Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing of Proposed Rule Change to Implement the Governance Provisions of an Equity Rights Program, 40100-40107 [2015-16975]
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Federal Register / Vol. 80, No. 133 / Monday, July 13, 2015 / Notices
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received from
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(ii) of the Act 14 and
subparagraph (f)(6) of Rule 19b–4
thereunder.15
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved. The
Exchange has provided the Commission
written notice of its intent to file the
proposed rule change, along with a brief
description and text of the proposed
rule change, at least five business days
prior to the date of filing of the
proposed rule change.
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:
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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–NASDAQ–2015–066 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, Station Place, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2015–066. 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 Nasdaq. 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–NASDAQ–2015–066 and
should be submitted on or before
August 3, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Brent J. Fields,
Secretary.
[FR Doc. 2015–16976 Filed 7–10–15; 8:45 am]
BILLING CODE 8011–01–P
15 U.S.C. 78s(b)(3)(a)(ii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
14
15 17
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–75374; File No. SR–BOX–
2015–22]
Self-Regulatory Organizations; BOX
Options Exchange LLC; Notice of
Filing of Proposed Rule Change to
Implement the Governance Provisions
of an Equity Rights Program
July 7, 2015.
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 June 25,
2015, BOX Options Exchange LLC (the
‘‘Exchange’’) filed with the Securities
and Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the self-regulatory
organization. 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 the Substance
of the Proposed Rule Change
The Exchange proposes to implement
the governance provisions of an equity
rights program (the ‘‘VPR Program’’).
Upon Commission approval of the
proposed rule change, BOX Holdings
Group LLC (‘‘Holdings’’), an affiliate of
the Exchange and direct parent entity of
BOX Market LLC, a facility of the
Exchange (‘‘BOX’’), proposes to amend
the existing Limited Liability Company
Agreement of Holdings (the ‘‘Holdings
LLC Agreement’’) by adopting an
Amended and Restated Limited
Liability Company Agreement of
Holdings (the ‘‘Restated Holdings LLC
Agreement’’). There are no other
proposed changes to any rule text. The
text of the proposed rule change is
available from the principal office of the
Exchange, at the Commission’s Public
Reference Room and also on the
Exchange’s Internet Web site at https://
boxexchange.com.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization 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
1 15
16 17
CFR 200.30–3(a)(12).
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Federal Register / Vol. 80, No. 133 / Monday, July 13, 2015 / Notices
the places specified in Item IV below.
The self-regulatory organization has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to implement
the governance provisions of the VPR
Program, in which certain BOX Options
Participants (each, a ‘‘Participant’’)
elected to participate. The Exchange
notified all of its Participants of the
opportunity to participate in the VPR
Program by Regulatory Circular
published on October 1, 2014. All
Participants that indicated interest in
participating in the VPR Program by
October 31, 2014 and that subscribed to
the VPR Program by January 14, 2015
were permitted to participate in the VPR
Program.
The purpose of this rule filing is,
subject to Commission approval, to
fulfill a condition to providing
Subscribers the full benefits intended
through the VPR Program by permitting
Holdings to amend the Holdings LLC
Agreement by adopting the Restated
Holdings LLC Agreement.
Background
In order to implement the VPR
Program, the Exchange has already
submitted a proposed rule change under
Section 19(b)(3)(A)(ii) of the Securities
Exchange Act of 1934 (the ‘‘Act’’) 3 and
Rule 19b–4(f)(2) thereunder,4 for
immediate effectiveness, inasmuch as it
establishes or changes a due, fee, or
other charge imposed by the Exchange.5
In addition, the Exchange is submitting
this proposed rule change under Section
19(b)(1) of the Act 6 and Rule 19b–4
thereunder,7 subject to Commission
approval, to make changes to its
company governance documents to
accommodate aspects of the VPR
Program that involve or affect the
Restated Holdings LLC Agreement of
Holdings.
Participants that elected to participate
in the VPR Program have the right to
3 15
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
5 See Securities Exchange Act Release No. 74114
(January 22, 2015), 80 FR 4611 (January 28, 2015)
(Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change to Implement an Equity
Rights Program). See also Securities Exchange Act
Release No. 74576 (March 25, 2015), 80 FR 17122
(March 31, 2015) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change to Clarify
Certain Statements Made in SR–BOX– 2015–03).
6 15 U.S.C. 78s(b)(1).
7 17 CFR 240.19b–4.
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acquire equity in and receive
distributions from Holdings, in
exchange for the achievement of certain
order flow volume commitment
thresholds on the Exchange over a
period of five (5) years and a nominal
initial cash payment. The purpose of the
VPR Program is to promote the longterm interests of the Exchange by
incentivizing Participants to contribute
to the growth and success of BOX by
providing enhanced levels of trading
volume to BOX.
Upon initiation of the VPR Program
by Holdings, Participants that elected to
participate in the VPR Program, met the
eligibility criteria and made the initial
cash payment (‘‘Subscribers’’), were
issued Volume Performance Rights
(‘‘VPRs’’) in tranches of twenty (20)
VPRs (each, a ‘‘Tranche’’) with a
minimum subscription of two
(2)Tranches per Subscriber. Twentyseven (27) Tranches have been issued in
connection with the VPR Program.
Each VPR is comprised of the right to
receive 8.5 unvested new Class C
Membership Units of Holdings (‘‘Class C
Units’’), upon effectiveness of this rule
filing, and an average daily transaction
volume commitment (‘‘VPR Volume
Commitment’’) equal to 0.0055% of
Industry ADV, as measured in
Qualifying Contract Equivalents, for a
total of five (5) years (twenty (20)
consecutive measurement quarters).8
The VPR Volume Commitment, in terms
of total contracts, will change based on
the movement of the Industry ADV. One
VPR per Tranche will be eligible to vest
each quarter of the five (5) year Program
period, subject to the Subscriber
meeting its volume commitment for that
quarter. In addition, VPRs may be
reallocated among Subscribers based
upon exceeding or failing to meet
Subscribers’ volume commitments
during the VPR Program period.
Ownership Units
As discussed above, each VPR held by
a Subscriber includes the right to
receive 8.5 Class C Units of Holdings
within ten (10) business days after
effectiveness of this rule filing and the
completion or waiver of the conditions
to closing. Currently, Holdings has
8 The measurement of order flow for purposes of
the VPR Program first began on January 12, 2015,
the first trading day after the first Subscribers
subscribed to the VPR Program. However, BOX
extended the deadline to accommodate Subscribers;
therefore, the first measurement date began later for
a Subscriber that submitted the required documents
and payment during the extension period. See
Securities Exchange Act Release No. 74171 (January
29, 2015), 80 FR 6153 (February 4, 2015) (Notice of
Filing and Immediate Effectiveness of a Proposed
Rule Change To Extend the Deadline for the VPR
Program to January 14, 2015).
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issued and outstanding Class A and
Class B membership units. Class C Units
will be created by the adoption of the
Restated Holdings LLC Agreement and,
at such time, Holdings will admit the
Subscribers as Class C Members. Class
C Units may be held in fractional
numbers equal to one half Unit. Units
may, but need not be, represented by
physical certificates. The Restated
Holdings LLC Agreement provides for
the maintenance of capital accounts and
other accounting and tax provisions
relating to the Class C Units.
The existing limitations on the
percentage ownership of Holdings by
Participants will continue to apply. In
the event that a Member, or any Related
Person 9 of a Member, is a Participant
pursuant to the Exchange Rules, and the
Member owns more than 20% of the
Units, alone or together with any
9 ‘‘Related Person’’ means with respect to any
Person: (A) any Affiliate of the Person; (B) any other
Person with which the 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 Units; (C)
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 Exchange
Act) or director of the Person and, in the case of
a Person that is a partnership or limited liability
company, any general partner, managing member or
manager of the Person, as applicable; (D) in the case
of any BOX Options Participant who is at the same
time a broker-dealer, any Person that is associated
with the BOX Options Participant (as determined
using the definition of ‘‘person associated with a
member’’ as defined under Section 3(a)(21) of the
Exchange Act); (E) in the case of a Person that is
a natural person and a BOX Options Participant,
any broker or dealer that is also a BOX Options
Participant with which the Person is associated; (F)
in the case of a Person that is a natural person, any
relative or spouse of the Person, or any relative of
the spouse who has the same home as the Person
or who is a director or officer of the Exchange or
any of its parents or subsidiaries; (G) in the case of
a Person that is an executive officer (as defined
under Rule 3b-7 under the Exchange Act) or a
director of a company, corporation or similar entity,
the company, corporation or entity, as applicable;
and (H) in the case of a Person that is a general
partner, managing member or manager of a
partnership or limited liability company, the
partnership or limited liability company, as
applicable. ‘‘Affiliate’’ means, with respect to any
Person, any other Person controlling, controlled by
or under common control with, the Person. As used
in this definition, the term ‘‘control’’ means the
possession, directly or indirectly, of the power to
direct or cause the direction of the management and
policies of a Person, whether through the
ownership of voting securities, by contract or
otherwise with respect to the Person. A Person is
presumed to control any other Person, if that
Person: (i) is a director, general partner, or officer
exercising executive responsibility (or having
similar status or performing similar functions); (ii)
directly or indirectly has the right to vote 25
percent or more of a class of voting security or has
the power to sell or direct the sale of 25 percent
or more of a class of voting securities of the Person;
or (iii) in the case of a partnership, has contributed,
or has the right to receive upon dissolution, 25
percent or more of the capital of the partnership.
See proposed Restated Holdings LLC Agreement
Section 1.1.
