In the Matter of the Application of Long Term Stock Exchange, Inc.; for Registration as a National Securities Exchange; Findings, Opinion, and Order of the Commission, 21841-21853 [2019-10037]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 94 (Wednesday, May 15, 2019)]
[Notices]
[Pages 21841-21853]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-10037]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85828; File No. 10-234]


In the Matter of the Application of Long Term Stock Exchange, 
Inc.; for Registration as a National Securities Exchange; Findings, 
Opinion, and Order of the Commission

May 10, 2019.

I. Introduction and Procedural History

    On November 9, 2018, Long-Term Stock Exchange, Inc. (``LTSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a Form 1 application under the Securities Exchange Act 
of 1934 (``Act''), seeking registration as a national securities 
exchange under Section 6 of the Act.\1\ In a letter dated December 4, 
2018, LTSE consented to an extension of time for up to an additional 90 
days from the date of publication of notice of LTSE's Form 1 
application.\2\ Notice of the application was published for comment in 
the Federal Register on December 6, 2018.\3\ The Commission has 
received one comment letter on the application.\4\ On February 26, 
2019, LTSE submitted Amendment No. 1 to the application.\5\ On April 3, 
2019, LTSE submitted Amendment No. 2 to the application.\6\
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    \1\ 15 U.S.C. 78f.
    \2\ See Letter to Brett Redfearn, Director, Division of Trading 
and Markets, Commission, from Eric Ries, dated December 4, 2018.
    \3\ See Securities Exchange Act Release No. 84709 (November 30, 
2018), 83 FR 62941 (``Notice'').
    \4\ See Letter to Brent J. Fields, Secretary, Commission, from 
Jeffrey P. Mahoney, General Counsel, Council of Institutional 
Investors, dated January 22, 2019, available at: https://www.sec.gov/comments/10-234/10234-4844313-177202.pdf (``CII 
Letter'').
    \5\ See Letter to Brett Redfearn, Director, Division of Trading 
and Markets, Commission, from Annette L. Nazareth, dated February 
26, 2019. In Amendment No. 1, LTSE submitted updated portions of its 
Form 1, including revised Exhibits A, B, C, D, E, I, J and K.
    \6\ See Letter to Brett Redfearn, Director, Division of Trading 
and Markets, Commission, from Annette L. Nazareth, dated April 3, 
2019. In Amendment No. 2, LTSE updated portions of its Form 1, 
including revised Exhibits A, B, C, D, H, and J.
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    The Commission has reviewed the Exchange's registration 
application, as amended, together with the comment letter received, in 
order to make a determination whether to grant such registration. For 
the reasons set forth below, and based on the representations set forth 
in LTSE's Form 1, as amended, this order approves LTSE's Form 1 
application, as amended, for registration as a national securities 
exchange.

II. Statutory Standards

    Pursuant to Sections 6(b) and 19(a) of the Act,\7\ the Commission 
shall by order grant an application for registration as a national 
securities exchange if the Commission finds, among other things, that 
the proposed exchange is so organized and has the capacity to carry out 
the purposes of the Act and can comply, and can 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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    \7\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively.
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    As discussed in greater detail below, the Commission finds that 
LTSE's application, as amended, for exchange registration meets the 
requirements of the Act and the rules and regulations thereunder. 
Further, the Commission

[[Page 21842]]

finds that the proposed rules of LTSE are consistent with Section 6 of 
the Act in that, among other things, they are designed to: (1) Assure 
fair representation of the exchange's members in the selection of its 
directors and administration of its affairs and provide that, among 
other things, one or more directors shall be representative of 
investors and not be associated with the exchange, or with a broker or 
dealer; \8\ (2) prevent fraudulent and manipulative acts and practices, 
promote just and equitable principles of trade, foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, and remove impediments to and perfect the mechanisms of 
a free and open market and a national market system; \9\ (3) not permit 
unfair discrimination between customers, issuers, or dealers; \10\ and 
(4) protect investors and the public interest.\11\ The Commission also 
finds that the rules of LTSE are consistent with Section 11A of the 
Act.\12\ Finally, the Commission finds that LTSE's proposed rules do 
not impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.\13\
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    \8\ See U.S.C. 78f(b)(3).
    \9\ See U.S.C. 78f(b)(5).
    \10\ See id.
    \11\ See id.
    \12\ 15 U.S.C. 78k-1.
    \13\ 15 U.S.C. 78f(b)(8).
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III. Discussion

A. Governance of LTSE

    LTSE Group, Inc. (``LTSEG''), a Delaware corporation, will own 100% 
of the equity of LTSE and is the entity through which the individual 
investors who are ultimate owners of the Exchange will hold their 
ownership interests in the Exchange.\14\ LTSEG will be the primary 
employer of all LTSE personnel. In addition, the stockholders who 
directly own LTSEG also will directly own a separate, affiliated 
Delaware-incorporated entity, LTSE Services, Inc. (``LTSE Services''), 
a software business currently serving approximately 20,000 users, 
mostly early stage companies.\15\ It is contemplated that the Exchange 
will maintain a commercial relationship with LTSE Services, seeking to 
leverage the company's technological expertise to support the 
Exchange's software needs.
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    \14\ See Form 1, Exhibit C. The citations to the Exchange's Form 
1 and its Exhibits hereinafter in this Order refer to the Form 1 
application and its Exhibits, as amended.
    \15\ As described by the Exchange, LTSE Services provides tools 
to companies and investors designed to help founders and their 
employees through all stages of a company's life cycle and currently 
focuses on creating user-friendly software products for its clients 
that drive financial and other solutions that can be specialized or 
scaled for broad commercial application, and continues to develop 
new products that provide value to companies in different stages of 
their life cycles. Id.
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1. LTSE Board of Directors
    The board of directors of LTSE (``Exchange Board'') \16\ will be 
its governing body and will possess all of the powers necessary for the 
management of its business and affairs, including governance of LTSE as 
a self-regulatory organization (``SRO'').\17\ Pursuant to the LTSE 
Bylaws:
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    \16\ A Director may not be subject to statutory 
disqualification. See First Amended and Restated Bylaws of Long-Term 
Stock Exchange, Inc. (``LTSE Bylaws''), Article III, Section 3.2(d).
    \17\ See LTSE Bylaws, Article III, Section 3.1. See also Form 1, 
Exhibit J.
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     The Exchange Board initially will be composed of 6 or more 
directors; \18\
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    \18\ See LTSE Bylaws, Article III, Section 3.2(a). See also Form 
1, Exhibit A.
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     one director will be the Chief Executive Officer of LTSE; 
\19\
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    \19\ See LTSE Bylaws, Article III, Section 3.2(b).
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     the number of Non-Industry Directors,\20\ including at 
least one Independent Director,\21\ will equal or exceed the sum of the 
Industry Directors \22\ and Member Representative Directors; \23\ and
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    \20\ ``Non-Industry Director'' means a Director who is an 
Independent Director or any other individual who would not be an 
Industry Director. See LTSE Bylaws, Article I, Section (v).
    \21\ ``Independent Director'' means a Director who has no 
material relationship with the Exchange or any affiliate of the 
Exchange or any Exchange Member or any affiliate of any Exchange 
Member; provided, however, that an individual who otherwise 
qualifies as an Independent Director shall not be disqualified from 
serving in such capacity solely because such Director is a Director 
of LTSE or LTSEG. See LTSE Bylaws, Article I, Section (m).
    \22\ ``Industry Director'' means, among other criteria, a 
Director who is or has been within the prior three years an officer, 
director or employee of a broker or dealer, excluding an outside 
director or a director not engaged in the day-to-day management of a 
broker or dealer. See LTSE Bylaws, Article I, Section (o), for a 
description of all of the circumstances regarding when a Director 
would be considered an Industry Director.
    \23\ ``Member Representative Director'' means a Director who has 
been appointed as such to the initial Exchange Board pursuant to 
Article III, Section 3.4(g) of the Bylaws or elected by stockholders 
after having been nominated by the Member Nominating Committee or by 
an Exchange Member pursuant to the Bylaws and confirmed as the 
nominee of Exchange Members after majority vote of Exchange Members, 
if applicable. A Member Representative Director must be an officer, 
director, employee, or agent of an Exchange Member that is not a 
Stockholder Exchange Member. See LTSE Bylaws, Article I, Section 
(s).
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     at least 20% of the directors on the Exchange Board will 
be Member Representative Directors.
    The initial Directors of the Exchange Board will be appointed by 
LTSEG and will serve until the first annual meeting of 
stockholders.\24\ The first annual meeting of stockholders will be held 
prior to LTSE's commencement of operations as an Exchange.\25\
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    \24\ See LTSE Bylaws, Article III, Section 3.4(g).
    \25\ See LTSE Bylaws, Article IV, Section 4.1(b).
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    In addition, LTSEG will appoint the initial Nominating Committee 
and Member Nominating Committee, consistent with each committee's 
compositional requirements, to nominate candidates for election to the 
Exchange Board.\26\ The Nominating Committee and Member Nominating 
Committee, after completion of their respective duties for nominating 
directors for election to the Board for that year, will recommend 
candidates to serve on the succeeding year's Nominating Committee or 
Member Nominating Committee, as applicable.\27\ LTSE members will have 
rights to nominate and elect additional candidates for the Member 
Nominating Committee pursuant to a petition process.\28\
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    \26\ See LTSE Bylaws, Article VI, Section 6.1.
    \27\ Id.
    \28\ See LTSE Bylaws, Article III, Section 3.4
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    The Nominating Committee will nominate candidates for election to 
the Board at the annual stockholder meeting and all other vacant or new 
Director positions on the Board.\29\ For Member Representative Director 
positions, the Member Nominating Committee, composed solely of Member 
Representative Members, will solicit input from LTSE members and 
members may submit petition candidates.\30\ If no candidates are 
nominated pursuant to a petition process, then the initial nominees 
approved and submitted by the Member Nominating Committee will be 
nominated as Member Representative Directors by the Nominating 
Committee.\31\ If a petition process produces additional candidates, 
then the candidates nominated pursuant to the petition process, 
together with those nominated by the Member Nominating Committee, will 
be presented to LTSE members for election to determine the final 
designees for any open Member Representative Director positions.\32\ In 
the event of a contested election, the candidates who receive the most 
votes will be selected as the Member Representative Director designees 
by the Member Nominating Committee.\33\
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    \29\ See LTSE Bylaws, Article VI, Section 6.2.
    \30\ See LTSE Bylaws, Article III, Section 3.4.
    \31\ See LTSE Bylaws, Article III, Section 3.4(e).
    \32\ Id.
    \33\ See LTSE Bylaws, Article III, Section 3.4(f).
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    The Commission believes that the LTSE governance provisions are 
consistent with the Act. In particular, the Commission believes that 
the

