[Federal Register Volume 79, Number 21 (Friday, January 31, 2014)]
[Notices]
[Pages 5481-5491]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-01969]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71408; File No. SR-NYSEMKT-2014-08]
Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of
Proposed Rule Change Amending Various Sections of Both the Limited
Liability Company Agreement of NYSE Amex Options LLC Dated as of June
29, 2011 and the Members Agreement Dated as of June 29, 2011 By and
Among the Company, NYSE MKT, NYSE Euronext, Banc of America Strategic
Investments Corporation, Barclays Electronic Commerce Holdings Inc.,
Citadel Securities LLC, Citigroup Financial Strategies, Inc., Goldman,
Sachs & Co., Datek Online Management Corp. and UBS Americas Inc. In
Order To Make Certain Technical Changes Within the Aforementioned
Agreements
January 27, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on January 14, 2014, NYSE MKT LLC (``NYSE MKT'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the self-regulatory organization. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C.78s(b)(1).
\2\ 17 CFR 240.19-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to various sections of both the Limited
Liability Company Agreement of NYSE Amex Options LLC (the ``Company'')
dated as of June 29, 2011 (as amended,\3\ the ``LLC Agreement'') and
the Members Agreement dated as of June 29, 2011 by and among the
Company, NYSE MKT, NYSE Euronext, Banc of America Strategic Investments
Corporation, Barclays Electronic Commerce Holdings Inc., Citadel
Securities LLC, Citigroup Financial Strategies, Inc., Goldman, Sachs &
Co., Datek Online Management Corp. and UBS Americas Inc. (collectively,
excluding the Company, NYSE MKT and NYSE Euronext, the ``Founding
Firms'') (as amended,\4\ the ``Members Agreement'') in order to make
certain technical changes within the aforementioned agreements (the
``Proposed Rule Change''). The text of the proposed rule change is
available on the Exchange's Web site at www.nyse.com, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
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\3\ See Securities Exchange Act Release No. 34-69388 (April 17,
2013), 78 FR 23963 (Notice of filing and immediate effectiveness of
a proposed rule change amending the Members' Schedule of NYSE Amex
Options LLC in order to reflect changes to the capital structure of
the Company); Securities Exchange Act Release No. 34-67702 (August
21, 2012), 77 FR 51837 (Notice of filing and immediate effectiveness
of a proposed rule change amending the NYSE Amex Options LLC Limited
Liability Company Agreement to eliminate certain restrictions
relating to the qualification of Founding Firm Advisory Committee
Members); Securities Exchange Act Release No. 34-67902 (September
21, 2012), 77 FR 59423 (Order granting approval of a proposed rule
change amending the Members' Schedule of NYSE Amex Options LLC in
order to reflect changes to the capital structure of the Company);
Securities Exchange Act Release No. 34-67569 (August 1, 2012), 77 FR
47138 (Notice of filing of a proposed rule change amending the
Members' Schedule of NYSE Amex Options LLC in order to reflect
changes to the capital structure of the Company).
\4\ See Securities Exchange Act Release No. 34-69247 (March 27,
2013), 78 FR 19777 (Notice of filing and immediate effectiveness of
a proposed rule change to modify the NYSE Amex Options LLC fee
schedule to establish fees for mini-options contracts). Certain
provisions of the Members Agreement related to the Volume-Based
Equity Plan were duly amended by the Board on August 30, 2012.
Changes to the Volume-Based Equity Plan do not constitute proposed
rule changes within the meaning of Section 19(b)(1) of the Act and
Rule 19b-4 thereunder. See Securities Exchange Act Release No. 34-
64742 (June 24, 2011), 76 FR 38436, 38443.
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below.
[[Page 5482]]
The Exchange has prepared summaries, set forth in sections A, B, and C
below, of the most significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
On June 29, 2011, the Exchange, its ultimate parent NYSE Euronext
and the Founding Firms formed the Company. The Company operates an
electronic trading facility (the ``Options Exchange'') that engages in
the business of listing for trading options contracts permitted to be
listed on a national securities exchange (or facility thereof) and
related activities. The Company operates pursuant to the LLC Agreement
and the Members Agreement. The Exchange proposes to make technical
amendments to various sections of both the LLC Agreement and the
Members Agreement as further described herein.\5\
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\5\ All capitalized terms used in this Proposed Rule Change that
are not otherwise defined in this Proposed Rule Change shall have
the meanings specified in the Amended LLC Agreement or Amended
Members Agreement, as applicable.
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Summary
The Exchange proposes to make certain technical modifications and
clarifications to certain provisions of the LLC Agreement and the
Members Agreement. Specifically, the Exchange proposes to make
amendments that clarify:
(1) Differences between voting entitlements and economic
entitlements associated with Common Interests, where appropriate;
(2) provisions of the LLC Agreement and the Members Agreement
related to the capital structure of the Company;
(3) provisions of the LLC Agreement related to capital calls to
provide greater specificity as to the matters to be decided by the
board of directors of the Company (the ``Board'') in connection with a
capital call and as to matters surrounding oversubscription and the
issuance of Common Interests in connection with capital calls;
(4) provisions of the LLC Agreement related to ownership
limitations to clarify the mechanism for maintaining compliance with
applicable laws and regulations;
(5) provisions of the LLC Agreement related to royalty payments to
clarify the effect of such payments on the Capital Account of NYSE MKT;
(6) provisions of the LLC Agreement related to distributions with
respect to equity interests to clarify how the amounts of annual
distributions to Members are determined;
(7) provisions of the LLC Agreement related to restricted member
elections to clarify the circumstances under which a Member may become
a Restricted Member;
(8) provisions of the LLC Agreement related to the composition of
the Board to clarify the mechanism by which the Board may increase in
size;
(9) provisions of the LLC Agreement related to the Founding Firm
Advisory Committee to clarify the mechanism by which the Founding Firm
Advisory Committee may increase in size;
(10) provisions of the LLC Agreement governing a Member's
obligations with respect to the treatment of Confidential Information
in order to clarify the scope of such policies and procedures;
(11) provisions of the LLC Agreement and Members Agreement related
to transfers of Common Interests to clarify the mechanics by which
Common Interests may be transferred, including the mechanics by which
Common Interests may be converted into Non-voting Common Interests (and
then converted back to Common Interests, when and as applicable) and
applicable time periods for effecting transfers;
(12) provisions of the Members Agreement related to the Volume-
Based Equity Plan to clarify (i) the mechanism by which the Volume
Dispute Committee may increase in size and (ii) the calculation of
Industry Volume and the determination whether a Founding Firm has
achieved its Individual Target; \6\ and
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\6\ Changes to the Volume-Based Equity Plan do not constitute
proposed rule changes within the meaning of Section 19(b)(1) of the
Act and Rule 19b-4 thereunder. See Securities Exchange Act Release
No. 34-64742 (June 24, 2011), 76 FR 38436, 38443. The changes to
these provisions are being made simultaneously with the other
changes described herein for convenience and are described here in
the interest of completeness.
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(13) provisions of the Members Agreement related to the
determination of fair market value of a Member's Common Interests and
of the Company to clarify how such fair market value is determined
under various circumstances.
In addition, the Exchange proposes to make several typographical
corrections.
The technical modifications described herein are not intended to
substantively change the relevant provisions set forth in either the
LLC Agreement or the Members Agreement, but only to ensure that, from a
technical perspective, the LLC Agreement and Members Agreement clearly
reflect the original intentions of the parties to those agreements.
Economic and Voting Common Interests
As a limited liability company, ownership of the Company is
represented by limited liability company interests in the Company
(``Interests''). The Interests represent equity interests in the
Company and entitle the holders thereof to participate in the Company's
allocations and distributions. The Interests are divided into preferred
non-voting interests (``Preferred Interests''), Class A Common
Interests and Class B Common Interests.
The holders of Interests are referred to as members of the Company
(``Members''). The LLC Agreement designates Members as either Class A
Members or Class B Members. Generally, Class A Members and Class B
Members are distinguishable in that Class A Members hold Class A Common
Interests and Class B Members hold Class B Common Interests.
