[Federal Register: August 10, 2006 (Volume 71, Number 154)]
[Notices]
[Page 45868-45875]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10au06-129]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54273; File No. SR-ISE-2006-45]
Self-Regulatory Organizations; International Securities Exchange,
Inc.; Notice of Filing of a Proposed Rule Change Relating to
Establishing ISE Stock Exchange as a Facility of International
Securities Exchange, Inc.
August 3, 2006.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 31, 2006, the International Securities Exchange, Inc. (``ISE''
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 Exchange. 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 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The ISE proposes to establish ISE Stock Exchange (``ISE Stock'') as
a facility, as that term is defined in section 3(a)(2) of the Act,\3\
of the ISE. ISE states that ISE Stock would administer a fully
automated marketplace for the trading of equity securities by
Electronic Access Members, or EAMs, of ISE under the rules of ISE. ISE
Stock would be operated by ISE Stock Exchange, LLC (``ISE Stock,
LLC''), a Delaware limited liability company. In this filing, the
Exchange is submitting to the Commission: the Certificate of Formation
(Exhibit 5(a)); the proposed Second Amended and Restated Limited
Liability Company Agreement of ISE Stock (``LLC Agreement'') (Exhibit
5(b)); a Description of Services under the Management Agreement Exhibit
5(c)); Rule Changes of International Securities Exchange (Exhibit
5(d)); Constitutional
[[Page 45869]]
Changes of International Securities Exchange, LLC (Exhibit 5(e)). The
ISE states that the Certificate of Formation and the LLC Agreement are
the source of ISE Stock LLC's governance and operating authority and,
therefore, function in a similar manner as articles of incorporation
and by-laws function for a corporation. Certain sections of these
documents are discussed below. The full text of Exhibit 5(a) through
(e) is available on the Commission's Web site at http://www.sec.gov, the Web site of the Exchange at http://www.iseoptions.com, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
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\3\ 15 U.S.C. 78c(a)(2).
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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 Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to establish ISE Stock as a facility, as that
term is defined in section 3(a)(2) of the Act,\4\ of the ISE. ISE Stock
would administer a fully automated marketplace for the trading of
equity securities by EAMs of ISE under the rules of ISE. ISE Stock
would be operated by ISE Stock, LLC, a Delaware limited liability
company. In this filing, the Exchange is submitting to the Commission
the Certificate of Formation and the LLC Agreement of ISE Stock, LLC.
The Certificate of Formation and the LLC Agreement are the source of
ISE Stock, LLC's governance and operating authority and, therefore,
function in a similar manner as articles of incorporation and by-laws
function for a corporation.
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\4\ 15 U.S.C. 78c(a)(2).
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The ISE is a founding and controlling member of ISE Stock, LLC. ISE
owns all of the Class A Membership Units of ISE Stock, LLC,
representing 51% of the voting securities of ISE Stock, LLC. In
addition to its ownership stake in ISE Stock, LLC, ISE will enter into
a management agreement (the ``Management Agreement'') with ISE Stock,
LLC. Pursuant to the Management Agreement, ISE Stock, LLC would appoint
ISE as ISE Stock, LLC's manager (``Manager'') to perform certain
management, operational, and related services. In particular, as
Manager, ISE would have responsibility for all regulatory functions
related to the facility (including conducting market surveillance for
trading on ISE Stock). Moreover, the Board of Directors of ISE would be
required to approve any changes to the Certificate of Formation and the
LLC Agreement of ISE Stock, LLC that are required to be filed with the
Commission pursuant to section 19(b) of the Act and Rule 19b-4
thereunder.\5\ ISE Stock, LLC would have responsibility for the
business operations of the facility to the extent those activities are
not inconsistent with the regulatory and oversight functions of the ISE
as Manager. This means that ISE Stock, LLC would not interfere with
ISE's self-regulatory responsibilities. ISE is a registered ``national
securities exchange'' under Section 6 of the Act \6\ and a self-
regulatory organization (``SRO''). ISE represents that it has adequate
funds to discharge all regulatory functions related to the facility
that it proposes to undertake to perform under the Management Agreement
and the LLC Agreement.\7\
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\5\ LLC Agreement, Section 12.1.
\6\ 15 U.S.C. 78f.
\7\ Telephone conference between Michou H.M. Nguyen, Special
Counsel, Division of Market Regulation (``Division''), Commission,
and Tracy Tang, Assistant General Counsel, Exchange, on August 2,
2006. (clarifying that the sentence refers to the LLC Agreement as
well) (herein after referred to as ``August 2nd Telephone
Conference''). See also LLC Agreement, Section 9.2(d).
