Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Notice of Filing of a Proposed Rule Change in Connection With the Proposed Business Combination Involving BATS Global Markets, Inc. and Direct Edge Holdings LLC, 75585-75597 [2013-29623]
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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Notices
similar in all material respects to the
New Contracts, but particularly with
respect to the Credit Enhancements and
recapture of Credit Enhancements and
that each factual statement and
representation about the Credit
Enhancement feature will be equally
true of any Future Contracts. Applicants
also represent that each material
representation made by them about the
Separate Account and SFS will be
equally true of Future Accounts and
Future Underwriters, to the extent that
such representations relate to the issues
discussed in this Application. In
particular, each Future Underwriter will
be registered as a broker-dealer under
the Securities Exchange Act of 1934 and
be a member of FINRA.
11. Based upon the foregoing,
Applicants submit that recapture of the
proposed Credit Enhancement involves
none of the abuses to which provisions
of the 1940 Act and rules thereunder are
directed. The contract owner will
always retain the investment experience
attributable to the Credit Enhancement
and will retain the principal amount in
all cases except under the circumstances
described in the Application. Further,
Applicants assert that Minnesota Life
should be able to recapture such Credit
Enhancement to limit potential losses
associated with such Credit
Enhancements.
Conclusions
For the reasons set forth in the
Application, the Applicants assert that
the provisions for recapture of Credit
Enhancements under the Contracts do
not violate Section 2(a)(32) and
27(i)(2)(A) of the Act and rule 22c–1
under the Act and that the requested
relief is consistent with the standards
set forth in Section 6(c) of the Act.
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013–29625 Filed 12–11–13; 8:45 am]
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71024; File No. SR–BYX–
2013–039]
Self-Regulatory Organizations; BATS
Y-Exchange, Inc.; Notice of Filing of a
Proposed Rule Change in Connection
With the Proposed Business
Combination Involving BATS Global
Markets, Inc. and Direct Edge Holdings
LLC
December 6, 2013.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on November
25, 2013, BATS Y-Exchange, Inc. (the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange filed a proposed rule
change (the ‘‘Proposed Rule Change’’) in
connection with the proposed business
combination (the ‘‘Combination’’), as
described in more detail below,
involving its parent company, BATS
Global Markets, Inc. and Direct Edge
Holdings LLC (‘‘DE Holdings’’), the
indirect parent company of EDGX
Exchange, Inc. (‘‘EDGX’’) and EDGA
Exchange, Inc. (‘‘EDGA’’), each a
national securities exchange registered
with the Commission.
Upon completion of the Combination
(the ‘‘Closing’’), BATS Global Markets,
Inc. and DE Holdings will each become
intermediate holding companies, held
under a single new holding company.
The new holding company, currently
named ‘‘BATS Global Markets Holdings,
Inc.,’’ will at that time change its name
to ‘‘BATS Global Markets, Inc.’’ In
addition, the current parent company of
the Exchange, BATS Global Markets,
Inc., will at that time change its name
to ‘‘BATS Global Markets Holdings,
Inc.’’
For ease of reference, this Proposed
Rule Change will refer to the current
parent company of the Exchange as
‘‘Current BGM’’ when referring to the
entity prior to the Closing, and as ‘‘BGM
Holdings’’ when referring to that entity
after the Closing. The entity that will
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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become the new top-level holding
company that will, after Closing, own
BGM Holdings and DE Holdings, will be
referred to as ‘‘New BGM.’’
To effectuate the Combination, the
Exchange seeks to obtain the
Commission’s approval of (i) resolutions
of Current BGM’s board of directors (the
‘‘Resolutions’’) making certain
determinations regarding New BGM and
the impact of the Combination on the
Exchange; (ii) the proposed Amended
and Restated Certificate of Incorporation
of New BGM (the ‘‘New BGM Charter’’);
(iii) the proposed Amended and
Restated Bylaws of New BGM (the ‘‘New
BGM Bylaws’’); (iv) the proposed
amendments to Current BGM’s Second
Amended and Restated Certificate of
Incorporation (the ‘‘Current BGM
Charter,’’ and after such amendments,
the ‘‘BGM Holdings Charter’’); (v) the
proposed amendments to the Amended
and Restated Bylaws of Current BGM
(the ‘‘Current BGM Bylaws,’’ and after
such amendments, the ‘‘BGM Holdings
Bylaws’’); (vi) the proposed
amendments to the By-Laws of the
Exchange (the ‘‘Exchange Bylaws’’); (vii)
the proposed amendments to Exchange
Rule 2.3 to reflect the affiliation
between the Exchange and two
additional registered national securities
exchanges; (viii) the proposed
amendments to Exchange Rule 2.12 to
reflect the affiliation between the
Exchange and the routing broker for
EDGA and EDGX; and (ix) the indirect
acquisition by an affiliate of the
Exchange of a Member 3 of the Exchange
and the resulting affiliation between the
Exchange and the Member of the
Exchange, as required under Exchange
Rule 2.10.
The text of the proposed rule change
is available at the Exchange’s Web site
at https://www.batstrading.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
3 The term ‘‘Member’’ is defined in Exchange
Rule 1.5(n) as any registered broker or dealer that
has been admitted to membership in the Exchange.
1 15
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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Notices
the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
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1. Purpose
The Exchange submits this Proposed
Rule Change to seek the Commission’s
approval of various changes to the
organizational and governance
documents of the Exchange and the
Exchange’s current and proposed future
parent companies, changes to Exchange
Rules,4 and related actions that are
necessary in connection with the
Closing of the Combination, as
described below.
Other than as described herein and set
forth in the attached Exhibits 5A
through 5H, the Exchange will continue
to conduct its regulated activities
(including operating and regulating its
market and Members) in the manner
currently conducted, and will not make
any changes to its regulated activities in
connection with the Combination.
Except as set forth in this Proposed Rule
Change, the Exchange is not proposing
any amendments to its trading and
regulatory rules at this time. If the
Exchange determines to make any such
changes, it will seek the approval of the
Commission to the extent required by
the Act, and the Commission’s rules
thereunder, and the Rules of the
Exchange.
1. Current Corporate Structures
The Exchange and BATS Exchange,
Inc. (‘‘BZX’’ and together with the
Exchange, the ‘‘BATS Exchanges’’), are
each Delaware corporations that are
national securities exchanges registered
with the Commission pursuant to
Section 6(a) of the Act.5 Each BATS
Exchange is a direct, wholly owned
subsidiary of Current BGM, a Delaware
corporation. Current BGM also owns
100 percent of the equity interest in
BATS Trading, Inc., a Delaware
corporation (‘‘BATS Trading’’) that is a
broker-dealer registered with the
Commission that provides routing
services outbound from and, in certain
instances inbound to, each BATS
Exchange. In contemplation of the
Combination, several new entities have
been formed: New BGM, a Delaware
corporation, is currently a wholly
owned subsidiary of Current BGM, and
is currently a shell company with no
material assets or operations. New BGM,
in turn, owns 100 percent of the equity
4 The
term ‘‘Exchange Rules’’ refers to the rules
of the Exchange.
5 15 U.S.C. 78f(a).
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interest in each of Blue Merger Sub Inc.,
a Delaware corporation (‘‘Blue Merger
Sub’’), and Delta Merger Sub LLC, a
Delaware limited liability company
(‘‘Delta Merger Sub’’). Each of Blue
Merger Sub and Delta Merger Sub are
currently shell companies with no
material assets or operations.
Current BGM is itself beneficially
owned primarily by a consortium of
several unaffiliated firms, including
Members or affiliates of Members of the
Exchange. No firm beneficially owns 20
percent or greater of Current BGM, and
the only firms beneficially owning ten
percent or greater of Current BGM are (i)
GETCO Investments, LLC, an affiliate of
KCG Holdings, Inc., (ii) BGM Holding,
L.P., a holding company itself owned by
entities affiliated with the Spectrum
Equity Investors and TA Associates
Management private investment funds,
and (iii) Strategic Investments I, Inc., an
affiliate of Morgan Stanley.6 Seven other
firms each beneficially own five percent
or greater but less than ten percent of
Current BGM, while seven other firms
as well as various individuals each
beneficially own less than five percent
of Current BGM.
DE Holdings, a Delaware limited
liability company, owns 100 percent of
the equity interest in Direct Edge, Inc.,
a Delaware corporation (‘‘DEI’’). DEI, in
turn, owns 100 percent of the equity
interest in two registered national
securities exchanges, EDGX and EDGA,
each a Delaware corporation (together,
the ‘‘DE Exchanges’’). In addition, DE
Holdings owns 100 percent of the equity
interest in Direct Edge ECN LLC d/b/a
DE Route, a Delaware limited liability
company and the routing broker-dealer
for the DE Exchanges (‘‘DE Route’’).
As a limited liability company,
ownership in DE Holdings is
represented by units held by ‘‘LLC
Members.’’ Certain of the DE Holdings
LLC Members are Members or affiliates
of Members of the Exchange. The
Exchange understands that International
Securities Exchange Holdings, Inc. (‘‘ISE
Holdings’’) is the only LLC Member of
DE Holdings to beneficially own greater
than 20 percent of the equity interest in
DE Holdings. Other than ISE Holdings,
the only firms beneficially owning ten
percent or greater of DE Holdings (but
in each case less than 20 percent) are
Citadel Securities LLC, The Goldman
Sachs Group, Inc., and an affiliate of
KCG Holdings, Inc. No LLC Member
beneficially owns five percent or greater
but less than ten percent of DE
Holdings. Five other firms as well as
various individuals each beneficially
own less than five percent of DE
Holdings.
6 For purposes of this Proposed Rule Change,
references to the beneficial ownership of a ‘‘firm’’
refers to the aggregate beneficial ownership of the
firm and its affiliated entities.
3. Post-Closing Corporate Structure
As a result of the Combination, New
BGM will own (i) 100 percent of the
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2. The Combination
On August 23, 2013, an Agreement
and Plan of Merger (the ‘‘Merger
Agreement’’) was entered into among
Current BGM, New BGM, DE Holdings,
Blue Merger Sub, Delta Merger Sub, and
Cole, Schotz, Meisel, Forman &
Leonard, P.A., solely in its capacity as
representative of the LLC Members.
Pursuant to and subject to the terms of
the Merger Agreement, at the Closing,
among other things:
(i) Blue Merger Sub will be merged
with and into Current BGM, whereupon
the separate existence of Blue Merger
Sub will cease and Current BGM will be
the surviving company (the ‘‘BATS
Merger’’);
(ii) Delta Merger Sub will be merged
with and into DE Holdings, whereupon
the separate existence of Delta Merger
Sub will cease and DE Holdings will be
the surviving company (the ‘‘Direct
Edge Merger’’);
(iii) by virtue of the BATS Merger and
without any action required on the part
of Current BGM, New BGM, Blue
Merger Sub or any holder of Current
BGM stock, each outstanding share of
Current BGM stock issued and
outstanding will be converted into the
right to receive shares of New BGM
stock, and each outstanding share of
Blue Merger Sub issued and outstanding
will be converted into one share of
Current BGM, such that Current BGM
will become a wholly owned subsidiary
of New BGM; and
(iv) by virtue of the Direct Edge
Merger and without any action required
on the part of DE Holdings, New BGM,
Delta Merger Sub, or any LLC Member,
each LLC Member’s membership
interests in DE Holdings will be
converted into the right to receive
shares of New BGM stock, and each unit
of ownership interest of Delta Merger
Sub issued and outstanding will be
converted into one unit of ownership of
DE Holdings, such that DE Holdings
will become a wholly owned subsidiary
of New BGM.
Upon the Closing, each of Current BGM
and New BGM will amend and restate
their respective certificates of
incorporation to, among other things,
change their names such that New BGM
will be renamed ‘‘BATS Global Markets,
Inc.’’ and Current BGM will be renamed
‘‘BATS Global Markets Holdings, Inc.’’
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equity interest in BGM Holdings (the
entity previously referred to as ‘‘Current
BGM’’), and (ii) 100 percent of the LLC
membership interests in DE Holdings.
BGM Holdings will continue to own 100
percent of the equity interest in each
BATS Exchange and BATS Trading. DE
Holdings will continue to own 100
percent of the equity interest in DE
Route 7 and DEI. DEI will, in turn,
continue to own 100 percent of the
equity interest in each DE Exchange.
Each of the BATS Exchanges and BATS
Trading, on the one hand, and the DE
Exchanges and DE Route, on the other
hand, will continue to operate
separately.
New BGM, as the new top-level
holding company for the combined
businesses, will have widely dispersed
ownership, divided among the several
firms and individuals that previously
held equity interests in each of Current
BGM and DE Holdings. Of the firms and
individuals that are expected to hold
equity interests in New BGM after the
Closing, none will beneficially own 20
percent or greater of New BGM and only
an affiliate of KCG Holdings, Inc. will
beneficially own ten percent or greater.
Seven firms will beneficially own five
percent or greater but less than ten
percent, while 12 other firms as well as
various individuals will each
beneficially own less than five percent
of New BGM.8
7 As described above, the Combination will result
in a change of ownership of both BATS Trading and
DE Route, each of which is a member of the
Financial Industry Regulatory Authority, Inc.
(‘‘FINRA’’). The Exchange understands that,
pursuant to NASD Rule 1017, each of BATS
Trading and DE Route is seeking approval for this
change of ownership from FINRA.
8 ISE Holdings, which will beneficially own
greater than five percent but less than ten percent
of New BGM, will receive common stock of New
BGM designated as Class A Non-Voting Common
Stock. As set forth in the proposed New BGM
Charter and described below, shares of Class A
Non-Voting Common Stock are generally nonvoting, except with respect to certain actions that
would adversely affect the preferences, rights or
powers of the holders of Class A Non-Voting
Common Stock disproportionately relative to
Voting Common Stock or the Class B Non-Voting
Common Stock. See New BGM Charter, Art.
FOURTH, para. (b)(ii). Pursuant to the New BGM
Charter and the Investor Rights Agreement expected
to be entered into at Closing and attached as Exhibit
A to the New BGM Bylaws (the ‘‘Investor Rights
Agreement’’), ISE Holdings’ shares of Class A NonVoting Common Stock may convert to Voting
Common Stock (i) automatically with respect to any
shares transferred to persons other than Related
Persons of ISE Holdings; (ii) upon the termination
of the Investor Rights Agreement; and (iii)
automatically with respect to any shares of Class A
Non-Voting Common Stock sold by ISE Holdings in
any public offering of the stock of New BGM. See
New BGM Charter, Art. FOURTH, para. (c); Investor
Rights Agreement, Section 2.2(j).
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4. Voting and Ownership Limitations of
Current BGM; Resolutions
The Current BGM Charter provides
that (i) no person, either alone or
together with its ‘‘Related Persons,’’ 9
may own, directly or indirectly, of
record or beneficially, shares
constituting more than 40 percent of any
class of its capital stock, and no
Exchange Member, either alone or
together with its Related Persons, may
own, directly or indirectly, of record or
beneficially, shares constituting more
than 20 percent of any class of its
capital stock (collectively, the ‘‘BGM
Ownership Limitation’’), and (ii) subject
to certain exceptions, no person, either
alone or together with its Related
Persons, at any time, may, directly,
indirectly or pursuant to any of various
arrangements, vote or cause the voting
of shares or give any consent or proxy
with respect to shares representing more
than 20 percent of the voting power of
its then issued and outstanding capital
stock (the ‘‘BGM Voting Limitation’’).10
Purported transfers that would result in
9 The Current BGM Charter generally defines a
‘‘Related Person’’ as, with respect to any person, (i)
any ‘‘affiliate’’ of such person (as defined in Rule
12b–2 under the Act); (ii) any other person with
which such first person has any agreement,
arrangement or understanding (whether or not in
writing) to act together for the purpose of acquiring,
voting, holding or disposing of shares of the capital
stock of Current BGM (provided no person is
deemed a Related Person pursuant to clause (ii)
solely as a result of such person’s being or
becoming a party to the Investor Rights Agreement
entered into by and among Current BGM and the
stockholders named therein on January 1, 2008);
(iii) in the case of a person that is a company,
corporation or similar entity, any executive officer
(as defined under Rule 3b–7 under the Act) or
director of such person and, in the case of a person
that is a partnership or limited liability company,
any general partner, managing member or manager
of such person, as applicable; (iv) in the case of any
person that is a registered broker or dealer that has
been admitted to membership in either of the BATS
Exchanges (for purposes of this definition of
‘‘Related Person,’’ each such national securities
exchange shall be referred to generally as an
‘‘Exchange’’ and any member of such Exchange, an
‘‘Exchange Member’’), any person that is associated
with the Exchange Member (as determined using
the definition of ‘‘person associated with a
member’’ as defined under Section 3(a)(21) of the
Act); (v) in the case of a person that is a natural
person and Exchange Member, any broker or dealer
that is also an Exchange Member with which such
person is associated; (vi) in the case of a person that
is a natural person, any relative or spouse of such
person, or any relative of such spouse who has the
same home as such person or who is a director or
officer of Current BGM or any of its parents or
subsidiaries; (vii) in the case of a person that is an
executive office (as defined under Rule 3b–7 under
the Act) or a director of a company, corporation or
similar entity, such company, corporation or entity,
as applicable; and (viii) in the case of a person that
is a general partner, managing member or manager
of a partnership or limited liability company, such
partnership or limited liability company, as
applicable. See Current BGM Charter, Art. FIFTH,
para. (a)(ii).
10 See Current BGM Charter, Art. FIFTH, para. (b).
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a violation of the BGM Ownership
Limitation are not recognized by
Current BGM to the extent of any
ownership in excess of the BGM
Ownership Limitation, and purported
voting or voting arrangements in
violation of the BGM Voting Limitation
are not honored by Current BGM to the
extent of any voting in excess of the
limitation.11
However, the Current BGM Charter
provides that each of the BGM
Ownership Limitation and the BGM
Voting Limitation may be waived
(except with respect to Exchange
Members and their Related Persons)
pursuant to a resolution duly adopted
by the board of directors of Current
BGM if, in connection with taking such
action, the board of directors states in
such resolution that it is the
determination of the board of directors
that the waiver:
• Will not impair the ability of each
BATS Exchange to carry out its
functions and responsibilities as an
‘‘exchange’’ under the Act and the rules
and regulations promulgated
thereunder;
• is otherwise in the best interests of
Current BGM, its stockholders, and each
BATS Exchange;
• will not impair the ability of the
Commission to enforce the Act and the
rules and regulations promulgated
thereunder; and
• shall not be effective until it is filed
with and approved by the
Commission.12
In granting such a waiver, the Current
BGM board of directors has the
discretion to impose on the person and
its Related Persons, such conditions and
restrictions that it deems necessary,
appropriate or desirable in furtherance
of the objectives of the Act and the rules
and regulations promulgated
thereunder, and the governance of each
BATS Exchange.13
In addition, notwithstanding the
above, the Current BGM Charter
provides 14 that in any case where a
person, either alone or with its Related
Persons, would own or vote more than
the BGM Ownership Limitation or BGM
Voting Limitation, respectively, upon
consummation of any proposed sale,
assignment or transfer of Current BGM’s
capital stock, such a transaction will not
become effective until the Current BGM
board of directors determines, by
resolution, that such person and its
11 See
Current BGM Charter, Art. FIFTH, para. (d).
Current BGM Charter, Art. FIFTH, para.
(b)(ii)(B).
13 Id.
14 See Current BGM Charter, Art. FIFTH, para.
(b)(iii).
12 See
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Related Persons are not subject to any
‘‘statutory disqualification,’’ as defined
in Section 3(a)(39) of the Act.15
As described above, upon the Closing
of the proposed Combination, New BGM
will become the sole owner of Current
BGM (referred to as ‘‘BGM Holdings’’
upon the Closing and thereafter).