Class A Common Interests and Class B Common Interests are not
intended to be directly fungible (meaning that one Class A Common
Interest does not represent the equivalent entitlements of one Class B
Common Interest). This dissimilarity results from the operation of the
Volume-Based Equity Plan, as set forth in Article II of the Members
Agreement, pursuant to which, each year (until 2015, unless extended by
the Board) the Company may issue additional Class B Common Interests as
Incentive Shares without at the same time issuing new Class A Common
Interests. These Incentive Shares would be allocated among the Class B
Members based on each Class B Member's contribution to the volume of
the Exchange relative to an Individual Target, which would have the
effect of changing the relative economic and voting rights among the
Class B Members. However, Incentive Shares have no effect on the
relative economic and voting rights as between Class A Members (in the
aggregate) and Class B Members (in the aggregate). As a result, the
aggregate number of Class B Common Interests may increase while the
relative economic or voting rights of Class B Members (in the
aggregate) vis-[agrave]-vis Class A Members (in the aggregate) remain
unchanged. The overall impact of the issuance of Incentive Shares,
then, is to dilute the value of each Class B Common Interest relative
to each Class A Common Interest.
[[Page 5483]]
Certain provisions of the LLC Agreement prohibit Members from
owning or voting Interests in excess of applicable regulatory
thresholds (as discussed in Sections 4.9 and 7.5 of the LLC Agreement).
If a Member exceeds such thresholds, it may be necessary to separate
the economic and voting entitlements associated with such Member's
Interests (in addition to limiting entitlements to the relevant
thresholds). To account for such situations, a Member's Common
Interests represent separate entitlements to net profits, net losses
and distributions (an ``Economic Common Interest Percentage'' \7\) and
entitlements to vote (a ``Voting Common Interest Percentage'' \8\).
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\7\ ``Economic Common Interest Percentage'' is defined in the
Amended LLC Agreement to mean, at any time, (A) with respect to the
Common Interests owned by one or more Class A Member(s), the product
of (w) the Aggregate Class A Economic Allocation multiplied by (x) a
fraction, (1) the numerator of which shall be the number of Class A
Common Interests then held by such Class A Member(s) (including any
Class A Non-voting Common Interests) and (2) the denominator of
which shall be the number of Class A Common Interests then owned by
all Class A Members (including any Class A Non-voting Common
Interests), and (B) with respect to the Common Interests owned by
one or more Class B Member(s), the product of (y) the Aggregate
Class B Economic Allocation multiplied by (z) a fraction, (1) the
numerator of which shall be the number of Class B Common Interests
then owned by such Class B Member(s) (including any Class B Non-
voting Common Interests) and (2) the denominator of which shall be
the number of Class B Common Interests then owned by all Class B
Members (including any Class B Non-voting Common Interests).
\8\ ``Voting Common Interest Percentage'' is defined in the
Amended LLC Agreement to mean, at any time, (A) with respect to the
Common Interests owned by one or more Class A Member(s), the product
of (w) the Aggregate Class A Voting Allocation multiplied by (x) a
fraction, (1) the numerator of which shall be the number of Class A
Common Interests then owned by such Class A Member(s) excluding any
Class A Non-voting Common Interests and (2) the denominator of which
shall be the number of Class A Common Interests then owned by all
Class A Members excluding all Class A Non-voting Common Interests,
and (B) with respect to Common Interests owned by one or more Class
B Member(s), the product of (y) the Aggregate Class B Voting
Allocation multiplied by (z) a fraction, (1) the numerator of which
shall be the number of Class B Common Interests then owned by such
Class B Member(s) excluding any Class B Non-voting Common Interests
and (2) the denominator of which shall be the number of Class B
Common Interests then owned by all Class B Members excluding all
Class B Non-voting Common Interests.
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By way of example, consider a Class B Member that is subject to a
hypothetical regulatory restriction that prevents it from holding
greater than a 15% voting interest in the Company. If such Class B
Member earned Incentive Shares by operation of the Volume-Based Equity
Plan that would bring its Economic Common Interest Percentage and
Voting Common Interest Percentage to 18%, it would need to convert some
of its Class B Common Interests into Non-voting Common Interests.\9\
Following such a conversion, the Class B Member would hold Class B
Common Interests (some of which would be Non-voting Common Interests)
representing a Voting Common Interest Percentage of 15% and an Economic
Common Interest Percentage of 18%.
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\9\ The mechanics for how Common Interests may be converted into
Non-voting Common Interests are included in proposed Section 11.2(c)
of the Amended LLC Agreement and are discussed in greater detail
under the heading ``Transfers of Interests--Converting Common
Interests to Non-voting Common Interests.''
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As a result of this potential deviation between a Member's economic
entitlement and its voting entitlement, it is appropriate, in certain
circumstances, to refer to either a Member's Voting Common Interest
Percentage or its Economic Common Interest Percentage. For example, a
Member's participation in a capital call would be based on its Economic
Common Interest Percentage rather than its Voting Common Interest
Percentage. As further discussed below, however, the restriction on a
Member's ability to own or vote Common Interests representing an
Economic Common Interest Percentage or a Voting Common Interest
Percentage in excess of nineteen and nine-tenths percent (19.9%) will
continue to apply (other than to NYSE MKT alone, or, subject to
appropriate SEC approval, together with its Permitted Transferees), so
that no such Member's Economic Common Interest Percentage or Voting
Common Interest Percentage will be permitted to exceed nineteen and
nine-tenths percent (19.9%).
Under the existing agreements, various provisions refer to a
Member's ``Common Interest Percentage'' to denote a Member's ownership
interest in the Company. The term is meant to capture the percentage of
economic or voting rights represented by the absolute number of Common
Interests held by such Member. However, because (i) the term ``Common
Interest Percentage'' does not, in all cases, properly convey the
distinction between a Member's voting entitlement and its economic
entitlement and (ii) various sections refer to an absolute number of
Common Interests rather than a relative percentage, the Exchange
proposes to amend the references to a Member's Common Interests or
Common Interest Percentage in Sections 1.1, 4.3, 4.4, 4.5, 4.9, 5.1,
5.2, 5.3, 5.4, 6.1, 7.5, 8.1, 9.1, 9.2, 10.3, 11.2, 11.3, 11.5, 11.8,
12.2, 12.4, 12.5, 13.2, 16.10 and Schedule 8.1(i)(v) of the LLC
Agreement and Sections 1.1, 2.1, 3.2, 3.3, 3.4, 4.1 and 5.10 of the
Members Agreement to more directly specify when the entitlement being
referred to is the Member's economic entitlement rather than its voting
entitlement and vice versa.
Capital Structure
Sections 4.1 and 10.1 of the LLC Agreement describe the capital
structure of the Company. Since the formation of the Company, the
Company has entered into five transactions that have altered its
capital structure: (i) The admission of NYSE Market, Inc. (``NYSE
Market'') as a Member of the Company in conjunction with the transfer
of Common Interests by the Founding Firms to NYSE Market on September
19, 2011 pursuant to Sections 10.4 and 11.1 of the LLC Agreement and
Section 3.2 of the Members Agreement, (ii) the issuance of Annual
Incentive Shares to the Founding Firms on February 29, 2012 pursuant to
Section 2.1 of the Members Agreement (iii) the transfer of Common
Interests by the Founding Firms to NYSE Market on October 1, 2012
pursuant to Article XI of the LLC Agreement and Section 3.1 of the
Members Agreement, (iv) the issuance of Annual Incentive Shares to the
Founding Firms on February 28, 2013 pursuant to Section 2.1 of the
Members Agreement and (v) the transfer of Common Interests by the
Founding Firms to NYSE Market on April 2, 2013 pursuant to Article XI
of the LLC Agreement and Section 3.1 of the Members Agreement. All five
transactions, along with the resultant changes to the Company's
Members' Schedule, have been approved by the SEC.\10\
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\10\ See Securities Exchange Act Release No. 34-69388 (April 17,
2013), 78 FR 23963 (Notice of filing and immediate effectiveness of
a proposed rule change amending the Members' Schedule of NYSE Amex
Options LLC in order to reflect changes to the capital structure of
the Company) (``Release No. 34-69388''); Securities Exchange Act
Release No. 34-67902 (September 21, 2012), 77 FR 59423 (Order
granting approval of a proposed rule change amending the Members'
Schedule of NYSE Amex Options LLC in order to reflect changes to the
capital structure of the Company); see also Securities Exchange Act
Release No. 34-67569 (August 1, 2012), 77 FR 47138 (Notice of filing
of a proposed rule change amending the Members' Schedule of NYSE
Amex Options LLC in order to reflect changes to the capital
structure of the Company).