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In this filing, the Exchange is submitting to the Commission the
Certificate of Formation and the LLC Agreement of ISE Stock, LLC
specifically relating to the control and governance of ISE Stock, LLC
that would ensure that the ISE has the authority within ISE Stock, LLC
to maintain its responsibility for all regulatory functions related to
the ISE Stock facility. The LLC Agreement would ensure that the SEC and
the ISE would have regulatory authority over investors and members of
the advisory board of ISE Stock, LLC (the ``Advisory Board''). The
Exchange will submit separate filings to establish ISE rules relating
to listing, membership and trading on ISE Stock. As the purpose of this
filing is to focus on only those provisions which are directly related
to the ISE authority for all regulatory functions of its proposed ISE
Stock facility, the Exchange's discussion in this filing will be
limited to those relevant provisions of the LLC Agreement.
Description of LLC Membership Interests in ISE Stock, LLC
As an LLC, ownership of ISE Stock, LLC is represented by limited
liability company membership interests in ISE Stock, LLC. The holders
of such membership interests are referred to as the members (the
``Members'') of ISE Stock, LLC. The membership interests are divided
into two classes--Class A and Class B limited liability company
membership units (collectively, the ``Units''). The Units represent
equity interests in ISE Stock, LLC and entitle the holders thereof to
participate in certain of ISE Stock, LLC's allocations and
distributions. Each ``Class A Unit'' represents a limited liability
company membership interest in ISE Stock, LLC and as a class, the
holders of the Class A Units hold fifty-one percent (51%) of the
aggregate voting rights of all Members. Each holder of a Class A Unit
has a vote, in respect of each Class A Unit held by such holder of
record on each matter on which holders of Units are entitled to vote,
equal to the product of (A) 51 and (B) a fraction, whose numerator is
the number of Class A Units then held by such holder and whose
denominator is the number of Class A Units then held by all holders of
Class A Units.\8\ Currently, ISE holds all of the Class A Units, making
it a fifty-one percent (51%) owner of ISE Stock, LLC. Each ``Class B
Unit'' represents a limited liability company membership interest in
ISE Stock, LLC. Each holder of a Class B Unit shall have a vote, in
respect of each Class B Unit held by such holder of record on each
matter on which holders of Class B Units shall be entitled to vote as
specifically required by the LLC Agreement or by the Delaware Limited
Liability Company Act (``DLLCA''), \9\ equal to the product of (A) 49
and (B) a fraction, whose numerator is the number of Class B Units then
held by such holder and whose denominator is the number of Class B
Units then held by all holders of Class B Units.\10\ There are 49 Class
B Units issued and outstanding, held by 11 Class B Unit holders. The
ISE represents that no Class B Unit holder owns more than 5 units.
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\8\ LLC Agreement, Section 3.2(a).
\9\ August 2nd Telephone Conference (clarifying that reference
is to the DLLCA and not the Act).
\10\ LLC Agreement, Section 3.2(b).
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[[Page 45870]]
Management of ISE Stock, LLC
As the Manager, ISE would have the authority to make all decisions
regarding the business of ISE Stock, LLC and matters concerning the
Units, such as whether or not to authorize distributions.\11\ In
certain limited circumstances, the Manager would need the approval of
two-thirds of the disinterested members of the Advisory Board prior to
taking certain actions, as discussed below. The Manager would be
responsible for the control and management of the business of ISE
Stock, LLC, and must exercise good faith and integrity in handling its
affairs.\12\
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\11\ LLC Agreement, Section 8.1 and 8.12.
\12\ August 2nd Telephone Conference (removing language).
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Under Section 7.1 of the LLC Agreement, other than as set forth in
the LLC Agreement or required by the DLLCA\13\ or by the Commission,
the Members do not participate in the management or control of ISE
Stock, LLC's business, they do not transact any business for ISE Stock,
LLC, and they do not have the power to act for or bind ISE Stock, LLC.
All of those powers are vested solely and exclusively in the Manager.
Specifically, under Section 8.1 of the LLC Agreement, subject to the
limitations provided in the LLC Agreement and except as specifically
provided therein, the Manager shall have exclusive and complete
authority and discretion to manage the operations and affairs of ISE
Stock, LLC and to make all decisions regarding the business of ISE
Stock, LLC and shall have the power to act for or bind ISE Stock, LLC.
Any action taken by the Manager shall constitute the act of and serve
to bind ISE Stock, LLC. Further, except as otherwise specifically
provided in the LLC Agreement, the Manager has all rights and powers of
a ``manager'' under the DLLCA, and shall have all authority, rights and
powers in the management of ISE Stock, LLC business to do any and all
other acts and things necessary, proper, convenient or advisable to
effectuate the purposes of the LLC Agreement.
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\13\ August 2nd Telephone Conference (clarifying that reference
is to the DLLCA and not the Act).
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Under Section 8.13 of the LLC Agreement, any replacement and
appointment of the Manager, and any assignment of the rights and
obligations of the Manager under the Management Agreement, shall be
subject to the rule filing process pursuant to section 19 of the Act.
ISE believes that this section provides the Commission with the
authority to review and subject to public comment any replacement of
the Manager of ISE Stock which the Commission may deem to have the
potential to affect ISE's self-regulatory responsibilities regarding
its proposed ISE Stock facility.
