Self-Regulatory Organizations; EDGA Exchange, Inc.; EDGX Exchange, Inc.; Order Granting Approval of Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, in Connection With the Proposed Business Combination Involving BATS Global Markets, Inc. and Direct Edge Holdings LLC, 6961-6970 [2014-02382]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 24 (Wednesday, February 5, 2014)]
[Notices]
[Pages 6961-6970]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-02382]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71449; File Nos. SR-EDGA-2013-34; SR-EDGX-2013-43]


Self-Regulatory Organizations; EDGA Exchange, Inc.; EDGX 
Exchange, Inc.; Order Granting Approval of Proposed Rule Change, as 
Modified by Amendment Nos. 1 and 2, in Connection With the Proposed 
Business Combination Involving BATS Global Markets, Inc. and Direct 
Edge Holdings LLC

January 30, 2014.

I. Introduction

    On November 29, 2013, EDGA Exchange, Inc. (``EDGA'') and EDGX 
Exchange, Inc. (``EDGX'' and, together with EDGA, the ``DE Exchanges'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 1934 
(``Act''),\2\ and Rule 19b-4 thereunder,\3\ proposed rule changes in 
connection with the proposed business combination (``Combination'') of 
their indirect parent company, Direct Edge Holdings LLC (``DE 
Holdings''), and BATS Global Markets, Inc., the parent company of BATS 
Exchange, Inc. (``BATS'') and BATS-Y Exchange, Inc. (``BYX'' and, 
together with BATS, the ``BATS Exchanges'') (the DE Exchanges and the 
BATS Exchanges are the ``Exchanges'').\4\ On December 9, 2013, EDGA and 
EDGX each filed an Amendment No. 1 to their respective proposed rule 
changes. The proposed rule changes, as modified by Amendment No. 1, 
were published for comment in the Federal Register on December 17, 
2013.\5\ The Commission received no comments on the proposal. On 
January 29, 2014, EDGA and EDGX each filed an Amendment No. 2 to their 
respective proposed rule changes.\6\ This Order approves the proposed 
rule changes, as modified by Amendment Nos. 1 and 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ The Commission approved corresponding proposed rule changes 
submitted by the BATS Exchanges relating to the Combination. See 
Securities Exchange Act Release No. 71375 (January 23, 2014), 79 FR 
4771 (January 29, 2014) (approving SR-BATS-2013-059 and SR-BYX-2013-
039) (``BATS Exchanges Approval Order'').
    \5\ See Securities Exchange Act Release Nos. 71046 (December 11, 
2013), 78 FR 76416 (SR-EDGA-2013-34) and 71045 (December 11, 2013) 
78 FR 76480 (SR-EDGX-2013-43) (``Notices'').
    \6\ Amendment No. 2 makes technical amendments to language in 
the DEI Certificate of Incorporation (as defined below) and the DE 
Exchange Certificate of Incorporation (as defined below) based on 
comments from the State of Delaware, Department of State, Division 
of Corporations. Specifically, these comments are to: (1) Add 
references to certain applicable Delaware General Corporations Law 
sections in the DEI Certificate of Incorporation, (2) add the state 
and zip code for DEI's registered office, and (3) add several 
introductory paragraphs describing the Delaware filing history of 
the DE Exchanges Certificate of Incorporation. Amendment No. 2 is 
not subject to notice and comment because it is a technical 
amendment that does not materially alter the substance of the 
proposed rule change or raise any novel regulatory issues.
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    The Commission has reviewed carefully the proposed rule changes and 
finds that the proposed rule changes are consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\7\ In particular, the 
Commission finds that the proposed rule changes are consistent with

[[Page 6962]]

Sections 6(b)(1) and (3) of the Act,\8\ which, among other things, 
requires a national securities exchange to be so organized and have the 
capacity to be able to carry out the purposes of the Act, and to 
enforce compliance by its members and persons associated with its 
members with the provisions of the Act, the rules and regulations 
thereunder, and the rules of the exchange, and assure the fair 
representation of its members in the selection of its directors and 
administration of its affairs, and provide that one or more directors 
shall be representative of issuers and investors and not be associated 
with a member of the exchange, broker, or dealer. The Commission also 
finds that the proposal is consistent with Section 6(b)(5) of the 
Act,\9\ which requires that the rules of the exchange be designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.
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    \7\ In approving the proposed rule changes, the Commission has 
considered their impact on efficiency, competition and capital 
formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(1) and (b)(3).
    \9\ 15 U.S.C. 78f(b)(5).
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II. Discussion

A. Corporate Structure

1. Current Structure
    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 of 
each DE Exchange. 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 \10\ or affiliates of Members of the 
Exchange. 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.\11\ 
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.
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    \10\ With respect to each of the DE Exchanges, the term 
``Member'' is defined in Rule 1.5(n) of the DE Exchanges' Rules as 
``any registered broker or dealer, or any person associated with a 
registered broker or dealer, that has been admitted to membership in 
the Exchange.''
    \11\ For purposes of this Order, references to the beneficial 
ownership of a ``firm'' refers to the aggregate beneficial ownership 
of the firm and its affiliated entities. See Notices, supra note 5, 
at 76417 n.13 and 76481 n.13.
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    BATS Global Markets, Inc., a Delaware corporation, owns 100 percent 
of the equity interests in two registered national securities 
exchanges, BATS and BYX, each a Delaware corporation. BATS Global 
Markets, Inc. 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 of 
the BATS Exchanges. Currently, BATS Global Markets, Inc. is 
beneficially owned primarily by a consortium of several unaffiliated 
firms, including Members \12\ or affiliates of Members of the BATS 
Exchanges. No firm beneficially owns 20 percent or greater of BATS 
Global Markets, Inc., and the only firms beneficially owning ten 
percent or greater of BATS Global Markets, Inc. are: (1) GETCO 
Investments, LLC, an affiliate of KCG Holdings, Inc., (2) 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 (3) Strategic Investments I, Inc., an affiliate 
of Morgan Stanley. Seven other firms each beneficially own five percent 
or greater, but less than ten percent of BATS Global Markets, Inc., 
while seven other firms as well as various individuals each 
beneficially own less than five percent of BATS Global Markets, Inc.
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    \12\ With respect to each of the BATS Exchanges, the term 
``Member'' is defined in Rule 1.5(n) of the BATS Exchanges' Rules as 
``any registered broker or dealer that has been admitted to 
membership in the Exchange.''
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2. The Combination
    In connection with the Combination, several new entities were 
formed. BATS Global Markets Holdings, Inc., a Delaware corporation, is 
currently a wholly owned subsidiary of BATS Global Markets, Inc., and 
is currently a shell company with no material assets or operations. 
BATS Global Markets Holdings, Inc., 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.
    As described in more detail below, at the closing of the 
Combination (``Closing''), BATS Global Markets, Inc. and DE Holdings 
will each become intermediate holding companies, held under a single 
new holding company upon the Closing. 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 BATS Exchanges, BATS Global Markets, 
Inc., will at that time change its name to ``BATS Global Markets 
Holdings, Inc.'' For ease of reference, this Order will refer to the 
current parent company of each BATS 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.''
    At the Closing, among other things, (1) Blue Merger Sub will merge 
with and into Current BGM, whereupon the separate existence of Blue 
Merger Sub will cease and Current BGM (to be renamed ``BGM Holdings'') 
will be the surviving company (the ``BATS Merger''); (2) Delta Merger 
Sub will merge 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''); (3) 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 (4) 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