Additionally, as discussed in more
detail below, the Exchange is also
seeking the Commission’s approval for
Current BGM’s proposal to,
contemporaneously with the Closing,
amend and restate the Current BGM
Charter as the BGM Holdings Charter,
and for New BGM to adopt the New
BGM Charter. Unlike the Current BGM
Charter, as proposed to be amended, the
BGM Holdings Charter will not contain
the BGM Ownership Limitation or the
BGM Voting Limitation.16 While the
BGM Ownership Limitation and BGM
Voting Limitation will not be contained
in the BGM Holdings Charter, the BGM
Holdings Charter specifies that BGM
Holdings’ sole stockholder will be New
BGM, and the New BGM Charter will
contain substantively identical
ownership and voting limitation
provisions, which will also become
effective contemporaneously with the
Closing.17
As a result, New BGM’s acquisition of
ownership and voting rights in BGM
Holdings upon Closing would not cause
New BGM to contravene the BGM
Ownership Limitation or BGM Voting
Limitation, because the Current BGM
Charter will be contemporaneously
amended to eliminate the BGM
Ownership Limitation and the BGM
Voting Limitation, and the New BGM
Charter will be contemporaneously
amended with respect to New BGM’s
stockholders.
Nevertheless, because the
Combination will result in a change of
ownership of Current BGM (in that New
BGM will become the sole stockholder
of Current BGM), the Exchange and the
board of directors of Current BGM each
believe that it is appropriate for the
board of directors of Current BGM to
adopt the Resolutions, attached as
Exhibit 5A, making certain
determinations with respect to New
BGM and the Combination similar to
those that would be necessary to waive
the BGM Ownership Limitation and
BGM Voting Limitation. Specifically,
the board of directors of Current BGM
determined that:
• The acquisition of the proposed
ownership by New BGM in Current
15 15
U.S.C. 78c(a)(39).
infra text accompanying note 58.
17 See infra text accompanying notes 23 through
27.
16 See
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BGM will not impair the ability of each
BATS Exchange to carry out its
functions and responsibilities as an
‘‘exchange’’ under the Act and the rules
and regulations promulgated
thereunder, is otherwise in the best
interests of Current BGM, its
stockholders and the BATS Exchanges,
and will not impair the ability of the
Commission to enforce the Act and the
rules and regulations promulgated
thereunder;
• the acquisition or exercise of the
proposed voting rights by New BGM in
Current BGM will not impair the ability
of each BATS Exchange to carry out its
functions and responsibilities as an
‘‘exchange’’ under the Act and the rules
and regulations promulgated
thereunder, that it is otherwise in the
best interests of the Current BGM, its
stockholders and the BATS Exchanges,
and that it will not impair the ability of
the Commission to enforce the Act and
the rules and regulations promulgated
thereunder;
• neither New BGM, nor any of its
Related Persons, is subject to ‘‘statutory
disqualification’’ within the meaning of
Section 3(a)(39) of the Act; 18 and
• neither New BGM, nor any of its
Related Persons (excluding BATS
Trading, an Exchange Member whose
affiliation with the Exchanges has been
approved/permitted by the Commission
pursuant to Rule 2.11 and Rule 2.12 of
each Exchange),19 is an Exchange
Member.20
The Exchange has reviewed such
Resolutions and requests that the
Commission approve such Resolutions.
The Exchange believes that the
Commission should approve the
Resolutions, as the Combination will
not impair the ability of either BATS
Exchange to carry out its functions and
responsibilities as an ‘‘exchange’’ under
the Act and the rules and regulations
promulgated thereunder, or the ability
of the Commission to enforce the Act
and the rules and regulations
promulgated thereunder. The BATS
Exchanges will continue to operate and
regulate their markets and Members as
18 15
U.S.C. 78c(a)(39).
19 As noted above, BATS Trading is a routing
broker-dealer and an Exchange Member that is
affiliated with the Exchange, pursuant to Exchange
Rules 2.11 and 2.12, and a direct subsidiary of
Current BGM. The same structure will continue to
be in place following the Closing and BATS Trading
will remain a direct subsidiary of BGM Holdings.
20 In addition, the Resolutions contain a
determination that the execution and delivery of the
Merger Agreement by New BGM constituted notice
of New BGM’s intention to acquire ownership and
voting rights in excess of the BGM Ownership
Limitation and BGM Voting Limitation,
respectively, in writing and not less than 45 days
before the Closing. See Current BGM Charter, Art.
FIFTH, para. (b)(iv).
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they have done prior to the
Combination. Thus, each BATS
Exchange will continue to enforce the
Act, the Commission’s rules thereunder,
and each Exchange’s own rules, in the
manner it does today. Further, the
Commission will continue to have
plenary regulatory authority over the
BATS Exchanges, as is currently the
case with these entities.
The Exchange also notes that the
Resolutions reflect the determination by
the Current BGM board of directors that
the Combination and New BGM’s
resulting ownership and voting rights in
BGM Holdings are otherwise in the best
interests of Current BGM, its
stockholders, and the BATS Exchanges.
In addition, the Exchange notes that
notwithstanding the Resolutions and the
Combination, the BGM Ownership
Limitation and the BGM Voting
Limitation will remain in place with
respect to potential future transactions
involving the ultimate parent company
of the BATS Exchanges. As described in
more detail below, the Exchange is also
proposing the adoption of the New BGM
Charter and the New BGM Bylaws,
which are modeled in large part on the
Current BGM Charter and the Current
BGM Bylaws (and include provisions
substantially identical to the BGM
Ownership Limitation and the BGM
Voting Limitation), creating an
ownership structure that will continue
to provide the Commission with
appropriate oversight tools to ensure
that the Commission will have the
ability to enforce the Act with respect to
the Exchange, its direct and indirect
parent entities, and its directors,
officers, employees and agents to the
extent they are involved in the activities
of the Exchange, and protect the
independence of the Exchange’s selfregulatory activities.
The Exchange therefore requests that
the Commission approve the
Resolutions, attached as Exhibit 5A.
5. Adoption of New BGM Charter and
New BGM Bylaws
New BGM was incorporated on
August 22, 2013, under the name BATS
Global Markets Holdings, Inc., by filing
a certificate of incorporation with the
Secretary of State of Delaware. Upon
incorporation, New BGM also adopted
bylaws. New BGM is currently a shell
company, with no material assets or
operations. Therefore, neither its
certificate of incorporation nor bylaws
currently need or contain any
provisions that would be appropriate for
an entity that has direct or indirect
ownership in a registered national
securities exchange.
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However, in connection with the
Combination, upon the Closing, New
BGM will become (i) the indirect owner
(through BGM Holdings) of each of the
BATS Exchanges and BATS Trading, (ii)
the indirect owner (through DE
Holdings and DEI) of each of the DE
Exchanges, and (iii) the indirect owner
(through DE Holdings) of DE Route. As
a result, the Exchange is proposing that
in connection with New BGM’s
acquisition of indirect ownership in the
Exchange, New BGM would amend and
restate each of its certificate of
incorporation and bylaws to adopt
provisions designed to protect and
maintain the integrity of the selfregulatory functions of the Exchange
and to facilitate the ability of the
Exchange and the Commission to carry
out their regulatory and oversight
obligations under the Act. Each of the
New BGM Charter and the New BGM
Bylaws is modeled on, and substantially
similar to, the Current BGM Charter and
Current BGM Bylaws, respectively,
except with respect to the differences
described below.
a. New BGM Charter
The New BGM Charter is proposed to
be adopted as the Amended and
Restated Certificate of Incorporation of
BATS Global Markets Holdings, Inc.
However, the New BGM Charter will
effect an amendment to the name of the
corporation upon Closing such that it
will be renamed ‘‘BATS Global Markets,
Inc.’’ 21 The change of name is intended
to reflect the fact that New BGM is
succeeding to the business of Current
BGM in all respects, notwithstanding
the technical change of corporate entity
that will result from the structure of the
Combination.
The New BGM Charter, which is
attached as Exhibit 5B, is substantially
similar to the Current BGM Charter,
which the Commission has previously
found to be consistent with the Act.22 It
contains provisions imposing the BGM
Ownership Limitation and the BGM
Voting Limitation on any owners or
prospective owners of New BGM.23 In
addition, similar to the Current BGM
Charter, the New BGM Charter prohibits
a Member of any of New BGM’s
registered national securities exchange
subsidiaries, either alone or together
with such Member’s Related Persons,24
21 See
New BGM Charter, Art. FIRST.
Securities Exchange Act Release No. 58375
(August 18, 2008), 73 FR 49498 (August 21, 2008).
23 See New BGM Charter, Art. FIFTH paras.
(b)(i)(A) and (C).
24 The New BGM Charter defines ‘‘Related
Persons’’ consistent with the definition in the
Current BGM Charter, see supra note 9, except that
(i) the definition of ‘‘Exchange’’ for purposes of
22 See
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from owning, directly or indirectly, of
record or beneficially, more than 20
percent of shares of any class of capital
stock of New BGM.25 As in the Current
BGM Charter, purported sales, transfers,
assignments, pledges or ownership that
would result in a violation of the BGM
Ownership Limitation will not be
recognized by New BGM to the extent
of any ownership in excess of the
limitation, and New BGM shall have the
right to redeem the shares in excess of
the applicable ownership limit for their
fair market value. In addition, in
contrast to the Current BGM Charter, the
New BGM Charter would clarify that
these same non-recognition and
redemption rights apply in the case of
a purported conversion of shares
resulting in a violation of the BGM
Ownership Limitation, as apply to
purported sales, transfers, assignments,
pledges or ownership that result in such
a violation.26 Similarly, as in the
Current BGM Charter, purported voting
or voting arrangements in violation of
the BGM Voting Limitation will not be
honored by New BGM to the extent of
any voting in excess of the limitation.27
These provisions are designed to
prevent any stockholder from exercising
undue control over the operation of the
BATS Exchanges or the DE Exchanges
(together, the ‘‘Exchange Subsidiaries’’),
each of which New BGM will indirectly
own following the Combination, and to
assure that each Exchange Subsidiary
and the Commission are able to carry
out their regulatory obligations under
the Act.
Further, consistent with the Current
BGM Charter, the New BGM Charter
provides that, for so long as New BGM
controls, directly or indirectly, a
registered national securities exchange,
before any amendment to the New BGM
Charter may be effective, those changes
must be submitted to the board of
directors of each such exchange, and if
the amendment is required to be filed
with, or filed with and approved by the
Commission pursuant to Section 19(b)
of the Act, 28 such change shall not be
effective until filed with, or filed with
and approved by, the Commission.29
The Exchange believes that these
provisions will assist the Exchange in
such definition is expanded to refer to any national
securities exchange that is a direct or indirect
subsidiary of New BGM, and (ii) the reference to the
Investor Rights Agreement has been revised to refer
to the Investor Rights Agreement to be entered into
upon Closing.
25 See New BGM Charter, Art. FIFTH para.
(b)(i)(B).
26 See New BGM Charter, Art. FIFTH, paras. (d)–
(e).
27 See New BGM Charter, Art. FIFTH, para. (d).
28 15 U.S.C. 78s(b).
29 See New BGM Charter, Art. TWELFTH.
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fulfilling its self-regulatory obligations
and in administering and complying
with the requirements of the Act.
The provisions of the New BGM
Charter differ from those of the Current
BGM Charter in certain limited respects:
• The total number of shares of
common stock that New BGM will have
authority to issue is 75,000,000, divided
between 55,000,000 shares designated
as Voting Common Stock, 10,000,000
shares designated as Class A Non-Voting
Common Stock, and 10,000,000 shares
designated as Class B Non-Voting
Common Stock.30 This represents an
increase from the 25,000,000 shares that
Current BGM is authorized to issue
(divided between 24,500,000 shares
designated as Voting Common Stock
and 500,000 shares designated as NonVoting Common Stock). The increase in
authorized shares is due to the greater
number of stockholders that New BGM
will have following the Combination, as
compared to Current BGM, as well as to
provide an adequate number of
authorized shares to allow for potential
future issuances. The rights and
preferences of the Class A Non-Voting
Common Stock and Class B Non-Voting
Common Stock are identical in all
respects, except for conversion rights.
Class A Non-Voting Common Stock
converts into Voting Common Stock
automatically upon transfer to a person
other than a Related Person of such
holder, upon termination of the Investor
Rights Agreement, and may be
converted into Voting Common Stock at
any time at the option of the holder.31
Class B Non-Voting Common Stock,
however, may only be converted into
Voting Common Stock following a
‘‘Qualified Transfer.’’ 32 The term
30 See
New BGM Charter, Art. FOURTH, para. (a).
New BGM Charter, Art. FOURTH, para. (c).
In addition, Class A Non-Voting Common Stock
held by ISE Holdings will convert automatically if
ISE Holdings includes any such shares in any
public offering of stock of New BGM.
32 The Exchange notes that, notwithstanding the
conversion features, neither Class A Non-Voting
Common Stock nor Class B Non-Voting Common
Stock may convert into Voting Common Stock if
such a conversion would cause the stockholder to
own, alone or with its Related Persons, directly or
indirectly, of record or beneficially (i) more than
40% of any class of capital stock of New BGM in
contravention of the BGM Ownership Limitation
(unless a waiver is granted by the board of directors
of New BGM and approved by the Commission), or
(ii) in the case of an Exchange Member stockholder,
more than 20% of any class of capital stock of New
BGM. See New BGM Charter, Art. FIFTH, para.
(b)(i)(A) and (B). In addition, to the extent that any
Class A Non-Voting Common Stock or Class B NonVoting Common Stock is converted into Voting
Common Stock, the stockholder owning the
converted Voting Common Stock would be subject
to the BGM Voting Limitation and not permitted,
either alone or together with its Related Persons, at
any time, directly, indirectly or pursuant to any of
31 See
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‘‘Qualified Transfer’’ means a sale or
other transfer of Class B Non-Voting
Common Stock by a holder of such
shares: (a) In a widely distributed public
offering registered pursuant to the
Securities Act of 1933; 33 (b) in a private
sale or transfer in which the relevant
transferee (together with its Affiliates, as
defined below, and other transferees
acting in concert with it) acquires no
more than two percent of any class of
voting shares (as defined in 12 CFR
225.2(q)(3) and determined by giving
effect to any such permitted conversion
of transferred shares of Class B NonVoting Common Stock upon such
transfer pursuant to Article FOURTH of
the New BGM Charter), (c) to a
transferee that (together with its
Affiliates and other transferees acting in
concert with it) owns or controls more
than 50 percent of any class of voting
shares (as defined in 12 CFR 225.2(q)(3))
of New BGM without regard to any
transfer of shares from the transferring
holder of shares of Class B Non-Voting
Common Stock, or (d) to New BGM. As
used above, the term ‘‘Affiliate’’ means,
with respect to any person, any other
person directly or indirectly controlling,
controlled by or under common control
with such person, and ‘‘control’’
(including, with correlative meanings,
the terms ‘‘controlled by’’ and ‘‘under
common control with’’) has the meaning
set forth in 12 CFR 225.2(e)(1).34 The
Exchange understands that certain
persons that will become stockholders
of New BGM as of the Closing may be,
or may become, subject to restrictions
under the Bank Holding Company Act
of 1956 35 on the extent to which they
are permitted to own voting stock of
New BGM or certain types of non-voting
stock convertible into voting stock of
New BGM. The Exchange understands
that New BGM’s Class B Non-Voting
Common Stock is designed to permit a
stockholder that may be subject to such
restrictions to maintain an economic
interest in New BGM, through
ownership of Class B Non-Voting
Common Stock, in excess of its voting
interest and in compliance with such
restrictions, for purposes of the Bank
Holding Company Act of 1956.
• The term ‘‘Exchange,’’ as used in
the New BGM Charter, is defined to
various arrangements, to vote or cause the voting of
shares or give any consent or proxy with respect to
shares representing more than 20 percent of the
voting power of the then issued and outstanding
capital stock of New BGM (unless a waiver is
granted by the board of directors of New BGM and
approved by the Commission). See New BGM
Charter, Art. FIFTH, para. (b)(i)(C).
33 15 U.S.C. 77a.
34 See New BGM Charter, Art. FOURTH, para.
(d)(i).
35 12 U.S.C. 1841 et seq.
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refer to ‘‘any national securities
exchange registered under Section 6 of
the Act with the [Commission] that is a
direct or indirect subsidiary’’ of New
BGM.36 The term ‘‘Exchange’’ is used
throughout the New BGM Charter to
refer to subsidiaries of New BGM that
are registered as national securities
exchanges. This definition differs from
the definition contained in the Current
BGM Charter, which defines
‘‘Exchange’’ by specific reference to the
names of the BATS Exchanges. Because,
following the Combination, the DE
Exchanges will also become indirect
subsidiaries of New BGM, the definition
in the New BGM Charter has been
expanded so as to capture the DE
Exchanges in addition to the BATS
Exchanges.
• The New BGM Charter reflects
certain non-substantive differences and
typographical corrections, including
conforming the spelling of ‘‘Bylaws’’
throughout the organizational
documents of New BGM and its
proposed subsidiaries.
b. New BGM Bylaws
As with the New BGM Charter, the
New BGM Bylaws, which are set forth
in Exhibit 5C, contain provisions
substantially similar to those of the
Current BGM Bylaws, which the
Commission has previously found to be
consistent with the Act.37 This includes
provisions that are designed to maintain
the independence of the self-regulatory
functions of the Exchange Subsidiaries.
Consistent with the Current BGM
Bylaws, the New BGM Bylaws provide
that New BGM and its officers,
directors, employees and agents submit
to the Commission’s jurisdiction with
respect to activities relating to any of the
Exchange Subsidiaries,38 and, for so
long as New BGM controls, directly or
indirectly, such Exchange Subsidiary,
New BGM agrees to provide the
Commission and each Exchange
Subsidiary with access to its books and
records that are related to the operation
or administration of the Exchange
Subsidiary.39 In addition, to the extent
they are related to the operation or
administration of an Exchange
Subsidiary, the books, records,
premises, officers, directors, agents, and
employees of New BGM shall be
deemed to be the books, records,
premises, officers, directors, agents, and
employees of the Exchange Subsidiary
New BGM Charter, Art. FIFTH, para. (a)(ii).
Securities Exchange Act Release No. 58375
(August 18, 2008), 73 FR 49498 (August 21, 2008).
38 See New BGM Bylaws, Section 14.05.
39 See New BGM Bylaws, Section 14.03.
for purposes of, and subject to oversight
pursuant to, the Act.40
The New BGM Bylaws also provide
that all books and records of an
Exchange Subsidiary reflecting
confidential information pertaining to
the self-regulatory function of the
Exchange Subsidiary (including but not
limited to disciplinary matters, trading
data, trading practices and audit
information) that shall come into the
possession of New BGM shall not be
made available other than to those
officers, directors, employees and agents
of New BGM that have a reasonable
need to know the contents thereof, and
shall be retained in confidence by New
BGM, the members of its board of
directors, its officers, employees and
agents, and not used for any nonregulatory purposes.41 The New BGM
Bylaws, however, specify that the New
BGM Bylaws (including these
confidentiality provisions) shall not be
interpreted so as to limit or impede the
rights of the Commission or an
Exchange Subsidiary to access and
examine such confidential information
pursuant to the federal securities laws
and the rules and regulations
thereunder, or to limit or impede the
ability of any officers, directors,
employees or agents of New BGM to
disclose such confidential information
to the Commission or an Exchange
Subsidiary.42
In addition, for so long as New BGM
controls, directly or indirectly, an
Exchange Subsidiary, the directors,
officers, employees and agents of New
BGM are required to give due regard to
the preservation of the independence of
each Exchange Subsidiary’s selfregulatory functions, and to its
obligations to investors and the general
public, and not take any actions which
would interfere with the effectuation of
decisions by the board of directors of
such Exchange Subsidiary relating to
regulatory functions (including
disciplinary matters) or which would
interfere with such Exchange
Subsidiary’s ability to carry out its
responsibilities under the Act.43
Further, the New BGM Bylaws require
that, for so long as New BGM controls,
directly or indirectly, an Exchange
Subsidiary, before any amendment to or
repeal of any provision of the New BGM
Bylaws may be effective, those changes
must be submitted to the board of
directors of each Exchange Subsidiary,
and, if such amendment is required to
be filed with, or filed with and
36 See
37 See
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40 Id.
