Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice of Filing of a Proposed Rule Change in Connection With the Proposed Corporate Transaction Involving Bats Global Markets, Inc. and CBOE Holdings, Inc., 80114-80123 [2016-27369]
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Federal Register / Vol. 81, No. 220 / Tuesday, November 15, 2016 / Notices
notice and an opportunity to be heard
before a neutral tribunal. Moreover, the
Exchange anticipates using the authority
provided by these rules sparingly.
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 not
necessary or appropriate in furtherance
of the purposes of the Act. The changes
are being proposed to provide an
important regulatory tool to the
Exchange and FINRA, acting on its
behalf, which will protect investors
when violative conduct is being taken
by a member or person associated with
a member, and time is of the essence to
prevent harm, or further harm, to
investors.
The proposed change does not impose
a burden on competition among
participants or other venues because it
will only be used in circumstances
where investor harm is imminent or is
occurring. Thus, to the extent a burden
on competition results from use of the
authority provided by the proposed
rules, such burden is necessary to
protect investors, which is consistent
with the purposes of the Act.
mstockstill on DSK3G9T082PROD with NOTICES
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
IV. Solicitation of Comments
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, if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to Section
19(b)(3)(A)(iii) of the Act 43 and
subparagraph (f)(6) of Rule 19b–4
thereunder.44
The Exchange has asked the
Commission to waive the 30-day
operative delay so that the proposal may
become operative upon filing. The
Exchange has stated that it is requesting
this waiver so that the Exchange could
apply, at the earliest time possible, the
authority to issue temporary cease and
43 15
44 17
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6).
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desist orders and explicit authority to
impose permanent cease and desist
orders as a remedy in disciplinary cases.
The Exchange explained that although it
does not anticipate that it will be
necessary to use this authority, when its
cease and desist authority is needed, the
Exchange must be able to move swiftly
to prevent or stop investor harm. The
Commission believes that waiving the
30-day operative delay is consistent
with the protection of investors and the
public interest because this waiver will
enable the Exchange to utilize the
temporary or permanent cease and
desist authority described herein
without delay in the unlikely event that
circumstances arise that warrant its use.
For this reason, the Commission hereby
waives the 30-day operative delay and
designates the proposed rule change as
operative upon filing.45
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.
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–
BX–2016–055 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–BX–2016–055. 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
45 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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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–BX–
2016–055, and should be submitted on
or December 6, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.46
Brent J. Fields,
Secretary.
[FR Doc. 2016–27365 Filed 11–14–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79264; File No. SRBatsEDGX–2016–60]
Self-Regulatory Organizations; Bats
EDGX Exchange, Inc.; Notice of Filing
of a Proposed Rule Change in
Connection With the Proposed
Corporate Transaction Involving Bats
Global Markets, Inc. and CBOE
Holdings, Inc.
November 8, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on November
2, 2016, Bats EDGX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
46 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78f(a).
1 15
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change as described in Items I, II and III
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange filed a proposed rule
change (the ‘‘Proposed Rule Change’’) in
connection with the proposed corporate
transaction (the ‘‘Transaction’’), as
described in more detail below,
involving its ultimate parent company,
Bats Global Markets, Inc. (‘‘BGM’’),
CBOE Holdings, Inc. (‘‘CBOE
Holdings’’), and two wholly owned
subsidiaries of CBOE Holdings, CBOE
Corporation and CBOE V, LLC (‘‘CBOE
V’’). CBOE Holdings is the parent
company of Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’) and
C2 Options Exchange, Incorporated
(‘‘C2’’), each a national securities
exchange registered with the
Commission pursuant to Section 6(a) of
the Act,3 and CBOE Futures Exchange,
LLC (‘‘CBOE Futures,’’ and together
with CBOE and C2, the ‘‘CBOE
Exchanges’’), a national securities
exchange that lists or trades securityfutures products notice-registered with
the Commission pursuant to Section
6(g) of the Act.4
Upon completion of the mergers
described below that effectuate the
Transaction (the ‘‘Closing’’), the
business of BGM will be carried on by
CBOE V. CBOE V, rather than BGM, will
be the direct parent company of Direct
Edge LLC (‘‘Direct Edge’’), which is the
direct parent company of the Exchange.
As a result, CBOE Holdings will become
the ultimate parent company of Direct
Edge and of the Exchange.
To effectuate the Transaction, the
Exchange seeks to obtain the
Commission’s approval of: (i) The
resolutions of BGM’s board of directors
(the ‘‘BGM Board’’) waiving certain
provisions of the Amended and Restated
Certificate of Incorporation of BGM (the
‘‘BGM Charter’’) and making certain
related determinations regarding CBOE
Holdings and the impact of the
Transaction on the Exchange (the
‘‘Resolutions’’); (ii) the CBOE Holdings
Second Amended and Restated
Certificate of Incorporation (the ‘‘CBOE
Holdings Charter’’) and the CBOE
Holdings Third Amended and Restated
Bylaws (the ‘‘CBOE Holdings Bylaws’’);
(iii) the Certificate of Formation of
CBOE V (the ‘‘CBOE V Certificate’’) and
the Limited Liability Company
4 15
U.S.C. 78f(g).
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Operating Agreement of CBOE V (the
‘‘CBOE V Operating Agreement’’); (iv)
the proposed amendments to the
Amended and Restated Limited
Liability Company Operating Agreement
of Direct Edge (the ‘‘Direct Edge
Operating Agreement’’); (v) the
proposed amendments to the Fifth
Amended and Restated Bylaws of the
Exchange (the ‘‘Exchange Bylaws’’); and
(vi) the proposed amendments to EDGX
Rules 2.3, 2.10 and 2.12 (the ‘‘Exchange
Rules’’).
The text of the proposed rule change
is available at the Exchange’s Web site
at www.batstrading.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange submits this Proposed
Rule Change to seek the Commission’s
approval of the organizational and
governance documents of the Exchange
and its current and proposed future
parent companies, and related actions
that are necessary in connection with
the Closing of the Transaction, as
described below.
Other than as described herein and set
forth in Exhibits 5A through 5H, the
Exchange will continue to conduct its
regulated activities (including operating
and regulating its market and members)
in the manner currently conducted, and
will not make any changes to its
regulated activities in connection with
the Transaction. Except as set forth in
this Proposed Rule Change, the
Exchange is not proposing any
amendments to its trading and
regulatory rules at this time. If the
Exchange determines to make any such
changes, it will seek the approval of the
Commission to the extent required by
the Act, and the Commission’s rules
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80115
thereunder, and the Rules of the
Exchange.
1. Current Corporate Structures
The Exchange, Bats BZX Exchange,
Inc. (‘‘BZX’’), Bats BYX Exchange, Inc.
(‘‘BYX’’) and Bats EDGA Exchange, Inc.
(‘‘EDGA,’’ and together with the
Exchange, BZX and BYX, the ‘‘Bats
Exchanges’’) are each Delaware
corporations that are national securities
exchanges registered with the
Commission pursuant to Section 6(a) of
the Act.5
The Exchange and EDGA are each
direct, wholly owned subsidiaries of
Direct Edge, a Delaware limited liability
company that is a direct, wholly owned
subsidiary of BGM. BZX and BYX are
direct, wholly owned subsidiaries of
Bats Global Markets Holdings, Inc.
(‘‘BGM Holdings’’), a Delaware
corporation that is a direct, wholly
owned subsidiary of BGM. In addition
to certain other subsidiaries not
registered with the Commission in any
capacity, BGM Holdings also owns 100
percent of the equity interest in Bats
Trading, Inc. (‘‘Bats Trading’’), a
Delaware corporation that is a brokerdealer registered with the Commission
that provides routing services outbound
from, and in certain instances inbound
to, each Bats Exchange. BGM, a
Delaware corporation, is a publicly
traded company listed on BZX.
CBOE Holdings, a Delaware
corporation, is a publicly traded
company listed on The NASDAQ Stock
Market. CBOE Holdings owns 100
percent of the equity interest in the
CBOE Exchanges.
In contemplation of the Transaction,
CBOE Holdings formed two additional
entities, CBOE Corporation, a Delaware
corporation, and CBOE V, a Delaware
limited liability company, each of
which are direct, wholly owned
subsidiaries of CBOE Holdings. Each of
CBOE Corporation and CBOE V
currently have no material assets or
conduct any operations.
2. The Transaction
On September 25, 2016, BGM, CBOE
Holdings, CBOE Corporation and CBOE
V entered into an Agreement and Plan
of Merger (the ‘‘Merger Agreement’’).
Pursuant to and subject to the terms of
the Merger Agreement, at the Closing,
among other things:
(i) CBOE Corporation will be merged
with and into BGM, whereupon the
separate existence of CBOE Corporation
will cease and BGM will be the
surviving company (the ‘‘Merger’’);
5
15 U.S.C. 78f(a).
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(ii) by virtue of the Merger and
without any action required on the part
of BGM, CBOE Corporation or any
holder of BGM or CBOE Corporation
stock, each share of BGM common stock
(whether voting or non-voting) issued
and outstanding (with the exception of
shares owned by CBOE Holdings, BGM
or any of their respective subsidiaries
and certain shares held by persons that
are entitled to and properly demand
appraisal rights) will be converted into
the right to receive a particular number
of shares of CBOE Holdings and/or cash,
at the election of the holder of such
share of BGM common stock (the
‘‘Merger Consideration’’), and each
share of CBOE Corporation issued and
outstanding will be converted into one
share of BGM, such that BGM will
become a wholly owned subsidiary of
CBOE Holdings; and
(iii) immediately following the
Merger, BGM will be merged with and
into CBOE V, whereupon the separate
existence of BGM will cease and CBOE
V will be the surviving company (the
‘‘Subsequent Merger’’).
Upon the Closing, the Direct Edge
Operating Agreement, the Exchange
Bylaws and the Exchange Rules will be
amended to take into account the postClosing corporate structure, described
below.
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3. Post-Closing Corporate Structure
As a result of the Transaction, BGM
will cease to exist and the business of
BGM will be carried on by CBOE V,
which is a wholly owned subsidiary of
CBOE Holdings.6 CBOE V will own 100
percent of the equity interest in Direct
Edge and BGM Holdings. Direct Edge
will continue to own 100 percent of the
equity interest in the Exchange and
EDGA. BGM Holdings will continue to
own 100 percent of the equity interest
in BZX, BYX, Bats Trading, and certain
other subsidiaries not registered with
the Commission in any capacity.7
6 In connection with the Transaction, CBOE
Holdings agreed in the Merger Agreement to take
all requisite actions so, as of the Closing, the CBOE
Holdings Board will include three individuals
designated by BGM who (1) are serving as BGM
directors immediately prior to the Closing and (2)
comply with the policies (including clarifications of
the policies provided to BGM) of the Nominating
and Governance Committee of the CBOE Holdings
Board as in effect on the date of the Merger
Agreement and previously provided to BGM (each
of whom will be appointed to the CBOE Holdings
Board as of the Closing). The CBOE Holdings Board
currently consists of 14 directors. The Exchange
expects three current CBOE Holdings directors to
resign effective prior to the Closing and the
remaining CBOE Holdings directors to fill those
vacancies with the three BGM directors designated
by BGM.
7 As described above, the Transaction will result
in a change of ownership of Bats Trading, which is
a member of the Financial Industry Regulatory
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4. Ownership and Voting Limitations of
BGM; Resolutions
The BGM Charter provides that (i) no
Person,8 either alone or together with its
Related Persons,9 may own, directly or
indirectly, of record or beneficially,
shares constituting more than 40
percent of any class of its capital stock,
and no Exchange Member, either alone
or together with its Related Persons,
may own, directly or indirectly, of
record or beneficially, shares
constituting more than 20 percent of any
class of its capital stock (collectively,
the ‘‘BGM Ownership Limitation’’); and
(ii) subject to certain exceptions, no
Person, either alone or together with its
Related Persons, at any time, may,
directly, indirectly or pursuant to any of
various arrangements, vote or cause the
voting of shares or give any consent or
proxy with respect to shares
representing more than 20 percent of the
voting power of its then issued and
Authority, Inc. (‘‘FINRA’’). The Exchange
understands that, pursuant to NASD Rule 1017,
Bats Trading is seeking approval for this change of
ownership from FINRA.
8 The BGM Charter generally defines a ‘‘Person’’
as a natural person, partnership, corporation,
limited liability company, entity, government, or
political subdivision, agency or instrumentality of
a government. See BGM Charter, Art. FIFTH, para.
(a)(i).
9 The BGM Charter generally defines a ‘‘Related
Person’’ as, with respect to any Person, (i) any
‘‘affiliate’’ of such Person (as defined in Rule 12b2 under the Act); (ii) any other Person with which
such first Person has any agreement, arrangement
or understanding (whether or not in writing) to act
together for the purpose of acquiring, voting,
holding or disposing of shares of the capital stock
of BGM; (iii) in the case of a Person that is a
company, corporation or similar entity, any
executive officer (as defined under Rule 3b–7 under
the Act) or director of such Person and, in the case
of a Person that is a partnership or limited liability
company, any general partner, managing member or
manager of such Person, as applicable; (iv) in the
case of any Person that is a registered broker or
dealer that has been admitted to membership in any
of the Bats Exchanges (for purposes of this
definition of ‘‘Related Person,’’ each such national
securities exchange shall be referred to generally as
an ‘‘Exchange’’ and any member of such Exchange,
an ‘‘Exchange Member’’), any Person that is
associated with the Exchange Member (as
determined using the definition of ‘‘person
associated with a member’’ as defined under
Section 3(a)(21) of the Act); (v) in the case of a
Person that is a natural person and Exchange
Member, any broker or dealer that is also an
Exchange Member with which such Person is
associated; (vi) in the case of a Person that is a
natural person, any relative or spouse of such
Person, or any relative of such spouse who has the
same home as such Person or who is a director or
officer of BGM or any of its parents or subsidiaries;
(vii) in the case of a Person that is an executive
officer (as defined under Rule 3b–7 under the Act)
or a director of a company, corporation or similar
entity, such company, corporation or entity, as
applicable; and (viii) in the case of a Person that
is a general partner, managing member or manager
of a partnership or limited liability company, such
partnership or limited liability company, as
applicable. See BGM Charter, Art. FIFTH, para.