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Related Person of the Member (Units
owned in excess of 20% being referred
to as ‘‘Excess Units’’), the Member and
its designated Directors will have no
voting rights with respect to the Excess
Units on any action relating to BOX
Holdings nor will the Member or its
designated Directors, if any, be entitled
to give any proxy with respect to the
Excess Units in relation to a vote of the
Members; provided, however, that
whether or not the Member or its
designated Directors, if any, otherwise
participates in a meeting in person or by
proxy, the Member’s Excess Units will
be counted for quorum purposes and
will be voted by the person presiding
over quorum and vote matters in the
same proportion as the Units held by
the other Members are voted (including
any abstentions from voting).10
Upon completion of the VPR Program,
all outstanding Class C Units associated
with vested VPRs will be automatically
converted into an equal number of Class
A Units and all outstanding Class C
Units associated with unvested VPRs
will be automatically cancelled and be
of no further effect. All rights related to
Class C Units will terminate
automatically upon cancellation or
conversion and rights related to the
converted Class A Units will remain,
subject to the terms of the Restated
Holdings LLC Agreement.11
Voting
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Each Class C Member will have the
right to vote its Class C Units that are
associated with vested VPRs (‘‘Voting
Class C Units’’) on matters submitted to
a vote of all holders of Units. VPRs will
vest in accordance with the vesting
provisions of the VPR Program.12
Members holding Voting Class C Units
will vote with Members holding all
other classes of Units. Members holding
Voting Units 13 will be entitled to vote
together, as a single class, each with one
vote per Voting Unit so held.14 Issued
and outstanding Class C Units that are
not Voting Class C Units will not have
voting rights. Accordingly, as a
Subscriber meets or exceeds volume
commitments, voting powers as Class C
Member of Holdings will increase.
Similarly, if Subscribers do not meet
volume commitments, voting powers
will decrease.
10 See proposed Restated Holdings LLC
Agreement Section 7.4(h).
11 See proposed Restated Holdings LLC
Agreement Section 2.5(e).
12 See supra, note 5.
13 ‘‘Voting Unit’’ means any Class A Unit, Class
B Unit, or Voting Class C Unit.
14 See proposed Restated Holdings LLC
Agreement Section 4.13(a).
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The Holdings LLC Agreement
currently provides, and the Restated
Holdings LLC Agreement will continue
to provide, that any Director designated
by either MX US 2, Inc. or IB Exchange
Corp may effectively block certain
actions of Holdings (the ‘‘Major Action
Veto’’). The Restated Holdings LLC
Agreement provides that, upon vesting
of VPRs associated with Class C Units
equal to at least 25% of the total
outstanding Units, the Major Action
Veto will automatically expire and be of
no further effect. Also, when the 25%
threshold is met, the Restated Holdings
LLC Agreement also provides that
Holdings and its Members will take all
necessary action to amend the Limited
Liability Company Agreement of BOX to
eliminate the major action veto
provisions therein that are applicable to
BOX and inure to the benefit of MX US
2, Inc. and IB Exchange Corp and to
provide that the executive committee of
BOX will be constituted in the same
manner as the Executive Committee of
Holdings.15
The Restated Holdings LLC
Agreement includes a new
supermajority voting requirement that
Members holding at least 67% of all
outstanding Voting Units must vote to
approve certain actions (the
‘‘Supermajority Actions’’) by
Holdings.16 The new supermajority
voting requirement will be in addition
to all other existing voting requirements
applicable to Holdings and any actions
Holdings may take, including the Major
Action Veto. This new requirement
provides additional protections to
Subscribers and Members that
Supermajority Actions will not be
undertaken without broad support
among holders of Voting Units.
Supermajority Actions include the
following: (i) Merger or consolidation of
Holdings or BOX with any other entity,
a sale of Holdings or BOX, or the sale,
lease or transfer, by Holdings or BOX, of
any material portion of its assets; (ii)
entry by Holdings or BOX into any line
of business other than the business
described in Article 3 of the Restated
Holdings LLC Agreement or in Article 3
of the Limited Liability Company
Agreement of BOX; (iii) conversion of
Holdings or BOX from a Delaware
limited liability company into any other
type of entity; (iv) except as expressly
contemplated by a members agreement
among the Members (the ‘‘Members
Agreement’’), Holdings or BOX entering
into any agreement, commitment, or
15 See proposed Restated Holdings LLC
Agreement Section 16.4.
16 See proposed Restated Holdings LLC
Agreement Section 4.13(b).
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transaction with any Member or any of
its Affiliates other than transactions or
agreements upon commercially
reasonable terms that are no less
favorable to Holdings or BOX,
respectively, than Holdings or BOX
would obtain in a comparable armslength transaction or agreement with a
third party; (v) to the fullest extent
permitted by law, taking any action to
effect the voluntary, or which would
precipitate an involuntary, dissolution
or winding-up of Holdings or BOX; (vi)
except as otherwise provided in the
facility agreement between the
Exchange and BOX (the ‘‘Facility
Agreement’’) or to the extent otherwise
required by the Exchange to fulfill its
regulatory functions or responsibilities
or to oversee the BOX Market as
determined by the board of the
Exchange, the issuance, by Holdings, of
any additional equity interests in, or any
securities exchangeable for or
convertible into equity securities of,
Holdings other than the following, as
approved by the Holdings Board and in
the aggregate not to exceed ten percent
(10%) of the outstanding equity
interests of Holdings: (A) Equity
interests, options or convertible
securities issued as a dividend, Unit
split or distribution on existing Units,
(B) equity interests issued to employees
or Directors of, or consultants or
advisors to, Holdings or one or more
subsidiaries thereof pursuant to a plan,
agreement or arrangement, (C) equity
interests issued upon the exercise of
options or convertible securities issued
by Holdings, provided each such
exercise or conversion is in accordance
with the terms of each such option or
security, and (D) equity interests issued
by Holdings in the acquisition of any
business; (vii) the issuance, by BOX, of
any additional equity interests in, or any
securities exchangeable for or
convertible into equity securities of,
BOX, except as otherwise provided in
the Facility Agreement or to the extent
otherwise required by the Exchange to
fulfill its regulatory functions or
responsibilities or to oversee the BOX
Market as determined by the board of
the Exchange; (viii) permitting BOX to
operate the BOX Market utilizing any
other regulatory services provider other
than the Exchange, except as otherwise
provided in the Facility Agreement or to
the extent otherwise required by the
Exchange to fulfill its regulatory
functions or responsibilities or to
oversee the BOX Market as determined
by the Exchange Board; (ix) except as
otherwise provided in the Facility
Agreement, entering into, or permitting
any subsidiary of Holdings to enter into,
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Directors
The Restated Holdings LLC
Agreement will amend the provisions
governing composition of the Holdings
Board. Currently, MX US 2, Inc. has the
right to designate up to five (5)
Directors, IB Exchange Corp has the
right to designate up to two (2) Directors
and each other Member has the right to
designate one (1) Director to the
Holdings Board and the Holdings Board
has the power to increase the size of the
Holdings Board and to authorize new
Members to designate Directors.
Under the Restated Holdings LLC
Agreement, no Member may designate
more than three (3) Directors and each
Member may designate the maximum
number of Directors permitted under
any one (1) (but not more than one) of
the following criteria: (i) Each Member,
so long as it (together with its respective
Affiliates) holds a combined total of
Class A Units and Class B Units greater
than two and one-half percent (2.5%) of
all outstanding Voting Units, will be
entitled to designate one (1) Director, (ii)
each Member, so long as it (together
with its respective Affiliates) holds a
combined total of Voting Class C Units
greater than four percent (4%) of all
outstanding Voting Units, will be
entitled to designate one (1) Director,
(iii) each Member, so long as it (together
with its respective Affiliates) holds a
combined total of Voting Units greater
than fourteen percent (14%) of all
outstanding Voting Units, will be
entitled to designate two (2) Directors,
(iv) each Member, so long as it (together
with its respective Affiliates) holds a
combined total of Voting Units greater
than twenty-eight percent (28%) of all
outstanding Voting Units, will be
entitled to designate three (3) Directors,
and (v) each other existing Member may
designate one (1) Director.18 Directors
serving on the Holdings Board may also
serve on the board of directors of any
subsidiary of Holdings. If a Member
ceases to qualify for the right to
designate a Director then serving, that
Director will then automatically be
removed from the Holdings Board.
The Restated Holdings LLC
Agreement will also amend the
provisions governing the right of
Members to designate members of the
Executive Committee of Holdings (the
‘‘Executive Committee’’), if any.
Currently, MX US 2, Inc. has the right
to designate up to two (2) members of
the Executive Committee (‘‘EC
Members’’) and IB Exchange Corp has
the right to designate one (1) EC
Member. Under the Restated Holdings
LLC Agreement, any Member with the
right to designate three (3) Directors to
the Holdings Board will have the right
to designate up to two (2) EC Members
and any Member with the right to
designate two (2) Directors to the
Holdings Board will have the right to
designate one (1) EC Member. Other
provisions relating to the composition of
17 See proposed Restated Holdings LLC
Agreement Section 18.1(b)(ii).
18 See proposed Restated Holdings LLC
Agreement Section 4.1.
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any partnership, joint venture or other
similar joint business undertaking; (x)
making a fundamental change to the
business model of BOX to be other than
a for-profit business, except to the
extent otherwise required by the
Exchange to fulfill its regulatory
functions or responsibilities or to
oversee the BOX Market as determined
by the Exchange Board; (xi) subject to
the transfer provisions of the Restated
Holdings LLC Agreement, the
acquisition of any Units by any person
that results in the person, alone or
together with any Affiliate of the person,
newly holding an aggregate percentage
interest equal to or greater than twenty
percent (20%); (xii) altering the
provisions relating to the designation of
Directors set forth in Section 4.1(a),
except to the extent otherwise required
by the Exchange to fulfill its regulatory
functions or responsibilities or to
oversee the BOX Market as determined
by the Exchange Board; and (xiii)
altering or amending any of the
Supermajority Actions provisions,
except to the extent otherwise required
by the Exchange to fulfill its regulatory
functions or responsibilities or to
oversee the BOX Market as determined
by the Exchange Board.
Amendments to the Restated Holdings
LLC Agreement that alter the terms of
one or more classes of Units in a manner
that would materially, adversely and
disproportionately (as compared with
other classes of Units) affect the rights
associated with the Class C Units as a
class will require the written consent of
holders of Class C Units (‘‘Class C
Members’’) holding at least seventy-five
percent (75%) of the then outstanding
Class C Units and any amendment to the
Restated Holdings LLC Agreement that
would have a disproportionate (with
respect to the same class), material and
adverse effect on the rights associated
with any Units, or impose any
additional, disproportionate (with
respect to the same Class) and material
liability or obligation upon the holder of
any Units, will not be effective without
the consent of the holders of those
Units.17
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40103
the Executive Committee will be
unchanged.19
Subscribers will also have the right to
designate one individual to a new
Advisory Committee organized by
Holdings, the purpose of which will be
to advise and make recommendations to
Holdings with respect to the Exchange’s
competitiveness in the marketplace.
