49498 Federal Register / Vol. 73, No. 163 / Thursday, August 21, 2008 / Notices 

1 15 U.S.C. 78f. 

2See Securities Exchange Act Release No. 57322 

(February 13, 2008), 73 FR 9370 (‘‘Notice’’). 

3The commenter expressed support for the BATS 

Exchange Form 1. See letter from Brian McPartlin 

dated February 14, 2008. 

4 In Amendment No. 2, BATS Exchange modified 

its application by: (1) Updating its response to the 

Form 1 Exhibits to reflect, among other things, 

certain personnel changes, the existence of a new 

affiliate, BATS Trading Limited, audited financials 

for BATS Trading, Inc. (‘‘BATS Trading’’), and how 

BATS Exchange intends to fulfill its regulatory 

obligations; (2) adding a provision to the BATS 

Exchange Amended and Restated By-Laws that 

allows the stockholder of BATS Exchange to 

appoint the initial Member Representative Directors 

to the BATS Exchange Board, and amending the 

definition of ‘‘Executive Representative’’ of a 

member of BATS Exchange; (3) updating certain 

provisions of the Investors Rights Agreement; and 

(4) amending the BATS Holdings Amended and 

Restated Certificate of Incorporation to reduce the 

number of authorized shares of stock of BATS 

Holdings, Inc. (‘‘BATS Holdings’’). BATS Exchange 

also made certain modifications to its proposed 

rules to: (1) Change the start of its pre-opening 

session from 9:00 a.m. to 8:00 a.m.; (2) remove the 

ability of a person to submit one membership 

application with the Financial Industry Regulatory 

Authority, Inc. (‘‘FINRA’’), when applying for 

membership in both FINRA and BATS Exchange; 

(3) clarify that the requirement for eligibility for 

BATS Exchange membership of membership in 

another SRO applies for continued membership; (4) 

clarify that the 90-day waive-in period will begin 

on the date that BATS Exchange’s application for 

registration as a national securities exchange is 

approved by the Commission; (5) amend the BATS 

Only Order type to provide that a non-displayed 

order would get a new timestamp when it becomes 

displayed; (6) add continuing education 

requirements for Authorized Traders that are 

substantially similar to those of FINRA; (7) specify 

certain BATS Exchange rules and recommended 

fine amounts for minor rule violations; (8) delete a 

provision requiring non-clearing members to 

implement certain procedures of FINRA’s Code of 

Practice; (9) amend its rule relating to failures to 

deliver/receive to conform to Regulation SHO; and 

(10) adding a rule to codify the ability of BATS 

Exchange to enter into an agreement with another 

self-regulatory organization (‘‘SRO’’) to provide 

regulatory services to BATS Exchange. The changes 

proposed in Amendment No. 2 either are not 

material or are otherwise responsive to the concerns 

of the Commission. 

5 15 U.S.C. 78f(b) and 78s(a). 

6 15 U.S.C. 78k–1. 

7 15 U.S.C. 78f(b)(8). 

8See BATS Exchange Rule 2.11. See also infra 

note 151 and accompanying text. 

9See BATS Holdings Amended and Restated ByLaws Article XII and Article XIV, Sections 14.01, 

14.02, 14.03, 14.04, 14.05, and 14.06. 

10See BATS Holdings Amended and Restated ByLaws Article XIV, Section 14.05. 

11See BATS Holdings Amended and Restated ByLaws Article XIV, Section 14.03. 

12 Id. 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–58375; File No. 10–182] 

In the Matter of the Application of 

BATS Exchange, Inc. for Registration 

as a National Securities Exchange; 

Findings, Opinion, and Order of the 

Commission 

August 18, 2008. 

I. Introduction 

On November 8, 2007, BATS 

Exchange, Inc. (‘‘BATS Exchange’’ or 

‘‘Exchange’’) submitted to the Securities 

and Exchange Commission 

(‘‘Commission’’) a Form 1 application 

(‘‘Form 1’’) under the Securities 

Exchange Act of 1934 (‘‘Act’’), seeking 

registration as a national securities 

exchange pursuant to Section 6 of the 

Act.1 On February 13, 2008, BATS 

Exchange submitted Amendment No. 1 

to its Form 1. Notice of the application, 

as amended, was published for 

comment in the Federal Register on 

February 20, 2008.2 The Commission 

received one comment letter regarding 

the BATS Exchange Form 1.3 On June 

18, 2008, BATS Exchange filed 

Amendment No. 2 to its Form 1.4

II. Statutory Standards 

Under Sections 6(b) and 19(a) of the 

Act,5 the Commission shall by order 

grant a registration as a national 

securities exchange if it finds that the 

exchange is so organized and has the 

capacity to carry out the purposes of the 

Act and can comply, and can enforce 

compliance by its members and persons 

associated with its members, with the 

provisions of the Act, the rules and 

regulations thereunder, and the rules of 

the exchange. 

As discussed in greater detail below, 

the Commission finds that BATS 

Exchange’s application for exchange 

registration meets the requirements of 

the Act and the rules and regulations 

thereunder. Further, the Commission 

finds that the proposed rules of BATS 

Exchange are consistent with Section 6 

of the Act in that, among other things, 

they are designed to: (1) Assure fair 

representation of an exchange’s 

members in the selection of its directors 

and administration of its affairs and 

provide that, among other things, one or 

more directors shall be representative of 

investors and not be associated with the 

exchange, or with a broker or dealer; (2) 

prevent fraudulent and manipulative 

acts and practices, promote just and 

equitable principles of trade, foster 

cooperation and coordination with 

persons engaged in regulating, clearing, 

settling, processing information with 

respect to, and facilitating transactions 

in securities, remove impediments to 

and perfect the mechanisms of a free 

and open market and a national market 

system; and (3) protect investors and the 

public interest. The Commission also 

believes that the rules of BATS 

Exchange are consistent with Section 

11A of the Act.6 Finally, the 

Commission finds that the proposed 

rules of BATS Exchange do not impose 

any burden on competition not 

necessary or appropriate in furtherance 

of the purposes of the Act.7

III. Discussion 

A. Corporate Structure 

BATS Exchange has applied to the 

Commission to register as a national 

securities exchange. BATS Holdings, a 

Delaware corporation, will wholly own 

BATS Exchange and BATS Trading. 

Currently, BATS Trading, a registered 

broker-dealer, operates the BATS ECN. 

Before operation of BATS Exchange as 

a national securities exchange, BATS 

Trading will transfer most of its assets 

to BATS Exchange. BATS Trading will 

continue as a broker-dealer with the sole 

function of providing outbound order 

routing services to BATS Exchange.8

1. Self-Regulatory Function of BATS 

Exchange; Relationship Between BATS 

Holdings, Inc. and BATS Exchange; 

Jurisdiction Over BATS Holdings, Inc. 

Although BATS Holdings will not 

itself carry out regulatory functions, its 

activities with respect to the operation 

of BATS Exchange must be consistent 

with, and not interfere with, the 

Exchange’s self-regulatory obligations. 

The proposed BATS Holdings corporate 

documents include certain provisions 

that are designed to maintain the 

independence of the Exchange’s selfregulatory function from BATS 

Holdings, enable the Exchange to 

operate in a manner that complies with 

the federal securities laws, including the 

objectives of Sections 6(b) and 19(g) of 

the Act, and facilitate the ability of the 

Exchange and the Commission to fulfill 

their regulatory and oversight 

obligations under the Act.9

For example, BATS Holdings submits 

to the Commission’s jurisdiction with 

respect to activities relating to BATS 

Exchange,10 and agrees to provide the 

Commission and BATS Exchange with 

access to its books and records that are 

related to the operation or 

administration of BATS Exchange.11 In 

addition, to the extent they are related 

to the operation or administration of 

BATS Exchange, the books, records, 

premises, officers, directors, agents, and 

employees of BATS Holdings shall be 

deemed the books, records, premises, 

officers, directors, agents, and 

employees of BATS Exchange for 

purposes of, and subject to oversight 

pursuant to, the Act.12 BATS Holdings 

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Federal Register / Vol. 73, No. 163 / Thursday, August 21, 2008 / Notices 49499 

13This requirement to keep confidential nonpublic information relating to the self-regulatory 

function shall not limit the Commission’s ability to 

access and examine such information or limit the 

ability of directors, officers, or employees of BATS 

Holdings to disclose such information to the 

Commission. See BATS Holdings Amended and 

Restated By-Laws Article XIV, Section 14.02. 

14See BATS Holdings Amended and Restated ByLaws Article XIV, Section 14.02. 

15See BATS Holdings Amended and Restated ByLaws Article XIV, Section 14.01. 

16See BATS Holdings Amended and Restated 

Certificate of Incorporation TWELFTH and BATS 

Holdings Amended and Restated By-Laws Article 

XII. 

17 15 U.S.C. 78t(a). 

18 15 U.S.C. 78t(e). 

19 15 U.S.C. 78u–3. 

20These provisions are generally consistent with 

ownership and voting limits approved by the 

Commission for other SROs. See e.g., Securities 

Exchange Act Release Nos. 53963 (June 8, 2006), 71 

FR 34660 (June 15, 2006) (SR–NSX–2006–03) 

(‘‘NSX Demutualization Order’’); 51149 (February 8, 

2005), 70 FR 7531 (February 14, 2005) (SR–CHX–

2004–26) (‘‘CHX Demutualization Order’’); and 

49098 (January 16, 2004), 69 FR 3974 (January 27, 

2004) (SR–Phlx–2003–73) (‘‘Phlx Demutualization 

Order’’). 

21See BATS Holdings Amended and Restated 

Certificate of Incorporation FIFTH (a)(ii). 

