[Federal Register Volume 79, Number 246 (Tuesday, December 23, 2014)]
[Notices]
[Pages 77066-77069]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-29972]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73860; File No. SR-ISE-2014-44]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Order Granting Approval of Proposed Rule Change, as Modified by
Amendment No. 1 Thereto, Relating to a Corporate Transaction Involving
Its Indirect Parent
December 17, 2014.
I. Introduction
On October 22, 2014, the International Securities Exchange, LLC
(the ``Exchange'' or the ``ISE'') filed with the Securities and
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) \1\
of the Securities Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4
thereunder,\3\ a proposed rule change to make certain amendments to its
corporate governance documents and those of certain of its upstream
owners, in order to effectuate changes to its indirect, non-U.S.
upstream ownership
[[Page 77067]]
structure (the ``Transactions'') \4\ and to amend the Second Amended
and Restated Limited Liability Company Agreement of ISE (``ISE LLC
Agreement'') with respect to distributions of its assets. On October
31, 2014, the Exchange filed Amendment No. 1 to the proposed rule
change. The proposed rule change, as modified by Amendment No. 1, was
published for comment in the Federal Register on November 12, 2014.\5\
The Commission received no comments on the proposed rule change. This
order approves the proposed rule change, as modified by Amendment No.
1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
\4\ The amendments also update certain of the corporate
governance documents to reflect prior transactions.
\5\ See Securities Exchange Act Release No. 73530 (November 5,
2014), 79 FR 67224 (``Notice'').
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II. Description of the Proposed Rule Change
The Exchange proposes to make certain changes to its indirect, non-
U.S. upstream ownership structure.\6\ Currently, the Exchange is a
wholly owned subsidiary of International Securities Exchange Holdings,
Inc. (``ISE Holdings''). ISE Holdings, in turn, is a wholly owned
subsidiary of U.S. Exchange Holdings, Inc. (``U.S. Exchange
Holdings''), which is wholly owned by Eurex Frankfurt AG (``Eurex
Frankfurt''). Eurex Frankfurt is a wholly owned subsidiary of a Swiss
stock corporation, Eurex Z[uuml]rich AG (``Eurex Z[uuml]rich''), which,
in turn, is jointly owned by Deutsche B[ouml]rse AG (``Deutsche
B[ouml]rse'') and Eurex Global Derivatives AG (``EGD,'' and together
with Eurex Z[uuml]rich, the ``Swiss companies''). EGD is a wholly-
owned, direct subsidiary of Deutsche B[ouml]rse.\7\
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\6\ For a more detailed description of the anticipated steps to
effectuate the Transactions, see Notice, supra note 5, at 67225.
\7\ Each of Deutsche B[ouml]rse, Eurex Frankfurt, Eurex
Z[uuml]rich, and EGD is referred to as a ``Non-U.S. Upstream Owner''
and collectively as the ``Non-U.S. Upstream Owners.''
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As a result of the Transactions, the Swiss companies will cease to
be Non-U.S. Upstream Owners of the Exchange, as Deutsche B[ouml]rse
will become the sole, direct owner of Eurex Frankfurt, which will
directly own 85% of U.S. Exchange Holdings. Deutsche B[ouml]rse will
directly own the remaining 15% of U.S. Exchange Holdings. Also in
connection with the Transactions, the Series A Preferred Stock of ISE
Holdings (``ISE Holdings Preferred'') will be converted to shares of
ISE Holdings common stock (the ``Conversion'').\8\ Upon consummation of
the Transactions, U.S. Exchange Holdings will remain the sole, direct
owner of ISE Holdings, which, in turn, will also remain the sole,
direct owner of the Exchange.\9\ In order to consummate the
Transactions, including the Conversion, the Exchange proposes to amend
certain of its, and its upstream owners', corporate governance
documents as described below.
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\8\ Upon consummation of the Transactions, all of the common
stock of ISE Holdings will continue to be held by U.S. Exchange
Holdings. See Notice, supra note 5, at 67225.
\9\ According to the Exchange, the Transactions will not result
in any additional person or entity acquiring direct or indirect
ownership in the Exchange. See Notice, supra note 5, at 67225.
