alone or together with its Related
Persons, will not impair the ability of
the SEC to enforce the Exchange Act;
(iii) neither such Person nor its Related
Persons are subject to any applicable
‘‘statutory disqualification’’ (within the
meaning of Section 3(a)(39) of the
Exchange Act); and (iv) neither such
Person nor its Related Persons is an
‘‘Exchange Member’’ (as such term is
defined in the Constitution of the ISE).
In making the determinations referred to
in the immediately preceding sentence,
the Sole Member and ISE may impose
such conditions and restrictions on such
Person and its Related Persons owning
any Common Interests entitled to vote
on any matter as the Sole Member and
ISE may each deem necessary,
appropriate or desirable in furtherance
of the objectives of the Exchange Act
and the governance of Maple Merger
Sub.
Beginning after Commission approval
of this proposed rule change, Maple
Merger Sub shall provide the
VerDate Aug<31>2005
18:18 Nov 14, 2008
Jkt 217001
Commission with written notice ten (10)
days prior to the closing date of any
transaction that results in a Person’s
Percentage Interest, alone or together
with any Related Persons, meeting or
crossing the threshold level of 5% or the
successive 5% Percentage Interest levels
of 10% and 15%.
ISE believes that these provisions
provide the Commission with the
authority to review and subject to public
comment any substantial transfer of
ownership that may have the potential
to affect ISE’s regulatory responsibilities
regarding the Facility.
ISE believes that these transfer
restrictions, together with the Voting
Limitation and Concentration
Limitation, are adequately designed to
prohibit any Person, either alone or with
its Related Persons, from having the
power to control a substantial number of
outstanding votes entitled to be cast on
any matter, and more importantly, that
may be adverse to ISE’s regulatory
oversight responsibilities. Moreover, ISE
believes that these provisions serve to
protect the integrity of ISE’s and the
Commission’s regulatory oversight
responsibilities and allows the
Commission to review the acquisition of
substantial ownership or voting power
by any Person.
Regulatory Jurisdiction Over Sole
Member
ISE will regulate Maple Merger Sub as
an operator of a facility of the Exchange.
ISE has responsibility under the
Exchange Act for the Facility. The Sole
Member of Maple Merger Sub, as owner
and operator of the Facility, will also be
subject to the SEC’s jurisdiction. In this
regard, Section 10.2 of the LLC
Agreement provides that the Sole
Member acknowledges that to the extent
that they are related to the business of
Maple Merger Sub or the Facility, the
books, records, premises, officers,
directors, agents and employees of the
Sole Member shall be deemed to be the
books, records, premises, officers,
directors, agents and employees of ISE
for purposes of and subject to oversight
pursuant to the Exchange Act.
Furthermore, the books, records,
premises, officers, directors, agents and
employees of Maple Merger Sub shall be
deemed to be the books, records,
premises, officers, directors, agents and
employees of the ISE for purposes of
and subject to oversight pursuant to the
Exchange Act. In addition, the books
and records of Maple Merger Sub will
be kept within the U.S.12
Section 10.3(a) requires that
confidential information pertaining to
12 LLC
PO 00000
Agreement, Section 10.2(a).
Frm 00078
Fmt 4703
Sfmt 4703
Maple Merger Sub, the Facility or the
self-regulatory function of ISE
(including but not limited to
disciplinary matters, trading data,
trading practices and audit information)
contained in the books and records of
Maple Merger Sub shall: (i) Not be made
available to any Persons (other than as
provided in the next sentence) other
than to those officers, directors,
employees and agents of the Maple
Merger Sub that have a reasonable need
to know the contents thereof; (ii) be
retained in confidence by the Maple
Merger Sub and the officers, directors,
employees and agents of the Maple
Merger Sub; and (iii) not be used for any
commercial purposes. Nothing in the
LLC Agreement shall be interpreted as
to limit or impede the rights of the
Commission to access and examine such
confidential information pursuant to the
federal securities laws and the rules and
regulations thereunder, or to limit or
impede the ability of officers, directors,
employees or agents of Maple Merger
Sub to disclose such confidential
information to the Commission.13
ISE believes that these provisions
would help to ensure the Sole Member
and Maple Merger Sub’s books and
records by the Commission and, to the
extent the Sole Member and Maple
Merger Sub’s books and records relate to
the operation or administration of the
Facility would help enable the
Commission to carry out its regulatory
responsibilities regarding Maple Merger
Sub.
Under Section 10.2(c) of the LLC
Agreement, Maple Merger Sub, its
Members, the Facility and officers,
directors, agents, and employees of
Maple Merger Sub and its Members
irrevocably submit to the jurisdiction of
the U.S. federal courts, the Commission
and ISE, for the purposes of any suit,
action or proceeding pursuant to the
U.S. federal securities laws, the rules or
regulations thereunder, directly arising
out of, or relating to, Maple Merger Sub
or the Facility activities or Section 10.2
of the LLC Agreement (except that such
jurisdictions shall also include
Delaware for any such matter relating to
the organizational or internal affairs of
Maple Merger Sub), and waives, and
agrees not to assert by way of motion,
as a defense or otherwise in any such
suit, action or proceeding, any claims
that it is not personally subject to the
jurisdiction of the Commission, that the
suit, action or proceeding is an
inconvenient forum or that the venue of
the suit, action or proceeding is
improper, or that the subject matter
13 LLC
E:\FR\FM\17NON1.SGM
Agreement, Section 10.3.
17NON1
Federal Register / Vol. 73, No. 222 / Monday, November 17, 2008 / Notices
jlentini on PROD1PC65 with NOTICES
hereof may not be enforced in or by
such courts or agency.
Under Section 10.2(d) of the LLC
Agreement, Maple Merger Sub, its
Members, the Facility and officers,
directors, agents, and employees of
Maple Merger Sub and its Members
agree to comply with the federal
securities laws and the rules and
regulations thereunder and shall
cooperate with ISE pursuant to its
regulatory authority and the provisions
of the LLC Agreement and the
Commission; and to engage in conduct
that fosters and does not interfere with
ISE’s ability to prevent fraudulent and
manipulative acts and practices; to
promote just and equitable principles of
trade; to foster cooperation and
coordination with Persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities; to
remove impediments to and perfect the
mechanisms of a free and open market
and a national market system; and, in
general, to protect investors and the
public interest.
Section 10.2(e) provides that Maple
Merger Sub and each Member shall take
such action as is necessary to ensure
that Maple Merger Sub’s and such
Member’s officers, directors and
employees consent in writing to the
application to them of the applicable
provisions of Section 10.2(b), (c) and
(d), as applicable, with respect to their
Maple Merger Sub-related activities.
The Exchange believes that these
provisions will serve as notice to the
Sole Member and Maple Merger Sub
that they will be subject to the
jurisdiction of the U.S. federal courts,
the Commission and the ISE. It is
imperative that regulatory cooperation
is assured from the Sole Member, Maple
Merger Sub and the Facility, regardless
of their business location, country of
domicile or other circumstance which
the Commission may deem to have the
potential to be adverse to the regulatory
responsibilities and interests of the ISE,
the Commission, or the U.S. federal
courts. Accordingly, these provisions
ensure that, should an occasion arise
that requires regulatory cooperation or
jurisdictional submission from the Sole
Member or Maple Merger Sub; such
party’s cooperation will be forthcoming
and uncontested.
Fair Representation of Trading
Participants, or EAMs
ISE believes that the Maple Merger
Sub company structure assures the fair
representation of ISE Members, its
trading participants, in the selection of
its directors and administration of its
affairs, and satisfies Commission
VerDate Aug<31>2005
18:18 Nov 14, 2008
Jkt 217001
requirements in that one or more
directors shall be representative of
issuers and investors and not be
associated with a member of the
exchange, broker, or dealer.
In order to exercise trading privileges
on ISE Stock, a broker-dealer must be an
approved EAM of ISE. There is only one
type of EAM membership for both
options trading on ISE and equities
trading on ISE Stock. When an applicant
is approved under ISE rules as an EAM,
the member is issued an EAM Exchange
Right. Under the ISE Constitution,
holders of EAM Exchange Rights, or
EAMs, have the right to elect two
members (the ‘‘EAM Directors’’) of the
Board of Directors of ISE (the ‘‘ISE
Board’’). Nominees for election to the
ISE Board to serve as Industry Directors,
including EAM Directors, are currently
made by the Exchange’s Nominating
Committee, which is not a committee of
the ISE Board, and is comprised of
representatives of the holders of each
EAM Exchange Right. ISE Members also
may nominate Industry Director
candidates for election to the ISE Board
by petition. Accordingly, since trading
participants on ISE Stock must be
EAMs, and since EAMs have the right
to elect EAM Directors of the ISE Board,
the ISE believes that ISE Stock trading
participants are fairly represented on
the ISE Board.