22See BATS Holdings Amended and Restated 

Certificate of Incorporation FIFTH (b)(i)(A). 

23See BATS Holdings Amended and Restated 

Certificate of Incorporation FIFTH (b)(i)(B). 

24See BATS Holdings Amended and Restated 

Certificate of Incorporation FIFTH (e). 

25See BATS Holdings Amended and Restated 

Certificate of Incorporation FIFTH (b)(i)(C). 

26See BATS Holdings Amended and Restated 

Certificate of Incorporation FIFTH (d). 

27See BATS Holdings Amended and Restated 

Certificate of Incorporation FIFTH (b)(ii)(B). 

28These provisions are generally consistent with 

waiver of ownership and voting limits approved by 

the Commission for other SROs. See e.g., NSX 

Demutualization Order, supra note 20; CHX 

Demutualization Order, supra note 20; and 

Securities Exchange Act Release No. 49718 (May 

17, 2004), 69 FR 29611 (May 24, 2004) (SR–PCX–

2004–08). 

29See, e.g., Securities Exchange Act Release Nos. 

53128 (January 13, 2006), 71 FR 3550 (January 23, 

2006) (File No. 10–131) (‘‘Nasdaq Exchange 

Registration Order’’) and 53382 (February 27, 2006), 

71 FR 11251 (March 6, 2006) (SR–NYSE–2005–77) 

(‘‘NYSE/Archipelago Merger Approval Order’’). 

30See BATS Exchange Amended and Restated 

By-Laws Article I(cc). 

31See 15 U.S.C. 78s. 

32See BATS Exchange Amended and Restated 

By-Laws Article IV, Section 7. 

also agrees to keep confidential nonpublic information relating to the selfregulatory function 13 of BATS 

Exchange and not to use such 

information for any non-regulatory 

purpose.14 In addition, the board of 

directors of BATS Holdings, as well as 

its officers, employees, and agents, are 

required to give due regard to the 

preservation of the independence of the 

Exchange’s self-regulatory function.15

Further, BATS Holdings By-Laws 

require that any changes to the BATS 

Holdings Certificate of Incorporation 

and By-Laws be submitted to the Board 

of Directors of the Exchange (‘‘Exchange 

Board’’), and, if such amendment is 

required to be filed with the 

Commission pursuant to Section 19(b) 

of the Act, such change shall not be 

effective until filed with, or filed with 

and approved by, the Commission.16

The Commission finds that these 

provisions are consistent with the Act, 

and that they will assist the Exchange in 

fulfilling its self-regulatory obligations 

and in administering and complying 

with the requirements of the Act. 

The Commission also believes that 

under Section 20(a) of the Act 17 any 

person with a controlling interest in 

BATS Exchange would be jointly and 

severally liable with and to the same 

extent that BATS Exchange is liable 

under any provision of the Act, unless 

the controlling person acted in good 

faith and did not directly or indirectly 

induce the act or acts constituting the 

violation or cause of action. In addition, 

Section 20(e) of the Act 18 creates aiding 

and abetting liability for any person 

who knowingly provides substantial 

assistance to another person in violation 

of any provision of the Act or rule 

thereunder. Further, Section 21C of the 

Act 19 authorizes the Commission to 

enter a cease-and-desist order against 

any person who has been ‘‘a cause of’’

a violation of any provision of the Act 

through an act or omission that the 

person knew or should have known 

would contribute to the violation. These 

provisions are applicable to BATS 

Holdings’ dealings with BATS 

Exchange. 

2. Ownership and Voting Limitations; 

Changes in Control of BATS Exchange 

The BATS Holdings proposed 

Amended and Restated Certificate of 

Incorporation includes restrictions on 

the ability to own and vote shares of 

capital stock of BATS Holdings.20 These 

limitations are designed to prevent any 

shareholder from exercising undue 

control over the operation of BATS 

Exchange and to assure that the 

Exchange and the Commission are able 

to carry out their regulatory obligations 

under the Act. 

Generally, no person, either alone or 

together with its related persons,21 may 

beneficially own more than forty 

percent of any class of capital stock of 

BATS Holdings.22 The BATS Holdings 

proposed Amended and Restated 

Certificate of Incorporation prohibits 

BATS Exchange members, either alone 

or together with their related persons, 

from beneficially owning more than 

twenty percent of shares of any class of 

capital stock of BATS Holdings.23 If any 

stockholder violates these ownership 

limits, BATS Holdings will redeem the 

shares in excess of the applicable 

ownership limit for their fair market 

value.24 In addition, no person, alone or 

together with its related persons, may 

vote or cause the voting of more than 

twenty percent of the voting power of 

the then issued and outstanding capital 

stock of BATS Holdings.25 If any 

stockholder purports to vote, or cause 

the voting of, shares that would violate 

this voting limit, BATS Holdings will 

not honor such vote in excess of the 

voting limit.26

The BATS Holdings Board may waive 

the forty percent ownership limitation 

applicable to non-BATS Exchange 

member stockholders and the twenty 

percent voting limitation, pursuant to a 

resolution duly adopted by the Board of 

Directors, if it makes certain findings. 

Any such waiver would not be effective 

until approved by the Commission 

pursuant to Section 19 of the Act.27

However, as long as BATS Holdings 

directly or indirectly controls BATS 

Exchange, the BATS Holdings Board 

cannot waive the voting and ownership 

limits above twenty percent for BATS 

Exchange members and their related 

persons.28

Members that trade on an exchange 

traditionally have ownership interests 

in such exchange. As the Commission 

has noted in the past, however, a 

member’s interest in an exchange could 

become so large as to cast doubt on 

whether the exchange can fairly and 

objectively exercise its self-regulatory 

responsibilities with respect to that 

member.29 A member that is a 

controlling shareholder of an exchange 

might be tempted to exercise that 

controlling influence by directing the 

exchange to refrain from, or the 

exchange may hesitate to, diligently 

monitor and surveil the member’s 

conduct or diligently enforce its rules 

and the federal securities laws with 

respect to conduct by the member that 

violates such provisions. 

In addition, as proposed, BATS 

Exchange will be a wholly-owned 

subsidiary of BATS Holdings. The 

BATS Exchange Amended and Restated 

By-Laws identifies this ownership 

structure.30 Any changes to the BATS 

Exchange Amended and Restated ByLaws, including any change in the 

provision that identifies BATS Holdings 

as the sole owner, must be filed with 

and approved by the Commission 

pursuant to Section 19 of the Act.31

Further, pursuant to the BATS Exchange 

Amended and Restated By-Laws, BATS 

Holdings may not transfer or assign, in 

whole or in part, its ownership interest 

in BATS Exchange.32

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33See BATS Exchange Amended and Restated 

By-Laws Article III, Section 2(a). 

34See BATS Exchange Amended and Restated 

By-Laws Article III, Section 2(b). 

35 ‘‘Non-Industry Director’’ means a Director who 

is an Independent Director or any other individual 

who would not be an Industry Director. See BATS 

Exchange Amended and Restated By-Laws Article 

I(v). 

36 ‘‘Independent Director’’ means a ‘‘Director who 

has no material relationship with the [Exchange], or 

any Exchange Member or any affiliate of any such 

Exchange Member; provided, however, that an 

individual who otherwise qualifies as an 

Independent Director shall not be disqualified from 

serving in such capacity solely because such 

Director is a Director of the [Exchange] or its 

stockholder.’’ See BATS Exchange Amended and 

Restated By-Laws Article I(m). 

37 Generally, an ‘‘Industry Director’’ is, among 

other things, a Director that is or has been within 

the past three years an officer, director, employee, 

or owner of a broker-dealer. In addition, persons 

who have a consulting or employment relationship 

with the Exchange and its affiliates, are considered 

‘‘Industry.’’ See BATS Exchange Amended and 

Restated By-Laws Article I(o). 

38See BATS Exchange Amended and Restated 

By-Laws Article III, Section 2(b)(i). 

39See BATS Exchange Amended and Restated 

By-Laws Article III, Section 2(b)(ii). ‘‘Member 

Representative Director’’ means a ‘‘Director who has 

been elected by stockholders after having been 

nominated by the Member Nominating Committee 

or by an Exchange Member pursuant to these ByLaws and confirmed as the nominee of Exchange 

Members after majority vote of Exchange Members, 

if applicable. A Member Representative Director 

must be an officer, director, employee, or agent of 

an Exchange member that is not a Stockholder 

Exchange Member.’’ See BATS Exchange Amended 

and Restated By-Laws Article I(s). See also BATS 

Exchange Amended and Restated By-Laws Article 

III, Section 4(b). 

40See BATS Exchange Amended and Restated 

By-Laws Article I(s) and Article III, Section 4(g); see 

also Amendment No. 2. 

41See BATS Exchange Amended and Restated 

By-Laws Article IV, Section 1(b). 

42See BATS Exchange Amended and Restated 

By-Laws Article III, Section 2. 

43See BATS Exchange Amended and Restated 

By-Laws Article VI, Section 2. The Nominating 

Committee will be comprised of at least three 

directors, and the number of Non-Industry members 

on the Nominating Committee must equal or exceed 

the number of Industry members. 

44See BATS Exchange Amended and Restated 

By-Laws Article VI, Section 3. The Member 

Nominating Committee will be comprised of at least 

three directors, and each member of the Member 

Nominating Committee shall be a Member 

Representative member. 

45See BATS Exchange Amended and Restated 

By-Laws Article VI, Section 1. 

46See BATS Exchange Amended and Restated 

By-Laws Article VI, Section 1. 

47The Member Nominating Committee will 

solicit comments from BATS Exchange Members for 

the purpose of approving and submitting names of 

candidates for election to the position of Member 

Representative Director. See BATS Exchange 

Amended and Restated By-Laws Article III, Section 

4(b). 