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A. Certificate of Designations of Series A Preferred Stock of ISE
Holdings
The Exchange proposes to amend and restate the Certificate of
Designations of Series A Preferred Stock of ISE Holdings (the ``COD'').
In particular, the Exchange proposes to amend Section 6(b) of the COD,
which currently provides that the ISE Holdings Preferred is not
convertible, to state that each share of ISE Holdings Preferred may, at
the option of the holder thereof, be converted into one fully paid and
non-assessable share of ISE Holdings common stock (``ISE Holdings
Common'') on the date on which such holder delivers a duly executed
notice of conversion to ISE Holdings substantially in the form of a new
Annex A attached to the COD.\10\
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\10\ The Exchange also proposes to retitle the COD as the
``Amended and Restated'' Certificate of Designations of Series A
Preferred Stock of ISE Holdings.
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B. Amended and Restated Certificate of Incorporation of ISE Holding
The Exchange proposes to amend and restate the Amended and Restated
Certificate of Incorporation of ISE Holdings (the ``COI'') by
increasing the number of authorized shares of ISE Holdings Common from
1,000 shares to 101,000 shares in order to account for the increase in
the authorized number of ISE Holdings Common that will result from the
Conversion.\11\ As such, the total number of authorized ISE Holdings
Common and ISE Holdings Preferred will increase from 101,000 shares to
201,000 shares.\12\
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\11\ The Exchange also proposes to retitle the COI as the
``Second'' Amended and Restated Certificate of Incorporation of ISE
Holdings and update the date thereof.
\12\ The Exchange will maintain the total number of authorized
ISE Holdings Preferred Stock at 100,000 shares.
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C. Trust Agreement
The Exchange proposes to amend and restate the Second Amended and
Restated Trust Agreement (the ``Trust Agreement'') that exists among
ISE Holdings, U.S. Exchange Holdings, and the Trustees (as defined
therein) in connection with the Transactions. Specifically, the
Exchange proposes to: (i) Update the recitals of the Trust Agreement
with respect to the Transactions; (ii) remove references to the Swiss
companies from the definition of ``Affected Affiliate'' in Section 1.1
of the Trust Agreement; (iii) remove outdated references to EDGA
Exchange, Inc. (``EDGA'') and EDGX Exchange, Inc. (``EDGX'') from the
definition of ``Controlled National Securities Exchange'' in Section
1.1 and update the recitals of the Trust Agreement accordingly; \13\
and (iv) remove EGD's address from the notices provision in Section 8.8
of the Trust Agreement.\14\
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\13\ EDGA and EDGX previously were Controlled National
Securities Exchanges, but ceased to be so as a result of a business
combination whereby BATS Global Markets, Inc. became the ultimate
parent company for each. See Securities Exchange Act Release No.
71449 (January 30, 2014), 79 FR 6961 (February 5, 2014) (SR-EDGA-
2014-34; SR-EDGX-2014-43). See also Notice, supra note 5, at 67226
n.22.
\14\ The Exchange also proposes to retitle the Trust Agreement
as the ``Third'' Amended and Restated Trust Agreement and update the
date thereof.
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D. Certain Resolutions and Agreements
The Exchange proposes to delete certain corporate resolutions and
agreements that were previously adopted by the Swiss companies that
will cease to be indirect, upstream owners of ISE after the
Transactions. In particular, each of the Non-U.S. Upstream Owners
previously adopted resolutions, which were approved by the Commission,
to incorporate measures regarding ownership, jurisdiction, books and
records, and other issues related to their control of the Exchange,
with respect to the Non-U.S. Upstream Owners, as well as its board
members, officers, employees, and agents (as applicable), to the extent
that they are involved in the activities of the Exchange. In addition
to these resolutions, the Swiss companies previously entered into an
``Agreement and Consent,'' in which EGD agreed to provide certain
information related to the activities of the Exchange, including books
and records of EGD related to the activities of the Exchange, to the
Commission, through Eurex Z[uuml]rich. As the Swiss companies will
cease to be Non-U.S. Upstream Owners of the Exchange following the
consummation of the Transactions, the Exchange proposes to delete the
resolutions of these entities, as referenced above, along with the
Agreement and Consent, such that they will no longer be rules of the
Exchange as of a date in December 2014 that corresponds to the
effective closing
[[Page 77068]]
date of the applicable step in the Transactions.\15\
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\15\ The Exchange also proposes to delete similar resolutions of
entities that had previously been Non-U.S. Upstream Owners of the
Exchange, but whose status as such has since ceased. See SR-ISE-
2014-44 Exhibit 5G, as modified by Amendment No. 1, proposing to
delete in its entirety the ``Form of Swiss Parent Association
Resolutions.''