Only Subscribers will have the right to
designate individuals to serve on the
Advisory Committee.20 The Advisory
Committee will be advisory only and
will not have any powers, votes or
fiduciary duties to Holdings.
Distributions
Once per year, Holdings will make a
distribution (an ‘‘Annual Distribution’’)
to its Members to the extent funds are
available for distribution.21 In
determining the amount of each Annual
Distribution, the Holdings Board will
first provide for any regulatory needs of
BOX and the Exchange, as determined
by the Exchange Board, and any Annual
Distribution amounts will be calculated
after taking into account all financial
and regulatory needs of the Exchange, as
determined by the Exchange.22 The
Annual Distribution will be equal to
80% of Free Cash Flow,23 except as
limited by applicable law, including for
regulatory and compliance purposes. In
addition, another 15% of Free Cash
Flow will be included in the
distribution, except to the extent the
Holdings Board determines that any
portion thereof is (i) required for the
operations of Holdings and its
subsidiaries, which will be reflected on
the annual budget for the next year, (ii)
required for payment of liabilities or
19 See proposed Restated Holdings LLC
Agreement Section 4.2(c).
20 See Securities Exchange Act Release No. 74114
(January 22, 2015), 80 FR 4611 at 4613 (January 28,
2015) (Notice of Filing and Immediate Effectiveness
of a Proposed Rule Change to Implement an Equity
Rights Program).
21 Distributions on Class C Units will not be paid
until this rule change is effective. Distributions
payable on Class C Units that accrue before such
effectiveness will be held in a segregated account
until such effectiveness. If this rule filing does not
become effective by July 1, 2016, a Subscriber may
terminate its involvement in the VPR Program and
any and all distributions with respect to Class C
Units payable to that Subscriber held in the
segregated account will be released back to
Holdings and distributed to existing Members in
accordance with the terms of the Holdings LLC
Agreement. Id at 4612.
22 See proposed Restated Holdings LLC
Agreement Section 8.1.
23 ‘‘Free Cash Flow’’ means consolidated net
income, plus depreciation, less capital expenditures
(in each case calculated in accordance with
generally accepted accounting principles in the
United States, as in effect from time to time) of
Holdings and BOX, for the calendar year. See
proposed Restated Holdings LLC Agreement
Section 1.1.
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expenses of Holdings, or (iii) required as
a reserve to make reasonable provision
to pay other claims and obligations then
known to, or reasonably anticipated by,
BOX or Holdings. When, as and if
declared by the Holdings Board,
Holdings will make the cash
distribution to each Member pro rata in
accordance with the number of Units
held by each Member, which will be
determined by multiplying the aggregate
Annual Distribution amount by each
Member’s Percentage Interest 24 on the
record date. Distributions to Class C
Members may be adjusted as provided
in the Members Agreement.25
Transfers
asabaliauskas on DSK5VPTVN1PROD with NOTICES
Class C Units are not expected to be
registered for resale by Holdings and
may not be transferred without
complying with, or qualifying for an
exemption from, the registration
requirements of the Securities Act. Any
Transferee of Class C Units must
become a party to the Members
Agreement and the Restated Holdings
LLC Agreement as a condition to the
transfer.
Transfers of Class C Units will be
subject to certain rights of first refusal.
Before a Class C Member may transfer
Class C Units to a transferee that is not
an Affiliate, the Class C Member must
first offer to sell the Class C Units to
Holdings on the same terms26 and, to
the extent Holdings does not exercise its
primary right of first refusal, the Class
C Units must then be offered to the
other Class C Members on the same
terms.27
Class C Units will include preemptive rights. In the event Holdings
proposes to issue and sell new equity
securities of Holdings, other than for
certain customary exceptions, a Class C
Member will have the right to maintain
its percentage ownership in Holdings
represented by the Class C Units it
holds, by electing to purchase from
Holdings, on the same terms, a
percentage of the new securities equal to
the percentage of all outstanding
securities of Holdings represented by
24 ‘‘Percentage Interest’’ with respect to a Member
means the ratio of the number of Units held by the
Member to the total of all of the issued Units,
expressed as a percentage and determined with
respect to each class of Units, whenever applicable.
‘‘Units’’ means Class A Membership Units, Class B
Membership Units and Class C Membership Units
of Holdings, whether or not associated with vested
VPRs. See proposed Restated Holdings LLC
Agreement Section 1.1.
25 See proposed Restated Holdings LLC
Agreement Section 8.1 and see supra, note 5.
26 See proposed Restated Holdings LLC
Agreement Section 7.2.
27 See proposed Restated Holdings LLC
Agreement Section 7.3(b).
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the outstanding Class C Units held by
the Class C Member.28
Class C Units will be subject to co-sale
rights. In the event a Class C Member
proposes to Transfer Voting Class C
Units (a ‘‘Transferring Member’’) to a
transferee that is not an Affiliate, each
other Class C Member will have the
right to sell a portion of its Voting Class
C Units to the transferee on the same
terms. All Class C Members that elect to
exercise this right of co-sale may,
collectively, sell a number of Voting
Class C Units equal to one-half (1/2) of
the total number of Voting Class C Units
proposed to be sold by the Transferring
Member. If more than one Class C
Member elects to exercise this co-sale
right, the number of Voting Class C
Units each may sell will be divided pro
rata among them based upon their
relative ownership of Voting Class C
Units.29
Class C Units will be subject to dragalong rights. In the event that holders of
at least seventy-five percent (75%) of
the then outstanding Voting Units,
including at least seventy-five percent
(75%) of the then outstanding Voting
Class C Units (collectively, the ‘‘Selling
Members’’) approve a sale of Holdings
in writing, specifying that the dragalong rights will apply to the
transaction, then each Class C Member
will be required to approve, cooperate
and participate as a seller of Class C
Units in the transaction, subject to
certain customary exceptions.30
Miscellaneous
The Holdings LLC Agreement
currently requires, and the Restated
Holdings LLC Agreement will continue
to require, that, so long as MX US 2, Inc.
and its Affiliates own 4% or more of
Holdings, it shall not invest in more
than 5%, or participate in the creation
and/or operation of, a competing
business (the ‘‘Non-compete
Covenant’’). The proposed Restated
Holdings LLC Agreement provides that,
upon vesting of VPRs associated with
Class C Units equal to at least 10% of
the total outstanding Units, the Noncompete Covenant will automatically
expire and be of no further effect.
Additional structural, technical and
non-substantive changes to the Holdings
LLC Agreement are proposed to
accommodate the substantive changes
described above.
28 See proposed Restated Holdings LLC
Agreement Section 7.3(c).
29 See proposed Restated Holdings LLC
Agreement Section 7.6(c).
30 See proposed Restated Holdings LLC
Agreement Section 7.7.
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2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the Act
and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.31 Specifically,
the Exchange believes that its proposed
rule change is consistent with Section
6(b)(5) of the Act32 in that it 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 facilitating
transactions in securities, to remove
impediments to and perfect the
mechanisms of a free and open market
and a national market system and, in
general, to protect investors and the
public interest. Additionally, the
Exchange believes the proposed rule
change is consistent with the
requirement in Section 6(b)(5) of the
Act33 that the rules of an exchange not
be designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers. The
Exchange also believes the proposed
rule change is consistent with Section
6(b)(1) of the Act,34 which requires that
the Exchange be so organized and 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.
Ownership
The Exchange believes that
continuing to apply the existing
limitations on the percentage ownership
of Holdings by Participants is just and
equitable and not unfairly
discriminatory because it will protect all
Members, including Participants, by
ensuring that no Participant will be
permitted to vote more than a 20%
ownership interest in Holdings.
Therefore, no Participant will be able to
assert excessive influence over
Holdings. The diverse ownership of
Holdings will enhance the Exchange’s
ability to enforce compliance by
Holdings with the provisions of the Act,
the rules and regulations thereunder,
and the rules of the Exchange. Further,
the diverse ownership of Holdings will
promote just and equitable principles of
trade, foster cooperation and
coordination with persons engaged in
31 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
32 15
33 Id.
34 15
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U.S.C. 78f(b)(1).
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facilitating transactions in securities,
remove impediments to and perfect the
mechanisms of a free and open market
and a national market system and, in
general, protect investors and the public
interest. The Exchange believes that the
limit is reasonable and not unfairly
discriminatory because each Participant
Member may vote up to 20% so there
is no risk that the limit will prevent a
Participant with substantial ownership
from being adequately represented.
The Exchange believes that the
conversion of Class C Units associated
with vested VPRs into Class A Units at
the end of the VPR Program is just and
equitable and not unfairly
discriminatory. Class A Units are the
primary ownership unit of Holdings.
The conversion is just and equitable and
not unfairly discriminatory because, at
the end of the VPR Program, each
Subscriber will be rewarded with Class
A Units to the extent it has met its
obligations under the VPR Program.
asabaliauskas on DSK5VPTVN1PROD with NOTICES
Voting
Limiting voting on matters submitted
to a vote of all holders of Units to Class
C Units that are associated with vested
VPRs is just and equitable and not
unfairly discriminatory because the
Exchange does not believe it would be
fair to treat Class C Units associated
with unvested VPRs in the same manner
as Class C Units associated with vested
VPRs when it comes to matters of voting
since vested VPRs in the VPR Program
have satisfied certain requirements that
provide value to Holdings in return for
establishing a voting interest in
Holdings. Additionally, the Exchange
believes it is reasonable to exclude Class
C Units associated with unvested VPRs
from voting because Subscribers holding
unvested VPRs are still able to provide
input and make recommendations to
Holdings through the VPR Program.35
The Exchange believes that allowing
the expiration of the Major Action Veto
upon vesting of VPRs associated with
Class C Units equal to at least 25% of
the total outstanding Units is reasonable
and not unfairly discriminatory because
it will allow all Members to exert
influence over the affairs and direction
of Holdings in percentages more closely
aligned with their respective ownership
percentages. Eliminating the Major
Action Veto from both the Restated
Holdings LLC Agreement and the
Limited Liability Company Agreement
of BOX is just and equitable and not
unfairly discriminatory because it will
allow Holdings and BOX to undertake a
broader range of actions without
35 See
supra, note 20.