48See BATS Exchange Amended and Restated 

By-Laws Article III, Section 4(c). The petition must 

be signed by Executive Representatives of ten 

percent or more of the Exchange members. No 

Exchange member, together with its affiliates, may 

account for more than fifty percent of the signatures 

endorsing a particular candidate. Id. 

49See BATS Exchange Amended and Restated 

By-Laws Article III, Section 4(e) and (f). Each BATS 

Exchange Member shall have the right to cast one 

vote for each available Member Representative 

Director nomination, provided that any such vote 

must be cast for a person on the List of Candidates 

and that no BATS Exchange Member, together with 

its affiliates, may account for more than twenty 

percent of the votes cast for a candidate. Id. 

50See BATS Exchange Amended and Restated 

By-Laws Article III, Section 4(f). 

51 Id. 

The Commission believes that these 

provisions are consistent with the Act. 

These requirements should minimize 

the potential that a person could 

improperly interfere with or restrict the 

ability of the Commission or the 

Exchange to effectively carry out their 

regulatory oversight responsibilities 

under the Act. 

3. BATS Exchange 

BATS Exchange has applied to the 

Commission to register as a national 

securities exchange. As part of its 

exchange application, the Exchange has 

filed the BATS Exchange Certificate of 

Incorporation and the proposed 

Amended and Restated By-Laws of 

BATS Exchange. In these documents, 

among other things, BATS Exchange 

establishes the composition of the 

Exchange Board and the BATS 

Exchange committees. 

a. The BATS Exchange Board of 

Directors 

The Exchange Board will be the 

governing body of BATS Exchange and 

possess all of the powers necessary for 

the management of the business and 

affairs of the Exchange and the 

execution of its responsibilities as an 

SRO. Under the BATS Exchange 

Amended and Restated By-Laws: 

• The Exchange Board will be 

composed of ten directors; 33

• One director will be the Chief 

Executive Officer of BATS Exchange; 34

• The number of Non-Industry 

Directors,35 including at least one 

Independent Director,36 will equal or 

exceed the sum of the number of 

Industry Directors 37 and Member 

Representative Directors; 38 and 

• At least twenty percent of the 

directors on the Exchange Board will be 

Member Representative Directors.39

BATS Holdings will appoint the 

initial Exchange Board, including the 

Member Representative Directors, 

which shall serve until the first annual 

meeting of stockholders.40 The first 

annual meeting of the stockholders will 

be held prior to BATS Exchange 

commencing operations as a national 

securities exchange.41 At the first 

annual meeting of stockholders, a new 

Exchange Board will be elected 

pursuant to the BATS Exchange 

Amended and Restated By-Laws. 

Therefore, prior to commencing 

operations as a national securities 

exchange, BATS Exchange Members 

will have the opportunity to participate 

in the selection of Member 

Representative Directors, and the 

Exchange Board will be in compliance 

with the compositional requirements 

contained in the BATS Exchange 

Amended and Restated By-Laws.42

BATS Holdings will appoint the 

initial Nominating Committee 43 and 

Member Nominating Committee,44

consistent with each committee’s 

compositional requirements,45 to 

nominate candidates for election to the 

Exchange Board. Each of the 

Nominating Committee and Member 

Nominating Committee, after 

completion of its respective duties for 

nominating directors for election to the 

Board for that year, shall nominate 

candidates to serve on the succeeding 

year’s Nominating Committee or 

Member Nominating Committee, as 

applicable. Additional candidates for 

the Member Nominating Committee 

may be nominated and elected by BATS 

Exchange Members pursuant to a 

petition process.46

The Nominating Committee will 

nominate candidates for each director 

position other than the Member 

Representative Directors, and BATS 

Holdings, as the sole shareholder, will 

elect those directors. The Member 

Nominating Committee will nominate 

candidates for each Member 

Representative Director position on the 

Exchange Board.47 Additional 

candidates may be nominated for the 

Member Representative Director 

positions by BATS Exchange Members 

pursuant to a petition process.48 If no 

candidates are nominated pursuant to a 

petition process, then the initial 

nominees of the Member Nominating 

Committee will be nominated as 

Member Representative Directors by the 

Nominating Committee. If a petition 

process produces additional candidates, 

then the candidates nominated pursuant 

to a petition process, together with those 

nominated by the Member Nominating 

Committee, will be presented to BATS 

Exchange Members for election to 

determine the final nomination of 

Member Representative Directors.49 The 

candidates who receive the most votes 

will be nominated as Member 

Representative Directors by the 

Nominating Committee.50 BATS 

Holdings, as the sole shareholder, will 

elect those candidates nominated by the 

Nominating Committee as Member 

Representative Directors.51

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52 15 U.S.C. 78f(b)(3). 

53See Nasdaq Exchange Registration Order and 

NYSE/Archipelago Merger Approval Order, supra 

note 29. 

54See, e.g., Regulation of Exchanges and 

Alternative Trading Systems, Securities Exchange 

Act Release No. 40760 (December 8, 1998), 63 FR 

70844 (December 22, 1998) (‘‘Regulation ATS 

Release’’). 

55See Nasdaq Exchange Registration Order and 

NYSE/Archipelago Merger Approval Order, supra 

note 29. 

56 15 U.S.C. 78f(b)(3). 

57The number of Non-Industry Directors on the 

Exchange Board must equal or exceed the sum of 

the Industry and Member Representative Directors, 

and the Exchange Board must include at least one 

Independent Director. See BATS Exchange 

Amended and Restated By-Laws Article III, Section 

2(b)(i). 

58See BATS Exchange Amended and Restated 

By-Laws Article V, Section 6(a). The Compensation 

Committee will be comprised of at least three 

people, and each voting member of the 

Compensation Committee shall be a Non-Industry 

Director. Id. 59See BATS Exchange Amended and Restated 

By-Laws Article V, Section 6(b). The Audit 

Committee will be comprised of at least three 

people, and a majority of the Audit Committee 

members shall be Non-Industry Directors and a 

Non-Industry Director shall serve as Chairman of 

the Audit Committee. Id. 60See BATS Exchange Amended and Restated 

By-Laws Article V, Section 6(c). The Regulatory 

Oversight Committee will be comprised of at least 

three people, and each member of the Regulatory 

Oversight Committee shall be a Non-Industry 

Director. Id. 61See BATS Exchange Amended and Restated 

By-Laws Article V, Section 6(d). The Appeals 

Committee shall consist of one Independent 

Director, one Industry Director, and one Member 

Representative Director. Id. 

62See BATS Exchange Amended and Restated 

By-Laws Article V, Section 6(e). The number of 

Non-Industry Directors on the Executive Committee 

shall equal or exceed the number of Industry 

Directors. The percentage of Independent Directors 

on the Executive Committee shall be at least as great 

as the percentage of Independent Directors on the 

whole Exchange Board, and the percentage of 

Member Representative Directors on the Executive 

Committee shall be at least as great as the 

percentage of Member Representative Directors on 

the whole Exchange Board. Id. 

63See BATS Exchange Amended and Restated 

By-Laws Article V, Section 6(f). 

64See BATS Exchange Amended and Restated 

By-Laws Article VI, Section 2, and supra note 43. 

65See BATS Exchange Amended and Restated 

By-Laws Article VI, Section 1, and supra note 44. 

Additional candidates for the Member Nominating 

Committee may be nominated and elected by BATS 

Exchange members pursuant to a petition process. 

See supra note 48 and accompanying text. 

66See Section 6(b)(1) of the Act, 15 U.S.C. 

78f(b)(1). 

67 Id. See also Section 19(g) of the Act, 15 U.S.C. 

78s(g). 

68See BATS Exchange Rules 2.3 and 2.5(a)(4) and 

Amendment No. 2. 

69 Id. 

70See BATS Exchange Rule 2.4. 

71 Id. 

72 Id. 

73See BATS Exchange Rule 2.6 and Amendment 

No. 2. 

The Commission believes that the 

requirement in the BATS Exchange 

Amended and Restated By-Laws that 

twenty percent of the directors be 

Member Representative Directors and 

the means by which they are chosen by 

members provides for the fair 

representation of members in the 

selection of directors and the 

administration of BATS Exchange 

consistent with the requirement in 

Section 6(b)(3) of the Act.52 As the 

Commission has previously noted, this 

requirement helps to ensure that 

members have a voice in the use of selfregulatory authority, and that an 

exchange is administered in a way that 

is equitable to all those who trade on its 

market or through its facilities.53

The Commission has previously 

stated its belief that the inclusion of 

public, non-industry representatives on 

exchange oversight bodies is critical to 

an exchange’s ability to protect the 

public interest.54 Further, public, nonindustry representatives help to ensure 

that no single group of market 

participants has the ability to 

systematically disadvantage other 

market participants through the 

exchange governance process. The 

Commission believes that public 

directors can provide unique, unbiased 

perspectives, which should enhance the 

ability of the Exchange Board to address 

issues in a non-discriminatory fashion 

and foster the integrity of BATS 

Exchange.55 The Commission believes 

that the Exchange Board satisfies the 

requirements in Section 6(b)(3) of the 

Act,56 which requires that one or more 

directors be representative of issuers 

and investors and not be associated with 

a member of the exchange, or with a 

broker or dealer.57

b. BATS Exchange Committees 

In the BATS Exchange Amended and 

Restated By-Laws, BATS Exchange has 

proposed to establish several 

committees. Specifically, BATS 

Exchange has proposed to establish the 

following committees that would be 

appointed by the Chairman of the 

Exchange Board, with the approval of 

the Exchange Board: A Compensation 

Committee; 58 Audit Committee; 59

Regulatory Oversight Committee; 60

Appeals Committee; 61 Executive 

Committee; 62 and Finance Committee.63

In addition, BATS Exchange has 

proposed to establish a Nominating 

Committee 64 and a Member Nominating 

Committee, which would be elected on 

an annual basis by vote of 

stockholders.65 For the reasons 

discussed above, the Commission 

believes that BATS Exchange’s 

proposed committees should enable 

BATS Exchange to carry out its 

responsibilities under the Act and are 

consistent with the Act. 