The Commission notes that the transactions and corresponding
changes to the Company's governing documents that were the subject
of Release No. 34-69388 (April 17, 2013) were filed pursuant to
Section 19(b)(3)(A)(iii) of the Exchange Act (15 U.S.C.
78s(b)(3)(A)(iii)) and Rule 19b-4(f)(6) thereunder (17 CFR 240.19b-
4(f)(6)). As a result, that filing was not approved by the
Commission; rather, it became immediately effective upon filing.
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The Exchange proposes to amend the preamble, Sections 4.1, 10.1,
10.2 and
[[Page 5484]]
10.4 and Schedule A of the LLC Agreement to eliminate references to
historical capital contributions and to provide, instead, a description
of the Company's capitalization as it currently stands. The Exchange
also proposes to amend the cover page and the preamble of the Members
Agreement to provide context for the execution of the Amended Members
Agreement.
In addition, the Exchange proposes to amend the definition of the
term ``Effective Date'' in Section 1.1 of the LLC Agreement to provide
that the LLC Agreement and Members Agreement are only effective with
respect to a Person as of the time such Person becomes a Member of the
Company. Relatedly, the Exchange proposes to replace the term
``Effective Date'' with the term ``Initial Effective Date'' in the
preamble, Sections 1.1, 4.3, 4.4, 4.8, 8.1, 8.3, 8.6, 11.8, 14.1, 14.2,
16.2, 16.3 and Schedule 8.1(i)(v) of the Amended LLC Agreement and
Sections 3.4, 5.3, 5.13 and Schedule 5.3 of the Amended Members
Agreement in order to clarify that time periods in the Amended LLC
Agreement and the Amended Members Agreement that are based on the date
the LLC Agreement and Members Agreement were originally executed remain
unchanged.
Because the admission of NYSE Market results in there now being
more than one Class A Member, the Exchange proposes to amend Section
3.3 of the Members Agreement to clarify that it applies to transfers by
NYSE MKT as well as any other Person that is or becomes a Class A
Member. Similarly, to account for there being more than one Class A
Member, the Exchange proposes to amend Section 10.2(b) of the LLC
Agreement to clarify that Class A Common Interests will be owned only
by NYSE MKT and its Permitted Transferees such as NYSE Market, its
affiliate. Furthermore, to account for the possibility of more than one
Person holding Preferred Interests, the Exchange proposes to amend the
definition of ``Priority Claim'' in Section 1.1 of the LLC Agreement to
clarify that distributions to owners of Preferred Interests shall be
accomplished on a pro rata basis in accordance with the number of
Preferred Interests owned by each such owner.\11\
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\11\ Note that NYSE MKT is currently the only holder of
Preferred Interests and it is not currently anticipated that any
Preferred Interests will be issued to any other Person.
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In addition, as NYSE Market is an affiliate of NYSE MKT, the
Exchange proposes to amend Sections 1.1, 8.1 and 11.2 of the LLC
Agreement and Sections 3.3 and 3.4 of the Members Agreement to clarify
that these provisions apply to NYSE MKT as well as NYSE MKT's
Affiliates.
Finally, the Exchange proposes to amend the LLC Agreement and the
Members Agreement in their entirety to change references to NYSE Amex
to NYSE MKT.
Capital Calls
Pursuant to Sections 4.3, 4.4 and 4.5 of the LLC Agreement, Members
may be subject to both regulatory and voluntary capital calls.
Generally, capital calls may be issued by the Board from time to time
subject to certain limitations. In connection with a voluntary capital
call, participating Members are entitled to have their respective
Economic Common Interest Percentages and Voting Common Interest
Percentages increased in respect of their capital contributions, while
the Economic Common Interest Percentages and Voting Common Interest
Percentages of non-participating Members are accordingly reduced.
To further specify the mechanics of a capital call and related
capital contributions, the Exchange proposes to amend Sections 4.3, 4.4
and 4.5 of the LLC Agreement. First, the Exchange proposes to amend
Sections 4.3 and 4.4 to require the Board to specify certain items in
connection with a capital call. Specifically, the Exchange proposes to
require that the Board specify: the aggregate amount of the capital
call, the date by which a capital contribution in respect of the
capital call must be made, the fair market value of the Company with
respect to such capital call (without giving effect to any capital
contributions in respect of such capital call), the Per Common Interest
FMV \12\ with respect to such capital call (without giving effect to
any capital contributions in respect of such capital call) and such
other matters as the Board may determine.
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\12\ ``Per Common Interest FMV'' is proposed to be defined in
the Amended LLC Agreement to mean, with respect to any regulatory or
voluntary capital call, (A) with respect to a Class A Common
Interest, the quotient of (I) the product of (x) the FMV of the
Company with respect to such Regulatory Capital Call or Voluntary
Capital Call, as applicable, multiplied by (y) the Aggregate Class A
Economic Allocation divided by (II) the total number of issued and
outstanding Class A Common Interests at such time; (B) with respect
to a Class B Common Interest, the quotient of (I) the product of (x)
the FMV of the Company with respect to such Regulatory Capital Call
or Voluntary Capital Call, as applicable, multiplied by (y) the
Aggregate Class B Economic Allocation divided by (II) the total
number of issued and outstanding Class B Common Interests at such
time.
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The Exchange also proposes to amend Section 4.4 of the LLC
Agreement in order to clarify that, should a participating Member (or
class of Members) oversubscribe to a voluntary capital call,
appropriate adjustments will be made to the Economic Common Interest
Percentages and Voting Common Interest Percentages of the affected
Members. To effect these adjustments, Section 4.4 of the Amended LLC
Agreement provides that: (1) Appropriate adjustments shall be made to
the Aggregate Class A Economic Allocation, Aggregate Class A Voting
Allocation, Aggregate Class B Economic Allocation and Aggregate Class B
Voting Allocation, (2) the Company shall issue Class A Common Interests
or Class B Common Interests as necessary to the relevant Members, and
(3) the Members' Schedule shall be adjusted accordingly. Any such
adjustments will be subject to regulatory limitations including those
contained in Section 4.9 of the Amended LLC Agreement. The Exchange
proposes to further clarify that if each Member contributes its pro
rata share of a voluntary capital call, such that no adjustments need
be made to any Member's Economic Common Interest Percentage or Voting
Common Interest Percentage, no new Common Interests shall be issued to
any Member in connection with such voluntary capital call.
In addition, the Exchange proposes to amend Section 4.5(b) of the
LLC Agreement to clarify the consequences of a Member failing to fund
either (x) its pro rata portion of a regulatory capital call or (y) if
the Member has committed to participate in a voluntary capital call,
its portion of the voluntary capital call (such Member, a ``Non-Funding
Member'' and the amount it fails to contribute, its ``Requested
Amount''). Generally, the Board has the right to transfer the Common
Interests a Non-Funding Member would have received had it participated
in a regulatory or voluntary capital call (``Non-Funded Interests'') to
the existing Members of the Company or, should the Members not purchase
all of the Non-Funded Interests, to a Person who is not a Member.
The Exchange proposes to amend the proviso to Section 4.5(b) of the
LLC Agreement by adding three provisions. First, clause (C) of the
proviso to Section 4.5(b) of the Amended LLC Agreement provides that
the aggregate number of Non-Funded Interests shall be equal to the
quotient of (i) the Requested Amount divided by (ii) the relevant Per
Common Interest FMV.