DE Operating Agreement
As discussed above, Direct Edge will
be the sole owner of Maple Merger Sub,
and Maple Merger Sub will operate the
Facility as a facility of ISE. Because the
Facility will be a facility of ISE, ISE will
have regulatory responsibility under the
Exchange Act for the Facility. Because
Direct Edge is the sole owner of the
operator of the ISE’s Facility, the DE
Operating Agreement will include
certain provisions that are designed to
preserve the independence of the ISE’s
self-regulatory function with respect to
the Facility, enable the Facility to
operate in a manner that complies with
the federal securities laws, including the
objectives of Section 6(b) and 19(g) of
the Exchange Act and facilitate the
ability of the Exchange and the
Commission to fulfill their regulatory
and oversight obligations over the
Facility under the Exchange Act.
For example, Section 7.7 of the DE
Operating Agreement which contains
provisions requiring supermajority and
majority votes of the Board of Directors
of Direct Edge in connection with
certain activities that could apply to the
ISE as the entity with regulatory
responsibility for the Facility, provides
that nothing in Section 7.7 will be
applicable where the application of the
PO 00000
Frm 00079
Fmt 4703
Sfmt 4703
67913
provision would interfere with the
effectuation of any decisions by the ISE
Board relating to its regulatory functions
(including disciplinary matters) or the
structure of the market ISE regulates or
would interfere with the ability of ISE
to carry out its responsibilities under
the Exchange Act as determined by the
ISE Board, which functions or
responsibilities include the ability of the
ISE as a self-regulatory organization to
prevent fraudulent and manipulative
acts and practices; promote just and
equitable principles of trade; foster
cooperation and coordination with
Persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities; remove impediments to
and perfect the mechanism of a free and
open market and a national market
system; and, in general, protect
investors and the public interest. In
addition, Section 7.7(i) provides that a
member of Direct Edge may transfer its
ownership interest without the approval
of the Direct Edge Board or any
members of Direct Edge if such transfer
is required to comply with the
requirements of a governmental entity
or any self-regulatory organization.
The DE Operating Agreement also
includes ownership and voting
limitations. For example, Section 12.1 of
the DE Operating Agreement relates to
ownership and voting concentration
limitations and provides that no Person,
either alone or together with its Related
Persons (as defined in the DE Operating
Agreement): (i) May own, directly or
indirectly, of record or beneficially,
equity units of the Sole Member
representing in the aggregate a
percentage interest of more than 40%;
(ii) may, if they are a holder of EAM
Rights (as defined in the LLC
Agreement), own, directly or indirectly,
of record or beneficially, equity units of
the Sole Member representing in the
aggregate a percentage interest of more
than 20%; and (iii) may, directly,
indirectly or pursuant to any voting
trust, agreement, plan or other
arrangement, vote or cause the voting of
equity units or give any consent or
proxy with respect to equity units of the
Sole Member representing a percentage
interest of more than 20%, nor may they
enter into any agreement, plan or other
arrangement with any other Person,
either alone or together with Related
Persons, under circumstances that
would result in the equity units that are
subject to such agreement, plan or other
arrangement not being voted on any
matter or matters or any proxy relating
thereto being withheld, where the effect
of such agreement, plan or other
E:\FR\FM\17NON1.SGM
17NON1
jlentini on PROD1PC65 with NOTICES
67914
Federal Register / Vol. 73, No. 222 / Monday, November 17, 2008 / Notices
arrangement would be to enable any
Person, either alone or together with
their Related Persons, to vote, possess
the right to vote or cause the voting of
equity units of the Sole Member that
would represent a percentage interest of
more than 20%. The concentration
limitations set forth in Section 12.1 of
the DE Operating Agreement do not
apply to ISE Holdings for so long as ISE
is a wholly owned subsidiary of ISE
Holdings. The limitations set forth in (i)
and (iii) above may be waived by the
board of managers of the Sole Member
by amendment to the DE Operating
Agreement adopted by the board of
managers if, in connection with the
adoption of such amendment, the board
adopts a resolution stating that that the
board has determined that the
amendment: (i) Will not impair the
ability of ISE to carry out its functions
and responsibilities under the Exchange
Act and the rules and regulations
thereunder, (ii) is otherwise in the best
interests of the Sole Member and its
members and the Maple Merger Sub;
and (iii) will not impair the ability of
the SEC to enforce the Exchange Act
and the rules and regulations
thereunder. Such amendment shall not
be effective unless it is filed with and
approved by the SEC. In making the
determinations referred to in Section
12.1(b), the board of managers of the
Sole Member may impose on the Person
in question and its Related Persons such
conditions and restrictions as it may in
its sole discretion deem necessary,
appropriate or desirable in furtherance
of the objectives of the Exchange Act,
and the rules under the Exchange Act,
and the governance of the Maple Merger
Sub.
The DE Operating Agreement contains
a number of provisions designed to
ensure that ISE has sufficient access to
the books and records of the Sole
Member. For example, Section 11.2 of
the DE Operating Agreement relates to
access to and preservation of
confidentiality of the books and records
and other confidential information and
provides that the books, records,
premises, officers, managers, agents and
employees of the Sole Member shall be
deemed to be the books, records,
premises, officers, managers, agents and
employees of ISE to the extent that they
are related to the operation or
administration of Maple Merger Sub for
purposes of and subject to oversight
pursuant to the Exchange Act.
Furthermore, for as long as the Sole
Member controls, directly or indirectly,
Maple Merger Sub, the books and
records, as well as any confidential
information of the Maple Merger Sub
VerDate Aug<31>2005
18:18 Nov 14, 2008
Jkt 217001
relating to the self regulatory function of
the ISE, shall be subject at all times to
inspection and copying by the SEC and
ISE provided that such books and
records are related to the operation or
administration of Maple Merger Sub.
Section 11.2 of the DE Operating
Agreement also provides for the
confidentiality of all books and records
of the Maple Merger Sub that reflect
confidential information pertaining to
the self regulatory function of ISE and
that such books and records shall not be
used for any non-regulatory purposes.
The DE Operating Agreement contains
a number of provisions specifically
related to the SRO function. For
example, Section 14.1 of the DE
Operating Agreement provides that the
managers, officers, employees and
agents of the Sole Member shall not take
any actions that would interfere with
the effectuation of any decisions by ISE
in its capacity as an SRO relating to its
regulatory functions (including
disciplinary matters) or which would
interfere with the ability of ISE in its
capacity as an SRO to carry out its
responsibilities under the Exchange Act.
Section 14.2 of the DE Operating
Agreement provides that the Sole
Member shall cooperate with the SEC
and ISE, as applicable, pursuant to and
to the extent of their respective
regulatory authority. The officers,
managers, employees and agents of the
Sole Member additionally are deemed to
agree to: (i) Comply with the U.S.
federal securities laws and the rules and
regulations thereunder and (ii)
cooperate with the SEC and ISE in
respect of the SEC’s oversight
responsibilities regarding Maple Merger
Sub and ISE and the self-regulatory
functions and responsibilities of ISE.
Section 14.3 of the DE Operating
Agreement provides that the Sole
Member and its officers, managers,
employees and agents, by virtue of their
acceptance of such position, shall be
deemed to irrevocably submit to the
jurisdiction of the United States federal
courts, the SEC and ISE, as applicable,
for the purposes of any suit, action or
proceeding pursuant to the U.S. federal
securities laws and the rules and
regulations thereunder arising out of, or
relating to, the activities of Maple
Merger Sub, and by virtue of their
acceptance of any such position, shall
be deemed to waive, and agree not to
assert by way of motion, as a defense or
otherwise in any such suit, action or
proceeding, any claims that it or they
are not personally subject to the
jurisdiction of the United States federal
courts, the SEC or ISE that the suit,
action or proceeding is an inconvenient
PO 00000
Frm 00080
Fmt 4703
Sfmt 4703
forum or that the venue of the suit,
action or proceeding is improper, or that
the subject matter of that suit, action or
proceeding may not be enforced in or by
such courts or agency. The Sole Member
and its officers, managers, employees
and agents also agree that they will
maintain an agent, in the United States,
for the service of process of a claim
arising out of, or relating to, the
activities of Maple Merger Sub, and
agree to notify the other parties hereto
of the name and address of such agent.