B. Regulation of BATS Exchange 

As a prerequisite for the 

Commission’s approval of an exchange’s 

application for registration, an exchange 

must be organized and have the capacity 

to carry out the purposes of the Act.66

Specifically, an exchange must be able 

to enforce compliance by its members, 

and persons associated with its 

members, with the federal securities 

laws and the rules of the exchange.67

1. Membership 

Membership on BATS Exchange will 

be open to any registered broker or 

dealer that is a member of another 

registered national securities exchange 

or association, or any natural person 

associated with such a registered broker 

or dealer.68 To remain eligible for 

membership in BATS Exchange, a BATS 

Exchange member must be a member of 

another SRO at all times.69

For a temporary 90-day period after 

approval of BATS Exchange’s 

application, an applicant that is an 

active member of another SRO and is a 

current or former subscriber to the 

BATS ECN will be able to apply through 

an expedited process to become a BATS 

Exchange member, and to register with 

BATS Exchange all of its associated 

persons whose registrations are active at 

the time BATS Exchange is approved as 

a national securities exchange, by 

submitting a waive-in application form, 

including membership agreements.70

BATS Exchange may request additional 

documentation in addition to the waivein application form in order to 

determine that a waive-in applicant 

meets BATS Exchange’s qualification 

standards.71 All of the firm’s associated 

persons who are registered in categories 

recognized by BATS Exchange rules 

would become registered persons of a 

BATS Exchange member firm.72

All other applicants (and after the 90- 

day period has ended, those that could 

have waived in through the expedited 

process) may apply for membership in 

BATS Exchange by submitting a full 

membership application to BATS 

Exchange.73 Applications for 

association with an Exchange Member 

shall be submitted to the Exchange on 

Form U–4 and such other forms as 

BATS Exchange may prescribe. 

BATS Exchange will receive and 

review all applications for membership 

in the Exchange. If the Exchange is 

satisfied that the applicant is qualified 

for membership, the Exchange will 

promptly notify the applicant, in 

writing, of such determination, and the 

applicant shall be a member of the 

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49502 Federal Register / Vol. 73, No. 163 / Thursday, August 21, 2008 / Notices 

74See BATS Exchange Rule 2.6(c). 

75See BATS Exchange Rule 2.6(d). 

76See BATS Exchange Rule 2.7; see also BATS 

Exchange Rules Chapters VII and VIII. 

77See BATS Exchange Rule 10.3; see also BATS 

Exchange Amended and Restated By-Laws Article 

V, Section 6(d). 

78See BATS Exchange Rule 10.5(b). Membership 

decisions are subject to review by the Commission. 

See BATS Exchange Rule 10.7. 

79 15 U.S.C. 78f. 

80 5 U.S.C. 78f(b)(2). 

81See Nasdaq Exchange Registration Order, supra 

note 29. 

82See BATS Exchange Amended and Restated 

By-Laws Articles I(v) and V, Section 6(c). 

83See BATS Exchange Amended and Restated 

By-Laws Article V, Section 6(c). 

84See BATS Exchange Amended and Restated 

By-Laws Article VII, Section 9. 

85 Id. 

86 Id. 

87 Id. 

88 Id. See Nasdaq Exchange Registration Order, 

supra note 29. 

89See BATS Exchange Amended and Restated 

By-Laws Article X, Section 4. 

90See, e.g., Securities Exchange Act Release No. 

53382 (February 27, 2006), 71 FR 11251 (March 6, 

2006). 

91See BATS Exchange Rule 2.10. 

92See infra Section III.E. 

93See 15 U.S.C. 78f(b)(1). 

94See infra Section III.E. The Commission has 

approved similar arrangements for other SROs. See, 

e.g., Securities Exchange Act Release Nos. 57478 

(March 12, 2008), 73 FR 14521 (March 18, 2008) 

(SR–NASDAQ–2007–004) (‘‘NOM Approval 

Order’’) and 54391 (August 31, 2006), 71 FR 52836 

Exchange.74 If the Exchange is not 

satisfied that the applicant is qualified 

for membership, the Exchange shall 

promptly notify the applicant of the 

grounds for denial.75 Once an applicant 

is a member of the Exchange, it must 

continue to possess all the qualifications 

set forth in the BATS Exchange rules. 

When the Exchange has reason to 

believe that an Exchange member or 

associated person of a member fails to 

meet such qualifications, the Exchange 

may suspend or revoke such person’s 

membership or association.76

Appeal of a staff denial, suspension, 

or termination of membership will be 

heard by the Appeals Committee.77

Decisions of the Appeals Committee 

will be made in writing and will be sent 

to the parties to the proceeding. The 

decisions of the Appeals Committee will 

be subject to review by the Exchange 

Board, on its own motion, or upon 

written request by the aggrieved party or 

by the Chief Regulatory Officer (‘‘CRO’’). 

The Exchange Board will have sole 

discretion to grant or deny the request. 

The Exchange Board will conduct the 

review of the Appeals Committee’s 

decision. The Exchange Board may 

affirm, reverse, or modify the Appeals 

Committee’s decision. The Exchange 

Board’s decision is final.78

The Commission finds that the BATS 

Exchange’s membership rules are 

consistent with Section 6 of the Act,79

specifically Section 6(b)(2) of the Act,80

which requires that a national securities 

exchange have rules that provide that 

any registered broker or dealer or 

natural person associated with such 

broker or dealer may become a member 

and any person may become associated 

with an exchange member. The 

Commission notes that pursuant to 

Section 6(c) of the Act, an exchange 

must deny membership to any person, 

other than a natural person, that is not 

a registered broker or dealer, any natural 

person that is not, or is not associated 

with, a registered broker or dealer, and 

registered broker-dealers that do not 

satisfy certain standards, such as 

financial responsibility or operational 

capacity. As a registered exchange, 

BATS Exchange must independently 

determine if an applicant satisfies the 

standards set forth in the Act, regardless 

of whether an applicant is a member of 

another SRO.81

2. Regulatory Independence 

BATS Exchange has proposed several 

measures to help ensure the 

independence of its regulatory function 

from its market operations and other 

commercial interests. The regulatory 

operations of BATS Exchange will be 

supervised by the CRO and monitored 

by the Regulatory Oversight Committee. 

The Regulatory Oversight Committee 

will consist of three members, each of 

whom must be a Non-Industry 

Director.82 The Regulatory Oversight 

Committee will be responsible for 

monitoring the adequacy and 

effectiveness of the Exchange’s 

regulatory program, assessing the 

Exchange’s regulatory performance, and 

assisting the Exchange Board in 

reviewing the Exchange’s regulatory 

plan and the overall effectiveness of the 

Exchange’s regulatory functions.83 The 

Regulatory Oversight Committee also 

will meet with the CRO in executive 

session at regularly scheduled meetings 

and at any time upon request of the CRO 

or any member of the Regulatory 

Oversight Committee.84

BATS Exchange proposes that its CRO 

have general supervision of the 

regulatory operations of the Exchange, 

including overseeing surveillance, 

examination, and enforcement 

functions.85 The CRO also will 

administer any regulatory services 

agreement with another SRO to which 

BATS Exchange is a party.86 The CRO 

will be an Executive Vice President or 

Senior Vice President that reports 

directly to the Chief Executive Officer.87

The CRO also may serve as BATS 

Exchange’s General Counsel.88 In 

addition, any revenues received by 

BATS Exchange from fees derived from 

its regulatory function or regulatory 

penalties will not be used for nonregulatory purposes.89

The Commission is concerned about 

the potential for unfair competition and 

conflicts of interest between an 

exchange’s self-regulatory obligations 

and its commercial interests that could 

exist if an exchange were to otherwise 

become affiliated with one of its 

members, as well as the potential for 

unfair competitive advantage that the 

affiliated member could have by virtue 

of informational or operational 

advantages, or the ability to receive 

preferential treatment.90 BATS 

Exchange Rule 2.10 provides that 

without the prior approval of the 

Commission, BATS Exchange or any 

entity with which it is affiliated shall 

not, directly or indirectly, acquire or 

maintain an ownership interest in a 

BATS Exchange member, and a BATS 

Exchange member shall not be or 

become an affiliate of BATS Exchange, 

or an affiliate of any affiliate of the 

Exchange.91 BATS Exchange also has 

proposed for Commission approval 

BATS Exchange Rule 2.11, which 

provides that BATS Trading, a 

registered broker-dealer, will provide an 

Outbound Router function as a facility 

of the Exchange pursuant to certain 

conditions and limitations.92 BATS 

Trading is an affiliate of BATS Exchange 

and will become a member of BATS 

Exchange. This affiliation would not be 

consistent with proposed Rule 2.10 

absent prior Commission approval. As 

part of the approval today of BATS 

Exchange’s application for registration 

as a national securities exchange, the 

Commission is approving BATS 

Exchange Rule 2.11. 

