Self-Regulatory Organizations; NYSE Amex LLC; Order Approving Proposed Rule Change, as Modified by Amendment No. 1, Relating to the Formation of a Joint Venture Between the Exchange, Its Ultimate Parent NYSE Euronext, and Seven Other Entities To Operate an Electronic Trading Facility for Options Contracts, 38436-38443 [2011-16417]
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38436
Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011–16397 Filed 6–29–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–64742; File No. SR–
NYSEAmex–2011–18]
Self-Regulatory Organizations; NYSE
Amex LLC; Order Approving Proposed
Rule Change, as Modified by
Amendment No. 1, Relating to the
Formation of a Joint Venture Between
the Exchange, Its Ultimate Parent
NYSE Euronext, and Seven Other
Entities To Operate an Electronic
Trading Facility for Options Contracts
June 24, 2011.
srobinson on DSK4SPTVN1PROD with NOTICES
I. Introduction
On March 23, 2011, NYSE Amex LLC
(‘‘NYSE Amex’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’ or ‘‘SEC’’) a proposed
rule change, pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 in connection with the
formation of a joint venture between
NYSE Amex, its ultimate parent NYSE
Euronext, a Delaware corporation, and
the following entities (each, a
‘‘Founding Firm’’): Citadel Securities
LLC (‘‘Citadel’’); Goldman, Sachs & Co.
(‘‘Goldman Sachs’’); Banc of America
Strategic Investments Corporation
(‘‘BAML’’); Citigroup Financial
Strategies, Inc. (‘‘Citigroup’’); Datek
Online Management Corp. (‘‘TD
Ameritrade’’); UBS Americas Inc.
(‘‘UBS’’); and Barclays Electronic
Commerce Holdings Inc. (‘‘Barclays’’),
to operate an electronic trading facility
(‘‘Options Facility’’) that will engage in
the business of listing for trading
options contracts permitted to be listed
on a national securities exchange (or
facility thereof) and related activities.
The proposed rule change was
published for comment in the Federal
Register on April 4, 2011.3 The
Commission received three comment
letters on the proposal.4 The
10 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 64144
(March 29, 2011), 76 FR 18591 (‘‘Notice’’).
4 See Letter from Andrew Rothlein, to Hon. Mary
L. Schapiro, Chairman, and Hon. Kathleen L. Casey,
Hon. Elisse B. Walter, Hon. Luis A. Aguilar, and
Hon. Troy A. Paredes, Commissioners, Commission,
1 15
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Commission subsequently extended to
July 1, 2011, the time period in which
to either approve the proposed rule
change, or to institute proceedings to
determine whether to disapprove the
proposed rule change.5 On June 15,
2011, NYSE Amex filed Amendment
No. 1 to the proposed rule change.6 This
order approves the proposed rule
change, as modified by Amendment
No. 1.
II. Overview
NYSE Amex proposes to establish
NYSE Amex Options LLC (‘‘Company’’),
a Delaware limited liability company
formed by NYSE Euronext, NYSE Amex,
and the Founding Firms, and jointly
owned by NYSE Amex and the
Founding Firms, to operate the Options
Facility. Pursuant to the proposal, the
Options Facility will be operated as a
facility 7 of NYSE Amex, which will act
as the self-regulatory organization
(‘‘SRO’’) for the Options Facility and as
such have regulatory responsibility for
the activities of the Options Facility.8
With this proposed rule change,
NYSE Amex seeks the Commission’s
approval of the proposed governance
structure of the Company as reflected in
the proposed Limited Liability
Company Agreement (‘‘LLC
Agreement’’) for the Company and a
proposed Members Agreement of the
Company setting forth certain additional
provisions (‘‘Members Agreement’’)
relating to the proposed governance
dated April 14, 2011 (‘‘Rothlein Letter’’); Letter
from Benjamin Kerensa, dated April 25, 2011
(‘‘Kerensa Letter’’); and Letter from Joan C. Conley,
Senior Vice President and Corporate Secretary,
Nasdaq OMX Group, Inc. (‘‘NASDAQ’’), to
Elizabeth M. Murphy, Secretary, Commission, dated
April 29, 2011 (‘‘NASDAQ Letter’’).
5 See Securities Exchange Act Release No. 64511
(May 18, 2011), 76 FR 29809 (May 23, 2011).
6 See Amendment No. 1 dated June 15, 2011
(‘‘Amendment No. 1’’). Amendment No. 1 deletes
an erroneous reference in Section 16.1(f) of the LLC
Agreement; clarifies those Founding Firms that are
NYSE Amex members or their affiliates; clarifies the
availability of information noted ‘‘To Come’’ on
certain Schedules to the LLC Agreement; and
confirms the applicability of Section 4.9 of the LLC
Agreement to a NYSE Amex member that is an
affiliate of NYSE Amex. Amendment No. 1 is a
technical amendment and is not subject to notice
and comment.
7 Pursuant to Section 3(a)(2) of the Act, 15 U.S.C.
78c(a)(2), the term ‘‘facility’’ when used with
respect to a national securities exchange, includes
‘‘its premises, tangible or intangible property
whether on the premises or not, any right to the use
of such premises or property or any service thereof
for the purpose of effecting or reporting a
transaction on an exchange (including, among other
things, any system of communication to or from the
exchange, by ticker or otherwise, maintained by or
with the consent of the exchange), and any right of
the exchange to the use of any property or service.’’
8 NYSE Amex represented that it has adequate
funds to discharge all regulatory functions related
to the Options Facility. See Notice, supra note 3,
76 FR 18592.
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structure of the Company.9 NYSE Amex
is not proposing any changes to its
listing and trading rules in connection
with establishment of the Company and
operation of the Options Facility.
As a limited liability company,
ownership of the Company is
represented by limited liability
company interests in the Company
(‘‘Interests’’).10 The holders of Interests
are referred to as the members of the
Company (‘‘Members’’).11 The Interests
represent equity interests in the
Company and entitle the holders thereof
to participate in the Company’s
allocations and distributions. Initially,
NYSE Amex will own 100% of the
preferred non-voting Interests
(‘‘Preferred Interests’’) and 47.2% of the
Common Interests,12 as Class A
Common Interests. The Founding Firms
will own the remaining 52.8% of the
Common Interests, as Class B Common
Interests, and no single Founding Firm
(including its affiliates) will own Class
B Common Interests comprising more
than 19.9% of the issued and
outstanding Common Interests. The
52.8% ownership of Class B Common
Interests will initially be allocated as
follows: 14.95% to each of Citadel and
Goldman Sachs; 5.0% to each of BAML,
Citigroup and TD Ameritrade; 4.9% to
UBS; and 3.0% to Barclays.13
9 Certain portions of the Members Agreement are
not considered part of the proposed rule change.
See infra note 13.
10 ‘‘Interest’’ means the limited liability company
interest in the Company owned by each Member
including any and all benefits to which such
Member may be entitled as provided in the LLC
Agreement or required by the Act, together with all
obligations of such Member to comply with the
terms and provisions of the LLC Agreement. See
Section 1.1 of the LLC Agreement. See infra note
11 for the definition of Member.
11 ‘‘Member’’ means each Person who is a
signatory to this Agreement (other than NYSE
Euronext) or who has been admitted to the
Company as a Member in accordance with this
Agreement and has not ceased to be a Member in
accordance with this Agreement or for any other
reason. See Section 1.1 of the LLC Agreement. See
infra note 78 for definition of Person.
12 Common Interests consist of Class A Common
Interests and Class B Common Interests. See Section
1.1 of the LLC Agreement. ‘‘Class A Common
Interests’’ means the Interests in the form of shares
owned by NYSE Amex, as specified in Schedule A
of the LLC Agreement, having the rights and
obligations specified in the LLC Agreement. See id.
‘‘Class B Common Interests’’ means the Interests in
the form of shares owned by each Founding Firm,
as specified in Schedule A of the LLC Agreement,
having the rights and obligations specified in the
LLC Agreement. See id. Schedule A of the LLC
Agreement sets forth the Interest allocations of each
Member.
13 Following the effective date of the proposed
rule change, additional Class B Common Interests
will be issued to the Founding Firms based, in part,
on each Founding Firm’s contribution to the annual
volume of the Options Facility from October 1, 2009
to December 31, 2010 (i.e., the ‘‘Volume-Based
Equity Plan’’). See Notice, supra note 3, 76 FR at
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srobinson on DSK4SPTVN1PROD with NOTICES
Pursuant to Section 2.1 of the
Members Agreement, for an initial
period of five (5) years and three (3)
months, each Founding Firm will have
to satisfy certain minimum volume
requirements. Under the Volume-Based
Equity Plan (‘‘Incentive Plan’’),14 for
each measurement period, the Company
will issue Annual Incentive Shares.15
Each Founding Firm will be entitled to
receive, for no additional consideration,
a portion of the Annual Incentive Shares
such that it dilutes, maintains or
increases its equity interest in the
Company (relative to the other
Founding Firms) based on the degree to
which the Founding Firm has failed to
achieve, achieved or exceeded its
‘‘Individual Target’’ during the
measurement period. A Founding
Firm’s Individual Target will be its pro
rata portion of an aggregate Founding
Firm target contribution to the annual
volume of the Options Facility.16 This
pro rata calculation will be performed
once, based on the Founding Firm’s
holdings of Class B Common Interests
relative to the other Founding Firms at
the time the Company is formed and
will not change as a Founding Firm’s
equity holdings fluctuate as a result of
the Incentive Plan. The Incentive Plan
will not affect the equity holdings of
NYSE Amex and it will not increase or
decrease the aggregate equity interest of
18594. NYSE Amex represented that this issuance
of shares to the Founding Firms will not result in
any Member (alone or together with its affiliates)
other than NYSE Amex exceeding the 19.9%
Maximum Percentage (as defined below).
14 As stated in the purpose section of the
proposed rule change, it is NYSE Amex’s view that
the Incentive Plan does not constitute a proposed
rule change within the meaning of Section 19(b)(1)
of the Act and Rule 19b–4 thereunder. See Notice,
supra note 3, 76 FR at 18594, n.19.
15 Pursuant to Section 2.1(a) of the Members
Agreement, ‘‘Annual Incentive Shares’’ generally
are additional Class B Common Interests equal to
a percentage of the amount of Class B Common
Interests issued and outstanding immediately prior
to such issuance and owned by the Founding Firms.
16 See Notice, supra note 3, 76 FR at 18610. See
also Members Agreement, Section 1.1 (defining
‘‘Individual Target’’). In determining whether a
Founding Firm has achieved its individual target
for a measurement period, a Founding Firm will
receive one credit for each side of a transaction
executed through the Options Facility, either for its
proprietary account or for the account of its
customers. See Section 2.3(a) of the Members
Agreement.
Members of the LLC are entitled to distributions
of the LLC’s available cash, reflective of their
common interest percentages. See Section 6.1 of the
Members Agreement. See also Section 1.1 of the
LLC Agreement (defining ‘‘available cash’’ generally
as cash held by the Company that both (i) is not
required for the operations of the Company based
on the annual budget of the Company for the year;
and (ii) the Board of Directors of the Company
(‘‘Board’’) determines in good faith is not required
for the payment of liabilities of the Company or the
setting aside of reserves to meet the anticipated
cash needs of the Company.
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the Founding Firms relative to NYSE
Amex. The Annual Incentive Shares not
allocated to one or more Founding
Firms by virtue of each such Founding
Firm failing to achieve its respective
Individual Target will be either partially
or fully reallocated among those
Founding Firms that exceed their
respective Individual Targets.
III. Regulatory Structure
As an SRO, NYSE Amex has
regulatory responsibility for all of its
facilities, including the Options Facility.
Day-to-day operations of the Company
and the management of its business and
affairs will be delegated to the
Company’s officers and to NYSE Group,
Inc. (‘‘NYSE Group’’), a subsidiary of
NYSE Euronext, in accordance with a
services agreement (‘‘NYSE Euronext
Agreement’’) between NYSE Group and
the Company.17 Under the NYSE
Euronext Agreement, NYSE Group will
agree to provide the Options Facility
with a range of operational and support
services.18 The Board 19 will be
responsible for the oversight of the
Company’s officers and NYSE Group’s
performance under the NYSE Euronext
Agreement.20 The Board initially will
consist of six directors 21 designated by
the Founding Firms (one by each
Founding Firm), and seven directors
designated by NYSE Amex.22
NYSE Regulation, Inc. (‘‘NYSE
Regulation’’), an indirect wholly-owned
subsidiary of NYSE Euronext, and NYSE
Amex entered into a regulatory services
agreement (‘‘RSA’’) dated October 1,
2008 pursuant to which NYSE
Regulation performs all of NYSE Amex’s
regulatory functions on NYSE Amex’s
behalf. However, certain of these
member and market regulatory
functions, which include surveillance,
examination, investigation and related
disciplinary functions, are performed by
the Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) pursuant to a
RSA dated June 14, 2010 among FINRA,
NYSE Group, New York Stock Exchange
LLC, NYSE Regulation, NYSE Arca, Inc.
and NYSE Amex. FINRA and NYSE
Amex have also entered into an
allocation agreement pursuant to
Section 17(d)(1) of the Act,23 and Rule
17d–2 24 thereunder, whereby FINRA
assumed regulatory responsibility for
specified rules that are common to
FINRA and NYSE Amex and for
17 See
Section 8.1(b) of the LLC Agreement.
Notice, supra note 3, 76 FR at 18593.
19 See Section 8.1(a) of the LLC Agreement.
20 See Section 8.1(b) of the LLC Agreement.
21 See Section 8.1(a) of the LLC Agreement.
22 See Section 8.1(d) of the LLC Agreement.
23 15 U.S.C. 78q(d)(1).
24 17 CFR 240.17d–2.
18 See
PO 00000
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38437
common members. Because the Options
Facility will be a facility of NYSE Amex,
FINRA will perform the applicable
regulatory functions and responsibilities
with respect to activity on or through
the Options Facility, including both
general regulatory functions, as noted
above, and targeted regulatory reviews
as applicable.