41 See
New BGM Bylaws, Section 14.02.
id.
43 See New BGM Bylaws, Section 14.01.
42 See
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approved by, the Commission before the
changes may be effective under Section
19 of the Act and the rules promulgated
thereunder, then the proposed changes
shall not be effective until filed with, or
filed with and approved by, the
Commission, as the case may be.44 The
Exchange believes that these provisions
will assist the Exchange in fulfilling its
self-regulatory obligations and in
administering and complying with the
requirements of the Act.
The provisions of the New BGM
Bylaws differ from those of the Current
BGM Bylaws in certain limited respects:
• The New BGM Bylaws provide for
two separate corporate officer positions,
one known as the Chief Executive
Officer and another known as the
President. The Current BGM Bylaws, in
contrast, provide for a combined
position known as the President and
Chief Executive Officer.45 Under the
New BGM Bylaws, the Chief Executive
Officer will be the chief executive
officer of New BGM and subject to the
control of the board of directors of New
BGM, has general supervision, direction
and control of the business and affairs
of New BGM,46 while the President will
be a senior executive officer with certain
designated powers, among other things,
to serve as the chief executive officer in
the absence or disability of the Chief
Executive Officer.47 References to
corporate officers throughout the New
BGM Bylaws reflect this difference. The
difference in corporate officer
designations is intended to facilitate the
anticipated executive leadership of New
BGM following the Combination. It is
anticipated that, following the
Combination, the current President and
Chief Executive Officer of Current BGM
will become the Chief Executive Officer
of New BGM, while the current Chief
Executive Officer of DE Holdings will
become the President of New BGM.
• The New BGM Bylaws provide for
a board of directors consisting of 15
members, or such other number of
members as the board of directors
determines from time to time. The
Current BGM Bylaws provide that the
board of directors will consist of one or
more members, as determined by
resolution of the board of directors.48
The size of the New BGM board is
proposed to be initially set at 15 in
order to reflect the anticipated initial
membership of the board of directors of
New BGM. The Current BGM board of
directors currently has 13 members.
After the Closing, it is anticipated that
the New BGM board of directors will
consist of the same members as the
Current BGM board, except that the
New BGM board will be expanded by
two members, to include representatives
of two additional firms that are
currently LLC Members of DE Holdings
but will, by virtue of the Combination,
become stockholders of New BGM.
• Section 5.02(a) of the Current BGM
Bylaws sets forth the process for
representatives of Current BGM to
attend meetings of, and vote the shares
of, any corporation, partnership or other
entity (including each BATS Exchange)
in which Current BGM may hold stock,
partnership, or other equity interests.
This provision parenthetically refers to
the BATS Exchanges to reflect the fact
that Current BGM is the direct owner of
each of the BATS Exchanges. However,
following the Combination, New BGM
will instead be the direct owner of each
of BGM Holdings and DE Holdings. The
corresponding provision in the New
BGM Bylaws therefore contains a
similar parenthetical reference to its
ownership of BGM Holdings and DE
Holdings, rather than the BATS
Exchanges.49 In addition, the New BGM
Bylaws include a reference to meetings
of ‘‘members’’ of any ‘‘limited liability
company’’ in which New BGM holds
equity interests, which terms are not
included in the corresponding provision
in the Current BGM Bylaws.50 This is
intended to reflect the fact that New
BGM will, following the Closing, be the
sole member of DE Holdings, a limited
liability company, while Current BGM
does not hold equity in any limited
liability companies.51 In addition, the
Current BGM Bylaws contain provisions
that relate to Current BGM’s voting of
shares in the election of directors, and
Members of the Member Nominating
Committees, of the BATS Exchanges.52
These provisions will not be applicable
to New BGM and are not included in the
New BGM Bylaws, as the BATS
Exchanges will be directly owned by
BGM Holdings, rather than New BGM.53
• The term ‘‘Exchange,’’ as used in
the New BGM Bylaws, is defined to
refer to ‘‘any national securities
exchange registered with the
[Commission] under Section 6 of the
49 See
44 See
New BGM Bylaws, Art. XII.
45 Compare New BGM Bylaws, Sections 4.01 and
4.02 with Current BGM Bylaws, Sections 4.01 and
4.02(c) and (d).
46 See New BGM Bylaws, Section 4.02(c).
47 See New BGM Bylaws, Section 4.02(d).
48 Compare New BGM Bylaws, Section 3.01 with
Current BGM Bylaws, Section 3.01.
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New BGM Bylaws, Section 5.02.
50 Id.
51 Compare New BGM Bylaws, Section 5.02 with
Current BGM Bylaws, Section 5.02.
52 See Current BGM Bylaws, Sections 5.02(b) and
(c).
53 Substantially identical provisions are instead
included in the BGM Holdings Bylaws. See infra
text accompanying note 70.
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[Act] that is a direct or indirect
subsidiary’’ of New BGM.54 The term
‘‘Exchange’’ is used throughout the New
BGM Bylaws to refer to subsidiaries of
New BGM that are registered as national
securities exchanges. The Current BGM
Bylaws either refer to each BATS
Exchange by name or define
‘‘Exchange’’ by specific reference to the
BATS Exchanges. Because, following
the Combination, the DE Exchanges will
also become indirect subsidiaries of
New BGM, the definition in the New
BGM Bylaws has been expanded so as
to capture the DE Exchanges in addition
to the BATS Exchanges.
• The New BGM Bylaws reflect
certain non-substantive updates to dates
of agreements and cross-references, as
well as typographical corrections,
including conforming the spelling of
‘‘Bylaws’’ throughout the organizational
documents of New BGM and its
proposed subsidiaries.
6. Adoption of BGM Holdings Charter
and BGM Holdings Bylaws
Effective as of the Closing of the
Combination, BGM Holdings
(previously referred to as Current BGM)
will continue to hold direct ownership
of the BATS Exchanges and BATS
Trading, but will no longer be the
ultimate holding company of the
corporate structure, itself being a wholly
owned subsidiary of New BGM. As a
result, provisions of the Current BGM
Charter and Current BGM Bylaws,
which contemplate an entity that was
the ultimate holding company in the
corporate structure, will no longer be
appropriate. The Exchange is therefore
proposing the amendment and
restatement of each of the Current BGM
Charter (as amended, referred to as the
‘‘BGM Holdings Charter’’) and the
Current BGM Bylaws (as amended,
referred to as the ‘‘BGM Holdings
Bylaws’’). Each of the proposed BGM
Holdings Charter and the BGM Holdings
Bylaws are modeled on, and
substantially similar to, the current
certificate of incorporation and bylaws,
respectively, of DEI, which is similarly
situated as an intermediate holding
company between DE Holdings and the
DE Exchanges. The Commission has
previously found the DEI certificate of
incorporation and bylaws to be
consistent with the Act.55
Following the Closing, BGM Holdings
will be the sole stockholder of the BATS
Exchanges. Although BGM Holdings
will not carry out any regulatory
54 See
New BGM Bylaws, Section 10.02.
Securities Exchange Act Release No. 62515
(July 16, 2010), 75 FR 43584 (July 26, 2010) (SR–
EDGX–2010–02).
55 See
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functions, the Exchange notes that its
activities with respect to the operation
of the BATS Exchanges must be
consistent with, and must not interfere
with, the self-regulatory obligations of
each BATS Exchange. The BGM
Holdings Charter and the BGM Holdings
Bylaws therefore include certain
provisions that are designed to maintain
the independence of the BATS
Exchanges’ self-regulatory functions,
enable the BATS Exchanges to operate
in a manner that complies with the
federal securities laws, including the
objectives of Sections 6(b) 56 and 19(g) 57
of the Act, and facilitate the ability of
each BATS Exchange and the
Commission to fulfill their regulatory
and oversight obligations under the Act.
a. BGM Holdings Charter
With respect to ownership and
control of BGM Holdings, the proposed
BGM Holdings Charter, attached as
Exhibit 5D, specifically provides that
BGM Holdings’ sole stockholder will be
New BGM.58 This restriction is designed
to assure that any change to the
ownership or control of the BATS
Exchanges may only occur through a
change in the ownership or control of
New BGM. As such, any purported
change of such ownership or control
would need to comply with the New
BGM Charter and New BGM Bylaws,
including the BGM Ownership
Limitation and the BGM Voting
Limitation (or a Commission-approved
waiver therefrom).
The proposed BGM Holdings Charter
further specifies that nothing contained
therein or in the BGM Holdings Bylaws
shall be applicable where the
application of the provision would
interfere with the effectuation of any
and all decisions relating to the
regulatory functions of the BATS
Exchanges (including disciplinary
matters) or the structure of the market
that each BATS Exchange regulates, or
would interfere with the ability of each
BATS Exchange to carry out its
responsibilities under the Act or oversee
the market that each regulates.59
In addition, the proposed BGM
Holdings Charter provides that for so
long as BGM Holdings controls, directly
or indirectly, a registered national
securities exchange, before any
amendment to or repeal of any
provision of the BGM Holdings Charter
may be effective, those changes shall be
submitted to the board of directors of
each such exchange, and if the same
must be filed with, or filed with and
approved by, the Commission before the
changes may be effective under Section
19 of the Act 60 and the rules
promulgated thereunder, then such
proposed changes shall not be effective
until filed with, or filed with and
approved by, the Commission, as the
case may be.61
b. BGM Holdings Bylaws
The proposed BGM Holdings Bylaws,
attached as Exhibit 5E, contain several
provisions designed to protect the
independence of the self-regulatory
functions of the BATS Exchanges. The
proposed BGM Holdings Bylaws require
that, for so long as BGM Holdings,
directly or indirectly, controls a BATS
Exchange, BGM Holdings’ board of
directors, officers, employees and agents
must give due regard to the preservation
of independence of the self-regulatory
functions of each BATS Exchange and
not interfere with the effectuation of any
decisions by either of the BATS
Exchange boards of directors relating to
its regulatory functions (including
disciplinary matters) or which would
interfere with the ability of such
exchange to carry out its responsibilities
under the Act.62 The BGM Holdings
Bylaws would further require that BGM
Holdings comply with the U.S. federal
securities laws and rules and
regulations thereunder and shall
cooperate with the Commission and
each BATS Exchange, as applicable,
pursuant to and to the extent of their
respective regulatory authority.63
Pursuant to the BGM Holdings Bylaws,
BGM Holdings’ officers, directors,
employees and agents shall be deemed
to agree to (i) comply with the U.S.
federal securities laws and the rules and
regulations thereunder; and (ii) to
cooperate with the Commission and
each BATS Exchange in respect of the
Commission’s oversight responsibilities
regarding the BATS Exchanges and their
self-regulatory functions and
responsibilities of the BATS Exchanges,
and BGM Holdings will take reasonable
steps to cause its officers, directors,
employees and agents to so cooperate.64
Furthermore, BGM Holdings and its
officers, directors, employees and agents
will be deemed to irrevocably submit to
the jurisdiction of the U.S. federal
courts, the Commission, and each BATS
Exchange, as applicable, for purposes of
56 15
60 15
57 15
61 See
U.S.C. 78f(b).
U.S.C. 78s(g).
58 See BGM Holdings Charter, Art. SEVENTH,
para. 4.
59 See BGM Holdings Charter, Art. FIFTH, para.
2.
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U.S.C. 78s(b).
BGM Holdings Charter, Art. Seventh, para.
any suit, action, or proceeding pursuant
to the U.S. federal securities laws or the
rules or regulations thereunder arising
out of, or relating to, the activities of
such exchange.65
The proposed BGM Holdings Bylaws
also contain a number of provisions
designed to ensure that the BATS
Exchanges have sufficient access to the
books and records of BGM Holdings.
Pursuant to the BGM Holdings Bylaws,
the books, records, premises, officers,
directors, agents, and employees of
BGM Holdings are deemed to be the
books, records, premises, officers,
directors, agents and employees of the
BATS Exchanges to the extent they are
related to the operation or
administration of such exchange.66 In
addition, for as long as BGM Holdings
controls, directly or indirectly, the
BATS Exchanges, BGM Holdings’ books
and records shall be subject at all times
to inspection and copying by the
Commission and the BATS Exchanges,
provided that such books and records
are related to the operation or
administration of the BATS
Exchanges.67
The proposed BGM Holdings Bylaws
also provide that, to the fullest extent
permitted by law, all books and records
of the BATS Exchanges reflecting
confidential information pertaining to
the self-regulatory function of such
exchange (including disciplinary
matters, trading data, trading practices
and audit information) that comes into
the possession of BGM Holdings, shall
be retained in confidence by BGM
Holdings and its stockholders, board of
directors, officers, employees and
agents, and not be used for any nonregulatory purposes.68 The proposed
BGM Holdings Bylaws provide,
however, that the foregoing shall not
limit or impede the rights of the
Commission or the BATS Exchanges to
access and examine such confidential
information pursuant to the federal
securities laws and the rules and
regulations thereunder, or limit or
impede the ability of any BGM Holdings
stockholders, officers, directors,
employees or agents to disclose such
confidential information to the
Commission or either BATS
Exchange.69
With respect to the election of
directors of the BATS Exchanges,
Current BGM is currently the sole and
direct stockholder of each of the BATS
Exchanges. As noted above, while
65 See
66 See
3.
62 See
63 See
BGM Holdings Bylaws, Section 7.1.
BGM Holdings Bylaws, Section 7.2.
64 Id.
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BGM Holdings Bylaws, Section 7.3.
BGM Holdings Bylaws, Section 5.8(b).
67 Id.
68 See
BGM Holdings Bylaws, Section 5.8(a).
69 Id.
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Current BGM will become BGM
Holdings, it will continue to hold the
direct ownership interest and voting
rights in the BATS Exchanges.
Therefore, the BGM Holdings Bylaws
are proposed to maintain provisions
relating to its voting of its interests in
the BATS Exchanges that are
substantially identical to those
contained in the Current BGM Bylaws.70
In particular, the proposed BGM
Holdings Bylaws would continue to
provide that at any meeting of the
stockholders of either BATS Exchange
held for the purpose of electing
directors and members of such
exchange’s Member Nominating
Committee, or in the event written
consents are solicited or otherwise
sought from the stockholders of such
BATS Exchange with respect thereto,
BGM Holdings will cause all
outstanding shares of the BATS
Exchange owned by BGM Holdings to
be voted in favor of only those Member
Representative Directors and nominees
for the Member Nominating Committee
nominated in accordance with such
exchange’s bylaws, and, with respect to
any written consents, BGM Holdings
will only cause to be validly executed
written consents electing such directors
and members of the Member
Nominating Committee.71 The Exchange
believes that this requirement will
ensure that BGM Holdings effectuates
the election of directors and members of
the Exchange’s Member Nominating
Committee in the manner contemplated
by the Exchange’s Bylaws, ensuring the
fair representation of members in the
selection of directors and the
administration of the Exchange as
required by Section 6(b)(3) of the Act.72
Similar to the proposed BGM
Holdings Charter, the proposed BGM
Holdings Bylaws provide that for so
long as BGM Holdings controls either
BATS Exchange, before any amendment
to or repeal of any provision of the BGM
Holdings Bylaws will be effective, those
changes must be submitted to the board
of directors of each BATS Exchange,
and if the same must be filed with, or
filed with and approved by, the
Commission before the changes may be
effective under Section 19 of the Act, 73
and the rules promulgated thereunder,
then the proposed changes shall not be
effective until filed with, or filed with
70 Compare BGM Holdings Bylaws, Sections
2.15(b) and (c) with Current BGM Bylaws, Sections
5.02(b) and (c).
71 See BGM Holdings Bylaws, Sections 2.15(b)
and (c).
72 15 U.S.C. 78f(b)(3).
73 15 U.S.C. 78s.
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and approved by, the Commission, as
the case may be.74
Lastly, while as noted above, the BGM
Holdings Bylaws are modeled on the
current bylaws of DEI (the ‘‘DEI
Bylaws’’), in contrast with the current
DEI Bylaws, the proposed BGM
Holdings Bylaws do not contain a
provision relating to BGM Holdings’
handling of funds derived from the
regulatory operations of its exchange
subsidiaries (such as regulatory fees,
fines and penalties). The Exchange
Bylaws and the bylaws of BZX each
prohibit the Exchange and BZX,
respectively, from distributing any such
funds to its stockholder, instead
requiring that such funds only be
applied to fund the legal and regulatory
operations of the respective exchange or
pay restitution and disgorgement of
funds intended for customers.75 As a
result, BGM Holdings will not be
permitted to come into possession of
regulatory funds, as they will remain at
the respective exchange and used only
for permitted purposes. The Exchange
therefore believes that including a
provision in the BGM Holdings Bylaws
relating to the handling by BGM
Holdings of such funds is unnecessary
and potentially confusing. The
Exchange understands that the DE
Exchanges are each proposing to amend
DEI’s bylaws to eliminate the
corresponding provision.76
7. Bylaws of the Exchange
In connection with the Combination,
the Exchange proposes to amend and
restate its Second Amended and
Restated By-Laws and adopt the
amended Exchange Bylaws as its Third
Amended and Restated Bylaws,
attached as Exhibit 5F. The Exchange
proposes making the following
amendments to the Exchange Bylaws:
• Amending Article I, paragraph (cc)
of the Exchange Bylaws to reflect the
change of name of the Exchange’s
stockholder from Current BGM to BGM
Holdings. This amendment is intended
to reflect the change in the Exchange’s
corporate holding structure and
corporate name changes described
above as well as prevent any change of
ownership of the Exchange other than in
accordance with the requirements set
forth in the organizational documents of
the Exchange’s parent and indirect
parent companies.
• Amending Section 2(b) and Section
3(b) of Article III of the Exchange
Bylaws to clarify that the Chief
Executive Officer of the Exchange is
considered to be an Industry Director,
but is excluded from being designated
as a member of one of the three classes
of directors for purposes of the Board’s
staggered three-year terms. This
amendment is meant to clarify, rather
than change, current practice. The
Exchange Bylaws require that the Board
of Directors be composed of one
Director who is the Chief Executive
Officer of the Exchange, and a sufficient
number of Non-Industry Directors
(including Independent Directors),
Industry Directors and Member
Representative Directors such that (i)
the number of Non-Industry Directors,
including at least one Independent
Director, equals or exceeds the sum of
the number of Industry Directors and
Member Representative Directors, and
(ii) the number of Member
Representative Directors equals at least
20 percent of the Board of Directors (the
‘‘Exchange Board Composition
Requirements’’).77 Because the
definition of ‘‘Industry Director’’
includes a Director that has an
employment relationship with the
Exchange,78 the Chief Executive Officer
of the Exchange will always meet the
definition of ‘‘Industry Director.’’
Consistent with this definition, and in
order to effectuate the Exchange Board
Composition Requirements, the
Exchange considers the Chief Executive
Officer to be an Industry Director. Were
the Chief Executive Officer to not be
considered for purposes of determining
composition of the board, the total
number of persons affiliated with the
securities industry (including Industry
Directors, Member Representative
Directors and the Chief Executive
Officer) could potentially exceed the
number of Non-Industry Directors—a
result that the Exchange believes the
Exchange Board Composition
Requirements were intended to prevent.