The Commission believes that the 

Exchange’s proposal is consistent with 

the Act, particularly with Section 

6(b)(1), which requires an exchange to 

be so organized and have the capacity 

to carry out the purposes of the Act.93

Although the Commission continues to 

be concerned about potential unfair 

competition and conflict of interest 

between an exchange’s self-regulatory 

obligations and its commercial interests 

when an exchange is affiliated with one 

of its members, the Commission 

believes that it is consistent with the 

Act to permit BATS Trading to become 

an affiliate of BATS Exchange for the 

limited Outbound Router function, in 

light of the protections afforded by the 

conditions and limitations imposed in 

BATS Exchange’s rules.94

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(September 7, 2006) (SR–NSX–2006–08) (‘‘NSX 

Blade Approval Order’’). 

95See BATS Exchange Rule 13.7; see also 

Amendment No. 2. Pursuant to the applicable 

provisions of the Freedom of Information Act, 5 

U.S.C. 552, and Commission regulations 

thereunder, 17 CFR 200.83, BATS Exchange has 

requested confidential treatment for the Regulatory 

Contract. 

96See Amendment No. 2. 

97See, e.g., Regulation ATS Release, supra note 

54. See also Securities Exchange Act Release 50122 

(July 29, 2004), 69 FR 47962 (August 6, 2004) (SR–

Amex–2004–32) (order approving rule that allowed 

Amex to contract with another SRO for regulatory 

services) (‘‘Amex Regulatory Services Approval 

Order’’); NOM Approval Order, supra note 94; and 

Nasdaq Exchange Registration Order, supra note 29. 

98See Amex Regulatory Services Approval Order, 

supra note 97; NOM Approval Order, supra note 94; 

and Nasdaq Exchange Registration Order, supra 

note 29. The Commission notes that the Regulatory 

Contract is not before the Commission and, 

therefore, the Commission is not acting on it. 

99See Section 17(d)(1) of the Act and Rule 17d–

2 thereunder, 15 U.S.C. 78q(d)(1) and 17 CFR 

240.17d–2. See also infra notes 103–110 and 

accompanying text. 

100For example, if failings by FINRA have the 

effect of leaving BATS Exchange in violation of any 

aspect of BATS Exchange’s self-regulatory 

obligations, BATS Exchange would bear direct 

liability for the violation, while FINRA may bear 

liability for causing or aiding and abetting the 

violation. See Nasdaq Exchange Registration Order, 

supra note 29 and Securities Exchange Act Release 

No. 42455 (February 24, 2000), 65 FR 11388 (March 

2, 2000) (File No. 10–127) (order approving the 

International Securities Exchange LLC’s application 

for registration as a national securities exchange). 

101 Id. 

102Alternatively, BATS Exchange could 

demonstrate that it has the ability to fulfill its 

regulatory obligations. 

103 15 U.S.C. 78s(g)(1). 

104 15 U.S.C. 78q(d). 

105See Securities Exchange Act Release No. 

12935 (October 28, 1976), 41 FR 49091 (November 

8, 1976) (‘‘Rule 17d–2 Adopting Release’’). 

106 17 CFR 240.17d–2. 

107See Rule 17d–2 Adopting Release, supra note 

105. 

108See, e.g., Securities Exchange Act Release Nos. 

13326 (March 3, 1977), 42 FR 13878 (March 14, 

1977) (NYSE/Amex); 13536 (May 12, 1977), 42 FR 

26264 (May 23, 1977) (NYSE/BSE); 14152 

(November 9, 1977), 42 FR 59339 (November 16, 

1977) (NYSE/CSE); 13535 (May 12, 1977), 42 FR 

26269 (May 23, 1977) (NYSE/CHX); 13531 (May 12, 

1977), 42 FR 26273 (May 23, 1977) (NYSE/PSE); 

14093 (October 25, 1977), 42 FR 57199 (November 

1, 1977) (NYSE/Phlx); 15191 (September 26, 1978), 

43 FR 46093 (October 5, 1978) (NASD/BSE, CSE, 

CHX and PSE); 16858 (May 30, 1980), 45 FR 37927 

(June 5, 1980) (NASD/BSE, CSE, CHX and PSE); 

42815 (May 23, 2000), 65 FR 34762 (May 31, 2000) 

(NASD/ISE); and 54136 (July 12, 2006), 71 FR 

40759 (July 18, 2006) (NASD/Nasdaq). 

3. Regulatory Contract 

Although BATS Exchange will be an 

SRO with all of the attendant regulatory 

obligations under the Act, it has entered 

into a regulatory contract with FINRA 

(‘‘Regulatory Contract’’), under which 

FINRA will perform certain regulatory 

functions on BATS Exchange’s behalf.95

Specifically, BATS Exchange represents 

that FINRA will assist Exchange staff on 

registration issues on an as-needed 

basis, investigate potential violations of 

BATS Exchange’s rules or federal 

securities laws related to activity on the 

Exchange, conduct examinations related 

to market conduct on the Exchange by 

Members, assist the Exchange with 

disciplinary proceedings pursuant to 

BATS Exchange’s Rules, including 

issuing charges and conducting 

hearings, and provide dispute resolution 

services to BATS Exchange Members on 

behalf of the Exchange, including 

operation of the Exchange’s arbitration 

program. BATS Exchange represents 

that FINRA also will provide the 

Exchange with access to FINRA’s 

WebCRD system, and will assist with 

programming BATS-specific 

functionality relating to such system.96

Notwithstanding the Regulatory 

Contract, BATS Exchange will retain 

ultimate legal responsibility for the 

regulation of its members and its 

market. 

The Commission believes that it is 

consistent with the Act to allow BATS 

Exchange to contract with FINRA to 

perform examination, enforcement, and 

disciplinary functions.97 These 

functions are fundamental elements to a 

regulatory program, and constitute core 

self-regulatory functions. It is essential 

to the public interest and the protection 

of investors that these functions are 

carried out in an exemplary manner, 

and the Commission believes that 

FINRA has the expertise and experience 

to perform these functions on behalf of 

BATS Exchange.98

At the same time, BATS Exchange, 

unless relieved by the Commission of its 

responsibility,99 bears the responsibility 

for self-regulatory conduct and primary 

liability for self-regulatory failures, not 

the SRO retained to perform regulatory 

functions on the Exchange’s behalf. In 

performing these regulatory functions, 

however, FINRA may nonetheless bear 

liability for causing or aiding and 

abetting the failure of BATS Exchange to 

perform its regulatory functions.100

Accordingly, although FINRA will not 

act on its own behalf under its SRO 

responsibilities in carrying out these 

regulatory services for BATS Exchange, 

FINRA may have secondary liability if, 

for example, the Commission finds that 

the contracted functions are being 

performed so inadequately as to cause a 

violation of the federal securities laws 

by BATS Exchange.101

Although BATS Exchange has entered 

into the Regulatory Contact, the 

provisions in the Regulatory Contract 

that will specify the particular BATS 

Exchange and Commission rules for 

which FINRA will provide certain 

regulatory functions have not been 

finalized. Accordingly, the Commission 

is conditioning the operation of BATS 

Exchange on the execution of the 

Regulatory Contract and finalization of 

the provisions in the Regulatory 

Contract that will specify the BATS 

Exchange and Commission rules for 

which FINRA will provide regulatory 

functions.102

4. 17d–2 Agreement 

Section 19(g)(1) of the Act 103 requires 

every SRO to examine its members and 

persons associated with its members 

and to enforce compliance with the 

federal securities laws and the SRO’s 

own rules, unless the SRO is relieved of 

this responsibility pursuant to Section 

17(d) of the Act.104 Section 17(d) was 

intended, in part, to eliminate 

unnecessary multiple examinations and 

regulatory duplication with respect to 

members of more than one SRO 

(‘‘common members’’).105 Rule 17d–2 of 

the Act permits SROs to propose joint 

plans allocating regulatory 

responsibilities concerning common 

members.106 These agreements, which 

must be filed with and approved by the 

Commission, generally cover such 

regulatory functions as personnel 

registration, branch office examinations, 

and sales practices. Commission 

approval of a 17d–2 plan relieves the 

specified SRO of those regulatory 

responsibilities allocated by the plan to 

another SRO.107 Many existing SROs 

have entered in to such agreements.108

BATS Exchange has represented to 

the Commission that BATS Exchange 

and FINRA intend to file a 17d–2 

agreement with the Commission 

covering common members of BATS 

Exchange and FINRA. This agreement 

would allocate to FINRA regulatory 

responsibility, with respect to common 

members, for the following: 

• FINRA will examine common 

members of BATS Exchange and FINRA 

for compliance with federal securities 

laws, rules and regulations, and rules of 

BATS Exchange that have been certified 

by BATS Exchange as identical or 

substantially similar to FINRA rules. 

• FINRA will investigate common 

members of BATS Exchange and FINRA 

for violations of federal securities laws, 

rules or regulations, or BATS Exchange 

rules that has been certified by BATS 

Exchange as identical or substantially 

identical to a FINRA rule. 

• FINRA will enforce compliance by 

common members with federal 

securities laws, rules and regulations, 

and rules of BATS Exchange that have 

been certified by BATS Exchange as 

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109The Commission notes that regulation that is 

to be covered by the 17d–2 agreement for common 

members will be carried out by FINRA under the 

Regulatory Contract for BATS Exchange members 

that are not also members of FINRA. 

110Alternatively, BATS Exchange could 

demonstrate that it has the ability to fulfill its 

regulatory obligations. 

111See 15 U.S.C. 78f(b)(1). 

112See supra note 97 and accompanying text. 

113See BATS Exchange Rule 8.10(b). 

114See BATS Exchange Rule 8.10(c). 

115See generally BATS Exchange Amended and 

Restated By-Laws Article X and BATS Exchange 

Rules Chapters II and VIII. 

116See BATS Exchange Rules 2.2 and 8.1(a). 

117See BATS Exchange Rule 8.15 and 

Amendment No. 2. 

118 17 CFR 240.19d–1(c)(2). 