In addition, the Exchange proposes to add clause (D) of the proviso
to Section 4.5(b) of the Amended LLC Agreement to clarify that, with
respect to a
[[Page 5485]]
regulatory capital call, each Member that is not a Non-Funding Member
shall be entitled to receive a number of new Class A Common Interests
or Class B Common Interests, as applicable, equal to the quotient of
(i) such Member's regulatory capital contribution divided by (ii) the
applicable Per Common Interest FMV. In addition, the Capital Account of
each such Member shall be increased by the sum of its regulatory
capital contribution plus the amount of the regulatory capital
contribution attributable to the Non-Funded Interests acquired by such
Member. This provision is designed to mirror Section 4.4(e) of the
Amended LLC Agreement. Thus, under the Amended LLC Agreement, a
regulatory capital call in which not all Members fully participate (by
making capital contributions on a pro rata basis) would be treated
similarly to a voluntary capital call in which the Members do not all
participate on a pro rata basis.
Finally, the Exchange proposes to add clause (E) of the proviso to
Section 4.5(b) of the Amended LLC Agreement to provide that a Member
that acquires Non-Funded Interests will be entitled to receive
additional Class A Common Interests or Class B Common Interests, as
applicable, to supplement those Common Interests that such Member was
entitled to receive pursuant to either Section 4.4(e) of the Amended
LLC Agreement (in the case of a voluntary capital call) or clause (D)
described above (in the case of a regulatory capital call) by virtue of
having made its initial contribution to the relevant capital call.
Example 4 in Exhibit 5C demonstrates the operation of these
provisions.
Ownership Limitations
Section 4.9 of the LLC Agreement provides a mechanism by which
Members who exceed certain regulatory thresholds with respect to
ownership or voting entitlements may come into compliance with the
applicable regulatory framework.
The Exchange proposes to clarify that a Member may be subject to
the provisions of Section 4.9 (such a Member, an ``Exceeding Member'')
either as a result of a regulatory threshold applicable directly to the
Member's holdings of Common Interests or as a result of regulations
applicable to the Company that operate to impose a regulatory threshold
on each Member's holdings of Common Interests. Specifically, the
Exchange proposes to clarify that a Member's ``Alternative Maximum
Percentage'' is the lower of (1) the maximum Voting Common Interest
Percentage or Economic Common Interest Percentage such Member (alone or
together with its Affiliates) may own or vote under applicable Law or
(2) the maximum Voting Common Interest Percentage or Economic Common
Interest Percentage such Member (alone or together with its Affiliates)
may own or vote without subjecting the Company to material regulatory
obligations or material liabilities or a reasonable likelihood of
material regulatory obligations or material liabilities arising as a
result of the extent of such ownership or voting interest.
In addition, the Exchange proposes to amend Section 4.9 to clarify
the mechanics by which ordinary Common Interests may be converted into
Non-voting Common Interests pursuant to Section 11.2(c) of the Amended
LLC Agreement, as described below under the heading ``Transfers of
Interests''.
The proposed changes do not have any effect on the restrictions on
a Member's ability to own or vote Common Interests representing an
Economic Common Interest Percentage or a Voting Common Interest
Percentage in excess of nineteen and nine-tenths percent (19.9%).
Royalty Payments
Pursuant to Section 4.10 of the LLC Agreement, NYSE MKT is required
to make a capital contribution to the Company in the event that certain
royalty fees are invoiced to the Company pursuant to the NYSE Euronext
Agreement. The amount of this capital contribution is required to be
equal to the amount of this royalty fee.
The Exchange proposes to amend Section 4.10 of the LLC Agreement to
clarify that the amount of any such capital contribution shall increase
the capital account of NYSE MKT and the amount of any such royalty fee
shall decrease the capital account of NYSE MKT.
Distributions
Pursuant to Section 6.1 of the LLC Agreement, the Board is
obligated to distribute annually the Company's Available Cash \13\ to
the holders of Preferred Interests and to the other Members.
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\13\ ``Available Cash'' is defined in the LLC Agreement to mean,
with respect to a distribution pursuant to Section 6.1 of the LLC
Agreement, cash (excluding cash in the redemption reserve) held by
the Company at the time of such distribution that both (i) is not
required for the operations of the Company based on the annual
budget of the Company for such year, and (ii) the Board determines
in good faith is not required for (A) the payment of liabilities or
expenses of the Company or (B) the setting aside of reserves to meet
the anticipated cash needs of the Company.
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The Exchange proposes to amend Section 6.1 of the LLC Agreement to
clarify that the amounts of distributions of Available Cash to each
Member shall be calculated on an ``accrual'' basis, which shall be
measured on the basis of the calendar year period during which the
Members actually own their respective Common Interests, in accordance
with the Amended LLC Agreement or otherwise as the Members may
agree.\14\
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\14\ By way of example, assume a Member holds Common Interests
representing an Economic Common Interest Percentage of 10% on
January 1, 2012. Assume further that this Member divests itself of
10% of its Common Interests on March 31, 2012, so that its Economic
Common Interest Percentage is reduced to 9%. At the time of the
distribution of Available Cash, the Member shall be entitled to more
than 9% of such distribution, to reflect the fact that the Member
held 10% for the period from January 1, 2012 through March 31, 2012.
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Restricted Members
Section 7.5 of the LLC Agreement provides a mechanism by which a
Member who owns Interests in excess of such Member's Alternative
Maximum Percentage or who owns an Interest entitling such Member to
distributions in excess of such Member's maximum percentage of the
distributions (a ``Capped Distribution Amount'') then being made to all
Members may, from time to time, make an election (a ``Restricted Member
Election''), by written notice to the Company, to be treated for
purposes of the LLC Agreement as a ``Restricted Member,'' solely with
respect to its Excess Interest Percentage or Capped Distribution
Amount.
Any Class B Member, even one who does not own Interests in excess
of such Member's Alternative Maximum Percentage, may make a Restricted
Member Election. The Exchange proposes to amend Section 7.5(a) to
clarify that the restricted member provisions only apply to Class B
Members. The Exchange also proposes to amend Section 7.5(a) to clarify
that, in those circumstances where a Restricted Member may reverse its
election, it may do so in whole or in part.
The Exchange proposes to amend Section 7.5(b) of the LLC Agreement
and delete Section 7.5(d) of the LLC Agreement in order to clarify the
circumstances under which a Class B Member that has not exceeded its
Alternative Maximum Percentage may become a Restricted Member.
Specifically, the Exchange proposes to amend Section 7.5(b) of the LLC
[[Page 5486]]
Agreement to clarify that a Class B Member may make a Restricted Member
Election with respect to any of its Class B Common Interests, even if
such Class B Common Interests do not represent an Excess Interest
Percentage; provided that (1) such Class B Member may only reverse such
election under the circumstances described in Section 7.5(a)(iii)(C) of
the Amended LLC Agreement and (2) the Voting Common Interest Percentage
represented by such Class B Common Interests shall be deemed to be an
``Excess Interest Percentage'' (and such Class B Member shall be
treated as a Converting Member with respect thereto) unless and until
such Class B Member reverses the Restricted Member Election under the
circumstances described in Section 7.5(a)(iii)(C) of the Amended LLC
Agreement.
Composition of the Board
Pursuant to Section 8.1(d) of the LLC Agreement, subject to certain
restrictions, each Member is entitled to appoint Directors to serve on
the Board. Generally, each Founding Firm, subject to certain
restrictions, is entitled to appoint one (1) Director and NYSE MKT is
entitled to appoint up to seven (7) Directors. In addition, in the
event that additional Founding Firms are entitled to appoint Directors
to the Board resulting in an increase in the size of the Board, NYSE
MKT is entitled to appoint additional Directors corresponding to the
number of new Directors appointed by Founding Firms, so that NYSE MKT,
subject to certain conditions, shall have the right to appoint a number
of Directors to the Board that is equal to the number appointed by the
Founding Firms plus one. NYSE MKT is further required to appoint a
number of Directors (not to exceed the 7 Directors NYSE MKT is
otherwise entitled to appoint) sufficient to ensure that no single
Founding Firm's designees to the Board constitute twenty percent (20%)
or a greater percentage of the Board.
The Exchange proposes to amend Section 8.1(d)(i) of the LLC
Agreement to clarify that, in the event that the Board increases in
size, NYSE MKT would be entitled and required to appoint a number of
Directors in excess of the 7 Directors it is otherwise entitled to
appoint to ensure that no single Founding Firm's designees constitute
twenty percent (20%) or a greater percentage of the Board.