[[Page 21843]]

requirement in the LTSE Bylaws that the number of Member Representative 
Directors must be at least 20% of the Board and the means by which they 
will be chosen by LTSE members provide for the fair representation of 
members in the selection of directors and the administration of LTSE 
and therefore are consistent with Section 6(b)(3) of the Act.\34\ As 
the Commission has previously noted, this requirement helps to ensure 
that members have a voice in an exchange's self-regulatory program, and 
that an exchange is administered in a way that is equitable to all 
those who trade on its market or through its facilities.\35\
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    \34\ 15 U.S.C. 78f(b)(3).
    \35\ See, e.g., Securities Exchange Act Release Nos. 79543 
(December 13, 2016), 81 FR 92901, 92903 (December 20, 2016) (File 
No. 10-227) (order granting registration of MIAX PEARL, LLC) (``MIAX 
PEARL Order''); 68341 (December 3, 2012), 77 FR 73065, 73067 
(December 7, 2012) (File No. 10-207) (order granting the 
registration of Miami International Securities Exchange, LLC (``MIAX 
Exchange'')) (``MIAX Order''); 58375 (August 18, 2008), 73 FR 49498, 
49501 (August 21, 2008) (File No. 10-182) (order granting the 
registration of BATS Exchange, Inc.) (``BATS Order''); and 53128 
(January 13, 2006), 71 FR 3550, 3553 (January 23, 2006) (File No. 
10-131) (granting the exchange registration of Nasdaq Stock Market, 
Inc.) (``Nasdaq Order'').
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    In addition, with respect to the requirement that the number of 
Non-Industry Directors, including at least one Independent Director, 
will equal or exceed the sum of the number of Industry Directors and 
Member Representative Directors, the Commission believes that the 
proposed composition of the Exchange Board satisfies the requirements 
in Section 6(b)(3) of the Act,\36\ which require in part that one or 
more directors be representative of issuers and investors and not be 
associated with a member of the exchange, or with a broker or dealer. 
The Commission previously has stated that the inclusion of public, non-
industry representatives on exchange oversight bodies is an important 
mechanism to support an exchange's ability to protect the public 
interest.\37\ Further, the presence of public, non-industry 
representatives can help to ensure that no single group of market 
participants has the ability to systematically disadvantage other 
market participants through the exchange governance process. The 
Commission believes that public directors can provide unbiased 
perspectives, which may enhance the ability of the Exchange Board to 
address issues in a non-discriminatory fashion and foster the integrity 
of the Exchange.
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    \36\ 15 U.S.C. 78f(b)(3).
    \37\ See, e.g., MIAX PEARL Order, supra note 35, at 92903; MIAX 
Order, supra note 35, at 73067; BATS Order, supra note 35, at 49501; 
and Nasdaq Order, supra note 35, at 3553.
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2. Interim Board
    LTSEG, as the sole stockholder of the Exchange, will appoint 
Interim Directors of the Board (``Interim Board'') at a special meeting 
of the stockholder, which will include Interim Member Representative 
Directors.\38\ Upon appointment of the Interim Directors by the 
stockholder, the Interim Board will meet the Board composition 
requirements set forth in the LTSE Bylaws.\39\ The Interim Board 
members will serve only until the first annual meeting of the 
stockholders, which will be held prior to the company's commencement of 
operations as an Exchange.\40\ The Exchange represents that it will 
complete the full nomination, petition, and voting process set forth in 
the LTSE Bylaws, which will provide persons that are approved as LTSE 
members after the date that the Commission grants the Exchange's 
registration as a national securities exchange with the opportunity to 
participate in the selection of Member Representative Directors as 
promptly as possible after the effective date of the Bylaws.\41\
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    \38\ See Form 1, Exhibit J. See also LTSE Bylaws, Article III, 
Section 3.2 (stating that the Exchange Board shall consist of five 
(6) or more Directors).
    \39\ See Form 1, Exhibit J.
    \40\ Id.
    \41\ Id.
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3. Exchange Committees
    LTSE has proposed to establish several committees of the Exchange 
Board. Specifically, LTSE has proposed to establish the following 
committees of the Exchange Board: an Audit Committee, an Appeals 
Committee, and a Regulatory Oversight Committee, as well as a 
Compensation Committee.\42\ In addition, LTSE has proposed to establish 
a Nominating Committee and a Member Nominating Committee, as discussed 
above.
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    \42\ See LTSE Bylaws, Article V, Sections 5.1 and 5.6(a). If no 
Compensation Committee is elected, reference to the Compensation 
Committee shall refer to the entire Board. See LTSE Bylaws, Article 
V, Section 5.6(a).
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    The Appeals Committee will consist of two Independent Directors, 
and one Member Representative Director.\43\ Each member of the 
Regulatory Oversight Committee must be an Independent Director.\44\ 
Each voting member of the Compensation Committee must be an Independent 
Director.\45\ Each member of the Audit Committee must be an Independent 
Director.\46\
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    \43\ See LTSE Bylaws, Article V, Section 5.6(d).
    \44\ See LTSE Bylaws, Article V, Section 5.6(c).
    \45\ See LTSE Bylaws, Article V, Section 5.6(a).
    \46\ See LTSE Bylaws, Article V, Section 5.6(b). See also LTSE 
Bylaws, Article III, Section 3.18(a) regarding the potential role of 
the Audit Committee in conflict of interest matters.
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    Because the Executive Committee will have the powers and authority 
of the Exchange Board in the management of the business and affairs of 
the Exchange between meetings of the Exchange Board, its composition 
must reflect that of the Exchange Board. Accordingly, the number of 
Non-Industry Directors on the Executive Committee must equal or exceed 
the number of Industry Directors and the percentages of Independent 
Directors and Member Representative Directors on the Executive 
Committee must be at least as great as the corresponding percentages of 
each such class of Directors on the Exchange Board as a whole.\47\
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    \47\ See LTSE Bylaws, Article V, Section 5.6(e).
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    The Commission believes that LTSE's proposed committees, which are 
similar to the committees maintained by other exchanges,\48\ are 
designed to help enable the Exchange to carry out its responsibilities 
under the Act and are consistent with the Act, including Section 
6(b)(1), which requires, in part, an exchange to be so organized and 
have the capacity to carry out the purposes of the Act.\49\
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    \48\ See, e.g., Securities Exchange Act Release No. 78101 (June 
17, 2016), 81 FR 41141 (June 23, 2016) (File No. 10-222) (order 
granting the registration of Investors' Exchange, LLC) (``IEX 
Order''); Nasdaq Order, supra note 35; and BATS Order, supra note 
35.
    \49\ 15 U.S.C. 78f(b)(1).
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B. LTSE Group and Regulation of the Exchange

    When LTSE commences operations as a national securities exchange, 
it will have all of the attendant regulatory obligations under the Act. 
In particular, LTSE will be responsible for the operation and 
regulation of its trading system and the regulation of its members. The 
Commission believes that certain provisions in the LTSE and LTSEG 
governing documents are designed to facilitate the ability of LTSE to 
fulfill its regulatory obligations and to help facilitate Commission 
oversight of LTSE. The discussion below summarizes some of these key 
provisions.
1. Ownership Structure; Ownership and Voting Limitations
    As stated above, LTSE will be wholly owned by LTSEG. The proposed 
Amended and Restated Certificate of Incorporation of LTSEG (``LTSEG 
Certificate'') includes restrictions on the ability to own and vote 
shares of capital

[[Page 21844]]

stock of LTSEG.\50\ These limitations are designed to prevent any LTSEG 
shareholder from exercising undue control over the operation of the 
Exchange and to ensure that the Exchange and the Commission are able to 
carry out their regulatory obligations under the Act.
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    \50\ These provisions are consistent with ownership and voting 
limits approved by the Commission for other SROs. See, e.g., IEX 
Order, supra note 48, and MIAX PEARL Order, MIAX Order, and BATS 
Order, supra note 35; see also Securities Exchange Release Nos. 6068 
(February 4, 2016) (File No. 10-221) (order granting exchange 
registration of ISE Mercury, LLC) (``ISE Mercury Order''); 70050 
(July 26, 2013), 78 FR 46622, 46624 (August 1, 2013) (File No. 10-
209) (order granting the exchange registration of ISE Gemini, LLC) 
(``ISE Gemini Order''); 62158 (May 24, 2010), 75 FR 30082 (May 28, 
2010) (CBOE-2008-88) (CBOE demutualization order); 53963 (June 8, 
2006), 71 FR 34660 (June 15, 2006) (SR-NSX-2006-03) (NSX 
demutualization order); 51149 (February 8, 2005), 70 FR 7531 
(February 14, 2005) (SR-CHX-2004-26) (CHX demutualization order); 
and 49098 (January 16, 2004), 69 FR 3974 (January 27, 2004) (SR-
Phlx-2003-73) (Phlx demutualization order).
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    In particular, for so long as LTSEG shall control, directly or 
indirectly, a national securities exchange, no Person,\51\ either alone 
or together with its Related Persons,\52\ will be permitted to 
beneficially own, directly or indirectly, of record or beneficially, 
shares constituting more than 40% of any class of capital stock of 
LTSEG.\53\ A more restrictive condition will apply to members of the 
Exchange, who will be prohibited from beneficially owning, directly or 
indirectly, either alone or together with their Related Persons, more 
than 20% of shares of any class of capital stock of LTSEG.\54\ If any 
stockholder purports to sell, transfer, assign, pledge, or own any 
shares of LTSEG in violation of these ownership limits, LTSEG will be 
required (to the extent funds are legally available) to redeem the 
shares in excess of the applicable ownership limit at their par 
value.\55\
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    \51\ See LTSEG Certificate, Article IX, subparagraph 
(A)(2)(a)(i) (defining ``Person'').
    \52\ See id. at subparagraph (A)(2)(a)(ii) (defining ``Related 
Persons'').
    \53\ See id. at subparagraph (A)(2)(b)(i)(A). There are limited 
exceptions to these prohibitions. See infra notes 58-63 and 
accompanying text.
    \54\ See id. at subparagraph (A)(2)(b)(i)(B).
    \55\ See id. at subparagraph (A)(2)(e). The number of shares to 
be redeemed is to be calculated after taking into account that the 
redeemed shares will become treasury shares and will no longer be 
deemed to be outstanding shares. Id. It is further provided in the 
LTSEG Certificate that any shares that have been called for 
redemption may not be deemed outstanding shares for the purpose of 
voting or determining the total number of shares entitled to vote on 
any matter. From and after the redemption date (unless LTSEG 
defaults in providing funds for the payment of the redemption 
price), the shares of redeemed stock which have been redeemed as per 
these provisions will become treasury shares and will no longer be 
deemed to be outstanding, and all rights of the holder of the 
redeemed stock as a stockholder of LTSEG (except the right to 
receive from LTSEG the redemption price against delivery to LTSEG of 
evidence of ownership of the shares) will cease. Id. In addition, in 
the event that any redemption has resulted in any additional 
stockholder owning such number of shares that is in violation of the 
ownership limits, LTSGE will be required to redeem those shares 
pursuant to the limitation provisions. Id.
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    In addition, no Person, alone or together with its Related Persons, 
will be entitled to vote or cause the voting of shares of the capital 
stock of LTSEG, in person or by proxy or through any voting agreement 
or other arrangement, to the extent that such shares represent in the 
aggregate more than 20% of the voting power of the then issued and 
outstanding capital stock of LTSEG (``Voting Limitation''), and LTSEG 
will disregard any such votes purported to be cast in excess of the 
Voting Limitation.\56\ Further, if any Person, either alone or together 
with its Related Persons, is a party to any agreement, plan or other 
arrangement relating to shares of stock of LTSEG entitled to vote in 
any matter with any other Person, either alone or together with its 
Related Persons, under circumstances that would result in the shares of 
capital stock of LTSEG that are subject to such agreement, plan or 
other arrangement not being voted on any matter or matters or any proxy 
relating thereto being withheld, where the effect of such agreement, 
plan or other arrangement would be to enable any Person, either alone 
or together with its Related Persons, to vote, possess the right to 
vote, or cause the voting of shares of the capital stock of LTSEG that 
would represent more than 20% of said voting power \57\ (the 
``Recalculated Voting Limitation''), then the Person, either alone or 
together with its Related Persons, will not be entitled to vote or 
cause the voting of shares of stock of LTSEG, in person or by proxy or 
through any voting agreement or other arrangement, to the extent that 
such shares represent in the aggregate more than the Recalculated 
Voting Limitation, and LTSEG will disregard any such votes purported to 
be case in excess of the Recalculated Voting Limitation.\58\
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    \56\ See id. at subparagraph (A)(2)(b)(i)(C).
    \57\ The text of the LTSEG Certificate stipulates that this 
provision applies ``assuming that all shares of [LTSEG] that are 
subject to the agreement, plan or other arrangement are not treated 
as having voting power.'' Id.
    \58\ See LTSEG Certificate, Article IX, subparagraph 
(A)(2)(b)(i)(C)(2). The provisions of this section of LTSEG 
Certificate regarding limitations on transfer, ownership and voting 
will not apply to: (a) Any solicitation of any revocable proxy from 
any stockholder of LTSEG by or on behalf of LTSEG or by any officer 
or director of LTSEG acting on behalf of LTSEG; or (b) any 
solicitation of any revocable proxy from any stockholder of LTSEG by 
another stockholder that is conducted pursuant to, and in accordance 
with, Regulation 14A under the Act (other than a solicitation 
pursuant to Rule 14a-2(b)(2)). See id. at subparagraph 
(A)(2)(b)(i)(D). See also id. at (b)(i)(E).
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    The board of directors of LTSEG (``LTSEG Board'') will be permitted 
to waive the 40% ownership limitation and the 20% voting limitation for 
non-members of the Exchange, pursuant to a resolution duly adopted by 
the LTSEG Board, if it makes certain determinations.\59\ Any such 
waiver will not be effective unless and until approved by the 
Commission.\60\ The LTSEG Board is specifically precluded from waiving 
the 20% voting and ownership limits described above for members of the 
Exchange and their Related Persons.\61\
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    \59\ See id. at subparagraph (A)(2)(b)(ii)(B). The required 
determinations are that (a) such waiver will not impair the ability 
of the Exchange to carry out its functions and responsibilities as 
an ``exchange'' under the Act and the rules and regulations 
promulgated thereunder; that such waiver is otherwise in the best 
interests of LTSEG, its stockholders, and the Exchange; that such 
waiver will not impair the ability of the Commission to enforce the 
Act and the rules and regulations promulgated thereunder; and that 
such Person and its Related Persons are not subject to any 
applicable ``statutory disqualification'' within the meaning of 
Section 3(a)(39) of the Act. See id. at subparagraphs (A)(2)(b)(ii) 
and (iii). These provisions are consistent with ownership and voting 
limits approved by the Commission for other SROs. See, e.g., IEX 
Order, ISE Mercury Order, and ISE Gemini Order, supra note 50; MIAX 
PEARL Order, MIAX Order, and BATS Order, supra note 35; and 
Securities Exchange Act Release No. 61698 (March 12, 2010), 75 FR 
13151 (March 18, 2010) (File Nos. 10-194 and 10-196) (order 
approving DirectEdge exchanges) (``DirectEdge Exchanges Order'').
    \60\ See LTSEG Certificate, Article IX, at subparagraph 
(A)(2)(b)(ii)(B).
    \61\ See id.
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    Any person that proposes to own shares of capital stock of LTSEG in 
excess of the 40% ownership limitation, or vote or cause the voting of 
shares of capital stock of LTSEG in person or by proxy or through any 
voting agreement or other arrangement in excess of the Voting 
Limitation or Recalculated Voting Limitation, as applicable, will be 
required to deliver written notice to the LTSEG Board of its 
intention.\62\ The notice must be delivered to the LTSEG Board not less 
than 45 days (or any shorter period to which the Board expressly 
consents) before the proposed ownership of such shares or the proposal 
to vote or cause the voting of such shares in person or by proxy 
through any voting agreement or other arrangement of its intention to 
do so.\63\
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    \62\ See id. at subparagraph (A)(2)(b)(iv).
    \63\ See id.
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    The LTSEG Certificate also contains provisions that are designed to 
further safeguard the ownership and voting limitations described above, 
or are otherwise related to direct and indirect