Governance of ISE Stock, LLC
Section 8.2(d)(i) of the LLC Agreement establishes the Advisory
Board of ISE Stock, LLC as a general advisory board and provides that
the Advisory Board will have no power or authority to act for ISE
Stock, LLC or to otherwise participate in the ISE Stock's management,
except for certain limited matters. Other than the matters for which
approval of the Advisory Board is specifically required by the LLC
Agreement, any actions taken by the Advisory Board are advisory only
and neither the Manager nor any of its Related Persons are required or
otherwise bound to act in accordance with any decision, action or
comments of the Advisory Board. The Advisory Board has no power or
authority to act for ISE Stock, LLC or to otherwise participate in ISE
Stock, LLC management. All decisions, including responsibility for the
management of ISE Stock, LLC, rest with the manager, and in no event
will a member of the Advisory Board be considered a ``manager'' of ISE
Stock, LLC.
Section 8.2(d)(ii) provides that the purpose of the Advisory Board
is to: (1) Review and assess any potential conflicts of interest that
may arise between ISE Stock, LLC, on the one hand, and the Manager, any
Member and/or any of their respective Related Persons,\14\ on the other
hand (including without limitation conflicts with respect to the
receipt by the Manager, or its Related Persons, of fees for services
rendered to ISE Stock, LLC); and (2) generally to consult with the
Manager on the ISE Stock, LLC's progress in achieving its business
objectives.
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\14\ ``Related Person'' means (1) With respect to any Person,
any executive officer (as defined under Rule 3b-7 under the Act),
director, general partner, manager or managing member, as
applicable, and all ``affiliates'' and ``associates'' of such Person
(as such terms are defined in Rule 12b-2 under the Act); (2) with
respect to any Person constituting a ``Exchange Member'' (as such
term is defined in the Constitution of ISE, a copy of which will be
provided to any member of ISE Stock upon written request therefore),
any broker or dealer with which such ``Exchange Member'' is
associated; (3) with respect to any Person that is an executive
officer (as defined under Rule 3b-7 under the Act), director,
general partner, manager or managing member of a company,
corporation or similar entity, such company, corporation or entity,
as applicable; and (4) any two or more Persons that have any
agreement, arrangement or understanding (whether or not in writing)
to act together for the purpose of acquiring, voting, holding or
disposing of Units of ISE Stock, LLC; and the term ``beneficially
owned'' and derivative or similar words shall have the meaning set
forth in Regulation 13D-G under the Act. LLC Agreement Section 2.1
``Definitions.'' August 2nd Telephone Conference (conforming purpose
section to text of LLC Agreement).
``Person'' means any individual, partnership, limited liability
company, association, corporation, trust or other entity. LLC
Agreement Section 2.1 ``Definitions.''
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Section 8.2(d)(iii) provides that the Advisory Board consists of
seven members. Each Member of ISE Stock, LLC may nominate a candidate
for election to serve on the Advisory Board. Three members of the
Advisory Board shall be officers, directors, or partners of holders of
the Class A Units, and shall be elected annually by a plurality of the
holders of the Class A Units voting together as a class (each a ``Class
A Advisory Board Member''). Each Class A Advisory Board member shall
serve for a term of one year. Four members of the Advisory Board shall
be officers, directors, or partners of holders of the Class B Units,
and, except as provided below, shall be elected annually by a plurality
of the holders of the Class B Units voting together as a class (each a
``Class B Advisory Board Member''). In any situation where an Advisory
Board Member's job status changes, either upon a significant change in
the employment status at the same employer or upon a change of
employer, or if the Member employing the Advisory Board member ceases
to be a holder of Class B Units, the Advisory Board member must tender
his or her resignation to the Manager, which the Manager, in
consultation with the Advisory Board, may, but need not, accept.
Notwithstanding any of the foregoing, no Member, other than ISE, shall
have more than one representative elected to the Advisory Board during
any term. The initial Class B Advisory Board Members shall serve
staggered terms with (x) two of such Class B Advisory Board Members
serving two consecutive one-year terms, and (y) the other two of such
Class B Advisory Board Members serving three consecutive one-year
terms. Thereafter, each Class B Advisory Board Member shall serve for a
term of one year. In no event shall any Class B Advisory Board Member
serve more than three consecutive one-year terms. Each Class B Advisory
Board Member will serve until the conclusion of its one-year term, and
until such Class B Advisory Board Member's successor has been elected,
or re-elected as permitted under the LLC Agreement, by a plurality of
the holders of the Class B Units voting together as a class, except in
the event of such Class B Advisory Board Member's earlier death,
resignation, or termination.
Under Section 8.2(e), ISE Stock, LLC also has advisory committees
(the
[[Page 45871]]
``Advisory Committees''), each consisting of up to ten individuals who
consult with ISE Stock, LLC and assist with the development of (1)
Agency broker trading; (2) institutional trading; (3) technology; and
(4) bulk quoting. As with the Advisory Board, the Advisory Committees
have no power or authority to act for ISE Stock, LLC or to otherwise
participate in management.