(a)(ii).
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outstanding capital stock (the ‘‘BGM
Voting Limitation’’).10 Purported
transfers that would result in a violation
of the BGM Ownership Limitation are
not recognized by BGM to the extent of
any ownership in excess of the BGM
Ownership Limitation, and purported
voting or voting arrangements in
violation of the BGM Voting Limitation
are not honored by BGM to the extent
of any voting in excess of the
limitation.11
However, the BGM Charter provides
that each of the BGM Ownership
Limitation and the BGM Voting
Limitation may be waived (except with
respect to Exchange Members and their
Related Persons) pursuant to a
resolution duly adopted by the BGM
Board if, in connection with taking such
action, the BGM Board states in such
resolution that it is the determination of
the BGM Board that the waiver:
• Will not impair the ability of each
Bats Exchange to carry out its functions
and responsibilities as an ‘‘exchange’’
under the Act and the rules and
regulations promulgated thereunder;
• is otherwise in the best interests of
BGM, its stockholders, and each Bats
Exchange;
• will not impair the ability of the
Commission to enforce the Act and the
rules and regulations promulgated
thereunder; and
• shall not be effective until it is filed
with and approved by the
Commission.12
In granting such a waiver, the BGM
Board has the discretion to impose on
the Person and its Related Persons, such
conditions and restrictions that it deems
necessary, appropriate or desirable in
furtherance of the objectives of the Act
and the rules and regulations
promulgated thereunder, and the
governance of each Bats Exchange.13
In addition, notwithstanding the
above, the BGM Charter provides 14 that
in any case where a Person, either alone
or with its Related Persons, would own
or vote more than the BGM Ownership
Limitation or BGM Voting Limitation,
respectively, upon consummation of
any proposed sale, assignment or
transfer of BGM’s capital stock, such a
transaction will not become effective
until the BGM Board determines, by
resolution, that such Person and its
Related Persons are not subject to any
‘‘statutory disqualification,’’ as defined
in Section 3(a)(39) of the Act.15
10 See
BGM Charter, Art. FIFTH, para. (b).
BGM Charter, Art. FIFTH, para. (d).
12 See BGM Charter, Art. FIFTH, para. (b)(ii)(B).
13 Id.
14 See BGM Charter, Art. FIFTH, para. (b)(iii).
15 15 U.S.C. 78c(a)(39).
11 See
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As described above, as a result of the
Merger (and prior to its separate
existence ceasing as a result of the
Subsequent Merger), BGM will become
a wholly owned subsidiary of CBOE
Holdings, such that CBOE Holdings will
possess ownership and voting rights in
BGM in excess of the Ownership
Limitation and the Voting Limitation. In
addition, as a result of the Subsequent
Merger, BGM will merge with and into
CBOE V, terminating the BGM Charter
and becoming an entity whose
ownership and voting is held entirely by
CBOE Holdings, in excess of the BGM
Ownership Limitation and the BGM
Voting Limitation that would otherwise
apply.
The BGM Board therefore determined
that in order to effect the Transaction,
a waiver of the BGM Ownership
Limitation and the BGM Voting
Limitation with respect to CBOE
Holdings would be required. To do so,
the BGM Board adopted the
Resolutions, attached as Exhibit 5A,
making certain determinations with
respect to CBOE Holdings and the
Transaction that are necessary to waive
the BGM Ownership Limitation and
BGM Voting Limitation. Specifically,
the BGM Board determined that:
• The acquisition of the proposed
ownership by CBOE Holdings in BGM
will not impair the ability of each Bats
Exchange to carry out its functions and
responsibilities as an ‘‘exchange’’ under
the Act and the rules and regulations
promulgated thereunder, is otherwise in
the best interests of BGM, its
stockholders and the Bats Exchanges,
and will not impair the ability of the
Commission to enforce the Act and the
rules and regulations promulgated
thereunder;
• the acquisition or exercise of the
proposed voting rights by CBOE
Holdings in BGM will not impair the
ability of each Bats Exchange to carry
out its functions and responsibilities as
an ‘‘exchange’’ under the Act and the
rules and regulations promulgated
thereunder, is otherwise in the best
interests of BGM, its stockholders and
the Bats Exchanges, and will not impair
the ability of the Commission to enforce
the Act and the rules and regulations
promulgated thereunder;
• neither CBOE Holdings nor any of
its Related Persons is subject to
‘‘statutory disqualification’’ within the
meaning of Section 3(a)(39) of the Act; 16
and
16 Id.
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• neither CBOE Holdings nor any of
its Related Persons is an Exchange
Member.17
The Exchange has reviewed such
Resolutions and requests that the
Commission approve such Resolutions.
The Exchange believes that the
Commission should approve the
Resolutions, as the Transaction will not
impair the ability of any Bats Exchange
to carry out its functions and
responsibilities as an ‘‘exchange’’ under
the Act and the rules and regulations
promulgated thereunder, or the ability
of the Commission to enforce the Act
and the rules and regulations
promulgated thereunder. The Bats
Exchanges will continue to operate and
regulate their markets and members as
they have done prior to the Transaction.
Thus, each Bats Exchange will continue
to enforce the Act, the Commission’s
rules thereunder, and each Exchange’s
own rules, in the manner it does today.
Further, the Commission will continue
to have plenary regulatory authority
over the Bats Exchanges, as is currently
the case with these entities.
The Exchange also notes that the
Resolutions reflect the determination by
the BGM Board that the Transaction and
CBOE Holdings’ resulting ownership
and voting rights in BGM following the
Merger, and CBOE V’s ownership and
voting rights following the Subsequent
Merger, are otherwise in the best
interests of BGM, its stockholders and
the Bats Exchanges. The Bats Exchanges
will be ultimately held by an entity,
CBOE Holdings, that already owns other
national securities exchanges and is
subject to governance documents that
similarly restrict concentration of
ownership and voting rights.
As described in more detail below,
the Exchange is also requesting approval
of the adoption of the CBOE Holdings
Charter and the CBOE Holdings Bylaws.
17 In addition, the Resolutions contain a
determination that the execution and delivery of the
Merger Agreement by CBOE Holdings constituted
notice of CBOE Holdings’ intention to acquire
ownership and voting rights in excess of the BGM
Ownership Limitation and BGM Voting Limitation,
respectively, in writing and not less than 45 days
before the Closing. See BGM Charter, Art. FIFTH,
para. (b)(iv). The Exchange notes that Art. FIFTH,
para. (c)(i) of the BGM Charter further requires that
any Person that, either alone or together with its
Related Persons, owns, directly or indirectly
(whether by acquisition or by a change in the
number of shares outstanding), of record or
beneficially, five percent or more of the then
outstanding shares of capital stock of BGM must
immediately upon acquiring knowledge of its
ownership of five percent or more give written
notice of such ownership to the BGM Board. The
Merger Agreement provides that the Merger
Agreement constitutes such notice with respect to
certain voting agreements entered into concurrently
with the Merger Agreement. See Merger Agreement,
Section 5.21.
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80117
The CBOE Holdings Charter includes a
number of provisions relating to the
Commission’s regulatory oversight that
have a similar effect as those in the
BGM Charter, including the BGM
Ownership Limitation and the BGM
Voting Limitation. Therefore,
notwithstanding the Resolutions and the
Transaction, provisions similar (and, in
some cases, more stringent) to the BGM
Ownership Limitation and the BGM
Voting Limitation will remain in place
with respect to potential future
transactions involving the ultimate
parent company of the Bats Exchanges.
This means that the Exchange
ownership structure will continue to
provide the Commission with
appropriate oversight tools to ensure
that the Commission will have the
ability to enforce the Act with respect to
the Exchange, its direct and indirect
parent companies, and its directors,
officers, employees and agents to the
extent they are involved in the activities
of the Exchange, and protect the
independence of the Exchange’s selfregulatory activities.
The Exchange therefore requests that
the Commission approve the
Resolutions, attached as Exhibit 5A.
5. CBOE Holdings Charter and CBOE
Holdings Bylaws
CBOE Holdings currently holds a
direct ownership interest in the CBOE
Exchanges. The Commission has
previously approved the CBOE Holdings
Charter and the CBOE Holdings Bylaws
(collectively, the ‘‘CBOE Holdings
Organizational Documents’’), attached
as Exhibits 5B and 5C, respectively.18
In connection with the Transaction,
upon the Closing, CBOE Holdings will
become the indirect owner (through
CBOE V and Direct Edge) of the
Exchange and EDGA and the indirect
owner (through CBOE V and BGM
Holdings) of BZX, BYX and Bats
Trading (and certain other subsidiaries
not registered with the Commission in
any capacity).
The CBOE Holdings Organizational
Documents include various provisions
relating to any ‘‘Regulated Securities
Exchange Subsidiary,’’ which is defined
as any national securities exchange
controlled, directly or indirectly, by
CBOE Holdings. Upon the Closing, the
Exchange will be covered by the
18 See Securities Exchange Act Release No. 62158
(May 24, 2010), 75 FR 30082 (May 28, 2010) (SR–
CBOE–2008–88). The CBOE Organizational
Documents have been subsequently amended from
time to time pursuant to proposed rule changes that
were filed with the Commission for immediate
effectiveness. See, e.g., Securities Exchange Act
Release No. 76282 (October 27, 2015), 80 FR 67464
(November 2, 2015) (SR–CBOE–2015–092).
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definition of Regulated Securities
Exchange Subsidiary for purposes of the
CBOE Holdings Organizational
Documents. As a result, no amendments
to the CBOE Holdings Organizational
Documents will be necessary to reflect
CBOE Holdings’ indirect ownership of
the Exchange.
The Exchange believes that the CBOE
Holdings Organizational Documents
will protect and maintain the integrity
of the self-regulatory functions of the
Exchange and facilitate the ability of the
Exchange and the Commission to carry
out their regulatory and oversight
obligations under the Act, as the CBOE
Organizational Documents do with
respect to the CBOE Exchanges.
In addition, the CBOE Organizational
Documents contain provisions,
including those with respect to the
following, that are similar to those
contained in the BGM Charter and
BGM’s Amended and Restated Bylaws
(the ‘‘BGM Bylaws’’), which the
Commission has previously found to be
consistent with the Act: 19
• Ownership and Voting Limitations.
Similar to the BGM Voting Limitation
and the BGM Ownership Limitation
contained in the BGM Charter, the
CBOE Holdings Charter limits the extent
of ownership and voting rights which
certain persons may possess or
exercise.20 Like the BGM Charter, the
CBOE Holdings Charter similarly
prohibits any Person,21 together with its
Related Persons,22 from exercising
voting rights with respect to more than
20 percent of the then outstanding votes
entitled to be cast on such matter.23
However, with respect to ownership
limitations, the CBOE Holdings Charter
contains a more stringent threshold than
contained in the BGM Charter. Under
the CBOE Holdings Charter, no Person,
together with its Related Persons, is
permitted at any time to beneficially
own directly or indirectly shares of
stock of CBOE Holdings representing in
the aggregate more than 20 percent of
the then outstanding shares of stock of
19 See Securities Exchange Act Release No. 77464
(March 29, 2016), 81 FR 19252 (April 4, 2016) (File
Nos. SR–BATS–2016–10, SR–BYX–2016–02, SR–
EDGX–2016–04, and SR–EDGA–2016–01).
20 Compare CBOE Holdings Charter, Art. SIXTH
with BGM Charter, Art. FIFTH.
21 ‘‘Person’’ mean an individual, partnership
(general or limited), joint stock company,
corporation, limited liability company, trust or
unincorporated organization, or any governmental
entity or agency or political subdivision thereof. See
CBOE Holdings Charter, Art. FIFTH, para. (a)(iv).
22 ‘‘Related Person’’ is defined in the CBOE
Holdings Charter in a manner substantially the
same as it is defined in the BGM Charter. See supra
note 9; CBOE Holdings Charter, Art. FIFTH, para.
(a)(vi).
23 See CBOE Holdings Charter, Art. SIXTH, para.
(a).
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CBOE Holdings.24 In contrast, the BGM
Ownership Limitation only applies a 20
percent threshold to any Exchange
Member together with its Related
Persons, while applying a 40 percent
threshold to any other Person together
with its Related Persons. As a result, the
CBOE Holdings Charter should be at
least as effective as the BGM Charter at
preventing any stockholder from
exercising undue control over the
operation of the Exchange.
• Independence and NonInterference. Similar to provisions
contained in the BGM Bylaws, the
CBOE Holdings Charter provides that
for so long as CBOE Holdings controls,
directly or indirectly, a Regulated
Securities Exchange Subsidiary, each
officer, director and employee of CBOE
Holdings must give due regard to the
preservation of the independence of the
self-regulatory function of the Regulated
Securities Exchange Subsidiaries and
may not take any actions that he or she
knows or reasonably should have
known would interfere with the
effectuation of any decisions by the
board of directors of any Regulated
Securities Exchange Subsidiary relating
to such Regulated Securities Exchange
Subsidiary’s regulatory functions
(including disciplinary matters) or that
would adversely affect the ability of the
Regulated Securities Exchange
Subsidiary to carry out such Regulated
Securities Exchange Subsidiary’s
responsibilities under the Act.25
• Confidentiality. Similar to
provisions contained in the BGM
Bylaws, the CBOE Holdings Charter
provides that, to the fullest extent
permitted by applicable law, all
confidential information pertaining to
the self-regulatory function of Regulated
Securities Exchange Subsidiaries
contained in the books and records of
any Regulated Securities Exchange
Subsidiary that shall come into the
possession of the CBOE Holdings must
be retained in confidence by CBOE
Holdings and its officers, directors,
employees and agents and must not be
used for any commercial purposes.26
• Books and Records. Similar to
provisions contained in the BGM
Bylaws, the CBOE Holdings Charter
provides that, for so long as CBOE
Holdings directly or indirectly controls
any Regulated Securities Exchange
Subsidiary, the books, records,
premises, officers, directors and
24 See
CBOE Holdings Charter, Art. SIXTH, para.