[[Page 21845]]

changes in control. Specifically, any Person that, either alone or 
together with its Related Persons beneficially owns, directly or 
indirectly(whether by acquisition or a change in the number of shares 
outstanding), of record or beneficially 5% or more of the then 
outstanding shares of capital stock of LTSEG (excluding shares of any 
class of stock that does not have the right by its terms to vote 
generally in the election of members of the LTSEG Board) will be 
required to immediately notify the LTSEG Board in writing of such 
ownership.\64\ Thereafter, such Persons will be required to update 
LTSEG of any increase or decrease of 1% or more in their previously 
reported ownership percentage.\65\
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    \64\ See id. at subparagraph (A)(2)(c)(i). The notice will 
require the Person's full legal name; the Person's title or status 
and the date on which such title or status was acquired; the 
Person's and its Related Person's) approximate ownership interest in 
LTSEG; and whether the person has power, directly or indirectly, to 
direct the management or policies of LTSEG, whether through 
ownership of securities, by contract or otherwise. See id.
    \65\ See id. at subparagraph (A)(2)(c)(ii). Changes of less than 
1% must also be reported to LTSEG if they result in such Person 
crossing a 20% or 40% ownership threshold. See id. In addition, the 
Exchange's rules also impose limits on affiliation between the 
Exchange and a member of the Exchange. See LTSE Rule 2.210 (No 
Affiliation between Exchange and any Member).
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    The Exchange's Amended and Restated Certificate of Incorporation 
(``LTSE Certificate'') does not include change of control provisions 
that are similar to those in the LTSEG Certificate. However, the LTSE 
Certificate explicitly provides that LTSEG will be the sole owner of 
the common stock of the Exchange.\66\ Thus, if LTSEG ever proposes to 
no longer be the sole owner of the Exchange, the LTSE Certificate will 
be required to be amended. Any amendment to the LTSE Certificate, 
including any change in the provisions that identify LTSEG as the sole 
owner of the Exchange, will constitute a proposed rule change under 
Section 19(b) of the Act \67\ and Rule 19b-4 \68\ thereunder that will 
be required to be filed with, or filed with and approved by, the 
Commission.\69\ Moreover, pursuant to the LTSE Certificate itself, any 
sale, transfer or assignment by LTSEG of common stock of the Exchange 
will be subject to prior approval by the Commission pursuant to the 
rule filing procedure under Section 19 of the Act.\70\
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    \66\ See LTSE Certificate, Article IV.
    \67\ 15 U.S.C. 78s(b).
    \68\ 17 CFR 240.19b-4.
    \69\ See LTSE Certificate, Article VI.
    \70\ See LTSE Certificate, Article IV.
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    Although LTSEG is not directly responsible for regulation, its 
activities with respect to the operation of LTSE must be consistent 
with, and must not interfere with, the self-regulatory obligations of 
LTSE.\71\ As described above, the provisions applicable to direct and 
indirect changes in control of LTSEG and LTSE, as well as the voting 
limitation imposed on owners of LTSEG who also are LTSE members, are 
designed to help prevent any owner of LTSEG from exercising undue 
influence or control over the operation of the Exchange and to help 
ensure that the Exchange retains a sufficient degree of independence to 
effectively carry out its regulatory obligations under the Act.
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    \71\ See, e.g., IEX Order, supra note 48.
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    In addition, these limitations are designed to address the 
conflicts of interests that might result from a member of a national 
securities exchange owning interests in the exchange. As the Commission 
has noted in the past, a member's ownership interest in an entity that 
controls an exchange could become so large as to cast doubt on whether 
the exchange may fairly and objectively exercise its self-regulatory 
responsibilities with respect to such member.\72\ A member that is a 
controlling shareholder of an exchange could seek to exercise that 
controlling influence by directing the exchange to refrain from, or the 
exchange may hesitate to, diligently monitor and conduct surveillance 
of the member's conduct or diligently enforce the exchange's rules and 
the federal securities laws with respect to conduct by the member that 
violates such provisions. As such, the Commission believes that these 
requirements are designed to minimize the potential that a person or 
entity can improperly interfere with or restrict the ability of the 
Exchange to effectively carry out its regulatory oversight 
responsibilities under the Act.
---------------------------------------------------------------------------

    \72\ See, e.g., ISE Mercury Order, supra note 50, and IEX Order, 
supra note 48; MIAX PEARL Order, MIAX Order, and BATS Order, supra 
note 35; and DirectEdge Exchanges Order, supra note 59.
---------------------------------------------------------------------------

    The Commission believes that LTSE's and LTSEG's proposed governance 
provisions are consistent with the Act, including Section 6(b)(1), 
which requires, in part, an exchange to be so organized and have the 
capacity to carry out the purposes of the Act.\73\ In particular, these 
requirements are designed to minimize the potential that a person could 
improperly interfere with or restrict the ability of the Commission or 
the Exchange to effectively carry out their regulatory oversight 
responsibilities under the Act.
---------------------------------------------------------------------------

    \73\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

2. Regulatory Independence and Oversight
    Although LTSEG will not itself carry out regulatory functions, its 
activities with respect to the operation of LTSE must be consistent 
with, and must not interfere with, LTSE's self-regulatory obligations. 
In this regard, LTSE and LTSEG propose to adopt certain provisions in 
their respective governing documents that are designed to help maintain 
the independence of the regulatory functions of LTSE. These proposed 
provisions are substantially similar to those included in the governing 
documents of other exchanges that recently have been granted 
registration.\74\ Specifically:
---------------------------------------------------------------------------

    \74\ See, e.g., IEX Order, supra note 48; MIAX Order, supra note 
35. See also DirectEdge Exchanges Order, supra note 59.
---------------------------------------------------------------------------

     The directors, officers, employees, and agents of LTSEG 
must give due regard to the preservation of the independence of the 
self-regulatory function of LTSE and to its obligations to investors 
and the general public and must not take actions which would interfere 
with the effectuation of decisions by the Exchange Board relating to 
its regulatory functions (including disciplinary matters) or which 
would interfere with LTSE's ability to carry out its responsibilities 
under the Act.\75\
---------------------------------------------------------------------------

    \75\ See proposed Bylaws of LTSE Group, Inc. (``LTSEG Bylaws''), 
Article X, Section 10.1. Similarly, Article III, Section 3.1(d) of 
the LTSE Bylaws requires the Exchange Board, when managing the 
business and affairs of LTSE, to consider the requirements of 
Section 6(b) of the Act and requires each Director, officer or 
employee of LTSE to comply with the federal securities laws and 
regulations thereunder and cooperate with the Commission, and LTSE 
pursuant to its regulatory authority. Article III, Section 3.1(e) of 
the LTSE Bylaws also requires the Exchange Board, when evaluating 
any proposal to take into account all factors that the Board deems 
relevant, to the extent deemed relevant: the potential impact on the 
integrity, continuity and stability of the national securities 
exchange operated by LTSE and the other operations of LTSE, on the 
ability to prevent fraudulent and manipulative acts and practices, 
and on investors and the public, and whether such would promote just 
and equitable principles of trade, foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to and facilitating transactions 
in securities or assist in the removal of impediments to or 
perfection of the mechanisms for a free and open market and a 
national market system.
---------------------------------------------------------------------------

     LTSEG must comply with the federal securities laws and the 
rules and regulations promulgated thereunder, and must cooperate with 
the Commission and LTSE pursuant to, and to the extent of, their 
respective regulatory authority. In addition, LTSEG's officers, 
directors, employees, and agents must comply with the federal 
securities laws and the rules and

[[Page 21846]]

regulations promulgated thereunder and are deemed to agree to cooperate 
with the Commission and LTSE in respect of the Commission's oversight 
responsibilities regarding LTSE and the self-regulatory functions and 
responsibilities of LTSE, and LTSEG must take reasonable steps 
necessary to cause its officers, directors, employees and agents to so 
cooperate.\76\
---------------------------------------------------------------------------

    \76\ See LTSEG Bylaws, Article X, Section 10.4. Similarly, 
Article V(b) of the LTSE Certificate requires LTSE's directors, 
officers and employees, in discharging their respective 
responsibilities, to comply with the federal securities laws and the 
rules and regulations promulgated thereunder and to cooperate with 
the Commission, and LTSE pursuant to its regulatory authority.
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     LTSEG, and its officers, directors, employees, and agents 
must submit to the jurisdiction of the U.S. federal courts, the 
Commission, and LTSE, for purposes of any suit, action or proceeding 
pursuant to the U.S. federal securities laws, and the rules and 
regulations thereunder, arising out of, or relating to, LTSE 
activities.\77\
---------------------------------------------------------------------------

    \77\ See LTSEG Bylaws, Article X, Section 10.5.
---------------------------------------------------------------------------