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E. ISE LLC Agreement
In addition to the changes described above, the Exchange proposes
to amend and restate the ISE LLC Agreement by adding a new Section 3.3
to the ISE LLC Agreement that would provide that, notwithstanding any
provision to the contrary contained in the ISE LLC Agreement, (i) the
Exchange would not be required to make a distribution to ISE Holdings
if such distribution would violate the Delaware Limited Liability
Company Act, any other applicable law, or is otherwise required to
fulfill the regulatory functions or responsibilities of the Exchange,
and (ii) Regulatory Funds will not be used for non-regulatory purposes,
but rather shall be used to fund the legal, regulatory, and
surveillance operations of the Exchange and the Exchange will not make
any distribution to ISE Holdings using Regulatory Funds. For purposes
of proposed Section 3.3, the Exchange proposes to define the term
``Regulatory Funds'' as fees, fines or penalties derived from the
regulatory operations of the Exchange, provided that Regulatory Funds
does not include revenues derived from listing fees, market data
revenues, transaction revenues or any other aspect of the commercial
operations of the Exchange or a facility of the Exchange, even if a
portion of such revenues are used to pay costs associated with the
regulatory operations of the Exchange.\16\
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\16\ The Exchange also proposes to renumber existing Section 3.3
of the ISE LLC Agreement to Section 3.4. In addition, the Exchange
proposes to retitle the ISE LLC Agreement as the ``Third'' Amended
and Restated Limited Liability Company Agreement, update the date
thereof, update the table of contents, update the name of the
Exchange's President and Chief Executive Officer and update the
address of the Registered Agent in Section 1.5.
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U.S. Exchange Holdings Certificate of Incorporation
Lastly, the Exchange proposes to make several administrative
amendments to the Second Amended and Restated Certificate of
Incorporation of U.S. Exchange Holdings (``U.S. Exchange Holdings
COI'') to update references therein to the Trust Agreement.
Specifically, Article THIRTEENTH of the U.S. Exchange Holdings COI
contains outdated references to (i) the ``Amended and Restated'' Trust
Agreement, which is currently the ``Second Amended and Restated'' Trust
Agreement and will become the ``Third Amended and Restated'' Trust
Agreement; and (ii) the effective date of the Trust Agreement, which
will be changed to a date in December 2014 that corresponds to the
effective closing date of the applicable step in the Transactions. The
Exchange also proposes to add language in Article THIRTEENTH specifying
that the Trust Agreement may be amended, restated, or replaced from
time to time and remove references to EDGA Exchange and EDGX Exchange
from the definition of ``Controlled National Securities Exchange'' in
Article TENTH.\17\
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\17\ The Exchange also proposes to retitle the U.S. Exchange
Holdings COI as the ``Third'' Amended and Restated Certificate of
Incorporation of U.S. Exchange Holdings, and update the effective
date thereof.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and rules and
regulations thereunder applicable to a national securities
exchange.\18\ Specifically, the Commission finds that the proposal is
consistent with Section 6(b)(1) of the Act,\19\ which requires that an
exchange be organized and have the capacity to be able to carry out the
purposes of the Act and to comply, and to enforce compliance by its
members and persons associated with its members, with the provisions of
the Act, the rules and regulations thereunder, and the rules of the
Exchange.
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\18\ In approving the proposed rule changes, the Commission has
considered their impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\19\ 15 U.S.C. 78s(b)(1).