Finally, the DE Operating Agreement
contains provisions designed to ensure
that any changes to the DE Operating
Agreement be first reviewed by ISE to
determine whether such change must be
filed with the SEC. For example, Section
15.2 of the DE Operating Agreement
provides that before any amendment to
any provision of the DE Operating
Agreement shall be effective, such
amendment shall be submitted to ISE
and if ISE determines that such
amendment must be filed with, or filed
with and approved by, the SEC before
the amendment may be effective under
Section 19 of the Exchange Act and the
rules promulgated under the Exchange
Act or otherwise, then the proposed
amendment to the DE Operating
Agreement shall not be effective until
filed with, or filed with and approved
by, the SEC, as the case may be.
ISE Holding’s Certificate of
Incorporation and Bylaws
The Exchange proposes to amend
certain provisions of the Certificate of
Incorporation and Bylaws (together the
‘‘Corporate Documents’’) of ISE
Holdings in connection with the
contemplated ownership and operation
of two (2) national securities exchanges
by Direct Edge. As a result of ISE
Holdings owning a 31.54% equity
interest in Direct Edge and possessing
certain contractual rights and
obligations with respect to Direct Edge,
ISE Holdings may, in the future, control,
indirectly subsidiary exchanges of
Direct Edge. Accordingly, the Exchange
proposes to broaden certain references
that are currently limited to ISE (the
sole registered national securities
exchange controlled by ISE Holdings) to
cover these two contemplated Direct
Edge subsidiary exchanges. Thus, the
Exchange proposes to replace certain
references to ISE with each ‘‘Controlled
National Securities Exchange.’’ These
references appear in the ownership and
voting limitations sections of the
Corporate Documents, as well as other
miscellaneous sections, including, but
not limited to, the confidentiality
section, the books and records section,
E:\FR\FM\17NON1.SGM
17NON1
Federal Register / Vol. 73, No. 222 / Monday, November 17, 2008 / Notices
the compliance with laws section and
the amendments section.
jlentini on PROD1PC65 with NOTICES
ISE Rules
The Exchange proposes to amend the
language in Rule 312 (Limitation on
Affiliation between the Exchange and
Members) to reflect that this provision
now covers Maple Merger Sub, as an
operator of the Facility.
Subsequent to the effectuation of the
transactions discussed above, ISE
Holdings will have a 31.54% equity
interest in Direct Edge, which wholly
owns and operates Direct Edge ECN LLC
(‘‘DE ECN’’) which displays its quotes
on ISE. DE ECN currently, and will
continue to after the transactions are
effected, routes orders into ISE Stock.
Due to the combination of ISE Holdings
owning a 31.54% equity interest in DE
ECN’s parent company, Direct Edge, and
DE ECN routing orders into ISE Stock,
DE ECN will be deemed to be a facility
of ISE, as that term is defined in Section
3(a)(2) of the Exchange Act.
Further, upon closing of the
transaction, ISE and Maple Merger Sub
will be affiliated with DE ECN, which is
a member of ISE and a wholly owned
subsidiary of Direct Edge.
Recognizing that the Commission has
previously expressed concern regarding
(1) the potential for conflicts of interest
in instances where an exchange is
affiliated with one of its members, and
(2) the potential for informational
advantages that could place an affiliated
member of an exchange at a competitive
`
advantage vis-a-vis the other nonaffiliated members, ISE proposes to
amend Rule 312 to permit the proposed
affiliation subject to several conditions
and limitations.
Accordingly, the Exchange is
proposing to adopt subsection (b) to
Rule 312 to require that for so long as
the Exchange is affiliated with DE ECN
or DE ECN is a facility of the
Exchange: 14 (1) Financial Industry
Regulatory Authority (‘‘FINRA’’), a selfregulatory organization unaffiliated with
the Exchange or any of its affiliates, will
carry out oversight and enforcement
responsibilities as the designated
examining authority designated by the
Commission pursuant to Rule 17d–1 of
the Exchange Act with the
responsibility for examining DE ECN for
compliance with applicable financial
responsibility rules; (2) the Exchange
shall contract with a non-affiliated selfregulatory organization to regulate and
oversee the activities of DE ECN,
14 E-mail from Joseph W. Ferrarro III, Associated
General Counsel, Exchange, to Heidi Pilpel,
Attorney, Division of Trading and Markets,
Commission, dated November 7, 2008.
VerDate Aug<31>2005
18:18 Nov 14, 2008
Jkt 217001
pursuant to Rule 17d–2 under the
Exchange Act; (3) the Exchange shall
provide said non-affiliated selfregulatory organization with
information regarding all exception
reports, alerts, complaints, trading
errors, cancellations, investigations, and
enforcement matters (collectively,
‘‘Exceptions’’) in which DE ECN is
identified as a participant that has
potentially violated Exchange or SEC
rules, in an easily accessible manner,
and said non-affiliated self-regulatory
organization shall provide a report to
the Exchange quantifying Exceptions on
not less than a quarterly basis; (4) the
Exchange, on behalf of Direct Edge,
shall establish and maintain procedures
and internal controls reasonably
designed to ensure that DE ECN does
not develop or implement changes to its
systems on the basis of nonpublic
information obtained as a result of its
affiliation with the Exchange until such
information is available generally to
similarly situated members of the
Exchange in connection with the
provision of inbound order routing to
the Exchange; (5) in the event that DE
ECN acts as an introducing broker for
subscribers of DE ECN who are not
members of the Exchange, then DE
ECN’s role as introducing broker is
limited to its role as introducing broker
to DE ECN; (6) DE ECN will not engage
in any business other than operating as
an ECN and other than acting as an
introducing broker as described above;
(7) the affiliation of DE ECN is subject
to the conditions set forth above and is
granted on a temporary basis, for not
longer than one year from the date of
Commission approval of this filing.
The Exchange proposes to adopt
subsection (c) of ISE Rule 2108 (Order
Routing and Route Out Facility) to
expand the scope of the rule to cover DE
ECN. Specifically, proposed Rule
2108(c), requires that the books, records,
premises, officers, directors, agents, and
employees of the DE ECN, as a facility
of the Exchange, shall be deemed to be
the books, records, premises, officers,
directors, agents, and employees of the
Exchange for purposes of and subject to
oversight pursuant to the Exchange Act.
The books and records of the DE ECN,
as a facility of the Exchange, shall be
subject at all times to inspection and
copying by the Exchange and the
Commission.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the provisions of Section 6 of the
Exchange Act,15 in general, and with
15 15
PO 00000
U.S.C. 78f.
Frm 00081
Fmt 4703
Sections 6(b)(1) and (b)(5) of the
Exchange Act,16 in particular, in that the
proposal enables the Exchange and the
Facility to be so organized as to have the
capacity to be able to carry out the
purposes of the Exchange Act and to
comply with and enforce compliance by
members and persons associated with
members with provisions of the
Exchange Act, the rules and regulations
thereunder, and SRO rules, and is
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The proposed rule change does not
impose any burden on competition that
is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received from
Members, Participants or Others
The Exchange has not solicited, and
does not intend to solicit, comments on
this proposed rule change. The
Exchange has not received any
unsolicited written comments from
members or other interested parties.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission will:
A. by order approve such proposed
rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
16 15
Sfmt 4703
67915
E:\FR\FM\17NON1.SGM
U.S.C. 78f(b)(1), (5).
17NON1
67916
Federal Register / Vol. 73, No. 222 / Monday, November 17, 2008 / Notices
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (www.sec.gov/rules/
sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–ISE–2008–85 on the subject
line.
Paper Comments
jlentini on PROD1PC65 with NOTICES
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street, NE.,
Washington, DC 20549–1090.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–58915; File No. SR–Phlx–
2008–68]
Self-Regulatory Organizations; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Change and
Amendment No. 1 Thereto by NASDAQ
OMX PHLX, Inc. Relating to Settlement
Values and Spot Prices for Foreign
Currency Options
November 6, 2008.
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 October
All submissions should refer to File
30, 2008, NASDAQ OMX PHLX, Inc.
Number SR–ISE–2008–85. This file
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
number should be included on the
Securities and Exchange Commission
subject line if e-mail is used. To help the (‘‘SEC’’ or ‘‘Commission’’) the proposed
Commission process and review your
rule change as described in Items I and
comments more efficiently, please use
II below, which Items have been
only one method. The Commission will prepared by the Exchange. On
post all comments on the Commission’s November 6, 2008, the Exchange filed
Internet Web site (https://www.sec.gov/
Amendment No. 1 to the proposed rule
rules/sro.shtml). Copies of the
change. The Commission is publishing
submission, all subsequent
this notice to solicit comments on the
amendments, all written statements
proposed rule change, as amended, from
with respect to the proposed rule
interested persons.
change that are filed with the
I. Self-Regulatory Organization’s
Commission, and all written
Statement of the Terms of Substance of
communications relating to the
the Proposed Rule Change
proposed rule change between the
Commission and any person, other than
The Exchange, pursuant to Section
those that may be withheld from the
19(b)(1) of the Act 3 and Rule 19b–4
public in accordance with the
thereunder,4 proposes to modify the
provisions of 5 U.S.C. 552, will be
definition of the closing settlement
available for inspection and copying in
value for foreign currency options
the Commission’s Public Reference
traded on the Exchange (‘‘FCOs’’).