The ISE believes that these limitations on the powers of the
Advisory Board and Advisory Committees of ISE Stock, LLC will enable
ISE to have complete authority over the control the actions of ISE
Stock, LLC, especially as they relate to regulatory responsibilities.
Under Section 8.2(d)(vii) of the LLC Agreement, in discharging his
or her responsibilities as a member of the Advisory Board, such member
shall take into consideration the effect that ISE Stock LLC's actions
would have on the ability of ISE Stock, LLC \15\ to carry out its
responsibilities under the Act and whether or not his or her actions as
a member of the Advisory Board would cause ISE Stock, LLC to engage in
conduct that fosters and does not interfere with ISE Stock LLC's
ability to prevent fraudulent and manipulative acts and practices; to
promote just and equitable principles of trade; to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities; to remove impediments to and perfect the
mechanisms of a free and open market and a national market system; and,
in general, to protect investors and the public interest. Furthermore,
in discharging his or her responsibilities as a member of the Advisory
Board, each member shall comply with the Federal securities laws and
the rules and regulations thereunder and shall cooperate with ISE and
the Commission pursuant to their respective regulatory authority and
the provisions of the LLC Agreement.
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\15\ August 2nd Telephone Conference (clarifying that sentence
relates to ISE Stock, LLC and not ISE).
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Under Section 8.2(d)(viii) of the LLC Agreement, the Manager, in
its sole discretion, may, after appropriate notice and opportunity for
hearing, terminate an Advisory Board member: (a) In the event such
Advisory Board member has violated any provision of the LLC Agreement,
any Federal or state securities law, or (b) if the Manager determines
that such action is necessary or appropriate in the public interest or
for the protection of investors.
ISE believes that these provisions would require all members of ISE
Stock's Advisory Board, regardless of their association with ISE, to
adhere to regulatory responsibilities in that they must comply with
Federal securities laws and the rules and regulations promulgated
thereunder, and cooperate with the Commission and the ISE pursuant to
their regulatory authority. In addition, all members of the Advisory
Board would be required to take into consideration and facilitate ISE's
responsibility to comply with the requirements under section 6(b)(5) of
the Act.\16\ Members of the Advisory Board that do not adhere to these
requirements face termination from the ISE Stock Advisory Board and
possible sanctions by regulatory authorities.
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\16\ August 2nd Telephone Conference (clarifying that ISE as an
SRO has the responsibilities under 6(b)(5) of the Act and not ISE
Stock, LLC and clarifying ISE's interpretation of Section
8.2(d)(vii) of the LLC Agreement). Section 8.2(d)(vii) of the LLC
Agreement states that Advisory Board members shall comply with the
Federal securities laws and the rules and regulations thereunder and
shall cooperate with ISE and the Commission pursuant to their
respective regulatory authority. ISE interprets this to mean that
Advisory Board members must take into consideration and facilitate
ISE's responsibilities under section 6(b)(5) of the Act.
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Voting Limitations of Members
Under Section 7.11 of the LLC Agreement, no Person (other than
ISE), either alone or together with its Related Persons, as of any
record date for the determination of members entitled to vote on any
matter, shall be entitled to: (i) Vote or cause the voting of Units
beneficially owned by such Person or its Related Persons, in person or
by proxy or through any voting agreement, plan, or arrangement, to the
extent that such Units represent in the aggregate more than twenty
percent (20%) of voting power of the then-issued and outstanding Units
(such threshold being hereinafter referred to as the ``Voting
Limitation''); or (ii) enter into any voting agreement, plan, or
arrangement that would result in Units beneficially owned by such
Person or its Related Persons, subject to such voting agreement, plan,
or arrangement not being voted on a matter, or any proxy relating
thereto being withheld, where the effect of that voting agreement,
plan, or arrangement would be to enable any Person, alone or together
with its Related Persons, to exceed the Voting Limitation. ISE Stock,
LLC shall disregard any such votes purported to be cast in excess of
the Voting Limitation.
The limitations imposed by Sections 7.11 may be waived by the
Manager, if in its sole discretion, it consented to expressly permit
such waiver of the Voting Limitation; and such waiver shall have been
filed with, and approved by, the Commission under section 19(b) of the
Act and shall have become effective thereunder. In granting a waiver,
the Manager must have determined that: (i) The exercise of such voting
rights or the entering of such agreement, plan or other arrangement, as
applicable, by such Person, either alone or together with its Related
Persons, will not impair the ability of the ISE Stock, LLC and ISE, as
the manager, to carry out its functions and responsibilities,
including, but not limited to, under the Act, is otherwise in the best
interests of the ISE Stock, LLC and its Members; (ii) such voting
rights by such Person, either alone or together with its Related
Persons, will not impair the ability of the Commission to enforce the
Act; (iii) neither such Person nor its Related Persons are subject to
any applicable ``statutory disqualification'' (within the meaning of
section 3(a)(39) of the Act); and (iv) neither such Person nor its
Related Persons is an ``Exchange Member'' (as such term is defined in
the Constitution of ISE).