Founding Firm Advisory Committee
Pursuant to Section 8.3 of the LLC Agreement, the Board has
established a Founding Firm Advisory Committee comprised of natural
persons having the capacity to provide advice to the Board, which
advice the Board will consider in good faith but shall not be bound by,
with respect to subjects identified by the Board from time to time,
including new products and market structure. Members of the Founding
Firm Advisory Committee are appointed by the Members as follows: two
(2) Advisory Committee Members are appointed by NYSE MKT and one (1)
Advisory Committee Member is appointed by each Founding Firm.
The Exchange proposes to amend Section 8.3 of the LLC Agreement to
clarify that, upon the admission to the Company of a new Member that is
deemed to be a Founding Firm pursuant to Section 11.1(c) of the LLC
Agreement, the authorized number of Advisory Committee Members shall
automatically be increased by one.
Policies Related to Confidential Information
Section 7.4 of the LLC Agreement requires that each Member maintain
commercially reasonable policies and procedures to prevent the
disclosure of Confidential Information of the Company by any Director,
alternate Director, observer to the Board or any committee of the Board
or Advisory Committee Member to any other individual appointed by such
Member to perform a similar role with respect to, or who is an officer
or employee of, a Specified Entity.
The Exchange proposes to amend Section 7.4 of the LLC Agreement to
provide that each Member maintain policies and procedures to prevent
the disclosure of Confidential Information to a Specified Entity
generally, rather than to individuals performing specified roles at a
Specified Entity.
Transfers of Interests
Article XI of the LLC Agreement and Article III of the Members
Agreement specify certain conditions under which Members may Transfer
their Common Interests. Under the LLC Agreement, acquisitions of Class
A Common Interests by Class B Members or Class B Common Interests by
Class A Members require the recalculation of the Aggregate Class A
Allocation and the Aggregate Class B Allocation.
The Exchange proposes to amend Section 11.2(a) of the LLC Agreement
and Section 3.1 of the Members Agreement to clarify that the provisions
of Section 11.2 of the LLC Agreement and Article III of the Members
Agreement apply to transfers among the Members as well as to transfers
to third parties. In addition, the Exchange proposes to amend Section
11.2 of the LLC Agreement to clarify the mechanics by which (1) Common
Interests may be transferred among Members or redeemed, and (2) Common
Interests may be converted into Non-voting Common Interests. These
amendments are not intended to substantively change these mechanics,
but rather to clarify, as a technical matter, the specific changes that
are required to be made to the Members' Schedule to reflect such
transactions. Exhibit 5C includes examples of how these mechanics may
be implemented from time to time.
The Exchange also proposes to make certain conforming changes to
the Members Agreement to clarify that the mechanics described below are
applicable to transfers authorized thereunder.
In addition, the Exchange proposes to clarify that the call option
granted to NYSE MKT pursuant to Section 3.4 of the Members Agreement is
granted solely by the Class B Members.
Finally, the Exchange proposes to amend provisions in the Members
Agreement to clarify the time periods during which Members may elect to
transfer their Common Interests and relevant deadlines with respect to
such transfers.
Transfers Among Members; Redemptions
The Exchange proposes to clarify that following any transfer or
redemption of Class A Common Interests or Class B Common Interests, the
Aggregate Class A Economic Allocation, the Aggregate Class A Voting
Allocation, the Aggregate Class B Economic Allocation, the Aggregate
Class B Voting Allocation and the number of Class A Common Interests
and Class B Common Interests shall be adjusted, subject in each case to
Section 4.9 of the Amended LLC Agreement, as follows, to reflect such
transfers or redemptions:
(i) In the case of an acquisition of Class B Common Interests by a
Class A Member or any of its Affiliates,
(A) the Aggregate Class A Economic Allocation shall be increased by
the Economic Common Interest Percentage represented by the Class B
Common Interests so acquired and the Aggregate Class B Economic
Allocation shall be reduced by an equal percentage,
(B) the Aggregate Class A Voting Allocation shall be increased by a
percentage equal to the Voting Common Interest Percentage represented
by the Class B Common Interests so acquired and the Aggregate Class B
Voting Allocation shall be reduced by an equal percentage, and
(C) the Class B Common Interests so acquired shall be converted
into a
[[Page 5487]]
number of Class A Common Interests equal to the product of (w) a
fraction, (1) the numerator of which shall be the Economic Common
Interest Percentage represented by the Class B Common Interests so
acquired and (2) the denominator of which shall be the Aggregate Class
A Economic Allocation prior to such acquisition multiplied by (x) the
aggregate number of Class A Common Interests issued and outstanding
prior to such acquisition; provided that if any acquired Class B Common
Interests are Class B Non-voting Common Interests, the number of such
Class A Common Interests that shall be Class A Non-voting Common
Interests shall be equal to the difference between (I) the total number
of such Class A Common Interests less (II) the product of (y) a
fraction, (1) the numerator of which shall be the Voting Common
Interest Percentage represented by the Class B Common Interests so
acquired and (2) the denominator of which shall be the Aggregate Class
A Voting Allocation prior to such acquisition multiplied by (z) the
total number of Class A Common Interests issued and outstanding prior
to such acquisition that are not Class A Non-voting Common Interests.
(ii) In the case of a redemption of Class B Common Interests by the
Company,
(A) the Aggregate Class A Economic Allocation shall be increased by
a percentage equal to the product of (x) the Economic Common Interest
Percentage represented by the Class B Common Interests so redeemed
multiplied by (y) a fraction, (1) the numerator of which shall be equal
to the Aggregate Class A Economic Allocation immediately prior to such
redemption and (2) the denominator of which shall be equal to (I) one-
hundred percent (100%) minus (II) the Economic Common Interest
Percentage so redeemed, and the Aggregate Class B Economic Allocation
shall be reduced by an equal percentage, and
(B) the Aggregate Class A Voting Allocation shall be increased by a
percentage equal to (x) the total Voting Common Interest Percentage
represented by the Class B Common Interests so redeemed multiplied by
(y) a fraction, (1) the numerator of which shall be equal to the
Aggregate Class A Voting Allocation immediately prior to such
redemption and (2) the denominator of which shall be equal to (I) one-
hundred percent (100%) minus (II) the Voting Common Interest Percentage
so redeemed, and the Aggregate Class B Voting Allocation shall be
reduced by an equal percentage.
(iii) In the case of an acquisition of Class A Common Interests by
a Class B Member or any of its Affiliates,
(A) the Aggregate Class A Economic Allocation shall be reduced by
the Economic Common Interest Percentage represented by the Class A
Common Interests so acquired and the Aggregate Class B Economic
Allocation shall be concomitantly increased,
(B) the Aggregate Class A Voting Allocation shall be reduced by the
Voting Common Interest Percentage represented by the Class A Common
Interests so acquired and the Aggregate Class B Voting Allocation shall
be concomitantly increased, and
(C) the Class A Common Interests so acquired shall be converted
into a number of Class B Common Interests equal to the product of (w) a
fraction, (1) the numerator of which shall be the Economic Common
Interest Percentage represented by the Class A Common Interests so
acquired and (2) the denominator of which shall be the Aggregate Class
B Economic Allocation prior to such acquisition multiplied by (x) the
aggregate number of Class B Common Interests issued and outstanding
prior to such acquisition; provided that if any acquired Class A Common
Interests are Non-voting Common Interests, the number of such Class B
Common Interests that shall be Class B Non-voting Common Interests
shall be equal to the difference between (I) the total number of such
Class B Common Interests less (II) the product of (y) a fraction, (1)
the numerator of which shall be the Voting Common Interest Percentage
represented by the Class A Common Interests so acquired and (2) the
denominator of which shall be the Aggregate Class B Voting Allocation
prior to such acquisition multiplied by (z) the total number of Class B
Common Interests issued and outstanding prior to such acquisition that
are not Class B Non-voting Common Interests.