[[Page 6963]]

unit of ownership of DE Holdings, such that DE Holdings will become a 
wholly owned subsidiary of New BGM.
    As a result of the Combination, New BGM will own: (1) 100 percent 
of the equity interest in BGM Holdings (the entity previously referred 
to as Current BGM), and (2) 100 percent of the LLC membership interests 
in DE Holdings. BGM Holdings will continue to own 100 percent of the 
equity interest in the BATS Exchanges and BATS Trading. DE Holdings 
will continue to own 100 percent of the equity interest in DE Route and 
DEI. DEI will, in turn, continue to own 100 percent of the equity 
interest in the DE Exchanges. 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.
    The ownership of New BGM, as the new top-level holding company for 
the combined businesses, will be 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.\13\
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    \13\ 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 New BGM Charter (as defined 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 proposed New BGM Charter, 
Article FOURTH, para. (b)(ii). ISE Holdings' shares of Class A Non-
Voting Common Stock may convert to Voting Common Stock: (1) 
Automatically with respect to any shares transferred to persons 
other than Related Persons of ISE Holdings; (2) upon the termination 
of the Investor Rights Agreement; and (3) 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 
proposed New BGM Charter, Article FOURTH, para. (c); and Investor 
Rights Agreement, Section 2.2(j).
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B. Proposed Rule Changes

    Section 19(b) of the Act and Rule 19b-4 thereunder require a self-
regulatory organization (``SRO'') to file proposed rule changes with 
the Commission. Although New BGM,\14\ DE Holdings, and DEI are not 
SROs, certain provisions of their proposed certificates of 
incorporation and bylaws, along with other corporate documents, are 
rules of the exchange, if they are stated policies, practices, or 
interpretations, as defined in Rule 19b-4 under the Act, and must be 
filed with the Commission pursuant to Section 19(b)(4) of the Act and 
Rule 19b-4 thereunder. Accordingly, each of the DE Exchanges filed with 
the Commission the following documents, along with other corporate 
documents, in connection with the Combination: (1) The proposed 
Resolutions of the DE Holdings board of managers regarding the 
Combination (the ``Resolutions'') making certain determinations 
regarding New BGM and the impact of the Combination on the DE 
Exchanges; (2) the proposed Amended and Restated Certificate of 
Incorporation of New BGM (the ``New BGM Charter''); \15\ (3) the 
proposed Amended and Restated Bylaws of New BGM (the ``New BGM 
Bylaws''); \16\ (4) the proposed Seventh Amended and Restated Limited 
Liability Company Operating Agreement of Direct Edge Holdings LLC (the 
``New DE Holdings LLC Agreement''); (5) the proposed amendments to the 
DEI Certificate of Incorporation (the ``DEI Certificate of 
Incorporation''); (6) the proposed amendments to the Bylaws of DEI (the 
``DEI Bylaws''); (7) the proposed amendments to the Certificate of 
Incorporation of the DE Exchanges (each, and collectively, the ``DE 
Exchange Certificate of Incorporation''); (8) the proposed amendments 
to the Bylaws of the DE Exchanges (each, and collectively, the ``DE 
Exchange Bylaws''); (9) the proposed amendments to Rule 2.3 of each of 
the DE Exchanges to reflect the affiliation between each DE Exchange 
and two additional registered national securities exchanges; (10) the 
proposed amendments to Rule 2.10 of each of the DE Exchanges to reflect 
the new affiliated entities of each DE Exchange; and (11) the proposed 
amendments to Rule 2.12 of each of the DE Exchanges to reflect the 
affiliation between the DE Exchanges and the routing broker for BATS 
and BYX. Each of the DE Exchanges also requested that the Commission 
approve the proposed indirect acquisition by an affiliate of the DE 
Exchanges of a Member of the DE Exchanges and the resulting affiliation 
between the DE Exchanges and the Member of the DE Exchanges, as 
required under Exchange Rule 2.10.\17\
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    \14\ The DE Exchanges are filing with the Commission the New BGM 
Charter and New BGM Bylaws because, as noted above, after the 
Combination, New BGM will be the ultimate parent company of the DE 
Exchanges, and, as such, the New BGM Charter and New BGM Bylaws will 
be considered rules of the Exchange under Section 19(b)(1) of the 
Act.
    \15\ The DE Exchanges note that the New BGM Charter is 
substantially similar to the Current BGM Charter. See Notices, supra 
note 5, at 76420 and 76484.
    \16\ The DE Exchanges note that the New BGM Charter is 
substantially similar to the Current BGM Charter. See Notices, supra 
note 5, at 76420 and 76484.
    \17\ See Notices, supra note 5, at 76440 and 76504.
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1. Voting and Ownership Limitations
    The New BGM Charter includes restrictions on the ability to own and 
vote shares of capital stock of New BGM.\18\ These limitations are 
designed to prevent any stockholder from exercising undue control over 
the operation of any of the BATS Exchanges or the DE Exchanges and to 
assure that the BATS Exchanges, the DE Exchanges, and the Commission 
are able to carry out their regulatory obligations under the Act.
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    \18\ These provisions are generally consistent with ownership 
and voting limits approved by the Commission for other SROs. See 
e.g., Securities Exchange Act Release Nos. 70210 (August 15, 2013), 
78 FR 51758 (August 21, 2013) (SR-NYSE-2013-42, SR-NYSEMKT-2013-50 
and SR-NYSEArca-2013-62) (order approving proposed transaction in 
which NYSE Euronext will become a wholly owned subsidiary of 
IntercontinentalExchange Group, Inc.) (``IntercontinentalExchange 
Group, Inc. Combination Order''); 62716 (August 13, 2010), 75 FR 
51295 (August 19, 2010) (File No. 10-198) (order approving 
registration application of BYX as a national securities exchange) 
(``BYX Approval Order); 61698 (March 12, 2010), 75 FR 13151 (March 
18, 2010) (File Nos. 10-194 and 10-196) (order approving 
registration application of EDGX Exchange, Inc. and EDGA Exchange, 
Inc.) (``EDGX and EDGA Approval Order''); 58375 (August 18, 2008), 
73 FR 49498 (August 21, 2008) (File No. 10-182) (order approving 
registration of BATS as a national securities exchange) (``BATS 
Approval Order''); 55293 (February 14, 2007), 72 FR 8033 (February 
22, 2007) (SR-NYSE-2006-120) (order approving proposed combination 
between NYSE Group, Inc. and Euronext N.V.) (``NYSE-Euronext Merger 
Order''); 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) 
(SR-NYSE-2005-77) (order approving merger of New York Stock 
Exchange, Inc. and Archipelago, and demutualization of New York 
Stock Exchange, Inc.) (``NYSE Inc.-Archipelago Merger Order''); 
53963 (June 8, 2006), 71 FR 34660 (June 15, 2006) (File No. SR-NSX-
2006-03) (``NSX Demutualization Order''); 53128 (January 13, 2006), 
71 FR 3550 (File No. 10-131) (order approving registration 
application of NASDAQ as a national securities exchange) (``NASDAQ 
Approval Order''); 51149 (February 8, 2005), 70 FR 7531 (February 
14, 2005) (SR-CHX-2004-26) (``CHX Demutualization Order''); and 
49098 (January 16, 2004), 69 FR 3974 (January 27, 2004) (SR-Phlx-
2003-73) (``Phlx Demutualization Order'').
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    Specifically, the proposed New BGM Charter includes restrictions on 
the ability to vote and own shares of stock of New BGM. Under the 
proposed New BGM Charter: (1) No person, either alone or together with 
its Related

[[Page 6964]]