The ISE believes that these provisions will prevent any Person from
exercising undue control over ISE Stock, LLC and will protect the
ability of ISE, as well as other investors, to exercise their full
ownership rights. By specifically imposing a Voting Limitation on any
Person that owns Units which represent in the aggregate more than
twenty percent (20%) of the voting power then entitled to be cast, ISE
would ensure that it is in all cases, able to maintain proper control
over the exercise of its regulatory function in relation to ISE Stock,
LLC, and is not subject to influence that may be adverse to its
regulatory responsibilities from any Person who may own a substantial
number of the outstanding Units. This provision and other related
provisions relating to notice and rule filing requirements with respect
to any Person who acquires certain Percentage Interest \17\ levels in
ISE Stock would
[[Page 45872]]
serve to protect the integrity of ISE's self-regulatory
responsibilities.
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\17\ ``Percentage Interest'' shall mean (i) As of any time when
the number of outstanding Class B Units does not exceed 49, (x) with
respect to the Class B Units one percent (1%) (or fraction thereof)
as to each Unit (or fraction thereof) held by such holder of Class B
Units and (y) as to the holders of Class A Units, in the aggregate,
100% less the aggregate Percentage Interest of holders of Class B
Units as of such time; and as to each holder of a Class A Unit, the
product of (x) the aggregate Percentage Interest of all holders of
Class A Units and (y) a fraction, whose numerator is the number of
Class A Units then held by such holder and whose denominator is the
number of Class A Units then held by all holders of Class A Units;
and (ii) as of any time when the number of outstanding Class B Units
exceeds 49, as to each holder of a Class A Unit or Class B Unit, the
percentage equivalent of a fraction whose numerator is the number of
Units held by such holder and whose denominator is the aggregate
number of Units outstanding. LLC Agreement Section 2.1
``Definitions.''
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Ownership Limitations of Members and Changes in Ownership
Under Section 9.2(a) of the LLC Agreement, no Person (other than
ISE), either alone or together with its Related Persons, at any time,
may own, directly or indirectly, of record or beneficially, an
aggregate amount of Units which would result in more than twenty
percent (20%) Percentage Interest level in ISE Stock, LLC (the
``Concentration Limitation''). Any transfer of Units that result in the
acquisition and holding by any Person, alone or together with its
Related Persons, of an aggregate Percentage Interest level which
crosses the threshold level of twenty percent (20%) is subject to the
rule filing process pursuant to Section 19 of the Act. Furthermore, any
transfer of Units that results in a reduction of ISE's Percentage
Interest level of Class A Units or Precentage Interest level in ISE
Stock, LLC below the twenty percent (20%) threshold is subject to the
rule filing process pursuant to section 19 of the Act.\18\
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\18\ Telephone conference between Michou H.M. Nguyen, Special
Counsel, Division, Commission, and Tracy Tang, Assistant General
Counsel, Exchange, on August 1, 2006. See also LLC Agreement,
Section 9.2(d).
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The limitations imposed by Sections 9.2(a) may be waived by the
Manager, if in its sole discretion, it consented to expressly permit
such waiver of the Concentration Limitation; and such waiver shall have
been filed with, and approved by, the Commission under section 19(b) of
the Act and shall have become effective thereunder. In granting a
waiver, the Manager must have determined that: (i) Such beneficial
ownership of Units by such Person, either alone or together with its
Related Persons, will not impair the ability of ISE Stock, LLC and the
Manager to carry out its functions and responsibilities, including but
not limited to, under the Act, is otherwise in the best interests of
ISE Stock, LLC and its Members; (ii) such beneficial ownership of Units
by such Person, either alone or together with its Related Persons, will
not impair the ability of the Commission to enforce the Act; (iii)
neither such Person nor its Related Persons are subject to any
applicable ``statutory disqualification'' (within the meaning of
Section 3(a)(39) of the Act); and (iv) neither such Person nor its
Related Persons is an ``Exchange Member'' (as such term is defined in
the Constitution of ISE).
ISE believes that these provisions provide the Commission with the
authority to review and subject to public comment any substantial
transfer of ownership which the Commission may deem to have the
potential to affect the ISE's self-regulatory responsibilities
regarding its proposed ISE Stock facility.
Under Section 9.1, no Member may sell, assign, pledge or in any
manner dispose of or create or suffer the creation of a security
interest in or any encumbrance on all or a portion of its Units in the
Company (the commission of any such act being referred to as a
``Transfer'', any person who effects a Transfer being referred to as a
``Transferor'' and any person to whom a Transfer is effected being
referred to as a ``Transferee'') except in accordance with the terms
and conditions set forth in Article 9 of the LLC Agreement. Any
Transfer or purported Transfer of a Unit in ISE Stock, LLC not made in
accordance with the LLC Agreement shall be null and void and of no
force or effect whatsoever.