(b).
25 Compare CBOE Holdings Charter, Art.
SIXTEENTH, para. (c) with BGM Bylaws, Section
12.01.
26 Compare CBOE Holdings Charter, Art.
FIFTEENTH with BGM Bylaws, Section 12.02.
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employees of CBOE Holdings shall be
deemed to be the books, records,
premises, officers, directors and
employees of the Regulated Securities
Exchange Subsidiary for purposes of
and subject to oversight pursuant to the
Act, but only to the extent that such
books, records, premises, officers,
directors and employees of the
Corporation relate to the business of
such Regulated Securities Exchange
Subsidiary.27
• Compliance With Securities Laws;
Cooperation With the Commission.
Similar to provisions contained in the
BGM Bylaws, the CBOE Holdings
Charter provides that CBOE Holdings
shall comply with the federal securities
laws and the rules and regulations
thereunder and shall cooperate with the
Commission, and each Regulated
Securities Exchange Subsidiary
pursuant to and to the extent of its
regulatory authority, and shall take
reasonable steps necessary to cause its
agents to cooperate with the
Commission and, where applicable, the
Regulated Securities Exchange
Subsidiaries pursuant to their regulatory
authority, with respect to such agents’
activities related to the Regulated
Securities Exchange Subsidiaries.28
• Consent to Jurisdiction. Similar to
provisions contained in the BGM
Bylaws, the CBOE Holdings Charter
provides that CBOE Holdings, its
directors, officers, agents and
employees, irrevocably submit to the
jurisdiction of the U.S. federal courts,
the Commission, and the Regulated
Securities Exchange Subsidiaries, for
the purposes of any suit, action or
proceeding pursuant to U.S. federal
securities laws or the rules or
regulations thereunder, commenced or
initiated by the Commission arising out
of, or relating to, the Regulated
Securities Exchange Subsidiaries’
activities.29
• Amendments. Similar to provisions
contained in the BGM Charter and BGM
Bylaws, the CBOE Organizational
Documents provide that for so long as
CBOE Holdings controls, directly or
indirectly, Regulated Securities
Exchange, before any amendment to or
repeal of the CBOE Holdings Charter or
CBOE Holdings Bylaws may be
effective, such amendment or repeal
must be submitted to the board of
directors of each such exchange, and if
the amendment or repeal is required to
27 Compare CBOE Holdings Charter, Art.
FIFTEENTH with BGM Bylaws, Section 12.03.
28 Compare CBOE Holdings Charter, Art.
SIXTEENTH, para. (a) with BGM Bylaws, Section
12.04.
29 Compare CBOE Holdings Charter, Art.
FOURTEENTH with BGM Bylaws, Section 12.05.
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be filed with, or filed with and
approved by the Commission, then such
change shall not be effective until filed
with, or filed with and approved by, the
Commission, as the case may be.30 As
stated above, the Exchange believes that
the foregoing provisions will assist the
Exchange in fulfilling its self-regulatory
obligations and in administering and
complying with the requirements of the
Act.
6. CBOE V Certificate and CBOE V
Operating Agreement
Effective as of the Closing of the
Transaction, CBOE V will hold direct
ownership of (i) Direct Edge, which will
continue to hold direct ownership of the
Exchange and EDGA and (ii) BGM
Holdings, which will continue to hold
direct ownership of BZX, BYX and Bats
Trading (and certain other subsidiaries
not registered with the Commission in
any capacity). However, unlike BGM
currently, CBOE V will not be the
ultimate holding company under the
post-Closing corporate structure, but
rather will be an intermediate holding
company owned by CBOE Holdings.
The Exchange believes that the CBOE V
Operating Agreement contains
provisions relating to its indirect
ownership of one or more national
securities exchanges, including such
exchanges’ regulatory functions and
Commission oversight, that are
appropriate for an intermediate holding
company in the ownership chain of a
national securities exchange. Many of
the provisions of the CBOE V Operating
Agreement relating to these matters are
similar to the organizational documents
of Direct Edge, which currently is, and
following the Subsequent Merger will
be, similarly situated as an intermediate
holding company of the Exchange. The
Commission has previously found the
Direct Edge organizational documents to
be consistent with the Act.31
Although CBOE V will not carry out
any regulatory functions, the Exchange
notes that its activities with respect to
the operation of the Bats Exchanges
must be consistent with, and must not
interfere with, the self-regulatory
obligations of each Bats Exchange. The
CBOE V Operating Agreement therefore
includes certain provisions that are
designed to maintain the independence
of the Bats Exchanges’ self-regulatory
functions, enable the Bats Exchanges to
operate in a manner that complies with
30 Compare CBOE Holdings Charter, Arts.
ELEVENTH, TWELFTH and CBOE Holdings
Bylaws, Section 10.2 with BGM Charter, Art.
FOURTEENTH and BGM Bylaws, Article XI.
31 See Securities Exchange Act Release No. 71449
(January 30, 2014), 79 FR 6961 (February 5, 2014)
(SR–EDGA–2013–34; SR–EDGX–2013–43).
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the federal securities laws, including the
objectives of Sections 6(b) 32 and 19(g) 33
of the Act, and facilitate the ability of
each Bats Exchange and the
Commission to fulfill their respective
regulatory and oversight obligations
under the Act.
a. CBOE V Certificate of Formation
The CBOE V Certificate, attached as
Exhibit 5D, includes the following
provisions required under Delaware
law: (i) The full name of CBOE V as
‘‘CBOE V, LLC’’, and (ii) the name and
address of CBOE V’s registered office in
the State of Delaware and the name of
CBOE V’s registered agent at such
address.34 In addition, the CBOE V
Certificate contains a provision
providing that CBOE V shall indemnify
members of its board of directors and
certain other persons, subject to certain
conditions.
As the Exchange believes is
customary for limited liability
companies formed in the State of
Delaware, other substantive provisions
governing the ownership, operation and
management of CBOE V are set forth in
the CBOE V Operating Agreement,
discussed below.
b. CBOE V Operating Agreement
With respect to ownership and
control of CBOE V, the CBOE V
Operating Agreement, attached as
Exhibit 5E, specifically provides that
CBOE V’s sole member is CBOE
Holdings, until the CBOE V Operating
Agreement is amended (subject to
Commission approval, as described
below).35 Further, for so long as CBOE
V controls, directly or indirectly, a
subsidiary that is registered with the
Commission as a national securities
exchange (an ‘‘Exchange Subsidiary’’),
CBOE Holdings may not sell, assign,
transfer, convey, gift, exchange or
otherwise dispose of any or all of its
member interest in CBOE V, except
pursuant to an amendment to the CBOE
V Operating Agreement that is filed
with and approved by the Commission.
36 These restrictions are designed to
ensure that any change to the ownership
or control of any Exchange Subsidiary,
including without limitation the Bats
Exchanges, may only occur through a
change in the ownership or control of
CBOE Holdings. As such, any purported
change of such ownership or control
(unless pursuant to a Commissionapproved change of ownership of CBOE
U.S.C. 78f(b).
U.S.C. 78s(g).
34 Delaware Limited Liability Company Act § 18–
201.
35 CBOE V Operating Agreement, Section 1.1.
36 CBOE V Operating Agreement, Section 5.1.
80119
V) would need to comply with the
CBOE Holdings Charter and CBOE
Holdings Bylaws, including the
ownership and voting limitations
discussed above (or a Commissionapproved waiver therefrom).
The CBOE V Operating Agreement
also contains several provisions
designed to protect the independence of
the self-regulatory functions of the Bats
Exchanges. The CBOE V Operating
Agreement requires that, for so long as
CBOE V, directly or indirectly, controls
any Exchange Subsidiary, CBOE
Holdings, as the sole member of CBOE
V, and officers, employees and agents of
CBOE V must give due regard to the
preservation of independence of the
self-regulatory functions of such
Exchange Subsidiary, as well as to its
obligations to investors and the general
public, and not interfere with the
effectuation of any decisions by the
board of directors of an Exchange
Subsidiary relating to its regulatory
functions (including disciplinary
matters) or which would interfere with
the ability of such Exchange Subsidiary
to carry out its responsibilities under
the Act.37
The CBOE V Operating Agreement
also would require that CBOE V comply
with the U.S. federal securities laws and
rules and regulations thereunder and
cooperate with the Commission and
each Exchange Subsidiary, as
applicable, pursuant to and to the extent
of their respective regulatory
authority.38 Further, CBOE V’s officers,
directors, employees and agents shall be
deemed to agree to (i) comply with the
U.S. federal securities laws and the
rules and regulations thereunder; and
(ii) cooperate with the Commission and
each Exchange Subsidiary in respect of
the Commission’s oversight
responsibilities regarding such
Exchange Subsidiary and the selfregulatory functions and responsibilities
of the Exchange Subsidiaries, and CBOE
V will take reasonable steps to cause its
officers, employees and agents to so
cooperate.39
Furthermore, to the fullest extent
permitted by law, CBOE V and its
officers, directors, employees and agents
will be deemed to irrevocably submit to
the jurisdiction of the U.S. federal
courts, the Commission, and each
Exchange Subsidiary, as applicable, for
purposes of any suit, action, or
proceeding pursuant to the U.S. federal
securities laws or the rules or
32 15
33 15
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37 See CBOE V Operating Agreement, Section
10.1(a).
38 See CBOE V Operating Agreement, Section
10.2(a).
39 Id.
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regulations thereunder arising out of, or
relating to, the activities of such
Exchange Subsidiary.40
The proposed CBOE V Operating
Agreement also contains a number of
provisions designed to ensure that the
Exchange will have sufficient access to
the books and records of CBOE V as
they relate to any Exchange Subsidiary.
Pursuant to the CBOE V Operating
Agreement, to the extent they are related
to the operation or administration of an
Exchange Subsidiary, the books,
records, premises, officers, agents, and
employees of CBOE V are deemed to be
the books, records, premises, officers,
agents and employees of such Exchange
Subsidiary for the purposes of, and
subject to oversight pursuant to, the
Act.41 In addition, for as long as CBOE
V controls, directly or indirectly, an
Exchange Subsidiary, CBOE V’s books
and records shall be subject at all times
to inspection and copying by the
Commission and the applicable
Exchange Subsidiary, provided that
such books and records are related to
the operation or administration of an
Exchange Subsidiary.42
The proposed CBOE V Operating
Agreement also provides that, to the
fullest extent permitted by law, all
books and records of any Exchange
Subsidiary reflecting confidential
information pertaining to the selfregulatory function of such Exchange
Subsidiary (including disciplinary
matters, trading data, trading practices
and audit information) that comes into
the possession of CBOE V, shall be
retained in confidence by CBOE V,
CBOE V’s officers, employees and
agents and CBOE Holdings, and not
used for any non-regulatory purposes.43
The proposed CBOE V Operating
Agreement provides, however, that the
foregoing shall not limit or impede the
rights of the Commission or an
Exchange Subsidiary to access and
examine such confidential information
pursuant to the U.S. federal securities
laws and the rules and regulations
thereunder, or limit or impede the
ability of CBOE Holdings or any of
CBOE V’s officers, employees or agents
to disclose such confidential
information to the Commission or an
Exchange Subsidiary.44
In addition, the CBOE V Operating
Agreement provides that for so long as
CBOE V controls, directly or indirectly,
40 See CBOE V Operating Agreement, Section
10.3(a).
41 See CBOE V Operating Agreement, Section
8.4(b).
42 Id.
43 See CBOE V Operating Agreement, Section
8.4(a).
44 Id.
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any Exchange Subsidiary, before any
amendment to or repeal of any
provision of the CBOE V Operating
Agreement will be effective, those
changes must be submitted to the board
of directors of each Exchange
Subsidiary, and if the same must be
filed with, or filed with and approved
by, the Commission before the changes
may be effective under Section 19 of the
Act 45 and the rules promulgated
thereunder, then the proposed changes
shall not be effective until filed with, or
filed with and approved by, the
Commission, as the case may be.46
7. Direct Edge Operating Agreement
The Direct Edge Operating Agreement
currently provides that the sole member
of Direct Edge is BGM. However, as a
result of the Transaction, CBOE V will
become the sole member of Direct Edge.
The Exchange proposes to amend the
Direct Edge Operating Agreement to
reflect this change, as set forth in
Exhibit 5F.
8. Bylaws of the Exchange
In connection with the Transaction,
the Exchange proposes to amend and
restate its Fifth Amended and Restated
Bylaws and adopt the amended
Exchange Bylaws as its Sixth Amended
and Restated Bylaws, attached as
Exhibit 5G. Specifically, the Exchange
proposes to (i) expand the prohibition
contained in Section 2 of Article XI of
the Exchange Bylaws and (ii) add a
definition of ‘‘Trading Permit Holder’’ to
Article I.
Currently, Section 2 of Article XI of
the Exchange Bylaws prohibits directors
of BGM or Direct Edge who are not also
directors, officers, staff, counsel or
advisors of the Exchange from
participating in any meetings of the
Exchange’s board of directors (or any
committee thereof) pertaining to the
self-regulatory function of the Exchange
(including disciplinary matters). This
provision refers to BGM and Direct Edge
because they are currently the only
direct and indirect owners of the
Exchange. However, following the
Transaction, the Exchange will be
owned indirectly by CBOE V and CBOE
Holdings (in addition to its direct
ownership by Direct Edge). Therefore,
the Exchange is proposing to remove the
reference to BGM and insert references
to CBOE V and CBOE Holdings, so that
CBOE V and CBOE Holdings will both
be covered by this prohibition. The
Exchange believes that this amendment
15 U.S.C. 78s.
See CBOE V Operating Agreement, Section
11.2.
will protect the independence of the
Exchange’s self-regulatory activities.