Persons,\19\ at any time may, directly, indirectly or pursuant to any 
voting trust, agreement, plan or other arrangement (other than the 
Investor Rights Agreement), vote or cause the voting of shares of the 
capital stock of New BGM 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,\20\ and (2) no 
person, either alone or together with its Related Persons, enter into 
any agreement, plan or other arrangement (other than the Investor 
Rights Agreement) with any other Person,\21\ either alone or together 
with its Related Persons, under circumstances that would result in the 
shares of capital stock of New BGM that are subject to such agreement, 
plan or other arrangement not being voted on any matter or matters or 
any proxy relating thereto being withheld, where the effect of such 
agreement, plan or other arrangement would be to enable any Person, 
either alone or together with its Related Persons, to vote, possess the 
right to vote or cause the voting of shares of the capital stock of New 
BGM that would represent more than 20 percent of said voting power (the 
``New BGM Voting Restrictions'').\22\
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    \19\ See proposed New BGM Charter, Article FIFTH, para. (a)(ii) 
(defining ``Related Person''). See Notices, supra note 5, at 76420-
21 and 76484-85.
    \20\ See proposed New BGM Charter, Article FIFTH, para. 
(b)(i)(C).
    \21\ See id. at Article FIFTH, para. (a)(i) (defining 
``Person'').
    \22\ See id. at Article FIFTH, para. (b)(i)(C).
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    In addition, the New BGM Charter includes ownership restrictions 
that provide that: (1) No Person, either alone or together with its 
Related Persons, may own, directly or indirectly, of record or 
beneficially, shares constituting more than 40 percent of any class of 
capital stock of New BGM, and (2) no Member of any of the BATS 
Exchanges or the DE Exchanges, 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 
capital stock of New BGM (the ``New BGM Ownership Restrictions'').\23\
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    \23\ See id. at Article FIFTH, paras. (b)(i)(A) and (B). The 
limitations imposed by the New BGM Ownership Restrictions and New 
BGM Voting Restrictions shall not apply in the case of any class of 
stock that does not have the right to vote in the election of 
members of the board of directors of New BGM or on other matters 
that may require the approval of the holders of voting shares of New 
BGM (other than matters affecting the rights, preferences or 
privileges of said class of stock). See id. at Article FIFTH, para. 
(b)(ii)(A).
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    If any stockholder purports to transfer to any person any shares 
that would violate the New BGM Voting Restrictions or New BGM Ownership 
Restrictions (``New BGM Voting and Ownership Restrictions''), then New 
BGM shall record on the books only that number of shares that would not 
violate that restriction and shall treat the remaining shares as owned 
by the purported transferor for all purposes.\24\ If any stockholder of 
New BGM purports to vote, or grant any proxy or enter into any 
agreement, plan or other arrangement relating to the voting of shares 
that would violate the New BGM Voting and Ownership Restrictions, then 
New BGM shall not honor such vote, proxy, agreement, plan or other 
arrangement to the extent that such provisions would be violated and 
any shares subject to that arrangement shall not be entitled to vote to 
the extent of such violation.\25\
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    \24\ See id. at Article FIFTH, para. (d).
    \25\ Id. If any stockholder purports to sell, transfer, assign, 
convert, pledge, or own any shares in violation of the New BGM 
Voting and Ownership Restrictions, then New BGM shall have the right 
to, and shall promptly after confirming such violation and to the 
extent funds are legally available, redeem the shares transferred in 
violation of the restriction. See id. at Article FIFTH, para. (e).
---------------------------------------------------------------------------

    The New BGM Charter would provide that the New BGM Voting and 
Ownership Restrictions would apply only for so long as New BGM directly 
or indirectly controls a national securities exchange registered under 
Section 6 of the Act with the Commission.\26\
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    \26\ See id. at Article FIFTH, para. (b)(i).
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    The New BGM board of directors may waive the New BGM Ownership 
Restrictions applicable to non-Member stockholders and the New BGM 
Voting Restrictions, if, in connection with taking such action, the 
board of directors adopts a resolution stating that the waiver:

     Will not impair the ability of any exchange subsidiary 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 New BGM, its 
stockholders and its exchange subsidiaries; and
     will not impair the Commission's ability to enforce the 
Act or the rules and regulations promulgated thereunder.\27\
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    \27\ See id. at Article FIFTH, para. (b)(ii)(B). In making this 
determination, the BGM board of directors may impose on the Person 
in question and its Related Persons such conditions and restrictions 
that it may in its sole discretion deem necessary, appropriate or 
desirable in furtherance of the objectives of the Act and the 
governance of the applicable exchange subsidiary. Id.

Any such waiver would not be effective until approved by the Commission 
pursuant to Section 19 of the Act.\28\ However, the New BGM board of 
directors cannot waive the voting and ownership limits above 20 percent 
for a Member of any of the BATS Exchanges or any of the DE Exchanges 
and their Related Persons.\29\ Further, the New BGM board of directors 
also cannot waive the voting and ownership limits above the 20% 
threshold if such person or its Related Persons is subject to any 
statutory disqualification (as defined in Section 3(a)(39) of the 
Act).\30\
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    \28\ See id. at Article FIFTH, para. (b)(ii)(B).
    \29\ See id. at Article FIFTH, paras. (b)(i)(B) and (b)(ii)(B).
    \30\ See id. at Article FIFTH, para.(b)(iii).
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    Members that trade on an exchange traditionally have had ownership 
interests in such exchange. As the Commission has noted in the past, 
however, a member's interest in an exchange could become so large as to 
cast doubt on whether the exchange can fairly and objectively exercise 
its self-regulatory responsibilities with respect to that member.\31\ A 
member that is a controlling shareholder of an exchange might be 
tempted to exercise that controlling influence by directing the 
exchange to refrain from, or the exchange may hesitate to, diligently 
monitor and surveil the member's conduct or diligently enforce its 
rules and the federal securities laws with respect to conduct by the 
member that violates such provisions.\32\
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    \31\ See, e.g., IntercontinentalExchange Group, Inc. Combination 
Order; BYX Approval Order; EDGX and EDGA Approval Order; BATS 
Approval Order; NYSE-Euronext Merger Order; NYSE Inc.-Archipelago 
Merger Order; NSX Demutualization Order; NASDAQ Approval Order; CHX 
Demutualization Order; and Phlx Demutualization Order, supra note 
18.
    \32\ See, e.g., id.
---------------------------------------------------------------------------

    In addition, as proposed, DE Holdings will be a wholly-owned 
subsidiary of New BGM and the New DE Holdings LLC Agreement identifies 
this ownership structure.\33\ Any changes to the New DE Holdings LLC 
Agreement, including any change in the provision that identifies New 
BGM as the sole member of DE Holdings, must be filed with and approved 
by the Commission pursuant to Section 19 of the Act.\34\ Similarly, as 
proposed, DEI will be a wholly owned subsidiary of DE Holdings, and in 
turn, each of the DE Exchanges will be a wholly-owned subsidiary of 
DEI. The Certificate of Incorporation of DEI identifies DE Holdings as 
the sole stockholder of

[[Page 6965]]