(iv) In the case of a redemption of Class A Common Interests by the
Company,
(A) the Aggregate Class A Economic Allocation shall be reduced by a
percentage equal to (x) the Economic Common Interest Percentage
represented by the Class A Common Interests so redeemed multiplied by
(y) a fraction, (1) the numerator of which shall be equal to the
Aggregate Class B Economic Allocation immediately prior to such
redemption and (2) the denominator of which shall be equal to (I) one-
hundred percent (100%) minus (II) the Economic Common Interest
Percentage so redeemed, and the Aggregate Class B Economic Allocation
shall be concomitantly increased, and
(B) the Aggregate Class A Voting Allocation shall be reduced by a
percentage equal to (x) the total Voting Common Interest Percentage
represented by the Class A Common Interests so redeemed multiplied by
(y) a fraction, (1) the numerator of which shall be equal to the
Aggregate Class B Voting Allocation immediately prior to such
redemption and (2) the denominator of which shall be equal to (I) one-
hundred percent (100%) minus (II) the Voting Common Interest Percentage
so redeemed, and the Aggregate Class B Voting Allocation shall be
concomitantly increased.
Examples 1, 2 and 3 in Exhibit 5C demonstrate the operation of
these provisions.\15\
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\15\ Examples 1, 2 and 3 were the subject of discussions with
the SEC staff at a meeting on August 23, 2012.
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Converting Common Interests to Non-voting Common Interests
The Exchange proposes to add a Section 11.2(c) that clarifies that
if a Member holds Common Interests representing an Excess Interest
Percentage (such Member, solely to the extent that such Member holds
Common Interests representing an Excess Interest Percentage or Common
Interests converted into Non-voting Common Interests by operation of
Section 11.2(c) of the Amended LLC Agreement, a ``Converting Member''),
such Member's Voting Common Interest Percentage shall be reduced by
converting a number of such Member's Common Interests into Non-voting
Common Interests as follows:
(i) A number of such Member's Common Interests shall be converted
into Non-voting Common Interests, which number shall be equal to the
product of:
(A) In the case of Class A Common Interests, (x) such Member's
Excess Interest Percentage multiplied by (y) a fraction, (1) the
numerator of which shall be the total number of Class A Common
Interests that are not Class A Non-voting Common Interests prior to
such conversion and (2) the denominator of which shall be the Aggregate
Class A Voting Allocation; or
(B) In the case of Class B Common Interests, (x) such Member's
Excess Interest Percentage multiplied by (y) a fraction, (1) the
numerator of which shall be the total number of Class B Common
Interests that are not Class B Non-voting Common Interests prior to
such conversion and (2) the
[[Page 5488]]
denominator of which shall be the Aggregate Class B Voting Allocation;
(ii) Each Member's (including the Converting Member's) Voting
Common Interest Percentage shall be recalculated, taking into account
the applicable calculation set forth in clause (i)(A) above; provided
that with respect to all newly-converted Non-voting Common Interests,
the Aggregate Class A Voting Allocation and Aggregate Class B Voting
Allocation shall be adjusted to allocate the Voting Common Interest
Percentage represented by the Common Interests that are subject to
conversion pursuant to clause (i)(A) above proportionally between the
Aggregate Class A Voting Allocation and Aggregate Class B Voting
Allocation; and
(iii) If the calculations performed pursuant to clause (ii) result
in any Member owning Common Interests representing an Excess Interest
Percentage, the calculations required by Section 11.2(c)(i) of the
Amended LLC Agreement shall be repeated until no Member owns Common
Interests representing an Excess Interest Percentage.
By way of example, consider a Class B Member that holds 7 of 8
outstanding Class B Common Interests (none of which are Non-voting
Common Interests), where the Aggregate Class B Voting Allocation is
25%. Such Class B Member's Voting Common Interest Percentage would be
21.875% (i.e., 7/8 of 25%) and it would, therefore, be an Exceeding
Member with an Excess Interest Percentage of 1.875% (i.e., 21.875%--
20%).\16\ By operation of Section 4.9(c) of the Amended LLC Agreement,
the Exceeding Member would be automatically deemed to be a Converting
Member and would be subjected to the conversion mechanics of Section
11.2(c)(i) of the Amended LLC Agreement. First, a number of its Common
Interests would be converted into Non-voting Common Interests. Pursuant
to Section 11.2(c)(i)(A)(2) of the Amended LLC Agreement, this number
would be equal to the product of (x) 1.875% (the Member's Excess
Interest Percentage) multiplied by (y) a fraction, (1) the numerator of
which would be 8 (the then-outstanding number of ordinary Class B
Common Interests) and (2) the denominator of which would be 25% (the
Aggregate Class B Voting Allocation), or 0.6 Class B Common Interests.
Thus, by operation of Section 11.2(c)(i)(A)(2) of the Amended LLC
Agreement, the Member would then hold 6.4 ordinary Class B Common
Interests and 0.6 Non-voting Common Interests.
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\16\ In the interests of simplicity, for this example, we round
up the 19.9% Maximum Percentage to 20%.
---------------------------------------------------------------------------
Next, pursuant to Section 11.2(c)(i)(B) of the Amended LLC
Agreement, each Member's (including the Converting Member's) Voting
Common Interest Percentage would be recalculated to reflect the
conversion and the Aggregate Class A Voting Allocation and Aggregate
Class B Voting Allocation would be adjusted to allocate the Voting
Common Interest Percentage of the converted Common Interests
proportionally between the Class A Members and the Class B Members. The
Voting Common Interest Percentage represented by 0.6 Class B Common
Interests is 1.875%. The proportional reallocation of this 1.875% is
effected in the same way the Company would reallocate the Economic
Common Interest Percentage of Common Interests that had been redeemed:
the Aggregate Class A Voting Allocation is recalculated as 75%/98.125%
(i.e., 100%--1.875%) and the Aggregate Class B Voting Allocation is
recalculated as 23.125%/98.125% (i.e., 25%--1.875% and 100%--1.875%,
respectively). Thus, the new Aggregate Class B Voting Allocation is
23.567%. As a result of this reallocation, the Converting Member's
Voting Common Interest Percentage would be recalculated as 6.4
(ordinary Class B Common Interests held by it) divided by 7.4 (ordinary
Class B Common Interests outstanding) multiplied by 23.567% (the new
Aggregate Class B Voting Allocation), or 20.382%. Note that the
Converting Member is still an Exceeding Member as a result of the
proportional allocation of the Voting Common Interest Percentage
represented by the converted Class B Common Interests. As a result,
pursuant to Section 11.2(c)(i)(C) of the Amended LLC Agreement, the
process described above will need to be repeated, iteratively, in
respect of such Converting Member's ``new'' Excess Interest Percentage,
until it is no longer an Exceeding Member. Ultimately, a total of 0.75
of such Member's Class B Common Interests will need to be converted
into Non-voting Common Interests, resulting in: (1) Such Member holding
6.25 Class B Common Interests and 0.75 Non-voting Common Interests, (2)
the Aggregate Class A Voting Allocation increasing to 76.8%, (3) the
Aggregate Class B Voting Allocation falling to 23.2%, and (4) such
Member's Voting Common Interest Percentage falling to 20%.\17\
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\17\ Note that as a consequence of the changes to the Aggregate
Class A Voting Allocation and Aggregate Class B Voting Allocation,
each Member's Voting Common Interest Percentage will also be
proportionally increased. If, as a result, such a Member becomes an
Exceeding Member, it would also be subjected to the provisions of
amended Section 4.9 and, if applicable, proposed Section 11.2(c) of
the Amended LLC Agreement.
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Conversion of Non-Voting Common Interests to Common Interests
In certain circumstances (including, for example, where an
Exceeding Member holds Non-voting Common Interests while it divests
itself of the Common Interests representing its Excess Interest
Percentage in accordance with Section 4.9 of the Amended LLC
Agreement), a Member's Common Interests that were required to be
converted to Non-voting Common Interests may be converted back into
ordinary Common Interests upon their transfer to another Member. To
effect this reconversion, the Exchange proposes to provide in Section
11.2(c) of the Amended LLC Agreement that, subject to Section 7.5 of
the Amended LLC Agreement, in the event of (x) a Transfer by a
Converting Member of any Common Interests or (y) a redemption by the
Company of any Common Interests owned by a Converting Member:
(i) Simultaneously with such Transfer or redemption, as applicable,
(A) all Non-voting Common Interests created by application of Section
11.2(c) of the Amended LLC Agreement (other than those held or
transferred by a Restricted Member) shall be converted back into Common
Interests (with applicable voting and consent rights as set forth in
the Amended LLC Agreement) and shall represent the same Voting Common
Interest Percentage they represented prior to their conversion, (B) the
Aggregate Class A Voting Allocation and Aggregate Class B Voting
Allocation shall be adjusted to reverse the adjustments required by
Section 11.2(c)(i) of the Amended LLC Agreement with respect to such
converted Common Interests and (C) each Member's (including the
Converting Member's) Voting Common Interest Percentage shall be
recalculated accordingly; and
(ii) Upon giving effect to such Transfer or redemption, as
applicable (including giving effect to clause (i) hereof) any Member
(including any Transferee or Transferor Member) that is or becomes an
Exceeding Member shall be subject to the provisions of Section 4.9 of
the Amended LLC Agreement and shall be required to be a Converting
Member with respect to the resulting Excess Interest Percentage.