     All books and records of LTSE reflecting confidential 
information pertaining to the self-regulatory function of LTSE 
(including but not limited to disciplinary matters, trading data, 
trading practices, and audit information) must be retained in 
confidence by LTSE and its personnel, directors, officers, employees 
and agents, and will not be used by LTSE for any non-regulatory 
purposes and shall not be made available to any person (including, 
without limitation, any LTSE member) other than to personnel of the 
Commission, and those personnel of LTSE, members of committees of the 
Exchange Board, members of the Exchange Board, or hearing officers and 
other agents of LTSE, to the extent necessary or appropriate to 
properly discharge the self- regulatory responsibilities of LTSE.\78\ 
Similar provisions apply to LTSEG and its directors, officers, 
employees and agents.\79\
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    \78\ See LTSE Bylaws, Article XI, Section 11.4.
    \79\ The LTSEG Bylaws also provide that all books and records of 
LTSE reflecting confidential information pertaining to the self-
regulatory function of LTSE that come into the possession of LTSEG, 
and the information contained in those books and records, will be 
subject to confidentiality restrictions and will not be used for any 
non- regulatory purposes. See LTSEG Bylaws, Article X, Section 10.2. 
The LTSE and LTSEG governing documents acknowledge that requirements 
to keep such information confidential shall not limit or impede the 
rights of the Commission to access and examine such information or 
limit the ability of officers, directors, employees, or agents of 
LTSE or LTSEG to disclose such information to the Commission. See 
LTSE Bylaws, Article XI, Section 11.4 and LTSEG Bylaws, Article X, 
Section 10.2.
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     The books and records of LTSE and LTSEG must be maintained 
in the United States \80\ and, to the extent they are related to the 
operation or administration of LTSE, LTSEG's books and records will be 
subject at all times to inspection and copying by the Commission and 
LTSE.\81\
---------------------------------------------------------------------------

    \80\ See LTSE Bylaws, Article XI, Section 11.4; and LTSEG Bylaws 
Article X, Section 10.3.
    \81\ See LTSEG Bylaws, Article X, Section 10.3.
---------------------------------------------------------------------------

     Furthermore, to the extent they are related to the 
operation or administration of LTSE, the books, records, premises, 
officers, directors, employees, and agents of LTSEG will be deemed to 
be the books, records, premises, officers, directors, employees, and 
agents of LTSE, for purposes of, and subject to oversight pursuant to, 
the Act.\82\
---------------------------------------------------------------------------

    \82\ See LTSEG Bylaws, Article X, Section 10.3.
---------------------------------------------------------------------------

     LTSEG will take reasonable steps necessary to cause its 
officers, directors, employees, and agents, prior to accepting a 
position as an officer, director, employee or agent (as applicable) to 
consent in writing to the applicability of provisions regarding non-
interference, confidentiality, books and records, compliance and 
cooperation, jurisdiction, and regulatory obligations, with respect to 
their activities related to LTSE.\83\
---------------------------------------------------------------------------

    \83\ See LTSEG Bylaws, Article X, Section 10.6.
---------------------------------------------------------------------------

     The LTSEG Certificate and Bylaws require that, so long as 
LTSEG controls LTSE, any changes to those documents must be submitted 
to the Exchange Board for approval, and, if such change is required to 
be filed with the Commission pursuant to Section 19(b) of the Act and 
the rules and regulations thereunder, such change shall not be 
effective until filed with and effective by operation of law, or filed 
with, and approved by, the Commission.\84\
---------------------------------------------------------------------------

    \84\ See LTSEG Certificate, Article IX, Section (A)1; and LTSEG 
Bylaws, Article IX.
---------------------------------------------------------------------------

    The Commission believes that the provisions discussed in this 
section, which are designed to help ensure the independence of LTSE's 
regulatory function and facilitate the ability of LTSE to carry out its 
regulatory responsibilities under, and operate in a manner consistent 
with, the Act, are appropriate and consistent with the requirements of 
the Act, particularly with Section 6(b)(1), which requires, in part, an 
exchange to be so organized and have the capacity to carry out the 
purposes of the Act.\85\
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    \85\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    Further, Section 19(h)(1) of the Act \86\ provides the Commission 
with the authority ``to suspend for a period not exceeding twelve 
months or revoke the registration of [an SRO], or to censure or impose 
limitations upon the activities, functions, and operations of [an SRO], 
if [the Commission] finds, on the record after notice and opportunity 
for hearing, that [the SRO] has violated or is unable to comply with 
any provision of the Act, the rules or regulations thereunder, or its 
own rules or without reasonable justification or excuse has failed to 
enforce compliance . . . '' with any such provision by its members 
(including associated persons thereof). If the Commission were to find, 
or become aware of, through staff review and inspection or otherwise, 
facts indicating any violations of the Act, including without 
limitation Sections 6(b)(1) and 19(g)(1),\87\ these matters could 
provide the basis for a disciplinary proceeding under Section 19(h)(1) 
of the Act.
---------------------------------------------------------------------------

    \86\ See 15 U.S.C. 78s(h)(1).
    \87\ 15 U.S.C. 78f(b)(1); 15 U.S.C. 78s(g)(1).
---------------------------------------------------------------------------

    The Commission also notes that, even in the absence of the 
governance provisions described above, under Section 20(a) of the Act 
any person with a controlling interest in LTSE would be jointly and 
severally liable with and to the same extent that LTSE is liable under 
any provision of the Act, unless the controlling person acted in good 
faith and did not directly or indirectly induce the act or acts 
constituting the violation or cause of action.\88\ In addition, Section 
20(e) of the Act creates aiding and abetting liability for any person 
who knowingly provides substantial assistance to another person in 
violation of any provision of the Act or rule thereunder.\89\ Further, 
Section 21C of the Act authorizes the Commission to enter a cease-and-
desist order against any person who has been ``a cause of'' a violation 
of any provision of the Act through an act or omission that the person 
knew or should have known would contribute to the violation.\90\ These 
provisions are applicable to all entities' dealings with LTSE, 
including LTSEG.
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    \88\ 15 U.S.C. 78t(a).
    \89\ 15 U.S.C. 78t(e).
    \90\ 15 U.S.C. 78u-3.
---------------------------------------------------------------------------

3. Regulatory Oversight Committee
    The regulatory operations of LTSE will be monitored by the 
Regulatory Oversight Committee of the Exchange Board. The Regulatory 
Oversight Committee will consist of at least three members, all of whom 
must be Independent Directors.\91\ The Regulatory Oversight Committee 
will be responsible for overseeing the adequacy and effectiveness of 
LTSE's regulatory and SRO responsibilities, assessing

[[Page 21847]]

LTSE's regulatory performance, and assisting the Exchange Board (and 
committees of the Exchange Board) in reviewing LTSE's regulatory plan 
and the overall effectiveness of LTSE's regulatory functions.\92\
---------------------------------------------------------------------------

    \91\ See LTSE Bylaws, Article V, Sections 5.2(a) and 5.6(c). The 
Regulatory Oversight Committee is responsible for reviewing LTSE's 
regulatory budget, and also will meet regularly with the Chief 
Regulatory Officer.
    \92\ See LTSE Bylaws, Article V, Section 5.6(c).
---------------------------------------------------------------------------

    Further, a Chief Regulatory Officer (``CRO'') of LTSE will have 
general supervision over LTSE's regulatory operations, including 
responsibility for overseeing LTSE's surveillance, examination, and 
enforcement functions and for administering any regulatory services 
agreements with another self-regulatory organization to which LTSE is a 
party.\93\ The Regulatory Oversight Committee, in consultation with the 
Chief Executive Officer of LTSE, will be responsible for establishing 
the goals, assessing the performance, fixing the compensation of the 
CRO and for recommending personnel actions involving the CRO and senior 
regulatory personnel.\94\
---------------------------------------------------------------------------

    \93\ See LTSE Bylaws, Article VII, Section 7.9.
    \94\ See LTSE Bylaws, Article V, Section 5.6(c). To the extent 
that the Chief Executive Officer of LTSE has any indirect 
supervisory responsibility for the role or function of the CRO, 
including but not limited to, implementation of the budget for the 
regulatory function or regulatory personnel matters, the Regulatory 
Oversight Committee will take all steps reasonably necessary to 
ensure that the Chief Executive Officer does not compromise the 
regulatory autonomy and independence of the CRO or the regulatory 
function. Id.
---------------------------------------------------------------------------

4. Regulatory Funding and Services
    As a prerequisite for the Commission's granting of an exchange's 
application for registration, an exchange must be organized and have 
the capacity to carry out the purposes of the Act.\95\ Specifically, an 
exchange must be able to enforce compliance by its members, and persons 
associated with its members, with the federal securities laws and rules 
thereunder and the rules of the exchange.\96\ The discussion below 
summarizes how LTSE proposes to conduct and structure its regulatory 
operations.
---------------------------------------------------------------------------

    \95\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
    \96\ See id. See also Section 19(g) of the Act, 15 U.S.C. 
78s(g).
---------------------------------------------------------------------------

a. Regulatory Funding
    To help ensure that LTSE has and will continue to have adequate 
funding to be able to meet its responsibilities under the Act, LTSE 
represents that, if the Commission approves LTSE's application for 
registration as a national securities exchange, LTSEG will allocate 
sufficient assets to LTSE to enable the Exchange's operation.\97\ 
Specifically, LTSE represents that LTSEG will make a cash contribution 
to LTSE of $5,000,000, in addition to any previously-provided in-kind 
contributions, such as legal, regulatory, and infrastructure-related 
services.\98\
---------------------------------------------------------------------------

    \97\ See Form 1, Exhibit I.
    \98\ See id.
---------------------------------------------------------------------------

    LTSE also represents that such cash and in-kind contributions from 
LTSEG will be adequate to operate LTSE, including the regulation of the 
Exchange, and that LTSEG and LTSE will enter into an agreement that 
requires LTSEG to provide adequate funding for the Exchange's 
operations, including the regulation of the Exchange.\99\
---------------------------------------------------------------------------

    \99\ See id. LTSE represents that this agreement will provide 
that LTSE will receive all fees, including regulatory fees and 
trading fees, payable by LTSE's members, as well as any funds 
received from any applicable market data fees and tape revenue, and 
will further provide that LTSEG will reimburse LTSE for its costs 
and expenses to the extent that the Exchange's assets are 
insufficient to meet its costs and expenses. Id.
---------------------------------------------------------------------------

    Further, any ``Regulatory Funds'' received by LTSE will not be used 
for non-regulatory purposes or distributed to LTSEG, but rather will be 
applied to fund the regulatory operations of LTSE, or, as applicable, 
used to pay restitution and disgorgement to customers as part of a 
regulatory proceeding.\100\ Any excess non-regulatory funds, as solely 
determined by LTSE, will be remitted to LTSEG in accordance with LTSE 
Bylaws.\101\
---------------------------------------------------------------------------

    \100\ See LTSE Bylaws, Article X, Section 10.4. LTSE Bylaws, 
Article I(bb) defines ``Regulatory Funds'' as ``fees, fines, or 
penalties derived from the regulatory operations of [LTSE],'' but 
such term does not include ``revenues derived from listing fees, 
market data revenues, transaction revenues, or any other aspect of 
the commercial operations of [LTSE], even if a portion of such 
revenues are used to pay costs associated with the regulatory 
operations of [LTSE].'' This definition is consistent with the rules 
of other SROs. See, e.g., Amended and Restated By-Laws of MIAX 
Exchange, Article 1(ll); By-Laws of NASDAQ PHLX LLC, Article I(ii); 
and By-Laws of NASDAQ BX, Inc., Article I(ii).
    \101\ See Form 1, Exhibit I. See also LTSE Bylaws, Article XI, 
Section 11.5. Further, LTSE will not be required to pay any 
dividends if payment of such dividends would violate the Act or any 
other applicable law. See id.
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b. Regulatory Contract with FINRA
    Although LTSE will be an SRO with all of the attendant regulatory 
obligations under the Act, it has represented to the Commission that it 
intends to enter into a Regulatory Services Agreement (``RSA'') with 
FINRA, under which FINRA as a regulatory services provider will perform 
certain regulatory functions on LTSE's behalf.\102\ Specifically, LTSE 
represents that FINRA will perform certain regulatory surveillance of 
trading activity on LTSE and conduct various regulatory services on 
behalf of LTSE, which are expected to include performance of 
investigation, disciplinary, and hearing services.\103\ Notwithstanding 
the RSA, LTSE will retain legal responsibility for the regulation of 
its members and its market and the performance of FINRA as its 
regulatory services provider. Because LTSE anticipates entering into an 
RSA with FINRA, it has not made provisions to fulfill the regulatory 
services that would be undertaken by FINRA. Accordingly, the Commission 
is conditioning the operation of LTSE on a final RSA that specifies the 
services that will be provided to LTSE.
---------------------------------------------------------------------------