DEI.\35\ The Bylaws of the DE Exchanges identify DEI as the sole 
stockholder of the DE Exchanges.\36\ Any changes to the DEI Certificate 
of Incorporation, including any change in the provision that identifies 
DE Holdings as the sole stockholder of DEI, must be filed with and 
approved by the Commission pursuant to Section 19 of the Act.\37\ 
Similarly, any changes to the Bylaws of the DE Exchanges, including any 
change in the provision that identifies DEI as the sole stockholder of 
the DE Exchanges, must be filed with and approved by the Commission 
pursuant to Section 19 of the Act.\38\ Further, pursuant to the New DE 
Holdings LLC Agreement, New BGM may not sell, assign, transfer, convey, 
gift, exchange or otherwise dispose of any or all of its interest in DE 
Holdings except pursuant to an amendment to the New DE Holdings LLC 
Agreement, which would not be effective until filed with and approved 
by the Commission under Section 19 of the Exchange Act.\39\ Similarly, 
pursuant to the DE Exchange Bylaws, DEI may not transfer or assign, in 
whole or in part, its ownership interest in each DE Exchange.\40\
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    \33\ See proposed New DE Holdings LLC Agreement (identifying New 
BGM as the sole LLC Member of the company).
    \34\ See id. at Article XII, Section 12.02(b) and 15 U.S.C. 
78s(b).
    \35\ See proposed DEI Certificate of Incorporation, Article 
SEVENTH, para. 4.
    \36\ See proposed DE Exchange Bylaws, Article I(cc).
    \37\ See proposed DEI Certificate of Incorporation, Article 
SEVENTH, para.3.
    \38\ 15 U.S.C. 78s(b).
    \39\ See proposed New DE Holdings LLC Agreement, Article VII.
    \40\ See proposed DE Exchange Bylaws, Article IV, Section 7.
---------------------------------------------------------------------------

    The Commission believes that these provisions are consistent with 
the Act. These requirements should minimize the potential that a person 
could improperly interfere with or restrict the ability of the 
Commission or the Exchange to effectively carry out their regulatory 
oversight responsibilities under the Act.
2. Jurisdiction; Books and Records; Due Regard
    As described above, following the Closing, New BGM will be the sole 
LLC Member of DE Holdings, DE Holdings will be the sole stockholder of 
DEI, and DEI will be the sole stockholder of the DE Exchanges. Although 
New BGM, DE Holdings and DEI will not carry out any regulatory 
functions, their activities with respect to the operation of the DE 
Exchanges must be consistent with, and must not interfere with, the 
self-regulatory obligations of each DE Exchange. The New BGM Charter, 
New BGM Bylaws, New DE Holdings LLC Agreement and DEI Bylaws therefore 
include certain provisions that are designed to maintain the 
independence of the DE Exchanges' \41\ self-regulatory functions, 
enable the DE Exchanges to operate in a manner that complies with the 
federal securities laws, including the objectives of Sections 6(b) \42\ 
and 19(g) \43\ of the Act, and facilitate the ability of the DE 
Exchanges and the Commission to fulfill their regulatory and oversight 
obligations under the Act.\44\
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    \41\ The provisions in the New BGM Holdings Charter applies to 
``Exchange Subsidiaries,'' which is defined as any direct or 
indirect subsidiary of New BGM that is a registered with the 
Commission as a national securities exchange as provided in Section 
6 of the Act. The DE Exchanges, as well as the BATS Exchanges, will 
be Exchange Subsidiaries upon the Closing of the Combination.
    \42\ 15 U.S.C. 78f(b).
    \43\ 15 U.S.C. 78s(g).
    \44\ See e.g., proposed New BGM Bylaws, Article XIV; proposed 
New DE Holdings LLC Agreement, Articles X and XI; and proposed DEI 
Bylaws, Article VII.
---------------------------------------------------------------------------

    For example, under the New BGM Bylaws, New DE Holdings LLC 
Agreement and DEI Bylaws, for so long as New BGM, DE Holdings or DEI, 
as the case may be, directly or indirectly, controls either or both of 
the DE Exchanges, the board of directors (or sole LLC Member in the 
case of DE Holdings), officers, employees and agents of each of New 
BGM, DE Holdings and DEI, must give due regard to the preservation of 
independence of the self-regulatory functions of the DE Exchanges, as 
well as to its obligations to investors and the general public and 
shall not take any actions that would interfere with the effectuation 
of any decisions by either of the boards of directors of the DE 
Exchanges 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.\45\ The New BGM Bylaws, 
New DE Holdings LLC Agreement, and DEI Bylaws would further require 
that New BGM, DE Holdings or DEI, as the case may be, comply with the 
United States federal securities laws and rules and regulations 
thereunder and shall cooperate with the Commission and each of the DE 
Exchanges, pursuant to and to the extent of their respective regulatory 
authority.\46\ In addition, the New BGM Bylaws, New DE Holdings LLC 
Agreement, and DEI Bylaws provide that the officers, directors,\47\ 
employees and agents of New BGM, DE Holdings and DEI, as the case may 
be, by virtue of the acceptance of their position, shall be deemed to 
agree to: (1) Comply with the U.S. federal securities laws and the 
rules and regulations thereunder; and (2) to cooperate with the 
Commission and the DE Exchanges in respect of the Commission's 
oversight responsibilities regarding the DE Exchanges and the self-
regulatory functions and responsibilities of the DE Exchanges, and New 
BGM, DE Holdings and DEI will take reasonable steps to cause its 
officers, directors, employees and agents to so cooperate.\48\ 
Furthermore, New BGM, DE Holdings and DEI and their respective 
officers, directors, employees and agents will be deemed to irrevocably 
submit to the jurisdiction of the U.S. federal courts, the Commission, 
and each DE 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.\49\
---------------------------------------------------------------------------

    \45\ See proposed New BGM Bylaws, Article XIV, Section 14.01; 
proposed New DE Holdings LLC Agreement, Article X, Section 10.01; 
and proposed DEI Bylaws Article VII, Section 7.1.
    \46\ See proposed New BGM Bylaws, Article XIV, Section 14.01; 
proposed New DE Holdings LLC Agreement, Article X, Section 10.02(a); 
and proposed DEI Bylaws, Article VII, Section 7.2.
    \47\ The Commission notes that DE Holdings does not have a board 
of directors. Therefore, the proposed New DE Holdings LLC Agreement 
does not reference directors in the provisions identified in this 
section. Otherwise, the DE Holdings' provisions identified in this 
section are substantively the same as those in the proposed New BGM 
Bylaws and proposed DEI Bylaws.
    \48\ See proposed New BGM Bylaws, Article XIV, Section 14.04; 
proposed New DE Holdings LLC Agreement, Article X, Section 10.02(a); 
and proposed DEI Bylaws, Article VII, Section 7.2.
    \49\ See proposed New BGM Bylaws, Article XIV, Section 14.05; 
proposed New DE Holdings LLC Agreement, Article X, Section 10.03(a); 
and proposed DEI Bylaws, Article VII, Section 7.3.
---------------------------------------------------------------------------

    The New BGM Bylaws, New DE Holdings LLC Agreement, and DEI Bylaws 
provide that New BGM, DE Holdings, DEI and their respective officers, 
directors, employees and agents must submit to the Commission's 
jurisdiction with respect to activities relating to any of the DE 
Exchanges,\50\ and, for so long as New BGM, DE Holdings, and/or DEI 
control, directly or indirectly, such DE Exchange, New BGM, DE Holdings 
and DEI, as the case may be, agree to provide the Commission and each 
DE Exchange with access to its books and records that are related to 
the operation or administration of each DE Exchange.\51\ In addition, 
to the extent they are related to the operation or administration of 
the DE Exchanges, the books, records, premises, officers, directors, 
agents, and employees of New BGM, DE Holdings and DEI shall be deemed 
to be the books, records, premises, officers, directors, agents, and

[[Page 6966]]

employees of the respective DE Exchange for purposes of, and subject to 
oversight pursuant to, the Act.\52\ The New BGM Bylaws, New DE Holdings 
LLC Agreement, and DEI Bylaws further provide that all books and 
records of New BGM, DE Holdings and DEI shall be maintained at a 
location within the United States.\53\
---------------------------------------------------------------------------

    \50\ Id.
    \51\ See proposed New BGM Bylaws, Article XIV, Section 14.03; 
proposed New DE Holdings LLC Agreement, Article XI, Section 
11.02(b); and proposed DEI Bylaws, Article V, Section 5.8(b).
    \52\ Id.
    \53\ See proposed New BGM Bylaws, Article XIV, Section 14.03; 
and proposed New DE Holdings LLC Agreement, Article XI, Section 
11.01(b); and proposed DEI Bylaws, Article VII, Section 7.5. See 
also proposed DE Exchange Bylaws, Article XI, Section 3.
---------------------------------------------------------------------------