In addition, as noted above, the CBOE
Holdings Charter currently prohibits
certain persons from owning or
exercising voting rights over certain
percentages of ownership of CBOE
Holdings. The CBOE Holdings Charter
permits the board of directors of CBOE
Holdings to waive the limitation on the
exercise of voting rights in excess of 20
percent of the then outstanding votes
entitled to be cast on such matter only
if, among other things, ‘‘for so long as
[CBOE Holdings] directly or indirectly
controls any Regulated Securities
Exchange Subsidiary, neither such
Person nor any of its Related Persons is
a ‘Trading Permit Holder’ (as defined in
the Bylaws of any Regulated Securities
Exchange Subsidiary as they may be
amended from time to time).’’ 47
The Exchange does not issue ‘‘trading
permits,’’ but admits members. The
Exchange believes the provisions of the
CBOE Holdings Charter that refer to
Trading Permit Holders of its Regulated
Securities Exchange Subsidiaries should
apply equally to members of the
Exchange once it becomes a Regulated
Securities Exchange Subsidiary of CBOE
Holdings. As a result, the Exchange
proposes to add clause (ff) to Article I
of the Exchange Bylaws, providing that
‘‘ ‘Trading Permit Holder’ shall have the
same meaning as Exchange Member.’’
This will ensure that the Exchange’s
members will be considered Trading
Permit Holders of a Regulated Securities
Exchange Subsidiary for purposes of the
CBOE Holdings Charter.
9. Exchange Rules
a. Exchange Rule 2.3—Member
Eligibility
Pursuant to Exchange Rule 2.3, in
order to be eligible for membership in
the Exchange, a registered broker or
dealer is currently required to be a
member of at least one other national
securities association or national
securities exchange. However,
membership in the Exchange’s affiliated
national securities exchanges, BZX,
BYX or EDGA, is not sufficient for
purposes of eligibility for Exchange
membership. The Exchange adopted
this because the Bats Exchanges have
historically not functioned as the
designated examining authority for any
of its members, and the Exchange
wanted to be sure that any member
would be appropriately supervised by
another national securities association
or national securities exchange that has
45
46
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47 See CBOE Holdings Charter, Art. SIXTH, para.
(a)(ii)(C).
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the capacity to function as the member’s
designated examining authority.
As a result of the Transaction, the
Exchange will additionally become
affiliated with the CBOE Exchanges. As
with the Bats Exchanges, C2 does not
currently serve as the designated
examination authority for any of its
members. CBOE, however, does act as
the designated examining authority for
certain of its members. Therefore, the
Exchange proposes to amend Exchange
Rule 2.3 to specify that a registered
broker or dealer will be eligible for
membership only if it is a member of a
national securities association or
national securities exchange other than
or in addition to the following affiliates
of the Exchange: BZX, BYX, EDGA and
C2.
In addition, to ensure there is no
confusion with respect to the possibility
that a broker or dealer could qualify for
membership in the Exchange based
solely on membership in CBOE Futures
or any other national securities
exchange notice—registered with the
Commission pursuant to Section 6(g) of
the Act 48 that lists or trades securityfutures products, the Exchange proposes
to also specify that eligibility for
membership requires membership in a
national securities association registered
pursuant to Section 15A of the Act or
a national securities exchange registered
with the Commission pursuant to
Section 6(a) of the Act, so as to exclude
a national securities exchange registered
solely under Section 6(g) of the Act. The
proposed amendments to Exchange Rule
2.3 are set forth in Exhibit 5H.
b. Exchange Rule 2.10—Affiliation
Between Exchange and a Member
Exchange Rule 2.10 provides that,
without prior approval of the
Commission, neither the Exchange, nor
any of its affiliates, shall directly or
indirectly acquire or maintain an
ownership interest in a member of the
Exchange. This restriction is intended to
address potential conflicts of interest
that could result from affiliation
between the Exchange and a member.
Notwithstanding this general restriction,
Exchange Rule 2.10 provides that it does
not prohibit a member or its affiliate
from acquiring or holding an equity
interest in BGM that is permitted by the
ownership and voting limitations
contained in the BGM Charter and the
BGM Bylaws. In addition, Exchange
Rule 2.10 states that it does not prohibit
a member from being or becoming an
affiliate of the Exchange, or an affiliate
of any affiliate of the Exchange, solely
by reason of such member or any officer,
48
15 U.S.C. 78f(g).
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director, manager, managing member,
partner or affiliate of such member
being or becoming either (a) a director
of the Exchange pursuant to the Bylaws
of the Exchange, or (b) a director of the
Exchange serving on the board of
directors of BGM. The Exchange
proposes to replace the references to
BGM in Rule 2.10 with references to
CBOE Holdings to reflect the fact that
following the Transaction, CBOE
Holdings will replace BGM as the
ultimate parent holding company of the
Exchange.
Exchange Rule 2.10 also clarifies that
it does not prohibit the Exchange from
being an affiliate of its routing brokerdealer Direct Edge ECN LLC d/b/a DE
Route (‘‘DE Route’’) or of EDGA, BZX,
BYX, or Bats Trading, each of which are
affiliated with the Exchange. The
Exchange proposes to remove the
reference to DE Route to reflect the fact
that Bats Trading previously replaced
DE Route as the Exchange’s routing
broker-dealer.49 The Exchange also
proposes to add references to the CBOE
Exchanges, as the CBOE Exchanges will
become new affiliated exchanges
following the Transaction. The
proposed amendments to Exchange Rule
2.10 are set forth in Exhibit 5H.
c. Exchange Rule 2.12—Bats Trading,
Inc. as Inbound Router
Exchange Rule 2.12 provides that the
Exchange, on behalf of BGM, shall
establish and maintain procedures and
internal controls reasonably designed to
ensure that Bats Trading does not
develop or implement changes to its
systems on the basis of nonpublic
information obtained as a result of its
affiliation with the Exchange until such
information is available generally to
similarly situated members of the
Exchange in connection with the
provision of inbound order routing to
the Exchange. The Exchange proposes to
replace the reference to BGM with a
reference to ‘‘the holding company
indirectly owning the Exchange and
Bats Trading.’’ This change would
reflect the fact that BGM would no
longer be the ultimate holding company
of the Exchange following the
Transaction and would also make this
language consistent with the language
used in Rule 2.12 of the BZX and BYX
rulebooks. The proposed amendments
to Exchange Rule 2.12 are set forth in
Exhibit 5H.
49 See Securities Exchange Act Release No. 71449
(January 30, 2014), 79 FR 6961 (February 5, 2014)
(SR–EDGA–2013–34; SR–EDGX–2013–43).
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Sfmt 4703
80121
2. Statutory Basis
The Exchange believes that the
Proposed Rule Change is consistent
with the requirements of the Act and the
rules and regulations thereunder that
are applicable to a national securities
exchange, and, in particular, with the
requirements of Section 6(b) of the
Act.50 In particular, the proposal is
consistent with Section 6(b)(1) of the
Act 51 in that it enables the Exchange to
be so organized as to have the capacity
to be able to carry out the purposes of
the Act and to comply, and to enforce
compliance by its members and persons
associated with its members, with the
provisions of the Act, the rules and
regulations thereunder, and the Rules of
the Exchange.
The Proposed Rule Change is
designed to enable the Exchange to
continue to have the authority and
ability to effectively fulfill its selfregulatory duties pursuant to the Act
and the rules promulgated thereunder.
In particular, the Proposed Rule Change
includes in the CBOE Holdings Charter
and CBOE Holdings Bylaws, like the
BGM Charter and BGM Bylaws, various
provisions intended to protect and
maintain the integrity of the selfregulatory functions of the Exchange
upon Closing. For example, the CBOE
Holdings Charter, as described above, is
drafted to preserve the independence of
the Exchange’s self-regulatory function
and carry out its regulatory
responsibilities under the Act. In
addition, the CBOE Holdings Charter
imposes limitations similar to the BGM
Ownership Limitation and BGM Voting
Limitation to preclude undue influence
over or interference with the Exchange’s
self-regulatory functions and fulfillment
of its regulatory duties under the Act.
Moreover, notwithstanding the
Proposed Rule Change, including the
change to the indirect ownership of the
Exchange, the Commission will
continue to have regulatory authority
over the Exchange, as is currently the
case, as well as jurisdiction over the
Exchange’s direct and indirect parent
companies with respect to activities
related to the Exchange.52 As a result,
the Proposed Rule Change will facilitate
an ownership structure that will provide
the Commission with appropriate
oversight tools to ensure that the
Commission will have the ability to
enforce the Act with respect to the
Exchange, its direct and indirect parent
15 U.S.C. 78f(b).
15 U.S.C. 78f(b)(1).
52 See, e.g., CBOE Holdings Charter, Art.
FOURTEENTH; CBOE V Operating Agreement,
Section 10.3; Direct Edge Operating Agreement,
Section 10.3.
50
51
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80122
Federal Register / Vol. 81, No. 220 / Tuesday, November 15, 2016 / Notices
mstockstill on DSK3G9T082PROD with NOTICES
companies and their directors, officers,
employees and agents to the extent they
are involved in the activities of the
Exchange.
The Exchange also believes that the
Proposed Rule Change furthers the
objectives of Section 6(b)(5) of the Act 53
because the Proposed Rule Change
would be consistent with and facilitate
a governance and regulatory structure
that is designed to prevent fraudulent
and manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to, and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest.
In addition, as discussed further in
the Exchange’s Statement on Burden on
Competition below, the Exchange
expects that the Transaction will foster
further innovation while facilitating
efficient, transparent and well-regulated
markets for issuers and investors,
removing impediments to, and
perfecting the mechanism of a free and
open market and a national market
system. The Transaction will benefit
investors and the securities market as a
whole by, among other things,
enhancing competition among securities
venues and reducing costs.
Furthermore, the Exchange is not
proposing any significant changes to its
existing operational and trading
structure in connection with the change
in ownership; the Exchange will operate
in essentially the same manner upon
Closing as it operates today. Therefore,
the Exchange believes that it will
continue to satisfy the requirements of
the Act and the rules and regulations
thereunder that are applicable to a
national securities exchange. The
changes that the Exchange is proposing
to the Exchange Rules are designed to
reflect the prospective affiliation with
CBOE Holdings and the CBOE
Exchanges. The Exchange believes that
the proposed change to its Rules is
consistent with the requirements of the
Act and the rules and regulations
thereunder.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the Proposed Rule Change would result
in any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Indeed, the
53 15
U.S.C. 78f(b)(5).
VerDate Sep<11>2014
22:00 Nov 11, 2016
Jkt 241001
Exchange believes that the Proposed
Rule Change will enhance competition
among trading venues, as the Exchange
believes that the Transaction will result
in various synergies and efficiencies.
For example, the Transaction will allow
the Bats Exchanges and the CBOE
Exchanges to utilize a single technology
platform, which the Exchange expects
will reduce Bats Exchanges’ and the
CBOE Exchanges’ combined costs,
creating the opportunity to further
reduce costs to their respective members
and other constituents. The potential
use of a single technology platform may
also reduce investors’ costs of
connecting to and using the Bats
Exchanges and the CBOE Exchanges,
including through the combination of
data centers and market data services.
Combining the expertise of the CBOE
Exchanges’ personnel with the expertise
of the Bats Exchanges’ personnel will
also facilitate ongoing innovation,
including through new product creation
and platform improvements.
The Exchange notes that the Bats
Exchanges and the CBOE Exchanges
generally operate with different
business models, target different
customer bases and primarily focus on
different asset classes, limiting any
concern that the Transaction could
burden competition. Therefore, the
Exchange expects that the Transaction
will benefit investors, issuers,
shareholders and the market as a whole.
The Exchange will continue to conduct
regulated activities (including operating
and regulating its market and members)
of the type it currently conducts, but
will be able to do so in a more efficient
manner to the benefit of its members.
These efficiencies will pass through to
the benefit of investors and issuers,
promoting further efficiencies,
competition and capital formation,
placing no burden on competition not
necessary or appropriate in furtherance
of the Act.
Furthermore, the Exchange’s
conclusion that the Proposed Rule
Change would not result in any burden
on competition that is not necessary or
appropriate in furtherance of the
purposes of the Act is consistent with
the Commission’s prior conclusions
about similar combinations involving
multiple exchanges in a single corporate
family.54
54 See, e.g., Securities Exchange Act Release Nos.
71375 (January 23, 2014), 79 FR 4771 (January 29,
2014) (SR–BATS–2013–059; SR–BYX–2013–039);
66071 (December 29, 2011), 77 FR 521 (January 5,
2012) (SR–CBOE–2011–107 and SR–NSX–2011–14);
58324 (August 7, 2008), 73 FR 46936 (August 12,
2008) (SR–BSE–2008–02; SR–BSE–2008–23; SR–
BSE–2008–25; SR–BSECC–2008–01); 53382
(February 27, 2006), 71 FR 11251 (March 6, 2006)
(SR–NYSE–2005–77).
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has not solicited or
received written comments on the
Proposed Rule Change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission will: (a) By order
approve or disapprove such proposed
rule change, or (b) institute proceedings
to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
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–
BatsEDGX–2016–60 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–BatsEDGX–2016–60. 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
E:\FR\FM\15NON1.SGM
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Federal Register / Vol. 81, No. 220 / Tuesday, November 15, 2016 / Notices
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
BatsEDGX–2016–60, and should be
submitted on or before December 6,
2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.55
Brent J. Fields,
Secretary.
[FR Doc. 2016–27369 Filed 11–14–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79262; File No. SR–BX–
2016–153]
Self-Regulatory Organizations;
NASDAQ BX, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Commentary
.14 to Rule 4770 (Compliance With
Regulation NMS Plan To Implement a
Tick Size Pilot)
November 8, 2016.
mstockstill on DSK3G9T082PROD with NOTICES
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on October
31, 2016, NASDAQ BX, Inc. (‘‘BX’’ 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 amend
Commentary .14 to Rule 4770
(Compliance with Regulation NMS Plan
to Implement a Tick Size Pilot) to
provide the SEC with notice of its efforts
55 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
22:00 Nov 11, 2016
NASDAQ BX Rules
*
*
*
*
*
4770. Compliance With Regulation
NMS Plan To Implement a Tick Size
Pilot
(a) through (d) No Change.
Commentary
.01–.13 No change.