    \102\ See Form 1, Exhibit L. See also LTSE Rules 1.160(jj) and 
6.170.
    \103\ See Form 1, Exhibit L.
---------------------------------------------------------------------------

    The Commission believes that it is consistent with the Act for LTSE 
to contract with FINRA to perform certain examination, enforcement, and 
disciplinary functions.\104\ These functions are fundamental elements 
of a regulatory program, and constitute core self-regulatory functions. 
The Commission believes that FINRA has the expertise and experience to 
perform these functions for LTSE.\105\ However, LTSE, unless relieved 
by the Commission of its responsibility, bears the self-regulatory 
responsibilities and primary liability for self-regulatory failures, 
not the SRO retained to perform regulatory functions on LTSE's 
behalf.\106\ In performing these regulatory functions, however, FINRA 
may nonetheless bear liability for causing or aiding and abetting the 
failure of LTSE to perform its regulatory functions.\107\ Accordingly, 
although FINRA will not act on its own behalf under its SRO 
responsibilities in carrying out these regulatory services for LTSE, 
FINRA may have secondary liability if, for example, the Commission 
finds that the contracted functions are being performed so inadequately 
as to cause a violation of the federal securities laws or rules 
thereunder by LTSE.\108\
---------------------------------------------------------------------------

    \104\ For example, IEX, MIAX Exchange, MIAX PEARL, LLC, Nasdaq 
MRX, LLC, Cboe EDGA Exchange, Inc., Cboe EDGX Exchange Inc., and 
Cboe BZX Exchange, Inc. (``Cboe BZX'') have entered into RSAs with 
FINRA.
    \105\ See, e.g., IEX Order, supra note 48; DirectEdge Exchanges 
Order, supra note 59; and Nasdaq Order, supra note 35. The 
Commission notes that the Commission is not approving the RSA or any 
of its specific terms.
    \106\ See Section 19(g)(1) of the Act, 15 U.S.C. 78s(g)(1).
    \107\ For example, if failings by FINRA have the effect of 
leaving LTSE in violation of any aspect of LTSE's self-regulatory 
obligations, LTSE would bear direct liability for the violation, 
while FINRA may bear liability for causing or aiding and abetting 
the violation. See, e.g., IEX Order, supra note 48; Nasdaq Order and 
BATS Order, supra note 35; and DirectEdge Exchanges Order, supra 
note 59.
    \108\ See, e.g., IEX Order, supra note 48, and Nasdaq Order, 
supra note 35.

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[[Page 21848]]

c. Rule 17d-2 Agreements
    Section 19(g)(1) of the Act,\109\ among other things, requires 
every SRO registered as either a national securities exchange or 
national securities association to comply with the Act, the rules and 
regulations thereunder, and the SRO's own rules, and, absent reasonable 
justification or excuse, enforce compliance by its members and persons 
associated with its members, unless the SRO is relieved of this 
responsibility pursuant to Section 17(d) or Section 19(g)(2) of the 
Act.\110\ Rule 17d-2 of the Act permits SROs to propose joint plans to 
allocate regulatory responsibilities amongst themselves for their 
common rules with respect to their common members.\111\ These 
agreements, which must be filed with and declared effective by the 
Commission, generally cover areas where each SRO's rules substantively 
overlap, including such regulatory functions as personnel registration 
and sales practices. Without this relief, the statutory obligation of 
each individual SRO could result in a pattern of multiple examinations 
of broker-dealers that maintain memberships in more than one SRO.\112\ 
Such regulatory duplication would add unnecessary expenses for common 
members and their SROs.\113\
---------------------------------------------------------------------------

    \109\ 15 U.S.C. 78s(g)(1).
    \110\ 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), respectively.
    \111\ See Section 17(d)(1) of the Act and Rule 17d-2 thereunder, 
15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2, respectively. Section 
17(d)(1) of the Act allows the Commission to relieve an SRO of 
certain responsibilities with respect to members of the SRO who are 
also members of another SRO (``common members''). Specifically, 
Section 17(d)(1) allows the Commission to relieve an SRO of its 
responsibilities to: (i) Receive regulatory reports from such 
members; (ii) examine such members for compliance with the Act and 
the rules and regulations thereunder, and the rules of the SRO; or 
(iii) carry out other specified regulatory responsibilities with 
respect to such members.
    \112\ Section 17(d) was intended, in part, to eliminate 
unnecessary multiple examinations and regulatory duplication with 
respect to common members. See Securities Exchange Act Release No. 
12935 (October 28, 1976), 41 FR 49091 (November 8, 1976) (``Rule 
17d-2 Adopting Release'').
    \113\ See id.
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    A Rule 17d-2 plan that is declared effective by the Commission 
relieves the specified SRO of those regulatory responsibilities 
allocated by the plan to another SRO.\114\ Many SROs have entered into 
Rule 17d-2 agreements.\115\ LTSE has represented to the Commission that 
LTSE and FINRA intend to file a Rule 17d-2 agreement with the 
Commission covering common members of LTSE and FINRA.\116\ This 
agreement will allocate to FINRA regulatory responsibility, with 
respect to common members, for specified regulatory and enforcement 
matters arising out of specified common rules and specified provisions 
of the Act and the rules and regulations thereunder. In addition, LTSE 
has represented to the Commission that it intends to join all 
applicable Rule 17d-2 plans, as applicable and in the interest of its 
members and their ``Sponsored Participants''--entities whose access to 
LTSE is authorized in advance by one or more members in accordance with 
LTSE rules,\117\ including the multi-party Rule 17d-2 plan for the 
allocation of regulatory responsibilities with respect to certain 
Regulation NMS Rules and the multi-party Rule 17d-2 plan for the 
surveillance, investigation, and enforcement of common insider trading 
rules.\118\
---------------------------------------------------------------------------

    \114\ See Rule 17d-2 Adopting Release, supra note 112.
    \115\ See, e.g., Securities Exchange Act Release Nos. 83696 
(July 24, 2018), 83 FR 35682 (July 27, 2018) (FINRA/MIAX Exchange/
MIAX PEARL); 77321 (March 8, 2016), 81 FR 13434 (March 14, 2016) 
(File No. 4-697) (FINRA/ISE Mercury, LLC); 73641 (November 19, 
2014), 79 FR 70230 (November 25, 2014) (File No. 4-678) (FINRA/MIAX 
Exchange); 70053 (July 26, 2013), 78 FR 46656 (August 1, 2013) (File 
No. 4-663) (FINRA/Topaz Exchange n/k/a ISE Gemini, LLC); 59218 
(January 8, 2009), 74 FR 2143 (January 14, 2009) (File No. 4-575) 
(FINRA/Boston Stock Exchange, Inc.); 58818 (October 20, 2008), 73 FR 
63752 (October 27, 2008) (File No. 4-569) (FINRA/BATS Exchange, 
Inc.); 55755 (May 14, 2007), 72 FR 28087 (May 18, 2007) (File No. 4-
536) (National Association of Securities Dealers, Inc. (``NASD'') n/
k/a FINRA) and Chicago Board of Options Exchange, Inc. concerning 
the CBOE Stock Exchange, LLC); 55367 (February 27, 2007), 72 FR 9983 
(March 6, 2007) (File No. 4-529) (NASD/International Securities 
Exchange, LLC); and 54136 (July 12, 2006), 71 FR 40759 (July 18, 
2006) (File No. 4-517) (NASD/Nasdaq).
    \116\ See Form 1, Exhibit E.
    \117\ Id.
    \118\ See id. See also Securities Exchange Act Release No. 65991 
(December 16, 2011), 76 FR 79714 (December 22, 2011) (File No. 4-
566) (notice of filing and order approving and declaring effective 
an amendment to the multi-party Rule 17d-2 plan relating to the 
surveillance, investigation, and enforcement of insider trading 
rules).
---------------------------------------------------------------------------

    Because LTSE anticipates entering into these Rule 17d-2 agreements, 
it has not made provision to fulfill the regulatory obligations that 
would be undertaken by FINRA and other SROs under these agreements with 
respect to common members.\119\ Accordingly, the Commission is 
conditioning the operation of LTSE on approval by the Commission of a 
Rule 17d-2 agreement that allocates the above specified matters, and 
the approval of an amendment to the existing multi-party Rule 17d-2 
plans specified above to add LTSE as a party.
---------------------------------------------------------------------------

    \119\ For common members, the regulatory obligations will be 
covered by the Rule 17d-2 agreements, and for LTSE members that are 
not also members of FINRA, the regulatory obligations will be 
covered by the RSA.
---------------------------------------------------------------------------

C. LTSE Trading System

    LTSE will operate a fully automated electronic order book, and will 
not maintain or operate a physical trading floor. Only broker-dealer 
members of LTSE and entities that enter into market access arrangements 
with members (collectively, ``Users'') will have access to the LTSE 
system.\120\ Users will be able to electronically submit orders to buy 
or sell securities listed or traded on the Exchange through a variety 
of systems.\121\ LTSE will allow firms to register as market makers 
with affirmative and negative market making obligations.\122\
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    \120\ To obtain authorized access to the LTSE System, each User 
must enter into a User Agreement with LTSE. See LTSE Rule 11.130(a).
    \121\ For a discussion of the means of access to LTSE, see LTSE 
Form 1, Exhibit E, Section 1.
    \122\ See LTSE Rules 11.150 through 11.154. LTSE's rules 
relating to market makers are similar to the rules of other national 
securities exchanges. See, e.g., IEX Rules 11.150 through 11.154; 
and Cboe BZX Rules 11.5 through 11.8.
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    Users may submit orders to the Exchange as Limit Orders or Market 
Orders, with the following order parameters: Displayed; Reserve; Non-
Displayed; Odd Lot; Mixed Lot; LTSE Only; Minimum Quantity; and Inter-
market Sweep.\123\ Orders may be submitted with the following time-in-
force instructions: Immediate-or-Cancel; Day; Good `til Extended Day; 
System Session; and Good `til Time.\124\ Users may submit orders with 
the display instructions of Displayed, Non-Displayed, or Reserve, but 
orders submitted without display instructions will be fully 
displayed.\125\ Displayed orders will be displayed on an anonymous 
basis at a specified price.\126\ Orders will be classified as a Round 
Lot, Odd Lot, or Mixed Lot.\127\ Users may also choose to designate 
orders with an Anti-Internalization Group Identifier modifier for anti-
internalization purposes to prevent executions against resting opposite 
side orders originating from the same market participant 
identifier.\128\ All of these order types and parameters are similar to 
order types and parameters approved by the Commission and currently 
available on other national securities exchanges.\129\
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    \123\ See LTSE Rule 11.190(a)-(b).
    \124\ See LTSE Rule 11.190(c).
    \125\ See LTSE Form 1, Exhibit E, Section 2, and LTSE Rule 
11.190(b)(1)-(3).
    \126\ See LTSE Form 1, Exhibit E, Section 1.
    \127\ See LTSE Form 1, Exhibit E, Section 2, and LTSE Rule 
11.180.
    \128\ See LTSE Form 1, Exhibit E, Section 2, and LTSE Rule 
11.190(e).
    \129\ See, e.g., IEX Rule 11.190.