The Exchange therefore proposes to
amend Section 2(b) of Article III of the
Exchange Bylaws to explicitly clarify
that the Chief Executive Officer shall be
considered to be an Industry Director.
The Exchange Bylaws separately
provide that each of the Non-Industry
Directors and Industry Directors are
divided into one of three classes to serve
staggered three-year terms.79 Unlike
other Industry Directors, rather than
serving a three-year term, the Chief
Executive Officer of the Exchange serves
on the Board of Directors until he or she
ceases to be Chief Executive Officer.80
77 See
74 See
BGM Holdings Bylaws, Section 6.4.
75 See e.g., Exchange Bylaws, Art. X, Section 4.
76 See DEI Bylaws, Section 4.6(b).
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Exchange Bylaws, Art. III, Section 2(b).
Exchange Bylaws, Art. I, para. (o)(vi).
79 See Exchange Bylaws, Art. III, Section 3(b).
80 See Exchange Bylaws, Art. III, Section 3(a).
78 See
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The Exchange is therefore proposing to
amend Section 3(b) of Article III of the
Exchange Bylaws to explicitly clarify
that the reference to each Industry
Director serving a staggered three-year
term excludes the Chief Executive
Officer.
• Amending Section 4(a), Section 4(c)
and Section 4(e) of Article III of the
Exchange Bylaws to permit the Director
nomination and election process
(including the Member Representative
Director nomination and election
process conducted by the Member
Nominating Committee) to be conducted
through either an annual or special
meeting of stockholders, rather than
solely through an annual meeting of
stockholders. Under the current
Exchange Bylaws, should one or more
vacancies on the Board of Directors
occur, the vacancies would continue
until they can be filled at an annual
meeting. As a result, vacancies that arise
soon after an annual meeting could
remain for close to a full year. The
Exchange therefore proposes to amend
the Exchange Bylaws to add flexibility
to the governance process around the
nomination and election of a Director
position that may become vacant at a
time that does not coincide with the
Exchange’s annual director election
process, by permitting the process to
occur at any time via a special meeting
of stockholders.
• Amending Section 2(a) of Article V
of the Exchange Bylaws to clarify that
the Chairman, with the approval of the
Board, not only appoints the members
of all committees of the Board, but also
the chair of each committee. This
amendment is intended to reflect the
current committee and committee Chair
appointment processes utilized by the
Exchange.
• Amending Section 6(c) of Article V
of the Exchange Bylaws to clarify that
the Regulatory Oversight Committee
responsibilities include (i) those with
regard to each of the Exchange’s
facilities, as defined in Section 3(a)(2) of
the Act,81 (ii) assessing the Exchange’s
regulatory performance, (iii) assisting
the Board and committees of the Board
in reviewing the regulatory plan and the
overall effectiveness of the Exchange’s
regulatory functions, and (iii) in
consultation with the Chief Executive
Officer of the Exchange, establishing the
goals, assessing the performance, and
fixing the compensation of the Chief
Regulatory Officer of the Company.
These amendments are intended to
reflect the current responsibilities of the
Regulatory Oversight Committee.
81 15
U.S.C. 78c(a)(2).
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• Deleting as outdated Section 1 of
Article XI of the Exchange Bylaws,
relating to the interpretation of the
Exchange Bylaws prior to the
Exchange’s commencement of business
as a national securities exchange, and
renumbering the remaining sections
within Article XI accordingly.
• Expanding the prohibition
contained in Section 3 of Article XI of
the Exchange Bylaws (to be renumbered
as Section 2). Currently, Section 3 of
Article XI prohibits Current BGM’s
directors, officers, staff, counsel and
advisors who are not also directors,
officers, staff, counsel or advisors of the
Exchange from participating in any
meetings of the Exchange’s Board of
Directors (or any committee thereof)
pertaining to the self-regulatory function
of the Exchange (including disciplinary
matters). Because, following the
Combination, the Exchange will be
owned directly by BGM Holdings and
indirectly by New BGM, instead of only
directly by Current BGM, the Exchange
is proposing to expand this prohibition
to cover both its direct and indirect
parent companies. The Exchange
believes that this amendment will
protect the independence of the
Exchange’s self-regulatory activities.
• Correcting certain typographical
errors, including conforming the
spelling of ‘‘Bylaws’’ throughout the
organizational documents of the
Exchange and its parent companies.
8. Exchange Rule 2.3—Member
Eligibility
Pursuant to Exchange Rule 2.3, in
order to be eligible for membership in
the Exchange, a registered broker or
dealer is required to be a member of at
least one other national securities
association or national securities
exchange. However, membership in the
Exchange’s affiliated national securities
exchange, BZX, is not sufficient for
purposes of eligibility for Exchange
membership. As a result of the
Combination, the Exchange will
additionally become affiliated with the
DE Exchanges. The Exchange continues
to believe that it is appropriate to limit
its membership to registered brokerdealers that are members of at least one
national securities association or
national securities exchange that is not
affiliated with the Exchange. Therefore,
the Exchange proposes to amend
Exchange Rule 2.3 to specify that a
registered broker-dealer will be eligible
for membership only if it is a member
of a national securities association or
national securities exchange other than
BZX, EDGA or EDGX. The proposed
amendments to Exchange Rule 2.3 are
set forth in Exhibit 5G.
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9. Exchange Rule 2.12—DE Route as
Inbound Router
BATS Trading provides Members of
the Exchange and BZX with optional
routing services to other market centers.
Thus, in certain circumstances, BATS
Trading provides inbound routing from
BZX to the Exchange. Exchange Rule
2.12 governs this inbound routing of
orders by BATS Trading to the
Exchange in BATS Trading’s capacity as
a facility of BZX. Recognizing that the
Commission has previously expressed
concern regarding the potential for
conflicts of interest in instances where
a member firm is affiliated with an
exchange to which it is routing orders,
the Exchange has implemented
limitations and conditions on BATS
Trading’s affiliation with the Exchange
in order to permit the Exchange to
accept inbound orders that BATS
Trading routes in its capacity as a
facility of BZX. These conditions and
limitations, set forth in Exchange Rule
2.12, require that:
(1) The Exchange must enter into (a)
a plan pursuant to Rule 17d–2 under the
Act with a non-affiliated self-regulatory
organization (‘‘SRO’’) to relieve the
Exchange of regulatory responsibilities
for BATS Trading with respect to rules
that are common rules between the
Exchange and the non-affiliated SRO,
and (b) a regulatory services contract
(‘‘Regulatory Contract’’) with a nonaffiliated SRO to perform regulatory
responsibilities for BATS Trading for
unique Exchange rules.
(2) The Regulatory Contract must
require the Exchange to provide the
non-affiliated SRO with information, in
an easily accessible manner, regarding
all exception reports, alerts, complaints,
trading errors, cancellations,
investigations, and enforcement matters
(collectively ‘‘Exceptions’’) in which
BATS Trading is identified as a
participant that has potentially violated
Exchange or Commission Rules, and
requires that the non-affiliated SRO
provide a report, at least quarterly, to
the Exchange quantifying all Exceptions
in which BATS Trading is identified as
a participant that has potentially
violated Exchange or Commission rules.
(3) The Exchange, on behalf of its
parent company, must establish and
maintain procedures and internal
controls reasonably designed to ensure
that BATS Trading does not develop or
implement changes to its system based
on non-public information obtained as a
result of its affiliation with the
Exchange, until such information is
available generally to similarly situated
Members of the Exchange.
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(4) The Exchange may furnish to
BATS Trading only the same
information and on the same terms as
the Exchange makes available in the
normal course of business to other
users.82
Similar to the role of BATS Trading
with respect to the BATS Exchanges, the
Exchange understands that DE Route
provides members of the DE Exchanges
with optional routing services to other
market centers, which may include
routing from a DE Exchange to the
Exchange. Following the Combination,
it is expected that DE Route will
continue to provide these routing
services, which may involve routing to
the Exchange. Because, following the
Combination, DE Route will be affiliated
with and potentially routing to the
Exchange, the Exchange believes that
the potential conflict of interest
currently addressed by Exchange Rule
2.12 with respect to BATS Trading must
also be addressed with respect to DE
Route.
The Exchange is therefore proposing
to amend and expand Exchange Rule
2.12 such that substantially the same
conditions and limitations that
currently apply to the inbound routing
of orders by BATS Trading apply to the
inbound routing of orders by DE Route.
The proposed amendments to Exchange
Rule 2.12, as set forth in Exhibit 5H,
would provide that, in order for the
Exchange to accept inbound routed
orders from DE Route, the conditions
and limitations currently set forth in
Exchange Rule 2.12 with respect to
BATS Trading must also be satisfied
with respect to DE Route.
The Exchange believes that these
proposed amendments will adequately
manage the potential for a conflict of
interest that could arise from DE Route
routing orders to the Exchange. The
Exchange expects to arrange that these
conditions be met prior to the Closing
so as to allow DE Route to continue
routing to the Exchange following the
Closing without interruption.83
In addition, the language in Exchange
Rule 2.12 leading into the four
conditions described above incorrectly
refers to the conditions being
undertaken by ‘‘each of the Exchange
and BATS Trading.’’ However, by their
terms, the conditions contained in
Exchange Rule 2.12 are undertaken only
by the Exchange and, in one case, the
Exchange on behalf of its parent
82 See Securities Exchange Act Release No. 66572
(March 12, 2012), 77 FR 15152 (March 14, 2012)
(SR–BYX–2012–006).
83 If such conditions and limitations are not
satisfied by Closing, the Exchange will not accept
inbound orders from DE Route until such
conditions and limitations are satisfied.
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company. The Exchange therefore
proposes to delete the incorrect
reference to BATS Trading.
10. Exchange Rule 2.10—Affiliation
With DE Route
Exchange Rule 2.10 provides that,
subject to certain exceptions, without
the prior approval of the Commission,
(i) the Exchange or any entity with
which the Exchange is affiliated (as
defined in Rule 12b–2 under the Act),
may not directly or indirectly acquire or
maintain an ownership interest in a
Member of the Exchange, and (ii) a
Member of the Exchange may not be or
become an affiliate of the Exchange, or
an affiliate of any affiliate of the
Exchange.
DE Route is currently a Member of the
Exchange. As a result of the
Combination, (i) New BGM, an entity
affiliated with the Exchange, will
acquire and maintain an indirect
ownership interest in DE Route, and (ii)
DE Route will become an affiliate of the
Exchange. Pursuant to Exchange Rule
2.10, the Exchange is seeking the
Commission’s prior approval to permit
this affiliation.
The Exchange notes that the purpose
of Exchange Rule 2.10 is to prevent or
manage potential conflicts of interest
that could arise from the Exchange or its
affiliates having an ownership interest
in an Exchange Member, particularly
with respect to the Exchange’s
obligation under Section 19(g) of the Act
to enforce its Members’ compliance
with the Act, the Commission’s rules
thereunder, and Exchange Rules.84
The Exchange believes that it should
be permitted to become affiliated with
DE Route, notwithstanding DE Route’s
Exchange membership. As described
above, as a result of the proposed
amendments to Exchange Rule 2.12, the
Exchange intends on addressing the
potential conflicts of interests arising
from its expected affiliation with DE
Route by, among other things, entering
into (i) a plan pursuant to Rule 17d-2
under the Act with a non-affiliated SRO
to relieve the Exchange of regulatory
responsibilities for DE Route with
respect to rules that are common rules
between the Exchange and the nonaffiliated SRO, and (ii) a Regulatory
Contract with a non-affiliated SRO to
perform regulatory responsibilities for
DE Route for unique Exchange rules.
The Exchange believes that any
potential conflict of interest that would
arise as a result of its affiliation with DE
Route will be mitigated by the same
procedures that the Exchange
anticipates adopting to satisfy the
proposed amendments to Exchange Rule
2.12. The Exchange therefore requests
that, pursuant to Exchange Rule 2.10,
the Commission approve the indirect
acquisition of DE Route by an affiliate
of the Exchange and the resulting
affiliation between the Exchange and DE
Route, so long as the requirements
under Exchange Rule 2.12, as proposed
to be amended, are satisfied.
2. Statutory Basis
The Exchange believes that the
Proposed Rule Change is consistent
with the requirements of the Act and the
rules and regulations thereunder that
are applicable to a national securities
exchange, and, in particular, with the
requirements of Section 6(b) of the
Act.85 In particular, the proposal is
consistent with Section 6(b)(1) of the
Act 86 in that it enables the Exchange to
be so organized as to have the capacity
to be able to carry out the purposes of
the Act and to comply, 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 Proposed Rule
Change is designed to enable the
Exchange to continue to have the
authority and ability to effectively fulfill
its self-regulatory duties pursuant to the
Act and the rules promulgated
thereunder. In particular, the Proposed
Rule Change includes in the New BGM
Charter and New BGM Bylaws, like the
Current BGM Charter and Current BGM
Bylaws, various provisions intended to
protect and maintain the integrity of the
self-regulatory functions of the
Exchange upon Closing. For example,
the New BGM Bylaws, as described
above, are drafted to preserve the
independence of the Exchange’s selfregulatory function and ensure that the
Exchange is able to obtain information
it needs from the specified parties to
detect and deter any fraudulent and
manipulative acts in its marketplace and
carry out their regulatory
responsibilities under the Act. In
addition, the New BGM Charter and
New BGM Bylaws are drafted to make
sure that the Exchange’s Board of
Directors receives notice of any
amendment to the New BGM Charter
and New BGM Bylaws so that the
Exchange’s Board of Directors may
review and approve, and the Exchange
may make any filings with the
Commission necessary for the Exchange
to fulfill its regulatory duties under the
Act. The New BGM Charter also
imposes the BGM Ownership Limitation
85 15
84 15
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and BGM Voting Limitation to preclude
undue influence over or interference
with the Exchange’s self-regulatory
functions and fulfillment of its
regulatory duties under the Act.
Moreover, notwithstanding the
Proposed Rule Change, including the
change to the ownership structure of the
Exchange, the Commission will
continue to have regulatory authority
over the Exchange, as is currently the
case, as well as jurisdiction over the
Exchange’s direct and indirect parents
with respect to activities related to the
Exchange.87 As a result, the Proposed
Rule Change will facilitate an
ownership structure that will provide
the Commission with appropriate
oversight tools to ensure that the
Commission will have the ability to
enforce the Act with respect to the
Exchange, its direct and indirect parent
entities and their directors, officers,
employees and agents to the extent they
are involved in the activities of the
Exchange.
The Exchange also believes that the
Proposed Rule Change furthers the
objectives of Section 6(b)(5) of the Act 88
because the Proposed Rule Change
would be consistent with and facilitate
a governance and regulatory structure
that is designed to prevent fraudulent
and manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to, and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest.
In addition, the Exchange expects that
the Combination will facilitate
efficiencies and innovation for clients
and efficient, transparent and wellregulated markets for issuers and
clients, thus removing impediments to,
and perfecting the mechanism of a free
and open market and a national market
system. The Combination will benefit
investors, the market as a whole, and
shareholders by, among other things,
enhancing competition among securities
venues and reducing costs. In particular,
the Combination will result in a third
major exchange operator which will
have more streamlined and efficient
operations, including the transition of
the DE Exchanges to a technology
platform in common with the BATS
Exchanges, thereby intensifying
87 See, e.g., New BGM Bylaws, Section 14.05;
BGM Holdings Bylaws, Section 7.3.
88 15 U.S.C. 78f(b)(5).
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competition for transaction order flow
with other exchange and non-exchange
trading centers, as well as potentially in
other areas where the two major
exchange operators lead, such as
proprietary market data products and
listings. This enhanced level of
competition among trading centers will
benefit investors through new or more
competitive product offerings and,
ultimately, lower costs.
Furthermore, the Exchange is not
proposing any significant changes to its
existing operational and trading
structure in connection with the change
in ownership; the Exchange will operate
in essentially the same manner upon
Closing as it operates today. Therefore,
the Exchange believes that it will
continue to satisfy the requirements of
the Act and the rules and regulations
thereunder that are applicable to a
national securities exchange. The
changes the Exchange is proposing to
Exchange Rules 2.3 are designed to
extend the membership eligibility
criteria in a way that is consistent with
the current rule, taking into account the
prospective affiliation with the DE
Exchanges. The proposed change to
Exchange Rule 2.12 is designed to
address the potential for conflicts of
interest due to the prospective
affiliation between the Exchange and DE
Route. The Exchange believes that the
proposed change to its Rules is
consistent with the requirements of the
Act and the rules and regulations
thereunder. The Exchange believes that
the rule change promotes the
maintenance of a fair and orderly
market, the protection of investors and
the public interest, and is in the best
interests of the Exchange and its
Members as it would continue to allow
routing of orders between the four
affiliated exchanges.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the Proposed Rule Change would result
in any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Indeed, the
Exchange believes that the Proposed
Rule Change will enhance competition
among intermarket trading venues, as
the Exchange believes that the
Combination will produce a stronger
and more efficient entity that will have
an improved ability to provide
innovative products and services.
Moreover, the Exchange will continue to
conduct regulated activities (including
operating and regulating its market and
Members) of the type it currently
conducts, but will be able to do so in a
more efficient manner to the benefit of
PO 00000
Frm 00054
Fmt 4703
Sfmt 4703
its Members. Furthermore, the
Exchange’s conclusion that the
Proposed Rule Change would not result
in any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act is consistent
with the Commission’s prior
conclusions about similar combinations
involving multiple exchanges in a single
corporate family.89
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has neither solicited
nor received written comments on the
proposed rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BYX–2013–039 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
89 See, e.g., Securities Exchange Act Release No.
66071 (December 29, 2011), 77 FR 521 (January 05,
2012) (SR–CBOE–2011–107 and SR–NSX–2011–14);
Securities Exchange Act Release No. 58324 (Aug. 7,
2008), 73 FR 46936 (August 12, 2008) (SR–BSE–
2008–02; SR–BSE–2008–23; SR–BSE–2008–25; SR–
BSECC–2008–01); Securities Exchange Act Release
No. 53382 (Feb. 27, 2006), 71 FR 11251 (March 06,
2006) (SR–NYSE–2005–77).
E:\FR\FM\12DEN1.SGM
12DEN1
Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Notices
All submissions should refer to File
Number SR–BYX–2013–039. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–BYX–
2013–039, and should be submitted on
or before January 2, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.90
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013–29623 Filed 12–11–13; 8:45 am]
27, 2013, C2 Options Exchange,
Incorporated (the ‘‘Exchange’’ or ‘‘C2’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
C2 Options Exchange, Incorporated
(the ‘‘Exchange’’ or ‘‘C2’’) proposes to
amend the Options Regulatory Fee. The
text of the proposed rule change is
available on the Exchange’s Web site
(https://www.c2exchange.com/Legal/), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8011–01–P
1. Purpose
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71006; File No. SR–C2–
2013–040]
maindgalligan on DSK5TPTVN1PROD with NOTICES
Self-Regulatory Organizations; C2
Options Exchange, Incorporated;
Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change Relating to the Options
Regulatory Fee
December 6, 2013.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on November
90 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
VerDate Mar<15>2010
16:45 Dec 11, 2013
Jkt 232001
The Exchange has reevaluated the
current amount of the Options
Regulatory Fee (‘‘ORF’’) in connection
with its annual budget review. In light
of increased regulatory costs, including
the hiring of many new regulatory
employees, and expected volume levels
for 2014, the Exchange proposes to
increase the ORF from zero to $.0017
per contract. The proposed fee change
would be operative on January 1, 2014.