Pursuant to the RSA between NYSE
Regulation and NYSE Amex, NYSE
Regulation exercises oversight, on
behalf of NYSE Amex, of FINRA’s
performance of the regulatory functions
performed by FINRA as described
above. NYSE Regulation also has
responsibilities with respect to the
Options Facility for rule interpretation,
regulatory policy and participation in
rule development. NYSE Regulation
periodically reports on regulatory
matters to the board of directors of
NYSE Amex, which has appointed a
Chief Regulatory Officer (‘‘CRO’’) who is
also the Chief Executive Officer of NYSE
Regulation. NYSE Amex does not have
a regulatory oversight committee of its
board of directors, but the CRO is also
an officer of NYSE Amex, and in that
capacity is charged with reporting on
regulatory matters to the NYSE Amex
board of directors. Notwithstanding the
foregoing, NYSE Amex will still retain
ultimate legal responsibility for the
performance of all of its regulatory
obligations as an SRO, including with
respect to the Options Facility, as well
as the ability to take action as required
to meet that responsibility.
The board of directors of NYSE Amex
currently consists of five (5) directors, a
majority of whom are required to be
individuals domiciled in the U.S. who
are classified as independent members
of the NYSE Euronext board of
directors. At least twenty percent (20%)
of NYSE Amex’s directors (currently
one individual) must be ‘‘non-affiliated’’
directors who are not members of the
NYSE Euronext board of directors and
need not be independent under the
independence requirements of NYSE
Euronext. Any required non-affiliated
directors of NYSE Amex are nominated
and elected through a process designed
to ensure fair representation of members
of NYSE Amex on NYSE Amex’s board
of directors. NYSE Amex does not have
any committees of its board of directors
that perform functions relating to audit,
governance and compensation. Instead,
such functions are performed for NYSE
Amex by related committees of the
NYSE Euronext board of directors that
are comprised solely of NYSE Euronext
directors who meet the independence
requirements of NYSE Euronext.
Decisions on the listing of options to
be traded on the Options Facility will be
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Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Notices
made by the business side of NYSE
Amex in accordance with NYSE Amex’s
rules. The business side also will
continue to be responsible for new
product development, participation in
rule development, strategic analysis,
administering NYSE Amex programs,
business development and client
outreach.
IV. Summary of Comment Letters
srobinson on DSK4SPTVN1PROD with NOTICES
As noted above, the Commission
received three comment letters on the
proposed rule change. One commenter
opposed the proposed rule change,
asserting that he continues to own
unredeemed New York Stock Exchange
Option Trading Rights (‘‘OTRs’’) that
were separated from full New York
Stock Exchange, Inc. (‘‘NYSE, Inc.’’)
seats (‘‘Separated OTRs’’).25 All NYSE,
Inc. seat ownership (with or without
OTRs) was extinguished in the 2006
demutualization of NYSE, Inc.26 The
commenter believes that the owners of
Separated OTRs retained their
Separated OTRs, even after NYSE, Inc.
exited the options business in 1997,
with the expectation that their
ownership of the Separated OTRs would
afford them full rights to trade options
under the auspices of NYSE, Inc. or its
successor entity. The commenter further
argues that such ownership gives him
rights to effect options trades on all
NYSE related or affiliated markets,
including the various successor markets
to NYSE, Inc. The Commission notes
that the issue of the rights of owners of
Separated OTRs is not before the
Commission in the context of this
proposed rule change and thus its
consideration of the NYSE Amex
proposal does not address the rights of
owners of Separated OTRs.
Another commenter opposed the
proposed rule change because Goldman
Sachs will be a Founding Firm.27 The
commenter stated that Goldman Sachs
should not be able to benefit from the
proposed rule change because the firm
‘‘recently was found by a congressional
committee to have been involved [in]
deceptive and potentially illegal
practices.’’ The Commission does not
find the comment to be dispositive in its
determination regarding whether to
approve the proposed rule change.
Moreover, the Commission believes
25 See Rothlein Letter, supra note 4. NYSE, Inc.
is the predecessor to New York Stock Exchange LLC
(‘‘NYSE’’). See Securities Exchange Act Release No.
53382 (February 27, 2006), 71 FR 11251 (March 6,
2006) (SR–NYSE–2005–77) (order approving merger
of NYSE, Inc. and Archipelago, and
demutualization of NYSE, Inc.) (‘‘NYSE–Arca
Merger Order’’).
26 See NYSE–Arca Merger Order.
27 See Kerensa Letter, supra note 4.
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that, as discussed more fully below, the
proposed rule change is designed to
provide NYSE Amex, in its capacity as
an SRO, and the Commission
appropriate authority and jurisdiction to
oversee any issues or concerns that may
arise from ownership by NYSE Amex’s
members of the Company, which is
organized to operate a facility of NYSE
Amex.
The third commenter expressly did
not object to the proposal, but stated
that the Incentive Plan is ‘‘virtually
indistinguishable in purpose and effect
from other fee or rebate-based incentive
plans operated by national securities
exchanges,’’ and that the Commission
‘‘must apply the same principles to all
fee and rebate plans.’’ 28
NASDAQ also stated that the
proposed rule change will allow NYSE
Amex to make distinctions among
market participants and to pre-select
firms that will be rewarded for order
flow. NASDAQ remarked that NYSE
Amex’s proposal ‘‘seems reasonably
designed to incentivize order flow and
enhance the competitiveness of its
market’’ and that ‘‘[m]arket participants
benefit in reduced costs and improved
liquidity when the Commission allows
genuine competition among exchanges.’’
NASDAQ further cited to data
indicating that NYSE Amex’s options
volume generally has increased from
around 6% in October 2009, which was
about the time of the initial
announcement of the transaction, to
15% in March 2011, when the proposal
was filed with the Commission.
NASDAQ drew the conclusion that such
increase correlates to the Incentive
Plan 29 noting that the initial volume
measurement period began in October
2009.
NASDAQ noted that the Commission
has been ‘‘reluctant to endorse
differential pricing for exchanges’’ in
the past. NASDAQ indicated that
Section 6(b)(4) of the Act focuses on
‘‘equitable’’ allocation of fees, not
identical fees, and that Section 6(b)(5) of
the Act prohibits the ‘‘unfair
discrimination,’’ not any differentiation,
between customers. NASDAQ stated
that, in the past, the Commission
required that fees and rebates be open
to all members and that transparent
thresholds provide equal fees and
rebates to all members that meet the
threshold and contended that the
NASDAQ Letter, supra note 4.
also Notice, supra note 3, 76 FR at 18592,
n. 6 (explaining that additional Class B Common
Interests will be issued to the Funding Firms based
on their contribution to the annual volume of the
options facility from October 1, 2009 to December
31, 2010).
Incentive Plan is a departure from this
interpretation.
Finally, NASDAQ stated that
exchanges should have the flexibility to
offer fee incentives and rebates, and that
such flexibility should not be limited to
the use of equity and equity-like
instruments, and that limiting such
flexibility to equity incentive plans
penalizes exchanges that choose to
avoid the appearance of a conflict of
interest when an SRO is owned by its
members. NASDAQ noted, however,
that the Incentive Plan includes several
provisions that attempt to deal with the
appearance of such a conflict of interest.
The Commission discusses the Incentive
Plan in light of NASDAQ’s comments in
Section V.E. below.
V. Discussion and Commission Findings
After careful consideration, 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 exchange.30 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(1) of the Act,31 which,
among other things, requires a national
securities exchange to be so organized
and have the capacity to be able to carry
out the purposes of the Act and to
enforce compliance by its members and
persons associated with its members
with the provisions of the Act, the rules
and regulations thereunder, and the
rules of the exchange.
The Commission also finds that the
proposed rule change is consistent with
Section 6(b)(5) of the Act,32 which
requires, among other things, that the
rules of a national securities exchange
be designed to prevent fraudulent and
manipulative acts and practices; to
promote just and equitable principles of
trade; to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, and
processing information with respect to,
and facilitating transactions in
securities; to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system; and, in general, to protect
investors and the public interest.
A. The Options Facility as a Facility of
NYSE Amex
The Commission believes that the
proposed rule change is consistent with
Section 6(b)(1) of the Act in that, upon
28 See
29 See
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30 In approving the proposed rule change, the
Commission has considered its impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
31 15 U.S.C. 78f(b)(1).
32 15 U.S.C. 78f(b)(5).
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establishing the Options Facility as a
facility of NYSE Amex, and entering
into the relationship with the Company
described above, NYSE Amex will
remain so organized and have the
capacity to carry out the purposes of the
Act. As an SRO, NYSE Amex will have
regulatory control over the Options
Facility and will be responsible for
ensuring its compliance with the federal
securities laws and all applicable rules
and regulations thereunder.
Furthermore, the Company is obligated
under the LLC Agreement to operate the
Options Facility in a manner consistent
with the regulatory and oversight
responsibilities of NYSE Amex and the
Act, and the rules and regulations
thereunder. The Commission notes that
it previously approved similar
structures with respect to the operation
of exchange facilities.33
Although the Company does not carry
out any regulatory functions, all of its
activities must be consistent with the
Act. As a facility of a national securities
exchange, the Options Facility is not
solely a commercial enterprise but is an
integral part of an SRO that is registered
pursuant to the Act and therefore
subject to obligations imposed by the
Act. The Commission believes that the
LLC Agreement and Members
Agreement are reasonably designed to
enable the Company to operate in a
manner that is consistent with this
principle. The LLC Agreement provides
that the Company, NYSE Euronext,
NYSE Group, each Member, and the
officers, directors, agents, and
employees of the Company, NYSE
Euronext, NYSE Group, and each
Member agree to comply with the
federal securities laws and the rules and
regulations promulgated thereunder and
cooperate with NYSE Amex and the
Commission, and to engage in conduct
that fosters and does not interfere with
the Company’s and NYSE Amex’s
ability to carry out their respective
responsibilities under the Act.34
33 See Securities Exchange Act Release Nos.
55389 (March 2, 2007), 72 FR 10575 (March 8,
2007) (order approving CBOE Stock Exchange as a
facility of the Chicago Board Options Facility)
(‘‘CBSX Order’’); 54399 (September 1, 2006), 71 FR
53728 (September 12, 2006) (order approving the
ISE Stock Exchange as a facility of the International
Securities Exchange) (‘‘ISE Stock Order’’); 54364
(August 25, 2006), 71 FR 52185 (order approving
the Boston Equities Exchange as a facility of the
Boston Stock Exchange) (‘‘BeX Order’’); 49065
(January 13, 2004), 69 FR 2768 (January 20, 2004)
(order approving the Boston Options Facility as a
facility of the Boston Stock Exchange) (‘‘BOX
Order’’); and 59281 (January 22, 2009), 74 FR 5014
(January 28, 2009) (order approving the New York
Block Exchange as a facility of the New York Stock
Exchange) (‘‘NYSE Block Order’’).
34 See Section 16.1(e) of the LLC Agreement. See
also Section 7.6 of the LLC Agreement.
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The LLC Agreement likewise provides
that the Board collectively, and each
member of the Board individually, must
comply with the federal securities laws
and the rules and regulations
thereunder and cooperate with NYSE
Amex and with the Commission.35
Moreover, each Director must take into
consideration whether his or her
actions, and each Member must take
into consideration whether its actions,
would cause the Options Facility or the
Company to engage in conduct that
fosters, and does not interfere with,
NYSE Amex’s or the Company’s ability
to carry out their respective
responsibilities under the Act.36
The LLC Agreement stipulates that all
confidential information pertaining to
the self-regulatory function of NYSE
Amex or the Company (including but
not limited to disciplinary matters,
trading data, trading practices, and audit
information) contained in the books and
records of the Company will not be
made available to any persons other
than to those officers, directors,
employees, and agents of the Company
that have a reasonable need to know the
contents thereof; will be retained in
confidence by the Company and their
respective officers, directors, employees,
and agents; and will not be used for any
non-regulatory purposes.37 Nothing in
the LLC Agreement, however, will limit
or impede the rights of the Commission
or NYSE Amex to access and examine
confidential information of the
Company pursuant to the federal
securities laws and rules and
regulations thereunder or limit or
impede the ability of a member of the
Board, any Member, or any officer,
director, agent, or employee of a
Member or the Company to disclose
confidential information to the
Commission or NYSE Amex.38
The LLC Agreement also provides that
NYSE Amex will receive notice of
planned or proposed changes to the
Company (excluding Non-Market
Matters 39) or the Options Facility, and
NYSE Amex must not object
affirmatively to such changes prior to
35 See
Sections 8.1(m)(i) of the LLC Agreement.
respectively, Sections 8.1(m)(ii) and 7.6 of
the LLC Agreement.
37 See Section 14.1(j) of the LLC Agreement.
38 See Section 14.1(k) of the LLC Agreement.
39 ‘‘Non-Market Matters’’ means matters relating
solely to one or more of the following: Marketing,
administrative matters, personnel matters, social or
team-building events, meetings of Members,
communication with Members, finance, location
and timing of Board meetings, market research, real
property, equipment, furnishings, personal
property, intellectual property, insurance, contracts
unrelated to the operation of the Options Facility
and de minimis items. See Section 1.1 of the LLC
Agreement.
36 See,
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38439
implementation.40 In the event that
NYSE Amex, in its sole discretion,
determines that such planned or
proposed changes to the Company or
the Options Facility could cause a
Regulatory Deficiency 41 if
implemented, NYSE Amex may direct
the Company to, and the Company
shall, modify the planned or proposed
changes as necessary to ensure that it
does not cause a Regulatory
Deficiency.42 Likewise, in the event that
NYSE Amex, in its sole discretion,
determines that a Regulatory Deficiency
exists or is planned, NYSE Amex may
direct the Company to, and the
Company shall, undertake such
modifications to the Company (but not
to include Non-Market Matters) or the
Options Facility as are necessary or
appropriate to eliminate or prevent the
Regulatory Deficiency and allow NYSE
Amex to perform and fulfill its
regulatory responsibilities under the
Act.43
Moreover, Section 16.1 of the LLC
Agreement provides requirements
regarding regulatory approvals and
compliance.44 So long as the Options
Facility is a facility of NYSE Amex, in
the event that NYSE Amex, in its sole
discretion, 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 NYSE Amex’s
regulatory functions, its responsibilities
under the Act or as specifically required
by the Commission, NYSE Amex shall
have the sole and exclusive authority to
direct that any such required, necessary
or appropriate action, as it may
determine in its sole discretion, be taken
or transaction be undertaken by or on
behalf of the Company without regard to
the vote, act or failure to vote or act by
any other party in any capacity.45
Furthermore, before any amendment
to or repeal of any provision of the LLC
Agreement or Members Agreement
becomes effective, such amendment or
repeal must be submitted to the board
of directors of NYSE Amex, and if such
40 See
Section 8.1(m)(iii) of the LLC Agreement.