Room, 100 F Street, NE., Washington,
The text of the proposed rule change
DC 20549, on official business days
is available on the Exchange’s Web site
between the hours of 10 a.m. and 3 p.m. at https://www.phlx.com/regulatory/
Copies of the filing also will be available reg_rulefilings.aspx.
for inspection and copying at the
II. Self-Regulatory Organization’s
principal office of the Exchange. All
Statement of the Purpose of, and
comments received will be posted
Statutory Basis for, the Proposed Rule
without change; the Commission does
Change
not edit personal identifying
information from submissions. You
In its filing with the Commission, the
should submit only information that
Exchange included statements
you wish to make available publicly. All concerning the purpose of and basis for
submissions should refer to File
the proposed rule change and discussed
Number SR–ISE–2008–85 and should be any comments it received on the
submitted on or before December 8,
proposed rule change. The text of these
2008.
statements may be examined at the
places specified in Item IV below. The
For the Commission, by the Division of
Exchange has prepared summaries, set
Trading and Markets, pursuant to delegated
forth in sections A, B, and C below, of
authority.17
the most significant aspects of such
Florence E. Harmon,
statements.
Acting Secretary.
[FR Doc. E8–27157 Filed 11–14–08; 8:45 am]
BILLING CODE 8011–01–P
17 17
18:18 Nov 14, 2008
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(1).
4 17 CFR 240.19b–4.
2 17
CFR 200.30–3(a)(12).
VerDate Aug<31>2005
1 15
Jkt 217001
PO 00000
Frm 00082
Fmt 4703
Sfmt 4703
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 indicate that the spot price
at 12:00:00 Eastern Time (noon) on the
last trading day prior to expiration will
be the closing settlement value for FCOs
instead of the Noon Buying Rate.
The Exchange currently uses the
Noon Buying Rate, which it receives
from the Federal Reserve Bank of New
York (the ‘‘New York Fed’’),5 for the
purposes of setting the closing
settlement values of the Australian
dollar, the Euro, the British pound, the
Canadian dollar, the Swiss franc and the
Japanese yen. Going forward, the closing
settlement value for FCOs will be the
spot price at 12:00:00 Eastern Time
(noon) on the last trading day prior to
expiration.
By way of background, for all
currencies underlying FCOs trading on
the Exchange, it disseminates closing
(final) settlement values on its Web site,
and disseminates modified spot prices
over the facilities of the Consolidated
Tape Association (‘‘CTA’’) at least once
every fifteen seconds while the
Exchange is open for trading.6 Spot
prices are FCO quotations obtained by
the Exchange from a foreign currency
price quotation dissemination system
selected by the Exchange.7 The
Exchange calculates averages of bid and
ask values provided by Tenfore Systems
Limited (‘‘Tenfore’’) (the ‘‘Tenfore
Values’’) to get spot prices for FCOs.
The Exchange then calculates modified
spot prices for each of the foreign
currencies underlying its FCOs by
applying multipliers to the spot prices
(100 for the British pound, the
Australian dollar, the Canadian dollar
and the Swiss franc; and 10,000 for the
Japanese yen). Because the Tenfore
Values are expressed in foreign currency
units per U.S. dollar for the Japanese
yen, the Canadian dollar and the Swiss
franc (rather than in U.S. dollars per
unit of foreign currency as for other
5 On October 2, 2007, the New York Fed
announced its decision to discontinue the
publication of foreign exchange rates such as the
Noon Buying Rate on December 31, 2008, given the
availability of alternate market-based sources for
these rates. The Exchange believes that other
markets that trade foreign currency options, such as
for example the International Securities Exchange
(‘‘ISE’’), also use foreign currency rates provided by
the New York Fed. See ISE Rule 2212.
6 See Securities Exchange Act Release Nos. 55513
(March 22, 2007), 72 FR 14636 (March 28, 2007)
(SR–Phlx–2007–28) and 56034 (July 10, 2007), 72
FR 38853 (July 16, 2007) (SR–Phlx–2007–34).
7 See Phlx Rule 1000(b)16.
E:\FR\FM\17NON1.SGM
17NON1
]]>Agencies
[Federal Register Volume 73, Number 222 (Monday, November 17, 2008)]
[Notices]
[Pages 67909-67916]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-27157]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58918; File No. SR-ISE-2008-85]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing of Proposed Rule Change Relating to Changes to
the ISE Stock Exchange Governing Documents in Connection with ISE's
Purchase of Equity Interests in Direct Edge Holdings, Inc.
November 7, 2008.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is
hereby given that on November 7, 2008, the International Securities
Exchange, LLC (the ``Exchange'' or ``ISE'') filed with the Securities
and Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I, II, and III below, which items have
been prepared by the Exchange. The Commission is publishing this notice
to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes, among other things, to merge the ISE Stock
Exchange, LLC (``ISE Stock''), a Delaware limited liability company,
with and into Maple Merger Sub, LLC (``Maple Merger Sub''), a Delaware
limited liability company and a wholly owned subsidiary of Direct Edge
Holdings LLC (``Direct Edge''), with Maple Merger Sub being the
surviving entity. As part of the same transaction, International
Securities Exchange Holdings, Inc. (``ISE Holdings'') will purchase
equity interests in Direct Edge such that after the transactions
contemplated by the
[[Page 67910]]
merger and purchase, ISE Holdings will have a 31.54% equity interest in
Direct Edge. Currently, ISE Stock operates a marketplace for the
trading of U.S. cash equities by Equity Electronic Access Members
(``Equity EAMs'') of ISE under the rules of ISE, as a facility, as that
term is defined in Section 3(a)(2) of the Securities Exchange Act of
1934 (``Exchange Act'') \3\ of ISE (the ``Facility''). ISE proposes
that, following the closing of the transaction and the merger of ISE
Stock into Maple Merger Sub, Maple Merger Sub will operate the
Facility.\4\ Maple Merger Sub will be wholly-owned by Direct Edge, a
Delaware limited liability company.
---------------------------------------------------------------------------
\3\ 15 U.S.C. 78c(a)(2).
\4\ Direct Edge is planning to file two Form 1 Applications to
own and operate two national securities exchanges. If the Commission
approves the Form 1 Applications, the Facility will cease
operations.
---------------------------------------------------------------------------
ISE is a registered national securities exchange under Section 6 of
the Exchange Act and a self-regulatory organization (``SRO''). As a
facility of ISE, the Facility is subject to regulation by ISE and
oversight by the Commission. ISE represents that following the
transactions described above, it will continue to have adequate funds
to discharge all regulatory functions related to the Facility.\5\ ISE
will also enter into a Regulatory Services Agreement with Maple Merger
Sub. In this filing, the Exchange is submitting to the SEC: (i) The
Certificate of Formation and the Limited Liability Company Agreement of
Maple Merger Sub (``LLC Agreement'') which specifically relates to the
control and governance of Maple Merger Sub and helps to ensure that ISE
has the authority over Maple Merger Sub to maintain ISE's
responsibility for all regulatory functions related to the Facility;
(ii) the Third Amended and Restated Limited Liability Company Operating
Agreement of Direct Edge Holdings LLC (``DE Operating Agreement'');
(iii) amendments to the ISE Holdings Certificate of Incorporation and
Bylaws; and (iv) amendments to ISE Rules 312 and 2108. As the primary
purpose of this rule filing is to focus on those provisions that are
directly related to ISE's ability to perform its regulatory
responsibility with respect to the Facility following the transactions
described above, the Exchange's discussion in this filing will be
limited to those relevant provisions of the LLC Agreement and the DE
Operating Agreement. The text of the proposed rule change is available
on the Exchange's Web site https://www.ise.com at the principal office
of the Exchange, and at the Commission's Public Reference Room.
---------------------------------------------------------------------------
\5\ Maple Merger Sub will not be entitled to any revenue
generated in connection with penalties, fines, and regulatory fees
that may be assessed by ISE against Equity EAMs in connection with
trading on ISE Stock. Rather, all regulatory fines, penalties and
fees assessed against and paid by ISE members to ISE in connection
with trading on ISE Stock shall remain with ISE.