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[[Page 21849]]

    The LTSE system will continuously and automatically match orders 
pursuant to price/display/time priority, with displayed orders and 
displayed portions of orders having precedence over non-displayed 
orders and non-displayed portions of orders at the same price without 
regard to time.\130\ LTSE will also utilize certain collars and 
constraints in an effort to reduce the occurrence of erroneous 
trades.\131\ With respect to the price of executions that would occur 
on LTSE, the LTSE system is designed to comply with the order 
protection requirements of Rule 611 of Regulation NMS \132\ by 
requiring that, for any execution to occur on LTSE during regular 
trading hours, the price must be equal to, or better than, the 
``protected quotation,'' unless an exception to Rule 611 applies.\133\ 
Orders may be executed on the Exchange during the Regular Market 
Session or during Pre- and Post-Market Sessions; \134\ however, some 
order types and functionality are available only during the Regular 
Market Session.\135\
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    \130\ See LTSE Rule 11.220(a)(1).
    \131\ See LTSE Rule 11.190(f) (describing the Order Collar, 
Crossed Market Collar, One-Sided Market Handling, and Zero Markets 
Handling) and LTSE Form 1, Exhibit E, Section 3. See also LTSE Rule 
11.270 (Clearly Erroneous Executions).
    \132\ 17 CFR 242.611.
    \133\ See LTSE Rule 11.230(a)(2). See also 17 CFR 242.600(b)(58) 
(defining ``protected quotation'').
    \134\ LTSE's Pre-Market Session will run from 8:00 a.m. ET to 
9:30 a.m. ET, and its Post-Market Session will run from 4:00 p.m. ET 
to 5:00 p.m. ET. See LTSE Rule 1.160(bb)-(cc).
    \135\ See LTSE Rules 11.110(a) and 11.230(a)(2).
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    In addition, LTSE's rules are designed to address locked and 
crossed markets, as required by Rule 610(d) of Regulation NMS,\136\ in 
that they are designed not to disseminate interest that would lock or 
cross a protected quote, require Users to reasonably avoid displaying 
interest that locks or crosses any protected quotation, and are 
reasonably designed to assure the reconciliation of locked or crossed 
interest.\137\
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    \136\ 17 CFR 242.610(d).
    \137\ See LTSE Rule 11.310. See also LTSE Rule 11.190(g) 
(relating to price sliding functionality to avoid violations of Rule 
610(d) of Regulation NMS, 17 CFR 242.610(d)).
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    LTSE will conduct an opening process for non-LTSE-listed securities 
at the start of its regular market session, and Users who wish to 
participate in the opening process may enter appropriately designated 
orders for queuing in the system.\138\ LTSE's rules also contemplate 
auction processes for any securities that may be listed on LTSE, which 
include Opening Auctions, Closing Auctions, IPO and Halt Auctions, and 
Volatility Auctions.\139\
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    \138\ See LTSE Rule 11.231.
    \139\ See LTSE Rule 11.350.
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    Initially, LTSE will not offer any outbound routing 
functionality;\140\ thus, all orders submitted to LTSE will be treated 
as LTSE Only,\141\ though limit orders may also include the execution 
instructions of Inter-Market Sweep Order, if appropriate.\142\
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    \140\ See LTSE Form 1, Exhibit E, Section 2.
    \141\ See LTSE Rule 11.190(b)(6).
    \142\ See LTSE Rule 11.190(b)(12).
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    The Commission finds that LTSE's trading rules are consistent with 
the Act and, in particular, the Section 6(b)(5) requirement that an 
exchange's rules be designed to promote just and equitable principles 
of trade, remove impediments to and perfect the mechanisms of a free 
and open market and a national market system, and protect investors and 
the public interest.\143\
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    \143\ See 15 U.S.C. 78f(b)(5). The Commission notes that LTSE's 
trading rules, including its rules relating to market makers, order 
types and parameters, priority, execution, and opening and auction 
processes, are similar to existing exchanges' trading rules. See, 
e.g., Chapter 11 of the IEX rule book.
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    As a national securities exchange, LTSE will be a trading center 
whose quotations can be ``automated quotations'' under Rule 
600(b)(3).\144\ In turn, LTSE is designed to be an ``automated trading 
center'' under Rule 600(b)(4) whose best-priced, displayed quotation 
would be a ``protected quotation'' under Rules 600(b)(57) and 
600(b)(58), and for purposes of Rule 611.\145\
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    \144\ See LTSE Rule 11.240(c).
    \145\ See 17 CFR 242.600(b)(57)-(58) and 17 CFR 242.611.
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    At the same time, to meet their regulatory responsibilities under 
Rule 611(a) of Regulation NMS, such other trading centers will be 
required to have sufficient notice of new protected quotations, as well 
as all necessary information (such as final technical 
specifications).\146\ The Commission believes that it would be a 
reasonable policy and procedure under Rule 611(a) to require that 
industry participants begin treating LTSE's best bid and best offer as 
a protected quotation as soon as possible but no later than 90 days 
after the date of this order, or such later date as LTSE begins 
operation as a national securities exchange. The Commission notes that 
it has taken the same position with other new equities exchanges.\147\
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    \146\ See Securities Exchange Act Release No. 53829 (May 18, 
2006), 71 FR 30038, 30041 (May 24, 2006) (File No. S7-10-04) 
(extending the compliance dates for Rule 610 and Rule 611 of 
Regulation NMS under the Act).
    \147\ See, e.g., BATS Order at 49505, supra note 35 and 
DirectEdge Exchanges Order at 13163, supra note 59.
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D. Discipline and Oversight of Members

    As noted above, one prerequisite for the Commission's grant of an 
exchange's application for registration is that a proposed exchange 
must be so organized and have the capacity to be able to carry out the 
purposes of the Act.\148\ Specifically, an exchange must be able to 
enforce compliance by its members and persons associated with its 
members with the federal securities laws and rules thereunder and the 
rules of the exchange.\149\ As also noted above, pursuant to the 
proposed RSA with FINRA, FINRA will perform many of the initial 
disciplinary processes on behalf of LTSE.\150\ For example, FINRA will 
investigate potential securities laws violations, issue complaints, and 
conduct hearings pursuant to LTSE rules. Appeals from disciplinary 
decisions will be heard by the LTSE Appeals Committee \151\ and the 
LTSE Appeals Committee's decision shall be final.\152\ In addition, the 
Exchange Board on its own initiative may order review of a disciplinary 
decision.\153\
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    \148\ See 15 U.S.C. 78f(b)(1).
    \149\ See id.
    \150\ See supra notes 102-103 and accompanying text. See also 
LTSE Rule 9.001 (noting that LTSE and FINRA are parties to a 
regulatory contract, pursuant to which FINRA will perform certain 
functions described in the Rule 9.000 Series on behalf of LTSE).
    \151\ See LTSE Rule 1.160(u).
    \152\ See LTSE Rule 9.349(c) (providing, among other things, 
that if the Exchange Board does not call the disciplinary proceeding 
for review, the proposed written decision of the LTSE Appeals 
Committee shall become final).
    \153\ See LTSE Rule Series 9.350.
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    The LTSE Bylaws and LTSE rules provide that the Exchange has 
disciplinary jurisdiction over its members so that it can enforce its 
members' compliance with its rules and the federal securities laws and 
rules.\154\ The Exchange's rules also permit LTSE to sanction members 
for violations of its rules and violations of the federal securities 
laws and rules by, among other things, expelling or suspending members, 
limiting members' activities, functions, or operations, fining or 
censuring members, or suspending or barring a person from being 
associated with a member, or any other fitting sanction.\155\ LTSE's 
rules also provide for the imposition of fines for certain minor rule 
violations in lieu of commencing disciplinary proceedings.\156\ 
Accordingly, as a condition to the operation of LTSE, a Minor Rule 
Violation Plan (``MRVP'') filed by LTSE under Act Rule 19d-

[[Page 21850]]

1(c)(2) must be declared effective by the Commission.\157\
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    \154\ See generally LTSE Bylaws, Article X and LTSE Rules 
Chapters 8 and 9.
    \155\ See LTSE Rule 2.120.
    \156\ See LTSE Rule 9.216(b).
    \157\ 17 CFR 240.19d-1(c)(2).
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    The Commission finds that the LTSE Bylaws and rules concerning its 
disciplinary and oversight programs are consistent with the 
requirements of Sections 6(b)(6) and 6(b)(7) \158\ of the Act in that 
they provide fair procedures for the disciplining of members and 
persons associated with members. The Commission further finds that the 
rules of LTSE provide it with the ability to comply, and with the 
ability 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 LTSE.\159\
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    \158\ 15 U.S.C. 78f(b)(6) and (b)(7).
    \159\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
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E. Listing and Trading on LTSE