The ORF is assessed by the Exchange
to each Permit Holder for all options
transactions executed or cleared by the
Permit Holder that are cleared by The
Options Clearing Corporation (‘‘OCC’’)
in the customer range (i.e., transactions
that clear in a customer account at OCC)
regardless of the marketplace of
execution. In other words, the Exchange
imposes the ORF on all customer-range
PO 00000
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Fmt 4703
Sfmt 4703
75597
transactions executed by a Permit
Holder, even if the transactions do not
take place on the Exchange.3 The ORF
also is charged for transactions that are
not executed by a Permit Holder but are
ultimately cleared by a Permit Holder.
In the case where a Permit Holder
executes a transaction and a different
Permit Holder clears the transaction, the
ORF is assessed to the Permit Holder
who executed the transaction. In the
case where a non-Permit Holder
executes a transaction and a Permit
Holder clears the transaction, the ORF is
assessed to the Permit Holder who
clears the transaction. The ORF is
collected indirectly from Permit Holders
through their clearing firms by OCC on
behalf of the Exchange.
The ORF is designed to recover a
material portion of the costs to the
Exchange of the supervision and
regulation of Permit Holder customer
options business, including performing
routine surveillances, investigations,
examinations, financial monitoring, as
well as policy, rulemaking, interpretive
and enforcement activities. The
Exchange believes that revenue
generated from the ORF, when
combined with all of the Exchange’s
other regulatory fees and fines, will
cover a material portion, but not all, of
the Exchange’s regulatory costs. The
Exchange notes that its regulatory
responsibilities with respect to Permit
Holder compliance with options sales
practice rules have largely been
allocated to FINRA under a 17d–2
agreement. The ORF is not designed to
cover the cost of that options sales
practice regulation.
The Exchange will monitor the
amount of revenue collected from the
ORF to ensure that it, in combination
with its other regulatory fees and fines,
does not exceed the Exchange’s total
regulatory costs. If the Exchange
determines regulatory revenues exceed
regulatory costs, the Exchange will
adjust the ORF by submitting a fee
change filing to the Commission. The
Exchange notifies Permit Holders of
adjustments to the ORF via regulatory
circular.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
3 Exchange rules require each Permit Holder to
record the appropriate account origin code on all
orders at the time of entry in order to allow the
Exchange to properly prioritize and route orders
and assess transaction fees pursuant to the rules of
the Exchange and report resulting transactions to
the OCC. C2 order origin codes are defined in C2
Regulatory Circular RG13–015. The Exchange
represents that it has surveillances in place to verify
that Trading Permit Holders mark orders with the
correct account origin code.
E:\FR\FM\12DEN1.SGM
12DEN1
]]>Agencies
[Federal Register Volume 78, Number 239 (Thursday, December 12, 2013)]
[Notices]
[Pages 75585-75597]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-29623]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71024; File No. SR-BYX-2013-039]
Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Notice of
Filing of a Proposed Rule Change in Connection With the Proposed
Business Combination Involving BATS Global Markets, Inc. and Direct
Edge Holdings LLC
December 6, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on November 25, 2013, BATS Y-Exchange, Inc. (the ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange filed a proposed rule change (the ``Proposed Rule
Change'') in connection with the proposed business combination (the
``Combination''), as described in more detail below, involving its
parent company, BATS Global Markets, Inc. and Direct Edge Holdings LLC
(``DE Holdings''), the indirect parent company of EDGX Exchange, Inc.
(``EDGX'') and EDGA Exchange, Inc. (``EDGA''), each a national
securities exchange registered with the Commission.
Upon completion of the Combination (the ``Closing''), BATS Global
Markets, Inc. and DE Holdings will each become intermediate holding
companies, held under a single new holding company. The new holding
company, currently named ``BATS Global Markets Holdings, Inc.,'' will
at that time change its name to ``BATS Global Markets, Inc.'' In
addition, the current parent company of the Exchange, BATS Global
Markets, Inc., will at that time change its name to ``BATS Global
Markets Holdings, Inc.''
For ease of reference, this Proposed Rule Change will refer to the
current parent company of the Exchange as ``Current BGM'' when
referring to the entity prior to the Closing, and as ``BGM Holdings''
when referring to that entity after the Closing. The entity that will
become the new top-level holding company that will, after Closing, own
BGM Holdings and DE Holdings, will be referred to as ``New BGM.''
To effectuate the Combination, the Exchange seeks to obtain the
Commission's approval of (i) resolutions of Current BGM's board of
directors (the ``Resolutions'') making certain determinations regarding
New BGM and the impact of the Combination on the Exchange; (ii) the
proposed Amended and Restated Certificate of Incorporation of New BGM
(the ``New BGM Charter''); (iii) the proposed Amended and Restated
Bylaws of New BGM (the ``New BGM Bylaws''); (iv) the proposed
amendments to Current BGM's Second Amended and Restated Certificate of
Incorporation (the ``Current BGM Charter,'' and after such amendments,
the ``BGM Holdings Charter''); (v) the proposed amendments to the
Amended and Restated Bylaws of Current BGM (the ``Current BGM Bylaws,''
and after such amendments, the ``BGM Holdings Bylaws''); (vi) the
proposed amendments to the By-Laws of the Exchange (the ``Exchange
Bylaws''); (vii) the proposed amendments to Exchange Rule 2.3 to
reflect the affiliation between the Exchange and two additional
registered national securities exchanges; (viii) the proposed
amendments to Exchange Rule 2.12 to reflect the affiliation between the
Exchange and the routing broker for EDGA and EDGX; and (ix) the
indirect acquisition by an affiliate of the Exchange of a Member \3\ of
the Exchange and the resulting affiliation between the Exchange and the
Member of the Exchange, as required under Exchange Rule 2.10.
---------------------------------------------------------------------------
\3\ The term ``Member'' is defined in Exchange Rule 1.5(n) as
any registered broker or dealer that has been admitted to membership
in the Exchange.
---------------------------------------------------------------------------
The text of the proposed rule change is available at the Exchange's
Web site at https://www.batstrading.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of
[[Page 75586]]
the most significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange submits this Proposed Rule Change to seek the
Commission's approval of various changes to the organizational and
governance documents of the Exchange and the Exchange's current and
proposed future parent companies, changes to Exchange Rules,\4\ and
related actions that are necessary in connection with the Closing of
the Combination, as described below.
---------------------------------------------------------------------------
\4\ The term ``Exchange Rules'' refers to the rules of the
Exchange.
---------------------------------------------------------------------------
Other than as described herein and set forth in the attached
Exhibits 5A through 5H, the Exchange will continue to conduct its
regulated activities (including operating and regulating its market and
Members) in the manner currently conducted, and will not make any
changes to its regulated activities in connection with the Combination.
Except as set forth in this Proposed Rule Change, the Exchange is not
proposing any amendments to its trading and regulatory rules at this
time. If the Exchange determines to make any such changes, it will seek
the approval of the Commission to the extent required by the Act, and
the Commission's rules thereunder, and the Rules of the Exchange.
1. Current Corporate Structures
The Exchange and BATS Exchange, Inc. (``BZX'' and together with the
Exchange, the ``BATS Exchanges''), are each Delaware corporations that
are national securities exchanges registered with the Commission
pursuant to Section 6(a) of the Act.\5\ Each BATS Exchange is a direct,
wholly owned subsidiary of Current BGM, a Delaware corporation. Current
BGM also owns 100 percent of the equity interest in BATS Trading, Inc.,
a Delaware corporation (``BATS Trading'') that is a broker-dealer
registered with the Commission that provides routing services outbound
from and, in certain instances inbound to, each BATS Exchange. In
contemplation of the Combination, several new entities have been
formed: New BGM, a Delaware corporation, is currently a wholly owned
subsidiary of Current BGM, and is currently a shell company with no
material assets or operations. New BGM, in turn, owns 100 percent of
the equity interest in each of Blue Merger Sub Inc., a Delaware
corporation (``Blue Merger Sub''), and Delta Merger Sub LLC, a Delaware
limited liability company (``Delta Merger Sub''). Each of Blue Merger
Sub and Delta Merger Sub are currently shell companies with no material
assets or operations.
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78f(a).
---------------------------------------------------------------------------
Current BGM is itself beneficially owned primarily by a consortium
of several unaffiliated firms, including Members or affiliates of
Members of the Exchange. No firm beneficially owns 20 percent or
greater of Current BGM, and the only firms beneficially owning ten
percent or greater of Current BGM are (i) GETCO Investments, LLC, an
affiliate of KCG Holdings, Inc., (ii) BGM Holding, L.P., a holding
company itself owned by entities affiliated with the Spectrum Equity
Investors and TA Associates Management private investment funds, and
(iii) Strategic Investments I, Inc., an affiliate of Morgan Stanley.\6\
Seven other firms each beneficially own five percent or greater but
less than ten percent of Current BGM, while seven other firms as well
as various individuals each beneficially own less than five percent of
Current BGM.
---------------------------------------------------------------------------
\6\ For purposes of this Proposed Rule Change, references to the
beneficial ownership of a ``firm'' refers to the aggregate
beneficial ownership of the firm and its affiliated entities.
---------------------------------------------------------------------------
DE Holdings, a Delaware limited liability company, owns 100 percent
of the equity interest in Direct Edge, Inc., a Delaware corporation
(``DEI''). DEI, in turn, owns 100 percent of the equity interest in two
registered national securities exchanges, EDGX and EDGA, each a
Delaware corporation (together, the ``DE Exchanges''). In addition, DE
Holdings owns 100 percent of the equity interest in Direct Edge ECN LLC
d/b/a DE Route, a Delaware limited liability company and the routing
broker-dealer for the DE Exchanges (``DE Route'').
As a limited liability company, ownership in DE Holdings is
represented by units held by ``LLC Members.'' Certain of the DE
Holdings LLC Members are Members or affiliates of Members of the
Exchange. The Exchange understands that International Securities
Exchange Holdings, Inc. (``ISE Holdings'') is the only LLC Member of DE
Holdings to beneficially own greater than 20 percent of the equity
interest in DE Holdings. Other than ISE Holdings, the only firms
beneficially owning ten percent or greater of DE Holdings (but in each
case less than 20 percent) are Citadel Securities LLC, The Goldman
Sachs Group, Inc., and an affiliate of KCG Holdings, Inc. No LLC Member
beneficially owns five percent or greater but less than ten percent of
DE Holdings. Five other firms as well as various individuals each
beneficially own less than five percent of DE Holdings.
2. The Combination
On August 23, 2013, an Agreement and Plan of Merger (the ``Merger
Agreement'') was entered into among Current BGM, New BGM, DE Holdings,
Blue Merger Sub, Delta Merger Sub, and Cole, Schotz, Meisel, Forman &
Leonard, P.A., solely in its capacity as representative of the LLC
Members. Pursuant to and subject to the terms of the Merger Agreement,
at the Closing, among other things:
(i) Blue Merger Sub will be merged with and into Current BGM,
whereupon the separate existence of Blue Merger Sub will cease and
Current BGM will be the surviving company (the ``BATS Merger'');
(ii) Delta Merger Sub will be merged with and into DE Holdings,
whereupon the separate existence of Delta Merger Sub will cease and DE
Holdings will be the surviving company (the ``Direct Edge Merger'');
(iii) by virtue of the BATS Merger and without any action required
on the part of Current BGM, New BGM, Blue Merger Sub or any holder of
Current BGM stock, each outstanding share of Current BGM stock issued
and outstanding will be converted into the right to receive shares of
New BGM stock, and each outstanding share of Blue Merger Sub issued and
outstanding will be converted into one share of Current BGM, such that
Current BGM will become a wholly owned subsidiary of New BGM; and
(iv) by virtue of the Direct Edge Merger and without any action
required on the part of DE Holdings, New BGM, Delta Merger Sub, or any
LLC Member, each LLC Member's membership interests in DE Holdings will
be converted into the right to receive shares of New BGM stock, and
each unit of ownership interest of Delta Merger Sub issued and
outstanding will be converted into one unit of ownership of DE
Holdings, such that DE Holdings will become a wholly owned subsidiary
of New BGM.
Upon the Closing, each of Current BGM and New BGM will amend and
restate their respective certificates of incorporation to, among other
things, change their names such that New BGM will be renamed ``BATS
Global Markets, Inc.'' and Current BGM will be renamed ``BATS Global
Markets Holdings, Inc.''
3. Post-Closing Corporate Structure
As a result of the Combination, New BGM will own (i) 100 percent of
the
[[Page 75587]]
equity interest in BGM Holdings (the entity previously referred to as
``Current BGM''), and (ii) 100 percent of the LLC membership interests
in DE Holdings. BGM Holdings will continue to own 100 percent of the
equity interest in each BATS Exchange and BATS Trading. DE Holdings
will continue to own 100 percent of the equity interest in DE Route \7\
and DEI. DEI will, in turn, continue to own 100 percent of the equity
interest in each DE Exchange. Each of the BATS Exchanges and BATS
Trading, on the one hand, and the DE Exchanges and DE Route, on the
other hand, will continue to operate separately.
---------------------------------------------------------------------------
\7\ As described above, the Combination will result in a change
of ownership of both BATS Trading and DE Route, each of which is a
member of the Financial Industry Regulatory Authority, Inc.
(``FINRA''). The Exchange understands that, pursuant to NASD Rule
1017, each of BATS Trading and DE Route is seeking approval for this
change of ownership from FINRA.
---------------------------------------------------------------------------
New BGM, as the new top-level holding company for the combined
businesses, will have widely dispersed ownership, divided among the
several firms and individuals that previously held equity interests in
each of Current BGM and DE Holdings. Of the firms and individuals that
are expected to hold equity interests in New BGM after the Closing,
none will beneficially own 20 percent or greater of New BGM and only an
affiliate of KCG Holdings, Inc. will beneficially own ten percent or
greater. Seven firms will beneficially own five percent or greater but
less than ten percent, while 12 other firms as well as various
individuals will each beneficially own less than five percent of New
BGM.\8\
---------------------------------------------------------------------------
\8\ ISE Holdings, which will beneficially own greater than five
percent but less than ten percent of New BGM, will receive common
stock of New BGM designated as Class A Non-Voting Common Stock. As
set forth in the proposed New BGM Charter and described below,
shares of Class A Non-Voting Common Stock are generally non-voting,
except with respect to certain actions that would adversely affect
the preferences, rights or powers of the holders of Class A Non-
Voting Common Stock disproportionately relative to Voting Common
Stock or the Class B Non-Voting Common Stock. See New BGM Charter,
Art. FOURTH, para. (b)(ii). Pursuant to the New BGM Charter and the
Investor Rights Agreement expected to be entered into at Closing and
attached as Exhibit A to the New BGM Bylaws (the ``Investor Rights
Agreement''), ISE Holdings' shares of Class A Non-Voting Common
Stock may convert to Voting Common Stock (i) automatically with
respect to any shares transferred to persons other than Related
Persons of ISE Holdings; (ii) upon the termination of the Investor
Rights Agreement; and (iii) automatically with respect to any shares
of Class A Non-Voting Common Stock sold by ISE Holdings in any
public offering of the stock of New BGM. See New BGM Charter, Art.
FOURTH, para. (c); Investor Rights Agreement, Section 2.2(j).
---------------------------------------------------------------------------
4. Voting and Ownership Limitations of Current BGM; Resolutions
The Current BGM Charter provides that (i) no person, either alone
or together with its ``Related Persons,'' \9\ may own, directly or
indirectly, of record or beneficially, shares constituting more than 40
percent of any class of its capital stock, and no Exchange Member,
either alone or together with its Related Persons, may own, directly or
indirectly, of record or beneficially, shares constituting more than 20
percent of any class of its capital stock (collectively, the ``BGM
Ownership Limitation''), and (ii) subject to certain exceptions, no
person, either alone or together with its Related Persons, at any time,
may, directly, indirectly or pursuant to any of various arrangements,
vote or cause the voting of shares or give any consent or proxy with
respect to shares representing more than 20 percent of the voting power
of its then issued and outstanding capital stock (the ``BGM Voting
Limitation'').\10\ Purported transfers that would result in a violation
of the BGM Ownership Limitation are not recognized by Current BGM to
the extent of any ownership in excess of the BGM Ownership Limitation,
and purported voting or voting arrangements in violation of the BGM
Voting Limitation are not honored by Current BGM to the extent of any
voting in excess of the limitation.\11\
---------------------------------------------------------------------------
\9\ The Current BGM Charter generally defines a ``Related
Person'' as, with respect to any person, (i) any ``affiliate'' of
such person (as defined in Rule 12b-2 under the Act); (ii) any other
person with which such first person has any agreement, arrangement
or understanding (whether or not in writing) to act together for the
purpose of acquiring, voting, holding or disposing of shares of the
capital stock of Current BGM (provided no person is deemed a Related
Person pursuant to clause (ii) solely as a result of such person's
being or becoming a party to the Investor Rights Agreement entered
into by and among Current BGM and the stockholders named therein on
January 1, 2008); (iii) in the case of a person that is a company,
corporation or similar entity, any executive officer (as defined
under Rule 3b-7 under the Act) or director of such person and, in
the case of a person that is a partnership or limited liability
company, any general partner, managing member or manager of such
person, as applicable; (iv) in the case of any person that is a
registered broker or dealer that has been admitted to membership in
either of the BATS Exchanges (for purposes of this definition of
``Related Person,'' each such national securities exchange shall be
referred to generally as an ``Exchange'' and any member of such
Exchange, an ``Exchange Member''), any person that is associated
with the Exchange Member (as determined using the definition of
``person associated with a member'' as defined under Section
3(a)(21) of the Act); (v) in the case of a person that is a natural
person and Exchange Member, any broker or dealer that is also an
Exchange Member with which such person is associated; (vi) in the
case of a person that is a natural person, any relative or spouse of
such person, or any relative of such spouse who has the same home as
such person or who is a director or officer of Current BGM or any of
its parents or subsidiaries; (vii) in the case of a person that is
an executive office (as defined under Rule 3b-7 under the Act) or a
director of a company, corporation or similar entity, such company,
corporation or entity, as applicable; and (viii) in the case of a
person that is a general partner, managing member or manager of a
partnership or limited liability company, such partnership or
limited liability company, as applicable. See Current BGM Charter,
Art. FIFTH, para. (a)(ii).
\10\ See Current BGM Charter, Art. FIFTH, para. (b).
\11\ See Current BGM Charter, Art. FIFTH, para. (d).
---------------------------------------------------------------------------
However, the Current BGM Charter provides that each of the BGM
Ownership Limitation and the BGM Voting Limitation may be waived
(except with respect to Exchange Members and their Related Persons)
pursuant to a resolution duly adopted by the board of directors of
Current BGM if, in connection with taking such action, the board of
directors states in such resolution that it is the determination of the
board of directors that the waiver:
Will not impair the ability of each BATS Exchange to carry
out its functions and responsibilities as an ``exchange'' under the Act
and the rules and regulations promulgated thereunder;
is otherwise in the best interests of Current BGM, its
stockholders, and each BATS Exchange;
will not impair the ability of the Commission to enforce
the Act and the rules and regulations promulgated thereunder; and
shall not be effective until it is filed with and approved
by the Commission.\12\
---------------------------------------------------------------------------
\12\ See Current BGM Charter, Art. FIFTH, para. (b)(ii)(B).
---------------------------------------------------------------------------
In granting such a waiver, the Current BGM board of directors has
the discretion to impose on the person and its Related Persons, such
conditions and restrictions that it deems necessary, appropriate or
desirable in furtherance of the objectives of the Act and the rules and
regulations promulgated thereunder, and the governance of each BATS
Exchange.\13\
---------------------------------------------------------------------------
\13\ Id.