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allowing a single Member to block such
actions.
The new supermajority voting
requirement that Members holding at
least 67% of all outstanding Voting
Units must vote to approve
Supermajority Actions is fair and
reasonable because it will ensure
sufficient oversight of the commercial
affairs of Holdings and that any
Supermajority Action undertaken is
necessary, appropriate and in the best
interest of Holdings and the Members.
Additionally, supermajority voting will
provide adequate safeguards and
affirmative approval of significant
changes to Holdings and will serve to
protect the interest of the Members. The
Exchange further believes that the
supermajority voting provision is
important given the new, more diverse
ownership structure of Holdings.
Specifically, requiring supermajority
voting will ensure any substantial
change in BOX will have to be approved
by more than a simple majority.
The proposed rule change will foster
key changes to the governance of
Holdings. Equity issued pursuant to the
proposed rule change and in connection
with the VPR Program is intended to
reduce the ownership percentage of the
existing majority owner of Holdings,
MX US 2, Inc., below fifty percent
(50%). If Subscribers meet expected
order flow commitments pursuant to the
VPR Program, the ownership of
Holdings by current Members, including
MX US 2, Inc., will be diluted such that
no single Member will have a majority
ownership.
The elimination of the Major Action
Veto, the addition of supermajority
voting provisions, and the dilution of
MX US 2, Inc.’s ownership below fifty
percent (50%) will give Members other
than MX US 2, Inc. increased voting
power and enhance the Exchange’s
ability to enforce compliance by
Holdings with the Act and the rules of
the Exchange. Further, such voting
provisions will promote just and
equitable principles of trade, foster
cooperation and coordination with
persons engaged in facilitating
transactions in securities, remove
impediments to and perfect the
mechanisms of a free and open market
and a national market system and, in
general, protect investors and the public
interest.
Requiring the written consent of Class
C Members holding at least seventy-five
percent (75%) of then outstanding Class
C Units for any amendment to the
Restated Holdings LLC Agreement that
alters the terms of one or more classes
of Units in a manner that would
materially, adversely and
PO 00000
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Fmt 4703
Sfmt 4703
40105
disproportionately (as compared with
other classes of Units) affect the rights
associated with the Class C Units as a
class is fair, reasonable and not unfairly
discriminatory because it will protect
Class C Units from being unfairly
disadvantaged relative to the other
classes of Units and will prevent the
other classes of Units from unfairly
discriminating against the Class C Units.
Directors
The Exchange believes that setting the
number of Directors that a Member can
designate is fair, reasonable and not
unfairly discriminatory because it will
ensure that the Holdings Board has
broad representation and that no single
Member will be able to exert undue
control and influence over the Holdings
Board. The diverse makeup of the
Holdings Board will enhance the
Exchange’s ability to enforce
compliance by Holdings with the
provisions of the Act, the rules and
regulations thereunder, and the rules of
the Exchange. Further, the Exchange
believes that broad representation will
be beneficial because it will foster
cooperation and coordination, will
contribute to the identification of
opportunities for innovation and will
enhance competition. The Exchange
further believes that the various
percentage thresholds for determining
the number of Directors a Member can
designate fosters cooperation and
coordination with persons engaged in
facilitating transactions in securities,
removes impediments to and perfect the
mechanisms of a free and open market
and a national market system, protects
investors and the public interest, and
are just and equitable and not unfairly
discriminatory because such thresholds
generally align Members’ economic
interests with their respective
representation on the Holdings Board.
Further, the purpose of the VPR
Program is to reward Subscribers that
execute orders on the Exchange; the
percentage thresholds for determining
the number of Directors a Member is
permitted to designate will reward those
Members that contribute to the success
of the Exchange by allowing them to
designate additional Directors to the
Holdings Board. The limitations on
designated members of the Executive
Committee of Holdings is fair,
reasonable and not unfairly
discriminatory because the Executive
Committee has oversight responsibility
over the affairs of Holdings and the
Exchange believes it is reasonable to
limit the membership of the Executive
Committee to those Members that have
a greater economic interest in Holdings.
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asabaliauskas on DSK5VPTVN1PROD with NOTICES
Distributions
The Exchange believes that the
proposed distribution provisions are
consistent with the Act and protects
investors and the public interest
because all financial and regulatory
needs of the Exchange and BOX will be
provided for in determining the amount
each distribution. This rule change
ensures that no funds necessary for the
regulation of the Exchange or BOX will
be distributed to the Members of
Holdings and will provide the Exchange
with the financial ability to carry out the
purposes of the Act, to comply and to
enforce compliance with the provisions
of the Act and the rules and regulations
thereunder, including the rules of the
Exchange, to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade and to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transaction in securities.
Transfers
The Exchange believes that the
limitations on transferring Class C Units
are fair, reasonable and not unfairly
discriminatory. Specifically, requiring
any such Transferee to become a party
to the Members Agreement and the
Restated Holdings LLC Agreement as a
condition of a transfer fosters
cooperation and coordination with
persons engaged in facilitating
transactions in securities, removes
impediments to and perfect the
mechanisms of a free and open market
and a national market system, protects
investors and the public interest, is just
and equitable and not unfairly
discriminatory because all Members are
required to be parties to the Members
Agreement and the Restated Holdings
LLC Agreement, which ensures that the
rule change will apply to all Members.
The limitation on transferring Class C
Units to a transferee that is not an
Affiliate is just and equitable and not
unfairly discriminatory because it
preserves the rights of the other
Members by protecting their ownership
stake in Holdings. Further, the proposed
rights of first refusal, pre-emptive rights,
co-sale rights and drag-along rights are
reasonable and not unfairly
discriminatory as these rights provide
stability among the ownership group,
allow Members to participate in
opportunities for third party
transactions and protect the nature of
the investment made by each Member.
All of the proposed limitations on
equity transfers enhance the Exchange’s
capacity and ability to carry out the
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Jkt 235001
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.
Miscellaneous
The Exchange believes that the
proposed rule change to permit the
potential future expiration of the noncompete obligation of MX US 2, Inc.
fosters cooperation and coordination
with persons engaged in facilitating
transactions in securities, removes
impediments to and perfect the
mechanisms of a free and open market
and a national market system, protects
investors and the public interest, and is
just and equitable and not unfairly
discriminatory. Currently, this
restriction applies only to MX US 2, Inc.
and not to other Members of Holdings.
The expiration of this non-compete
obligation was approved by the existing
Members and will only take effect if MX
US 2, Inc. becomes a minority Member
of Holdings by reducing its ownership
to less than fifty percent (50%) of the
outstanding equity of Holdings. The
expiration of this existing restriction
will place all Members of Holdings on
equal footing with respect to other
investments they wish to make.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange believes that the proposed
rule change will improve competition
by providing market participants with
an incentive to consider and utilize
another market, BOX, when determining
where to execute options contracts and
post liquidity.
The Exchange believes that the
proposed rule change will help the
Exchange achieve the goals of the VPR
Program to increase both intermarket
and intramarket competition by
incenting Subscribers to direct their
orders to the Exchange, which will
enhance the quality of quoting and
increase the volume of contracts traded
there. Notwithstanding these incentives,
Subscribers will still be free to send
orders to other markets, even if they
have not met their volume commitment
for that measurement period; thus the
proposed change will not impose a
burden on competition among
exchanges. To the extent an additional
competitive burden on non-Subscribers
is imposed by the proposed rule change,
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Fmt 4703
Sfmt 4703
the Exchange believes that this is
appropriate because the VPR Program
should incent Participants to direct
additional order flow to the Exchange
and thus provide additional liquidity,
which enhances the quality of BOX and
increases the volume of options traded
on BOX. To the extent that this purpose
is achieved, all of the Exchange’s
Participants, even non-Subscribers,
should benefit from the improved
market liquidity. Enhanced market
quality and increased transaction
volume that results from the anticipated
increase in order flow directed to the
Exchange will benefit all market
participants and improve competition
on the Exchange.
Given the robust competition for
volume among options markets, many of
which offer the same products,
implementing rule changes to help
achieve the goals of a program to attract
order flow like the VPR Program is
consistent with the above-mentioned
goals of the Act. This is especially true
for a smaller options exchange, such as
BOX, which is competing for volume
with much larger exchanges that
dominate the options trading industry.
BOX captures a relatively modest
percentage of the average daily trading
volume in options, so it is unlikely that
the rule change could cause any
competitive harm to the options market
generally or to market participants.
Rather, the proposed rule change, which
will allow BOX to fully implement the
governance provisions of the VPR
Program, is an attempt by a small
options market to attract order volume
away from larger competitors by
adopting an innovative pricing strategy.
Finally, the proposed rule change will
permit an increase in the diversity of
ownership of Holdings such that no one
entity will have a majority ownership of
Holdings. Upon the issuance of Class C
Units to Subscribers, the ownership of
Holdings will be distributed among
more holders and distributed more
evenly among existing holders. If there
is full participation in the VPR Program,
then the ownership of Holdings by its
majority owner will be diluted and no
single Member will have a majority
ownership of Holdings.
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 comments on the proposed
rule change.
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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.
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–BOX–
2015–22, and should be submitted on or
before August 3, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.36
Brent J. Fields,
Secretary.