1. Registration Under Section 12(b) of the Act
    Once LTSE begins operations as a national securities exchange, a 
security will be considered for listing on LTSE only if such security 
is registered pursuant to Section 12(b) of the Act \160\ or such 
security is subject to an exemption.\161\ An issuer may register a 
security pursuant to Section 12(b) by submitting to LTSE a listing 
application that provides certain required information.\162\ LTSE will 
review the listing application and, if the listing application is 
approved, will certify to the Commission that it has approved the 
security for listing and registration.\163\ Registration of the 
security will become effective thirty days after the receipt of such 
certification by the Commission or within a shorter period of time as 
the Commission may determine.\164\ Once registration is effective, the 
security is eligible for listing on LTSE.\165\
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    \160\ 15 U.S.C. 78l(b).
    \161\ 15 U.S.C. 78l(c); LTSE Rule 14.203.
    \162\ 15 U.S.C. 78l(b); LTSE Rule 14.202. Prior to submitting a 
listing application to LTSE, the issuer will be required to 
participate in a free confidential pre-application eligibility 
review, in which LTSE will determine whether the issuer meets its 
listing criteria and is eligible to submit a listing application. 
See LTSE Rule 14.201, which is based on the equivalent Rule 14.201 
of IEX's rules.
    \163\ See LTSE Rule 14.203(f); 15 U.S.C. 78l(d).
    \164\ 15 U.S.C. 78l(d).
    \165\ See LTSE Rule 14.203(f); 15 U.S.C. 78l(d).
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2. Initial and Continuing Listing Standards
    The Commission finds that LTSE's proposed initial and continuing 
listing standards are consistent with the requirements of the Act. With 
respect to the standards relating to the listing and delisting of 
companies, including procedures and prerequisites for initial and 
continued listing on LTSE, the obligations of issuers with securities 
listed on LTSE, as well as rules describing the application and 
qualification process, LTSE's proposed listing rules for securities are 
virtually identical to those of IEX.\166\ With respect to LTSE Rule 
14.201, which is substantially similar to the analogous rule of IEX, 
LTSE requires a company seeking the initial listing of one or more 
classes of securities on LTSE to participate in a free confidential 
pre-application eligibility review to determine whether the company 
meets LTSE's listing criteria and, if, upon completion of this review, 
LTSE determines that a company is eligible for listing, LTSE will 
notify that company in writing that it has been cleared to submit an 
original listing application. The Commission notes that, if, upon 
completion of this review, the Exchange determines that a company is 
ineligible for listing, the company may request a review of LTSE's 
determination pursuant to the process set forth in LTSE Rule 
9.555.\167\
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    \166\ LTSE 's proposed initial and continuing listing standards 
for securities to be listed and traded on LTSE are virtually 
identical to the current rules for IEX, except that LTSE will not 
have listing criteria for exchange-traded funds, portfolio 
depository receipts, and index fund shares. The Commission has 
previously determined that the initial and continuing listing 
standards of IEX are consistent with the Act. See LTSE Rules, 
Chapter 14 and IEX Rules, Chapter 14.
    \167\ See Amendment No. 2, supra note 6.
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3. Corporate Governance Standards
    LTSE has proposed corporate governance standards in connection with 
securities to be listed and traded on LTSE that are substantially 
similar to the corporate governance listing standards of other 
exchanges.\168\ Included in these standards are rules requiring a 
majority of directors on a listed issuer's board to be independent; 
rules and independence requirements relating to audit and compensation 
committees and the oversight of nominations; and rules requiring listed 
issuers to adopt codes of conduct applicable to all their directors, 
officers and employees.\169\ The Commission finds that LTSE's proposed 
corporate governance standards for listed issuers contained in LTSE's 
proposed rules are consistent with the Act.\170\ The Commission further 
finds that LTSE's rules satisfy the requirements of Section 10A(m) of 
the Act and Rule 10A-3 thereunder and Section 10C of the Act and Rule 
10C-1 thereunder, relating to audit and compensation committees, 
respectively.\171\ The Commission believes that LTSE's corporate 
governance standards for listed issuers that require a fully 
independent audit committee are designed to promote independent and 
objective review and oversight of the accounting and auditing practices 
of listed issuers and to enhance audit committee independence, 
authority, and responsibility by implementing the standards set forth 
in Rule 10A-3.\172\ In addition, the Commission believes that LTSE's 
proposed requirements relating to independent compensation committees 
for listed issuers would benefit investors by implementing the 
standards set forth in Rule 10C-1, which requires that the independent 
directors of a listed issuer oversee executive compensation matters, 
consider independence criteria before retaining compensation advisers 
and have responsibility for the appointment, compensation and oversight 
of these advisers.\173\ The corporate governance standards embodied in 
the listing rules of national securities exchanges, in particular, play 
an important role in assuring that companies listed for trading on the 
exchanges' markets observe good governance practices, including a 
reasoned, fair, and impartial approach for determining the compensation 
of corporate executives.\174\ The Commission believes that the 
Exchange's rules will foster greater transparency, accountability, and 
objectivity in the oversight of compensation practices of listed 
issuers and in the decision-making processes of their compensation 
committees.\175\
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    \168\ See proposed LTSE Rule Series 14.440, and see, e.g., 
Nasdaq Rule Series 5600 and IEX Rule series 14.400.
    \169\ See proposed LTSE Rules 14.405 and 14.406.
    \170\ The Commission notes that it has previously determined 
that the corporate governance standards of other exchanges, with 
which LTSE's proposed rules are commensurate, are consistent with 
the Act. See, e.g., Securities Exchange Act Release No. 48745 
(November 4, 2003), 68 FR 64154 (November 12, 2003) and IEX Order, 
supra note 48.
    \171\ See 15 U.S.C. 78f(b)(5); 15 U.S.C. 78j-1(m); 15 U.S.C. 
78j-3; 17 CFR 240.10A-3; 17 CFR 240.10C-1.
    \172\ See Securities Exchange Act Release No. 47654 (April 9, 
2003), 68 FR 18788 (April 16, 2003).
    \173\ See Securities Exchange Act Release No. 67220 (June 20, 
2012), 77 FR 38422, 38425 (June 27, 2012).
    \174\ See, e.g., Securities Exchange Act Release No. 68640 
(January 11, 2013), 78 FR 4554, 4563 (January 22, 2013)(approving 
SR-NASDAQ-2012-109 relating to rules for compensation committees for 
listed companies, upon which LTSE's proposed rules for compensation 
committees are based).
    \175\ See id. (finding Nasdaq compensation committee rules 
consistent with the Act). See also Securities Exchange Act Release 
No. 68639 (January 11, 2013), 78 FR 4570 (January 22, 2013) (order 
approving NYSE's compensation committee rules, which was cited by 
Nasdaq as precedent for a subsequent amendment to its own rules that 
was filed on an immediately effective basis;) see Securities Act 
Release No. 71037 (December 11, 2013), 78 FR 76179 (December 16, 
2013) (SR-NASDAQ-2013-147).

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[[Page 21851]]

    As noted above, the Commission received one comment letter on 
LTSE's Form 1 application. In its comment letter, the Council of 
Institutional Investors (``CII'') advised that it could not support 
LTSE's Form 1 application for two reasons. First, CII stated that the 
corporate governance requirements in LTSE's Form 1 application 
(specifically, its ``Voting Rights Policy'' \176\) would ``permit newly 
public companies to have multi-class structures with unequal voting 
rights in conflict with [CII's] membership approved policies supporting 
a one share, one vote structure'' with ``no sunsets on such 
structures.'' \177\ Second, CII stated that LTSE's Form 1 application 
``does not include any information about LTSE's reported plans to 
update its application to include time-phased voting rights as a core 
element of its proposed corporate governance listing standards.'' \178\ 
In addition, CII set forth its concerns about time-phased voting 
rights, including disproportionate empowerment of long-term 
stakeholders and challenges in tracking ownership of those with super-
voting rights.\179\
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    \176\ See LTSE Rule 14.413, Supplementary Material .01.
    \177\ CII Letter at 1-2.
    \178\ Id.
    \179\ CII Letter at 6-7.
---------------------------------------------------------------------------

    The issues raised in the CII Letter do not provide a basis for the 
Commission to reject LTSE's Form 1 application. Commission rules do not 
mandate that the rules of a national securities exchange must provide 
for a ``one share, one vote'' requirement for listed issuers. In 
approving the current rules governing the voting rights of shareholders 
of common stock listed on the NYSE, American Stock Exchange (``Amex''), 
or included on Nasdaq, the Commission stated that the new rules would 
protect investors from disparate voting rights plans that resulted in 
disenfranchisement.\180\ At the same time, however, the Commission 
stated that the new voting rights rules would provide flexibility to 
listed companies to devise their corporate capital structure by 
permitting disparate voting rights plans that do not disenfranchise 
existing shareholders and that a company could, for example, have a 
permissible dual class structure resulting from an initial public 
offering or the issuance of lower voting stock.\181\ The Commission 
notes that the Voting Rights Policy, as set forth in LTSE's proposed 
listing standards, is consistent with the current voting rights 
provisions of NYSE and Nasdaq, as acknowledged by CII in its 
letter.\182\ Other national securities exchanges that provide for the 
listing of equity securities also maintain shareholder voting rights 
provisions consistent with the NYSE and Nasdaq rules.\183\ As noted 
above, Commission rules do not mandate a ``one share, one vote'' 
requirement for listed issuers.
---------------------------------------------------------------------------

    \180\ See Securities Exchange Act Release No. 35121 (December 
19, 1994), 59 FR 66570 (December 27, 1994) (order approving rules 
regarding shareholder voting rights for NYSE, Amex, and National 
Association of Securities Dealers, Inc., on behalf of Nasdaq) 
(``1994 Approval Order'').
    \181\ Id.
    \182\ CII Letter at 8. See also 1994 Approval Order, supra note 
180.
    \183\ See, e.g., Securities Exchange Act Release No. 37481(July 
25, 1996), 61 FR 40270 (August 1, 1996) (approving a similar voting 
rights provision for Chicago Stock Exchange, Inc., n/k/a NYSE 
Chicago, Inc.; the provision is now contained in Rules of NYSE 
Chicago, Inc., Article 22, Rule 20). See also IEX Rule 14.413, 
Supplementary Material .01, which appears to be the model for the 
LTSE's proposed Voting Rights Policy.
---------------------------------------------------------------------------

    For the forgoing reasons, the Commission believes that it is 
appropriate to approve LTSE's Form 1 application with the inclusion of 
the Voting Rights Policy. With respect to the CII's concerns about 
time-phased voting rights, no such rights are proposed by LTSE in its 
Form 1 application. Once LTSE is registered as a national securities 
exchange, LTSE is required to file any changes to its rules as a 
proposed rule change under Section 19(b) of the Act and Rule 19b-
4,\184\ and the public will be provided notice and given the 
opportunity to provide comments on any such proposed rule change.
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    \184\ 15 U.S.C. 78s(b) and 17 CFR 240.19b-4.
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4. Trading Pursuant to Unlisted Trading Privileges
    As an exchange, LTSE will be permitted by Section 12(f) of the Act 
\185\ to extend unlisted trading privileges to securities listed and 
registered on other national securities exchanges, subject to 
Commission rules. In particular, Rule 12f-5 under the Act requires an 
exchange that extends unlisted trading privileges to securities to have 
in effect a rule or rules providing for transactions in the class or 
type of security to which the exchange extends unlisted trading 
privileges.\186\ The Commission notes that Chapter 14 of LTSE's rules 
provides for transactions in securities that meet specified criteria. 
Accordingly, pursuant to Section 12(f) of the Act and Rule 12f-5 
thereunder, the Exchange will be permitted to extend unlisted trading 
privileges to securities of the same class, subject to the trading 
rules of the Exchange.\187\
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    \185\ 15 U.S.C. 78l(f).
    \186\ See 17 CFR 240.12f-5. See also Securities Exchange Act 
Release No. 35737 (April 21, 1995), 60 FR 20891 (April 28, 1995) 
(File No. S7-4-95) (adopting Rule 12f-5 under the Act).
    \187\ See proposed LTSE Rule 11.120, which states: ``Any classes 
of securities listed or admitted to unlisted trading privileges on 
the Exchange shall be eligible to become designated for trading on 
the Exchange in accordance with the Rules of Chapter 14.'' LTSE's 
rules currently do not provide for the trading of exchange-traded 
funds, portfolio depository receipts, and index fund shares, or for 
the trading of options, security futures, or other similar 
instruments.
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F. Section 11(a) of the Act

    Section 11(a)(1) of the Act \188\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises investment discretion 
(collectively, ``covered accounts'') unless an exception applies. Rule 
11a2-2(T) under the Act,\189\ known as the ``effect versus execute'' 
rule, provides exchange members with an exemption from the Section 
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) Must transmit the order from off the exchange 
floor; (ii) may not participate in the execution of the transaction 
once it has been transmitted to the member performing the 
execution;\190\ (iii) may not be affiliated with the executing member; 
and (iv) with respect to an account over which the member or an 
associated person has investment discretion, neither the member nor its 
associated person may retain any compensation in connection with 
effecting the transaction except as provided in the Rule.
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    \188\ 15 U.S.C. 78k(a)(1).
    \189\ 17 CFR 240.11a2-2(T).
    \190\ This prohibition also applies to associated persons. The 
member may, however, participate in clearing and settling the 
transaction.
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    In a letter to the Commission, LTSE requested that the Commission 
concur with LTSE's conclusion that LTSE members that enter orders into 
the LTSE trading system satisfy the requirements of Rule 11a2-
2(T).\191\ For the reasons set forth below, the Commission believes 
that LTSE members entering orders into the LTSE trading system will 
satisfy the requirements of Rule 11a2-2(T).
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    \191\ See Letter from Eric Ries, Chief Executive Officer, LTSE, 
to Brent Fields, Director, Office of the Secretary, and Brett 
Redfearn, Director, Division of Trading and Markets, Commission, 
dated March 8, 2019 (``LTSE 11(a) Letter'').