---------------------------------------------------------------------------
In addition, notwithstanding the above, the Current BGM Charter
provides \14\ that in any case where a person, either alone or with its
Related Persons, would own or vote more than the BGM Ownership
Limitation or BGM Voting Limitation, respectively, upon consummation of
any proposed sale, assignment or transfer of Current BGM's capital
stock, such a transaction will not become effective until the Current
BGM board of directors determines, by resolution, that such person and
its
[[Page 75588]]
Related Persons are not subject to any ``statutory disqualification,''
as defined in Section 3(a)(39) of the Act.\15\
---------------------------------------------------------------------------
\14\ See Current BGM Charter, Art. FIFTH, para. (b)(iii).
\15\ 15 U.S.C. 78c(a)(39).
---------------------------------------------------------------------------
As described above, upon the Closing of the proposed Combination,
New BGM will become the sole owner of Current BGM (referred to as ``BGM
Holdings'' upon the Closing and thereafter). Additionally, as discussed
in more detail below, the Exchange is also seeking the Commission's
approval for Current BGM's proposal to, contemporaneously with the
Closing, amend and restate the Current BGM Charter as the BGM Holdings
Charter, and for New BGM to adopt the New BGM Charter. Unlike the
Current BGM Charter, as proposed to be amended, the BGM Holdings
Charter will not contain the BGM Ownership Limitation or the BGM Voting
Limitation.\16\ While the BGM Ownership Limitation and BGM Voting
Limitation will not be contained in the BGM Holdings Charter, the BGM
Holdings Charter specifies that BGM Holdings' sole stockholder will be
New BGM, and the New BGM Charter will contain substantively identical
ownership and voting limitation provisions, which will also become
effective contemporaneously with the Closing.\17\
---------------------------------------------------------------------------
\16\ See infra text accompanying note 58.
\17\ See infra text accompanying notes 23 through 27.
---------------------------------------------------------------------------
As a result, New BGM's acquisition of ownership and voting rights
in BGM Holdings upon Closing would not cause New BGM to contravene the
BGM Ownership Limitation or BGM Voting Limitation, because the Current
BGM Charter will be contemporaneously amended to eliminate the BGM
Ownership Limitation and the BGM Voting Limitation, and the New BGM
Charter will be contemporaneously amended with respect to New BGM's
stockholders.
Nevertheless, because the Combination will result in a change of
ownership of Current BGM (in that New BGM will become the sole
stockholder of Current BGM), the Exchange and the board of directors of
Current BGM each believe that it is appropriate for the board of
directors of Current BGM to adopt the Resolutions, attached as Exhibit
5A, making certain determinations with respect to New BGM and the
Combination similar to those that would be necessary to waive the BGM
Ownership Limitation and BGM Voting Limitation. Specifically, the board
of directors of Current BGM determined that:
The acquisition of the proposed ownership by New BGM in
Current BGM will not impair the ability of each BATS Exchange to carry
out its functions and responsibilities as an ``exchange'' under the Act
and the rules and regulations promulgated thereunder, is otherwise in
the best interests of Current BGM, its stockholders and the BATS
Exchanges, and will not impair the ability of the Commission to enforce
the Act and the rules and regulations promulgated thereunder;
the acquisition or exercise of the proposed voting rights
by New BGM in Current BGM will not impair the ability of each BATS
Exchange to carry out its functions and responsibilities as an
``exchange'' under the Act and the rules and regulations promulgated
thereunder, that it is otherwise in the best interests of the Current
BGM, its stockholders and the BATS Exchanges, and that it will not
impair the ability of the Commission to enforce the Act and the rules
and regulations promulgated thereunder;
neither New BGM, nor any of its Related Persons, is
subject to ``statutory disqualification'' within the meaning of Section
3(a)(39) of the Act; \18\ and
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78c(a)(39).
---------------------------------------------------------------------------
neither New BGM, nor any of its Related Persons (excluding
BATS Trading, an Exchange Member whose affiliation with the Exchanges
has been approved/permitted by the Commission pursuant to Rule 2.11 and
Rule 2.12 of each Exchange),\19\ is an Exchange Member.\20\
---------------------------------------------------------------------------
\19\ As noted above, BATS Trading is a routing broker-dealer and
an Exchange Member that is affiliated with the Exchange, pursuant to
Exchange Rules 2.11 and 2.12, and a direct subsidiary of Current
BGM. The same structure will continue to be in place following the
Closing and BATS Trading will remain a direct subsidiary of BGM
Holdings.
\20\ In addition, the Resolutions contain a determination that
the execution and delivery of the Merger Agreement by New BGM
constituted notice of New BGM's intention to acquire ownership and
voting rights in excess of the BGM Ownership Limitation and BGM
Voting Limitation, respectively, in writing and not less than 45
days before the Closing. See Current BGM Charter, Art. FIFTH, para.
(b)(iv).
---------------------------------------------------------------------------
The Exchange has reviewed such Resolutions and requests that the
Commission approve such Resolutions. The Exchange believes that the
Commission should approve the Resolutions, as the Combination will not
impair the ability of either BATS Exchange to carry out its functions
and responsibilities as an ``exchange'' under the Act and the rules and
regulations promulgated thereunder, or the ability of the Commission to
enforce the Act and the rules and regulations promulgated thereunder.
The BATS Exchanges will continue to operate and regulate their markets
and Members as they have done prior to the Combination. Thus, each BATS
Exchange will continue to enforce the Act, the Commission's rules
thereunder, and each Exchange's own rules, in the manner it does today.
Further, the Commission will continue to have plenary regulatory
authority over the BATS Exchanges, as is currently the case with these
entities.
The Exchange also notes that the Resolutions reflect the
determination by the Current BGM board of directors that the
Combination and New BGM's resulting ownership and voting rights in BGM
Holdings are otherwise in the best interests of Current BGM, its
stockholders, and the BATS Exchanges.
In addition, the Exchange notes that notwithstanding the
Resolutions and the Combination, the BGM Ownership Limitation and the
BGM Voting Limitation will remain in place with respect to potential
future transactions involving the ultimate parent company of the BATS
Exchanges. As described in more detail below, the Exchange is also
proposing the adoption of the New BGM Charter and the New BGM Bylaws,
which are modeled in large part on the Current BGM Charter and the
Current BGM Bylaws (and include provisions substantially identical to
the BGM Ownership Limitation and the BGM Voting Limitation), creating
an ownership structure that will continue to provide the Commission
with appropriate oversight tools to ensure that the Commission will
have the ability to enforce the Act with respect to the Exchange, its
direct and indirect parent entities, and its directors, officers,
employees and agents to the extent they are involved in the activities
of the Exchange, and protect the independence of the Exchange's self-
regulatory activities.
The Exchange therefore requests that the Commission approve the
Resolutions, attached as Exhibit 5A.
5. Adoption of New BGM Charter and New BGM Bylaws
New BGM was incorporated on August 22, 2013, under the name BATS
Global Markets Holdings, Inc., by filing a certificate of incorporation
with the Secretary of State of Delaware. Upon incorporation, New BGM
also adopted bylaws. New BGM is currently a shell company, with no
material assets or operations. Therefore, neither its certificate of
incorporation nor bylaws currently need or contain any provisions that
would be appropriate for an entity that has direct or indirect
ownership in a registered national securities exchange.
[[Page 75589]]
However, in connection with the Combination, upon the Closing, New
BGM will become (i) the indirect owner (through BGM Holdings) of each
of the BATS Exchanges and BATS Trading, (ii) the indirect owner
(through DE Holdings and DEI) of each of the DE Exchanges, and (iii)
the indirect owner (through DE Holdings) of DE Route. As a result, the
Exchange is proposing that in connection with New BGM's acquisition of
indirect ownership in the Exchange, New BGM would amend and restate
each of its certificate of incorporation and bylaws to adopt provisions
designed to protect and maintain the integrity of the self-regulatory
functions of the Exchange and to facilitate the ability of the Exchange
and the Commission to carry out their regulatory and oversight
obligations under the Act. Each of the New BGM Charter and the New BGM
Bylaws is modeled on, and substantially similar to, the Current BGM
Charter and Current BGM Bylaws, respectively, except with respect to
the differences described below.
a. New BGM Charter
The New BGM Charter is proposed to be adopted as the Amended and
Restated Certificate of Incorporation of BATS Global Markets Holdings,
Inc. However, the New BGM Charter will effect an amendment to the name
of the corporation upon Closing such that it will be renamed ``BATS
Global Markets, Inc.'' \21\ The change of name is intended to reflect
the fact that New BGM is succeeding to the business of Current BGM in
all respects, notwithstanding the technical change of corporate entity
that will result from the structure of the Combination.
---------------------------------------------------------------------------
\21\ See New BGM Charter, Art. FIRST.
---------------------------------------------------------------------------
The New BGM Charter, which is attached as Exhibit 5B, is
substantially similar to the Current BGM Charter, which the Commission
has previously found to be consistent with the Act.\22\ It contains
provisions imposing the BGM Ownership Limitation and the BGM Voting
Limitation on any owners or prospective owners of New BGM.\23\ In
addition, similar to the Current BGM Charter, the New BGM Charter
prohibits a Member of any of New BGM's registered national securities
exchange subsidiaries, either alone or together with such Member's
Related Persons,\24\ from owning, directly or indirectly, of record or
beneficially, more than 20 percent of shares of any class of capital
stock of New BGM.\25\ As in the Current BGM Charter, purported sales,
transfers, assignments, pledges or ownership that would result in a
violation of the BGM Ownership Limitation will not be recognized by New
BGM to the extent of any ownership in excess of the limitation, and New
BGM shall have the right to redeem the shares in excess of the
applicable ownership limit for their fair market value. In addition, in
contrast to the Current BGM Charter, the New BGM Charter would clarify
that these same non-recognition and redemption rights apply in the case
of a purported conversion of shares resulting in a violation of the BGM
Ownership Limitation, as apply to purported sales, transfers,
assignments, pledges or ownership that result in such a violation.\26\
Similarly, as in the Current BGM Charter, purported voting or voting
arrangements in violation of the BGM Voting Limitation will not be
honored by New BGM to the extent of any voting in excess of the
limitation.\27\
---------------------------------------------------------------------------
\22\ See Securities Exchange Act Release No. 58375 (August 18,
2008), 73 FR 49498 (August 21, 2008).
\23\ See New BGM Charter, Art. FIFTH paras. (b)(i)(A) and (C).
\24\ The New BGM Charter defines ``Related Persons'' consistent
with the definition in the Current BGM Charter, see supra note 9,
except that (i) the definition of ``Exchange'' for purposes of such
definition is expanded to refer to any national securities exchange
that is a direct or indirect subsidiary of New BGM, and (ii) the
reference to the Investor Rights Agreement has been revised to refer
to the Investor Rights Agreement to be entered into upon Closing.
\25\ See New BGM Charter, Art. FIFTH para. (b)(i)(B).
\26\ See New BGM Charter, Art. FIFTH, paras. (d)-(e).
\27\ See New BGM Charter, Art. FIFTH, para. (d).
---------------------------------------------------------------------------
These provisions are designed to prevent any stockholder from
exercising undue control over the operation of the BATS Exchanges or
the DE Exchanges (together, the ``Exchange Subsidiaries''), each of
which New BGM will indirectly own following the Combination, and to
assure that each Exchange Subsidiary and the Commission are able to
carry out their regulatory obligations under the Act.
Further, consistent with the Current BGM Charter, the New BGM
Charter provides that, for so long as New BGM controls, directly or
indirectly, a registered national securities exchange, before any
amendment to the New BGM Charter may be effective, those changes must
be submitted to the board of directors of each such exchange, and if
the amendment is required to be filed with, or filed with and approved
by the Commission pursuant to Section 19(b) of the Act, \28\ such
change shall not be effective until filed with, or filed with and
approved by, the Commission.\29\ The Exchange believes that these
provisions will assist the Exchange in fulfilling its self-regulatory
obligations and in administering and complying with the requirements of
the Act.
---------------------------------------------------------------------------
\28\ 15 U.S.C. 78s(b).
\29\ See New BGM Charter, Art. TWELFTH.
---------------------------------------------------------------------------
The provisions of the New BGM Charter differ from those of the
Current BGM Charter in certain limited respects:
The total number of shares of common stock that New BGM
will have authority to issue is 75,000,000, divided between 55,000,000
shares designated as Voting Common Stock, 10,000,000 shares designated
as Class A Non-Voting Common Stock, and 10,000,000 shares designated as
Class B Non-Voting Common Stock.\30\ This represents an increase from
the 25,000,000 shares that Current BGM is authorized to issue (divided
between 24,500,000 shares designated as Voting Common Stock and 500,000
shares designated as Non-Voting Common Stock). The increase in
authorized shares is due to the greater number of stockholders that New
BGM will have following the Combination, as compared to Current BGM, as
well as to provide an adequate number of authorized shares to allow for
potential future issuances. The rights and preferences of the Class A
Non-Voting Common Stock and Class B Non-Voting Common Stock are
identical in all respects, except for conversion rights. Class A Non-
Voting Common Stock converts into Voting Common Stock automatically
upon transfer to a person other than a Related Person of such holder,
upon termination of the Investor Rights Agreement, and may be converted
into Voting Common Stock at any time at the option of the holder.\31\
Class B Non-Voting Common Stock, however, may only be converted into
Voting Common Stock following a ``Qualified Transfer.'' \32\ The term
[[Page 75590]]
``Qualified Transfer'' means a sale or other transfer of Class B Non-
Voting Common Stock by a holder of such shares: (a) In a widely
distributed public offering registered pursuant to the Securities Act
of 1933; \33\ (b) in a private sale or transfer in which the relevant
transferee (together with its Affiliates, as defined below, and other
transferees acting in concert with it) acquires no more than two
percent of any class of voting shares (as defined in 12 CFR 225.2(q)(3)
and determined by giving effect to any such permitted conversion of
transferred shares of Class B Non-Voting Common Stock upon such
transfer pursuant to Article FOURTH of the New BGM Charter), (c) to a
transferee that (together with its Affiliates and other transferees
acting in concert with it) owns or controls more than 50 percent of any
class of voting shares (as defined in 12 CFR 225.2(q)(3)) of New BGM
without regard to any transfer of shares from the transferring holder
of shares of Class B Non-Voting Common Stock, or (d) to New BGM. As
used above, the term ``Affiliate'' means, with respect to any person,
any other person directly or indirectly controlling, controlled by or
under common control with such person, and ``control'' (including, with
correlative meanings, the terms ``controlled by'' and ``under common
control with'') has the meaning set forth in 12 CFR 225.2(e)(1).\34\
The Exchange understands that certain persons that will become
stockholders of New BGM as of the Closing may be, or may become,
subject to restrictions under the Bank Holding Company Act of 1956 \35\
on the extent to which they are permitted to own voting stock of New
BGM or certain types of non-voting stock convertible into voting stock
of New BGM. The Exchange understands that New BGM's Class B Non-Voting
Common Stock is designed to permit a stockholder that may be subject to
such restrictions to maintain an economic interest in New BGM, through
ownership of Class B Non-Voting Common Stock, in excess of its voting
interest and in compliance with such restrictions, for purposes of the
Bank Holding Company Act of 1956.
---------------------------------------------------------------------------
\30\ See New BGM Charter, Art. FOURTH, para. (a).
\31\ See New BGM Charter, Art. FOURTH, para. (c). In addition,
Class A Non-Voting Common Stock held by ISE Holdings will convert
automatically if ISE Holdings includes any such shares in any public
offering of stock of New BGM.
\32\ The Exchange notes that, notwithstanding the conversion
features, neither Class A Non-Voting Common Stock nor Class B Non-
Voting Common Stock may convert into Voting Common Stock if such a
conversion would cause the stockholder to own, alone or with its
Related Persons, directly or indirectly, of record or beneficially
(i) more than 40% of any class of capital stock of New BGM in
contravention of the BGM Ownership Limitation (unless a waiver is
granted by the board of directors of New BGM and approved by the
Commission), or (ii) in the case of an Exchange Member stockholder,
more than 20% of any class of capital stock of New BGM. See New BGM
Charter, Art. FIFTH, para. (b)(i)(A) and (B). In addition, to the
extent that any Class A Non-Voting Common Stock or Class B Non-
Voting Common Stock is converted into Voting Common Stock, the
stockholder owning the converted Voting Common Stock would be
subject to the BGM Voting Limitation and not permitted, either alone
or together with its Related Persons, at any time, directly,
indirectly or pursuant to any of various arrangements, to vote or
cause the voting of shares or give any consent or proxy with respect
to shares representing more than 20 percent of the voting power of
the then issued and outstanding capital stock of New BGM (unless a
waiver is granted by the board of directors of New BGM and approved
by the Commission). See New BGM Charter, Art. FIFTH, para.
(b)(i)(C).
\33\ 15 U.S.C. 77a.
\34\ See New BGM Charter, Art. FOURTH, para. (d)(i).
\35\ 12 U.S.C. 1841 et seq.
---------------------------------------------------------------------------
The term ``Exchange,'' as used in the New BGM Charter, is
defined to refer to ``any national securities exchange registered under
Section 6 of the Act with the [Commission] that is a direct or indirect
subsidiary'' of New BGM.\36\ The term ``Exchange'' is used throughout
the New BGM Charter to refer to subsidiaries of New BGM that are
registered as national securities exchanges. This definition differs
from the definition contained in the Current BGM Charter, which defines
``Exchange'' by specific reference to the names of the BATS Exchanges.
Because, following the Combination, the DE Exchanges will also become
indirect subsidiaries of New BGM, the definition in the New BGM Charter
has been expanded so as to capture the DE Exchanges in addition to the
BATS Exchanges.
---------------------------------------------------------------------------
\36\ See New BGM Charter, Art. FIFTH, para. (a)(ii).
---------------------------------------------------------------------------
The New BGM Charter reflects certain non-substantive
differences and typographical corrections, including conforming the
spelling of ``Bylaws'' throughout the organizational documents of New
BGM and its proposed subsidiaries.
b. New BGM Bylaws
As with the New BGM Charter, the New BGM Bylaws, which are set
forth in Exhibit 5C, contain provisions substantially similar to those
of the Current BGM Bylaws, which the Commission has previously found to
be consistent with the Act.\37\ This includes provisions that are
designed to maintain the independence of the self-regulatory functions
of the Exchange Subsidiaries. Consistent with the Current BGM Bylaws,
the New BGM Bylaws provide that New BGM and its officers, directors,
employees and agents submit to the Commission's jurisdiction with
respect to activities relating to any of the Exchange Subsidiaries,\38\
and, for so long as New BGM controls, directly or indirectly, such
Exchange Subsidiary, New BGM agrees to provide the Commission and each
Exchange Subsidiary with access to its books and records that are
related to the operation or administration of the Exchange
Subsidiary.\39\ In addition, to the extent they are related to the
operation or administration of an Exchange Subsidiary, the books,
records, premises, officers, directors, agents, and employees of New
BGM shall be deemed to be the books, records, premises, officers,
directors, agents, and employees of the Exchange Subsidiary for
purposes of, and subject to oversight pursuant to, the Act.\40\
---------------------------------------------------------------------------
\37\ See Securities Exchange Act Release No. 58375 (August 18,
2008), 73 FR 49498 (August 21, 2008).
\38\ See New BGM Bylaws, Section 14.05.
\39\ See New BGM Bylaws, Section 14.03.
\40\ Id.