By way of example, consider the Exceeding Member described above
(the ``Transferring Member'') desiring to transfer the Common Interests
representing its Excess Interest
[[Page 5489]]
Percentage. Prior to the application of the conversion mechanics
described in Section 11.2(c)(i) of the Amended LLC Agreement, its
Excess Interest Percentage was 1.875%.\18\ Assume there is only one
other Class B Member (the ``Acquiring Member''), holding 1 Class B
Common Interest (of the 8 total Interests outstanding). The Acquiring
Member's Voting Common Interest Percentage is only 3.125% and it is not
at risk of becoming an Exceeding Member. It, therefore, wishes to
acquire Common Interests from the Transferring Member representing the
entirety of the Transferring Member's Excess Interest Percentage. In
the hands of the Acquiring Member, such Common Interests will no longer
need to be Non-voting Common Interests, so they will need to be
converted back into ordinary Class B Common Interests.
---------------------------------------------------------------------------
\18\ In the interests of simplicity, for this example, we again
round up the 19.9% Maximum Percentage to 20%.
---------------------------------------------------------------------------
To effect this transfer, pursuant to Section 11.2(c)(ii)(A) of the
Amended LLC Agreement, all Non-voting Common Interests that had been
previously created by operation of Section 11.2(c)(i) of the Amended
LLC Agreement (other than those held or transferred by Restricted
Members) will be temporarily converted back to ordinary Common
Interests and the conversion described above will be temporarily
reversed, so that (1) the Transferring Member will be deemed to hold 7
(and not 6.25) ordinary Class B Common Interests and no Non-voting
Common Interests, (2) the Aggregate Class A Voting Allocation will be
deemed to be 75% and the Aggregate Class B Voting Allocation will be
deemed to be 25%, and (3) the Voting Common Interest Percentages of all
other Members will be deemed to have returned to their values prior to
the conversion. The Acquiring Member, then, will acquire Class B Common
Interests representing a Voting Common Interest Percentage (and an
Economic Common Interest Percentage) of 1.875%, or 0.6 Class B Common
Interests.
Upon giving effect to this Transfer, (1) the Transferring Member
will hold 6.4 (i.e., 7--0.6) Class B Common Interests, representing a
Voting Common Interest Percentage (and Economic Common Interest
Percentage) of 20% and (2) the Acquiring Member will hold 1.6 (i.e., 1
+ 0.6) Class B Common Interests, representing a Voting Common Interest
Percentage (and Economic Common Interest Percentage) of 5%.\19\ Neither
will hold any Non-voting Common Interests and neither will be an
Exceeding Member.
---------------------------------------------------------------------------
\19\ Because the transfer is between Class B Members, no
aggregate allocations would need to be adjusted.
---------------------------------------------------------------------------
Conforming Changes
The Exchange further proposes to amend Sections 3.2(i) and 3.3(e)
of the Members Agreement to clarify that (A) any redemption of Class B
Common Interests pursuant to Section 3.2(b)(iii) or Section 3.2(c)(ii)
of the Members Agreement and (B) any acquisition of Class A Common
Interests by Class B Members pursuant to Section 3.3 of the Members
Agreement or redemption of Class A Common Interests shall be, in all
cases, subject to the mechanics described above and shall result in
appropriate adjustments to the Aggregate Class A Economic Allocation,
the Aggregate Class B Economic Allocation, Aggregate Class A Voting
Allocation, the Aggregate Class B Voting Allocation, and the number of
Class A Common Interests and Class B Common Interests, in each case,
resulting from such transfer or redemption pursuant to Section 11.2(b)
of the Amended LLC Agreement, and resulting adjustments, if any, to
each Member's Economic Common Interest Percentage and Voting Common
Interest Percentage.
Call Option of NYSE MKT
Section 3.4 of the Members Agreement provides for a ``call option''
that is exercisable by NYSE MKT under certain circumstances. The
Exchange proposes to amend Section 3.4 of the Members Agreement to
clarify that the call option described therein is granted by the Class
B Members rather than the Members (other than NYSE MKT) and gives NYSE
MKT the right and the option to require the Class B Members (and any
transferee of a Class B Member or transferee of a transferee)
collectively to transfer to NYSE MKT any or all of the aggregate Class
B Common Interests held by all Class B Members.
Sale and Transfer Periods
The Exchange proposes to amend the definition of ``Sale Period'' in
Section 1.1 of the Members Agreement in order to clarify that the
period of time during which a Founding Firm may elect to transfer its
Common Interests pursuant to Section 3.2 of the Amended Members
Agreement is, in all cases, the 21 day period beginning on the first
Business Day after the later of (x) the deadline for NYSE Euronext to
file its Form 10-K with the SEC and (y) the date NYSE Euronext actually
files such Form 10-K. The Exchange also proposes to add the term
``Transfer Period'' in Section 1.1 of the Members Agreement, to mean,
with respect to a Sale Period, the period of time starting on the first
day of such Sale Period and ending on the earlier of (x) the day
immediately preceding the first day of the following Sale Period and
(y) with respect to a Member, if applicable, the date on which a
transfer by such Member pursuant to Section 3.2 of the Amended Members
Agreement is actually consummated. Relatedly, the Exchange proposes to
amend Section 3.2 and Schedule 3.2(a) of the Members Agreement to
clarify that transfers pursuant to Section 3.2 of the Amended Members
Agreement must be consummated during the applicable Transfer Period
rather than the applicable Sale Period.
In addition, the Exchange proposes to delete Section 3.2(j) of the
Members Agreement related to the determination of the first Sale
Period, as that provision is no longer applicable by its terms.
Volume-Based Equity Plan
Volume Dispute Committee
Section 2.4 of the Members Agreement establishes a Volume Dispute
Committee empowered to take certain actions related to the Volume-Based
Equity Plan. The Volume Dispute Committee is composed of fifteen
natural persons, one of whom is appointed by each Founding Firm and the
remainder of whom are appointed by NYSE MKT.
Under the Amended Members Agreement, Section 2.4 is clarified to
provide that upon the admission to the Company of a new Member that is
deemed a Founding Firm pursuant to Section 11.1(c) of the Amended LLC
Agreement, the number of representatives on the Volume Dispute
Committee shall automatically be increased by two (2), one of whom
shall be appointed by such new Member and one of whom shall be
appointed by NYSE MKT.
Volume Calculations
The definition of ``Industry Volume'' in the Members Agreement
provides a mechanism for determining the aggregate industry-wide volume
in certain products for purposes of determining a Founding Firm's
Individual Target. Section 2.3 of the Members Agreement provides a
mechanism for the determination of whether a Founding Firm has achieved
its Individual Target.
The Exchange proposes to amend the definition of ``Industry
Volume'' to specify that Industry Volume shall include one-tenth of the
volume in certain mini-options contracts that may be listed on the
Exchange pursuant to NYSE MKT Rule 903. The Exchange also proposes to
amend Section 2.3 of
[[Page 5490]]
the Members Agreement to provide that for purposes of determining
whether a Founding Firm has achieved its Individual Target, a Founding
Firm will receive one-tenth of a credit for each transaction in any
such mini-options contract.