Section 1.1 of the LLC Agreement (defining
‘‘Regulatory Deficiency’’).
42 See Section 8.1(m)(iii) of the LLC Agreement.
43 See id.
44 See Section 16.1 of the LLC Agreement.
45 See Section 16.1(a) of the LLC Agreement.
Furthermore, in its proposal, NYSE Amex
represents that nothing contained in the LLC
Agreement or the Members Agreement limits the
ability of NYSE Amex, in its capacity as an SRO,
(i) to take any action or to direct the taking of any
action that it determines is necessary or appropriate
for the performance or fulfillment of its obligations
as an SRO or (ii) to direct that an action that it
determines interferes with the performance or
fulfillment of its obligations as an SRO not be taken.
See Notice, supra note 3, 76 FR at 18610.
41 See
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amendment or repeal is required, under
Section 19 of the Act and the rules
promulgated thereunder to be filed
with, or filed with and approved by, the
Commission before such amendment or
repeal may be effective, then such
amendment or repeal shall not be
effective until filed with, or filed with
and approved by, the Commission, as
the case may be.46
The Commission believes that certain
additional provisions in the LLC
Agreement that make accommodation
for NYSE Amex as the SRO for the
Options Facility are consistent with the
Act, because they enhance the ability of
NYSE Amex to carry out its selfregulatory responsibilities with respect
to the Options Facility. The LLC
Agreement provides that, with written
consent of NYSE Amex, the Board, by
a Supermajority Vote,47 may suspend or
terminate a Member’s voting privileges,
including the ability to designate Board
directors, if the Member materially
violates any Regulatory Matters
Provision 48 or any applicable law; such
Member is subject to statutory
disqualification; 49 or such action is
necessary or appropriate in the public
interest or for the protection of
investors.50 The Director designated by
the Member subject to sanction will be
excluded from any vote to suspend or
terminate such Member’s voting
privileges.51
To reflect that the Options Facility is
not solely a commercial enterprise, the
LLC Agreement also stipulates that any
individual designated to the Board must
certify that he or she is not subject to a
statutory disqualification within the
46 See Section 16.10 of the LLC Agreement and
Section 5.10 of the Members Agreement.
47 ‘‘Supermajority Vote’’ means, with respect to
matters submitted to the Board at a validly called
and validly noticed meeting, (x) for so long as NYSE
Amex’s Common Interest Percentage equals or
exceeds fifteen percent (15%), (A) the affirmative
vote of more than fifty percent (50%) of the
Directors designated by NYSE Amex pursuant to
Section 8.1(d)(i) entitled to vote thereon and
present in person or by proxy and (B) the
affirmative vote of more than fifty percent (50%) of
those Directors designated by Founding Firms
pursuant to Section 8.1(d)(ii) entitled to vote
thereon and present in person or by proxy, and (y)
for so long as NYSE Amex’s Common Interest
Percentage is less than fifteen percent (15%), the
affirmative vote of more than fifty percent (50%) of
all Directors entitled to vote thereon and present in
person or by proxy (which excess of fifty percent
(50%) must include more than two-thirds (2⁄3) of
those Directors designated by Founding Firms and
NYSE Amex in the aggregate entitled to vote
thereon and present in person or by proxy). See
Section 1.1 of the LLC Agreement.
48 See Section 1.1 of the LLC Agreement (defining
‘‘Regulatory Matters Provision’’).
49 See Section 3(a)(39) of the Act, 15 U.S.C.
78c(a)(39) (defining ‘‘statutory disqualification’’).
50 See Section 7.6 of the LLC Agreement.
51 See id.
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meaning of Section 3(a)(39) of the Act.52
Further, any director who becomes
subject to any applicable statutory
disqualification shall be deemed to have
automatically resigned from the
Board.53
B. Regulatory Jurisdiction Over the
Company and Its Members
The Commission also believes that the
terms of the LLC Agreement provide
clarification of the Commission’s and
NYSE Amex’s regulatory jurisdiction
over the Company and its Members. The
LLC Agreement provides that (i) the
books, records, premises, officers,
directors, agents and employees of the
Company and (ii) to the extent related
to the Company’s business, the books,
records, premises, officers, directors,
agents and employees of each Member,
shall be deemed the books, records,
premises, officers, directors, agents, and
employees of NYSE Amex for purposes
of, and subject to oversight pursuant to,
the Act.54 The LLC Agreement also
provides that the books and records of
the Company will be subject at all times
to inspection and copying by the
Commission and NYSE Amex at no
additional charge to the Commission or
NYSE Amex.55
The LLC Agreement further provides
that the Company, NYSE Euronext,
NYSE Group, each Member and the
officers, directors, agents and employees
of the Company, NYSE Euronext, NYSE
Group and each Member irrevocably
submit to the jurisdiction of the U.S.
federal courts, the Commission, and
NYSE Amex (in its capacity as SRO) for
purposes of any suit, action, or
proceeding pursuant to U.S. federal
securities laws and the rules and
regulations thereunder, arising out of, or
relating to, activities of the Company
and waive, and agree not to assert by
way of motion, as a defense or otherwise
in any such suit, action, or proceeding,
any claims that they are not personally
subject to the jurisdiction of the
Commission; that the suit, action, or
proceeding is an inconvenient forum;
that the venue of the suit, action, or
proceeding is improper; or that the
subject matter may not be enforced in or
52 See
Section 8.1(h) of the LLC Agreement.
Section 8.1(e)(iii) of the LLC Agreement.
Pursuant to Section 8.1(e)(ii), the Board, by a
Supermajority Vote (excluding the vote of the
Directors designated by the Member subject to
sanction), may suspend or terminate a Director’s
service in the event such director has materially
violated any Regulatory Matters Provision or any
applicable law, or such action is necessary or
appropriate in the public interest or for the
protection of investors.
54 See Section 13.2(c) of the LLC Agreement.
55 See id.
53 See
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by such courts or agency.56 Moreover,
the Company, NYSE Euronext, NYSE
Group and each Member must take such
action as is necessary to ensure that the
officers, directors, agents, and
employees of the Company, NYSE
Euronext, NYSE Group and each
Member who are involved in the
activities of the Company or the Options
Facility consent in writing to the
application to them of specified
provisions in the LLC Agreement with
respect to their activities relating to the
Company or the Options Facility.57
The Commission believes that these
provisions are consistent with the Act
because they are reasonably designed to
facilitate the Commission’s and NYSE
Amex’s regulatory jurisdiction over the
Company and the Options Facility.
These provisions clarify the
Commission’s authority under the Act
to inspect the Company’s books and
records by deeming them to be the
books and records of a national
securities exchange. Further, these
provisions clarify that the Commission
may exercise its authority under Section
19(h)(4) of the Act 58 with respect to the
officers and directors of the Company
and its Members, because such officers
and directors are deemed to be officers
and directors of NYSE Amex. Finally,
the LLC Agreement clarifies that the
books and records of the Company and,
to the extent that they are related to the
Company’s business, the books and
records of each Member, are subject to
the Commission’s examination authority
under Section 17(b)(1) of the Act.59
Even in the absence of these
provisions, Section 20(a) of the Act 60
provides that any person with a
controlling interest in the Company will
be jointly and severally liable with and
to the same extent that the Company is
56 See
Section 16.1(d) of the LLC Agreement.
Section 16.1(f) of the LLC Agreement.
Specifically, the persons noted above will have to
consent to the applicability of Section 13.2(c),
Section 16.1(d), Section 16.1(e), Section 8.1(m),
Section 14.1(i) and Section 14.1(j) of the LLC
Agreement, as applicable, with respect to their
activities relating to the Company or the Options
Facility. See Amendment No. 1, which deleted from
Section 16.1(f) a reference to the final sentence of
Section 8.1(d)(iv).
58 15 U.S.C. 78s(h)(4) (authorizing the
Commission, by order, to remove from office or
censure any officer or director of a national
securities exchange if it finds, after notice and an
opportunity for hearing, that such officer or director
has: (1) Willfully violated any provision of the Act
or the rules and regulations thereunder, or the rules
of a national securities exchange; (2) willfully
abused his or her authority; or (3) without
reasonable justification or excuse, has failed to
enforce compliance with any such provision by a
member or person associated with a member of the
national securities exchange).
59 15 U.S.C. 78q(b)(1).
60 15 U.S.C. 78t(a).
57 See
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liable under any provision of the Act,
unless the controlling person acted in
good faith and did not directly or
indirectly induce the act or acts
constituting the violation or cause of
action. Moreover, NYSE Amex is
required to enforce compliance with
these provisions, because they are
‘‘rules of the exchange’’ within the
meaning of Section 3(a)(27) of the Act.61
A failure on the part of NYSE Amex to
enforce its rules could result in
suspension or revocation of its
registration, pursuant to Section 19(h)(1)
of the Act.62
C. Changes in Control of the Company
The Commission believes that the
provisions in the LLC Agreement and
Members Agreement relating to direct
and indirect changes in control of the
Company, which will operate the
Options Facility are consistent with the
Act. The LLC Agreement provides that
the aggregate Common Interest
Percentage 63 held by NYSE Amex and
its affiliates will not decline below 15%
unless and until NYSE Amex had
delivered to the Board a notice in
writing of its intention to Transfer 64 any
Common Interests that will result in
such a decline.65 Furthermore, before
NYSE Amex could reduce its Common
Interest Percentage to less than 15%, it
must first file a proposed rule change
with the Commission under Section
19(b) of the Act and obtain the
Commission’s approval of that
proposal.66 NYSE Amex’s regulatory
61 15
U.S.C. 78c(a)(27).
U.S.C. 78s(h)(1).
63 ‘‘Common Interest Percentage’’ means (i) with
respect to NYSE Amex or a Transferee of Class A
Common Interests, the product of (w) the Aggregate
Class A Economic Allocation multiplied by (x) a
fraction, (A) the numerator of which shall be the
number of Class A Common Interests then held by
NYSE Amex or such Transferee and (B) the
denominator of which shall be the number of Class
A Common Interests then held NYSE Amex and all
such Transferees, and (ii) with respect to any
Founding Firm or a Transferee of Class B Common
Interests, the product of (y) the Aggregate Class B
Economic Allocation multiplied by (z) a fraction,
(A) the numerator of which shall be the number of
Class B Common Interests then held by such
Founding Firm or such Transferee, including, for
the purpose of determining any economic
entitlement or entitlement to designate a Director,
any Non-voting Common Interests and (B) the
denominator of which shall be the number of Class
B Common Interests then held by all Founding
Firms and all such Transferees, including, for the
purpose of determining any economic entitlement
or entitlement to designate a Director, any Nonvoting Common Interests. See Section 1.1 of the
LLC Agreement. See also Section 1.1 of the LLC
Agreement (defining Transferee). See also Section
10.2(b) of the LLC Agreement (defining Aggregate
Class A and Aggregate Class B Economic
Allocation).
64 See Section 1.1 of the LLC Agreement (defining
‘‘Transfer’’).
65 See Section 11.8(c) of the LLC Agreement.
66 See id.
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obligations for the Options Facility will
endure as long as the Options Facility
is a facility of NYSE Amex, regardless
of the size of NYSE Amex’s ownership
interest in the Company.67
The LLC Agreement and Members
Agreement also provide that no Member
may resign or voluntarily withdraw as a
Member or Transfer any Common
Interests other than in accordance with
the applicable provisions of the LLC
Agreement and the Members
Agreement.68 NYSE Amex will have an
initial right of first offer to purchase
Class B Common Interests that a
Founding Firm intends to transfer, at a
price at least equal to their fair market
value.69 In the event NYSE Amex does
not exercise its right of first offer, the
transferring Founding Firm will have
the right, subject to certain conditions,
to sell its Class B Common Interests to
NYSE Amex at a price equal to their fair
market value or to sell its Common
Interests to a third party.70 In addition,
on or after the tenth anniversary of the
effective date of the LLC Agreement,
NYSE Amex will have the right to buy
some or all of the Class B Common
Interests from the Members at a price
equal to their pro rata portion fair
market value.71 In the event NYSE
Amex intends to transfer any of its Class
A Common Interests, the Founding
Firms will have certain rights of first
offer to purchase these Class A Common
Interests.72 In the event that NYSE
Amex acquires any Class B Common
Interests, such Class B Common
Interests will automatically be
converted into Class A Common
67 See Securities Exchange Act Release Nos.
58324 (August 7, 2008), 73 FR 46936 (August 12,
2008) (order approving the transfer of the Boston
Stock Exchange’s ownership interest in the Boston
Options Facility Group, the operator of the BOX
facility, to MX US 2, Inc., a wholly owned
´
subsidiary of the Montreal Exchange); 44983
(October 25, 2001), 66 FR 55225 (November 1, 2001)
(order approving the establishment of Archipelago
Exchange as a facility of the Pacific Exchange where
Pacific Exchange’s ownership interest in
Archipelago Exchange, L.L.C. (‘‘Arca L.L.C.’’), the
operator of Archipelago Exchange, consisted solely
of a 10% interest in Archipelago Holdings, LLC, the
parent company of Arca L.L.C.); 41210 (March 24,
1999), 64 FR 15857 (April 1, 1999) (order approving
electronic system operated as a facility of
Philadelphia Stock Exchange (‘‘Phlx’’), which had
no ownership interest in the operation of the
system); and 54538 (September 29, 2006), 71 FR
59184 (October 6, 2006) (order approving Phlx’s
New Equity Trading system and operation of
optional outbound router as a facility of Phlx,
which had no ownership interest in the third-party
operator).