---------------------------------------------------------------------------
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 self-regulatory organization has prepared summaries,
set forth in Sections A, B and C below, of the most significant aspects
of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes, among other things, to merge ISE Stock with
and into Maple Merger Sub, a wholly owned subsidiary of Direct Edge,
with Maple Merger Sub being the surviving entity. As part of the same
transaction, ISE Holdings will purchase equity interests in Direct Edge
such that after the transactions contemplated by the merger and
purchase, ISE Holdings will have a 31.54% equity interest in Direct
Edge. Currently, ISE Stock operates the Facility, however, ISE proposes
that, following the closing of the transaction and the merger of ISE
Stock into Maple Merger Sub, Maple Merger Sub will operate the
Facility.
ISE is an SRO, and as a facility of ISE, the Facility is subject to
regulation by ISE and oversight by the SEC. ISE represents that
following the transactions described above, it will continue to have
adequate funds to discharge all regulatory functions related to the
Facility.\6\ ISE will also enter into a Regulatory Services Agreement
with Maple Merger Sub. In this filing, the Exchange is submitting to
the Commission: (i) The Certificate of Formation and LLC Agreement
which specifically relates to the control and governance of Maple
Merger Sub and helps to ensure that ISE has the authority over Maple
Merger Sub to maintain ISE's responsibility for all regulatory
functions related to the Facility; (ii) the DE Operating Agreement;
(iii) amendments to the ISE Holdings Certificate of Incorporation and
Bylaws; and (iv) amendments to ISE Rules 312 and 2108. As the primary
purpose of this rule filing is to focus on those provisions that are
directly related to ISE's ability to perform its regulatory
responsibility with respect to the Facility following the transactions
described above, the Exchange's discussion in this filing will be
limited to those relevant provisions of the LLC Agreement and the DE
Operating Agreement.
---------------------------------------------------------------------------
\6\ Maple Merger Sub will not be entitled to any revenue
generated in connection with penalties, fines, and regulatory fees
that may be assessed by ISE against Equity EAMs in connection with
trading on ISE Stock. Rather, all regulatory fines, penalties and
fees assessed against and paid by ISE members to ISE in connection
with trading on ISE Stock shall remain with ISE.
---------------------------------------------------------------------------
Maple Merger Sub
As a limited liability company, ownership of Maple Merger Sub is
represented by limited liability membership interests in Maple Merger
Sub. Maple Merger Sub has only one owner, Direct Edge (the ``Sole
Member'').
Governance of Maple Merger Sub
Pursuant to Section 4.1 of the LLC Agreement, Maple Merger Sub will
be managed by the Sole Member. As noted above, ISE will have regulatory
responsibility over Maple Merger Sub and the Facility. Subject to the
foregoing and the provisions of Section 1.6 as described below, as the
Sole Member, Direct Edge will have the authority to make all decisions
regarding the business of Maple Merger Sub. The Sole Member is
responsible for the control and management of the business of Maple
Merger Sub.
Under Section 4.1 of the LLC Agreement, subject to the limitations
provided in the LLC Agreement and except as specifically provided
therein, the Sole Member shall have exclusive and complete authority
and discretion to manage the operations and affairs of Maple Merger Sub
and to make all decisions regarding the business of Maple Merger Sub
and shall have the power to act for or bind Maple Merger Sub. Any
action taken by the Sole Member shall constitute the act of and serve
to bind Maple Merger Sub.
The provisions contained in Section 1.6 of the LLC Agreement ensure
that ISE has the information regarding Maple Merger Sub and the
Facility necessary to carry out its regulatory responsibilities.
Specifically, Section 1.6 provides that, so long as Maple Merger Sub
operates the Facility, in the event that ISE, in its sole discretion,
reasonably and in good
[[Page 67911]]
faith, determines that any action, transaction, or aspect of an action
or transaction, is necessary or appropriate for, or interferes with,
the performance or fulfillment of ISE's regulatory functions or its
responsibilities under the Exchange Act or such action, transaction, or
aspect of an action or transaction is specifically required by the SEC,
(i) no such action, transaction, or aspect of an action or transaction
shall be authorized, undertaken or effective, without ISE's prior
approval and (ii) ISE shall have the sole and exclusive right to direct
that any such necessary or appropriate action, as it may reasonably and
in good faith determine in its sole discretion be taken or transaction
be undertaken by or on behalf of Maple Merger Sub without regard to any
other party in any capacity.
Additionally, Section 1.6(b) provides that ISE shall receive notice
of planned or proposed changes to Maple Merger Sub (but not to include
changes relating solely to one or more of the following: marketing,
administrative matters, personnel matters, social or team-building
events, meetings of members, communications with members, finance,
market research, real property, equipment, furnishings, personal
property, intellectual property, insurance, contracts unrelated to the
operation of the Facility and de minimis items) and the Facility. Any
such changes must be affirmatively approved by ISE prior to
implementation.
Section 4.1 of the LLC Agreement contains limitations on the
authority of the Sole Member. Specifically, Section 4.1 provides that
notwithstanding any contrary provision of the LLC Agreement, and
subject always to ISE's rights to act under Section 1.6, all actions
taken by the Sole Member shall be governed by and subject to Sections
7.3(a) \7\ and 7.7 of the DE Operating Agreement, which are discussed
in detail below.
---------------------------------------------------------------------------
\7\ Section 7.3(a) of the DE Operating Agreement provides, that
subject to Section 7.3(b), the Board may constitute any officer of
Direct Edge as the Direct Edge's proxy, with power of substitution,
to vote the equity of any subsidiary of Direct Edge and to exercise,
on behalf of Direct Edge, any and all rights and powers incident to
the ownership of that equity, including the authority to execute and
deliver proxies, waivers and consents. Subject to Sections 7.3(b)
and 7.7, in the absence of specific action by the Direct Edge Board,
the Chief Executive Officer shall have authority to represent Direct
Edge and to vote, on behalf of Direct Edge, the equity of other
Persons, both domestic and foreign, held by Direct Edge. Subject to
Sections 7.3(b) and 7.7, the Chief Executive Officer shall also have
the authority to exercise any and all rights incident to the
ownership of that equity, including the authority to execute and
deliver proxies, waivers and consents.
---------------------------------------------------------------------------
Voting Limitations of Members
Under Section 4.4 of the LLC Agreement, no Person \8\ (other than
the Sole Member), either alone or together with its Related Persons,\9\
as of any record date for the determination of members entitled to vote
on any matter, shall be entitled to: (i) Vote or cause the voting of
Common Interests, as defined in the LLC Agreement, beneficially owned
by such Person or its Related Persons, in person or by proxy or through
any voting agreement, plan, or arrangement, to the extent that such
Common Interests represent in the aggregate more than twenty percent
(20%) of voting power of the then-issued and outstanding Common
Interests (such threshold being hereinafter referred to as the ``Voting
Limitation''); or (ii) enter into any voting agreement, plan, or
arrangement that would result in Common Interests beneficially owned by
such Person or its Related Persons, subject to such voting agreement,
plan, or arrangement not being voted on a matter, or any proxy relating
thereto being withheld, where the effect of that voting agreement,
plan, or arrangement would be to enable any Person, alone or together
with its Related Persons, to exceed the Voting Limitation. Maple Merger
Sub shall disregard any such votes purported to be cast in excess of
the Voting Limitation.
---------------------------------------------------------------------------
\8\ ``Person'' means any individual, partnership, limited
liability company, association, corporation, trust, or other entity.
LLC Agreement Section 2.1 ``Definitions''.
\9\ ``Related Person'' means (i) with respect to any Person, any
executive officer (as defined under Rule 3b-7 under the Exchange
Act), director, general partner, manager or managing member, as
applicable, and all ``affiliates'' and ``associates'' of such Person
(as such terms are defined in Rule 12b-2 under the Exchange Act);
(ii) with respect to any Person constituting an ``Exchange Member''
(as such term is defined in the Constitution of the ISE LLC, a copy
of which will be provided to any member of Maple Merger Sub upon
written request therefore), any broker or dealer with which such
Exchange Member is associated; (iii) with respect to any Person that
is an executive officer (as defined under Rule 3b-7 under the
Exchange Act), director, general partner, manager or managing member
of a company, corporation or similar entity, such company,
corporation or entity, as applicable; and (iv) any two or more
Persons that have any agreement, arrangement or understanding
(whether or not in writing) to act together for the purpose of
acquiring, voting, holding or disposing of Common Interests; and the
term ``beneficially owned'' and derivative or similar words shall
have the meaning set forth in Regulation 13D-G under the Exchange
Act. LLC Agreement Section 2.1 ``Definitions''.