    The New BGM Bylaws, New DE Holdings LLC Agreement, and DEI Bylaws 
also provide that all books and records of each DE Exchange reflecting 
confidential information pertaining to the self-regulatory function of 
the DE Exchanges (including but not limited to disciplinary matters, 
trading data, trading practices and audit information) that shall come 
into the possession of New BGM, DE Holdings or DEI, as the case may be, 
shall not be made available other than to those officers, directors, 
employees and agents of New BGM, DE Holdings or DEI, as the case may 
be, that have a reasonable need to know the contents thereof, and shall 
be retained in confidence by New BGM, DE Holdings, or DEI, the members 
of their respective board of directors (as applicable), their officers, 
employees and agents, and not used for any non-regulatory purposes.\54\ 
The New BGM Bylaws, New DE Holdings LLC Agreement, and DEI Bylaws, 
however, specify that the New BGM Bylaws, New DE Holdings LLC 
Agreement, and DEI Bylaws (including these confidentiality provisions) 
shall not be interpreted so as to limit or impede the rights of the 
Commission or the DE Exchanges 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, DE Holdings or 
DEI, as the case may be, to disclose such confidential information to 
the Commission or the DE Exchanges.\55\
---------------------------------------------------------------------------

    \54\ See proposed New BGM Bylaws, Article XIV, Section 14.02; 
proposed New DE Holdings LLC Agreement, Article XI, Section 
11.02(a); and DEI Bylaws, Article V, Section 5.8(a).
    \55\ See id.
---------------------------------------------------------------------------

    The New BGM Charter, New DE Holdings LLC Agreement and DEI Bylaws 
provide that, for so long as New BGM, DE Holdings or DEI, as the case 
may be, controls, directly or indirectly, a registered national 
securities exchange, before any amendment to or repeal of any provision 
of the proposed New BGM Charter, New DE Holdings LLC Agreement or DEI 
Bylaws, as the case may be, may be effective, those changes must be 
submitted to the board of directors of each of the DE Exchanges, 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,\56\ such change 
shall not be effective until filed with, or filed with and approved by, 
the Commission.\57\ Each DE Exchange represents that these provisions 
will assist the Exchange in fulfilling its self-regulatory obligations 
and in administering and complying with the requirements of the 
Act.\58\
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78s(b).
    \57\ See proposed New BGM Charter, Article TWELFTH; proposed New 
DE Holdings LLC Agreement, Article XII, Section 12.02(b); and 
proposed DEI Bylaws, Article VI, Section 6.4.
    \58\ See Notices, supra note 5, at 76421 and 76486.
---------------------------------------------------------------------------

    The Commission finds that these provisions are consistent with the 
Act, and that they are intended to assist each DE Exchange in 
fulfilling its self-regulatory obligations and in administering and 
complying with the requirements of the Act. The Commission also notes 
that, even in the absence of these provisions, under Section 20(a) of 
the Act,\59\ any person with a controlling interest in any of the DE 
Exchanges shall be jointly and severally liable with and to the same 
extent that each DE Exchange is liable under any provision of the Act, 
unless the controlling person acted in good faith and did not directly 
or indirectly induce the act or acts constituting the violation or 
cause of action. In addition, Section 20(e) of the Act \60\ creates 
aiding and abetting liability for any person who knowingly provides 
substantial assistance to another person in violation of any provision 
of the Act or rule thereunder. Further, Section 21C of the Act \61\ 
authorizes the Commission to enter a cease-and-desist order against any 
person who has been ``a cause of'' a violation of any provision of the 
Act through an act or omission that the person knew or should have 
known would contribute to the violation.
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78t(a).
    \60\ 15 U.S.C. 78t(e).
    \61\ 15 U.S.C. 78u-3.
---------------------------------------------------------------------------

3. Change in Control
    Upon the Closing of the Combination, New BGM will become the sole 
owner of DE Holdings. The current Limited Liability Company Operating 
Agreement of DE Holdings (``Current DE Holdings LLC Agreement'') \62\ 
includes certain restrictions on the ability to vote and own units of 
DE Holdings. Specifically, the Current DE Holdings LLC Agreement 
provides that: (1) No Person,\63\ either alone or together with its 
Related Persons,\64\ may own, directly or indirectly, of record or 
beneficially, Units representing in the aggregate a Percentage Interest 
\65\ of more than 40 percent of DE Holdings, and no Member, either 
alone or together with its Related Persons, may own, directly or 
indirectly, of record or beneficially, Units representing in the 
aggregate a Percentage Interest more than 20 percent of DE Holdings 
(``Current DE Holdings Ownership Limitation''), and (2) subject to an 
exception for ISE Holdings, 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 Units or 
give any consent or proxy with respect to Units representing a 
Percentage Interest more than 20 percent of DE Holdings (``Current DE 
Holdings Voting Limitation'').\66\
---------------------------------------------------------------------------

    \62\ DE Holdings currently operates pursuant to the Sixth DE 
Holdings LLC Agreement. However, the Fourth DE Holdings LLC 
Agreement was the last version filed with and approved by the 
Commission. See Notices, supra note 5, at 76424 n.71 and 76488 n.71.
    \63\ See Current DE Holdings LLC Agreement, Article I, Section 
1.1 (defining ``Person'').
    \64\ See id. at Article I, Section 1.1 (defining ``Related 
Persons''). See Notices, supra note 5, at 76416 n.17 and 76480 n.17.
    \65\ Percentage Interest means, with respect to a LLC Member, 
the ratio of the number of Units held by the LLC Member to the total 
of all of the issued and outstanding Units, expressed as a 
percentage. For purposes of the Current DE Holdings Voting 
Limitation and the Current DE Holdings Ownership Limitation, 
Percentage Interest also includes Units owned, directly or directly, 
of record or beneficially, by a Person, either alone or together 
with its Related Persons. See Current DE Holdings LLC Agreement, 
Article I, Section I, Section 1.1 (also defining ``Units'' and 
``Person'').
    \66\ See Current DE Holdings LLC Agreement, Article XII, Section 
12.1(a).
---------------------------------------------------------------------------

    The Current DE Holdings Operating Agreement also provides that the 
Current DE Holdings Ownership Limitation and the Current DE Holdings 
Voting Limitation may be waived (except with respect to Exchange 
members and their Related Persons) pursuant to an amendment to the 
Current DE Holdings LLC Agreement adopted by the board of managers of 
DE Holdings, if, in connection with the adoption of such amendment, the 
board of managers adopts a resolution stating that it is the 
determination of such board that such amendment: (1) Will not impair 
the ability of each DE Exchange to carry out its functions and 
responsibilities under the Act and the rules and regulations 
promulgated thereunder; (2) is otherwise in the best interests of DE 
Holdings, its LLC Members, and the DE Exchanges; (3)

[[Page 6967]]

will not impair the ability of the Commission to enforce the Act and 
the rules and regulations promulgated thereunder; and (4) shall not be 
effective until it is filed with and approved by the Commission.\67\
---------------------------------------------------------------------------

    \67\ See Current DE Holdings LLC Agreement, Article XII, Section 
12.1(b). In granting such a waiver, the DE Holdings 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 DE Exchange. Id.
---------------------------------------------------------------------------