.14 Until [October 31, 2016]
November 14, 2016, the treatment of
Price to Comply Orders, Price to Display
Orders, Non-Displayed Orders, and
Post-Only Orders that are entered
through the OUCH or FLITE protocols
in Test Group Three securities shall be
as follows:
Following entry, and if market
conditions allow, a Price to Comply
Order in a Test Group Three Pilot
Security will be adjusted repeatedly in
accordance with changes to the NBBO
until such time as the Price to Comply
Order is able to be ranked and displayed
at its original entered limit price.
Following entry, and if market
conditions allow, a Price to Display
Order in a Test Group Three Pilot
Security will be adjusted repeatedly in
accordance with changes to the NBBO
until such time as the Price to Display
Order is able to be ranked and displayed
at its original entered limit price.
Following entry, and if market
conditions allow, a Non-Displayed
Order in a Test Group Three Pilot
Security will be adjusted repeatedly in
accordance with changes to the NBBO
up (down) to the Order’s limit price.
Following entry, and if market
conditions allow, the Post-Only Order
in a Test Group Three Pilot Security
will be adjusted repeatedly in
accordance with changes to the NBBO
or the best price on the Exchange Book,
as applicable until such time as the
Post-Only Order is able to be ranked and
displayed at its original entered limit
price.
*
*
*
*
*
3 See Securities Exchange Act Release No. 74892
(May 6, 2015), 80 FR 27513 (May 13, 2015)
(‘‘Approval Order’’).
1 15
VerDate Sep<11>2014
to re-program its systems to eliminate a
re-pricing functionality for certain
orders in Test Group Three securities in
connection with the Regulation NMS
Plan to Implement a Tick Size Pilot
Program (‘‘Plan’’ or ‘‘Pilot’’).3
The text of the proposed rule change
is set forth below. Proposed new
language is underlined; deleted text is
in brackets.
*
*
*
*
*
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80123
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
On September 7, 2016, the Exchange
filed with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
a proposed rule change (‘‘Proposal’’) to
adopt paragraph (d) to Exchange Rule
4770 to describe changes to system
functionality necessary to implement
the Plan. The Exchange also proposed
amendments to Rule 4770(a) and (c) to
clarify how the Trade-at exception may
be satisfied. The SEC published the
Proposal in the Federal Register for
notice and comment on September 20,
2016.4 BX subsequently filed three
Partial Amendments to clarify aspects of
the Proposal. The Commission approved
the Proposal, as amended, on October 7,
2016.5
In SR–BX–2016–050, BX had initially
proposed a re-pricing functionality for
Price to Comply Orders, Non-Displayed
Orders, and Post-Only Orders entered
through the OUCH and FLITE protocols
in Group Three securities.6 BX
subsequently determined that it would
not offer this re-pricing functionality for
4 See Securities Exchange Act Release No. 78838
(September 14, 2016), 81 FR 64566 (September 20,
2016) (SR–BX–2016–050).
5 See Securities Exchange Act Release No. 79076
(October 7, 2016) (SR–BX–2016–050).
6 As originally proposed, Rule 4770(d)(2) stated
that Price to Comply Orders in a Test Group Three
Pilot Security will be adjusted repeatedly in
accordance with changes to the NBBO until such
time as the Price to Comply Order is able to be
ranked and displayed at its original entered limit
price. Rule 4770(d)(3) stated that, if market
conditions allow, a Non-Displayed Order in a Test
Group Three Pilot Security will be adjusted
repeatedly in accordance with changes to the NBBO
up (down) to the Order’s limit price. Rule
4770(d)(4) stated that, if market conditions allow,
the Post-Only Order in a Test Group Three Pilot
Security will be adjusted repeatedly in accordance
with changes to the NBBO or the best price on the
BX Book, as applicable until such time as the PostOnly Order is able to be ranked and displayed at
its original entered limit price.
E:\FR\FM\15NON1.SGM
15NON1
]]>Agencies
[Federal Register Volume 81, Number 220 (Tuesday, November 15, 2016)]
[Notices]
[Pages 80114-80123]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27369]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79264; File No. SR-BatsEDGX-2016-60]
Self-Regulatory Organizations; Bats EDGX Exchange, Inc.; Notice
of Filing of a Proposed Rule Change in Connection With the Proposed
Corporate Transaction Involving Bats Global Markets, Inc. and CBOE
Holdings, Inc.
November 8, 2016.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on November 2, 2016, Bats EDGX Exchange, Inc. (the ``Exchange'' or
``EDGX'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule
[[Page 80115]]
change as described in Items I, II and III below, which Items have been
prepared by the Exchange. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange filed a proposed rule change (the ``Proposed Rule
Change'') in connection with the proposed corporate transaction (the
``Transaction''), as described in more detail below, involving its
ultimate parent company, Bats Global Markets, Inc. (``BGM''), CBOE
Holdings, Inc. (``CBOE Holdings''), and two wholly owned subsidiaries
of CBOE Holdings, CBOE Corporation and CBOE V, LLC (``CBOE V''). CBOE
Holdings is the parent company of Chicago Board Options Exchange,
Incorporated (``CBOE'') and C2 Options Exchange, Incorporated (``C2''),
each a national securities exchange registered with the Commission
pursuant to Section 6(a) of the Act,\3\ and CBOE Futures Exchange, LLC
(``CBOE Futures,'' and together with CBOE and C2, the ``CBOE
Exchanges''), a national securities exchange that lists or trades
security-futures products notice-registered with the Commission
pursuant to Section 6(g) of the Act.\4\
---------------------------------------------------------------------------
\3\ 15 U.S.C. 78f(a).
\4\ 15 U.S.C. 78f(g).
---------------------------------------------------------------------------
Upon completion of the mergers described below that effectuate the
Transaction (the ``Closing''), the business of BGM will be carried on
by CBOE V. CBOE V, rather than BGM, will be the direct parent company
of Direct Edge LLC (``Direct Edge''), which is the direct parent
company of the Exchange. As a result, CBOE Holdings will become the
ultimate parent company of Direct Edge and of the Exchange.
To effectuate the Transaction, the Exchange seeks to obtain the
Commission's approval of: (i) The resolutions of BGM's board of
directors (the ``BGM Board'') waiving certain provisions of the Amended
and Restated Certificate of Incorporation of BGM (the ``BGM Charter'')
and making certain related determinations regarding CBOE Holdings and
the impact of the Transaction on the Exchange (the ``Resolutions'');
(ii) the CBOE Holdings Second Amended and Restated Certificate of
Incorporation (the ``CBOE Holdings Charter'') and the CBOE Holdings
Third Amended and Restated Bylaws (the ``CBOE Holdings Bylaws''); (iii)
the Certificate of Formation of CBOE V (the ``CBOE V Certificate'') and
the Limited Liability Company Operating Agreement of CBOE V (the ``CBOE
V Operating Agreement''); (iv) the proposed amendments to the Amended
and Restated Limited Liability Company Operating Agreement of Direct
Edge (the ``Direct Edge Operating Agreement''); (v) the proposed
amendments to the Fifth Amended and Restated Bylaws of the Exchange
(the ``Exchange Bylaws''); and (vi) the proposed amendments to EDGX
Rules 2.3, 2.10 and 2.12 (the ``Exchange Rules'').
The text of the proposed rule change is available at the Exchange's
Web site at www.batstrading.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant parts of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange submits this Proposed Rule Change to seek the
Commission's approval of the organizational and governance documents of
the Exchange and its current and proposed future parent companies, and
related actions that are necessary in connection with the Closing of
the Transaction, as described below.
Other than as described herein and set forth in Exhibits 5A through
5H, the Exchange will continue to conduct its regulated activities
(including operating and regulating its market and members) in the
manner currently conducted, and will not make any changes to its
regulated activities in connection with the Transaction. Except as set
forth in this Proposed Rule Change, the Exchange is not proposing any
amendments to its trading and regulatory rules at this time. If the
Exchange determines to make any such changes, it will seek the approval
of the Commission to the extent required by the Act, and the
Commission's rules thereunder, and the Rules of the Exchange.
1. Current Corporate Structures
The Exchange, Bats BZX Exchange, Inc. (``BZX''), Bats BYX Exchange,
Inc. (``BYX'') and Bats EDGA Exchange, Inc. (``EDGA,'' and together
with the Exchange, BZX and BYX, the ``Bats Exchanges'') are each
Delaware corporations that are national securities exchanges registered
with the Commission pursuant to Section 6(a) of the Act.\5\
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78f(a).
---------------------------------------------------------------------------
The Exchange and EDGA are each direct, wholly owned subsidiaries of
Direct Edge, a Delaware limited liability company that is a direct,
wholly owned subsidiary of BGM. BZX and BYX are direct, wholly owned
subsidiaries of Bats Global Markets Holdings, Inc. (``BGM Holdings''),
a Delaware corporation that is a direct, wholly owned subsidiary of
BGM. In addition to certain other subsidiaries not registered with the
Commission in any capacity, BGM Holdings also owns 100 percent of the
equity interest in Bats Trading, Inc. (``Bats Trading''), a Delaware
corporation that is a broker-dealer registered with the Commission that
provides routing services outbound from, and in certain instances
inbound to, each Bats Exchange. BGM, a Delaware corporation, is a
publicly traded company listed on BZX.
CBOE Holdings, a Delaware corporation, is a publicly traded company
listed on The NASDAQ Stock Market. CBOE Holdings owns 100 percent of
the equity interest in the CBOE Exchanges.
In contemplation of the Transaction, CBOE Holdings formed two
additional entities, CBOE Corporation, a Delaware corporation, and CBOE
V, a Delaware limited liability company, each of which are direct,
wholly owned subsidiaries of CBOE Holdings. Each of CBOE Corporation
and CBOE V currently have no material assets or conduct any operations.
2. The Transaction
On September 25, 2016, BGM, CBOE Holdings, CBOE Corporation and
CBOE V entered into an Agreement and Plan of Merger (the ``Merger
Agreement''). Pursuant to and subject to the terms of the Merger
Agreement, at the Closing, among other things:
(i) CBOE Corporation will be merged with and into BGM, whereupon
the separate existence of CBOE Corporation will cease and BGM will be
the surviving company (the ``Merger'');
[[Page 80116]]
(ii) by virtue of the Merger and without any action required on the
part of BGM, CBOE Corporation or any holder of BGM or CBOE Corporation
stock, each share of BGM common stock (whether voting or non-voting)
issued and outstanding (with the exception of shares owned by CBOE
Holdings, BGM or any of their respective subsidiaries and certain
shares held by persons that are entitled to and properly demand
appraisal rights) will be converted into the right to receive a
particular number of shares of CBOE Holdings and/or cash, at the
election of the holder of such share of BGM common stock (the ``Merger
Consideration''), and each share of CBOE Corporation issued and
outstanding will be converted into one share of BGM, such that BGM will
become a wholly owned subsidiary of CBOE Holdings; and
(iii) immediately following the Merger, BGM will be merged with and
into CBOE V, whereupon the separate existence of BGM will cease and
CBOE V will be the surviving company (the ``Subsequent Merger'').
Upon the Closing, the Direct Edge Operating Agreement, the Exchange
Bylaws and the Exchange Rules will be amended to take into account the
post-Closing corporate structure, described below.
3. Post-Closing Corporate Structure
As a result of the Transaction, BGM will cease to exist and the
business of BGM will be carried on by CBOE V, which is a wholly owned
subsidiary of CBOE Holdings.\6\ CBOE V will own 100 percent of the
equity interest in Direct Edge and BGM Holdings. Direct Edge will
continue to own 100 percent of the equity interest in the Exchange and
EDGA. BGM Holdings will continue to own 100 percent of the equity
interest in BZX, BYX, Bats Trading, and certain other subsidiaries not
registered with the Commission in any capacity.\7\
---------------------------------------------------------------------------
\6\ In connection with the Transaction, CBOE Holdings agreed in
the Merger Agreement to take all requisite actions so, as of the
Closing, the CBOE Holdings Board will include three individuals
designated by BGM who (1) are serving as BGM directors immediately
prior to the Closing and (2) comply with the policies (including
clarifications of the policies provided to BGM) of the Nominating
and Governance Committee of the CBOE Holdings Board as in effect on
the date of the Merger Agreement and previously provided to BGM
(each of whom will be appointed to the CBOE Holdings Board as of the
Closing). The CBOE Holdings Board currently consists of 14
directors. The Exchange expects three current CBOE Holdings
directors to resign effective prior to the Closing and the remaining
CBOE Holdings directors to fill those vacancies with the three BGM
directors designated by BGM.
\7\ As described above, the Transaction will result in a change
of ownership of Bats Trading, which is a member of the Financial
Industry Regulatory Authority, Inc. (``FINRA''). The Exchange
understands that, pursuant to NASD Rule 1017, Bats Trading is
seeking approval for this change of ownership from FINRA.
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4. Ownership and Voting Limitations of BGM; Resolutions
The BGM Charter provides that (i) no Person,\8\ either alone or
together with its Related Persons,\9\ may own, directly or indirectly,
of record or beneficially, shares constituting more than 40 percent of
any class of its capital stock, and no Exchange Member, either alone or
together with its Related Persons, may own, directly or indirectly, of
record or beneficially, shares constituting more than 20 percent of any
class of its capital stock (collectively, the ``BGM Ownership
Limitation''); and (ii) subject to certain exceptions, no Person,
either alone or together with its Related Persons, at any time, may,
directly, indirectly or pursuant to any of various arrangements, vote
or cause the voting of shares or give any consent or proxy with respect
to shares representing more than 20 percent of the voting power of its
then issued and outstanding capital stock (the ``BGM Voting
Limitation'').\10\ Purported transfers that would result in a violation
of the BGM Ownership Limitation are not recognized by BGM to the extent
of any ownership in excess of the BGM Ownership Limitation, and
purported voting or voting arrangements in violation of the BGM Voting
Limitation are not honored by BGM to the extent of any voting in excess
of the limitation.\11\
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\8\ The BGM Charter generally defines a ``Person'' as a natural
person, partnership, corporation, limited liability company, entity,
government, or political subdivision, agency or instrumentality of a
government. See BGM Charter, Art. FIFTH, para. (a)(i).