---------------------------------------------------------------------------
The limitations imposed by Section 4.4 may be waived if both the
Sole Member and ISE each consent to expressly permit such waiver of the
Voting Limitation; and such waiver shall have been filed with, and
approved by, the Commission under Section 19(b) of the Exchange Act and
shall have become effective thereunder. In granting a waiver, both the
Sole Member and ISE must have determined that: (i) The exercise of such
voting rights or the entering of such agreement, plan or other
arrangement, as applicable, by such Person, either alone or together
with its Related Persons, will not impair the ability of Maple Merger
Sub and ISE to carry out its functions and responsibilities, including,
but not limited to, under the Exchange Act and is otherwise in the best
interests of the Maple Merger Sub, its Members \10\ and ISE; (ii) such
voting rights by such Person, either alone or together with its Related
Persons, will not impair the ability of the Commission to enforce the
Exchange Act; (iii) neither such Person nor its Related Persons are
subject to any applicable ``statutory disqualification'' (within the
meaning of Section 3(a)(39) of the Exchange Act); and (iv) neither such
Person nor its Related Persons is an ``Exchange Member'' (as such term
is defined in the Constitution of ISE).
---------------------------------------------------------------------------
\10\ ``Member(s)'' means the Sole Member and all Additional
Members admitted pursuant to Section 4.3(a). LLC Agreement Section
2.1 ``Definitions''.
---------------------------------------------------------------------------
By specifically imposing a Voting Limitation on any Person that,
either alone or together with its Related Persons, owns Common
Interests that represent in the aggregate more than twenty percent
(20%) of the voting power then entitled to be cast, ISE is ensuring
that it is in all cases able to maintain proper control over the
exercise of its regulatory function in relation to Maple Merger Sub,
and is not subject to influence that may be adverse to its regulatory
responsibilities from any Person that may control a substantial amount
of the outstanding votes entitled to be cast on any matter. This
provision and other related provisions relating to notice and rule
filing requirements with respect to any Person that acquires certain
Percentage Interest \11\ levels in Maple Merger Sub will serve to
protect the integrity of ISE's self-regulatory responsibilities and the
SEC's oversight responsibilities.
---------------------------------------------------------------------------
\11\ ``Percentage Interest'' shall mean, with respect to any
Member, the ratio of the number of Common Interests held by such
Member to the total of all of the issued and outstanding Common
Interests, expressed as a percentage. LLC Agreement Section 2.1
``Definitions''.
---------------------------------------------------------------------------
Ownership Limitations of Members and Changes in Ownership
Under Section 7.2(a) of the LLC Agreement, no Person (other than
the Sole Member), either alone or together with its Related Persons, at
any time, may own, directly or indirectly, of
[[Page 67912]]
record or beneficially, an aggregate amount of Common Interests which
would result in more than twenty percent (20%) Percentage Interest
level in Maple Merger Sub (the ``Concentration Limitation'').
Section 7.2(b) states that the Concentration Limitation shall apply
to each Person (other than the Sole Member) unless and until: (i) Such
Person shall have delivered to the Sole Member and ISE a notice in
writing, not less than 45 days (or such shorter period as the Sole
Member and ISE shall expressly consent to) prior to the acquisition of
any Common Interests that would cause such Person (either alone or
together with its Related Persons) to exceed the Concentration
Limitation, of such Person's intention to acquire such ownership; (ii)
the Sole Member and ISE shall each have consented to expressly permit
such ownership; and (iii) such waiver shall have been filed with, and
approved by, the SEC under Section 19(b) of the Exchange Act and shall
have become effective thereunder.
Section 7.2(c) states that in exercising their discretion under
Section 7.2(b), the Sole Member and ISE shall have determined that (i)
such beneficial ownership of Common Interests by such Person, either
alone or together with its Related Persons, will not impair the ability
of the Maple Merger Sub and ISE to carry out its functions and
responsibilities, including but not limited to, under the Exchange Act
and is otherwise in the best interests of the Maple Merger Sub, its
Members and ISE; (ii) such beneficial ownership of Common Interests by
such Person, either alone or together with its Related Persons, will
not impair the ability of the SEC to enforce the Exchange Act; (iii)
neither such Person nor its Related Persons are subject to any
applicable ``statutory disqualification'' (within the meaning of
Section 3(a)(39) of the Exchange Act); and (iv) neither such Person nor
its Related Persons is an ``Exchange Member'' (as such term is defined
in the Constitution of the ISE). In making the determinations referred
to in the immediately preceding sentence, the Sole Member and ISE may
impose such conditions and restrictions on such Person and its Related
Persons owning any Common Interests entitled to vote on any matter as
the Sole Member and ISE may each deem necessary, appropriate or
desirable in furtherance of the objectives of the Exchange Act and the
governance of Maple Merger Sub.
Beginning after Commission approval of this proposed rule change,
Maple Merger Sub shall provide the Commission with written notice ten
(10) days prior to the closing date of any transaction that results in
a Person's Percentage Interest, alone or together with any Related
Persons, meeting or crossing the threshold level of 5% or the
successive 5% Percentage Interest levels of 10% and 15%.
ISE believes that these provisions provide the Commission with the
authority to review and subject to public comment any substantial
transfer of ownership that may have the potential to affect ISE's
regulatory responsibilities regarding the Facility.
ISE believes that these transfer restrictions, together with the
Voting Limitation and Concentration Limitation, are adequately designed
to prohibit any Person, either alone or with its Related Persons, from
having the power to control a substantial number of outstanding votes
entitled to be cast on any matter, and more importantly, that may be
adverse to ISE's regulatory oversight responsibilities. Moreover, ISE
believes that these provisions serve to protect the integrity of ISE's
and the Commission's regulatory oversight responsibilities and allows
the Commission to review the acquisition of substantial ownership or
voting power by any Person.
Regulatory Jurisdiction Over Sole Member
ISE will regulate Maple Merger Sub as an operator of a facility of
the Exchange. ISE has responsibility under the Exchange Act for the
Facility. The Sole Member of Maple Merger Sub, as owner and operator of
the Facility, will also be subject to the SEC's jurisdiction. In this
regard, Section 10.2 of the LLC Agreement provides that the Sole Member
acknowledges that to the extent that they are related to the business
of Maple Merger Sub or the Facility, the books, records, premises,
officers, directors, agents and employees of the Sole Member shall be
deemed to be the books, records, premises, officers, directors, agents
and employees of ISE for purposes of and subject to oversight pursuant
to the Exchange Act. Furthermore, the books, records, premises,
officers, directors, agents and employees of Maple Merger Sub shall be
deemed to be the books, records, premises, officers, directors, agents
and employees of the ISE for purposes of and subject to oversight
pursuant to the Exchange Act. In addition, the books and records of
Maple Merger Sub will be kept within the U.S.\12\
---------------------------------------------------------------------------
\12\ LLC Agreement, Section 10.2(a).
---------------------------------------------------------------------------
Section 10.3(a) requires that confidential information pertaining
to Maple Merger Sub, the Facility or the self-regulatory function of
ISE (including but not limited to disciplinary matters, trading data,
trading practices and audit information) contained in the books and
records of Maple Merger Sub shall: (i) Not be made available to any
Persons (other than as provided in the next sentence) other than to
those officers, directors, employees and agents of the Maple Merger Sub
that have a reasonable need to know the contents thereof; (ii) be
retained in confidence by the Maple Merger Sub and the officers,
directors, employees and agents of the Maple Merger Sub; and (iii) not
be used for any commercial purposes. Nothing in the LLC Agreement shall
be interpreted as to limit or impede the rights of the Commission to
access and examine such confidential information pursuant to the
federal securities laws and the rules and regulations thereunder, or to
limit or impede the ability of officers, directors, employees or agents
of Maple Merger Sub to disclose such confidential information to the
Commission.\13\
---------------------------------------------------------------------------
\13\ LLC Agreement, Section 10.3.
---------------------------------------------------------------------------
ISE believes that these provisions would help to ensure the Sole
Member and Maple Merger Sub's books and records by the Commission and,
to the extent the Sole Member and Maple Merger Sub's books and records
relate to the operation or administration of the Facility would help
enable the Commission to carry out its regulatory responsibilities
regarding Maple Merger Sub.
Under Section 10.2(c) of the LLC Agreement, Maple Merger Sub, its
Members, the Facility and officers, directors, agents, and employees of
Maple Merger Sub and its Members irrevocably submit to the jurisdiction
of the U.S. federal courts, the Commission and ISE, for the purposes of
any suit, action or proceeding pursuant to the U.S. federal securities
laws, the rules or regulations thereunder, directly arising out of, or
relating to, Maple Merger Sub or the Facility activities or Section
10.2 of the LLC Agreement (except that such jurisdictions shall also
include Delaware for any such matter relating to the organizational or
internal affairs of Maple Merger Sub), and waives, and agrees not to
assert by way of motion, as a defense or otherwise in any such suit,
action or proceeding, any claims that it is not personally subject to
the jurisdiction of the Commission, that the suit, action or proceeding
is an inconvenient forum or that the venue of the suit, action or
proceeding is improper, or that the subject matter
[[Page 67913]]
hereof may not be enforced in or by such courts or agency.