---------------------------------------------------------------------------
The New BGM Bylaws also provide that all books and records of an
Exchange Subsidiary reflecting confidential information pertaining to
the self-regulatory function of the Exchange Subsidiary (including but
not limited to disciplinary matters, trading data, trading practices
and audit information) that shall come into the possession of New BGM
shall not be made available other than to those officers, directors,
employees and agents of New BGM that have a reasonable need to know the
contents thereof, and shall be retained in confidence by New BGM, the
members of its board of directors, its officers, employees and agents,
and not used for any non-regulatory purposes.\41\ The New BGM Bylaws,
however, specify that the New BGM Bylaws (including these
confidentiality provisions) shall not be interpreted so as to limit or
impede the rights of the Commission or an Exchange Subsidiary to access
and examine such confidential information pursuant to the federal
securities laws and the rules and regulations thereunder, or to limit
or impede the ability of any officers, directors, employees or agents
of New BGM to disclose such confidential information to the Commission
or an Exchange Subsidiary.\42\
---------------------------------------------------------------------------
\41\ See New BGM Bylaws, Section 14.02.
\42\ See id.
---------------------------------------------------------------------------
In addition, for so long as New BGM controls, directly or
indirectly, an Exchange Subsidiary, the directors, officers, employees
and agents of New BGM are required to give due regard to the
preservation of the independence of each Exchange Subsidiary's self-
regulatory functions, and to its obligations to investors and the
general public, and not take any actions which would interfere with the
effectuation of decisions by the board of directors of such Exchange
Subsidiary relating to regulatory functions (including disciplinary
matters) or which would interfere with such Exchange Subsidiary's
ability to carry out its responsibilities under the Act.\43\ Further,
the New BGM Bylaws require that, for so long as New BGM controls,
directly or indirectly, an Exchange Subsidiary, before any amendment to
or repeal of any provision of the New BGM Bylaws may be effective,
those changes must be submitted to the board of directors of each
Exchange Subsidiary, and, if such amendment is required to be filed
with, or filed with and
[[Page 75591]]
approved by, the Commission before the changes may be effective under
Section 19 of the Act and the rules promulgated thereunder, then the
proposed changes shall not be effective until filed with, or filed with
and approved by, the Commission, as the case may be.\44\ The Exchange
believes that these provisions will assist the Exchange in fulfilling
its self-regulatory obligations and in administering and complying with
the requirements of the Act.
---------------------------------------------------------------------------
\43\ See New BGM Bylaws, Section 14.01.
\44\ See New BGM Bylaws, Art. XII.
---------------------------------------------------------------------------
The provisions of the New BGM Bylaws differ from those of the
Current BGM Bylaws in certain limited respects:
The New BGM Bylaws provide for two separate corporate
officer positions, one known as the Chief Executive Officer and another
known as the President. The Current BGM Bylaws, in contrast, provide
for a combined position known as the President and Chief Executive
Officer.\45\ Under the New BGM Bylaws, the Chief Executive Officer will
be the chief executive officer of New BGM and subject to the control of
the board of directors of New BGM, has general supervision, direction
and control of the business and affairs of New BGM,\46\ while the
President will be a senior executive officer with certain designated
powers, among other things, to serve as the chief executive officer in
the absence or disability of the Chief Executive Officer.\47\
References to corporate officers throughout the New BGM Bylaws reflect
this difference. The difference in corporate officer designations is
intended to facilitate the anticipated executive leadership of New BGM
following the Combination. It is anticipated that, following the
Combination, the current President and Chief Executive Officer of
Current BGM will become the Chief Executive Officer of New BGM, while
the current Chief Executive Officer of DE Holdings will become the
President of New BGM.
---------------------------------------------------------------------------
\45\ Compare New BGM Bylaws, Sections 4.01 and 4.02 with Current
BGM Bylaws, Sections 4.01 and 4.02(c) and (d).
\46\ See New BGM Bylaws, Section 4.02(c).
\47\ See New BGM Bylaws, Section 4.02(d).
---------------------------------------------------------------------------
The New BGM Bylaws provide for a board of directors
consisting of 15 members, or such other number of members as the board
of directors determines from time to time. The Current BGM Bylaws
provide that the board of directors will consist of one or more
members, as determined by resolution of the board of directors.\48\ The
size of the New BGM board is proposed to be initially set at 15 in
order to reflect the anticipated initial membership of the board of
directors of New BGM. The Current BGM board of directors currently has
13 members. After the Closing, it is anticipated that the New BGM board
of directors will consist of the same members as the Current BGM board,
except that the New BGM board will be expanded by two members, to
include representatives of two additional firms that are currently LLC
Members of DE Holdings but will, by virtue of the Combination, become
stockholders of New BGM.
---------------------------------------------------------------------------
\48\ Compare New BGM Bylaws, Section 3.01 with Current BGM
Bylaws, Section 3.01.
---------------------------------------------------------------------------
Section 5.02(a) of the Current BGM Bylaws sets forth the
process for representatives of Current BGM to attend meetings of, and
vote the shares of, any corporation, partnership or other entity
(including each BATS Exchange) in which Current BGM may hold stock,
partnership, or other equity interests. This provision parenthetically
refers to the BATS Exchanges to reflect the fact that Current BGM is
the direct owner of each of the BATS Exchanges. However, following the
Combination, New BGM will instead be the direct owner of each of BGM
Holdings and DE Holdings. The corresponding provision in the New BGM
Bylaws therefore contains a similar parenthetical reference to its
ownership of BGM Holdings and DE Holdings, rather than the BATS
Exchanges.\49\ In addition, the New BGM Bylaws include a reference to
meetings of ``members'' of any ``limited liability company'' in which
New BGM holds equity interests, which terms are not included in the
corresponding provision in the Current BGM Bylaws.\50\ This is intended
to reflect the fact that New BGM will, following the Closing, be the
sole member of DE Holdings, a limited liability company, while Current
BGM does not hold equity in any limited liability companies.\51\ In
addition, the Current BGM Bylaws contain provisions that relate to
Current BGM's voting of shares in the election of directors, and
Members of the Member Nominating Committees, of the BATS Exchanges.\52\
These provisions will not be applicable to New BGM and are not included
in the New BGM Bylaws, as the BATS Exchanges will be directly owned by
BGM Holdings, rather than New BGM.\53\
---------------------------------------------------------------------------
\49\ See New BGM Bylaws, Section 5.02.
\50\ Id.
\51\ Compare New BGM Bylaws, Section 5.02 with Current BGM
Bylaws, Section 5.02.
\52\ See Current BGM Bylaws, Sections 5.02(b) and (c).
\53\ Substantially identical provisions are instead included in
the BGM Holdings Bylaws. See infra text accompanying note 70.
---------------------------------------------------------------------------
The term ``Exchange,'' as used in the New BGM Bylaws, is
defined to refer to ``any national securities exchange registered with
the [Commission] under Section 6 of the [Act] that is a direct or
indirect subsidiary'' of New BGM.\54\ The term ``Exchange'' is used
throughout the New BGM Bylaws to refer to subsidiaries of New BGM that
are registered as national securities exchanges. The Current BGM Bylaws
either refer to each BATS Exchange by name or define ``Exchange'' by
specific reference to the BATS Exchanges. Because, following the
Combination, the DE Exchanges will also become indirect subsidiaries of
New BGM, the definition in the New BGM Bylaws has been expanded so as
to capture the DE Exchanges in addition to the BATS Exchanges.
---------------------------------------------------------------------------
\54\ See New BGM Bylaws, Section 10.02.
---------------------------------------------------------------------------
The New BGM Bylaws reflect certain non-substantive updates
to dates of agreements and cross-references, as well as typographical
corrections, including conforming the spelling of ``Bylaws'' throughout
the organizational documents of New BGM and its proposed subsidiaries.
6. Adoption of BGM Holdings Charter and BGM Holdings Bylaws
Effective as of the Closing of the Combination, BGM Holdings
(previously referred to as Current BGM) will continue to hold direct
ownership of the BATS Exchanges and BATS Trading, but will no longer be
the ultimate holding company of the corporate structure, itself being a
wholly owned subsidiary of New BGM. As a result, provisions of the
Current BGM Charter and Current BGM Bylaws, which contemplate an entity
that was the ultimate holding company in the corporate structure, will
no longer be appropriate. The Exchange is therefore proposing the
amendment and restatement of each of the Current BGM Charter (as
amended, referred to as the ``BGM Holdings Charter'') and the Current
BGM Bylaws (as amended, referred to as the ``BGM Holdings Bylaws'').
Each of the proposed BGM Holdings Charter and the BGM Holdings Bylaws
are modeled on, and substantially similar to, the current certificate
of incorporation and bylaws, respectively, of DEI, which is similarly
situated as an intermediate holding company between DE Holdings and the
DE Exchanges. The Commission has previously found the DEI certificate
of incorporation and bylaws to be consistent with the Act.\55\
---------------------------------------------------------------------------
\55\ See Securities Exchange Act Release No. 62515 (July 16,
2010), 75 FR 43584 (July 26, 2010) (SR-EDGX-2010-02).
---------------------------------------------------------------------------
Following the Closing, BGM Holdings will be the sole stockholder of
the BATS Exchanges. Although BGM Holdings will not carry out any
regulatory
[[Page 75592]]
functions, the Exchange notes that its activities with respect to the
operation of the BATS Exchanges must be consistent with, and must not
interfere with, the self-regulatory obligations of each BATS Exchange.
The BGM Holdings Charter and the BGM Holdings Bylaws therefore include
certain provisions that are designed to maintain the independence of
the BATS Exchanges' self-regulatory functions, enable the BATS
Exchanges to operate in a manner that complies with the federal
securities laws, including the objectives of Sections 6(b) \56\ and
19(g) \57\ of the Act, and facilitate the ability of each BATS Exchange
and the Commission to fulfill their regulatory and oversight
obligations under the Act.
---------------------------------------------------------------------------
\56\ 15 U.S.C. 78f(b).
\57\ 15 U.S.C. 78s(g).
---------------------------------------------------------------------------
a. BGM Holdings Charter
With respect to ownership and control of BGM Holdings, the proposed
BGM Holdings Charter, attached as Exhibit 5D, specifically provides
that BGM Holdings' sole stockholder will be New BGM.\58\ This
restriction is designed to assure that any change to the ownership or
control of the BATS Exchanges may only occur through a change in the
ownership or control of New BGM. As such, any purported change of such
ownership or control would need to comply with the New BGM Charter and
New BGM Bylaws, including the BGM Ownership Limitation and the BGM
Voting Limitation (or a Commission-approved waiver therefrom).
---------------------------------------------------------------------------
\58\ See BGM Holdings Charter, Art. SEVENTH, para. 4.
---------------------------------------------------------------------------
The proposed BGM Holdings Charter further specifies that nothing
contained therein or in the BGM Holdings Bylaws shall be applicable
where the application of the provision would interfere with the
effectuation of any and all decisions relating to the regulatory
functions of the BATS Exchanges (including disciplinary matters) or the
structure of the market that each BATS Exchange regulates, or would
interfere with the ability of each BATS Exchange to carry out its
responsibilities under the Act or oversee the market that each
regulates.\59\
---------------------------------------------------------------------------
\59\ See BGM Holdings Charter, Art. FIFTH, para. 2.
---------------------------------------------------------------------------
In addition, the proposed BGM Holdings Charter provides that for so
long as BGM Holdings controls, directly or indirectly, a registered
national securities exchange, before any amendment to or repeal of any
provision of the BGM Holdings Charter may be effective, those changes
shall be submitted to the board of directors of each such exchange, and
if the same must be filed with, or filed with and approved by, the
Commission before the changes may be effective under Section 19 of the
Act \60\ and the rules promulgated thereunder, then such proposed
changes shall not be effective until filed with, or filed with and
approved by, the Commission, as the case may be.\61\
---------------------------------------------------------------------------
\60\ 15 U.S.C. 78s(b).
\61\ See BGM Holdings Charter, Art. Seventh, para. 3.
---------------------------------------------------------------------------
b. BGM Holdings Bylaws
The proposed BGM Holdings Bylaws, attached as Exhibit 5E, contain
several provisions designed to protect the independence of the self-
regulatory functions of the BATS Exchanges. The proposed BGM Holdings
Bylaws require that, for so long as BGM Holdings, directly or
indirectly, controls a BATS Exchange, BGM Holdings' board of directors,
officers, employees and agents must give due regard to the preservation
of independence of the self-regulatory functions of each BATS Exchange
and not interfere with the effectuation of any decisions by either of
the BATS Exchange boards of directors relating to its regulatory
functions (including disciplinary matters) or which would interfere
with the ability of such exchange to carry out its responsibilities
under the Act.\62\ The BGM Holdings Bylaws would further require that
BGM Holdings comply with the U.S. federal securities laws and rules and
regulations thereunder and shall cooperate with the Commission and each
BATS Exchange, as applicable, pursuant to and to the extent of their
respective regulatory authority.\63\ Pursuant to the BGM Holdings
Bylaws, BGM Holdings' officers, directors, employees and agents shall
be deemed to agree to (i) comply with the U.S. federal securities laws
and the rules and regulations thereunder; and (ii) to cooperate with
the Commission and each BATS Exchange in respect of the Commission's
oversight responsibilities regarding the BATS Exchanges and their self-
regulatory functions and responsibilities of the BATS Exchanges, and
BGM Holdings will take reasonable steps to cause its officers,
directors, employees and agents to so cooperate.\64\
---------------------------------------------------------------------------
\62\ See BGM Holdings Bylaws, Section 7.1.
\63\ See BGM Holdings Bylaws, Section 7.2.
\64\ Id.
---------------------------------------------------------------------------
Furthermore, BGM Holdings and its officers, directors, employees
and agents will be deemed to irrevocably submit to the jurisdiction of
the U.S. federal courts, the Commission, and each BATS Exchange, as
applicable, for purposes of any suit, action, or proceeding pursuant to
the U.S. federal securities laws or the rules or regulations thereunder
arising out of, or relating to, the activities of such exchange.\65\
---------------------------------------------------------------------------
\65\ See BGM Holdings Bylaws, Section 7.3.
---------------------------------------------------------------------------
The proposed BGM Holdings Bylaws also contain a number of
provisions designed to ensure that the BATS Exchanges have sufficient
access to the books and records of BGM Holdings. Pursuant to the BGM
Holdings Bylaws, the books, records, premises, officers, directors,
agents, and employees of BGM Holdings are deemed to be the books,
records, premises, officers, directors, agents and employees of the
BATS Exchanges to the extent they are related to the operation or
administration of such exchange.\66\ In addition, for as long as BGM
Holdings controls, directly or indirectly, the BATS Exchanges, BGM
Holdings' books and records shall be subject at all times to inspection
and copying by the Commission and the BATS Exchanges, provided that
such books and records are related to the operation or administration
of the BATS Exchanges.\67\
---------------------------------------------------------------------------
\66\ See BGM Holdings Bylaws, Section 5.8(b).
\67\ Id.
---------------------------------------------------------------------------
The proposed BGM Holdings Bylaws also provide that, to the fullest
extent permitted by law, all books and records of the BATS Exchanges
reflecting confidential information pertaining to the self-regulatory
function of such exchange (including disciplinary matters, trading
data, trading practices and audit information) that comes into the
possession of BGM Holdings, shall be retained in confidence by BGM
Holdings and its stockholders, board of directors, officers, employees
and agents, and not be used for any non-regulatory purposes.\68\ The
proposed BGM Holdings Bylaws provide, however, that the foregoing shall
not limit or impede the rights of the Commission or the BATS Exchanges
to access and examine such confidential information pursuant to the
federal securities laws and the rules and regulations thereunder, or
limit or impede the ability of any BGM Holdings stockholders, officers,
directors, employees or agents to disclose such confidential
information to the Commission or either BATS Exchange.\69\
---------------------------------------------------------------------------
\68\ See BGM Holdings Bylaws, Section 5.8(a).
\69\ Id.
---------------------------------------------------------------------------
With respect to the election of directors of the BATS Exchanges,
Current BGM is currently the sole and direct stockholder of each of the
BATS Exchanges. As noted above, while
[[Page 75593]]
Current BGM will become BGM Holdings, it will continue to hold the
direct ownership interest and voting rights in the BATS Exchanges.
Therefore, the BGM Holdings Bylaws are proposed to maintain provisions
relating to its voting of its interests in the BATS Exchanges that are
substantially identical to those contained in the Current BGM
Bylaws.\70\ In particular, the proposed BGM Holdings Bylaws would
continue to provide that at any meeting of the stockholders of either
BATS Exchange held for the purpose of electing directors and members of
such exchange's Member Nominating Committee, or in the event written
consents are solicited or otherwise sought from the stockholders of
such BATS Exchange with respect thereto, BGM Holdings will cause all
outstanding shares of the BATS Exchange owned by BGM Holdings to be
voted in favor of only those Member Representative Directors and
nominees for the Member Nominating Committee nominated in accordance
with such exchange's bylaws, and, with respect to any written consents,
BGM Holdings will only cause to be validly executed written consents
electing such directors and members of the Member Nominating
Committee.\71\ The Exchange believes that this requirement will ensure
that BGM Holdings effectuates the election of directors and members of
the Exchange's Member Nominating Committee in the manner contemplated
by the Exchange's Bylaws, ensuring the fair representation of members
in the selection of directors and the administration of the Exchange as
required by Section 6(b)(3) of the Act.\72\
---------------------------------------------------------------------------
\70\ Compare BGM Holdings Bylaws, Sections 2.15(b) and (c) with
Current BGM Bylaws, Sections 5.02(b) and (c).
\71\ See BGM Holdings Bylaws, Sections 2.15(b) and (c).
\72\ 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------
Similar to the proposed BGM Holdings Charter, the proposed BGM
Holdings Bylaws provide that for so long as BGM Holdings controls
either BATS Exchange, before any amendment to or repeal of any
provision of the BGM Holdings Bylaws will be effective, those changes
must be submitted to the board of directors of each BATS Exchange, and
if the same must be filed with, or filed with and approved by, the
Commission before the changes may be effective under Section 19 of the
Act, \73\ and the rules promulgated thereunder, then the proposed
changes shall not be effective until filed with, or filed with and
approved by, the Commission, as the case may be.\74\
---------------------------------------------------------------------------
\73\ 15 U.S.C. 78s.
\74\ See BGM Holdings Bylaws, Section 6.4.
---------------------------------------------------------------------------
Lastly, while as noted above, the BGM Holdings Bylaws are modeled
on the current bylaws of DEI (the ``DEI Bylaws''), in contrast with the
current DEI Bylaws, the proposed BGM Holdings Bylaws do not contain a
provision relating to BGM Holdings' handling of funds derived from the
regulatory operations of its exchange subsidiaries (such as regulatory
fees, fines and penalties). The Exchange Bylaws and the bylaws of BZX
each prohibit the Exchange and BZX, respectively, from distributing any
such funds to its stockholder, instead requiring that such funds only
be applied to fund the legal and regulatory operations of the
respective exchange or pay restitution and disgorgement of funds
intended for customers.\75\ As a result, BGM Holdings will not be
permitted to come into possession of regulatory funds, as they will
remain at the respective exchange and used only for permitted purposes.
The Exchange therefore believes that including a provision in the BGM
Holdings Bylaws relating to the handling by BGM Holdings of such funds
is unnecessary and potentially confusing. The Exchange understands that
the DE Exchanges are each proposing to amend DEI's bylaws to eliminate
the corresponding provision.\76\
---------------------------------------------------------------------------
\75\ See e.g., Exchange Bylaws, Art. X, Section 4.
\76\ See DEI Bylaws, Section 4.6(b).
---------------------------------------------------------------------------
7. Bylaws of the Exchange
In connection with the Combination, the Exchange proposes to amend
and restate its Second Amended and Restated By-Laws and adopt the
amended Exchange Bylaws as its Third Amended and Restated Bylaws,
attached as Exhibit 5F. The Exchange proposes making the following
amendments to the Exchange Bylaws:
Amending Article I, paragraph (cc) of the Exchange Bylaws
to reflect the change of name of the Exchange's stockholder from
Current BGM to BGM Holdings. This amendment is intended to reflect the
change in the Exchange's corporate holding structure and corporate name
changes described above as well as prevent any change of ownership of
the Exchange other than in accordance with the requirements set forth
in the organizational documents of the Exchange's parent and indirect
parent companies.