Section 9.3 provides that a Member may not Transfer all or any
portion of its Units in ISE Stock, LLC to any Person without the
consent of the Manager, which consent may be given or withheld in the
Manager's sole discretion; provided, that, subject to Section 9.10 of
the LLC Agreement, a Member may transfer all or a portion of its Units
in ISE Stock, LLC to one or more of its Permitted Transferees \19\
without the consent of the Manager or any other Member.\20\
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\19\ ``Permitted Transferee'' means, with respect to another
Person, (i) Any Person directly or indirectly owning, controlling or
holding with power to vote 80% or more of the outstanding voting
securities of and equity or beneficial interests in such other
Person, (ii) any Person 80% or more of whose outstanding voting
securities and equity or beneficial interests are directly or
indirectly owned, controlled or held with power to vote by such
other Person, (iii) any Person 80% or more of whose outstanding
voting securities and equity or other beneficial interests are
directly or indirectly owned, controlled or held with power to vote
by a Person directly or indirectly owning, controlling or holding
with power to vote 80% or more of the outstanding voting securities
and equity or other beneficial interests of such other Person with
whom affiliate status is being tested, (iv) any Family Members or
Family Trusts of such Person and (v) any Member. LLC Agreement
Section 2.1 ``Definitions.''
``Family Members'' means, with respect to any natural Person,
such Person's spouse, children, parents and lineal descendants of
such Person's parents. LLC Agreement Section 2.1 ``Definitions.''
``Family Trusts'' means, with respect to any natural Person, a
trust benefiting solely such Person or the Family Members of such
Person. LLC Agreement Section 2.1 ``Definitions.''
\20\ If a Member transfers all of its Unit, whether or not the
transfer is to a Related Person, such transfer must first be
approved by the Manager. Telephone conference between Michou H.M.
Nguyen, Special Counsel, Division, Commission, and Tracy Tang,
Assistant General Counsel, Exchange, on August 1, 2006 (clarifying
the additional restriction on transfers applicable when all of a
Member's interest is purported to be transferred). See also LLC
Agreement, Section 9.3(c).
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Under Section 9.11, unless a Transferee of a Member's Units becomes
a Substituted Member,\21\ such Transferee shall have no right to obtain
or require any information or account of ISE Stock, LLC transactions,
or to inspect ISE Stock, LLC's books or to vote on ISE Stock, LLC
matters. Furthermore, any successor or Transferee under the LLC
Agreement shall be subject to and bound by the LLC Agreement as if
originally a party to the LLC Agreement.
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\21\ ``Substituted Member'' means any Person admitted to the
Company as a substituted Member pursuant to the provisions of
Article 9. LLC Agreement Section 2.1 ``Definitions.''
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ISE believes that these transfer restrictions, together with the
Voting Limitation and Concentration Limitation, are adequately designed
to prohibit any Person, either alone or with its Related Persons, from
having the power to control a substantial number of outstanding votes
entitled to be cast on any matter, and more importantly, that may be
adverse to ISE's regulatory oversight responsibilities. Moreover, ISE
believes that these provisions serve to protect the integrity of ISE's
and the Commission's regulatory oversight responsibilities and allows
the Commission to review, and subject to public notice and comment, the
acquisition of substantial ownership or voting power by any Member.
Regulatory Jurisdiction Over Members
Under Section 6.1(b), each Member acknowledges that to the extent
that they relate to the business of ISE Stock, LLC, the books, records,
premises, officers, directors, agents and employees of Members shall be
deemed to be the books, records, premises, officers, directors, agents
and employees of ISE Stock, LLC for purposes of and subject to
oversight pursuant to the Act. Furthermore,\22\ the books, records,
premises, officers, directors, agents and employees of ISE Stock, LLC
shall be deemed to be the books, records, premises, officers,
directors, agents and employees of ISE for purposes of and subject to
oversight pursuant to the Act. In addition, the books and records of
ISE Stock, LLC will be kept within the U.S.\23\
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\22\ August 2nd Telephone Conference (conforming purpose section
to text of LLC Agreement).
\23\ LLC Agreement, Section 6.1(a).
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[[Page 45873]]
Section 13.1(a) of the LLC Agreement generally provides that a
Member may not disclose any confidential information of ISE Stock or of
any other Members to any persons, except as expressly provided by the
LLC Agreement. However, Section 13.1(a) provides exceptions for, among
other things, disclosure required by the Federal securities laws and
any other applicable self-regulatory organization, or in response to a
request by the Commission pursuant to the Act or by ISE. In addition,
confidential information pertaining to the self-regulatory function of
ISE (including but not limited to disciplinary matters, trading data,
trading practices and audit information) contained in the books and
records of ISE Stock, LLC shall: (i) Not be made available to any
persons (other than as provided in the next sentence) other than to
those officers, directors, employees, and agents of ISE Stock, LLC that
have a reasonable need to know the contents thereof; (ii) be retained
in confidence by ISE Stock, LLC and the officers, directors, employees
and agents of ISE Stock, LLC; and (iii) not be used for any commercial
purposes.\24\ Nothing in the LLC Agreement shall be interpreted as to
limit or impede the rights of the Commission or ISE to access and
examine such confidential information pursuant to the Federal
securities laws and the rules and regulations thereunder, or to limit
or impede the ability of any Member or any officers, directors,
employees or agents of ISE Stock, LLC or any Member to disclose such
confidential information to the Commission or ISE.\25\
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\24\ LLC Agreement, Section 13.1(b).