68 See Sections 11.1 and 11.2 of the LLC
Agreement and Article III of the Members
Agreement.
69 See Section 3.2(b)(ii) of the Members
Agreement.
70 See Section 3.2(c) of the Members Agreement.
71 See Section 3.4 of the Members Agreement.
72 See Section 3.3(a) of the Members Agreement.
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38441
Interests.73 Similarly, in the event any
Founding Firms acquire Class A
Common Interests, such Class A
Common Interests will be automatically
converted into Class B Common
Interests.74 Also, subject to certain
conditions, Members will be obligated
to transfer their Common Interests
where another Member, acting alone or
together with other Members, intends to
make a transfer of 75% of the thenoutstanding Common Interests and the
Board, by Supermajority Vote,75
approves the sale of the Company to a
person or entity who is not an affiliate
of the Company.
A person or entity may become a
Member by acquiring any Interest.76
Any new Member of the Company will
be required to become a party to the LLC
Agreement.77
The LLC Agreement also provides that
no Person 78 that is not a Member either
alone or together with its Affiliates,79
may directly own (or vote) Common
Interests in the Company representing
more than the 19.9% of the then issued
and outstanding Common Interests
(‘‘19.9% Maximum Percentage) 80 or any
successive 5% ownership threshold
(‘‘Concentration Limitation’’).81 The
Concentration Limitation, however, will
not apply to NYSE Amex alone or
together with its Affiliates.82 Further,
the LLC Agreement permits the
Concentration Limitation to be waived if
73 See Section 11.2(c) of the LLC Agreement. See
also Section 3.3(e) of the Members Agreement.
74 See id.
75 See Section 11.3(a) of the LLC Agreement.
76 See Sections 10.4 and 11.1 of the LLC
Agreement.
77 See id.
78 ‘‘Person’’ means an individual, partnership,
limited liability company, trust, estate, association,
joint stock company, unincorporated organization,
governmental or regulatory body or other entity. See
Section 1.1 of the LLC Agreement.
79 ‘‘Affiliate’’ means, with respect to any Person,
and other Person directly or indirectly, through one
or more intermediaries, controlling, controlled by,
or under common control with such Person. The
term ‘‘control,’’ as used in this definition of
‘‘Affiliate’’ means the possession, directly or
indirectly, of the power to direct or cause the
direction of the management or policies of such
Person, whether through the ownership of voting
securities, through the right or power to appoint
majority of the board of directors, by contract or
otherwise, and ‘‘controlled by’’ and ‘‘under
common control’’ have corresponding meanings.
See Section 1.1 of the LLC Agreement.
80 See Section 4.9(b) of the LLC Agreement.
81 See Section 11.8(b)(i) of the LLC Agreement.
See also Section 4.9(a). See Amendment No. 1,
which confirmed that Section 4.9 of the LLC
Agreement would prohibit a NYSE Amex member
that is an affiliate of NYSE Amex to own or vote
Common Interests in excess of 19.9% of the then
issued and outstanding Common Interests, unless it
has received Commission approval to do so
pursuant to the rule filing process under Section
19(b) of the Act.
82 See Section 11.8(b)(ii) of the LLC Agreement.
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written notice of the intention to exceed
the Concentration Limitation is
delivered to the Board; prior to the
acquisition of any Common Interests
that will exceed the Concentration
Limitation, the Board determines not to
oppose the acquisition; and the notice
has been filed as a proposed rule change
with, and approved, by the Commission
under Section 19(b) of the Act and shall
have become effective thereunder.83
Nevertheless, the Board shall oppose the
ownership of Common Interests if: such
ownership will impair the ability of the
Company and the Board to carry out
their functions and responsibilities,
including but not limited to, under the
Act; such ownership will impair the
ability of the SEC to enforce the Act; if
the acquiring Person or its Affiliates are
subject to any statutory disqualification
within the meaning of Section 3(a)(39)
of the Act; or if such ownership would
result in the Person, alone or together
with its Affiliates, having an ownership
of more than 20% of the aggregate
Common Interests and such Person or
one of its Affiliates is a member or
member organization of NYSE Amex.84
Moreover, the LLC Agreement
provides that, if any Person, alone or
together with any Affiliate, acquires a
direct or indirect ownership of 25% or
more of the total voting power of a
Member (such person, a ‘‘Controlling
Person,’’ and such interest a
‘‘Controlling Interest’’ 85), and the
Member, alone or together with any
Affiliate, holds an ownership interest in
the Company equal to or greater than
20% of the aggregate Common Interests,
then such Controlling Person must
become a party to the LLC Agreement
and agree to abide by all provisions
relating to regulatory matters.86 The LLC
Agreement also provides that NYSE
Amex must file with the Commission,
pursuant to Section 19(b) of the Act, any
amendment to the LLC Agreement
executed to comply with the provisions
of the LLC Agreement relating to
indirect ownership of the Company.87
The non-economic rights and privileges,
including all voting rights, of the
Member in which such Controlling
Interest is acquired will be suspended
until the proposed rule change has
become effective under the Act or until
the Controlling Person ceases to hold a
Controlling Interest in such Member.88
83 See
id.
84 See Section 11.8(b)(iii) of the LLC Agreement.
85 See Section 1.1 of the LLC Agreement (defining
‘‘Controlling Person’’ and ‘‘Controlling Interest’’).
86 See Sections 11.8(d)(i) and (ii) of the LLC
Agreement.
87 See Section 11.8(d)(iv) of the LLC Agreement.
88 See id.
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A proposed rule change filed with the
Commission in any of the circumstances
noted above will afford the Commission
an opportunity to ensure that a change
to the LLC Agreement or a change in the
ownership of the Company will be
consistent with the Act, including
whether the Commission and NYSE
Amex will retain sufficient regulatory
jurisdiction over the proposed indirect
controlling party. The Commission
understands that the LLC Agreement
will apply to any ultimate parent of the
Company, no matter how many levels of
ownership are involved, provided that a
Controlling Interest exists between each
link of the ownership chain.
Finally, the LLC Agreement requires
the Company to provide the
Commission with written notice ten
days prior to the closing date of any
acquisition of an Interest by a person
that results in a Member’s percentage
ownership interest in the Company,
alone or together with any Affiliate,
meeting or crossing the 5%, 10%, or
15% thresholds.89 This notice
requirement is analogous to a
requirement in Form 1,90 the
application and amendments to the
application for registration as a national
securities exchange. Exhibit K of Form
1 requires any exchange that is a
corporation or partnership to list any
persons that have an ownership interest
of 5% or more in the exchange.91
Additionally, Rule 6a–2(a)(2) under the
Act 92 requires an exchange to update its
Form 1 within ten days after any action
that renders inaccurate the information
previously filed in Exhibit K.
Exhibit K imposes no obligation on an
exchange to report parties whose
ownership interest in the exchange is
less than 5%. Similarly, Section 11.8(a)
of the LLC Agreement requires the
Company to notify the Commission of
the acquisition of an Interest when that
Interest reaches 5% or more. The
Commission does not believe that a
change to the LLC Agreement that
reflects the acquisition of less than a 5%
interest in a facility of a national
securities exchange (or an increase that
does not cross any of the additional
thresholds) is a ‘‘rule of the exchange’’
that must be filed pursuant to Section
19(b) of the Act.
89 See
Section 11.8(a) of the LLC Agreement.
CFR 249.1 and 17 CFR 249.1a.
91 This reporting requirement applies only to
exchanges that have one or more owners,
shareholders, or partners that are not also members
of the exchange. See Form 1, Exhibit K. Exhibit K
applies only to NYSE Amex itself, not to entities
that operate facilities of the exchange.
92 17 CFR 240.6a–2(a)(2).
90 17
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D. Ownership and Voting Restrictions
on Members of the Company
Section 4.9(a) of the LLC Agreement
prohibits any Member (other than NYSE
Amex alone, or subject to receipt of
Commission approval pursuant to the
rule filing process under Section 19(b)
of the Act, together with its Permitted
Transferees) 93 from owning or voting
(alone or together with its Affiliates),
directly or indirectly more than the
19.9% Maximum Percentage.94 In the
event a Member (alone or together with
its Affiliates) holds Excess Interests,
such Excess Interests shall
automatically and immediately
constitute non-voting Common Interests
and the Member shall institute remedial
measures to either divest itself of such
Excess Interests or retain such Excess
Interests as non-voting interests, in each
case as permitted by Section 4.9(c) of
the LLC Agreement.95
The Commission has previously
expressed concern regarding the
potential for unfair competition and
conflicts of interest where a member of
an exchange owns more than 20% of
that exchange or a facility thereof.96
Although it is common for a member to
have an ownership interest in an
exchange or a facility of an exchange,
such member’s interest could become so
large as to raise questions whether the
exchange can fairly and objectively
exercise its self-regulatory
responsibilities with respect to that
member. A member that has a
controlling interest in the exchange or a
facility might attempt to direct the
exchange to refrain from diligently
surveilling the member’s conduct or
from punishing any improper conduct.
An exchange might also be reluctant to
surveil and enforce its rules zealously
against a member that the exchange
relies on as its largest source of capital.
The Company, which will operate the
Options Facility, will be owned
collectively by NYSE Amex and the
seven Founding Firms, six of which
currently are members, or affiliates of
members, of NYSE Amex and a Member
93 See Section 11.4(a) of the LLC Agreement
(defining ‘‘Permitted Transferee’’).
94 See Section 4.9(a) of the LLC Agreement. Any
amount in excess of the 19.9% Maximum
Percentage are ‘‘Excess Interests.’’
95 See Section 4.9(c) of the LLC Agreement. See
also Section V.C. infra for a discussion of Section
11.8(b)(iii) of the LLC Agreement that prohibits the
Board from approving ownership by a Member of
more than 20% of the aggregate Common Interests
and such Person or one of its Affiliates is a member
or member organization of NYSE Amex.
96 See NYSE Block Order, 74 FR at 5017–5018,
n.65 and accompanying text. See also CBSX Order;
ISE Stock Order; BeX Order; and BOX Order.
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Federal Register / Vol. 76, No. 126 / Thursday, June 30, 2011 / Notices
of the Company.97 Initially, each of the
Founding Firms will own less than
19.9% of the Company and pursuant to
the LLC Agreement, and except as
described above, will not be permitted
to own or vote in excess of the 19.9%
of the Maximum Percentage as long as
they are a Member of the Company.
Accordingly, the Commission believes
that the ownership concentration and
voting limitations in the LLC Agreement
are designed to preserve the
independence of NYSE Amex’s selfregulatory functions and NYSE Amex’s
ability to fulfill its regulatory and
oversight obligations.
srobinson on DSK4SPTVN1PROD with NOTICES
E. The Incentive Plan
As noted above, NASDAQ did not
object to the proposed rule change, but
expressed the view that, by allowing
NYSE Amex ‘‘to make reasonable
distinctions among market participants
and to pre-select firms that will be
rewarded for order flow,’’ the
Commission should provide comparable
flexibility to fee or rebate-based plans of
other exchanges that provide incentives
to members to submit order flow.
NASDAQ also expressed the view that
the Incentive Plan is ‘‘virtually
indistinguishable in purpose and effect
from other fee or rebate-based incentive
plans operated by national securities
exchanges,’’ citing as an example
NASDAQ’s Investor Support Plan, and
stating that the economic value to the
Founding Firms is directly related to
how much order flow they send to
NYSE Amex.98
Any determination as to whether a
particular plan or program provided by
an exchange or to which an exchange is
a party that has a component related to
order flow, such as the Incentive Plan,
constitutes a proposed rule change that
is required to be filed with the
Commission under Section 19(b) of the
Act must be analyzed on a case-by-case
basis and is dependent on the facts and
circumstances of the particular plan’s or
97 See Amendment No. 1, which states as follows:
Founding Firms Goldman Sachs and Citadel hold
NYSE Amex Options Trading Permits (‘‘ATPs’’ and
each entity that holds an ATP, an ‘‘ATP Holder’’).
In addition, Goldman, Sachs & Co. is also an
affiliate of ATP Holder Goldman Sachs Execution
& Clearing LP. Founding Firm BAML is an affiliate
of ATP Holders Merrill Lynch, Pierce, Fenner &
Smith Inc. and Merrill Lynch Professional Clearing
Corp. Founding Firm Barclays is an affiliate of ATP
Holder Barclays Capital Inc. Founding Firm
Citigroup is an affiliate of ATP Holders Citigroup
Derivatives Markets, Inc. and Automated Trading
Desk Financial Services LLC. Founding Firm UBS
is an affiliate of ATP Holders UBS Financial
Services Inc. and UBS Securities LLC. Founding
Firm TD Ameritrade is neither an ATP Holder nor
an affiliate of an ATP Holder.
98 See NASDAQ Letter, supra note 4. See
NASDAQ Rule 7014 for a description of NASDAQ’s
Investor Support Program.