    In connection with the Combination, the Current DE Holdings 
Operating Agreement will be amended and restated to (among other 
changes): (1) remove the Current DE Holdings Ownership Limitation and 
the Current DE Holdings Voting Limitation and (2) specify that the sole 
stockholder of DE Holdings will be New BGM. In addition, as noted 
below, the New BGM Charter, which will become effective 
contemporaneously with the Closing, will contain ownership and voting 
limitation provisions that are substantively the same as the Current DE 
Holdings Ownership Limitation and the Current DE Holdings Voting 
Limitation.
    Because the Current DE Holdings LLC Agreement will be amended to 
eliminate the Current DE Holdings Ownership Limitation and the Current 
DE Holdings Voting Limitation contemporaneously with the Combination, 
New BGM's acquisition of ownership and voting rights in DE Holdings 
upon Closing would not cause New BGM to contravene the Current DE 
Holdings Ownership Limitation or the Current DE Holdings Voting 
Limitation. Therefore, in this instance, although New BGM will possess 
ownership and voting rights in excess of the Current DE Holdings 
Ownership Limitation and the Current DE Holdings Voting Limitation, no 
waiver of these provisions is necessary.
    Nevertheless, because the Combination will result in a change of 
ownership of DE Holdings (in that New BGM will become the sole 
stockholder of DE Holdings), the DE Exchanges and the board of managers 
of DE Holdings represented that it was appropriate for the board of 
managers of DE Holdings to adopt the Resolutions, which set forth 
certain determinations with respect to New BGM and the Combination 
similar to those that would have been necessary to waive the Current DE 
Holdings Ownership Limitation and Current DE Holdings Voting 
Limitation.
    Specifically, the board of managers of DE Holdings made the 
determination that the consummation of the Combination: (1) Will not 
impair the ability of each DE Exchange to carry out its functions and 
responsibilities under the Act and the rules and regulations 
promulgated thereunder, is in the best interests of DE Holdings, its 
LLC Members and the DE Exchanges, and will not impair the ability of 
the Commission to enforce the Act and the rules and regulations 
promulgated thereunder; (2) the acquisition of the proposed share 
ownership and the acquisition or exercise of the proposed voting rights 
by New BGM in DE Holdings will not impair the ability of each DE 
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 DE 
Holdings, its LLC Members and the DE Exchanges, and that it will not 
impair the ability of the Commission to enforce the Act and the rules 
and regulations promulgated thereunder; (3) no party to the 
Combination, including New BGM, nor any of its Related Persons, is 
subject to ``statutory disqualification'' within the meaning of Section 
3(a)(39) of the Act; \68\ and (4) neither New BGM, nor any of its 
Related Persons (excluding BATS Trading, which is a Member of the DE 
Exchanges),\69\ is a Member.\70\
---------------------------------------------------------------------------

    \68\ 15 U.S.C. 78c(a)(39).
    \69\ As noted below, BATS Trading is a routing broker-dealer and 
a Member that is affiliated with the DE Exchanges. As part of the 
proposed rule changes, the DE Exchanges seek for the Commission to 
approve BATS Trading's affiliation with the DE Exchanges pursuant to 
Rules 2.10 and 2.12 of each DE Exchange.
    \70\ The Resolutions also 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 Current DE Holdings Ownership 
Limitation and Current DE Holdings Voting Limitation, respectively, 
in writing and not less than 45 days before the Closing. See Current 
DE Holdings Operating Agreement, Article XII, Section 12.1(d).
---------------------------------------------------------------------------

    The Commission believes that it is consistent with the Act to allow 
New BGM to wholly-own and vote all of the outstanding units of DE 
Holdings. The Commission notes that, as the new top-level holding 
company for the combined businesses, New BGM will have ownership 
divided among the several firms and individuals that previously held 
equity interests in each of Current BGM and DE Holdings.\71\ According 
to the DE Exchanges, 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 10 percent or greater.\72\ 
The Commission also notes that, while the Current DE Holdings Ownership 
Limitation and Current DE Holdings Voting Limitation will no longer be 
in the New DE Holdings LLC Agreement, the New DE Holdings LLC Agreement 
will specify that DE Holdings' sole stockholder will be New BGM, and 
the New BGM Charter will contain substantively identical ownership and 
voting limitation provisions.\73\ Further, as discussed above, New BGM 
has included in its corporate documents certain provisions designed to 
maintain the independence of each DE Exchange's regulatory functions 
from New BGM, DE Holdings and DEI.\74\ Accordingly, the Commission does 
not believe that the Combination will impair the ability of either DE 
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.
---------------------------------------------------------------------------

    \71\ See Notices, supra note 5, at 76418 and 76482.
    \72\ See id.
    \73\ See proposed New DE Holdings LLC Agreement and proposed New 
BGM Charter, Article FIFTH.
    \74\ See proposed New BGM Bylaws, Article XIV, proposed New DE 
Holdings LLC Agreement Articles X and XI; and proposed DEI Bylaws 
Articles V and VII.
---------------------------------------------------------------------------

4. Miscellaneous Changes to the Corporate Governance Documents of DE 
Holdings, DEI and the DE Exchanges
    As noted above the Current DE Holdings Operating Agreement will be 
amended and restated to (among other changes): (1) Remove the Current 
DE Holdings Ownership Limitation and the Current DE Holdings Voting 
Limitation and (2) specify that the sole stockholder of DE Holdings 
will be New BGM.\75\ As described in more detail in the Notices, the 
other proposed changes to the Current DE Holdings Operating Agreement 
are to reflect DE Holdings' proposed new status as an intermediate 
holding company and to delete, or replace as appropriate, various other 
provisions that are applicable to a limited liability company with 
multiple LLC Members, but not to one with a sole LLC Member.\76\
---------------------------------------------------------------------------

    \75\ See supra Section II.B.3.
    \76\ See Notices, supra note 5, at 76425-26 and 76489-90 
(discussing changes to provisions that were adopted in light of DE 
Holdings being owned by multiple LLC Members; replacing provisions 
containing procedures for transfer of units with a provision 
prohibiting any transfers; replacing various board of managers 
governance provisions with provisions that provide that DE Holdings 
will be managed by its sole LLC Member; and replacing provisions 
governing distributions and calculations of profit and loss with 
more simplified provisions).

---------------------------------------------------------------------------

[[Page 6968]]

    The DE Exchanges also propose various changes to the DEI 
Certificate of Incorporation and the DEI Bylaws, as described in more 
detail in the Notices.\77\ For example, the DE Exchanges propose to 
amend the DEI Certificate of Incorporation to delete certain provisions 
that describe circumstances that require the majority or supermajority 
vote of the LLC Members or the board of managers of DE Holdings. 
According to the DE Exchanges, these provisions will no longer be 
necessary because, upon Closing, DE Holdings will no longer have a 
board of managers and will only have one LLC Member.\78\ The proposed 
rule change also modifies the language in the amendment provision in 
the DEI Certificate of Incorporation and the DEI Bylaws to conform them 
to the procedures in the New BGM Bylaws.\79\ Further, the DE Exchanges 
propose to delete references to ``Owner Directors''\80\ in the DEI 
Bylaws because the DE Exchanges propose to eliminate that category of 
directors from their board.
---------------------------------------------------------------------------

    \77\ See Notices, supra note 5, at 76426-27 and 76490-91.
    \78\ See Notices, supra note 5, at 76427 and 76491.
    \79\ Id. See also proposed DEI Certificate of Incorporation, 
Article SEVENTH, para. 4 (``For so long as the Corporation shall 
control, directly or indirectly, an Exchange Subsidiary, before any 
amendment to or repeal of any provision of this Certificate of 
Incorporation shall be effective, those changes shall be submitted 
to the board of directors of each Exchange Subsidiary and if the 
same must be filed with, or filed with and approved by, the 
Securities and Exchange Commission (the ``SEC'') before the changes 
may be effective under Section 19 of the Exchange Act and the rules 
promulgated thereunder by the SEC or otherwise, then the proposed 
changes to this Certificate of Incorporation of this Corporation 
shall not be effective until filed with, or filed with and approved 
by, the SEC, as the case may be.''); and proposed DEI Bylaws, 
Article VI, para. 6.4 (proposing similar changes to the amendment 
provision).
    \80\ See Notices, supra note 5 at 76427 and 76491 (defining 
``Owner Directors'').
---------------------------------------------------------------------------