[FR Doc. 2015–16975 Filed 7–10–15; 8:45 am]
BILLING CODE 8011–01–P
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–
BOX–2015–22 on the subject line.
asabaliauskas on DSK5VPTVN1PROD with NOTICES
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:
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Relating to the
Volume-Based and Multi-Trigger
Threshold
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–BOX–2015–22. 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 such
filing also will be available for
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–75372; File No. SR-Phlx2015–52]
July 7, 2015.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1, and Rule 19b–4 thereunder,2
notice is hereby given that on June 22,
2015, NASDAQ OMX PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to adopt a
new Rule 1095 entitled ‘‘Automated
Removal of Market Maker Quotes’’ of
the rules governing Phlx. The Exchange
proposes to adopt two new Phlx Market
PO 00000
36 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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40107
Maker 3 risk protections, a volume-based
threshold and a multi-trigger threshold.4
The text of the proposed rule change
is available on the Exchange’s Web site
at https://
nasdaqomxphlx.cchwallstreet.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
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the filing is to adopt
two new risk protections for Phlx
specialists, SQTs and RSQTs
(collectively ‘‘Market Makers’’) to
monitor marketplace risk. These
protections are intended to assist Market
Makers to control their trading risks.5
Quoting across many series in an option
creates the possibility of ‘‘rapid fire’’
executions that can create large,
unintended principal positions that
expose Market Makers, who are required
to continuously quote in assigned
options, to potentially significant
3 A ‘‘Market Maker’’ includes Registered Options
Traders (‘‘ROTs’’) (Rule 1014(b)(i) and (ii)), which
includes Streaming Quote Traders (‘‘SQTs’’) (see
Rule 1014(b)(ii)(A)) and Remote Streaming Quote
Traders (‘‘RSQTs’’) (see Rule 1014(b)(ii)(B)). An
SQT is defined in Exchange Rule 1014(b)(ii)(A) as
an ROT who has received permission from the
Exchange to generate and submit option quotations
electronically in options to which such SQT is
assigned. An RSQT is defined in Exchange Rule
1014(b)(ii)(B) as an ROT that is a member or
member organization with no physical trading floor
presence who has received permission from the
Exchange to generate and submit option quotations
electronically in options to which such RSQT has
been assigned. An RSQT may only submit such
quotations electronically from off the floor of the
Exchange. A Market Maker also includes a
specialist, an Exchange member who is registered
as an options specialist pursuant to Rule 1020(a).
4 Market Makers will be required to continue to
utilize the Risk Monitor Mechanism in Rule 1093,
as is the case today.
5 See Rule 1014 entitled ‘‘Obligations and
Restrictions Applicable to Specialists and
Registered Options Traders.’’
E:\FR\FM\13JYN1.SGM
13JYN1
]]>Agencies
[Federal Register Volume 80, Number 133 (Monday, July 13, 2015)]
[Notices]
[Pages 40100-40107]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-16975]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-75374; File No. SR-BOX-2015-22]
Self-Regulatory Organizations; BOX Options Exchange LLC; Notice
of Filing of Proposed Rule Change to Implement the Governance
Provisions of an Equity Rights Program
July 7, 2015.
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 June 25, 2015, BOX Options Exchange LLC (the ``Exchange'')
filed with the Securities and Exchange Commission (the ``Commission'')
the proposed rule change as described in Items I, II, and III below,
which Items have been prepared by the self-regulatory organization. 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 the
Substance of the Proposed Rule Change
The Exchange proposes to implement the governance provisions of an
equity rights program (the ``VPR Program''). Upon Commission approval
of the proposed rule change, BOX Holdings Group LLC (``Holdings''), an
affiliate of the Exchange and direct parent entity of BOX Market LLC, a
facility of the Exchange (``BOX''), proposes to amend the existing
Limited Liability Company Agreement of Holdings (the ``Holdings LLC
Agreement'') by adopting an Amended and Restated Limited Liability
Company Agreement of Holdings (the ``Restated Holdings LLC
Agreement''). There are no other proposed changes to any rule text. The
text of the proposed rule change is available from the principal office
of the Exchange, at the Commission's Public Reference Room and also on
the Exchange's Internet Web site at https://boxexchange.com.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
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
[[Page 40101]]
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to implement the governance provisions of the
VPR Program, in which certain BOX Options Participants (each, a
``Participant'') elected to participate. The Exchange notified all of
its Participants of the opportunity to participate in the VPR Program
by Regulatory Circular published on October 1, 2014. All Participants
that indicated interest in participating in the VPR Program by October
31, 2014 and that subscribed to the VPR Program by January 14, 2015
were permitted to participate in the VPR Program.
The purpose of this rule filing is, subject to Commission approval,
to fulfill a condition to providing Subscribers the full benefits
intended through the VPR Program by permitting Holdings to amend the
Holdings LLC Agreement by adopting the Restated Holdings LLC Agreement.
Background
In order to implement the VPR Program, the Exchange has already
submitted a proposed rule change under Section 19(b)(3)(A)(ii) of the
Securities Exchange Act of 1934 (the ``Act'') \3\ and Rule 19b-4(f)(2)
thereunder,\4\ for immediate effectiveness, inasmuch as it establishes
or changes a due, fee, or other charge imposed by the Exchange.\5\ In
addition, the Exchange is submitting this proposed rule change under
Section 19(b)(1) of the Act \6\ and Rule 19b-4 thereunder,\7\ subject
to Commission approval, to make changes to its company governance
documents to accommodate aspects of the VPR Program that involve or
affect the Restated Holdings LLC Agreement of Holdings.
---------------------------------------------------------------------------
\3\ 15 U.S.C. 78s(b)(3)(A)(ii).
\4\ 17 CFR 240.19b-4(f)(2).
\5\ See Securities Exchange Act Release No. 74114 (January 22,
2015), 80 FR 4611 (January 28, 2015) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change to Implement an Equity
Rights Program). See also Securities Exchange Act Release No. 74576
(March 25, 2015), 80 FR 17122 (March 31, 2015) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change to Clarify Certain
Statements Made in SR-BOX- 2015-03).
\6\ 15 U.S.C. 78s(b)(1).
\7\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
Participants that elected to participate in the VPR Program have
the right to acquire equity in and receive distributions from Holdings,
in exchange for the achievement of certain order flow volume commitment
thresholds on the Exchange over a period of five (5) years and a
nominal initial cash payment. The purpose of the VPR Program is to
promote the long-term interests of the Exchange by incentivizing
Participants to contribute to the growth and success of BOX by
providing enhanced levels of trading volume to BOX.
Upon initiation of the VPR Program by Holdings, Participants that
elected to participate in the VPR Program, met the eligibility criteria
and made the initial cash payment (``Subscribers''), were issued Volume
Performance Rights (``VPRs'') in tranches of twenty (20) VPRs (each, a
``Tranche'') with a minimum subscription of two (2)Tranches per
Subscriber. Twenty-seven (27) Tranches have been issued in connection
with the VPR Program.
Each VPR is comprised of the right to receive 8.5 unvested new
Class C Membership Units of Holdings (``Class C Units''), upon
effectiveness of this rule filing, and an average daily transaction
volume commitment (``VPR Volume Commitment'') equal to 0.0055% of
Industry ADV, as measured in Qualifying Contract Equivalents, for a
total of five (5) years (twenty (20) consecutive measurement
quarters).\8\ The VPR Volume Commitment, in terms of total contracts,
will change based on the movement of the Industry ADV. One VPR per
Tranche will be eligible to vest each quarter of the five (5) year
Program period, subject to the Subscriber meeting its volume commitment
for that quarter. In addition, VPRs may be reallocated among
Subscribers based upon exceeding or failing to meet Subscribers' volume
commitments during the VPR Program period.
---------------------------------------------------------------------------
\8\ The measurement of order flow for purposes of the VPR
Program first began on January 12, 2015, the first trading day after
the first Subscribers subscribed to the VPR Program. However, BOX
extended the deadline to accommodate Subscribers; therefore, the
first measurement date began later for a Subscriber that submitted
the required documents and payment during the extension period. See
Securities Exchange Act Release No. 74171 (January 29, 2015), 80 FR
6153 (February 4, 2015) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Extend the Deadline for
the VPR Program to January 14, 2015).
---------------------------------------------------------------------------
Ownership Units
As discussed above, each VPR held by a Subscriber includes the
right to receive 8.5 Class C Units of Holdings within ten (10) business
days after effectiveness of this rule filing and the completion or
waiver of the conditions to closing. Currently, Holdings has issued and
outstanding Class A and Class B membership units. Class C Units will be
created by the adoption of the Restated Holdings LLC Agreement and, at
such time, Holdings will admit the Subscribers as Class C Members.
Class C Units may be held in fractional numbers equal to one half Unit.
Units may, but need not be, represented by physical certificates. The
Restated Holdings LLC Agreement provides for the maintenance of capital
accounts and other accounting and tax provisions relating to the Class
C Units.
The existing limitations on the percentage ownership of Holdings by
Participants will continue to apply. In the event that a Member, or any
Related Person \9\ of a Member, is a Participant pursuant to the
Exchange Rules, and the Member owns more than 20% of the Units, alone
or together with any
[[Page 40102]]
Related Person of the Member (Units owned in excess of 20% being
referred to as ``Excess Units''), the Member and its designated
Directors will have no voting rights with respect to the Excess Units
on any action relating to BOX Holdings nor will the Member or its
designated Directors, if any, be entitled to give any proxy with
respect to the Excess Units in relation to a vote of the Members;
provided, however, that whether or not the Member or its designated
Directors, if any, otherwise participates in a meeting in person or by
proxy, the Member's Excess Units will be counted for quorum purposes
and will be voted by the person presiding over quorum and vote matters
in the same proportion as the Units held by the other Members are voted
(including any abstentions from voting).\10\
---------------------------------------------------------------------------
\9\ ``Related Person'' means with respect to any Person: (A) any
Affiliate of the Person; (B) any other Person with which the 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 Units; (C) 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 Exchange Act) or
director of the Person and, in the case of a Person that is a
partnership or limited liability company, any general partner,
managing member or manager of the Person, as applicable; (D) in the
case of any BOX Options Participant who is at the same time a
broker-dealer, any Person that is associated with the BOX Options
Participant (as determined using the definition of ``person
associated with a member'' as defined under Section 3(a)(21) of the
Exchange Act); (E) in the case of a Person that is a natural person
and a BOX Options Participant, any broker or dealer that is also a
BOX Options Participant with which the Person is associated; (F) in
the case of a Person that is a natural person, any relative or
spouse of the Person, or any relative of the spouse who has the same
home as the Person or who is a director or officer of the Exchange
or any of its parents or subsidiaries; (G) in the case of a Person
that is an executive officer (as defined under Rule 3b-7 under the
Exchange Act) or a director of a company, corporation or similar
entity, the company, corporation or entity, as applicable; and (H)
in the case of a Person that is a general partner, managing member
or manager of a partnership or limited liability company, the
partnership or limited liability company, as applicable.