VerDate Mar<15>2010
16:24 Jun 29, 2011
Jkt 223001
program’s features and its context.99
Based on the facts and circumstances in
this case, the Commission does not
believe that the Incentive Plan
constitutes a proposed rule change
within the meaning of Section 19(b)(1)
of the Act and Rule 19b–4 thereunder,
and believes that it is distinguishable
from the NASDAQ Investor Support
Program.100
The Incentive Plan is one aspect of
the equity investment and obligations of
the Founding Firms as owners
(Members) of the Company,101 and
reflects the commitment of each of the
Founding Firms to maintain certain
minimum levels of participation in the
joint venture. A Founding Firm may
meet or exceed its Individual Target, but
may not realize an increase in its equity
interest relative to the other Founding
Firms depending on the extent to which
the other firms meet or exceed their
Individual Targets.102 If each Founding
Firm meets its Individual Target in any
given year, there would be no change in
its equity interest relative to any other
Founding Firm. A Founding Firm
cannot increase its equity interest
relative to any other Founding Firm, no
matter how much order flow it sends to
the facility, unless one or more other
Founding Firms fails to achieve its
target for the year. Also, the Incentive
Plan will not increase or decrease the
aggregate equity interest of the
99 The Commission notes that NASDAQ in its
comment letter also pointed to the issue that ‘‘[t]he
ownership of self regulatory organizations by their
members can raise at least the appearance of a
conflict of interest.’’ In the past, and as discussed
in Section V. D. above, the Commission has
expressed concern regarding the potential for unfair
competition and conflicts of interest where a
member of an exchange owns more than a 20%
interest in that exchange of a facility thereof. See
infra note 96 and accompanying text. The
Commission believes, as discussed more fully
above, that the proposed structure is designed to
mitigate those concerns and preserve the
independence of NYSE Amex’s self-regulatory
obligations. See infra Section V. D.
100 As noted above, the determination regarding
whether a plan or program that is provided by an
SRO, or to which an SRO is a party, and that has
a component related to order flow is or is not a
proposed rule change is based on the particular
facts and circumstances of the arrangement.
Consequently, the Commission recommends that an
SRO consult with Commission staff as to its
determination as to whether such a plan or program
(or any changes to such plan or program) is a
proposed rule change.
101 The LLC Agreement establishes the rights and
obligations of the Company’s Members. Aside from
making an initial capital contribution in exchange
for equity interest, the Members, among other
things, are subject to ongoing regulatory capital
contributions, voluntary capital contributions, and
to potential penalties for failure to make requested
capital contributions. See Sections 4.3, 4.4, and 4.5
of the LLC Agreement.
102 See supra note 16 and accompanying text for
a description of what constitutes an Individual
Target.
PO 00000
Frm 00096
Fmt 4703
Sfmt 9990
38443
Founding Firms as a group relative to
NYSE Amex. The Commission therefore
believes that the impact of the Incentive
Plan is sufficiently attenuated from the
submission of individual orders to the
Options Facility by the Member that it
is properly not viewed as an order flow
or liquidity rebate that would constitute
a proposed rule change under Section
19(b) of the Act. By comparison, the
NASDAQ Investor Support Program
provides a fee credit for each order in
excess of a specified threshold to any
member wishing to participate in the
program.103 The fee credits are directly
linked to each incremental order
provided and are guaranteed so long as
the baseline threshold is met.104
For the reasons just discussed, the
Commission believes that the Incentive
Plan does not constitute a proposed rule
change within the meaning of Section
19(b)(1) of the Act and Rule 19b–4
thereunder.
VI. Conclusion
It Is Therefore Ordered, pursuant to
Section 19(b)(2) of the Act,105 that the
proposed rule change (SR–NYSEAmex–
2011–18), as modified by Amendment
No. 1, be, and it hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.106
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011–16417 Filed 6–29–11; 8:45 am]
BILLING CODE 8011–01–P
103 For a detailed description of the Investor
Support Program, see Securities Exchange Act
Release No. 63270 (November 8, 2010), 75 FR 69489
(November 12, 2010) (SR–NASDAQ–2010–141)
(notice of filing and immediate effectiveness). See
also Securities Exchange Act Release Nos. 63414
(December 2, 2010), 75 FR 76505 (December 8,
2010) (SR–NASDAQ–2010–153) (notice of filing
and immediate effectiveness); 63628 (January 3,
2011), 76 FR 1201 (January 7, 2011) (SR–NASDAQ–
2010–154) (notice of filing and immediate
effectiveness); 63891 (February 11, 2011), 76 FR
9384 (February 17, 2011) (SR–NASDAQ–2011–022)
(notice of filing and immediate effectiveness); and
64050 (March 8, 2011) (SR–NASDAQ–2011–034)
(notice of filing and immediate effectiveness).
104 Id.
105 15 U.S.C. 78s(b)(2).
106 17 CFR 200.30–3(a)(12).
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]]>Agencies
[Federal Register Volume 76, Number 126 (Thursday, June 30, 2011)]
[Notices]
[Pages 38436-38443]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-16417]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64742; File No. SR-NYSEAmex-2011-18]
Self-Regulatory Organizations; NYSE Amex LLC; Order Approving
Proposed Rule Change, as Modified by Amendment No. 1, Relating to the
Formation of a Joint Venture Between the Exchange, Its Ultimate Parent
NYSE Euronext, and Seven Other Entities To Operate an Electronic
Trading Facility for Options Contracts
June 24, 2011.
I. Introduction
On March 23, 2011, NYSE Amex LLC (``NYSE Amex'') filed with the
Securities and Exchange Commission (``Commission'' or ``SEC'') a
proposed rule change, pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ in
connection with the formation of a joint venture between NYSE Amex, its
ultimate parent NYSE Euronext, a Delaware corporation, and the
following entities (each, a ``Founding Firm''): Citadel Securities LLC
(``Citadel''); Goldman, Sachs & Co. (``Goldman Sachs''); Banc of
America Strategic Investments Corporation (``BAML''); Citigroup
Financial Strategies, Inc. (``Citigroup''); Datek Online Management
Corp. (``TD Ameritrade''); UBS Americas Inc. (``UBS''); and Barclays
Electronic Commerce Holdings Inc. (``Barclays''), to operate an
electronic trading facility (``Options Facility'') that will engage in
the business of listing for trading options contracts permitted to be
listed on a national securities exchange (or facility thereof) and
related activities. The proposed rule change was published for comment
in the Federal Register on April 4, 2011.\3\ The Commission received
three comment letters on the proposal.\4\ The Commission subsequently
extended to July 1, 2011, the time period in which to either approve
the proposed rule change, or to institute proceedings to determine
whether to disapprove the proposed rule change.\5\ On June 15, 2011,
NYSE Amex filed Amendment No. 1 to the proposed rule change.\6\ This
order approves the proposed rule change, as modified by Amendment No.
1.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 64144 (March 29,
2011), 76 FR 18591 (``Notice'').
\4\ See Letter from Andrew Rothlein, to Hon. Mary L. Schapiro,
Chairman, and Hon. Kathleen L. Casey, Hon. Elisse B. Walter, Hon.
Luis A. Aguilar, and Hon. Troy A. Paredes, Commissioners,
Commission, dated April 14, 2011 (``Rothlein Letter''); Letter from
Benjamin Kerensa, dated April 25, 2011 (``Kerensa Letter''); and
Letter from Joan C. Conley, Senior Vice President and Corporate
Secretary, Nasdaq OMX Group, Inc. (``NASDAQ''), to Elizabeth M.
Murphy, Secretary, Commission, dated April 29, 2011 (``NASDAQ
Letter'').
\5\ See Securities Exchange Act Release No. 64511 (May 18,
2011), 76 FR 29809 (May 23, 2011).
\6\ See Amendment No. 1 dated June 15, 2011 (``Amendment No.
1''). Amendment No. 1 deletes an erroneous reference in Section
16.1(f) of the LLC Agreement; clarifies those Founding Firms that
are NYSE Amex members or their affiliates; clarifies the
availability of information noted ``To Come'' on certain Schedules
to the LLC Agreement; and confirms the applicability of Section 4.9
of the LLC Agreement to a NYSE Amex member that is an affiliate of
NYSE Amex. Amendment No. 1 is a technical amendment and is not
subject to notice and comment.
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II. Overview
NYSE Amex proposes to establish NYSE Amex Options LLC
(``Company''), a Delaware limited liability company formed by NYSE
Euronext, NYSE Amex, and the Founding Firms, and jointly owned by NYSE
Amex and the Founding Firms, to operate the Options Facility. Pursuant
to the proposal, the Options Facility will be operated as a facility
\7\ of NYSE Amex, which will act as the self-regulatory organization
(``SRO'') for the Options Facility and as such have regulatory
responsibility for the activities of the Options Facility.\8\
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\7\ Pursuant to Section 3(a)(2) of the Act, 15 U.S.C. 78c(a)(2),
the term ``facility'' when used with respect to a national
securities exchange, includes ``its premises, tangible or intangible
property whether on the premises or not, any right to the use of
such premises or property or any service thereof for the purpose of
effecting or reporting a transaction on an exchange (including,
among other things, any system of communication to or from the
exchange, by ticker or otherwise, maintained by or with the consent
of the exchange), and any right of the exchange to the use of any
property or service.''
\8\ NYSE Amex represented that it has adequate funds to
discharge all regulatory functions related to the Options Facility.
See Notice, supra note 3, 76 FR 18592.
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With this proposed rule change, NYSE Amex seeks the Commission's
approval of the proposed governance structure of the Company as
reflected in the proposed Limited Liability Company Agreement (``LLC
Agreement'') for the Company and a proposed Members Agreement of the
Company setting forth certain additional provisions (``Members
Agreement'') relating to the proposed governance structure of the
Company.\9\ NYSE Amex is not proposing any changes to its listing and
trading rules in connection with establishment of the Company and
operation of the Options Facility.
---------------------------------------------------------------------------
\9\ Certain portions of the Members Agreement are not considered
part of the proposed rule change. See infra note 13.
---------------------------------------------------------------------------
As a limited liability company, ownership of the Company is
represented by limited liability company interests in the Company
(``Interests'').\10\ The holders of Interests are referred to as the
members of the Company (``Members'').\11\ The Interests represent
equity interests in the Company and entitle the holders thereof to
participate in the Company's allocations and distributions. Initially,
NYSE Amex will own 100% of the preferred non-voting Interests
(``Preferred Interests'') and 47.2% of the Common Interests,\12\ as
Class A Common Interests. The Founding Firms will own the remaining
52.8% of the Common Interests, as Class B Common Interests, and no
single Founding Firm (including its affiliates) will own Class B Common
Interests comprising more than 19.9% of the issued and outstanding
Common Interests. The 52.8% ownership of Class B Common Interests will
initially be allocated as follows: 14.95% to each of Citadel and
Goldman Sachs; 5.0% to each of BAML, Citigroup and TD Ameritrade; 4.9%
to UBS; and 3.0% to Barclays.\13\
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\10\ ``Interest'' means the limited liability company interest
in the Company owned by each Member including any and all benefits
to which such Member may be entitled as provided in the LLC
Agreement or required by the Act, together with all obligations of
such Member to comply with the terms and provisions of the LLC
Agreement. See Section 1.1 of the LLC Agreement. See infra note 11
for the definition of Member.
\11\ ``Member'' means each Person who is a signatory to this
Agreement (other than NYSE Euronext) or who has been admitted to the
Company as a Member in accordance with this Agreement and has not
ceased to be a Member in accordance with this Agreement or for any
other reason. See Section 1.1 of the LLC Agreement. See infra note
78 for definition of Person.
\12\ Common Interests consist of Class A Common Interests and
Class B Common Interests. See Section 1.1 of the LLC Agreement.
``Class A Common Interests'' means the Interests in the form of
shares owned by NYSE Amex, as specified in Schedule A of the LLC
Agreement, having the rights and obligations specified in the LLC
Agreement. See id. ``Class B Common Interests'' means the Interests
in the form of shares owned by each Founding Firm, as specified in
Schedule A of the LLC Agreement, having the rights and obligations
specified in the LLC Agreement. See id. Schedule A of the LLC
Agreement sets forth the Interest allocations of each Member.
\13\ Following the effective date of the proposed rule change,
additional Class B Common Interests will be issued to the Founding
Firms based, in part, on each Founding Firm's contribution to the
annual volume of the Options Facility from October 1, 2009 to
December 31, 2010 (i.e., the ``Volume-Based Equity Plan''). See
Notice, supra note 3, 76 FR at 18594. NYSE Amex represented that
this issuance of shares to the Founding Firms will not result in any
Member (alone or together with its affiliates) other than NYSE Amex
exceeding the 19.9% Maximum Percentage (as defined below).
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[[Page 38437]]
Pursuant to Section 2.1 of the Members Agreement, for an initial
period of five (5) years and three (3) months, each Founding Firm will
have to satisfy certain minimum volume requirements. Under the Volume-
Based Equity Plan (``Incentive Plan''),\14\ for each measurement
period, the Company will issue Annual Incentive Shares.\15\ Each
Founding Firm will be entitled to receive, for no additional
consideration, a portion of the Annual Incentive Shares such that it
dilutes, maintains or increases its equity interest in the Company
(relative to the other Founding Firms) based on the degree to which the
Founding Firm has failed to achieve, achieved or exceeded its
``Individual Target'' during the measurement period. A Founding Firm's
Individual Target will be its pro rata portion of an aggregate Founding
Firm target contribution to the annual volume of the Options
Facility.\16\ This pro rata calculation will be performed once, based
on the Founding Firm's holdings of Class B Common Interests relative to
the other Founding Firms at the time the Company is formed and will not
change as a Founding Firm's equity holdings fluctuate as a result of
the Incentive Plan. The Incentive Plan will not affect the equity
holdings of NYSE Amex and it will not increase or decrease the
aggregate equity interest of the Founding Firms relative to NYSE Amex.
The Annual Incentive Shares not allocated to one or more Founding Firms
by virtue of each such Founding Firm failing to achieve its respective
Individual Target will be either partially or fully reallocated among
those Founding Firms that exceed their respective Individual Targets.
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\14\ As stated in the purpose section of the proposed rule
change, it is NYSE Amex's view that the Incentive Plan does not
constitute a proposed rule change within the meaning of Section
19(b)(1) of the Act and Rule 19b-4 thereunder. See Notice, supra
note 3, 76 FR at 18594, n.19.
\15\ Pursuant to Section 2.1(a) of the Members Agreement,
``Annual Incentive Shares'' generally are additional Class B Common
Interests equal to a percentage of the amount of Class B Common
Interests issued and outstanding immediately prior to such issuance
and owned by the Founding Firms.
\16\ See Notice, supra note 3, 76 FR at 18610. See also Members
Agreement, Section 1.1 (defining ``Individual Target''). In
determining whether a Founding Firm has achieved its individual
target for a measurement period, a Founding Firm will receive one
credit for each side of a transaction executed through the Options
Facility, either for its proprietary account or for the account of
its customers. See Section 2.3(a) of the Members Agreement.