119 15 U.S.C. 78f(b)(6) and (b)(7). 

120See Section 6(b)(1) of the Act, 15 U.S.C. 

78f(b)(1). 

121To obtain authorized access to the BATS 

Exchange System, each User must enter in to a User 

Agreement with the Exchange. See BATS Exchange 

Rule 11.3(a). 

122BATS Exchange rules do not provide for 

specialists or market makers. 

123See BATS Exchange Rule 11.8. 

124 17 CFR 242.611. 

125See BATS Exchange Rule 11.9. 

126See BATS Exchange Rule 11.9(a)(2). 

127 17 CFR 242.600(b)(4). 

128See BATS Exchange Rule 11.9(c); see also 17 

CFR 242.600(b)(3). 

129See BATS Exchange Rules 11.5 and 11.9; see 

also 17 CFR 242.600(b)(3). 

130See BATS Exchange Rule 11.5(d)(1). 

131See BATS Exchange Rule 11.5(d)(2). 

132See BATS Exchange Rule 11.16. 

133 17 CFR 242.610(d). 

identical or substantially similar to 

FINRA rules. 

Because BATS Exchange anticipates 

entering into this 17d–2 agreement, it 

has not made provision to fulfill the 

regulatory obligations that would be 

undertaken by FINRA under this 

agreement with respect to common 

members of BATS Exchange and 

FINRA.109 Accordingly, the Commission 

is conditioning the operation of BATS 

Exchange on approval by the 

Commission of a 17d–2 agreement 

between BATS Exchange and FINRA 

that allocates the above specified 

matters to FINRA.110

5. Discipline and Oversight of Members 

As noted above, a prerequisite for the 

Commission approval of an exchange’s 

application for registration, an exchange 

must be organized and have the capacity 

to carry out the purposes of the Act. 

Specifically, an exchange must be able 

to enforce compliance by its members 

and persons associated with its 

members with federal securities laws 

and the rules of the exchange.111 As 

noted above, pursuant to the Regulatory 

Contract, FINRA will perform many of 

the initial disciplinary processes on 

behalf of BATS Exchange.112 For 

example, FINRA will investigate 

potential securities laws violations, 

issue complaints, and conduct hearings 

pursuant to BATS Exchange rules. 

Appeals from disciplinary decisions 

will be heard by the Appeals 

Committee 113 and the Appeals 

Committee’s decision shall be final. In 

addition, the Exchange Board may on its 

own initiative order review of a 

disciplinary decision.114

The BATS Amended and Restated ByLaws and BATS Exchange rules provide 

that the Exchange has disciplinary 

jurisdiction over its members so that it 

can enforce its members’ compliance 

with its rules and the federal securities 

laws.115 The Exchange’s rules also 

permit it to sanction members for 

violations of its rules and violations of 

the federal securities laws by, among 

other things, expelling or suspending 

members, limiting members’ activities, 

functions, or operations, fining or 

censuring members, or suspending or 

barring a person from being associated 

with a member, or any other fitting 

sanction.116 BATS Exchange’s rules also 

provide for the imposition of fines for 

certain minor rule violations in lieu of 

commencing disciplinary 

proceedings.117 Accordingly, as a 

condition to the operation of BATS 

Exchange, a Minor Rule Violation Plan 

(‘‘MRVP’’) filed by BATS Exchange 

under Act Rule 19d–1(c)(2) must be 

declared effective by the 

Commission.118

The Commission finds that the BATS 

Exchange’s Amended and Restated ByLaws and rules concerning its 

disciplinary and oversight programs are 

consistent with the requirements of 

Sections 6(b)(6) and 6(b)(7) 119 of the Act 

in that they provide fair procedures for 

the disciplining of members and 

persons associated with members. The 

Commission further finds that the rules 

of BATS Exchange provide it with the 

ability to comply, and with the 

authority 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 BATS 

Exchange.120

C. BATS Exchange Trading System 

1. Trading Rules 

BATS Exchange will operate a fully 

automated electronic order book. 

Exchange members and entities that 

enter into sponsorship arrangements 

with Exchange members will have 

access to the BATS Exchange system 

(collectively, ‘‘Users’’).121 Users will be 

able to electronically submit market and 

various types of limit orders to the 

Exchange from remote locations. All 

orders submitted to BATS Exchange 

will be displayed unless designated 

otherwise by the BATS Exchange 

member submitting the order. Displayed 

orders will be displayed on an 

anonymous basis at a specified price. 

Non-displayed orders will not be 

displayed but will be ranked in the 

BATS Exchange system at a specified 

price.122 The BATS Exchange system 

will continuously and automatically 

match orders pursuant to price/time 

priority, except that displayed orders 

will have priority over non-displayed 

orders at the same price.123

The BATS Exchange system is 

designed to comply with Rule 611 of 

Regulation NMS 124 by requiring that, 

for any execution to occur on the 

Exchange during regular trading hours, 

the price must be equal to, or better 

than, any ‘‘protected quotation’’ within 

the meaning of Regulation NMS 

(‘‘Protected Quotation’’), unless an 

exception to Rule 611 of Regulation 

NMS applies.125 BATS Exchange will 

direct any orders or portion of orders 

that cannot be executed in their entirety 

to away markets for execution through 

BATS Trading, unless the terms of the 

orders direct the Exchange not to route 

such orders away.126

BATS Exchange intends to operate as 

an automated trading center in 

compliance with Rule 600(b)(4) of 

Regulation NMS.127 BATS Exchange 

will display automated quotations at all 

times except in the event that a systems 

malfunction renders the system 

incapable of displaying automated 

quotations.128 The Exchange has 

designed its rules relating to orders, 

modifiers, and order execution to 

comply with the requirements of 

Regulation NMS, including an 

immediate-or-cancel functionality.129

These proposed rules include accepting 

orders marked as intermarket sweep 

orders, which will allow orders so 

designated to be automatically matched 

and executed without reference to 

Protected Quotations at other trading 

centers,130 and routing orders marked as 

intermarket sweep orders by a User to 

a specific trading center for 

execution.131 In addition, BATS 

Exchange rules address locked and 

crossed markets,132 as required by Rule 

610(d) of Regulation NMS.133 The 

Commission believes that BATS 

Exchange’s rules are consistent with the 

Act, in particular with the requirements 

of Rule 610(d) and Rule 611 of 

Regulation NMS. 

As stated above, BATS Exchange 

intends to operate as an automated 

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134 17 CFR 242.600(b)(58). 

135See Securities Exchange Act Release No. 

53829 (May 18, 2006), 71 FR 30038, 30041 (May 24, 

2006). 

136 15 U.S.C. 78k(a)(1). 

137 17 CFR 240.11a2–2(T). 

138The member may, however, participate in 

clearing and settling the transaction. 

139See letter to David Shillman, Associate 

Director, Division of Trading and Markets, 

Commission, from J. Craig Long, Foley & Lardner 

LLP, dated June 24, 2008 (‘‘BATS Exchange 11(a) 

Letter’’). 

140See, e.g., Nasdaq Exchange Registration Order, 

supra note 29; and Securities Exchange Act Release 

Nos. 49068 (January 13, 2004), 69 FR 2775 (January 

20, 2004) (order approving the Boston Options 

Exchange as an options trading facility of the 

Boston Stock Exchange); 44983 (October 25, 2001), 

66 FR 55225 (November 1, 2001) (order approving 

Archipelago Exchange (‘‘ArcaEx’’) as electronic 

trading facility of the Pacific Exchange (‘‘PCX’’) 

(‘‘ArcaEx Order’’)); 29237 (May 24, 1991), 56 FR 

24853 (May 31, 1991) (regarding NYSE’s Off-Hours 

Trading Facility); 15533 (January 29, 1979), 44 FR 

6084 (January 31, 1979) (regarding the American 

Stock Exchange (‘‘Amex’’) Post Execution Reporting 

System, the Amex Switching System, the 

Intermarket Trading System, the Multiple Dealer 

Trading Facility of the Cincinnati Stock Exchange, 

the PCX Communications and Execution System, 

and the Philadelphia Stock Exchange’s (‘‘Phlx’’) 

Automated Communications and Execution System 

(‘‘1979 Release’’)); and 14563 (March 14, 1978), 43 

FR 11542 (March 17, 1978) (regarding the NYSE’s 

Designated Order Turnaround System (‘‘1978 

Release’’)). 

141See BATS Exchange 11(a) Letter, supra note 

139. The member may cancel or modify the order, 

or modify the instructions for executing the order, 

but only from off the Exchange floor. Id. The 

Commission has stated that the non-participation 

requirement is satisfied under such circumstances 

so long as such modifications or cancellations are 

also transmitted from off the floor. See Securities 

Exchange Act Release No. 14563 (March 14, 1978), 

43 FR 11542 (March 17, 1978) (stating that the 

‘‘non-participation requirement does not prevent 

initiating members from canceling or modifying 

orders (or the instructions pursuant to which the 

initiating member wishes orders to be executed) 

after the orders have been transmitted to the 

executing member, provided that any such 

instructions are also transmitted from off the 

floor’’). 

142 In considering the operation of automated 

execution systems operated by an exchange, the 

Commission noted that while there is no 

independent executing exchange member, the 

execution of an order is automatic once it has been 

transmitted into the systems. Because the design of 

these systems ensures that members do not possess 

any special or unique trading advantages in 

handling their orders after transmitting them to the 

exchange, the Commission has stated that 

executions obtained through these systems satisfy 

the independent execution requirement of Rule 

11a2–2(T). See 1979 Release, supra note 140. 

143See BATS Exchange 11(a) Letter, supra note 

139. 