Under Section 10.2(d) of the LLC Agreement, Maple Merger Sub, its
Members, the Facility and officers, directors, agents, and employees of
Maple Merger Sub and its Members agree to comply with the federal
securities laws and the rules and regulations thereunder and shall
cooperate with ISE pursuant to its regulatory authority and the
provisions of the LLC Agreement and the Commission; and to engage in
conduct that fosters and does not interfere with ISE's ability to
prevent fraudulent and manipulative acts and practices; to promote just
and equitable principles of trade; to foster cooperation and
coordination with Persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities; to remove impediments to and perfect the mechanisms of a
free and open market and a national market system; and, in general, to
protect investors and the public interest.
Section 10.2(e) provides that Maple Merger Sub and each Member
shall take such action as is necessary to ensure that Maple Merger
Sub's and such Member's officers, directors and employees consent in
writing to the application to them of the applicable provisions of
Section 10.2(b), (c) and (d), as applicable, with respect to their
Maple Merger Sub-related activities.
The Exchange believes that these provisions will serve as notice to
the Sole Member and Maple Merger Sub that they will be subject to the
jurisdiction of the U.S. federal courts, the Commission and the ISE. It
is imperative that regulatory cooperation is assured from the Sole
Member, Maple Merger Sub and the Facility, regardless of their business
location, country of domicile or other circumstance which the
Commission may deem to have the potential to be adverse to the
regulatory responsibilities and interests of the ISE, the Commission,
or the U.S. federal courts. Accordingly, these provisions ensure that,
should an occasion arise that requires regulatory cooperation or
jurisdictional submission from the Sole Member or Maple Merger Sub;
such party's cooperation will be forthcoming and uncontested.
Fair Representation of Trading Participants, or EAMs
ISE believes that the Maple Merger Sub company structure assures
the fair representation of ISE Members, its trading participants, in
the selection of its directors and administration of its affairs, and
satisfies Commission requirements in that one or more directors shall
be representative of issuers and investors and not be associated with a
member of the exchange, broker, or dealer.
In order to exercise trading privileges on ISE Stock, a broker-
dealer must be an approved EAM of ISE. There is only one type of EAM
membership for both options trading on ISE and equities trading on ISE
Stock. When an applicant is approved under ISE rules as an EAM, the
member is issued an EAM Exchange Right. Under the ISE Constitution,
holders of EAM Exchange Rights, or EAMs, have the right to elect two
members (the ``EAM Directors'') of the Board of Directors of ISE (the
``ISE Board''). Nominees for election to the ISE Board to serve as
Industry Directors, including EAM Directors, are currently made by the
Exchange's Nominating Committee, which is not a committee of the ISE
Board, and is comprised of representatives of the holders of each EAM
Exchange Right. ISE Members also may nominate Industry Director
candidates for election to the ISE Board by petition. Accordingly,
since trading participants on ISE Stock must be EAMs, and since EAMs
have the right to elect EAM Directors of the ISE Board, the ISE
believes that ISE Stock trading participants are fairly represented on
the ISE Board.
DE Operating Agreement
As discussed above, Direct Edge will be the sole owner of Maple
Merger Sub, and Maple Merger Sub will operate the Facility as a
facility of ISE. Because the Facility will be a facility of ISE, ISE
will have regulatory responsibility under the Exchange Act for the
Facility. Because Direct Edge is the sole owner of the operator of the
ISE's Facility, the DE Operating Agreement will include certain
provisions that are designed to preserve the independence of the ISE's
self-regulatory function with respect to the Facility, enable the
Facility to operate in a manner that complies with the federal
securities laws, including the objectives of Section 6(b) and 19(g) of
the Exchange Act and facilitate the ability of the Exchange and the
Commission to fulfill their regulatory and oversight obligations over
the Facility under the Exchange Act.
For example, Section 7.7 of the DE Operating Agreement which
contains provisions requiring supermajority and majority votes of the
Board of Directors of Direct Edge in connection with certain activities
that could apply to the ISE as the entity with regulatory
responsibility for the Facility, provides that nothing in Section 7.7
will be applicable where the application of the provision would
interfere with the effectuation of any decisions by the ISE Board
relating to its regulatory functions (including disciplinary matters)
or the structure of the market ISE regulates or would interfere with
the ability of ISE to carry out its responsibilities under the Exchange
Act as determined by the ISE Board, which functions or responsibilities
include the ability of the ISE as a self-regulatory organization to
prevent fraudulent and manipulative acts and practices; promote just
and equitable principles of trade; foster cooperation and coordination
with Persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities; remove impediments to and perfect the mechanism of a free
and open market and a national market system; and, in general, protect
investors and the public interest. In addition, Section 7.7(i) provides
that a member of Direct Edge may transfer its ownership interest
without the approval of the Direct Edge Board or any members of Direct
Edge if such transfer is required to comply with the requirements of a
governmental entity or any self-regulatory organization.
The DE Operating Agreement also includes ownership and voting
limitations. For example, Section 12.1 of the DE Operating Agreement
relates to ownership and voting concentration limitations and provides
that no Person, either alone or together with its Related Persons (as
defined in the DE Operating Agreement): (i) May own, directly or
indirectly, of record or beneficially, equity units of the Sole Member
representing in the aggregate a percentage interest of more than 40%;
(ii) may, if they are a holder of EAM Rights (as defined in the LLC
Agreement), own, directly or indirectly, of record or beneficially,
equity units of the Sole Member representing in the aggregate a
percentage interest of more than 20%; and (iii) may, directly,
indirectly or pursuant to any voting trust, agreement, plan or other
arrangement, vote or cause the voting of equity units or give any
consent or proxy with respect to equity units of the Sole Member
representing a percentage interest of more than 20%, nor may they enter
into any agreement, plan or other arrangement with any other Person,
either alone or together with Related Persons, under circumstances that
would result in the equity units that are subject to such agreement,
plan or other arrangement not being voted on any matter or matters or
any proxy relating thereto being withheld, where the effect of such
agreement, plan or other
[[Page 67914]]
arrangement would be to enable any Person, either alone or together
with their Related Persons, to vote, possess the right to vote or cause
the voting of equity units of the Sole Member that would represent a
percentage interest of more than 20%. The concentration limitations set
forth in Section 12.1 of the DE Operating Agreement do not apply to ISE
Holdings for so long as ISE is a wholly owned subsidiary of ISE
Holdings. The limitations set forth in (i) and (iii) above may be
waived by the board of managers of the Sole Member by amendment to the
DE Operating Agreement adopted by the board of managers if, in
connection with the adoption of such amendment, the board adopts a
resolution stating that that the board has determined that the
amendment: (i) Will not impair the ability of ISE to carry out its
functions and responsibilities under the Exchange Act and the rules and
regulations thereunder, (ii) is otherwise in the best interests of the
Sole Member and its members and the Maple Merger Sub; and (iii) will
not impair the ability of the SEC to enforce the Exchange Act and the
rules and regulations thereunder. Such amendment shall not be effective
unless it is filed with and approved by the SEC. In making the
determinations referred to in Section 12.1(b), the board of managers of
the Sole Member may impose on the Person in question and its Related
Persons such conditions and restrictions as it may in its sole
discretion deem necessary, appropriate or desirable in furtherance of
the objectives of the Exchange Act, and the rules under the Exchange
Act, and the governance of the Maple Merger Sub.
The DE Operating Agreement contains a number of provisions designed
to ensure that ISE has sufficient access to the books and records of
the Sole Member. For example, Section 11.2 of the DE Operating
Agreement relates to access to and preservation of confidentiality of
the books and records and other confidential information and provides
that the books, records, premises, officers, managers, agents and
employees of the Sole Member shall be deemed to be the books, records,
premises, officers, managers, agents and employees of ISE to the extent
that they are related to the operation or administration of Maple
Merger Sub for purposes of and subject to oversight pursuant to the
Exchange Act. Furthermore, for as long as the Sole Member controls,
directly or indirectly, Maple Merger Sub, the books and records, as
well as any confidential information of the Maple Merger Sub relating
to the self regulatory function of the ISE, shall be subject at all
times to inspection and copying by the SEC and ISE provided that such
books and records are related to the operation or administration of
Maple Merger Sub. Section 11.2 of the DE Operating Agreement also
provides for the confidentiality of all books and records of the Maple
Merger Sub that reflect confidential information pertaining to the self
regulatory function of ISE and that such books and records shall not be
used for any non-regulatory purposes.