    The DE Exchanges also propose to delete a provision in the DEI 
Bylaws relating to the handling of regulatory funds in the possession 
of DEI.\81\ The DE Exchanges note that, pursuant to the rules of the DE 
Exchanges, DEI is not permitted to come into possession of regulatory 
funds and therefore retaining that provision in the corporate documents 
is unnecessary and potentially confusing.\82\ The DE Exchanges also 
propose various other minor changes to conform the DEI corporate 
governance documents to those of the BATS Exchanges and other 
ministerial changes, as described in more detail in the Notices.\83\
---------------------------------------------------------------------------

    \81\ See Notices, supra note 5, at 76428 and 76492.
    \82\ Id. Specifically, the DE Exchanges Bylaws each prohibit the 
DE Exchanges from distributing any regulatory funds to DEI and 
require that such funds only be applied to fund the legal and 
regulatory operations of the DE Exchanges or pay restitution and 
disgorgement of funds intended for customers. See DE Exchange 
Bylaws, Article X, Section 4.
    \83\ See Notices, supra note 5, at 76426-29 and 76490-93.
---------------------------------------------------------------------------

    In addition, as described in more detail in the Notices, each DE 
Exchange proposes to revise its DE Exchange Certificate of 
Incorporation and DE Exchange Bylaws to conform them to certificates of 
incorporation and bylaws of the BATS Exchanges.\84\ The DE Exchanges 
stated that they believed that it was important to have a consistent, 
uniform approach to corporate governance for all of the Exchanges held 
under New BGM.\85\
---------------------------------------------------------------------------

    \84\ See Notices, supra note 5, at 76429-39 and 76493-503 
(describing in detail changes to the DE Exchanges corporate 
documents to unify the governance and corporate practices of all 
four Exchanges).
    \85\ The DE Exchanges are proposing several amendments to the DE 
Exchange Bylaws that reflect changes that the BATS Exchanges 
proposed to make to their bylaws as a result of the Combination. The 
BATS Exchanges described these proposed revisions in the BATS 
Exchanges' companion rule filings related to the Combination. See 
Securities Exchange Act Release Nos. 71023 (December 6, 2013), 78 FR 
75607 (December 12, 2013) (SR-BATS-059) and 71024 (December 6, 
2013), 78 FR 75585 (December 12, 2013) (SR-BYX-2013-039). See also 
Notices, supra note 5, at 76429 and 76493.
---------------------------------------------------------------------------

    The Commission finds that these provisions are consistent with the 
Act. In large part, the proposed changes discussed in this section 
conform the corporate governance documents of DE Holdings, DEI and the 
DE Exchanges with provisions previously approved and in BATS' corporate 
documents and rules prior to the Combination. Other proposed changes 
correspond to provisions in BATS' corporate documents and rules 
approved by the Commission as part of the Combination.\86\ The 
remaining changes update the governing documents of DE Holdings, DEI 
and the DE Exchanges to reflect the new corporate structure and other 
ministerial changes.
---------------------------------------------------------------------------

    \86\ See BATS Exchanges Approval Order, supra note 4.
---------------------------------------------------------------------------

C. Affiliation Between BATS Exchanges and DE Exchanges

    Rule 2.3 of each of the DE Exchanges generally provides that, in 
order to be eligible for membership in a DE Exchange, a registered 
broker or dealer is required to be a member of another national 
securities association or national securities exchange. As discussed 
above, as a result of the Combination, the BATS Exchanges will become 
affiliated with the DE Exchanges. The Exchange believes that it is 
appropriate to limit 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 DE Exchanges. 
Therefore, the DE Exchanges propose to amend Rule 2.3 of each of the DE 
Exchanges 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 or in addition 
to BATS, BYX, EDGA or EDGX.
    The Commission notes that the proposed changes to Rule 2.3 of each 
of the DE Exchanges extends the membership eligibility criteria in a 
way that is consistent with the current Rule 2.3 of each of the BATS 
Exchanges, taking into account the each DE Exchange's affiliation with 
each other and the DE Exchanges new affiliation with the BATS Exchanges 
after the Closing.

D. Affiliation With BATS Trading

    As discussed above, as a result of the Combination, New BGM will, 
indirectly, wholly own the BATS Exchanges, the DE Exchanges, BATS 
Trading and DE Route. BATS Trading is a registered broker-dealer and a 
member of Financial Industry Regulation Authority. BATS Trading is also 
a member of each of the BATS Exchanges and the DE Exchanges.\87\
---------------------------------------------------------------------------

    \87\ See Notices, supra note 5, at 76440 and 76504.
---------------------------------------------------------------------------

    Rule 2.10 of each DE Exchange generally provides that, without the 
prior approval of the Commission, (1) each DE Exchange or any entity 
with which each DE 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 each DE Exchange, and (2) a Member of 
each DE Exchange may not be or become an affiliate of the DE Exchange, 
or an affiliate of any affiliate of the DE Exchanges. Rule 2.10 of each 
of the DE Exchanges, however, provides that nothing in Rule 2.10 shall 
prohibit a DE Exchange from being an affiliate of its member, DE Route, 
or the other DE Exchange.\88\ The DE Exchanges note that the purpose of 
Rule 2.10 is to prevent or manage potential conflicts of interest that 
could arise from the DE Exchanges or their affiliates having an 
ownership interest in a Member, particularly with respect to the 
Exchanges' obligation under Section 19(g) of the Act \89\ to enforce 
its Members' compliance with the Act, the Commission's rules 
thereunder, and DE Exchanges' Rules.\90\
---------------------------------------------------------------------------

    \88\ See infra note 98 and accompanying text.
    \89\ 15 U.S.C. 78s(g).
    \90\ See Notices, supra note 5, at 76440 and 76504.
---------------------------------------------------------------------------

    BATS Trading is currently a Member of each DE Exchange. The DE 
Exchanges

[[Page 6969]]