\25\ LLC Agreement, Section 13.1(c). August 2nd Telephone
Conference (conforming purpose section to text of LLC Agreement).
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ISE believes that these provisions would help to ensure access to
ISE's books and records by the Commission, and would help enable the
Commission to carry out its regulatory responsibilities regarding
ISE.\26\
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\26\ August 2nd Telephone Conference (conforming purpose section
to text of LLC Agreement).
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Under Section 6.1(c) of the LLC Agreement, ISE Stock, LLC, its
Members, and officers, directors, agents, and employees of ISE Stock,
LLC and its Members irrevocably submit to the jurisdiction of the U.S.
Federal courts, the Commission and ISE, for the purposes of any suit,
action or proceeding pursuant to the U.S. Federal securities laws, the
rules or regulations thereunder, directly arising out of, or relating
to, ISE Stock, LLC activities or Section 6.1 of the LLC Agreement
(except that such jurisdictions shall also include Delaware for any
such matter relating to the organizational or internal affairs of ISE
Stock, LLC), and hereby waives, and agrees not to assert by way of
motion, as a defense or otherwise in any such suit, action or
proceeding, any claims that it is not personally subject to the
jurisdiction of the Commission, that the suit, action or proceeding is
an inconvenient forum or that the venue of the suit, action or
proceeding is improper, or that the subject matter hereof may not be
enforced in or by such courts or agency.\27\
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\27\ Telephone conference between Michou H.M. Nguyen, Special
Counsel, Division, Commission, and Tracy Tang, Assistant General
Counsel, Exchange, on August 1, 2006 (conforming purpose section to
text of LLC Agreement).
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Under Section 6.1(d) of the LLC Agreement, ISE Stock, LLC, its
Members, the officers, directors, agents, and employees of ISE Stock,
LLC and its Members agree to comply with the Federal securities laws
and the rules and regulations thereunder and shall cooperate with ISE
and the Commission pursuant to their respective regulatory authority
and the provisions of the LLC Agreement; and to engage in conduct that
fosters and does not interfere with ISE Stock, LLC's ability to prevent
fraudulent and manipulative acts and practices; to promote just and
equitable principles of trade; to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities; to remove impediments to and perfect the mechanisms of a
free and open market and a national market system; and, in general, to
protect investors and the public interest.\28\
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\28\ Id.
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Section 6.1(e) provides that ISE Stock, LLC and each Member shall
take such action as is necessary to ensure that its respective
officers, directors, agents, and employees consent in writing to the
application to them of the applicable provisions of Section 6.1 with
respect to their ISE Stock, LLC-related activities.\29\
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\29\ Id.
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The Exchange believes that these provisions will serve as notice to
Members that they will be subject to the jurisdiction of the U.S.
Federal courts, the Commission and the ISE. While Members may represent
a diverse group of business interests, the ISE believes that it is
imperative that regulatory cooperation is assured from all Members,
regardless of each Member's business location, country of domicile or
other circumstance which the Commission may deem to have the potential
to be adverse to the regulatory responsibilities and interests of the
ISE, the Commission, or the U.S. Federal courts. Accordingly, these
provisions ensure that, should an occasion arise which requires
regulatory cooperation or jurisdictional submission from ISE Stock, LLC
or a Member, it will be forthcoming and uncontested.
Under Section 7.1(b) of the LLC Agreement, the Manager, may, after
appropriate notice and opportunity for hearing, suspend or terminate a
Member's voting privilege or membership: (i) In the event such Member
has violated a provision of this Agreement, any Federal or state
securities law, (ii) such Member or its Related Persons are subject to
any applicable ``statutory disqualification'' (within the meaning of
section 3(a)(39) of the Act); or (iii) if the Manager determines that
such action is necessary or appropriate in the public interest or for
the protection of investors.
ISE believes that this provision would require Members, regardless
of the nature of their association with ISE, to adhere to regulatory
responsibilities in that they must comply with Federal securities laws
and the rules and regulations thereunder, and cooperate with the
Commission and ISE pursuant to their regulatory authority or face
severe consequences such as termination of voting rights or ownership.
In addition, Members would be required to take into consideration and
facilitate ISE's and ISE Stock's ability to comply with the
requirements under section 6(b)(5) of the Act.\30\
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\30\ August 2nd Telephone Conference (clarifying that ISE as an
SRO has the responsibilities under 6(b)(5) of the Act and not ISE
Stock, LLC and clarifying ISE's interpretation of Section 6.1(d) of
the LLC Agreement). Section 6.1(d) of the LLC Agreement states that
Members shall comply with the Federal securities laws and the rules
and regulations thereunder and shall cooperate with ISE and the
Commission pursuant to their respective regulatory authority. ISE
interprets this to mean that Members must take into consideration
and facilitate ISE's responsibilities under section 6(b)(5) of the
Act.