Fair Market Value
The Exchange proposes to amend various provisions of the LLC
Agreement and the Members Agreement to provide greater specificity with
respect to the determination of fair market value. In addition, the
Exchange proposes to amend certain provisions of the Members Agreement
to remove references to provisions that are no longer applicable by
their terms. Specifically, the Exchange proposes to amend:
Section 4.9(c) of the LLC Agreement to provide that, in
connection with a transfer of Common Interests representing an Excess
Interest Percentage, the fair market value of such Common Interests
will be determined as the product of (x) the fair market value of the
Company, determined as of the date such Member is determined to be an
Exceeding Member, multiplied by (y) the Excess Interest Percentage
represented by such Common Interests;
Section 11.5(b) of the LLC Agreement to provide that, in
connection with certain redemptions of a Member's Common Interests, the
fair market value of the redeemed Common Interests will be determined
as the product of (x) the fair market value of the Company, determined
as of the end of the calendar month immediately preceding the date the
Company determines to redeem such Common Interests, multiplied by (y)
the Economic Common Interest Percentage represented by such Common
Interests;
Section 11.5(c) of the LLC Agreement to provide that, in
connection with certain redemptions of a Member's Common Interests, the
fair market value of the redeemed Common Interests will be determined
as the product of (x) the fair market value of the Company, determined
as of the date the Company determines to redeem such Common Interests,
multiplied by (y) the Economic Common Interest Percentage represented
by such Common Interests;
Section 11.5(g) of the LLC Agreement to provide that, in
connection with a transfer of Class B Common Interests to NYSE MKT
pursuant to Section 11.5(g) of the LLC Agreement, the fair market value
of such transferred Class B Common Interests will be determined as the
product of (x) the fair market value of the Company, determined as of
the end of the calendar month immediately preceding the date NYSE MKT
determines to exercise its right to require a Founding Firm to transfer
its Class B Common Interests to NYSE MKT multiplied by (y) the Economic
Common Interest Percentage represented by such Class B Common
Interests;
the definition of ``EBITDA'' in Section 1.1 of the Members
Agreement to remove provisions regarding the calculation of fair market
value that are no longer applicable;
Section 2.1(i) of the Members Agreement (proposed to be
renumbered as Section 2.1(h) in the Amended Members Agreement) to
provide that, in connection with the redemption of a Founding Firm's
Class B Common Interests pursuant to Section 2.1(i) of the Members
Agreement, fair market value of the Company will be determined as of
the final day of the calendar month immediately preceding the relevant
quarterly determination date; and
Section 3.4 of the Members Agreement to provide that, in
connection with NYSE MKT's call option, fair market value of the
Company will be determined as of the final day of the calendar month
immediately preceding the exercise by NYSE MKT of its call option.
Typographical and Other Technical Corrections
The Exchange proposes to amend various provisions of the LLC
Agreement and the Members Agreement in order to make certain
typographical corrections. Specifically, the Exchange proposes to:
Replace the term ``and'' with ``or'' in the definition of
``Initial Member'' in Section 1.1 of the LLC Agreement;
Replace the term ``hold(s)'' with ``own(s)'' in Sections
1.1 and 11.8 of the LLC Agreement;
Replace the term ``held'' with ``owned'' in Sections 8.1,
10.1, 11.3, 11.4 and 11.8 of the LLC Agreement;
Replace the term ``holding'' with ``owning'' in Sections
1.1, 9.1 and 13.2 of the LLC Agreement;
Replace the term ``holder(s)'' with ``owner(s)'' in
Sections 6.1, 9.1, 11.3 and 12.2 of the LLC Agreement;
Delete the phrase ``or hold'' in Section 9.5 of the LLC
Agreement;
Replace the term ``Shares'' with ``Common Interests or
Preferred Interests'' in Sections 1.1 and 11.1 of the LLC Agreement;
Replace the term ``subsection'' with ``clause'' in Section
11.8 of the LLC Agreement;
Delete the term ``ownership'' in describing certain
regulatory thresholds in Section 11.8 of the LLC Agreement;
Replace the term ``for'' with the phrase ``with respect
to'' in the definition of ``EBITDA'' in Section 1.1 of the Members
Agreement; and
Add the terms ``Agreement'', ``Company'' and ``NYSE
Euronext'' to Section 1.1 of the Members Agreement.
Redactions to the Members Agreement
Certain provisions in the Members Agreement have been redacted in
order to preserve the confidentiality of commercially sensitive
information. The redacted provisions are limited to (i) numerical
dollar amounts and percentage thresholds, (ii) commercially sensitive
terms and provisions related to the calculation of ``fair market
value'' and (iii) certain competitive information. In connection with
the revisions described herein, the Exchange proposes to amend certain
of the redacted provisions in the Members Agreement related to the
calculation of fair market value.
2. Statutory Basis
The Proposed Rule Change is consistent with Section 6(b) \20\ of
the Act,\21\ in general, and, in particular, furthers the objectives of
Sections 6(b)(1) \22\, 6(b)(5) \23\ and 6(b)(8) \24\ of the Act.
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\20\ 15 U.S.C. 78f(b).
\21\ 15 U.S.C. 78.
\22\ 15 U.S.C. 78f(b)(1).
\23\ 15 U.S.C. 78f(b)(5).
\24\ 15 U.S.C. 78f(b)(8).
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The Proposed Rule Change is consistent with, and furthers the
objectives of, Section 6(b)(1) of the Act because it enforces
compliance by its members and persons associated with its members, with
the provisions of the Act, the rules and regulations promulgated
thereunder and the rules of the Exchange. It is also consistent with,
and furthers the objectives of, Section 6(b)(5) of the Act in that it
preserves all of NYSE MKT's existing rules and mechanisms to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in facilitating transactions in securities, to
remove impediments to and perfect the mechanisms of a free and open
market and a national market system and, in general, to protect
investors and the public interest. The Proposed Rule Change does not
modify, in any material respect, any of the provisions of the LLC
Agreement or Members Agreement, that the SEC has found to be consistent
with
[[Page 5491]]
Section 6(b) of the Act. Finally, the Proposed Rule Change is
consistent with Section 6(b)(8) of the Act because it will not impose
any burden on competition, as discussed in Section 4 below.
The Proposed Rule Change does not modify the Options Exchange's
trading or compliance rules and preserves the existing mechanisms for
ensuring the Exchange's compliance with the Act, the rules and
regulations promulgated thereunder and the rules of the Exchange.
Furthermore, the proposed amendments to the provisions of the LLC
Agreement related to ownership limitations in the Proposed Rule Change
clarify the mechanisms by which Members may maintain compliance with
applicable laws and regulations, enabling and ensuring continued
compliance with such laws and regulations by both the Exchange and its
Members. Finally, the proposed amendments do not change the structure
of the joint venture which retains NYSE MKT's regulatory control over
the Options Exchange or the provisions specifically designed to ensure
the independence of its self-regulatory function and to ensure that any
regulatory determinations by NYSE MKT, as the self-regulatory
organization for the Options Exchange, are controlling with respect to
the actions and decisions of the Options Exchange.
Additionally, the Amended LLC Agreement continues to require the
Company, its Members and its directors to comply with the federal
securities laws and the rules and regulations promulgated thereunder
and to engage in conduct that fosters and does not interfere with the
Exchange's or the Company's ability to carry out its respective
responsibilities under the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the Proposed Rule Change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Proposed Rule Change
does not substantively change the LLC Agreement and Members Agreement,
and instead provides clarifications to address certain ambiguities in
those documents. Furthermore, the proposed amendments to the provisions
of the LLC Agreement related to ownership limitations in the Proposed
Rule Change clarify the mechanisms by which Members may maintain
compliance with applicable laws and regulations, including the
Commission's policies with respect to permissible equity ownership
limitations, enabling and ensuring continued compliance with applicable
equity ownership limits by Members of the Exchange. In addition, the
Proposed Rule Change does not affect the availability or pricing of any
goods or services and, as a result, will not affect competition either
between the Exchange and others that provide the same goods and
services as the Exchange or among market participants.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEMKT-2014-08 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEMKT-2014-08. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make publicly available. All
submissions should refer to File Number SR- NYSEMKT-2014-08 and should
be submitted on or before February 21, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-01969 Filed 1-30-14; 8:45 am]
BILLING CODE 8011-01-P