144 17 CFR 240.11a2–2(T)(a)(2)(iv). In addition, 

Rule 11a2–2(T)(d) requires a member or associated 

person authorized by written contract to retain 

compensation, in connection with effecting 

transactions for covered accounts over which such 

member or associated person thereof exercises 

Continued 

trading center and have its best bid and 

best offer be a Protected Quotation.134

To meet their regulatory responsibilities 

under Rule 611(a) of Regulation NMS, 

market participants must have sufficient 

notice of new Protected Quotations, as 

well as all necessary information (such 

as final technical specifications).135

Therefore, the Commission believes that 

it would be a reasonable policy and 

procedure under Rule 611(a) for 

industry participants to begin treating 

BATS Exchange’s best bid and best offer 

as a Protected Quotation within 90 days 

after the date of this order, or such later 

date as BATS Exchange begins 

operation as a national securities 

exchange. 

2. Section 11 of the Act 

Section 11(a)(1) of the Act 136

prohibits a member of a national 

securities exchange from effecting 

transactions on that exchange for its 

own account, the account of an 

associated person, or an account over 

which it or its associated person 

exercises discretion (collectively, 

‘‘covered accounts’’) unless an 

exception applies. Rule 11a2–2(T) 137

under the Act, known as the ‘‘effect 

versus execute’’ rule, provides exchange 

members with an exemption from the 

Section 11(a)(1) prohibition. Rule 11a2–

2(T) permits an exchange member, 

subject to certain conditions, to effect 

transactions for covered accounts by 

arranging for an unaffiliated member to 

execute the transactions on the 

exchange. To comply with Rule 11a2–

2(T)’s conditions, a member: (i) Must 

transmit the order from off the exchange 

floor; (ii) may not participate in the 

execution of the transaction once it has 

been transmitted to the member 

performing the execution; 138 (iii) may 

not be affiliated with the executing 

member; and (iv) with respect to an 

account over which the member has 

investment discretion, neither the 

member nor its associated person may 

retain any compensation in connection 

with effecting the transaction except as 

provided in the Rule. 

In a letter to the Commission,139

BATS Exchange requested that the 

Commission concur with BATS 

Exchange’s conclusion that BATS 

Exchange members that enter orders 

into the BATS Exchange system satisfy 

the requirements of Rule 11a2–2(T). For 

reasons set forth below, the Commission 

believes that BATS Exchange members 

entering orders into the BATS Exchange 

system would satisfy the conditions of 

the Rule. 

The Rule’s first condition is that 

orders for covered accounts be 

transmitted from off the exchange floor. 

The BATS Exchange system receives 

orders electronically through remote 

terminals or computer-to-computer 

interfaces. In the context of other 

automated trading systems, the 

Commission has found that the off-floor 

transmission requirement is met if a 

covered account order is transmitted 

from a remote location directly to an 

exchange’s floor by electronic means.140

Since the BATS Exchange system 

receives orders electronically through 

remote terminals or computer-tocomputer interfaces, the Commission 

believes that the BATS Exchange system 

satisfies the off-floor transmission 

requirement. 

Second, the rule requires that the 

member not participate in the execution 

of its order. BATS Exchange represented 

that at no time following the submission 

of an order is a member able to acquire 

control or influence over the result or 

timing of an order’s execution.141

According to BATS Exchange, the 

execution of a member’s order is 

determined solely by what orders, bids, 

or offers are present in the system at the 

time the member submits the order. 

Accordingly, the Commission believes 

that a BATS Exchange member would 

not participate in the execution of an 

order submitted into the BATS 

Exchange system. 

Third, Rule 11a2–2(T) requires that 

the order be executed by an exchange 

member who is unaffiliated with the 

member initiating the order. The 

Commission has stated that this 

requirement is satisfied when 

automated exchange facilities, such as 

the BATS Exchange system, are used, as 

long as the design of these systems 

ensures that members do not possess 

any special or unique trading 

advantages in handling their orders after 

transmitting them to the exchange.142

BATS Exchange has represented that the 

design of the BATS Exchange system 

ensures that no member has any special 

or unique trading advantage in the 

handling of its orders after transmitting 

its orders to BATS Exchange.143 Based 

on BATS Exchange’s representation, the 

Commission believes that the BATS 

Exchange system satisfies this 

requirement. 

Fourth, in the case of a transaction 

effected for an account with respect to 

which the initiating member or an 

associated person thereof exercises 

investment discretion, neither the 

initiating member nor any associated 

person thereof may retain any 

compensation in connection with 

effecting the transaction, unless the 

person authorized to transact business 

for the account has expressly provided 

otherwise by written contract referring 

to Section 11(a) of the Act and Rule 

11a2–2(T).144 BATS Exchange 

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investment discretion, to furnish at least annually 

to the person authorized to transact business for the 

account a statement setting forth the total amount 

of compensation retained by the member in 

connection with effecting transactions for the 

account during the period covered by the statement. 

See 17 CFR 240.11a2–2(T)(d). See also 1978 

Release, supra note 140 (stating ‘‘[t]he contractual 

and disclosure requirements are designed to assure 

that accounts electing to permit transaction-related 

compensation do so only after deciding that such 

arrangements are suitable to their interests’’). 

145See BATS Exchange 11(a) Letter, supra note 

139. 

146 17 CFR 242.601. 

147These plans also satisfy the requirement in 

Rule 603 that national securities exchanges and 

national securities associations act jointly pursuant 

to an effective national market system plan to 

disseminate consolidated information, including a 

national best bid and offer, and quotations for and 

transactions in NMS stocks. See 17 CFR 242.603. 

See also Nasdaq Exchange Registration Order, supra 

note 29. 

148 17 CFR 242.602. 

149 17 CFR 242.605. 

150See Securities Exchange Act Release No. 

44177 (April 12, 2001), 66 FR 19814 (April 17, 

2001). 

151See BATS Exchange Rule 2.11(a)(4). 

152See BATS Exchange Rule 2.11(a)(1). 

153See BATS Exchange Rule 2.11(a)(2). 

154See BATS Exchange Rule 2.11(a)(5). 

155See BATS Exchange Rule 2.11(b). 

156A User that does not wish to use the Outbound 

Router function of BATS Trading could submit an 

Immediate-or-Cancel Order or another order type 

that is not eligible for order routing pursuant to 

BATS Exchange rules, such as a BATS Only Order. 

See BATS Exchange Rule 11.5. 

157See BATS Exchange Rule 2.11(a)(3). 

158The Commission has approved similar 

arrangements for other SROs. See, e.g., NOM 

Approval Order and NSX Blade Approval Order, 

supra note 94. 

159BATS Exchange has incorporated listing 

standards for certain derivative securities products 

in its rules. However, BATS Exchange’s rules will 

prohibit BATS Exchange from listing any derivative 

security product pursuant to these listing standards 

until BATS Exchange submits a proposed rule 

change to the Commission to amend its listing 

standards to comply with Rule 10A–3 under the Act 

and incorporate qualitative listing criteria. See 

BATS Exchange Rule 14.1(a). 

160 17 CFR 240.12f–5. See also Securities 

Exchange Act Release No. 35737 (April 21, 1995), 

60 FR 20891 (April 28, 1995) (adopting Rule 12f–

5). 

represented that BATS Exchange 

members trading for covered accounts 

over which they exercise investment 

discretion must comply with this 

condition in order to rely on the rule’s 

exemption.145

D. Section 11A of the Act 

Section 11A of the Act and the rules 

thereunder form the basis of our 

national market system and impose 

requirements on exchanges to 

implement its objectives. Specifically, 

national securities exchanges are 

required, under Rule 601 of Regulation 

NMS,146 to file transaction reporting 

plans regarding transactions in listed 

equity and Nasdaq securities that are 

executed on their facilities. Currently 

registered exchanges satisfy this 

requirement by participating in the 

Consolidated Transaction Association 

Plan (‘‘CTA Plan’’) for listed equities 

and the Joint Self-Regulatory 

Organization Plan Governing the 

Collection, Consolidation and 

Dissemination of Quotation and 

Transaction Information for NasdaqListed Securities Traded on Exchanges 

on an Unlisted Trading Privileges Basis 

(‘‘Nasdaq UTP Plan’’) for Nasdaq 

securities.147 Before BATS Exchange 

can begin operating as an exchange, it 

must join these plans as a participant. 

National securities exchanges are 

required, under Rule 602 of Regulation 

NMS,148 to collect bids, offers, quotation 

sizes and aggregate quotation sizes from 

those members who are responsible 

broker or dealers. National securities 

exchanges must then make this 

information available to vendors at all 

times when the exchange is open for 

trading. The current exchanges satisfy 

this requirement by participating in the 

Consolidated Quotation System Plan 

(‘‘CQ Plan’’) for listed equity securities 

and the Nasdaq UTP Plan for Nasdaq 

securities. Before BATS Exchange can 

begin operating as an exchange it also 

must join the CQ Plan as a participant, 

in addition to the CTA Plan and the 

Nasdaq UTP Plan. 

Finally, national securities exchanges 

must make available certain order 

execution information pursuant to Rule 

605 of Regulation NMS.149 Current 

exchanges have standardized the 

required disclosure mechanisms by 

participating in the Order Execution 

Quality Disclosure Plan.150 BATS 

Exchange must join this plan before it 

begins operations as an exchange. 

E. Order Routing 

As noted above in Section III.A., 

BATS Exchange proposes to offer 

routing services to its Users through its 

affiliated broker-dealer, BATS Trading. 