``Affiliate'' means, with respect to any Person, any other Person
controlling, controlled by or under common control with, the Person.
As used in this definition, the term ``control'' means the
possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise
with respect to the Person. A Person is presumed to control any
other Person, if that Person: (i) is a director, general partner, or
officer exercising executive responsibility (or having similar
status or performing similar functions); (ii) directly or indirectly
has the right to vote 25 percent or more of a class of voting
security or has the power to sell or direct the sale of 25 percent
or more of a class of voting securities of the Person; or (iii) in
the case of a partnership, has contributed, or has the right to
receive upon dissolution, 25 percent or more of the capital of the
partnership. See proposed Restated Holdings LLC Agreement Section
1.1.
\10\ See proposed Restated Holdings LLC Agreement Section
7.4(h).
---------------------------------------------------------------------------
Upon completion of the VPR Program, all outstanding Class C Units
associated with vested VPRs will be automatically converted into an
equal number of Class A Units and all outstanding Class C Units
associated with unvested VPRs will be automatically cancelled and be of
no further effect. All rights related to Class C Units will terminate
automatically upon cancellation or conversion and rights related to the
converted Class A Units will remain, subject to the terms of the
Restated Holdings LLC Agreement.\11\
---------------------------------------------------------------------------
\11\ See proposed Restated Holdings LLC Agreement Section
2.5(e).
---------------------------------------------------------------------------
Voting
Each Class C Member will have the right to vote its Class C Units
that are associated with vested VPRs (``Voting Class C Units'') on
matters submitted to a vote of all holders of Units. VPRs will vest in
accordance with the vesting provisions of the VPR Program.\12\ Members
holding Voting Class C Units will vote with Members holding all other
classes of Units. Members holding Voting Units \13\ will be entitled to
vote together, as a single class, each with one vote per Voting Unit so
held.\14\ Issued and outstanding Class C Units that are not Voting
Class C Units will not have voting rights. Accordingly, as a Subscriber
meets or exceeds volume commitments, voting powers as Class C Member of
Holdings will increase. Similarly, if Subscribers do not meet volume
commitments, voting powers will decrease.
---------------------------------------------------------------------------
\12\ See supra, note 5.
\13\ ``Voting Unit'' means any Class A Unit, Class B Unit, or
Voting Class C Unit.
\14\ See proposed Restated Holdings LLC Agreement Section
4.13(a).
---------------------------------------------------------------------------
The Holdings LLC Agreement currently provides, and the Restated
Holdings LLC Agreement will continue to provide, that any Director
designated by either MX US 2, Inc. or IB Exchange Corp may effectively
block certain actions of Holdings (the ``Major Action Veto''). The
Restated Holdings LLC Agreement provides that, upon vesting of VPRs
associated with Class C Units equal to at least 25% of the total
outstanding Units, the Major Action Veto will automatically expire and
be of no further effect. Also, when the 25% threshold is met, the
Restated Holdings LLC Agreement also provides that Holdings and its
Members will take all necessary action to amend the Limited Liability
Company Agreement of BOX to eliminate the major action veto provisions
therein that are applicable to BOX and inure to the benefit of MX US 2,
Inc. and IB Exchange Corp and to provide that the executive committee
of BOX will be constituted in the same manner as the Executive
Committee of Holdings.\15\
---------------------------------------------------------------------------
\15\ See proposed Restated Holdings LLC Agreement Section 16.4.
---------------------------------------------------------------------------
The Restated Holdings LLC Agreement includes a new supermajority
voting requirement that Members holding at least 67% of all outstanding
Voting Units must vote to approve certain actions (the ``Supermajority
Actions'') by Holdings.\16\ The new supermajority voting requirement
will be in addition to all other existing voting requirements
applicable to Holdings and any actions Holdings may take, including the
Major Action Veto. This new requirement provides additional protections
to Subscribers and Members that Supermajority Actions will not be
undertaken without broad support among holders of Voting Units.
---------------------------------------------------------------------------
\16\ See proposed Restated Holdings LLC Agreement Section
4.13(b).
---------------------------------------------------------------------------
Supermajority Actions include the following: (i) Merger or
consolidation of Holdings or BOX with any other entity, a sale of
Holdings or BOX, or the sale, lease or transfer, by Holdings or BOX, of
any material portion of its assets; (ii) entry by Holdings or BOX into
any line of business other than the business described in Article 3 of
the Restated Holdings LLC Agreement or in Article 3 of the Limited
Liability Company Agreement of BOX; (iii) conversion of Holdings or BOX
from a Delaware limited liability company into any other type of
entity; (iv) except as expressly contemplated by a members agreement
among the Members (the ``Members Agreement''), Holdings or BOX entering
into any agreement, commitment, or transaction with any Member or any
of its Affiliates other than transactions or agreements upon
commercially reasonable terms that are no less favorable to Holdings or
BOX, respectively, than Holdings or BOX would obtain in a comparable
arms-length transaction or agreement with a third party; (v) to the
fullest extent permitted by law, taking any action to effect the
voluntary, or which would precipitate an involuntary, dissolution or
winding-up of Holdings or BOX; (vi) except as otherwise provided in the
facility agreement between the Exchange and BOX (the ``Facility
Agreement'') or to the extent otherwise required by the Exchange to
fulfill its regulatory functions or responsibilities or to oversee the
BOX Market as determined by the board of the Exchange, the issuance, by
Holdings, of any additional equity interests in, or any securities
exchangeable for or convertible into equity securities of, Holdings
other than the following, as approved by the Holdings Board and in the
aggregate not to exceed ten percent (10%) of the outstanding equity
interests of Holdings: (A) Equity interests, options or convertible
securities issued as a dividend, Unit split or distribution on existing
Units, (B) equity interests issued to employees or Directors of, or
consultants or advisors to, Holdings or one or more subsidiaries
thereof pursuant to a plan, agreement or arrangement, (C) equity
interests issued upon the exercise of options or convertible securities
issued by Holdings, provided each such exercise or conversion is in
accordance with the terms of each such option or security, and (D)
equity interests issued by Holdings in the acquisition of any business;
(vii) the issuance, by BOX, of any additional equity interests in, or
any securities exchangeable for or convertible into equity securities
of, BOX, except as otherwise provided in the Facility Agreement or to
the extent otherwise required by the Exchange to fulfill its regulatory
functions or responsibilities or to oversee the BOX Market as
determined by the board of the Exchange; (viii) permitting BOX to
operate the BOX Market utilizing any other regulatory services provider
other than the Exchange, except as otherwise provided in the Facility
Agreement or to the extent otherwise required by the Exchange to
fulfill its regulatory functions or responsibilities or to oversee the
BOX Market as determined by the Exchange Board; (ix) except as
otherwise provided in the Facility Agreement, entering into, or
permitting any subsidiary of Holdings to enter into,
[[Page 40103]]
any partnership, joint venture or other similar joint business
undertaking; (x) making a fundamental change to the business model of
BOX to be other than a for-profit business, except to the extent
otherwise required by the Exchange to fulfill its regulatory functions
or responsibilities or to oversee the BOX Market as determined by the
Exchange Board; (xi) subject to the transfer provisions of the Restated
Holdings LLC Agreement, the acquisition of any Units by any person that
results in the person, alone or together with any Affiliate of the
person, newly holding an aggregate percentage interest equal to or
greater than twenty percent (20%); (xii) altering the provisions
relating to the designation of Directors set forth in Section 4.1(a),
except to the extent otherwise required by the Exchange to fulfill its
regulatory functions or responsibilities or to oversee the BOX Market
as determined by the Exchange Board; and (xiii) altering or amending
any of the Supermajority Actions provisions, except to the extent
otherwise required by the Exchange to fulfill its regulatory functions
or responsibilities or to oversee the BOX Market as determined by the
Exchange Board.
Amendments to the Restated Holdings LLC Agreement that alter the
terms of one or more classes of Units in a manner that would
materially, adversely and disproportionately (as compared with other
classes of Units) affect the rights associated with the Class C Units
as a class will require the written consent of holders of Class C Units
(``Class C Members'') holding at least seventy-five percent (75%) of
the then outstanding Class C Units and any amendment to the Restated
Holdings LLC Agreement that would have a disproportionate (with respect
to the same class), material and adverse effect on the rights
associated with any Units, or impose any additional, disproportionate
(with respect to the same Class) and material liability or obligation
upon the holder of any Units, will not be effective without the consent
of the holders of those Units.\17\
---------------------------------------------------------------------------
\17\ See proposed Restated Holdings LLC Agreement Section
18.1(b)(ii).
---------------------------------------------------------------------------
Directors
The Restated Holdings LLC Agreement will amend the provisions
governing composition of the Holdings Board. Currently, MX US 2, Inc.
has the right to designate up to five (5) Directors, IB Exchange Corp
has the right to designate up to two (2) Directors and each other
Member has the right to designate one (1) Director to the Holdings
Board and the Holdings Board has the power to increase the size of the
Holdings Board and to authorize new Members to designate Directors.
Under the Restated Holdings LLC Agreement, no Member may designate
more than three (3) Directors and each Member may designate the maximum
number of Directors permitted under any one (1) (but not more than one)
of the following criteria: (i) Each Member, so long as it (together
with its respective Affiliates) holds a combined total of Class A Units
and Class B Units greater than two and one-half percent (2.5%) of all
outstanding Voting Units, will be entitled to designate one (1)
Director, (ii) each Member, so long as it (together with its respective
Affiliates) holds a combined total of Voting Class C Units greater than
four percent (4%) of all outstanding Voting Units, will be entitled to
designate one (1) Director, (iii) each Member, so long as it (together
with its respective Affiliates) holds a combined total of Voting Units
greater than fourteen percent (14%) of all outstanding Voting Units,
will be entitled to designate two (2) Directors, (iv) each Member, so
long as it (together with its respective Affiliates) holds a combined
total of Voting Units greater than twenty-eight percent (28%) of all
outstanding Voting Units, will be entitled to designate three (3)
Directors, and (v) each other existing Member may designate one (1)
Director.\18\ Directors serving on the Holdings Board may also serve on
the board of directors of any subsidiary of Holdings. If a Member
ceases to qualify for the right to designate a Director then serving,
that Director will then automatically be removed from the Holdings
Board.