The DE Operating Agreement contains a number of provisions
specifically related to the SRO function. For example, Section 14.1 of
the DE Operating Agreement provides that the managers, officers,
employees and agents of the Sole Member shall not take any actions that
would interfere with the effectuation of any decisions by ISE in its
capacity as an SRO relating to its regulatory functions (including
disciplinary matters) or which would interfere with the ability of ISE
in its capacity as an SRO to carry out its responsibilities under the
Exchange Act. Section 14.2 of the DE Operating Agreement provides that
the Sole Member shall cooperate with the SEC and ISE, as applicable,
pursuant to and to the extent of their respective regulatory authority.
The officers, managers, employees and agents of the Sole Member
additionally are deemed to agree to: (i) Comply with the U.S. federal
securities laws and the rules and regulations thereunder and (ii)
cooperate with the SEC and ISE in respect of the SEC's oversight
responsibilities regarding Maple Merger Sub and ISE and the self-
regulatory functions and responsibilities of ISE. Section 14.3 of the
DE Operating Agreement provides that the Sole Member and its officers,
managers, employees and agents, by virtue of their acceptance of such
position, shall be deemed to irrevocably submit to the jurisdiction of
the United States federal courts, the SEC and ISE, as applicable, for
the purposes of any suit, action or proceeding pursuant to the U.S.
federal securities laws and the rules and regulations thereunder
arising out of, or relating to, the activities of Maple Merger Sub, and
by virtue of their acceptance of any such position, shall be deemed to
waive, and agree not to assert by way of motion, as a defense or
otherwise in any such suit, action or proceeding, any claims that it or
they are not personally subject to the jurisdiction of the United
States federal courts, the SEC or ISE that the suit, action or
proceeding is an inconvenient forum or that the venue of the suit,
action or proceeding is improper, or that the subject matter of that
suit, action or proceeding may not be enforced in or by such courts or
agency. The Sole Member and its officers, managers, employees and
agents also agree that they will maintain an agent, in the United
States, for the service of process of a claim arising out of, or
relating to, the activities of Maple Merger Sub, and agree to notify
the other parties hereto of the name and address of such agent.
Finally, the DE Operating Agreement contains provisions designed to
ensure that any changes to the DE Operating Agreement be first reviewed
by ISE to determine whether such change must be filed with the SEC. For
example, Section 15.2 of the DE Operating Agreement provides that
before any amendment to any provision of the DE Operating Agreement
shall be effective, such amendment shall be submitted to ISE and if ISE
determines that such amendment must be filed with, or filed with and
approved by, the SEC before the amendment may be effective under
Section 19 of the Exchange Act and the rules promulgated under the
Exchange Act or otherwise, then the proposed amendment to the DE
Operating Agreement shall not be effective until filed with, or filed
with and approved by, the SEC, as the case may be.
ISE Holding's Certificate of Incorporation and Bylaws
The Exchange proposes to amend certain provisions of the
Certificate of Incorporation and Bylaws (together the ``Corporate
Documents'') of ISE Holdings in connection with the contemplated
ownership and operation of two (2) national securities exchanges by
Direct Edge. As a result of ISE Holdings owning a 31.54% equity
interest in Direct Edge and possessing certain contractual rights and
obligations with respect to Direct Edge, ISE Holdings may, in the
future, control, indirectly subsidiary exchanges of Direct Edge.
Accordingly, the Exchange proposes to broaden certain references that
are currently limited to ISE (the sole registered national securities
exchange controlled by ISE Holdings) to cover these two contemplated
Direct Edge subsidiary exchanges. Thus, the Exchange proposes to
replace certain references to ISE with each ``Controlled National
Securities Exchange.'' These references appear in the ownership and
voting limitations sections of the Corporate Documents, as well as
other miscellaneous sections, including, but not limited to, the
confidentiality section, the books and records section,
[[Page 67915]]
the compliance with laws section and the amendments section.
ISE Rules
The Exchange proposes to amend the language in Rule 312 (Limitation
on Affiliation between the Exchange and Members) to reflect that this
provision now covers Maple Merger Sub, as an operator of the Facility.
Subsequent to the effectuation of the transactions discussed above,
ISE Holdings will have a 31.54% equity interest in Direct Edge, which
wholly owns and operates Direct Edge ECN LLC (``DE ECN'') which
displays its quotes on ISE. DE ECN currently, and will continue to
after the transactions are effected, routes orders into ISE Stock. Due
to the combination of ISE Holdings owning a 31.54% equity interest in
DE ECN's parent company, Direct Edge, and DE ECN routing orders into
ISE Stock, DE ECN will be deemed to be a facility of ISE, as that term
is defined in Section 3(a)(2) of the Exchange Act.
Further, upon closing of the transaction, ISE and Maple Merger Sub
will be affiliated with DE ECN, which is a member of ISE and a wholly
owned subsidiary of Direct Edge.
Recognizing that the Commission has previously expressed concern
regarding (1) the potential for conflicts of interest in instances
where an exchange is affiliated with one of its members, and (2) the
potential for informational advantages that could place an affiliated
member of an exchange at a competitive advantage vis-[agrave]-vis the
other non-affiliated members, ISE proposes to amend Rule 312 to permit
the proposed affiliation subject to several conditions and limitations.
Accordingly, the Exchange is proposing to adopt subsection (b) to
Rule 312 to require that for so long as the Exchange is affiliated with
DE ECN or DE ECN is a facility of the Exchange: \14\ (1) Financial
Industry Regulatory Authority (``FINRA''), a self-regulatory
organization unaffiliated with the Exchange or any of its affiliates,
will carry out oversight and enforcement responsibilities as the
designated examining authority designated by the Commission pursuant to
Rule 17d-1 of the Exchange Act with the responsibility for examining DE
ECN for compliance with applicable financial responsibility rules; (2)
the Exchange shall contract with a non-affiliated self-regulatory
organization to regulate and oversee the activities of DE ECN, pursuant
to Rule 17d-2 under the Exchange Act; (3) the Exchange shall provide
said non-affiliated self-regulatory organization with information
regarding all exception reports, alerts, complaints, trading errors,
cancellations, investigations, and enforcement matters (collectively,
``Exceptions'') in which DE ECN is identified as a participant that has
potentially violated Exchange or SEC rules, in an easily accessible
manner, and said non-affiliated self-regulatory organization shall
provide a report to the Exchange quantifying Exceptions on not less
than a quarterly basis; (4) the Exchange, on behalf of Direct Edge,
shall establish and maintain procedures and internal controls
reasonably designed to ensure that DE ECN does not develop or implement
changes to its systems on the basis of nonpublic information obtained
as a result of its affiliation with the Exchange until such information
is available generally to similarly situated members of the Exchange in
connection with the provision of inbound order routing to the Exchange;
(5) in the event that DE ECN acts as an introducing broker for
subscribers of DE ECN who are not members of the Exchange, then DE
ECN's role as introducing broker is limited to its role as introducing
broker to DE ECN; (6) DE ECN will not engage in any business other than
operating as an ECN and other than acting as an introducing broker as
described above; (7) the affiliation of DE ECN is subject to the
conditions set forth above and is granted on a temporary basis, for not
longer than one year from the date of Commission approval of this
filing.
---------------------------------------------------------------------------
\14\ E-mail from Joseph W. Ferrarro III, Associated General
Counsel, Exchange, to Heidi Pilpel, Attorney, Division of Trading
and Markets, Commission, dated November 7, 2008.
---------------------------------------------------------------------------
The Exchange proposes to adopt subsection (c) of ISE Rule 2108
(Order Routing and Route Out Facility) to expand the scope of the rule
to cover DE ECN. Specifically, proposed Rule 2108(c), requires that the
books, records, premises, officers, directors, agents, and employees of
the DE ECN, as a facility of the Exchange, shall be deemed to be the
books, records, premises, officers, directors, agents, and employees of
the Exchange for purposes of and subject to oversight pursuant to the
Exchange Act. The books and records of the DE ECN, as a facility of the
Exchange, shall be subject at all times to inspection and copying by
the Exchange and the Commission.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Exchange Act,\15\ in general,
and with Sections 6(b)(1) and (b)(5) of the Exchange Act,\16\ in
particular, in that the proposal enables the Exchange and the Facility
to be so organized as to have the capacity to be able to carry out the
purposes of the Exchange Act and to comply with and enforce compliance
by members and persons associated with members with provisions of the
Exchange Act, the rules and regulations thereunder, and SRO rules, and
is designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78f.
\16\ 15 U.S.C. 78f(b)(1), (5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. by order approve such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act.
[[Page 67916]]
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (www.sec.gov/
rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-ISE-2008-85 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2008-85. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-ISE-2008-85 and should be
submitted on or before December 8, 2008.
---------------------------------------------------------------------------
\17\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-27157 Filed 11-14-08; 8:45 am]
BILLING CODE 8011-01-P