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[[Page 21852]]

    The Rule's first requirement is that orders for covered accounts be 
transmitted from off the exchange floor. In the context of automated 
trading systems, the Commission has found that the off-floor 
transmission requirement is met if a covered account order is 
transmitted from a remote location directly to an exchange's floor by 
electronic means.\192\ LTSE has represented that LTSE does not have a 
physical trading floor, and the LTSE trading system will receive orders 
from members electronically through remote terminals or computer-to-
computer interfaces.\193\ The Commission believes that the LTSE trading 
system satisfies this off-floor transmission requirement.
---------------------------------------------------------------------------

    \192\ See, e.g., Nasdaq Order, supra note 35; Securities 
Exchange Act Release Nos. 61419 (January 26, 2010), 75 FR 5157 
(February 1, 2010) (SR-BATS-2009-031) (approving BATS options 
trading); 59154 (December 23, 2008), 73 FR 80468 (December 31, 2008) 
(SR-BSE-2008-48) (approving equity securities listing and trading on 
BSE); 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-
NASDAQ-2007-004 and SR-NASDAQ-2007-080) (approving NOM options 
trading); 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001) 
(SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May 24, 
1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-53) 
(approving NYSE's Off-Hours Trading Facility); and 15533 (January 
29, 1979), 44 FR 6084 (January 31, 1979) (``1979 Release'').
    \193\ See LTSE 11(a) Letter, supra note 191.
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    Second, the Rule requires that the member and any associated person 
not participate in the execution of its order after the order has been 
transmitted. LTSE represented that at no time following the submission 
of an order is a member or an associated person of the member able to 
acquire control or influence over the result or timing of the order's 
execution.\194\ According to LTSE, the execution of a member's order is 
determined solely by what quotes and orders are present in the system 
at the time the member submits the order, and the order priority based 
on the LTSE rules.\195\ Accordingly, the Commission believes that an 
LTSE member and its associated persons do not participate in the 
execution of an order submitted to the LTSE trading system.\196\
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    \194\ See id. LTSE notes that a member may cancel or modify the 
order, or modify the instructions for executing the order, after the 
order has been transmitted, provided that such cancellations or 
modifications are transmitted from off an exchange floor. The 
Commission has stated that the non-participation requirement is 
satisfied under such circumstances so long as such modifications or 
cancellations are also transmitted from off the floor. See 
Securities Exchange Act Release No. 14563 (March 14, 1978), 43 FR 
11542 (March 17, 1978) (``1978 Release'') (stating that the ``non-
participation requirement does not prevent initiating members from 
canceling or modifying orders (or the instructions pursuant to which 
the initiating member wishes orders to be executed) after the orders 
have been transmitted to the executing member, provided that any 
such instructions are also transmitted from off the floor'').
    \195\ See LTSE 11(a) Letter, supra note 191. The Commission 
notes that LTSE has proposed rules for the registration, 
obligations, and operation of market makers on LTSE. LTSE has 
represented that market makers, if any, will submit quotes in the 
form of orders in their assigned symbols.
    \196\ See, e.g., BATS Order at 49505, supra note 35 and 
DirectEdge Exchanges Order at 13164, supra note 59.
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    Third, Rule 11a2-2(T) requires that the order be executed by an 
exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that this requirement is satisfied 
when automated exchange facilities, such as the LTSE trading system, 
are used, as long as the design of these systems ensures that members 
do not possess any special or unique trading advantages in handling 
their orders after transmitting them to the exchange.\197\ LTSE has 
represented that the design of the LTSE trading system ensures that no 
member has any special or unique trading advantage in the handling of 
its orders after transmitting its orders to LTSE.\198\ Based on LTSE's 
representation, the Commission believes that the LTSE trading system 
satisfies this requirement.
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    \197\ See, e.g., BATS Order at 49505, supra note 35 and 
DirectEdge Exchanges Order at 13164, supra note 59. In considering 
the operation of automated execution systems operated by an 
exchange, the Commission noted that, while there is not an 
independent executing exchange member, the execution of an order is 
automatic once it has been transmitted into the system. Because the 
design of these systems ensures that members do not possess any 
special or unique trading advantages in handling their orders after 
transmitting them to the exchange, the Commission has stated that 
executions obtained through these systems satisfy the independent 
execution requirement of Rule 11a2-2(T). See 1979 Release, supra 
note 192.
    \198\ See LTSE 11(a) Letter, supra note 191.
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    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\199\ LTSE members trading for covered accounts over 
which they exercise investment discretion must comply with this 
condition in order to rely on the rule's exemption.\200\
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    \199\ See, e.g., BATS Order at 49505, supra note 35 and 
DirectEdge Exchanges Order at 13164, supra note 59. In addition, 
Rule 11a2-2(T)(d) requires a member or associated person authorized 
by written contract to retain compensation, in connection with 
effecting transactions for covered accounts over which such member 
or associated persons thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member or any associated person 
thereof in connection with effecting transactions for the account 
during the period covered by the statement. See 17 CFR 240.11a2-
2(T)(d). See also 1978 Release, supra note 194 (stating ``[t]he 
contractual and disclosure requirements are designed to assure that 
accounts electing to permit transaction-related compensation do so 
only after deciding that such arrangements are suitable to their 
interests'').
    \200\ LTSE represented that it will advise its membership 
through the issuance of an Information Circular that those members 
trading for covered accounts over which they exercise investment 
discretion must comply with this condition in order to rely on the 
rule's exemption. See LTSE 11(a) Letter, supra note 191.
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G. Exemption From Section 19(b) of the Act With Regard to FINRA and 
NYSE Rules Incorporated by Reference

    LTSE proposes to incorporate by reference certain FINRA and NYSE 
rules as LTSE rules.\201\ Thus, for certain LTSE rules, Exchange 
members will comply with an LTSE rule by complying with the FINRA or 
NYSE rule referenced therein.\202\ In connection with its

[[Page 21853]]

proposal to incorporate FINRA and NYSE rules by reference, LTSE 
requested, pursuant to Rule 240.0-12,\203\ an exemption under Section 
36 of the Act from the rule filing requirements of Section 19(b) of the 
Act for changes to those LTSE rules that are effected solely by virtue 
of a change to a cross-referenced FINRA or NYSE rule.\204\ LTSE 
proposes to incorporate by reference categories of rules (rather than 
individual rules within a category) that are not trading rules. LTSE 
agrees to provide written notice to its members whenever a proposed 
rule change to a FINRA or NYSE rule that is incorporated by reference 
is proposed and whenever any such proposed change is approved by the 
Commission or otherwise becomes effective.\205\
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    \201\ See LTSE Rule 1.170. See Letter from Eric Ries, Chief 
Executive Officer, LTSE, to Brent Fields, Director, Office of the 
Secretary, and Brett Redfearn, Director, Division of Trading and 
Markets, Commission, dated March 8, 2019 (``Exemption Request 
Letter''). See also Letter from Eric Ries, Chief Executive Officer, 
LTSE, to Vanessa Countryman, Acting Directors, Office of the 
Secretary, and Brett Redfearn, Director of Division of Trading and 
Markets, Commission, dated April 16, 2019 (``Exemption Request 
Letter Addendum'').
    \202\ LTSE proposes to incorporate by reference the 12000 and 
13000 Series of the FINRA Manual (Code of Arbitration Procedures for 
Customer Disputes and Code of Arbitration Procedures for Industry 
Disputes). See LTSE Rule 12.110 (Arbitration). In addition, LTSE 
proposes to incorporate by reference FINRA Rules 4360 (Fidelity 
Bonds), 2090 (Know Your Customer), 2111 (Suitability), 2241 
(Research Analysts and Research Reports), 2210 (Communications with 
the Public), 3230 (Telemarketing), 4560 (Short-Interest Reporting), 
4110 (Capital Requirements), 4120 (Regulatory Notification and 
Business Curtailment), 4140 (Audit), 4511 (General Requirements), 
4512 (Customer Account Information), 4513 (Records of Written 
Customer Complaints), 3130 (Annual Certification of Compliance and 
Supervisory Procedures), 3210 (Accounts At Other Broker-Dealers and 
Financial Institutions), 5310 (Best Execution and Interpositioning), 
5270 (Front Running of Block Transactions), 4590 (Synchronization of 
Member Business Clocks), 7440 (Recording of Order Information), 7450 
(Order Data Transmission Requirements), 2268 (Requirements When 
Using Predispute Arbitration Agreements for Customer Accounts). See 
LTSE Rules 2.240 (Fidelity Bonds), 3.150 (Know Your Customer), 3.170 
(Suitability), 3.230 (Payments Involving Publications that Influence 
the Market Price of a Security), 3.280 (Communications with 
Customers and the Public), 3.292 (Telemarketing), 3.293 (Short-
Interest Reporting), 4.110 (Capital Compliance), 4.120 (Regulatory 
Notification and Business Curtailment), 4.140 (Audit), 4.511 
(General Requirements), 4.512 (Customer Account Information), 4.513 
(Record of Written Customer Complaints), 5.130 (Annual Certification 
of Compliance and Supervisory Procedures), 5.170 (Transactions for 
or by Associated Persons), 10.220 (Best Execution and 
Interpositioning), 10.260 (Front Running of Block Transactions), 
11.420(c), (d) and (e) (Order Audit Trail System Requirements), 
12.110 (Arbitration), respectively. LTSE also proposes to 
incorporate by reference certain definitions from NYSE Rule 7410. 
See LTSE Rule 11.420(a) (Order Audit Trail System Requirements).
    \203\ See 17 CFR 240.0-12.
    \204\ See Exemption Request Letter and Exemption Request Letter 
Addendum, supra note 201.
    \205\ LTSE will provide such notice through a posting on the 
same website location where LTSE posts its own rule filings pursuant 
to Rule 19b-4 under the Act, within the required time frame. The 
website posting will include a link to the location on the FINRA or 
NYSE website where FINRA's or NYSE's proposed rule change is posted. 
See id.
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    Using its authority under Section 36 of the Act,\206\ the 
Commission is hereby granting LTSE's request for an exemption, pursuant 
to Section 36 of the Act, from the rule filing requirements of Section 
19(b) of the Act with respect to the rules that LTSE proposes to 
incorporate by reference. \207\ This exemption is conditioned upon LTSE 
providing written notice to its members whenever FINRA or the NYSE 
proposes to change a rule that LTSE has incorporated by reference. The 
Commission believes that this exemption is appropriate in the public 
interest and consistent with the protection of investors because it 
will promote more efficient use of Commission and SRO resources by 
avoiding duplicative rule filings based on simultaneous changes to 
identical rules of more than one SRO.
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    \206\ 15 U.S.C. 78mm.
    \207\ The Commission previously exempted certain SROs from the 
requirement to file proposed rule changes under Section 19(b) of the 
Act. See, e.g., IEX Order, supra note 48; ISE Mercury Order, supra 
note 50; MIAX Pearl Order, MIAX Pearl Order and BATS Order, supra 
note 35; DirectEdge Exchanges Order, supra note 59.
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H. Conclusion

    It is ordered that the application of LTSE for registration as a 
national securities exchange be, and it hereby is, granted.
    It is furthered ordered that operation of LTSE is conditioned on 
the satisfaction of the requirements below:
    A. Participation in National Market System Plans. LTSE must join 
the Consolidated Tape Association Plan, the Consolidated Quotation 
Plan, the Nasdaq UTP Plan, the National Market System Plan Establishing 
Procedures Under Rule 605 of Regulation NMS, the Regulation NMS Plan to 
Address Extraordinary Market Volatility, the Plan for the Selection and 
Reservation of Securities Symbols, and the National Market System Plan 
Governing the Consolidated Audit Trail.
    B. Intermarket Surveillance Group. LTSE must join the Intermarket 
Surveillance Group.
    C. Minor Rule Violation Plan. A MRVP filed by LTSE under Rule 19d-
1(c)(2) must be declared effective by the Commission.\208\
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    \208\ 17 CFR 240.19d-1(c)(2).
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    D. Rule 17d-2 Agreement. An agreement pursuant to Rule 17d-2 \209\ 
that allocates regulatory responsibility for those matters specified 
above \210\ must be approved by the Commission, or LTSE must 
demonstrate that it independently has the ability to fulfill all of its 
regulatory obligations.
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    \209\ 17 CFR 240.17d-2.
    \210\ See supra notes 116-117 and accompanying text.
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    E. Participation in Multi-Party Rule 17d-2 Plans. LTSE must become 
a party to the multi-party Rule 17d-2 agreements concerning the 
surveillance, investigation, and enforcement of common insider trading 
rules.
    F. RSA. LTSE must finalize the provisions of the RSA with its 
regulatory services provider, as described above, that will specify the 
LTSE and Commission rules for which the regulatory services provider 
will provide certain regulatory functions, or LTSE must demonstrate 
that it independently has the ability to fulfill all of its regulatory 
obligations.
    It is further ordered, pursuant to Section 36 of the Act,\211\ that 
LTSE shall be exempted from the rule filing requirements of Section 
19(b) of the Act with respect to the FINRA and NYSE rules that LTSE 
proposes to incorporate by reference into LTSE's rules, subject to the 
conditions specified in this Order.
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    \211\ 15 U.S.C. 78mm.

    By the Commission.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-10037 Filed 5-14-19; 8:45 am]
 BILLING CODE 8011-01-P