---------------------------------------------------------------------------
\18\ See proposed Restated Holdings LLC Agreement Section 4.1.
---------------------------------------------------------------------------
The Restated Holdings LLC Agreement will also amend the provisions
governing the right of Members to designate members of the Executive
Committee of Holdings (the ``Executive Committee''), if any. Currently,
MX US 2, Inc. has the right to designate up to two (2) members of the
Executive Committee (``EC Members'') and IB Exchange Corp has the right
to designate one (1) EC Member. Under the Restated Holdings LLC
Agreement, any Member with the right to designate three (3) Directors
to the Holdings Board will have the right to designate up to two (2) EC
Members and any Member with the right to designate two (2) Directors to
the Holdings Board will have the right to designate one (1) EC Member.
Other provisions relating to the composition of the Executive Committee
will be unchanged.\19\
---------------------------------------------------------------------------
\19\ See proposed Restated Holdings LLC Agreement Section
4.2(c).
---------------------------------------------------------------------------
Subscribers will also have the right to designate one individual to
a new Advisory Committee organized by Holdings, the purpose of which
will be to advise and make recommendations to Holdings with respect to
the Exchange's competitiveness in the marketplace. Only Subscribers
will have the right to designate individuals to serve on the Advisory
Committee.\20\ The Advisory Committee will be advisory only and will
not have any powers, votes or fiduciary duties to Holdings.
---------------------------------------------------------------------------
\20\ See Securities Exchange Act Release No. 74114 (January 22,
2015), 80 FR 4611 at 4613 (January 28, 2015) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change to Implement an
Equity Rights Program).
---------------------------------------------------------------------------
Distributions
Once per year, Holdings will make a distribution (an ``Annual
Distribution'') to its Members to the extent funds are available for
distribution.\21\ In determining the amount of each Annual
Distribution, the Holdings Board will first provide for any regulatory
needs of BOX and the Exchange, as determined by the Exchange Board, and
any Annual Distribution amounts will be calculated after taking into
account all financial and regulatory needs of the Exchange, as
determined by the Exchange.\22\ The Annual Distribution will be equal
to 80% of Free Cash Flow,\23\ except as limited by applicable law,
including for regulatory and compliance purposes. In addition, another
15% of Free Cash Flow will be included in the distribution, except to
the extent the Holdings Board determines that any portion thereof is
(i) required for the operations of Holdings and its subsidiaries, which
will be reflected on the annual budget for the next year, (ii) required
for payment of liabilities or
[[Page 40104]]
expenses of Holdings, or (iii) required as a reserve to make reasonable
provision to pay other claims and obligations then known to, or
reasonably anticipated by, BOX or Holdings. When, as and if declared by
the Holdings Board, Holdings will make the cash distribution to each
Member pro rata in accordance with the number of Units held by each
Member, which will be determined by multiplying the aggregate Annual
Distribution amount by each Member's Percentage Interest \24\ on the
record date. Distributions to Class C Members may be adjusted as
provided in the Members Agreement.\25\
---------------------------------------------------------------------------
\21\ Distributions on Class C Units will not be paid until this
rule change is effective. Distributions payable on Class C Units
that accrue before such effectiveness will be held in a segregated
account until such effectiveness. If this rule filing does not
become effective by July 1, 2016, a Subscriber may terminate its
involvement in the VPR Program and any and all distributions with
respect to Class C Units payable to that Subscriber held in the
segregated account will be released back to Holdings and distributed
to existing Members in accordance with the terms of the Holdings LLC
Agreement. Id at 4612.
\22\ See proposed Restated Holdings LLC Agreement Section 8.1.
\23\ ``Free Cash Flow'' means consolidated net income, plus
depreciation, less capital expenditures (in each case calculated in
accordance with generally accepted accounting principles in the
United States, as in effect from time to time) of Holdings and BOX,
for the calendar year. See proposed Restated Holdings LLC Agreement
Section 1.1.
\24\ ``Percentage Interest'' with respect to a Member means the
ratio of the number of Units held by the Member to the total of all
of the issued Units, expressed as a percentage and determined with
respect to each class of Units, whenever applicable. ``Units'' means
Class A Membership Units, Class B Membership Units and Class C
Membership Units of Holdings, whether or not associated with vested
VPRs. See proposed Restated Holdings LLC Agreement Section 1.1.
\25\ See proposed Restated Holdings LLC Agreement Section 8.1
and see supra, note 5.
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Transfers
Class C Units are not expected to be registered for resale by
Holdings and may not be transferred without complying with, or
qualifying for an exemption from, the registration requirements of the
Securities Act. Any Transferee of Class C Units must become a party to
the Members Agreement and the Restated Holdings LLC Agreement as a
condition to the transfer.
Transfers of Class C Units will be subject to certain rights of
first refusal. Before a Class C Member may transfer Class C Units to a
transferee that is not an Affiliate, the Class C Member must first
offer to sell the Class C Units to Holdings on the same terms\26\ and,
to the extent Holdings does not exercise its primary right of first
refusal, the Class C Units must then be offered to the other Class C
Members on the same terms.\27\
---------------------------------------------------------------------------
\26\ See proposed Restated Holdings LLC Agreement Section 7.2.
\27\ See proposed Restated Holdings LLC Agreement Section
7.3(b).
---------------------------------------------------------------------------
Class C Units will include pre-emptive rights. In the event
Holdings proposes to issue and sell new equity securities of Holdings,
other than for certain customary exceptions, a Class C Member will have
the right to maintain its percentage ownership in Holdings represented
by the Class C Units it holds, by electing to purchase from Holdings,
on the same terms, a percentage of the new securities equal to the
percentage of all outstanding securities of Holdings represented by the
outstanding Class C Units held by the Class C Member.\28\
---------------------------------------------------------------------------
\28\ See proposed Restated Holdings LLC Agreement Section
7.3(c).
---------------------------------------------------------------------------
Class C Units will be subject to co-sale rights. In the event a
Class C Member proposes to Transfer Voting Class C Units (a
``Transferring Member'') to a transferee that is not an Affiliate, each
other Class C Member will have the right to sell a portion of its
Voting Class C Units to the transferee on the same terms. All Class C
Members that elect to exercise this right of co-sale may, collectively,
sell a number of Voting Class C Units equal to one-half (1/2) of the
total number of Voting Class C Units proposed to be sold by the
Transferring Member. If more than one Class C Member elects to exercise
this co-sale right, the number of Voting Class C Units each may sell
will be divided pro rata among them based upon their relative ownership
of Voting Class C Units.\29\
---------------------------------------------------------------------------
\29\ See proposed Restated Holdings LLC Agreement Section
7.6(c).
---------------------------------------------------------------------------
Class C Units will be subject to drag-along rights. In the event
that holders of at least seventy-five percent (75%) of the then
outstanding Voting Units, including at least seventy-five percent (75%)
of the then outstanding Voting Class C Units (collectively, the
``Selling Members'') approve a sale of Holdings in writing, specifying
that the drag-along rights will apply to the transaction, then each
Class C Member will be required to approve, cooperate and participate
as a seller of Class C Units in the transaction, subject to certain
customary exceptions.\30\
---------------------------------------------------------------------------
\30\ See proposed Restated Holdings LLC Agreement Section 7.7.
---------------------------------------------------------------------------
Miscellaneous
The Holdings LLC Agreement currently requires, and the Restated
Holdings LLC Agreement will continue to require, that, so long as MX US
2, Inc. and its Affiliates own 4% or more of Holdings, it shall not
invest in more than 5%, or participate in the creation and/or operation
of, a competing business (the ``Non-compete Covenant''). The proposed
Restated Holdings LLC Agreement provides that, upon vesting of VPRs
associated with Class C Units equal to at least 10% of the total
outstanding Units, the Non-compete Covenant will automatically expire
and be of no further effect.
Additional structural, technical and non-substantive changes to the
Holdings LLC Agreement are proposed to accommodate the substantive
changes described above.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\31\ Specifically, the Exchange believes that its proposed rule
change is consistent with Section 6(b)(5) of the Act\32\ in that it 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 facilitating transactions in
securities, to remove impediments to and perfect the mechanisms of a
free and open market and a national market system and, in general, to
protect investors and the public interest. Additionally, the Exchange
believes the proposed rule change is consistent with the requirement in
Section 6(b)(5) of the Act\33\ that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers. The Exchange also believes the proposed rule
change is consistent with Section 6(b)(1) of the Act,\34\ which
requires that the Exchange be so organized and 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.
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\31\ 15 U.S.C. 78f(b).
\32\ 15 U.S.C. 78f(b)(5).
\33\ Id.
\34\ 15 U.S.C. 78f(b)(1).
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Ownership
The Exchange believes that continuing to apply the existing
limitations on the percentage ownership of Holdings by Participants is
just and equitable and not unfairly discriminatory because it will
protect all Members, including Participants, by ensuring that no
Participant will be permitted to vote more than a 20% ownership
interest in Holdings. Therefore, no Participant will be able to assert
excessive influence over Holdings. The diverse ownership of Holdings
will enhance the Exchange's ability to enforce compliance by Holdings
with the provisions of the Act, the rules and regulations thereunder,
and the rules of the Exchange. Further, the diverse ownership of
Holdings will promote just and equitable principles of trade, foster
cooperation and coordination with persons engaged in
[[Page 40105]]
facilitating transactions in securities, remove impediments to and
perfect the mechanisms of a free and open market and a national market
system and, in general, protect investors and the public interest. The
Exchange believes that the limit is reasonable and not unfairly
discriminatory because each Participant Member may vote up to 20% so
there is no risk that the limit will prevent a Participant with
substantial ownership from being adequately represented.
The Exchange believes that the conversion of Class C Units
associated with vested VPRs into Class A Units at the end of the VPR
Program is just and equitable and not unfairly discriminatory. Class A
Units are the primary ownership unit of Holdings. The conversion is
just and equitable and not unfairly discriminatory because, at the end
of the VPR Program, each Subscriber will be rewarded with Class A Units
to the extent it has met its obligations under the VPR Program.