proposed to become affiliated with BATS Trading, and BATS Trading 
provides certain routing services to the DE Exchanges. Specifically, 
the DE Exchanges proposed to receive through BATS Trading orders routed 
inbound to the DE Exchanges from each of the BATS Exchanges, both of 
which will also be affiliates of the DE Exchanges as a result of the 
Combination. Accordingly, the DE Exchanges have asked the Commission to 
approve an amendment to Rule 2.10 that will permit the affiliation 
between each of the DE Exchanges and their Member, BATS Trading.\91\
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    \91\ The current Rule 2.10 of each of the DE Exchanges states 
that nothing in the rule shall prohibit each DE Exchange from being 
an affiliate of DE Route or the other DE Exchange. Because the DE 
Exchanges will be affiliated with BATS Trading and the BATS 
Exchanges, as well as DE Route, after Closing, the DE Exchanges 
propose to expand this provision to specifically permit the DE 
Exchanges' affiliation with BATS Trading and the BATS Exchanges.
    The DE Exchanges also propose to make several changes to Rule 
2.10 of each DE Exchange to reflect the proposed change in the 
corporate structure of the DE Exchanges after Closing. Specifically, 
Rule 2.10 currently states that nothing in Rule 2.10 shall prohibit 
a Member or its affiliate from acquiring or holding an equity 
interest in DE Holdings that is permitted by the DE Holdings 
Ownership and Voting Limitations. Furthermore, Rule 2.10 currently 
states, in relevant part, that nothing in Rule 2.10 shall prohibit a 
Member from being or becoming an affiliate of the DE Exchanges, or 
an affiliate of any affiliate of the DE Exchanges, solely by reason 
of such Member or any officer, director, manager, managing member, 
partner or affiliate of such Member being or becoming a director 
serving on the board of directors of DE Holdings. Because New BGM 
will replace DE Holdings as the ultimate parent company of the DE 
Exchanges after Closing, New BGM's governing documents, as opposed 
to the revised DE Holdings governing documents, set forth the 
relevant ownership and voting limitations, and provide for Member 
representation on the New BGM board of directors. Therefore, the DE 
Exchanges propose to replace the references to DE Holdings and its 
governing documents in Rule 2.10 with references to New BGM and its 
governing documents. See Notices, supra note 5, at 76440 and 76504.
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    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, particularly where a member 
is routing orders to such affiliated exchange,\92\ each DE Exchange 
previously implemented limitations and conditions to the affiliation 
between each DE Exchange and DE Route, also an affiliated member, to 
permit each DE Exchange to accept inbound orders that DE Route routes 
in its capacity as a facility of an affiliated exchange (EDGA or EDGX 
as applicable).\93\ Again recognizing the Commission's concerns, the DE 
Exchanges have now proposed that BATS Trading operate as an affiliated 
inbound router subject to substantially similar limitations and 
conditions.\94\
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    \92\ See e.g., Securities Exchange Act Release No. 53382 
(February 27, 2006), 71 FR 11251 (March 6, 2006). See also 
Securities Exchange Act Release No. 57648 (April 11, 2008), 73 FR 
20981 (April 17, 2008).
    \93\ See Rule 2.12 of each of the DE Exchanges. See also 
Securities Exchange Act Release No. 61698, (March 12, 2010), 75 FR 
13151 (March 18, 2010) (approving registration application of EDGA 
and EDGX and approving conditions and limitations which allowed EDGA 
and EDGX to receive inbound routes of orders by DE Route in its 
capacity as an order routing facility of EDGX and EDGA on a twelve 
month pilot). The Commission later approved proposals to make the 
pilots permanent. See Securities Exchange Act Release No. 69870 
(June 27, 2013), 78 FR 40225 (July 3, 2013) (EDGX-2013-17); and 
Securities Exchange Act Release No. 69871 (June 27, 2013), 78 FR 
40253 (July 3, 2013) (EDGA-2013-13).
    \94\ See Notices, supra note 5, at 76439 and 76503.
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    Specifically, the DE Exchanges proposed that BATS Trading, 
operating as a facility of the BATS Exchanges, provide routing services 
from each of the BATS Exchanges to each DE Exchange, subject to the 
following conditions and limitations set forth in the proposed Rule 
2.12(a) of each DE Exchange: \95\
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    \95\ See Rule 2.12 of each of the DE Exchanges. See also 
Notices, supra note 5, at 76439 and 76503. Additionally, Rule 
2.12(b) will require that BATS Trading operate as an outbound router 
on behalf of each of the BATS Exchanges in accordance with the rules 
of each BATS Exchange.
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     Each DE Exchange would enter into (1) a plan pursuant to 
Rule 17d-2 under the Exchange Act with a non-affiliated SRO to relieve 
each DE Exchange of regulatory responsibilities for BATS Trading with 
respect to rules that are common rules between each DE Exchange and the 
non-affiliated SRO, and (2) a regulatory services contract with a non-
affiliated SRO to perform regulatory responsibilities for BATS Trading 
for unique rules of each DE Exchange.
     The regulatory services contract would require the DE 
Exchanges 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 the rules 
of the DE Exchanges or Commission rules, and would require that the 
non-affiliated SRO provide a report, at least quarterly, to the DE 
Exchanges quantifying all such exception reports, alerts, complaints, 
trading errors, cancellations, investigations, and enforcement matters 
in which BATS Trading is identified as a participant that has 
potentially violated the rules of the DE Exchanges or the Commission.
     Each DE Exchange, on behalf of the holding company 
indirectly owning the DE Exchanges, would establish and maintain 
procedures and internal controls reasonably designed to ensure that 
BATS Trading does not develop or implement changes to its system on the 
basis of non-public information obtained as a result of its affiliation 
with the DE Exchanges, until such information is available generally to 
similarly situated members of the DE Exchanges in connection with the 
provision of inbound order routing to the DE Exchanges.
In addition, in the Notices, the DE Exchanges also stated that the 
provision of such routing services also is conditioned on the 
requirement that each DE Exchange may furnish to BATS Trading the same 
information and on the same terms as the Exchange makes available in 
the normal course of business to other uses.\96\
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    \96\ See Notices, supra note 5, at 76439 and 76503.
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    Although the Commission continues to be concerned about potential 
unfair competition and conflicts of interest between an exchange's 
self-regulatory obligations and its commercial interest when the 
exchange is affiliated with one of its members, for the reasons 
discussed below, the Commission believes that it is consistent with the 
Act to permit BATS Trading to be affiliated with the DE Exchanges and 
to provide inbound routing to the DE Exchanges, subject to the 
conditions described above.
    The DE Exchanges have proposed four conditions applicable to BATS 
Trading's inbound routing activities, which are enumerated above. The 
Commission believes that these conditions mitigate its concerns about 
potential conflicts of interest and unfair competitive advantage. In 
particular, the Commission believes that a non-affiliated SRO oversight 
of BATS Trading,\97\ combined with the non-affiliated SRO's monitoring 
of BATS Trading's compliance with the equity trading rules and 
quarterly reporting to each DE Exchange, will help to protect the 
independence of each DE Exchange's regulatory responsibilities with 
respect to BATS Trading. The Commission also believes that the 
requirement that each DE Exchange 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 DE 
Exchanges, until such

[[Page 6970]]

information is available generally to similarly situated members of the 
DE Exchanges, is reasonably designed to ensure that BATS Trading cannot 
misuse any information advantage it may have because of its affiliation 
with the DE Exchanges.
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    \97\ The oversight will be accomplished through the Rule 17d-2 
agreement and the regulatory contract.
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    Further, the Commission notes that the proposed conditions for the 
operation of BATS Trading as an affiliated inbound router on behalf of 
each DE Exchange are consistent with conditions the Commission has 
approved for other exchanges.\98\ The Commission therefore finds the 
proposed operation of BATS Trading as an affiliated inbound router of 
the DE Exchanges is consistent with the Act.
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    \98\ See, e.g., Securities Exchange Act Release Nos. 62716 
(August 13, 2010), 75 FR 51295 (August 19, 2010) (order approving 
the exchange registration of BATS Y-Exchange, Inc.), and 65456 
(September 30, 2011), 76 FR 62118 (October 6, 2011) (order approving 
a proposal by NYSE Arca, Inc. (``NYSE Arca'') to make permanent the 
pilot program that permits NYSE Arca to accept inbound orders routed 
by its affiliated broker-dealer).
    They are also consistent with the conditions and limitations on 
inbound routing to the DE Exchange by its affiliate DE Route. See 
supra note 96 and accompanying text.
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III. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule changes are consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\99\ that the proposed rule changes (SR-EDGA-2013-34 and SR-EDGX-2013-
43), as amended, are approved. For the Commission, by the Division of 
Trading and Markets, pursuant to delegated authority.\100\
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    \99\ 15 U.S.C. 78s(b)(2).
    \100\ 17 CFR 200.30-3(a)(12).

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-02382 Filed 2-4-14; 8:45 am]
BILLING CODE 8011-01-P