\9\ The BGM Charter generally defines a ``Related Person'' as,
with respect to any Person, (i) any ``affiliate'' of such Person (as
defined in Rule 12b-2 under the Act); (ii) any other Person with
which such first Person has any agreement, arrangement or
understanding (whether or not in writing) to act together for the
purpose of acquiring, voting, holding or disposing of shares of the
capital stock of BGM; (iii) in the case of a Person that is a
company, corporation or similar entity, any executive officer (as
defined under Rule 3b-7 under the Act) or director of such Person
and, in the case of a Person that is a partnership or limited
liability company, any general partner, managing member or manager
of such Person, as applicable; (iv) in the case of any Person that
is a registered broker or dealer that has been admitted to
membership in any of the Bats Exchanges (for purposes of this
definition of ``Related Person,'' each such national securities
exchange shall be referred to generally as an ``Exchange'' and any
member of such Exchange, an ``Exchange Member''), any Person that is
associated with the Exchange Member (as determined using the
definition of ``person associated with a member'' as defined under
Section 3(a)(21) of the Act); (v) in the case of a Person that is a
natural person and Exchange Member, any broker or dealer that is
also an Exchange Member with which such Person is associated; (vi)
in the case of a Person that is a natural person, any relative or
spouse of such Person, or any relative of such spouse who has the
same home as such Person or who is a director or officer of BGM or
any of its parents or subsidiaries; (vii) in the case of a Person
that is an executive officer (as defined under Rule 3b-7 under the
Act) or a director of a company, corporation or similar entity, such
company, corporation or entity, as applicable; and (viii) in the
case of a Person that is a general partner, managing member or
manager of a partnership or limited liability company, such
partnership or limited liability company, as applicable. See BGM
Charter, Art. FIFTH, para. (a)(ii).
\10\ See BGM Charter, Art. FIFTH, para. (b).
\11\ See BGM Charter, Art. FIFTH, para. (d).
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However, the BGM Charter provides that each of the BGM Ownership
Limitation and the BGM Voting Limitation may be waived (except with
respect to Exchange Members and their Related Persons) pursuant to a
resolution duly adopted by the BGM Board if, in connection with taking
such action, the BGM Board states in such resolution that it is the
determination of the BGM Board that the waiver:
Will not impair the ability of each Bats Exchange to carry
out its functions and responsibilities as an ``exchange'' under the Act
and the rules and regulations promulgated thereunder;
is otherwise in the best interests of BGM, its
stockholders, and each Bats Exchange;
will not impair the ability of the Commission to enforce
the Act and the rules and regulations promulgated thereunder; and
shall not be effective until it is filed with and approved
by the Commission.\12\
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\12\ See BGM Charter, Art. FIFTH, para. (b)(ii)(B).
In granting such a waiver, the BGM Board has the discretion to impose
on the Person and its Related Persons, such conditions and restrictions
that it deems necessary, appropriate or desirable in furtherance of the
objectives of the Act and the rules and regulations promulgated
thereunder, and the governance of each Bats Exchange.\13\
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\13\ Id.
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In addition, notwithstanding the above, the BGM Charter provides
\14\ that in any case where a Person, either alone or with its Related
Persons, would own or vote more than the BGM Ownership Limitation or
BGM Voting Limitation, respectively, upon consummation of any proposed
sale, assignment or transfer of BGM's capital stock, such a transaction
will not become effective until the BGM Board determines, by
resolution, that such Person and its Related Persons are not subject to
any ``statutory disqualification,'' as defined in Section 3(a)(39) of
the Act.\15\
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\14\ See BGM Charter, Art. FIFTH, para. (b)(iii).
\15\ 15 U.S.C. 78c(a)(39).
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[[Page 80117]]
As described above, as a result of the Merger (and prior to its
separate existence ceasing as a result of the Subsequent Merger), BGM
will become a wholly owned subsidiary of CBOE Holdings, such that CBOE
Holdings will possess ownership and voting rights in BGM in excess of
the Ownership Limitation and the Voting Limitation. In addition, as a
result of the Subsequent Merger, BGM will merge with and into CBOE V,
terminating the BGM Charter and becoming an entity whose ownership and
voting is held entirely by CBOE Holdings, in excess of the BGM
Ownership Limitation and the BGM Voting Limitation that would otherwise
apply.
The BGM Board therefore determined that in order to effect the
Transaction, a waiver of the BGM Ownership Limitation and the BGM
Voting Limitation with respect to CBOE Holdings would be required. To
do so, the BGM Board adopted the Resolutions, attached as Exhibit 5A,
making certain determinations with respect to CBOE Holdings and the
Transaction that are necessary to waive the BGM Ownership Limitation
and BGM Voting Limitation. Specifically, the BGM Board determined that:
The acquisition of the proposed ownership by CBOE Holdings
in BGM will not impair the ability of each Bats Exchange to carry out
its functions and responsibilities as an ``exchange'' under the Act and
the rules and regulations promulgated thereunder, is otherwise in the
best interests of BGM, its stockholders and the Bats Exchanges, and
will not impair the ability of the Commission to enforce the Act and
the rules and regulations promulgated thereunder;
the acquisition or exercise of the proposed voting rights
by CBOE Holdings in BGM will not impair the ability of each Bats
Exchange to carry out its functions and responsibilities as an
``exchange'' under the Act and the rules and regulations promulgated
thereunder, is otherwise in the best interests of BGM, its stockholders
and the Bats Exchanges, and will not impair the ability of the
Commission to enforce the Act and the rules and regulations promulgated
thereunder;
neither CBOE Holdings nor any of its Related Persons is
subject to ``statutory disqualification'' within the meaning of Section
3(a)(39) of the Act; \16\ and
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\16\ Id.
---------------------------------------------------------------------------
neither CBOE Holdings nor any of its Related Persons is an
Exchange Member.\17\
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\17\ In addition, the Resolutions contain a determination that
the execution and delivery of the Merger Agreement by CBOE Holdings
constituted notice of CBOE Holdings' intention to acquire ownership
and voting rights in excess of the BGM Ownership Limitation and BGM
Voting Limitation, respectively, in writing and not less than 45
days before the Closing. See BGM Charter, Art. FIFTH, para. (b)(iv).
The Exchange notes that Art. FIFTH, para. (c)(i) of the BGM Charter
further requires that any Person that, either alone or together with
its Related Persons, owns, directly or indirectly (whether by
acquisition or by a change in the number of shares outstanding), of
record or beneficially, five percent or more of the then outstanding
shares of capital stock of BGM must immediately upon acquiring
knowledge of its ownership of five percent or more give written
notice of such ownership to the BGM Board. The Merger Agreement
provides that the Merger Agreement constitutes such notice with
respect to certain voting agreements entered into concurrently with
the Merger Agreement. See Merger Agreement, Section 5.21.
---------------------------------------------------------------------------
The Exchange has reviewed such Resolutions and requests that the
Commission approve such Resolutions. The Exchange believes that the
Commission should approve the Resolutions, as the Transaction will not
impair the ability of any Bats Exchange to carry out its functions and
responsibilities as an ``exchange'' under the Act and the rules and
regulations promulgated thereunder, or the ability of the Commission to
enforce the Act and the rules and regulations promulgated thereunder.
The Bats Exchanges will continue to operate and regulate their markets
and members as they have done prior to the Transaction. Thus, each Bats
Exchange will continue to enforce the Act, the Commission's rules
thereunder, and each Exchange's own rules, in the manner it does today.
Further, the Commission will continue to have plenary regulatory
authority over the Bats Exchanges, as is currently the case with these
entities.
The Exchange also notes that the Resolutions reflect the
determination by the BGM Board that the Transaction and CBOE Holdings'
resulting ownership and voting rights in BGM following the Merger, and
CBOE V's ownership and voting rights following the Subsequent Merger,
are otherwise in the best interests of BGM, its stockholders and the
Bats Exchanges. The Bats Exchanges will be ultimately held by an
entity, CBOE Holdings, that already owns other national securities
exchanges and is subject to governance documents that similarly
restrict concentration of ownership and voting rights.
As described in more detail below, the Exchange is also requesting
approval of the adoption of the CBOE Holdings Charter and the CBOE
Holdings Bylaws. The CBOE Holdings Charter includes a number of
provisions relating to the Commission's regulatory oversight that have
a similar effect as those in the BGM Charter, including the BGM
Ownership Limitation and the BGM Voting Limitation. Therefore,
notwithstanding the Resolutions and the Transaction, provisions similar
(and, in some cases, more stringent) to the BGM Ownership Limitation
and the BGM Voting Limitation will remain in place with respect to
potential future transactions involving the ultimate parent company of
the Bats Exchanges. This means that the Exchange ownership structure
will continue to provide the Commission with appropriate oversight
tools to ensure that the Commission will have the ability to enforce
the Act with respect to the Exchange, its direct and indirect parent
companies, and its directors, officers, employees and agents to the
extent they are involved in the activities of the Exchange, and protect
the independence of the Exchange's self-regulatory activities.
The Exchange therefore requests that the Commission approve the
Resolutions, attached as Exhibit 5A.
5. CBOE Holdings Charter and CBOE Holdings Bylaws
CBOE Holdings currently holds a direct ownership interest in the
CBOE Exchanges. The Commission has previously approved the CBOE
Holdings Charter and the CBOE Holdings Bylaws (collectively, the ``CBOE
Holdings Organizational Documents''), attached as Exhibits 5B and 5C,
respectively.\18\
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\18\ See Securities Exchange Act Release No. 62158 (May 24,
2010), 75 FR 30082 (May 28, 2010) (SR-CBOE-2008-88). The CBOE
Organizational Documents have been subsequently amended from time to
time pursuant to proposed rule changes that were filed with the
Commission for immediate effectiveness. See, e.g., Securities
Exchange Act Release No. 76282 (October 27, 2015), 80 FR 67464
(November 2, 2015) (SR-CBOE-2015-092).
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In connection with the Transaction, upon the Closing, CBOE Holdings
will become the indirect owner (through CBOE V and Direct Edge) of the
Exchange and EDGA and the indirect owner (through CBOE V and BGM
Holdings) of BZX, BYX and Bats Trading (and certain other subsidiaries
not registered with the Commission in any capacity).
The CBOE Holdings Organizational Documents include various
provisions relating to any ``Regulated Securities Exchange
Subsidiary,'' which is defined as any national securities exchange
controlled, directly or indirectly, by CBOE Holdings. Upon the Closing,
the Exchange will be covered by the
[[Page 80118]]
definition of Regulated Securities Exchange Subsidiary for purposes of
the CBOE Holdings Organizational Documents. As a result, no amendments
to the CBOE Holdings Organizational Documents will be necessary to
reflect CBOE Holdings' indirect ownership of the Exchange.
The Exchange believes that the CBOE Holdings Organizational
Documents will protect and maintain the integrity of the self-
regulatory functions of the Exchange and facilitate the ability of the
Exchange and the Commission to carry out their regulatory and oversight
obligations under the Act, as the CBOE Organizational Documents do with
respect to the CBOE Exchanges.
In addition, the CBOE Organizational Documents contain provisions,
including those with respect to the following, that are similar to
those contained in the BGM Charter and BGM's Amended and Restated
Bylaws (the ``BGM Bylaws''), which the Commission has previously found
to be consistent with the Act: \19\
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\19\ See Securities Exchange Act Release No. 77464 (March 29,
2016), 81 FR 19252 (April 4, 2016) (File Nos. SR-BATS-2016-10, SR-
BYX-2016-02, SR-EDGX-2016-04, and SR-EDGA-2016-01).
---------------------------------------------------------------------------
Ownership and Voting Limitations. Similar to the BGM
Voting Limitation and the BGM Ownership Limitation contained in the BGM
Charter, the CBOE Holdings Charter limits the extent of ownership and
voting rights which certain persons may possess or exercise.\20\ Like
the BGM Charter, the CBOE Holdings Charter similarly prohibits any
Person,\21\ together with its Related Persons,\22\ from exercising
voting rights with respect to more than 20 percent of the then
outstanding votes entitled to be cast on such matter.\23\ However, with
respect to ownership limitations, the CBOE Holdings Charter contains a
more stringent threshold than contained in the BGM Charter. Under the
CBOE Holdings Charter, no Person, together with its Related Persons, is
permitted at any time to beneficially own directly or indirectly shares
of stock of CBOE Holdings representing in the aggregate more than 20
percent of the then outstanding shares of stock of CBOE Holdings.\24\
In contrast, the BGM Ownership Limitation only applies a 20 percent
threshold to any Exchange Member together with its Related Persons,
while applying a 40 percent threshold to any other Person together with
its Related Persons. As a result, the CBOE Holdings Charter should be
at least as effective as the BGM Charter at preventing any stockholder
from exercising undue control over the operation of the Exchange.
---------------------------------------------------------------------------
\20\ Compare CBOE Holdings Charter, Art. SIXTH with BGM Charter,
Art. FIFTH.
\21\ ``Person'' mean an individual, partnership (general or
limited), joint stock company, corporation, limited liability
company, trust or unincorporated organization, or any governmental
entity or agency or political subdivision thereof. See CBOE Holdings
Charter, Art. FIFTH, para. (a)(iv).
\22\ ``Related Person'' is defined in the CBOE Holdings Charter
in a manner substantially the same as it is defined in the BGM
Charter. See supra note 9; CBOE Holdings Charter, Art. FIFTH, para.
(a)(vi).
\23\ See CBOE Holdings Charter, Art. SIXTH, para. (a).
\24\ See CBOE Holdings Charter, Art. SIXTH, para. (b).