BATS Trading will provide ‘‘outbound’’

routing of orders from the Exchange to 

other trading centers (such function of 

BATS Trading is referred to as the 

‘‘Outbound Router’’), and BATS Trading 

will engage in no other activities unless 

approved by the Commission.151 The 

Outbound Router function of BATS 

Trading will operate as a facility (as 

defined in Section 3(a)(2) of the Act) of 

the Exchange. As such, the Outbound 

Router function of BATS Trading is 

subject to the Exchange’s and the 

Commission’s continuing oversight. In 

particular, and without limitation, 

under the Act, the Exchange is 

responsible for filing with the 

Commission proposed rule changes and 

fees relating to the BATS Trading 

Outbound Router function and BATS 

Trading Outbound Router function will 

be subject to exchange nondiscrimination requirements.152

BATS Trading will be a member of 

FINRA, an SRO unaffiliated with BATS 

Exchange or any of its affiliates, that is 

its designated examining authority.153

Also, BATS Exchange will establish and 

maintain procedures and internal 

controls reasonably designed to restrict 

the flow of confidential and proprietary 

information between BATS Exchange 

and its facilities, and any other entity, 

including any affiliate of BATS Trading, 

and, if BATS Trading or any of its 

affiliates engages in any other business 

activities other than the Outbound 

Router function, between the segment of 

BATS Trading or its affiliate that 

provides the other business activities 

and the Outbound Router function.154 In 

addition, the books, records, premises, 

officers, directors, agents, and 

employees of BATS Trading, as a 

facility of the Exchange, will be deemed 

to be those of the Exchange for purposes 

of and subject to oversight pursuant to 

the Act.155 Further, Users are not 

required to use the Outbound Router 

function of BATS Trading to route 

orders,156 and a User is free to route its 

orders to other market centers through 

alternative means.157

In light of the protections discussed 

above, the Commission believes that 

BATS Exchange rules and procedures 

regarding use of BATS Trading to route 

orders to away markets are consistent 

with the Act.158

F. Listing Requirements/Unlisted 

Trading Privileges 

BATS Exchange initially does not 

intend to list any securities. 

Accordingly, BATS Exchange has not 

proposed rules that would allow it to 

list any securities at this time.159

Instead, BATS Exchange has proposed 

to trade securities pursuant to unlisted 

trading privileges, consistent with 

Section 12(f) of the Act and Rule 12f–

5 thereunder. Rule 12f–5 requires an 

exchange that extends unlisted trading 

privileges to securities to have in effect 

a rule or rules providing for transactions 

in the class or type of security to which 

the exchange extends unlisted trading 

privileges.160 BATS Exchange’s 

proposed rules require that any security 

traded on the BATS Exchange be 

registered under the Act and listed on 

the New York Stock Exchange LLC, 

NYSE Arca, the American Stock 

Exchange LLC, or The NASDAQ Stock 

Market LLC. BATS Exchange’s proposed 

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161 Id. BATS Exchange’s rules currently do not 

provide for the trading of options, security futures, 

or other similar instruments. 

162BATS Exchange has represented to the 

Commission that it intends to phase-in the trading 

of securities currently trading on the BATS ECN to 

BATS Exchange, and that it will provide 

appropriate advance notice to its members of the 

phase-in schedule. The Commission believes that 

this approach is appropriate and should help 

maintain an orderly transition to the BATS 

Exchange. 

163BATS Exchange proposed to incorporate by 

reference the 12000 and 13000 Series of FINRA’s 

NASD Manual, the NASD Code of Arbitration 

Procedure for Customer and Industry Disputes. See 

BATS Exchange Rule 9.1. 

164See 17 CFR 240.0–12. 

165See letter to Nancy Morris, Secretary, 

Commission, from J. Craig Long, Foley & Lardner, 

dated June 24, 2008. 

166BATS Exchange will provide such notice via 

a posting on the same Web site location where 

BATS Exchange will post its own rule filings 

pursuant to Commission Rule 19b–4(l). The posting 

will include a link to the location on the FINRA 

Web site where the proposed rule change is posted. 

See id. 

167 15 U.S.C. 78mm. 

168See, e.g., Securities Exchange Act Release No. 

49260 (February 17, 2004), 69 FR 8500 (February 

24, 2004) and Nasdaq Exchange Registration Order, 

supra note 29. 

169 17 CFR 240.19d–1(c)(2). 

170 17 CFR 240.17d–2. 

171See supra notes 103 to 110 and accompanying 

text. 

172See supra notes 95 to 102 and accompanying 

text. 

173 15 U.S.C. 78mm. 

174 15 U.S.C. 78s(b). 

rules provide for transactions in the 

class or type of security to which the 

exchange intends to extend unlisted 

trading privileges.161 In addition, 

pursuant to its rules, BATS Exchange 

will cease trading any equity security 

admitted to unlisted trading privileges 

that is no longer listed on one of these 

exchanges. The Commission finds that 

these rules are consistent with the 

Act.162

IV. Exemption from Section 19(b) of the 

Act With Regard to FINRA Rules 

Incorporated by Reference 

BATS Exchange proposes to 

incorporate by reference certain FINRA 

rules as Exchange rules. Thus, for 

certain Exchange rules, Exchange 

members will comply with an Exchange 

rule by complying with the FINRA rule 

referenced.163 In connection with its 

proposal to incorporate FINRA rules by 

reference, BATS Exchange requested, 

pursuant to Rule 240.0–12,164 an 

exemption under Section 36 of the Act 

from the rule filing requirements of 

Section 19(b) of the Act for changes to 

those BATS Exchange rules that are 

effected solely by virtue of a change to 

a cross-referenced FINRA rule.165 BATS 

Exchange proposes to incorporate by 

reference categories of rules (rather than 

individual rules within a category) that 

are not trading rules. BATS Exchange 

agrees to provide written notice to its 

members whenever a proposed rule 

change to a FINRA rule that is 

incorporated by reference is 

proposed.166

Using its authority under Section 36 

of the Act,167 the Commission 

previously exempted certain SROs from 

the requirement to file proposed rule 

changes under Section 19(b) of the 

Act.168 Each such exempt SRO agreed to 

be governed by the incorporated rules, 

as amended from time to time, but is not 

required to file a separate proposed rule 

change with the Commission each time 

the SRO whose rules are incorporated 

by reference seeks to modify its rules. 

In addition, each such exempt SRO 

incorporated by reference only 

regulatory rules (i.e., margin, suitability, 

arbitration), not trading rules, and 

incorporated by reference whole 

categories of rules (i.e., did not ‘‘cherrypick’’ certain individual rules within a 

category). Each such exempt SRO had 

reasonable procedures in place to 

provide written notice to its members 

each time a change is proposed to the 

incorporated rules of another SRO in 

order to provide its members with 

notice of a proposed rule change that 

affects their interests, so that they would 

have an opportunity to comment on it. 

The Commission is granting BATS 

Exchange’s request for exemption, 

pursuant to Section 36 of the Act, from 

the rule filing requirements of Section 

19(b) of the Act with respect to the rules 

that BATS Exchange proposes to 

incorporate by reference. This 

exemption is conditioned upon BATS 

Exchange providing written notice to its 

members whenever FINRA proposes to 

change a rule that BATS Exchange has 

incorporated by reference. The 

Commission believes that this 

exemption is appropriate in the public 

interest and consistent with the 

protection of investors because it will 

promote more efficient use of 

Commission and SRO resources by 

avoiding duplicative rule filings based 

on simultaneous changes to identical 

rules sought by more than one SRO. 

Consequently, the Commission grants 

BATS Exchange’s exemption request. 

V. Conclusion 

It is ordered that the application of 

BATS Exchange for registration as a 

national securities exchange be, and 

hereby is, granted. 

It is further ordered that operation of 

BATS Exchange is conditioned on the 

satisfaction of the requirements below: 

A. Participation in National Market 

System Plans. BATS Exchange must join 

the CTA Plan, the CQ Plan, the Nasdaq 

UTP Plan, and the Order Execution 

Quality Disclosure Plan. 

B. Intermarket Surveillance Group. 

BATS Exchange must join the 

Intermarket Surveillance Group. 

C. Minor Rule Violation Plan. A 

MRVP filed by BATS Exchange under 

Rule 19d–1(c)(2) must be declared 

effective by the Commission.169

D. 17d–2 Agreement. An agreement 

pursuant to Rule 17d–2 170 between 

FINRA and BATS Exchange that 

allocates to FINRA regulatory 

responsibility for those matters 

specified above 171 must be approved by 

the Commission, or BATS Exchange 

must demonstrate that it independently 

has the ability to fulfill all of its 

regulatory obligations. 

E. Regulatory Contract. The 

Regulatory Contract between BATS 

Exchange and FINRA containing those 

matters specified above 172 must be 

executed and the provisions in the 

Regulatory Contract that will specify the 

BATS Exchange and Commission rules 

for which FINRA will provide certain of 

the regulatory functions under the 

Regulatory Contract must be finalized, 

or BATS Exchange must demonstrate 

that it independently has the ability to 

fulfill all of its regulatory obligations. 

F. Examination by the Commission. 

BATS Exchange must have, and 

represent in a letter to the staff in the 

Commission’s Office of Compliance 

Inspections and Examinations that it 

has, adequate procedures and programs 

in place to effectively regulate BATS 

Exchange. 

It is further ordered, pursuant to 

Section 36 of the Act,173 that BATS 

Exchange shall be exempt from the rule 

filing requirements of Section 19(b) of 

the Act 174 with respect to the FINRA 

rules BATS Exchange proposes to 

incorporate by reference into BATS 

Exchange’s rules, subject to the 

conditions specified in this Order. 

By the Commission (Chairman Cox and 

Commissioners Casey, Aguilar, and Paredes); 

Commissioner Walter not participating. 

Florence E. Harmon, 

Acting Secretary. 

[FR Doc. E8–19388 Filed 8–20–08; 8:45 am] 

BILLING CODE 8010–01–P 

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