Voting
Limiting voting on matters submitted to a vote of all holders of
Units to Class C Units that are associated with vested VPRs is just and
equitable and not unfairly discriminatory because the Exchange does not
believe it would be fair to treat Class C Units associated with
unvested VPRs in the same manner as Class C Units associated with
vested VPRs when it comes to matters of voting since vested VPRs in the
VPR Program have satisfied certain requirements that provide value to
Holdings in return for establishing a voting interest in Holdings.
Additionally, the Exchange believes it is reasonable to exclude Class C
Units associated with unvested VPRs from voting because Subscribers
holding unvested VPRs are still able to provide input and make
recommendations to Holdings through the VPR Program.\35\
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\35\ See supra, note 20.
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The Exchange believes that allowing the expiration of the Major
Action Veto upon vesting of VPRs associated with Class C Units equal to
at least 25% of the total outstanding Units is reasonable and not
unfairly discriminatory because it will allow all Members to exert
influence over the affairs and direction of Holdings in percentages
more closely aligned with their respective ownership percentages.
Eliminating the Major Action Veto from both the Restated Holdings LLC
Agreement and the Limited Liability Company Agreement of BOX is just
and equitable and not unfairly discriminatory because it will allow
Holdings and BOX to undertake a broader range of actions without
allowing a single Member to block such actions.
The new supermajority voting requirement that Members holding at
least 67% of all outstanding Voting Units must vote to approve
Supermajority Actions is fair and reasonable because it will ensure
sufficient oversight of the commercial affairs of Holdings and that any
Supermajority Action undertaken is necessary, appropriate and in the
best interest of Holdings and the Members. Additionally, supermajority
voting will provide adequate safeguards and affirmative approval of
significant changes to Holdings and will serve to protect the interest
of the Members. The Exchange further believes that the supermajority
voting provision is important given the new, more diverse ownership
structure of Holdings. Specifically, requiring supermajority voting
will ensure any substantial change in BOX will have to be approved by
more than a simple majority.
The proposed rule change will foster key changes to the governance
of Holdings. Equity issued pursuant to the proposed rule change and in
connection with the VPR Program is intended to reduce the ownership
percentage of the existing majority owner of Holdings, MX US 2, Inc.,
below fifty percent (50%). If Subscribers meet expected order flow
commitments pursuant to the VPR Program, the ownership of Holdings by
current Members, including MX US 2, Inc., will be diluted such that no
single Member will have a majority ownership.
The elimination of the Major Action Veto, the addition of
supermajority voting provisions, and the dilution of MX US 2, Inc.'s
ownership below fifty percent (50%) will give Members other than MX US
2, Inc. increased voting power and enhance the Exchange's ability to
enforce compliance by Holdings with the Act and the rules of the
Exchange. Further, such voting provisions will promote just and
equitable principles of trade, foster cooperation and coordination with
persons engaged in facilitating transactions in securities, remove
impediments to and perfect the mechanisms of a free and open market and
a national market system and, in general, protect investors and the
public interest.
Requiring the written consent of Class C Members holding at least
seventy-five percent (75%) of then outstanding Class C Units for any
amendment to the Restated Holdings LLC Agreement that alters the terms
of one or more classes of Units in a manner that would materially,
adversely and disproportionately (as compared with other classes of
Units) affect the rights associated with the Class C Units as a class
is fair, reasonable and not unfairly discriminatory because it will
protect Class C Units from being unfairly disadvantaged relative to the
other classes of Units and will prevent the other classes of Units from
unfairly discriminating against the Class C Units.
Directors
The Exchange believes that setting the number of Directors that a
Member can designate is fair, reasonable and not unfairly
discriminatory because it will ensure that the Holdings Board has broad
representation and that no single Member will be able to exert undue
control and influence over the Holdings Board. The diverse makeup of
the Holdings Board will enhance the Exchange's ability to enforce
compliance by Holdings with the provisions of the Act, the rules and
regulations thereunder, and the rules of the Exchange. Further, the
Exchange believes that broad representation will be beneficial because
it will foster cooperation and coordination, will contribute to the
identification of opportunities for innovation and will enhance
competition. The Exchange further believes that the various percentage
thresholds for determining the number of Directors a Member can
designate fosters cooperation and coordination with persons engaged in
facilitating transactions in securities, removes impediments to and
perfect the mechanisms of a free and open market and a national market
system, protects investors and the public interest, and are just and
equitable and not unfairly discriminatory because such thresholds
generally align Members' economic interests with their respective
representation on the Holdings Board. Further, the purpose of the VPR
Program is to reward Subscribers that execute orders on the Exchange;
the percentage thresholds for determining the number of Directors a
Member is permitted to designate will reward those Members that
contribute to the success of the Exchange by allowing them to designate
additional Directors to the Holdings Board. The limitations on
designated members of the Executive Committee of Holdings is fair,
reasonable and not unfairly discriminatory because the Executive
Committee has oversight responsibility over the affairs of Holdings and
the Exchange believes it is reasonable to limit the membership of the
Executive Committee to those Members that have a greater economic
interest in Holdings.
[[Page 40106]]
Distributions
The Exchange believes that the proposed distribution provisions are
consistent with the Act and protects investors and the public interest
because all financial and regulatory needs of the Exchange and BOX will
be provided for in determining the amount each distribution. This rule
change ensures that no funds necessary for the regulation of the
Exchange or BOX will be distributed to the Members of Holdings and will
provide the Exchange with the financial ability to carry out the
purposes of the Act, to comply and to enforce compliance with the
provisions of the Act and the rules and regulations thereunder,
including the rules of the Exchange, to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade and to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transaction in
securities.
Transfers
The Exchange believes that the limitations on transferring Class C
Units are fair, reasonable and not unfairly discriminatory.
Specifically, requiring any such Transferee to become a party to the
Members Agreement and the Restated Holdings LLC Agreement as a
condition of a transfer fosters cooperation and coordination with
persons engaged in facilitating transactions in securities, removes
impediments to and perfect the mechanisms of a free and open market and
a national market system, protects investors and the public interest,
is just and equitable and not unfairly discriminatory because all
Members are required to be parties to the Members Agreement and the
Restated Holdings LLC Agreement, which ensures that the rule change
will apply to all Members. The limitation on transferring Class C Units
to a transferee that is not an Affiliate is just and equitable and not
unfairly discriminatory because it preserves the rights of the other
Members by protecting their ownership stake in Holdings. Further, the
proposed rights of first refusal, pre-emptive rights, co-sale rights
and drag-along rights are reasonable and not unfairly discriminatory as
these rights provide stability among the ownership group, allow Members
to participate in opportunities for third party transactions and
protect the nature of the investment made by each Member. All of the
proposed limitations on equity transfers enhance the Exchange's
capacity and ability 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.
Miscellaneous
The Exchange believes that the proposed rule change to permit the
potential future expiration of the non-compete obligation of MX US 2,
Inc. fosters cooperation and coordination with persons engaged in
facilitating transactions in securities, removes impediments to and
perfect the mechanisms of a free and open market and a national market
system, protects investors and the public interest, and is just and
equitable and not unfairly discriminatory. Currently, this restriction
applies only to MX US 2, Inc. and not to other Members of Holdings. The
expiration of this non-compete obligation was approved by the existing
Members and will only take effect if MX US 2, Inc. becomes a minority
Member of Holdings by reducing its ownership to less than fifty percent
(50%) of the outstanding equity of Holdings. The expiration of this
existing restriction will place all Members of Holdings on equal
footing with respect to other investments they wish to make.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange believes that
the proposed rule change will improve competition by providing market
participants with an incentive to consider and utilize another market,
BOX, when determining where to execute options contracts and post
liquidity.
The Exchange believes that the proposed rule change will help the
Exchange achieve the goals of the VPR Program to increase both
intermarket and intramarket competition by incenting Subscribers to
direct their orders to the Exchange, which will enhance the quality of
quoting and increase the volume of contracts traded there.
Notwithstanding these incentives, Subscribers will still be free to
send orders to other markets, even if they have not met their volume
commitment for that measurement period; thus the proposed change will
not impose a burden on competition among exchanges. To the extent an
additional competitive burden on non-Subscribers is imposed by the
proposed rule change, the Exchange believes that this is appropriate
because the VPR Program should incent Participants to direct additional
order flow to the Exchange and thus provide additional liquidity, which
enhances the quality of BOX and increases the volume of options traded
on BOX. To the extent that this purpose is achieved, all of the
Exchange's Participants, even non-Subscribers, should benefit from the
improved market liquidity. Enhanced market quality and increased
transaction volume that results from the anticipated increase in order
flow directed to the Exchange will benefit all market participants and
improve competition on the Exchange.
Given the robust competition for volume among options markets, many
of which offer the same products, implementing rule changes to help
achieve the goals of a program to attract order flow like the VPR
Program is consistent with the above-mentioned goals of the Act. This
is especially true for a smaller options exchange, such as BOX, which
is competing for volume with much larger exchanges that dominate the
options trading industry. BOX captures a relatively modest percentage
of the average daily trading volume in options, so it is unlikely that
the rule change could cause any competitive harm to the options market
generally or to market participants. Rather, the proposed rule change,
which will allow BOX to fully implement the governance provisions of
the VPR Program, is an attempt by a small options market to attract
order volume away from larger competitors by adopting an innovative
pricing strategy.
Finally, the proposed rule change will permit an increase in the
diversity of ownership of Holdings such that no one entity will have a
majority ownership of Holdings. Upon the issuance of Class C Units to
Subscribers, the ownership of Holdings will be distributed among more
holders and distributed more evenly among existing holders. If there is
full participation in the VPR Program, then the ownership of Holdings
by its majority owner will be diluted and no single Member will have a
majority ownership of Holdings.
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 comments on the
proposed rule change.
[[Page 40107]]
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-BOX-2015-22 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-BOX-2015-22. 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 such 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-BOX-2015-22, and should be
submitted on or before August 3, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-16975 Filed 7-10-15; 8:45 am]
BILLING CODE 8011-01-P