---------------------------------------------------------------------------
Independence and Non-Interference. Similar to provisions
contained in the BGM Bylaws, the CBOE Holdings Charter provides that
for so long as CBOE Holdings controls, directly or indirectly, a
Regulated Securities Exchange Subsidiary, each officer, director and
employee of CBOE Holdings must give due regard to the preservation of
the independence of the self-regulatory function of the Regulated
Securities Exchange Subsidiaries and may not take any actions that he
or she knows or reasonably should have known would interfere with the
effectuation of any decisions by the board of directors of any
Regulated Securities Exchange Subsidiary relating to such Regulated
Securities Exchange Subsidiary's regulatory functions (including
disciplinary matters) or that would adversely affect the ability of the
Regulated Securities Exchange Subsidiary to carry out such Regulated
Securities Exchange Subsidiary's responsibilities under the Act.\25\
---------------------------------------------------------------------------
\25\ Compare CBOE Holdings Charter, Art. SIXTEENTH, para. (c)
with BGM Bylaws, Section 12.01.
---------------------------------------------------------------------------
Confidentiality. Similar to provisions contained in the
BGM Bylaws, the CBOE Holdings Charter provides that, to the fullest
extent permitted by applicable law, all confidential information
pertaining to the self-regulatory function of Regulated Securities
Exchange Subsidiaries contained in the books and records of any
Regulated Securities Exchange Subsidiary that shall come into the
possession of the CBOE Holdings must be retained in confidence by CBOE
Holdings and its officers, directors, employees and agents and must not
be used for any commercial purposes.\26\
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\26\ Compare CBOE Holdings Charter, Art. FIFTEENTH with BGM
Bylaws, Section 12.02.
---------------------------------------------------------------------------
Books and Records. Similar to provisions contained in the
BGM Bylaws, the CBOE Holdings Charter provides that, for so long as
CBOE Holdings directly or indirectly controls any Regulated Securities
Exchange Subsidiary, the books, records, premises, officers, directors
and employees of CBOE Holdings shall be deemed to be the books,
records, premises, officers, directors and employees of the Regulated
Securities Exchange Subsidiary for purposes of and subject to oversight
pursuant to the Act, but only to the extent that such books, records,
premises, officers, directors and employees of the Corporation relate
to the business of such Regulated Securities Exchange Subsidiary.\27\
---------------------------------------------------------------------------
\27\ Compare CBOE Holdings Charter, Art. FIFTEENTH with BGM
Bylaws, Section 12.03.
---------------------------------------------------------------------------
Compliance With Securities Laws; Cooperation With the
Commission. Similar to provisions contained in the BGM Bylaws, the CBOE
Holdings Charter provides that CBOE Holdings shall comply with the
federal securities laws and the rules and regulations thereunder and
shall cooperate with the Commission, and each Regulated Securities
Exchange Subsidiary pursuant to and to the extent of its regulatory
authority, and shall take reasonable steps necessary to cause its
agents to cooperate with the Commission and, where applicable, the
Regulated Securities Exchange Subsidiaries pursuant to their regulatory
authority, with respect to such agents' activities related to the
Regulated Securities Exchange Subsidiaries.\28\
---------------------------------------------------------------------------
\28\ Compare CBOE Holdings Charter, Art. SIXTEENTH, para. (a)
with BGM Bylaws, Section 12.04.
---------------------------------------------------------------------------
Consent to Jurisdiction. Similar to provisions contained
in the BGM Bylaws, the CBOE Holdings Charter provides that CBOE
Holdings, its directors, officers, agents and employees, irrevocably
submit to the jurisdiction of the U.S. federal courts, the Commission,
and the Regulated Securities Exchange Subsidiaries, for the purposes of
any suit, action or proceeding pursuant to U.S. federal securities laws
or the rules or regulations thereunder, commenced or initiated by the
Commission arising out of, or relating to, the Regulated Securities
Exchange Subsidiaries' activities.\29\
---------------------------------------------------------------------------
\29\ Compare CBOE Holdings Charter, Art. FOURTEENTH with BGM
Bylaws, Section 12.05.
---------------------------------------------------------------------------
Amendments. Similar to provisions contained in the BGM
Charter and BGM Bylaws, the CBOE Organizational Documents provide that
for so long as CBOE Holdings controls, directly or indirectly,
Regulated Securities Exchange, before any amendment to or repeal of the
CBOE Holdings Charter or CBOE Holdings Bylaws may be effective, such
amendment or repeal must be submitted to the board of directors of each
such exchange, and if the amendment or repeal is required to
[[Page 80119]]
be filed with, or filed with and approved by the Commission, then such
change shall not be effective until filed with, or filed with and
approved by, the Commission, as the case may be.\30\ As stated above,
the Exchange believes that the foregoing provisions will assist the
Exchange in fulfilling its self-regulatory obligations and in
administering and complying with the requirements of the Act.
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\30\ Compare CBOE Holdings Charter, Arts. ELEVENTH, TWELFTH and
CBOE Holdings Bylaws, Section 10.2 with BGM Charter, Art. FOURTEENTH
and BGM Bylaws, Article XI.
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6. CBOE V Certificate and CBOE V Operating Agreement
Effective as of the Closing of the Transaction, CBOE V will hold
direct ownership of (i) Direct Edge, which will continue to hold direct
ownership of the Exchange and EDGA and (ii) BGM Holdings, which will
continue to hold direct ownership of BZX, BYX and Bats Trading (and
certain other subsidiaries not registered with the Commission in any
capacity). However, unlike BGM currently, CBOE V will not be the
ultimate holding company under the post-Closing corporate structure,
but rather will be an intermediate holding company owned by CBOE
Holdings. The Exchange believes that the CBOE V Operating Agreement
contains provisions relating to its indirect ownership of one or more
national securities exchanges, including such exchanges' regulatory
functions and Commission oversight, that are appropriate for an
intermediate holding company in the ownership chain of a national
securities exchange. Many of the provisions of the CBOE V Operating
Agreement relating to these matters are similar to the organizational
documents of Direct Edge, which currently is, and following the
Subsequent Merger will be, similarly situated as an intermediate
holding company of the Exchange. The Commission has previously found
the Direct Edge organizational documents to be consistent with the
Act.\31\
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\31\ See Securities Exchange Act Release No. 71449 (January 30,
2014), 79 FR 6961 (February 5, 2014) (SR-EDGA-2013-34; SR-EDGX-2013-
43).
---------------------------------------------------------------------------
Although CBOE V will not carry out any regulatory functions, the
Exchange notes that its activities with respect to the operation of the
Bats Exchanges must be consistent with, and must not interfere with,
the self-regulatory obligations of each Bats Exchange. The CBOE V
Operating Agreement therefore includes certain provisions that are
designed to maintain the independence of the Bats Exchanges' self-
regulatory functions, enable the Bats Exchanges to operate in a manner
that complies with the federal securities laws, including the
objectives of Sections 6(b) \32\ and 19(g) \33\ of the Act, and
facilitate the ability of each Bats Exchange and the Commission to
fulfill their respective regulatory and oversight obligations under the
Act.
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\32\ 15 U.S.C. 78f(b).
\33\ 15 U.S.C. 78s(g).
---------------------------------------------------------------------------
a. CBOE V Certificate of Formation
The CBOE V Certificate, attached as Exhibit 5D, includes the
following provisions required under Delaware law: (i) The full name of
CBOE V as ``CBOE V, LLC'', and (ii) the name and address of CBOE V's
registered office in the State of Delaware and the name of CBOE V's
registered agent at such address.\34\ In addition, the CBOE V
Certificate contains a provision providing that CBOE V shall indemnify
members of its board of directors and certain other persons, subject to
certain conditions.
---------------------------------------------------------------------------
\34\ Delaware Limited Liability Company Act Sec. 18-201.
---------------------------------------------------------------------------
As the Exchange believes is customary for limited liability
companies formed in the State of Delaware, other substantive provisions
governing the ownership, operation and management of CBOE V are set
forth in the CBOE V Operating Agreement, discussed below.
b. CBOE V Operating Agreement
With respect to ownership and control of CBOE V, the CBOE V
Operating Agreement, attached as Exhibit 5E, specifically provides that
CBOE V's sole member is CBOE Holdings, until the CBOE V Operating
Agreement is amended (subject to Commission approval, as described
below).\35\ Further, for so long as CBOE V controls, directly or
indirectly, a subsidiary that is registered with the Commission as a
national securities exchange (an ``Exchange Subsidiary''), CBOE
Holdings may not sell, assign, transfer, convey, gift, exchange or
otherwise dispose of any or all of its member interest in CBOE V,
except pursuant to an amendment to the CBOE V Operating Agreement that
is filed with and approved by the Commission. \36\ These restrictions
are designed to ensure that any change to the ownership or control of
any Exchange Subsidiary, including without limitation the Bats
Exchanges, may only occur through a change in the ownership or control
of CBOE Holdings. As such, any purported change of such ownership or
control (unless pursuant to a Commission-approved change of ownership
of CBOE V) would need to comply with the CBOE Holdings Charter and CBOE
Holdings Bylaws, including the ownership and voting limitations
discussed above (or a Commission-approved waiver therefrom).
---------------------------------------------------------------------------
\35\ CBOE V Operating Agreement, Section 1.1.
\36\ CBOE V Operating Agreement, Section 5.1.
---------------------------------------------------------------------------
The CBOE V Operating Agreement also contains several provisions
designed to protect the independence of the self-regulatory functions
of the Bats Exchanges. The CBOE V Operating Agreement requires that,
for so long as CBOE V, directly or indirectly, controls any Exchange
Subsidiary, CBOE Holdings, as the sole member of CBOE V, and officers,
employees and agents of CBOE V must give due regard to the preservation
of independence of the self-regulatory functions of such Exchange
Subsidiary, as well as to its obligations to investors and the general
public, and not interfere with the effectuation of any decisions by the
board of directors of an Exchange Subsidiary relating to its regulatory
functions (including disciplinary matters) or which would interfere
with the ability of such Exchange Subsidiary to carry out its
responsibilities under the Act.\37\
---------------------------------------------------------------------------
\37\ See CBOE V Operating Agreement, Section 10.1(a).
---------------------------------------------------------------------------
The CBOE V Operating Agreement also would require that CBOE V
comply with the U.S. federal securities laws and rules and regulations
thereunder and cooperate with the Commission and each Exchange
Subsidiary, as applicable, pursuant to and to the extent of their
respective regulatory authority.\38\ Further, CBOE V's officers,
directors, employees and agents shall be deemed to agree to (i) comply
with the U.S. federal securities laws and the rules and regulations
thereunder; and (ii) cooperate with the Commission and each Exchange
Subsidiary in respect of the Commission's oversight responsibilities
regarding such Exchange Subsidiary and the self-regulatory functions
and responsibilities of the Exchange Subsidiaries, and CBOE V will take
reasonable steps to cause its officers, employees and agents to so
cooperate.\39\
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\38\ See CBOE V Operating Agreement, Section 10.2(a).
\39\ Id.
---------------------------------------------------------------------------
Furthermore, to the fullest extent permitted by law, CBOE V and its
officers, directors, employees and agents will be deemed to irrevocably
submit to the jurisdiction of the U.S. federal courts, the Commission,
and each Exchange Subsidiary, as applicable, for purposes of any suit,
action, or proceeding pursuant to the U.S. federal securities laws or
the rules or
[[Page 80120]]
regulations thereunder arising out of, or relating to, the activities
of such Exchange Subsidiary.\40\
---------------------------------------------------------------------------
\40\ See CBOE V Operating Agreement, Section 10.3(a).
---------------------------------------------------------------------------
The proposed CBOE V Operating Agreement also contains a number of
provisions designed to ensure that the Exchange will have sufficient
access to the books and records of CBOE V as they relate to any
Exchange Subsidiary. Pursuant to the CBOE V Operating Agreement, to the
extent they are related to the operation or administration of an
Exchange Subsidiary, the books, records, premises, officers, agents,
and employees of CBOE V are deemed to be the books, records, premises,
officers, agents and employees of such Exchange Subsidiary for the
purposes of, and subject to oversight pursuant to, the Act.\41\ In
addition, for as long as CBOE V controls, directly or indirectly, an
Exchange Subsidiary, CBOE V's books and records shall be subject at all
times to inspection and copying by the Commission and the applicable
Exchange Subsidiary, provided that such books and records are related
to the operation or administration of an Exchange Subsidiary.\42\
---------------------------------------------------------------------------
\41\ See CBOE V Operating Agreement, Section 8.4(b).
\42\ Id.
---------------------------------------------------------------------------
The proposed CBOE V Operating Agreement also provides that, to the
fullest extent permitted by law, all books and records of any Exchange
Subsidiary reflecting confidential information pertaining to the self-
regulatory function of such Exchange Subsidiary (including disciplinary
matters, trading data, trading practices and audit information) that
comes into the possession of CBOE V, shall be retained in confidence by
CBOE V, CBOE V's officers, employees and agents and CBOE Holdings, and
not used for any non-regulatory purposes.\43\ The proposed CBOE V
Operating Agreement provides, however, that the foregoing shall not
limit or impede the rights of the Commission or an Exchange Subsidiary
to access and examine such confidential information pursuant to the
U.S. federal securities laws and the rules and regulations thereunder,
or limit or impede the ability of CBOE Holdings or any of CBOE V's
officers, employees or agents to disclose such confidential information
to the Commission or an Exchange Subsidiary.\44\
---------------------------------------------------------------------------
\43\ See CBOE V Operating Agreement, Section 8.4(a).
\44\ Id.
---------------------------------------------------------------------------
In addition, the CBOE V Operating Agreement provides that for so
long as CBOE V controls, directly or indirectly, any Exchange
Subsidiary, before any amendment to or repeal of any provision of the
CBOE V Operating Agreement will be effective, those changes must be
submitted to the board of directors of each Exchange Subsidiary, and if
the same must be filed with, or filed with and approved by, the
Commission before the changes may be effective under Section 19 of the
Act \45\ and the rules promulgated thereunder, then the proposed
changes shall not be effective until filed with, or filed with and
approved by, the Commission, as the case may be.\46\
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\45\ 15 U.S.C. 78s.
\46\ See CBOE V Operating Agreement, Section 11.2.
---------------------------------------------------------------------------
7. Direct Edge Operating Agreement
The Direct Edge Operating Agreement currently provides that the
sole member of Direct Edge is BGM. However, as a result of the
Transaction, CBOE V will become the sole member of Direct Edge. The
Exchange proposes to amend the Direct Edge Operating Agreement to
reflect this change, as set forth in Exhibit 5F.