Members of the LLC are entitled to distributions of the LLC's
available cash, reflective of their common interest percentages. See
Section 6.1 of the Members Agreement. See also Section 1.1 of the
LLC Agreement (defining ``available cash'' generally as cash held by
the Company that both (i) is not required for the operations of the
Company based on the annual budget of the Company for the year; and
(ii) the Board of Directors of the Company (``Board'') determines in
good faith is not required for the payment of liabilities of the
Company or the setting aside of reserves to meet the anticipated
cash needs of the Company.
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III. Regulatory Structure
As an SRO, NYSE Amex has regulatory responsibility for all of its
facilities, including the Options Facility. Day-to-day operations of
the Company and the management of its business and affairs will be
delegated to the Company's officers and to NYSE Group, Inc. (``NYSE
Group''), a subsidiary of NYSE Euronext, in accordance with a services
agreement (``NYSE Euronext Agreement'') between NYSE Group and the
Company.\17\ Under the NYSE Euronext Agreement, NYSE Group will agree
to provide the Options Facility with a range of operational and support
services.\18\ The Board \19\ will be responsible for the oversight of
the Company's officers and NYSE Group's performance under the NYSE
Euronext Agreement.\20\ The Board initially will consist of six
directors \21\ designated by the Founding Firms (one by each Founding
Firm), and seven directors designated by NYSE Amex.\22\
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\17\ See Section 8.1(b) of the LLC Agreement.
\18\ See Notice, supra note 3, 76 FR at 18593.
\19\ See Section 8.1(a) of the LLC Agreement.
\20\ See Section 8.1(b) of the LLC Agreement.
\21\ See Section 8.1(a) of the LLC Agreement.
\22\ See Section 8.1(d) of the LLC Agreement.
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NYSE Regulation, Inc. (``NYSE Regulation''), an indirect wholly-
owned subsidiary of NYSE Euronext, and NYSE Amex entered into a
regulatory services agreement (``RSA'') dated October 1, 2008 pursuant
to which NYSE Regulation performs all of NYSE Amex's regulatory
functions on NYSE Amex's behalf. However, certain of these member and
market regulatory functions, which include surveillance, examination,
investigation and related disciplinary functions, are performed by the
Financial Industry Regulatory Authority, Inc. (``FINRA'') pursuant to a
RSA dated June 14, 2010 among FINRA, NYSE Group, New York Stock
Exchange LLC, NYSE Regulation, NYSE Arca, Inc. and NYSE Amex. FINRA and
NYSE Amex have also entered into an allocation agreement pursuant to
Section 17(d)(1) of the Act,\23\ and Rule 17d-2 \24\ thereunder,
whereby FINRA assumed regulatory responsibility for specified rules
that are common to FINRA and NYSE Amex and for common members. Because
the Options Facility will be a facility of NYSE Amex, FINRA will
perform the applicable regulatory functions and responsibilities with
respect to activity on or through the Options Facility, including both
general regulatory functions, as noted above, and targeted regulatory
reviews as applicable.
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78q(d)(1).
\24\ 17 CFR 240.17d-2.
---------------------------------------------------------------------------
Pursuant to the RSA between NYSE Regulation and NYSE Amex, NYSE
Regulation exercises oversight, on behalf of NYSE Amex, of FINRA's
performance of the regulatory functions performed by FINRA as described
above. NYSE Regulation also has responsibilities with respect to the
Options Facility for rule interpretation, regulatory policy and
participation in rule development. NYSE Regulation periodically reports
on regulatory matters to the board of directors of NYSE Amex, which has
appointed a Chief Regulatory Officer (``CRO'') who is also the Chief
Executive Officer of NYSE Regulation. NYSE Amex does not have a
regulatory oversight committee of its board of directors, but the CRO
is also an officer of NYSE Amex, and in that capacity is charged with
reporting on regulatory matters to the NYSE Amex board of directors.
Notwithstanding the foregoing, NYSE Amex will still retain ultimate
legal responsibility for the performance of all of its regulatory
obligations as an SRO, including with respect to the Options Facility,
as well as the ability to take action as required to meet that
responsibility.
The board of directors of NYSE Amex currently consists of five (5)
directors, a majority of whom are required to be individuals domiciled
in the U.S. who are classified as independent members of the NYSE
Euronext board of directors. At least twenty percent (20%) of NYSE
Amex's directors (currently one individual) must be ``non-affiliated''
directors who are not members of the NYSE Euronext board of directors
and need not be independent under the independence requirements of NYSE
Euronext. Any required non-affiliated directors of NYSE Amex are
nominated and elected through a process designed to ensure fair
representation of members of NYSE Amex on NYSE Amex's board of
directors. NYSE Amex does not have any committees of its board of
directors that perform functions relating to audit, governance and
compensation. Instead, such functions are performed for NYSE Amex by
related committees of the NYSE Euronext board of directors that are
comprised solely of NYSE Euronext directors who meet the independence
requirements of NYSE Euronext.
Decisions on the listing of options to be traded on the Options
Facility will be
[[Page 38438]]
made by the business side of NYSE Amex in accordance with NYSE Amex's
rules. The business side also will continue to be responsible for new
product development, participation in rule development, strategic
analysis, administering NYSE Amex programs, business development and
client outreach.
IV. Summary of Comment Letters
As noted above, the Commission received three comment letters on
the proposed rule change. One commenter opposed the proposed rule
change, asserting that he continues to own unredeemed New York Stock
Exchange Option Trading Rights (``OTRs'') that were separated from full
New York Stock Exchange, Inc. (``NYSE, Inc.'') seats (``Separated
OTRs'').\25\ All NYSE, Inc. seat ownership (with or without OTRs) was
extinguished in the 2006 demutualization of NYSE, Inc.\26\ The
commenter believes that the owners of Separated OTRs retained their
Separated OTRs, even after NYSE, Inc. exited the options business in
1997, with the expectation that their ownership of the Separated OTRs
would afford them full rights to trade options under the auspices of
NYSE, Inc. or its successor entity. The commenter further argues that
such ownership gives him rights to effect options trades on all NYSE
related or affiliated markets, including the various successor markets
to NYSE, Inc. The Commission notes that the issue of the rights of
owners of Separated OTRs is not before the Commission in the context of
this proposed rule change and thus its consideration of the NYSE Amex
proposal does not address the rights of owners of Separated OTRs.
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\25\ See Rothlein Letter, supra note 4. NYSE, Inc. is the
predecessor to New York Stock Exchange LLC (``NYSE''). See
Securities Exchange Act Release No. 53382 (February 27, 2006), 71 FR
11251 (March 6, 2006) (SR-NYSE-2005-77) (order approving merger of
NYSE, Inc. and Archipelago, and demutualization of NYSE, Inc.)
(``NYSE-Arca Merger Order'').
\26\ See NYSE-Arca Merger Order.
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Another commenter opposed the proposed rule change because Goldman
Sachs will be a Founding Firm.\27\ The commenter stated that Goldman
Sachs should not be able to benefit from the proposed rule change
because the firm ``recently was found by a congressional committee to
have been involved [in] deceptive and potentially illegal practices.''
The Commission does not find the comment to be dispositive in its
determination regarding whether to approve the proposed rule change.
Moreover, the Commission believes that, as discussed more fully below,
the proposed rule change is designed to provide NYSE Amex, in its
capacity as an SRO, and the Commission appropriate authority and
jurisdiction to oversee any issues or concerns that may arise from
ownership by NYSE Amex's members of the Company, which is organized to
operate a facility of NYSE Amex.
---------------------------------------------------------------------------
\27\ See Kerensa Letter, supra note 4.
---------------------------------------------------------------------------
The third commenter expressly did not object to the proposal, but
stated that the Incentive Plan is ``virtually indistinguishable in
purpose and effect from other fee or rebate-based incentive plans
operated by national securities exchanges,'' and that the Commission
``must apply the same principles to all fee and rebate plans.'' \28\
---------------------------------------------------------------------------
\28\ See NASDAQ Letter, supra note 4.
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NASDAQ also stated that the proposed rule change will allow NYSE
Amex to make distinctions among market participants and to pre-select
firms that will be rewarded for order flow. NASDAQ remarked that NYSE
Amex's proposal ``seems reasonably designed to incentivize order flow
and enhance the competitiveness of its market'' and that ``[m]arket
participants benefit in reduced costs and improved liquidity when the
Commission allows genuine competition among exchanges.'' NASDAQ further
cited to data indicating that NYSE Amex's options volume generally has
increased from around 6% in October 2009, which was about the time of
the initial announcement of the transaction, to 15% in March 2011, when
the proposal was filed with the Commission. NASDAQ drew the conclusion
that such increase correlates to the Incentive Plan \29\ noting that
the initial volume measurement period began in October 2009.
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\29\ See also Notice, supra note 3, 76 FR at 18592, n. 6
(explaining that additional Class B Common Interests will be issued
to the Funding Firms based on their contribution to the annual
volume of the options facility from October 1, 2009 to December 31,
2010).
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NASDAQ noted that the Commission has been ``reluctant to endorse
differential pricing for exchanges'' in the past. NASDAQ indicated that
Section 6(b)(4) of the Act focuses on ``equitable'' allocation of fees,
not identical fees, and that Section 6(b)(5) of the Act prohibits the
``unfair discrimination,'' not any differentiation, between customers.
NASDAQ stated that, in the past, the Commission required that fees and
rebates be open to all members and that transparent thresholds provide
equal fees and rebates to all members that meet the threshold and
contended that the Incentive Plan is a departure from this
interpretation.
Finally, NASDAQ stated that exchanges should have the flexibility
to offer fee incentives and rebates, and that such flexibility should
not be limited to the use of equity and equity-like instruments, and
that limiting such flexibility to equity incentive plans penalizes
exchanges that choose to avoid the appearance of a conflict of interest
when an SRO is owned by its members. NASDAQ noted, however, that the
Incentive Plan includes several provisions that attempt to deal with
the appearance of such a conflict of interest. The Commission discusses
the Incentive Plan in light of NASDAQ's comments in Section V.E. below.
V. Discussion and Commission Findings
After careful consideration, 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
exchange.\30\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(1) of the Act,\31\ which,
among other things, requires a national securities exchange to be so
organized and have the capacity to be able to carry out the purposes of
the Act and to enforce compliance by its members and persons associated
with its members with the provisions of the Act, the rules and
regulations thereunder, and the rules of the exchange.
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\30\ In approving the proposed rule change, the Commission has
considered its impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\31\ 15 U.S.C. 78f(b)(1).
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The Commission also finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\32\ which requires, among
other things, that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices; to
promote just and equitable principles of trade; to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, and 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.
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\32\ 15 U.S.C. 78f(b)(5).
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A. The Options Facility as a Facility of NYSE Amex
The Commission believes that the proposed rule change is consistent
with Section 6(b)(1) of the Act in that, upon
[[Page 38439]]
establishing the Options Facility as a facility of NYSE Amex, and
entering into the relationship with the Company described above, NYSE
Amex will remain so organized and have the capacity to carry out the
purposes of the Act. As an SRO, NYSE Amex will have regulatory control
over the Options Facility and will be responsible for ensuring its
compliance with the federal securities laws and all applicable rules
and regulations thereunder. Furthermore, the Company is obligated under
the LLC Agreement to operate the Options Facility in a manner
consistent with the regulatory and oversight responsibilities of NYSE
Amex and the Act, and the rules and regulations thereunder. The
Commission notes that it previously approved similar structures with
respect to the operation of exchange facilities.\33\
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\33\ See Securities Exchange Act Release Nos. 55389 (March 2,
2007), 72 FR 10575 (March 8, 2007) (order approving CBOE Stock
Exchange as a facility of the Chicago Board Options Facility)
(``CBSX Order''); 54399 (September 1, 2006), 71 FR 53728 (September
12, 2006) (order approving the ISE Stock Exchange as a facility of
the International Securities Exchange) (``ISE Stock Order''); 54364
(August 25, 2006), 71 FR 52185 (order approving the Boston Equities
Exchange as a facility of the Boston Stock Exchange) (``BeX
Order''); 49065 (January 13, 2004), 69 FR 2768 (January 20, 2004)
(order approving the Boston Options Facility as a facility of the
Boston Stock Exchange) (``BOX Order''); and 59281 (January 22,
2009), 74 FR 5014 (January 28, 2009) (order approving the New York
Block Exchange as a facility of the New York Stock Exchange) (``NYSE
Block Order'').
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Although the Company does not carry out any regulatory functions,
all of its activities must be consistent with the Act. As a facility of
a national securities exchange, the Options Facility is not solely a
commercial enterprise but is an integral part of an SRO that is
registered pursuant to the Act and therefore subject to obligations
imposed by the Act. The Commission believes that the LLC Agreement and
Members Agreement are reasonably designed to enable the Company to
operate in a manner that is consistent with this principle. The LLC
Agreement provides that the Company, NYSE Euronext, NYSE Group, each
Member, and the officers, directors, agents, and employees of the
Company, NYSE Euronext, NYSE Group, and each Member agree to comply
with the federal securities laws and the rules and regulations
promulgated thereunder and cooperate with NYSE Amex and the Commission,
and to engage in conduct that fosters and does not interfere with the
Company's and NYSE Amex's ability to carry out their respective
responsibilities under the Act.\34\
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\34\ See Section 16.1(e) of the LLC Agreement. See also Section
7.6 of the LLC Agreement.
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The LLC Agreement likewise provides that the Board collectively,
and each member of the Board individually, must comply with the federal
securities laws and the rules and regulations thereunder and cooperate
with NYSE Amex and with the Commission.\35\ Moreover, each Director
must take into consideration whether his or her actions, and each
Member must take into consideration whether its actions, would cause
the Options Facility or the Company to engage in conduct that fosters,
and does not interfere with, NYSE Amex's or the Company's ability to
carry out their respective responsibilities under the Act.\36\
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\35\ See Sections 8.1(m)(i) of the LLC Agreement.