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The Exchange represents that it will continue to operate and
regulate its market and members in the same manner following the
Transactions as it operates today.\20\ The Exchange further states that
the proposed rule change will facilitate an ownership structure that
will continue to provide the Commission with appropriate oversight
tools to allow the Commission to enforce the provisions of the Act with
respect to the Exchange and its direct and indirect Non-U.S. Upstream
Owners, including each of their directors, officers, employees, and
agents, to the extent they are involved in the activities of the
Exchange.\21\ The Commission notes that as a result of the
Transactions, the Swiss companies will no longer be indirect, upstream
owners of the Exchange, but that the upstream ownership of the Exchange
otherwise remains substantially the same.\22\ The Commission also notes
that the Exchange has represented that it is not proposing any changes
to the Exchange's operational or trading structure in connection with
the Transactions.\23\ The Exchange further stated that no changes will
be made to other aspects of the Exchange's corporate governance
documents that were previously approved by the Commission.\24\
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\20\ See Notice, supra note 5 at 67227.
\21\ See id. at 67228.
\22\ Although prior to the Transactions Deutsche B[ouml]rse's
interest in U.S. Exchange Holdings was held solely through its 100%
indirect ownership in Eurex Frankfurt, upon consummation of the
transactions it will instead directly own Eurex Frankfurt and will
hold a direct 15% interest in U.S. Exchange Holdings. The remaining
85% interest in U.S. Exchange Holdings will continue to be directly
held by Eurex Frankfurt.
\23\ See id.
\24\ See id.
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The Commission believes that the proposed changes related to the
Transactions will not impact provisions of the Exchange's, or its
upstream owners, corporate governance documents that were designed to
enable the ISE to operate in a manner that complies with the federal
securities laws, and were intended to assist the ISE in fulfilling its
self-regulatory obligations and administering and complying with the
requirements of the Act.\25\ The Commission also believes that the
proposed rule change will allow the Commission to continue to exercise
its plenary regulatory authority over the Exchange and continue to
provide the Commission and the Exchange with access to necessary
information that will allow the Exchange to comply, and enforce
compliance, with the Act. As the Exchanges notes, the proposed
administrative amendments will continue to preserve the independence of
the Exchange's self-regulatory functions and ensure that it will be
able to obtain any information it needs in order to address fraudulent
and manipulative acts in its marketplace and carry out its regulatory
responsibilities under the Act.\26\
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\25\ See e.g., Securities Exchange Act Release Nos. 56955
(December 13, 2007), 72 FR 71979 (December 19, 2007) (SR-ISE-2007-
101); and 53705 (April 21, 2006), 71 FR 25260 (April 28, 2006) (SR-
ISE-2006-04).
\26\ See id.
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The Commission also believes that the proposed amendments to the
ISE LLC Agreement related to distributions are consistent with the Act.
The Commission notes that the Exchange states that these provisions
will ensure any distributions by the Exchange to ISE Holdings, and
subsequently to its indirect upstream owners, would not be
[[Page 77069]]
made in violation of the Exchange's legal and regulatory
responsibilities or with Regulatory Funds.\27\ The Commission believes
that the proposed rule change is designed to facilitate the ability of
ISE to fulfill its regulatory obligations under the Act and will help
ensure the independence of its regulatory function from its market
operations and other commercial interests.\28\
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\27\ See Notice, supra note 5, at 67227 n.30 and accompanying
text.
\28\ The Commission notes that, as amended, the provision in
ISE's LLC Agreement governing distributions will be consistent with
similar provisions the Commission has previously approved for other
self-regulatory organizations. See, e.g., Securities Exchange Act
Release Nos. 70050 (July 26, 2013), 78 FR 46622 (August 1, 2013)
(approving the application for registration as a national securities
exchange of Topaz Exchange, LLC); and 68341 (December 3, 2012), 77
FR 73065 (December 7, 2012) (approving the application for
registration as a national securities exchange of Miami
International Securities Exchange, LLC).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\29\ that the proposed rule change (SR-ISE-2014-44), as modified by
Amendment No. 1, be, and hereby is, approved.
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\29\ 15 U.S.C. 78f(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-29972 Filed 12-22-14; 8:45 am]
BILLING CODE 8011-01-P