Amending Section 2(b) and Section 3(b) of Article III of
the Exchange Bylaws to clarify that the Chief Executive Officer of the
Exchange is considered to be an Industry Director, but is excluded from
being designated as a member of one of the three classes of directors
for purposes of the Board's staggered three-year terms. This amendment
is meant to clarify, rather than change, current practice. The Exchange
Bylaws require that the Board of Directors be composed of one Director
who is the Chief Executive Officer of the Exchange, and a sufficient
number of Non-Industry Directors (including Independent Directors),
Industry Directors and Member Representative Directors such that (i)
the number of Non-Industry Directors, including at least one
Independent Director, equals or exceeds the sum of the number of
Industry Directors and Member Representative Directors, and (ii) the
number of Member Representative Directors equals at least 20 percent of
the Board of Directors (the ``Exchange Board Composition
Requirements'').\77\ Because the definition of ``Industry Director''
includes a Director that has an employment relationship with the
Exchange,\78\ the Chief Executive Officer of the Exchange will always
meet the definition of ``Industry Director.'' Consistent with this
definition, and in order to effectuate the Exchange Board Composition
Requirements, the Exchange considers the Chief Executive Officer to be
an Industry Director. Were the Chief Executive Officer to not be
considered for purposes of determining composition of the board, the
total number of persons affiliated with the securities industry
(including Industry Directors, Member Representative Directors and the
Chief Executive Officer) could potentially exceed the number of Non-
Industry Directors--a result that the Exchange believes the Exchange
Board Composition Requirements were intended to prevent. The Exchange
therefore proposes to amend Section 2(b) of Article III of the Exchange
Bylaws to explicitly clarify that the Chief Executive Officer shall be
considered to be an Industry Director. The Exchange Bylaws separately
provide that each of the Non-Industry Directors and Industry Directors
are divided into one of three classes to serve staggered three-year
terms.\79\ Unlike other Industry Directors, rather than serving a
three-year term, the Chief Executive Officer of the Exchange serves on
the Board of Directors until he or she ceases to be Chief Executive
Officer.\80\
[[Page 75594]]
The Exchange is therefore proposing to amend Section 3(b) of Article
III of the Exchange Bylaws to explicitly clarify that the reference to
each Industry Director serving a staggered three-year term excludes the
Chief Executive Officer.
---------------------------------------------------------------------------
\77\ See Exchange Bylaws, Art. III, Section 2(b).
\78\ See Exchange Bylaws, Art. I, para. (o)(vi).
\79\ See Exchange Bylaws, Art. III, Section 3(b).
\80\ See Exchange Bylaws, Art. III, Section 3(a).
---------------------------------------------------------------------------
Amending Section 4(a), Section 4(c) and Section 4(e) of
Article III of the Exchange Bylaws to permit the Director nomination
and election process (including the Member Representative Director
nomination and election process conducted by the Member Nominating
Committee) to be conducted through either an annual or special meeting
of stockholders, rather than solely through an annual meeting of
stockholders. Under the current Exchange Bylaws, should one or more
vacancies on the Board of Directors occur, the vacancies would continue
until they can be filled at an annual meeting. As a result, vacancies
that arise soon after an annual meeting could remain for close to a
full year. The Exchange therefore proposes to amend the Exchange Bylaws
to add flexibility to the governance process around the nomination and
election of a Director position that may become vacant at a time that
does not coincide with the Exchange's annual director election process,
by permitting the process to occur at any time via a special meeting of
stockholders.
Amending Section 2(a) of Article V of the Exchange Bylaws
to clarify that the Chairman, with the approval of the Board, not only
appoints the members of all committees of the Board, but also the chair
of each committee. This amendment is intended to reflect the current
committee and committee Chair appointment processes utilized by the
Exchange.
Amending Section 6(c) of Article V of the Exchange Bylaws
to clarify that the Regulatory Oversight Committee responsibilities
include (i) those with regard to each of the Exchange's facilities, as
defined in Section 3(a)(2) of the Act,\81\ (ii) assessing the
Exchange's regulatory performance, (iii) assisting the Board and
committees of the Board in reviewing the regulatory plan and the
overall effectiveness of the Exchange's regulatory functions, and (iii)
in consultation with the Chief Executive Officer of the Exchange,
establishing the goals, assessing the performance, and fixing the
compensation of the Chief Regulatory Officer of the Company. These
amendments are intended to reflect the current responsibilities of the
Regulatory Oversight Committee.
---------------------------------------------------------------------------
\81\ 15 U.S.C. 78c(a)(2).
---------------------------------------------------------------------------
Deleting as outdated Section 1 of Article XI of the
Exchange Bylaws, relating to the interpretation of the Exchange Bylaws
prior to the Exchange's commencement of business as a national
securities exchange, and renumbering the remaining sections within
Article XI accordingly.
Expanding the prohibition contained in Section 3 of
Article XI of the Exchange Bylaws (to be renumbered as Section 2).
Currently, Section 3 of Article XI prohibits Current BGM's directors,
officers, staff, counsel and advisors who are not also directors,
officers, staff, counsel or advisors of the Exchange from participating
in any meetings of the Exchange's Board of Directors (or any committee
thereof) pertaining to the self-regulatory function of the Exchange
(including disciplinary matters). Because, following the Combination,
the Exchange will be owned directly by BGM Holdings and indirectly by
New BGM, instead of only directly by Current BGM, the Exchange is
proposing to expand this prohibition to cover both its direct and
indirect parent companies. The Exchange believes that this amendment
will protect the independence of the Exchange's self-regulatory
activities.
Correcting certain typographical errors, including
conforming the spelling of ``Bylaws'' throughout the organizational
documents of the Exchange and its parent companies.
8. Exchange Rule 2.3--Member Eligibility
Pursuant to Exchange Rule 2.3, in order to be eligible for
membership in the Exchange, a registered broker or dealer is required
to be a member of at least one other national securities association or
national securities exchange. However, membership in the Exchange's
affiliated national securities exchange, BZX, is not sufficient for
purposes of eligibility for Exchange membership. As a result of the
Combination, the Exchange will additionally become affiliated with the
DE Exchanges. The Exchange continues to believe that it is appropriate
to limit its membership to registered broker-dealers that are members
of at least one national securities association or national securities
exchange that is not affiliated with the Exchange. Therefore, the
Exchange proposes to amend Exchange Rule 2.3 to specify that a
registered broker-dealer will be eligible for membership only if it is
a member of a national securities association or national securities
exchange other than BZX, EDGA or EDGX. The proposed amendments to
Exchange Rule 2.3 are set forth in Exhibit 5G.
9. Exchange Rule 2.12--DE Route as Inbound Router
BATS Trading provides Members of the Exchange and BZX with optional
routing services to other market centers. Thus, in certain
circumstances, BATS Trading provides inbound routing from BZX to the
Exchange. Exchange Rule 2.12 governs this inbound routing of orders by
BATS Trading to the Exchange in BATS Trading's capacity as a facility
of BZX. Recognizing that the Commission has previously expressed
concern regarding the potential for conflicts of interest in instances
where a member firm is affiliated with an exchange to which it is
routing orders, the Exchange has implemented limitations and conditions
on BATS Trading's affiliation with the Exchange in order to permit the
Exchange to accept inbound orders that BATS Trading routes in its
capacity as a facility of BZX. These conditions and limitations, set
forth in Exchange Rule 2.12, require that:
(1) The Exchange must enter into (a) a plan pursuant to Rule 17d-2
under the Act with a non-affiliated self-regulatory organization
(``SRO'') to relieve the Exchange of regulatory responsibilities for
BATS Trading with respect to rules that are common rules between the
Exchange and the non-affiliated SRO, and (b) a regulatory services
contract (``Regulatory Contract'') with a non-affiliated SRO to perform
regulatory responsibilities for BATS Trading for unique Exchange rules.
(2) The Regulatory Contract must require the Exchange to provide
the non-affiliated SRO with information, in an easily accessible
manner, regarding all exception reports, alerts, complaints, trading
errors, cancellations, investigations, and enforcement matters
(collectively ``Exceptions'') in which BATS Trading is identified as a
participant that has potentially violated Exchange or Commission Rules,
and requires that the non-affiliated SRO provide a report, at least
quarterly, to the Exchange quantifying all Exceptions in which BATS
Trading is identified as a participant that has potentially violated
Exchange or Commission rules.
(3) The Exchange, on behalf of its parent company, must establish
and maintain procedures and internal controls reasonably designed to
ensure that BATS Trading does not develop or implement changes to its
system based on non-public information obtained as a result of its
affiliation with the Exchange, until such information is available
generally to similarly situated Members of the Exchange.
[[Page 75595]]
(4) The Exchange may furnish to BATS Trading only the same
information and on the same terms as the Exchange makes available in
the normal course of business to other users.\82\
---------------------------------------------------------------------------
\82\ See Securities Exchange Act Release No. 66572 (March 12,
2012), 77 FR 15152 (March 14, 2012) (SR-BYX-2012-006).
---------------------------------------------------------------------------
Similar to the role of BATS Trading with respect to the BATS
Exchanges, the Exchange understands that DE Route provides members of
the DE Exchanges with optional routing services to other market
centers, which may include routing from a DE Exchange to the Exchange.
Following the Combination, it is expected that DE Route will continue
to provide these routing services, which may involve routing to the
Exchange. Because, following the Combination, DE Route will be
affiliated with and potentially routing to the Exchange, the Exchange
believes that the potential conflict of interest currently addressed by
Exchange Rule 2.12 with respect to BATS Trading must also be addressed
with respect to DE Route.
The Exchange is therefore proposing to amend and expand Exchange
Rule 2.12 such that substantially the same conditions and limitations
that currently apply to the inbound routing of orders by BATS Trading
apply to the inbound routing of orders by DE Route. The proposed
amendments to Exchange Rule 2.12, as set forth in Exhibit 5H, would
provide that, in order for the Exchange to accept inbound routed orders
from DE Route, the conditions and limitations currently set forth in
Exchange Rule 2.12 with respect to BATS Trading must also be satisfied
with respect to DE Route.
The Exchange believes that these proposed amendments will
adequately manage the potential for a conflict of interest that could
arise from DE Route routing orders to the Exchange. The Exchange
expects to arrange that these conditions be met prior to the Closing so
as to allow DE Route to continue routing to the Exchange following the
Closing without interruption.\83\
---------------------------------------------------------------------------
\83\ If such conditions and limitations are not satisfied by
Closing, the Exchange will not accept inbound orders from DE Route
until such conditions and limitations are satisfied.
---------------------------------------------------------------------------
In addition, the language in Exchange Rule 2.12 leading into the
four conditions described above incorrectly refers to the conditions
being undertaken by ``each of the Exchange and BATS Trading.'' However,
by their terms, the conditions contained in Exchange Rule 2.12 are
undertaken only by the Exchange and, in one case, the Exchange on
behalf of its parent company. The Exchange therefore proposes to delete
the incorrect reference to BATS Trading.
10. Exchange Rule 2.10--Affiliation With DE Route
Exchange Rule 2.10 provides that, subject to certain exceptions,
without the prior approval of the Commission, (i) the Exchange or any
entity with which the Exchange is affiliated (as defined in Rule 12b-2
under the Act), may not directly or indirectly acquire or maintain an
ownership interest in a Member of the Exchange, and (ii) a Member of
the Exchange may not be or become an affiliate of the Exchange, or an
affiliate of any affiliate of the Exchange.
DE Route is currently a Member of the Exchange. As a result of the
Combination, (i) New BGM, an entity affiliated with the Exchange, will
acquire and maintain an indirect ownership interest in DE Route, and
(ii) DE Route will become an affiliate of the Exchange. Pursuant to
Exchange Rule 2.10, the Exchange is seeking the Commission's prior
approval to permit this affiliation.
The Exchange notes that the purpose of Exchange Rule 2.10 is to
prevent or manage potential conflicts of interest that could arise from
the Exchange or its affiliates having an ownership interest in an
Exchange Member, particularly with respect to the Exchange's obligation
under Section 19(g) of the Act to enforce its Members' compliance with
the Act, the Commission's rules thereunder, and Exchange Rules.\84\
---------------------------------------------------------------------------
\84\ 15 U.S.C. 78s(g).
---------------------------------------------------------------------------
The Exchange believes that it should be permitted to become
affiliated with DE Route, notwithstanding DE Route's Exchange
membership. As described above, as a result of the proposed amendments
to Exchange Rule 2.12, the Exchange intends on addressing the potential
conflicts of interests arising from its expected affiliation with DE
Route by, among other things, entering into (i) a plan pursuant to Rule
17d-2 under the Act with a non-affiliated SRO to relieve the Exchange
of regulatory responsibilities for DE Route with respect to rules that
are common rules between the Exchange and the non-affiliated SRO, and
(ii) a Regulatory Contract with a non-affiliated SRO to perform
regulatory responsibilities for DE Route for unique Exchange rules. The
Exchange believes that any potential conflict of interest that would
arise as a result of its affiliation with DE Route will be mitigated by
the same procedures that the Exchange anticipates adopting to satisfy
the proposed amendments to Exchange Rule 2.12. The Exchange therefore
requests that, pursuant to Exchange Rule 2.10, the Commission approve
the indirect acquisition of DE Route by an affiliate of the Exchange
and the resulting affiliation between the Exchange and DE Route, so
long as the requirements under Exchange Rule 2.12, as proposed to be
amended, are satisfied.
2. Statutory Basis
The Exchange believes that the Proposed Rule Change is consistent
with the requirements of the Act and the rules and regulations
thereunder that are applicable to a national securities exchange, and,
in particular, with the requirements of Section 6(b) of the Act.\85\ In
particular, the proposal is consistent with Section 6(b)(1) of the Act
\86\ in that it enables the Exchange to be so organized as to have the
capacity to be able to carry out the purposes of the Act and to comply,
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 Proposed Rule Change is
designed to enable the Exchange to continue to have the authority and
ability to effectively fulfill its self-regulatory duties pursuant to
the Act and the rules promulgated thereunder. In particular, the
Proposed Rule Change includes in the New BGM Charter and New BGM
Bylaws, like the Current BGM Charter and Current BGM Bylaws, various
provisions intended to protect and maintain the integrity of the self-
regulatory functions of the Exchange upon Closing. For example, the New
BGM Bylaws, as described above, are drafted to preserve the
independence of the Exchange's self-regulatory function and ensure that
the Exchange is able to obtain information it needs from the specified
parties to detect and deter any fraudulent and manipulative acts in its
marketplace and carry out their regulatory responsibilities under the
Act. In addition, the New BGM Charter and New BGM Bylaws are drafted to
make sure that the Exchange's Board of Directors receives notice of any
amendment to the New BGM Charter and New BGM Bylaws so that the
Exchange's Board of Directors may review and approve, and the Exchange
may make any filings with the Commission necessary for the Exchange to
fulfill its regulatory duties under the Act. The New BGM Charter also
imposes the BGM Ownership Limitation
[[Page 75596]]
and BGM Voting Limitation to preclude undue influence over or
interference with the Exchange's self-regulatory functions and
fulfillment of its regulatory duties under the Act.
---------------------------------------------------------------------------
\85\ 15 U.S.C. 78f(b).
\86\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------
Moreover, notwithstanding the Proposed Rule Change, including the
change to the ownership structure of the Exchange, the Commission will
continue to have regulatory authority over the Exchange, as is
currently the case, as well as jurisdiction over the Exchange's direct
and indirect parents with respect to activities related to the
Exchange.\87\ As a result, the Proposed Rule Change will facilitate an
ownership structure that will provide the Commission with appropriate
oversight tools to ensure that the Commission will have the ability to
enforce the Act with respect to the Exchange, its direct and indirect
parent entities and their directors, officers, employees and agents to
the extent they are involved in the activities of the Exchange.
---------------------------------------------------------------------------
\87\ See, e.g., New BGM Bylaws, Section 14.05; BGM Holdings
Bylaws, Section 7.3.
---------------------------------------------------------------------------
The Exchange also believes that the Proposed Rule Change furthers
the objectives of Section 6(b)(5) of the Act \88\ because the Proposed
Rule Change would be consistent with and facilitate a governance and
regulatory structure that is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to, and perfect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest.
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\88\ 15 U.S.C. 78f(b)(5).
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In addition, the Exchange expects that the Combination will
facilitate efficiencies and innovation for clients and efficient,
transparent and well-regulated markets for issuers and clients, thus
removing impediments to, and perfecting the mechanism of a free and
open market and a national market system. The Combination will benefit
investors, the market as a whole, and shareholders by, among other
things, enhancing competition among securities venues and reducing
costs. In particular, the Combination will result in a third major
exchange operator which will have more streamlined and efficient
operations, including the transition of the DE Exchanges to a
technology platform in common with the BATS Exchanges, thereby
intensifying competition for transaction order flow with other exchange
and non-exchange trading centers, as well as potentially in other areas
where the two major exchange operators lead, such as proprietary market
data products and listings. This enhanced level of competition among
trading centers will benefit investors through new or more competitive
product offerings and, ultimately, lower costs.
Furthermore, the Exchange is not proposing any significant changes
to its existing operational and trading structure in connection with
the change in ownership; the Exchange will operate in essentially the
same manner upon Closing as it operates today. Therefore, the Exchange
believes that it will continue to satisfy the requirements of the Act
and the rules and regulations thereunder that are applicable to a
national securities exchange. The changes the Exchange is proposing to
Exchange Rules 2.3 are designed to extend the membership eligibility
criteria in a way that is consistent with the current rule, taking into
account the prospective affiliation with the DE Exchanges. The proposed
change to Exchange Rule 2.12 is designed to address the potential for
conflicts of interest due to the prospective affiliation between the
Exchange and DE Route. The Exchange believes that the proposed change
to its Rules is consistent with the requirements of the Act and the
rules and regulations thereunder. The Exchange believes that the rule
change promotes the maintenance of a fair and orderly market, the
protection of investors and the public interest, and is in the best
interests of the Exchange and its Members as it would continue to allow
routing of orders between the four affiliated exchanges.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the Proposed Rule Change would
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. Indeed, the
Exchange believes that the Proposed Rule Change will enhance
competition among intermarket trading venues, as the Exchange believes
that the Combination will produce a stronger and more efficient entity
that will have an improved ability to provide innovative products and
services. Moreover, the Exchange will continue to conduct regulated
activities (including operating and regulating its market and Members)
of the type it currently conducts, but will be able to do so in a more
efficient manner to the benefit of its Members. Furthermore, the
Exchange's conclusion that the Proposed Rule Change would not result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act is consistent with the
Commission's prior conclusions about similar combinations involving
multiple exchanges in a single corporate family.\89\
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\89\ See, e.g., Securities Exchange Act Release No. 66071
(December 29, 2011), 77 FR 521 (January 05, 2012) (SR-CBOE-2011-107
and SR-NSX-2011-14); Securities Exchange Act Release No. 58324 (Aug.
7, 2008), 73 FR 46936 (August 12, 2008) (SR-BSE-2008-02; SR-BSE-
2008-23; SR-BSE-2008-25; SR-BSECC-2008-01); Securities Exchange Act
Release No. 53382 (Feb. 27, 2006), 71 FR 11251 (March 06, 2006) (SR-
NYSE-2005-77).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-BYX-2013-039 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
[[Page 75597]]
All submissions should refer to File Number SR-BYX-2013-039. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-BYX-2013-039, and should be
submitted on or before January 2, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\90\
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\90\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-29623 Filed 12-11-13; 8:45 am]
BILLING CODE 8011-01-P