\36\ See, respectively, Sections 8.1(m)(ii) and 7.6 of the LLC
Agreement.
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The LLC Agreement stipulates that all confidential information
pertaining to the self-regulatory function of NYSE Amex or the Company
(including but not limited to disciplinary matters, trading data,
trading practices, and audit information) contained in the books and
records of the Company will not be made available to any persons other
than to those officers, directors, employees, and agents of the Company
that have a reasonable need to know the contents thereof; will be
retained in confidence by the Company and their respective officers,
directors, employees, and agents; and will not be used for any non-
regulatory purposes.\37\ Nothing in the LLC Agreement, however, will
limit or impede the rights of the Commission or NYSE Amex to access and
examine confidential information of the Company pursuant to the federal
securities laws and rules and regulations thereunder or limit or impede
the ability of a member of the Board, any Member, or any officer,
director, agent, or employee of a Member or the Company to disclose
confidential information to the Commission or NYSE Amex.\38\
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\37\ See Section 14.1(j) of the LLC Agreement.
\38\ See Section 14.1(k) of the LLC Agreement.
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The LLC Agreement also provides that NYSE Amex will receive notice
of planned or proposed changes to the Company (excluding Non-Market
Matters \39\) or the Options Facility, and NYSE Amex must not object
affirmatively to such changes prior to implementation.\40\ In the event
that NYSE Amex, in its sole discretion, determines that such planned or
proposed changes to the Company or the Options Facility could cause a
Regulatory Deficiency \41\ if implemented, NYSE Amex may direct the
Company to, and the Company shall, modify the planned or proposed
changes as necessary to ensure that it does not cause a Regulatory
Deficiency.\42\ Likewise, in the event that NYSE Amex, in its sole
discretion, determines that a Regulatory Deficiency exists or is
planned, NYSE Amex may direct the Company to, and the Company shall,
undertake such modifications to the Company (but not to include Non-
Market Matters) or the Options Facility as are necessary or appropriate
to eliminate or prevent the Regulatory Deficiency and allow NYSE Amex
to perform and fulfill its regulatory responsibilities under the
Act.\43\
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\39\ ``Non-Market Matters'' means matters relating solely to one
or more of the following: Marketing, administrative matters,
personnel matters, social or team-building events, meetings of
Members, communication with Members, finance, location and timing of
Board meetings, market research, real property, equipment,
furnishings, personal property, intellectual property, insurance,
contracts unrelated to the operation of the Options Facility and de
minimis items. See Section 1.1 of the LLC Agreement.
\40\ See Section 8.1(m)(iii) of the LLC Agreement.
\41\ See Section 1.1 of the LLC Agreement (defining ``Regulatory
Deficiency'').
\42\ See Section 8.1(m)(iii) of the LLC Agreement.
\43\ See id.
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Moreover, Section 16.1 of the LLC Agreement provides requirements
regarding regulatory approvals and compliance.\44\ So long as the
Options Facility is a facility of NYSE Amex, in the event that NYSE
Amex, in its sole discretion, 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 NYSE Amex's
regulatory functions, its responsibilities under the Act or as
specifically required by the Commission, NYSE Amex shall have the sole
and exclusive authority to direct that any such required, necessary or
appropriate action, as it may determine in its sole discretion, be
taken or transaction be undertaken by or on behalf of the Company
without regard to the vote, act or failure to vote or act by any other
party in any capacity.\45\
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\44\ See Section 16.1 of the LLC Agreement.
\45\ See Section 16.1(a) of the LLC Agreement.
Furthermore, in its proposal, NYSE Amex represents that nothing
contained in the LLC Agreement or the Members Agreement limits the
ability of NYSE Amex, in its capacity as an SRO, (i) to take any
action or to direct the taking of any action that it determines is
necessary or appropriate for the performance or fulfillment of its
obligations as an SRO or (ii) to direct that an action that it
determines interferes with the performance or fulfillment of its
obligations as an SRO not be taken. See Notice, supra note 3, 76 FR
at 18610.
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Furthermore, before any amendment to or repeal of any provision of
the LLC Agreement or Members Agreement becomes effective, such
amendment or repeal must be submitted to the board of directors of NYSE
Amex, and if such
[[Page 38440]]
amendment or repeal is required, under Section 19 of the Act and the
rules promulgated thereunder to be filed with, or filed with and
approved by, the Commission before such amendment or repeal may be
effective, then such amendment or repeal shall not be effective until
filed with, or filed with and approved by, the Commission, as the case
may be.\46\
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\46\ See Section 16.10 of the LLC Agreement and Section 5.10 of
the Members Agreement.
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The Commission believes that certain additional provisions in the
LLC Agreement that make accommodation for NYSE Amex as the SRO for the
Options Facility are consistent with the Act, because they enhance the
ability of NYSE Amex to carry out its self-regulatory responsibilities
with respect to the Options Facility. The LLC Agreement provides that,
with written consent of NYSE Amex, the Board, by a Supermajority
Vote,\47\ may suspend or terminate a Member's voting privileges,
including the ability to designate Board directors, if the Member
materially violates any Regulatory Matters Provision \48\ or any
applicable law; such Member is subject to statutory disqualification;
\49\ or such action is necessary or appropriate in the public interest
or for the protection of investors.\50\ The Director designated by the
Member subject to sanction will be excluded from any vote to suspend or
terminate such Member's voting privileges.\51\
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\47\ ``Supermajority Vote'' means, with respect to matters
submitted to the Board at a validly called and validly noticed
meeting, (x) for so long as NYSE Amex's Common Interest Percentage
equals or exceeds fifteen percent (15%), (A) the affirmative vote of
more than fifty percent (50%) of the Directors designated by NYSE
Amex pursuant to Section 8.1(d)(i) entitled to vote thereon and
present in person or by proxy and (B) the affirmative vote of more
than fifty percent (50%) of those Directors designated by Founding
Firms pursuant to Section 8.1(d)(ii) entitled to vote thereon and
present in person or by proxy, and (y) for so long as NYSE Amex's
Common Interest Percentage is less than fifteen percent (15%), the
affirmative vote of more than fifty percent (50%) of all Directors
entitled to vote thereon and present in person or by proxy (which
excess of fifty percent (50%) must include more than two-thirds (\2/
3\) of those Directors designated by Founding Firms and NYSE Amex in
the aggregate entitled to vote thereon and present in person or by
proxy). See Section 1.1 of the LLC Agreement.
\48\ See Section 1.1 of the LLC Agreement (defining ``Regulatory
Matters Provision'').
\49\ See Section 3(a)(39) of the Act, 15 U.S.C. 78c(a)(39)
(defining ``statutory disqualification'').
\50\ See Section 7.6 of the LLC Agreement.
\51\ See id.
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To reflect that the Options Facility is not solely a commercial
enterprise, the LLC Agreement also stipulates that any individual
designated to the Board must certify that he or she is not subject to a
statutory disqualification within the meaning of Section 3(a)(39) of
the Act.\52\ Further, any director who becomes subject to any
applicable statutory disqualification shall be deemed to have
automatically resigned from the Board.\53\
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\52\ See Section 8.1(h) of the LLC Agreement.
\53\ See Section 8.1(e)(iii) of the LLC Agreement. Pursuant to
Section 8.1(e)(ii), the Board, by a Supermajority Vote (excluding
the vote of the Directors designated by the Member subject to
sanction), may suspend or terminate a Director's service in the
event such director has materially violated any Regulatory Matters
Provision or any applicable law, or such action is necessary or
appropriate in the public interest or for the protection of
investors.
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B. Regulatory Jurisdiction Over the Company and Its Members
The Commission also believes that the terms of the LLC Agreement
provide clarification of the Commission's and NYSE Amex's regulatory
jurisdiction over the Company and its Members. The LLC Agreement
provides that (i) the books, records, premises, officers, directors,
agents and employees of the Company and (ii) to the extent related to
the Company's business, the books, records, premises, officers,
directors, agents and employees of each Member, shall be deemed the
books, records, premises, officers, directors, agents, and employees of
NYSE Amex for purposes of, and subject to oversight pursuant to, the
Act.\54\ The LLC Agreement also provides that the books and records of
the Company will be subject at all times to inspection and copying by
the Commission and NYSE Amex at no additional charge to the Commission
or NYSE Amex.\55\
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\54\ See Section 13.2(c) of the LLC Agreement.
\55\ See id.
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The LLC Agreement further provides that the Company, NYSE Euronext,
NYSE Group, each Member and the officers, directors, agents and
employees of the Company, NYSE Euronext, NYSE Group and each Member
irrevocably submit to the jurisdiction of the U.S. federal courts, the
Commission, and NYSE Amex (in its capacity as SRO) for purposes of any
suit, action, or proceeding pursuant to U.S. federal securities laws
and the rules and regulations thereunder, arising out of, or relating
to, activities of the Company and waive, and agree not to assert by way
of motion, as a defense or otherwise in any such suit, action, or
proceeding, any claims that they are not personally subject to the
jurisdiction of the Commission; that the suit, action, or proceeding is
an inconvenient forum; that the venue of the suit, action, or
proceeding is improper; or that the subject matter may not be enforced
in or by such courts or agency.\56\ Moreover, the Company, NYSE
Euronext, NYSE Group and each Member must take such action as is
necessary to ensure that the officers, directors, agents, and employees
of the Company, NYSE Euronext, NYSE Group and each Member who are
involved in the activities of the Company or the Options Facility
consent in writing to the application to them of specified provisions
in the LLC Agreement with respect to their activities relating to the
Company or the Options Facility.\57\
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\56\ See Section 16.1(d) of the LLC Agreement.
\57\ See Section 16.1(f) of the LLC Agreement. Specifically, the
persons noted above will have to consent to the applicability of
Section 13.2(c), Section 16.1(d), Section 16.1(e), Section 8.1(m),
Section 14.1(i) and Section 14.1(j) of the LLC Agreement, as
applicable, with respect to their activities relating to the Company
or the Options Facility. See Amendment No. 1, which deleted from
Section 16.1(f) a reference to the final sentence of Section
8.1(d)(iv).
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The Commission believes that these provisions are consistent with
the Act because they are reasonably designed to facilitate the
Commission's and NYSE Amex's regulatory jurisdiction over the Company
and the Options Facility. These provisions clarify the Commission's
authority under the Act to inspect the Company's books and records by
deeming them to be the books and records of a national securities
exchange. Further, these provisions clarify that the Commission may
exercise its authority under Section 19(h)(4) of the Act \58\ with
respect to the officers and directors of the Company and its Members,
because such officers and directors are deemed to be officers and
directors of NYSE Amex. Finally, the LLC Agreement clarifies that the
books and records of the Company and, to the extent that they are
related to the Company's business, the books and records of each
Member, are subject to the Commission's examination authority under
Section 17(b)(1) of the Act.\59\
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\58\ 15 U.S.C. 78s(h)(4) (authorizing the Commission, by order,
to remove from office or censure any officer or director of a
national securities exchange if it finds, after notice and an
opportunity for hearing, that such officer or director has: (1)
Willfully violated any provision of the Act or the rules and
regulations thereunder, or the rules of a national securities
exchange; (2) willfully abused his or her authority; or (3) without
reasonable justification or excuse, has failed to enforce compliance
with any such provision by a member or person associated with a
member of the national securities exchange).
\59\ 15 U.S.C. 78q(b)(1).
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Even in the absence of these provisions, Section 20(a) of the Act
\60\ provides that any person with a controlling interest in the
Company will be jointly and severally liable with and to the same
extent that the Company is
[[Page 38441]]
liable under any provision of the Act, unless the controlling person
acted in good faith and did not directly or indirectly induce the act
or acts constituting the violation or cause of action. Moreover, NYSE
Amex is required to enforce compliance with these provisions, because
they are ``rules of the exchange'' within the meaning of Section
3(a)(27) of the Act.\61\ A failure on the part of NYSE Amex to enforce
its rules could result in suspension or revocation of its registration,
pursuant to Section 19(h)(1) of the Act.\62\
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\60\ 15 U.S.C. 78t(a).
\61\ 15 U.S.C. 78c(a)(27).
\62\ 15 U.S.C. 78s(h)(1).
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C. Changes in Control of the Company
The Commission believes that the provisions in the LLC Agreement
and Members Agreement relating to direct and indirect changes in
control of the Company, which will operate the Options Facility are
consistent with the Act. The LLC Agreement provides that the aggregate
Common Interest Percentage \63\ held by NYSE Amex and its affiliates
will not decline below 15% unless and until NYSE Amex had delivered to
the Board a notice in writing of its intention to Transfer \64\ any
Common Interests that will result in such a decline.\65\ Furthermore,
before NYSE Amex could reduce its Common Interest Percentage to less
than 15%, it must first file a proposed rule change with the Commission
under Section 19(b) of the Act and obtain the Commission's approval of
that proposal.\66\ NYSE Amex's regulatory obligations for the Options
Facility will endure as long as the Options Facility is a facility of
NYSE Amex, regardless of the size of NYSE Amex's ownership interest in
the Company.\67\
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\63\ ``Common Interest Percentage'' means (i) with respect to
NYSE Amex or a Transferee of Class A Common Interests, the product
of (w) the Aggregate Class A Economic Allocation multiplied by (x) a
fraction, (A) the numerator of which shall be the number of Class A
Common Interests then held by NYSE Amex or such Transferee and (B)
the denominator of which shall be the number of Class A Common
Interests then held NYSE Amex and all such Transferees, and (ii)
with respect to any Founding Firm or a Transferee of Class B Common
Interests, the product of (y) the Aggregate Class B Economic
Allocation multiplied by (z) a fraction, (A) the numerator of which
shall be the number of Class B Common Interests then held by such
Founding Firm or such Transferee, including, for the purpose of
determining any economic entitlement or entitlement to designate a
Director, any Non-voting Common Interests and (B) the denominator of
which shall be the number of Class B Common Interests then held by
all Founding Firms and all such Transferees, including, for the
purpose of determining any economic entitlement or entitlement to
designate a Director, any Non-voting Common Interests. See Section
1.1 of the LLC Agreement. See also Section 1.1 of the LLC Agreement
(defining Transferee). See also Section 10.2(b) of the LLC Agreement
(defining Aggregate Class A and Aggregate Class B Economic
Allocation).