8. Bylaws of the Exchange
In connection with the Transaction, the Exchange proposes to amend
and restate its Fifth Amended and Restated Bylaws and adopt the amended
Exchange Bylaws as its Sixth Amended and Restated Bylaws, attached as
Exhibit 5G. Specifically, the Exchange proposes to (i) expand the
prohibition contained in Section 2 of Article XI of the Exchange Bylaws
and (ii) add a definition of ``Trading Permit Holder'' to Article I.
Currently, Section 2 of Article XI of the Exchange Bylaws prohibits
directors of BGM or Direct Edge who are not also directors, officers,
staff, counsel or advisors of the Exchange from participating in any
meetings of the Exchange's board of directors (or any committee
thereof) pertaining to the self-regulatory function of the Exchange
(including disciplinary matters). This provision refers to BGM and
Direct Edge because they are currently the only direct and indirect
owners of the Exchange. However, following the Transaction, the
Exchange will be owned indirectly by CBOE V and CBOE Holdings (in
addition to its direct ownership by Direct Edge). Therefore, the
Exchange is proposing to remove the reference to BGM and insert
references to CBOE V and CBOE Holdings, so that CBOE V and CBOE
Holdings will both be covered by this prohibition. The Exchange
believes that this amendment will protect the independence of the
Exchange's self-regulatory activities.
In addition, as noted above, the CBOE Holdings Charter currently
prohibits certain persons from owning or exercising voting rights over
certain percentages of ownership of CBOE Holdings. The CBOE Holdings
Charter permits the board of directors of CBOE Holdings to waive the
limitation on the exercise of voting rights in excess of 20 percent of
the then outstanding votes entitled to be cast on such matter only if,
among other things, ``for so long as [CBOE Holdings] directly or
indirectly controls any Regulated Securities Exchange Subsidiary,
neither such Person nor any of its Related Persons is a `Trading Permit
Holder' (as defined in the Bylaws of any Regulated Securities Exchange
Subsidiary as they may be amended from time to time).'' \47\
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\47\ See CBOE Holdings Charter, Art. SIXTH, para. (a)(ii)(C).
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The Exchange does not issue ``trading permits,'' but admits
members. The Exchange believes the provisions of the CBOE Holdings
Charter that refer to Trading Permit Holders of its Regulated
Securities Exchange Subsidiaries should apply equally to members of the
Exchange once it becomes a Regulated Securities Exchange Subsidiary of
CBOE Holdings. As a result, the Exchange proposes to add clause (ff) to
Article I of the Exchange Bylaws, providing that `` `Trading Permit
Holder' shall have the same meaning as Exchange Member.'' This will
ensure that the Exchange's members will be considered Trading Permit
Holders of a Regulated Securities Exchange Subsidiary for purposes of
the CBOE Holdings Charter.
9. Exchange Rules
a. Exchange Rule 2.3--Member Eligibility
Pursuant to Exchange Rule 2.3, in order to be eligible for
membership in the Exchange, a registered broker or dealer is currently
required to be a member of at least one other national securities
association or national securities exchange. However, membership in the
Exchange's affiliated national securities exchanges, BZX, BYX or EDGA,
is not sufficient for purposes of eligibility for Exchange membership.
The Exchange adopted this because the Bats Exchanges have historically
not functioned as the designated examining authority for any of its
members, and the Exchange wanted to be sure that any member would be
appropriately supervised by another national securities association or
national securities exchange that has
[[Page 80121]]
the capacity to function as the member's designated examining
authority.
As a result of the Transaction, the Exchange will additionally
become affiliated with the CBOE Exchanges. As with the Bats Exchanges,
C2 does not currently serve as the designated examination authority for
any of its members. CBOE, however, does act as the designated examining
authority for certain of its members. Therefore, the Exchange proposes
to amend Exchange Rule 2.3 to specify that a registered broker or
dealer will be eligible for membership only if it is a member of a
national securities association or national securities exchange other
than or in addition to the following affiliates of the Exchange: BZX,
BYX, EDGA and C2.
In addition, to ensure there is no confusion with respect to the
possibility that a broker or dealer could qualify for membership in the
Exchange based solely on membership in CBOE Futures or any other
national securities exchange notice--registered with the Commission
pursuant to Section 6(g) of the Act \48\ that lists or trades security-
futures products, the Exchange proposes to also specify that
eligibility for membership requires membership in a national securities
association registered pursuant to Section 15A of the Act or a national
securities exchange registered with the Commission pursuant to Section
6(a) of the Act, so as to exclude a national securities exchange
registered solely under Section 6(g) of the Act. The proposed
amendments to Exchange Rule 2.3 are set forth in Exhibit 5H.
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\48\ 15 U.S.C. 78f(g).
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b. Exchange Rule 2.10--Affiliation Between Exchange and a Member
Exchange Rule 2.10 provides that, without prior approval of the
Commission, neither the Exchange, nor any of its affiliates, shall
directly or indirectly acquire or maintain an ownership interest in a
member of the Exchange. This restriction is intended to address
potential conflicts of interest that could result from affiliation
between the Exchange and a member. Notwithstanding this general
restriction, Exchange Rule 2.10 provides that it does not prohibit a
member or its affiliate from acquiring or holding an equity interest in
BGM that is permitted by the ownership and voting limitations contained
in the BGM Charter and the BGM Bylaws. In addition, Exchange Rule 2.10
states that it does not prohibit a member from being or becoming an
affiliate of the Exchange, or an affiliate of any affiliate of the
Exchange, solely by reason of such member or any officer, director,
manager, managing member, partner or affiliate of such member being or
becoming either (a) a director of the Exchange pursuant to the Bylaws
of the Exchange, or (b) a director of the Exchange serving on the board
of directors of BGM. The Exchange proposes to replace the references to
BGM in Rule 2.10 with references to CBOE Holdings to reflect the fact
that following the Transaction, CBOE Holdings will replace BGM as the
ultimate parent holding company of the Exchange.
Exchange Rule 2.10 also clarifies that it does not prohibit the
Exchange from being an affiliate of its routing broker-dealer Direct
Edge ECN LLC d/b/a DE Route (``DE Route'') or of EDGA, BZX, BYX, or
Bats Trading, each of which are affiliated with the Exchange. The
Exchange proposes to remove the reference to DE Route to reflect the
fact that Bats Trading previously replaced DE Route as the Exchange's
routing broker-dealer.\49\ The Exchange also proposes to add references
to the CBOE Exchanges, as the CBOE Exchanges will become new affiliated
exchanges following the Transaction. The proposed amendments to
Exchange Rule 2.10 are set forth in Exhibit 5H.
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\49\ See Securities Exchange Act Release No. 71449 (January 30,
2014), 79 FR 6961 (February 5, 2014) (SR-EDGA-2013-34; SR-EDGX-2013-
43).
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c. Exchange Rule 2.12--Bats Trading, Inc. as Inbound Router
Exchange Rule 2.12 provides that the Exchange, on behalf of BGM,
shall establish and maintain procedures and internal controls
reasonably designed to ensure that Bats Trading does not develop or
implement changes to its systems on the basis of nonpublic information
obtained as a result of its affiliation with the Exchange until such
information is available generally to similarly situated members of the
Exchange in connection with the provision of inbound order routing to
the Exchange. The Exchange proposes to replace the reference to BGM
with a reference to ``the holding company indirectly owning the
Exchange and Bats Trading.'' This change would reflect the fact that
BGM would no longer be the ultimate holding company of the Exchange
following the Transaction and would also make this language consistent
with the language used in Rule 2.12 of the BZX and BYX rulebooks. The
proposed amendments to Exchange Rule 2.12 are set forth in Exhibit 5H.
2. Statutory Basis
The Exchange believes that the Proposed Rule Change is consistent
with the requirements of the Act and the rules and regulations
thereunder that are applicable to a national securities exchange, and,
in particular, with the requirements of Section 6(b) of the Act.\50\ In
particular, the proposal is consistent with Section 6(b)(1) of the Act
\51\ in that it enables the Exchange to be so organized as to have the
capacity to be able to carry out the purposes of the Act and to comply,
and to enforce compliance by its members and persons associated with
its members, with the provisions of the Act, the rules and regulations
thereunder, and the Rules of the Exchange.
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\50\ 15 U.S.C. 78f(b).
\51\ 15 U.S.C. 78f(b)(1).
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The Proposed Rule Change is designed to enable the Exchange to
continue to have the authority and ability to effectively fulfill its
self-regulatory duties pursuant to the Act and the rules promulgated
thereunder. In particular, the Proposed Rule Change includes in the
CBOE Holdings Charter and CBOE Holdings Bylaws, like the BGM Charter
and BGM Bylaws, various provisions intended to protect and maintain the
integrity of the self-regulatory functions of the Exchange upon
Closing. For example, the CBOE Holdings Charter, as described above, is
drafted to preserve the independence of the Exchange's self-regulatory
function and carry out its regulatory responsibilities under the Act.
In addition, the CBOE Holdings Charter imposes limitations similar to
the BGM Ownership Limitation and BGM Voting Limitation to preclude
undue influence over or interference with the Exchange's self-
regulatory functions and fulfillment of its regulatory duties under the
Act.
Moreover, notwithstanding the Proposed Rule Change, including the
change to the indirect ownership of the Exchange, the Commission will
continue to have regulatory authority over the Exchange, as is
currently the case, as well as jurisdiction over the Exchange's direct
and indirect parent companies with respect to activities related to the
Exchange.\52\ As a result, the Proposed Rule Change will facilitate an
ownership structure that will provide the Commission with appropriate
oversight tools to ensure that the Commission will have the ability to
enforce the Act with respect to the Exchange, its direct and indirect
parent
[[Page 80122]]
companies and their directors, officers, employees and agents to the
extent they are involved in the activities of the Exchange.
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\52\ See, e.g., CBOE Holdings Charter, Art. FOURTEENTH; CBOE V
Operating Agreement, Section 10.3; Direct Edge Operating Agreement,
Section 10.3.
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The Exchange also believes that the Proposed Rule Change furthers
the objectives of Section 6(b)(5) of the Act \53\ because the Proposed
Rule Change would be consistent with and facilitate a governance and
regulatory structure that is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to, and perfect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest.
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\53\ 15 U.S.C. 78f(b)(5).
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In addition, as discussed further in the Exchange's Statement on
Burden on Competition below, the Exchange expects that the Transaction
will foster further innovation while facilitating efficient,
transparent and well-regulated markets for issuers and investors,
removing impediments to, and perfecting the mechanism of a free and
open market and a national market system. The Transaction will benefit
investors and the securities market as a whole by, among other things,
enhancing competition among securities venues and reducing costs.
Furthermore, the Exchange is not proposing any significant changes
to its existing operational and trading structure in connection with
the change in ownership; the Exchange will operate in essentially the
same manner upon Closing as it operates today. Therefore, the Exchange
believes that it will continue to satisfy the requirements of the Act
and the rules and regulations thereunder that are applicable to a
national securities exchange. The changes that the Exchange is
proposing to the Exchange Rules are designed to reflect the prospective
affiliation with CBOE Holdings and the CBOE Exchanges. The Exchange
believes that the proposed change to its Rules is consistent with the
requirements of the Act and the rules and regulations thereunder.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the Proposed Rule Change would
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. Indeed, the
Exchange believes that the Proposed Rule Change will enhance
competition among trading venues, as the Exchange believes that the
Transaction will result in various synergies and efficiencies. For
example, the Transaction will allow the Bats Exchanges and the CBOE
Exchanges to utilize a single technology platform, which the Exchange
expects will reduce Bats Exchanges' and the CBOE Exchanges' combined
costs, creating the opportunity to further reduce costs to their
respective members and other constituents. The potential use of a
single technology platform may also reduce investors' costs of
connecting to and using the Bats Exchanges and the CBOE Exchanges,
including through the combination of data centers and market data
services. Combining the expertise of the CBOE Exchanges' personnel with
the expertise of the Bats Exchanges' personnel will also facilitate
ongoing innovation, including through new product creation and platform
improvements.
The Exchange notes that the Bats Exchanges and the CBOE Exchanges
generally operate with different business models, target different
customer bases and primarily focus on different asset classes, limiting
any concern that the Transaction could burden competition. Therefore,
the Exchange expects that the Transaction will benefit investors,
issuers, shareholders and the market as a whole. The Exchange will
continue to conduct regulated activities (including operating and
regulating its market and members) of the type it currently conducts,
but will be able to do so in a more efficient manner to the benefit of
its members. These efficiencies will pass through to the benefit of
investors and issuers, promoting further efficiencies, competition and
capital formation, placing no burden on competition not necessary or
appropriate in furtherance of the Act.
Furthermore, the Exchange's conclusion that the Proposed Rule
Change would not result in any burden on competition that is not
necessary or appropriate in furtherance of the purposes of the Act is
consistent with the Commission's prior conclusions about similar
combinations involving multiple exchanges in a single corporate
family.\54\
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\54\ See, e.g., Securities Exchange Act Release Nos. 71375
(January 23, 2014), 79 FR 4771 (January 29, 2014) (SR-BATS-2013-059;
SR-BYX-2013-039); 66071 (December 29, 2011), 77 FR 521 (January 5,
2012) (SR-CBOE-2011-107 and SR-NSX-2011-14); 58324 (August 7, 2008),
73 FR 46936 (August 12, 2008) (SR-BSE-2008-02; SR-BSE-2008-23; SR-
BSE-2008-25; SR-BSECC-2008-01); 53382 (February 27, 2006), 71 FR
11251 (March 6, 2006) (SR-NYSE-2005-77).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited or received written comments on the
Proposed Rule Change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. 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-BatsEDGX-2016-60 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-BatsEDGX-2016-60. 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
[[Page 80123]]
available for Web site viewing and printing in the Commission's Public
Reference Room, 100 F Street NE., Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
the filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-BatsEDGX-2016-60, and should be submitted on or before
December 6, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\55\
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\55\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-27369 Filed 11-14-16; 8:45 am]
BILLING CODE 8011-01-P