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Fair Representation of Trading Participants, or EAMs
The Exchange believes that the ISE Stock corporate structure
assures the fair representation of its members, or trading
participants, in the selection of its directors and administration of
its affairs, and satisfies Commission requirements in that one or more
directors shall be representative of issuers and investors and not be
associated with a member of the exchange, broker, or dealer.
The Exchange notes that Members of (or holders of Units in) ISE
Stock, LLC are not automatically entitled to trading privileges on ISE
Stock, nor is the purchase of Units a pre-requisite for
[[Page 45874]]
exercising trading privileges on ISE Stock. Rather, in order to
exercise trading privileges on ISE Stock, a broker-dealer must be an
approved EAM of ISE. There is only one type of EAM membership for both
options trading on ISE and equities trading on ISE Stock. When an
applicant is approved under ISE rules as an EAM, the member is issued
one share of Class B Common Stock, Series B-3 (a ``B-3 Share''). Under
the ISE Constitution, holders of B-3 Shares, or EAMs, have the right to
elect two members (the ``B-3 Directors'') of the Board of Directors of
ISE (the ``ISE Board''). Nominees for election to the ISE Board to
serve as Industry Directors, including B-3 Directors, are currently
made by the Exchange's Nominating Committee, which is not a committee
of the ISE Board, and is comprised of representatives of the holders of
each series of Class B Common Stock. Stockholders also may nominate
Industry Director candidates for election to the ISE Board by petition.
Accordingly, since trading participants on ISE Stock must be EAMs, and
since EAMs have the right to elect B-3 Directors of the ISE Board, the
Exchange believes that ISE Stock trading participants are fairly
represented on the ISE Board. Additionally, as a result of ISE's stated
strategy of selling Units to entities that will support trading on ISE
Stock, trading participants will have representation via the ISE Stock,
LLC Advisory Board.
The Exchange proposes to modify the language in Rule 312
(Limitation on Affiliation between the Exchange and Members) to clarify
that this provision covers not only the Exchange, but the ISE Stock
Exchange LLC, as a facility of the ISE, as well.
Reorganization Into a Holding Company Structure
Finally, the Exchange notes that it intends to reorganize into a
holding company structure on September 1, 2006, in the manner described
in Securities Exchange Act Release No. 53705 (April 21, 2006) (SR-ISE-
2006-04) (the ``Reorganization'').\31\ Upon the Reorganization,
International Securities Exchange, LLC shall become the registered
``national securities exchange'' under section 6 of the Act, the SRO
and Manager of ISE Stock, LLC. International Securities Exchange
Holdings, Inc. (``ISE Holdings'') shall become the holder of the Class
A Units of ISE Stock, LLC.
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\31\ See Securities Exchange Act Release No. 53705 (April 21,
2006), 71 FR 25260 (April 28, 2006) (SR-ISE-2006-04).
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Prior to the Reorganization, the provisions relating to, among
other things, ownership and voting limitations (and exceptions
therefrom) are applicable to ISE, as the holder of the Class A Units.
Upon the Reorganization, those same provisions are applicable to ISE
Holdings, as the holder of the Class A Units. The Exchange believes
that applying the exceptions to the ownership and voting limitations to
ISE Holdings following the Reorganization is (i) Reasonable, as
International Securities Exchange, LLC, the SRO, will be a wholly-owned
subsidiary of ISE Holdings, and (ii) consistent with the provisions of
the LLC Agreement that prevent any Person from exercising undue control
over ISE Stock, LLC, as the Certificate of Incorporation and by-laws of
ISE Holdings include substantially similar ownership and voting
limitations (see, for example, Article Fourth, Subdivision III(a) and
(b) of the ISE Holdings Certificate of Incorporation).
2. Statutory Basis
ISE believes the proposal is consistent with the requirements of
the Act and the rules and regulations promulgated thereunder that are
applicable to a national securities exchange, and in particular, with
section 6(b) of the Act.\32\ ISE believes that the proposal is
consistent with section 6(b)(5) of the Act \33\ in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to remove impediments to and
perfect the mechanism for a free and open market and a national market
system, and, in general, to protect investors and the public interest.
In particular, the ISE believes that the proposal is designed to enable
it to promote competition in the trading of equity securities through
establishing a new marketplace.
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\32\ 15 U.S.C. 78f(b).
\33\ 15 U.S.C. 78f(b)(5).
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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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments on this proposal from members,
participants, or others.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) As the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding, or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve 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 e-mail to rule-comments@sec.gov. Please include
File Number SR-ISE-2006-45 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2006-45. This
file number should be included on the subject line if e-mail 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 inspection
and copying in the Commission's Public Reference
[[Page 45875]]
Room. Copies of the filing also will be available for inspection and
copying at the principal office of the Exchange. All comments received
will be posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-ISE-2006-45 and should be submitted on
or before August 31, 2006.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-13005 Filed 8-9-06; 8:45 am]
BILLING CODE 8010-01-P