\64\ See Section 1.1 of the LLC Agreement (defining
``Transfer'').
\65\ See Section 11.8(c) of the LLC Agreement.
\66\ See id.
\67\ See Securities Exchange Act Release Nos. 58324 (August 7,
2008), 73 FR 46936 (August 12, 2008) (order approving the transfer
of the Boston Stock Exchange's ownership interest in the Boston
Options Facility Group, the operator of the BOX facility, to MX US
2, Inc., a wholly owned subsidiary of the Montr[eacute]al Exchange);
44983 (October 25, 2001), 66 FR 55225 (November 1, 2001) (order
approving the establishment of Archipelago Exchange as a facility of
the Pacific Exchange where Pacific Exchange's ownership interest in
Archipelago Exchange, L.L.C. (``Arca L.L.C.''), the operator of
Archipelago Exchange, consisted solely of a 10% interest in
Archipelago Holdings, LLC, the parent company of Arca L.L.C.); 41210
(March 24, 1999), 64 FR 15857 (April 1, 1999) (order approving
electronic system operated as a facility of Philadelphia Stock
Exchange (``Phlx''), which had no ownership interest in the
operation of the system); and 54538 (September 29, 2006), 71 FR
59184 (October 6, 2006) (order approving Phlx's New Equity Trading
system and operation of optional outbound router as a facility of
Phlx, which had no ownership interest in the third-party operator).
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The LLC Agreement and Members Agreement also provide that no Member
may resign or voluntarily withdraw as a Member or Transfer any Common
Interests other than in accordance with the applicable provisions of
the LLC Agreement and the Members Agreement.\68\ NYSE Amex will have an
initial right of first offer to purchase Class B Common Interests that
a Founding Firm intends to transfer, at a price at least equal to their
fair market value.\69\ In the event NYSE Amex does not exercise its
right of first offer, the transferring Founding Firm will have the
right, subject to certain conditions, to sell its Class B Common
Interests to NYSE Amex at a price equal to their fair market value or
to sell its Common Interests to a third party.\70\ In addition, on or
after the tenth anniversary of the effective date of the LLC Agreement,
NYSE Amex will have the right to buy some or all of the Class B Common
Interests from the Members at a price equal to their pro rata portion
fair market value.\71\ In the event NYSE Amex intends to transfer any
of its Class A Common Interests, the Founding Firms will have certain
rights of first offer to purchase these Class A Common Interests.\72\
In the event that NYSE Amex acquires any Class B Common Interests, such
Class B Common Interests will automatically be converted into Class A
Common Interests.\73\ Similarly, in the event any Founding Firms
acquire Class A Common Interests, such Class A Common Interests will be
automatically converted into Class B Common Interests.\74\ Also,
subject to certain conditions, Members will be obligated to transfer
their Common Interests where another Member, acting alone or together
with other Members, intends to make a transfer of 75% of the then-
outstanding Common Interests and the Board, by Supermajority Vote,\75\
approves the sale of the Company to a person or entity who is not an
affiliate of the Company.
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\68\ See Sections 11.1 and 11.2 of the LLC Agreement and Article
III of the Members Agreement.
\69\ See Section 3.2(b)(ii) of the Members Agreement.
\70\ See Section 3.2(c) of the Members Agreement.
\71\ See Section 3.4 of the Members Agreement.
\72\ See Section 3.3(a) of the Members Agreement.
\73\ See Section 11.2(c) of the LLC Agreement. See also Section
3.3(e) of the Members Agreement.
\74\ See id.
\75\ See Section 11.3(a) of the LLC Agreement.
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A person or entity may become a Member by acquiring any
Interest.\76\ Any new Member of the Company will be required to become
a party to the LLC Agreement.\77\
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\76\ See Sections 10.4 and 11.1 of the LLC Agreement.
\77\ See id.
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The LLC Agreement also provides that no Person \78\ that is not a
Member either alone or together with its Affiliates,\79\ may directly
own (or vote) Common Interests in the Company representing more than
the 19.9% of the then issued and outstanding Common Interests (``19.9%
Maximum Percentage) \80\ or any successive 5% ownership threshold
(``Concentration Limitation'').\81\ The Concentration Limitation,
however, will not apply to NYSE Amex alone or together with its
Affiliates.\82\ Further, the LLC Agreement permits the Concentration
Limitation to be waived if
[[Page 38442]]
written notice of the intention to exceed the Concentration Limitation
is delivered to the Board; prior to the acquisition of any Common
Interests that will exceed the Concentration Limitation, the Board
determines not to oppose the acquisition; and the notice has been filed
as a proposed rule change with, and approved, by the Commission under
Section 19(b) of the Act and shall have become effective
thereunder.\83\ Nevertheless, the Board shall oppose the ownership of
Common Interests if: such ownership will impair the ability of the
Company and the Board to carry out their functions and
responsibilities, including but not limited to, under the Act; such
ownership will impair the ability of the SEC to enforce the Act; if the
acquiring Person or its Affiliates are subject to any statutory
disqualification within the meaning of Section 3(a)(39) of the Act; or
if such ownership would result in the Person, alone or together with
its Affiliates, having an ownership of more than 20% of the aggregate
Common Interests and such Person or one of its Affiliates is a member
or member organization of NYSE Amex.\84\
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\78\ ``Person'' means an individual, partnership, limited
liability company, trust, estate, association, joint stock company,
unincorporated organization, governmental or regulatory body or
other entity. See Section 1.1 of the LLC Agreement.
\79\ ``Affiliate'' means, with respect to any Person, and other
Person directly or indirectly, through one or more intermediaries,
controlling, controlled by, or under common control with such
Person. The term ``control,'' as used in this definition of
``Affiliate'' means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies
of such Person, whether through the ownership of voting securities,
through the right or power to appoint majority of the board of
directors, by contract or otherwise, and ``controlled by'' and
``under common control'' have corresponding meanings. See Section
1.1 of the LLC Agreement.
\80\ See Section 4.9(b) of the LLC Agreement.
\81\ See Section 11.8(b)(i) of the LLC Agreement. See also
Section 4.9(a). See Amendment No. 1, which confirmed that Section
4.9 of the LLC Agreement would prohibit a NYSE Amex member that is
an affiliate of NYSE Amex to own or vote Common Interests in excess
of 19.9% of the then issued and outstanding Common Interests, unless
it has received Commission approval to do so pursuant to the rule
filing process under Section 19(b) of the Act.
\82\ See Section 11.8(b)(ii) of the LLC Agreement.
\83\ See id.
\84\ See Section 11.8(b)(iii) of the LLC Agreement.
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Moreover, the LLC Agreement provides that, if any Person, alone or
together with any Affiliate, acquires a direct or indirect ownership of
25% or more of the total voting power of a Member (such person, a
``Controlling Person,'' and such interest a ``Controlling Interest''
\85\), and the Member, alone or together with any Affiliate, holds an
ownership interest in the Company equal to or greater than 20% of the
aggregate Common Interests, then such Controlling Person must become a
party to the LLC Agreement and agree to abide by all provisions
relating to regulatory matters.\86\ The LLC Agreement also provides
that NYSE Amex must file with the Commission, pursuant to Section 19(b)
of the Act, any amendment to the LLC Agreement executed to comply with
the provisions of the LLC Agreement relating to indirect ownership of
the Company.\87\ The non-economic rights and privileges, including all
voting rights, of the Member in which such Controlling Interest is
acquired will be suspended until the proposed rule change has become
effective under the Act or until the Controlling Person ceases to hold
a Controlling Interest in such Member.\88\
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\85\ See Section 1.1 of the LLC Agreement (defining
``Controlling Person'' and ``Controlling Interest'').
\86\ See Sections 11.8(d)(i) and (ii) of the LLC Agreement.
\87\ See Section 11.8(d)(iv) of the LLC Agreement.
\88\ See id.
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A proposed rule change filed with the Commission in any of the
circumstances noted above will afford the Commission an opportunity to
ensure that a change to the LLC Agreement or a change in the ownership
of the Company will be consistent with the Act, including whether the
Commission and NYSE Amex will retain sufficient regulatory jurisdiction
over the proposed indirect controlling party. The Commission
understands that the LLC Agreement will apply to any ultimate parent of
the Company, no matter how many levels of ownership are involved,
provided that a Controlling Interest exists between each link of the
ownership chain.
Finally, the LLC Agreement requires the Company to provide the
Commission with written notice ten days prior to the closing date of
any acquisition of an Interest by a person that results in a Member's
percentage ownership interest in the Company, alone or together with
any Affiliate, meeting or crossing the 5%, 10%, or 15% thresholds.\89\
This notice requirement is analogous to a requirement in Form 1,\90\
the application and amendments to the application for registration as a
national securities exchange. Exhibit K of Form 1 requires any exchange
that is a corporation or partnership to list any persons that have an
ownership interest of 5% or more in the exchange.\91\ Additionally,
Rule 6a-2(a)(2) under the Act \92\ requires an exchange to update its
Form 1 within ten days after any action that renders inaccurate the
information previously filed in Exhibit K.
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\89\ See Section 11.8(a) of the LLC Agreement.
\90\ 17 CFR 249.1 and 17 CFR 249.1a.
\91\ This reporting requirement applies only to exchanges that
have one or more owners, shareholders, or partners that are not also
members of the exchange. See Form 1, Exhibit K. Exhibit K applies
only to NYSE Amex itself, not to entities that operate facilities of
the exchange.
\92\ 17 CFR 240.6a-2(a)(2).
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Exhibit K imposes no obligation on an exchange to report parties
whose ownership interest in the exchange is less than 5%. Similarly,
Section 11.8(a) of the LLC Agreement requires the Company to notify the
Commission of the acquisition of an Interest when that Interest reaches
5% or more. The Commission does not believe that a change to the LLC
Agreement that reflects the acquisition of less than a 5% interest in a
facility of a national securities exchange (or an increase that does
not cross any of the additional thresholds) is a ``rule of the
exchange'' that must be filed pursuant to Section 19(b) of the Act.
D. Ownership and Voting Restrictions on Members of the Company
Section 4.9(a) of the LLC Agreement prohibits any Member (other
than NYSE Amex alone, or subject to receipt of Commission approval
pursuant to the rule filing process under Section 19(b) of the Act,
together with its Permitted Transferees) \93\ from owning or voting
(alone or together with its Affiliates), directly or indirectly more
than the 19.9% Maximum Percentage.\94\ In the event a Member (alone or
together with its Affiliates) holds Excess Interests, such Excess
Interests shall automatically and immediately constitute non-voting
Common Interests and the Member shall institute remedial measures to
either divest itself of such Excess Interests or retain such Excess
Interests as non-voting interests, in each case as permitted by Section
4.9(c) of the LLC Agreement.\95\
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\93\ See Section 11.4(a) of the LLC Agreement (defining
``Permitted Transferee'').
\94\ See Section 4.9(a) of the LLC Agreement. Any amount in
excess of the 19.9% Maximum Percentage are ``Excess Interests.''
\95\ See Section 4.9(c) of the LLC Agreement. See also Section
V.C. infra for a discussion of Section 11.8(b)(iii) of the LLC
Agreement that prohibits the Board from approving ownership by a
Member of more than 20% of the aggregate Common Interests and such
Person or one of its Affiliates is a member or member organization
of NYSE Amex.
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The Commission has previously expressed concern regarding the
potential for unfair competition and conflicts of interest where a
member of an exchange owns more than 20% of that exchange or a facility
thereof.\96\ Although it is common for a member to have an ownership
interest in an exchange or a facility of an exchange, such member's
interest could become so large as to raise questions whether the
exchange can fairly and objectively exercise its self-regulatory
responsibilities with respect to that member. A member that has a
controlling interest in the exchange or a facility might attempt to
direct the exchange to refrain from diligently surveilling the member's
conduct or from punishing any improper conduct. An exchange might also
be reluctant to surveil and enforce its rules zealously against a
member that the exchange relies on as its largest source of capital.
The Company, which will operate the Options Facility, will be owned
collectively by NYSE Amex and the seven Founding Firms, six of which
currently are members, or affiliates of members, of NYSE Amex and a
Member
[[Page 38443]]
of the Company.\97\ Initially, each of the Founding Firms will own less
than 19.9% of the Company and pursuant to the LLC Agreement, and except
as described above, will not be permitted to own or vote in excess of
the 19.9% of the Maximum Percentage as long as they are a Member of the
Company. Accordingly, the Commission believes that the ownership
concentration and voting limitations in the LLC Agreement are designed
to preserve the independence of NYSE Amex's self-regulatory functions
and NYSE Amex's ability to fulfill its regulatory and oversight
obligations.
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\96\ See NYSE Block Order, 74 FR at 5017-5018, n.65 and
accompanying text. See also CBSX Order; ISE Stock Order; BeX Order;
and BOX Order.
\97\ See Amendment No. 1, which states as follows: Founding
Firms Goldman Sachs and Citadel hold NYSE Amex Options Trading
Permits (``ATPs'' and each entity that holds an ATP, an ``ATP
Holder''). In addition, Goldman, Sachs & Co. is also an affiliate of
ATP Holder Goldman Sachs Execution & Clearing LP. Founding Firm BAML
is an affiliate of ATP Holders Merrill Lynch, Pierce, Fenner & Smith
Inc. and Merrill Lynch Professional Clearing Corp. Founding Firm
Barclays is an affiliate of ATP Holder Barclays Capital Inc.
Founding Firm Citigroup is an affiliate of ATP Holders Citigroup
Derivatives Markets, Inc. and Automated Trading Desk Financial
Services LLC. Founding Firm UBS is an affiliate of ATP Holders UBS
Financial Services Inc. and UBS Securities LLC. Founding Firm TD
Ameritrade is neither an ATP Holder nor an affiliate of an ATP
Holder.
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