[Federal Register Volume 82, Number 156 (Tuesday, August 15, 2017)]
[Notices]
[Pages 38734-38749]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-17179]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81366; File No. SR-CHX-2016-20]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, 
Regarding the Acquisition of CHX Holdings, Inc. by North America Casin 
Holdings, Inc.

August 9, 2017.

I. Introduction

    On December 2, 2016, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change in connection with the 
acquisition (``Transaction'') of CHX Holdings, Inc. (``CHX Holdings'') 
by North America Casin Holdings, Inc. (``NA Casin Holdings''). The 
proposed rule change was published for comment in the Federal Register 
on December 12, 2016.\3\ On January 12, 2017, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Exchange Act \4\ to 
determine whether to approve or disapprove the proposed rule change.\5\ 
The Commission received 28 comments on the proposed rule change,\6\ and 
three responses from the Exchange in response to certain comments.\7\ 
On June 6, 2017, pursuant

[[Page 38735]]

to Section 19(b)(2) of the Exchange Act,\8\ the Commission designated a 
longer period for Commission action on proceedings to determine whether 
to disapprove the proposed rule change.\9\ On August 7, 2017, the 
Exchange filed Amendment No. 1 to the proposed rule change.\10\ The 
Commission is publishing this notice to solicit comments on Amendment 
No. 1 from interested persons and is approving the proposed rule 
change, as modified by Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79474 (December 6, 
2016), 81 FR 89543 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2)(B).
    \5\ See Securities Exchange Act Release No. 79781, 82 FR 6669 
(January 19, 2017).
    \6\ See letters from: (1) Representative Robert Pittenger, 
Representative Earl L. ``Buddy'' Carter, Representative Peter 
DeFazio, Representative Collin Peterson, and Representative David 
Joyce, dated December 22, 2016 (``Pittenger Letter 1''); (2) James 
N. Hill, dated December 23, 2016; (3) John Ciccarelli, dated January 
2, 2017 (``Ciccarelli Letter''); (4) Anonymous, dated January 3, 
2017 (``Anonymous Letter''); (5) David E. Kaplan, Executive 
Director, Global Investigative Journalism Network, dated January 4, 
2017; (6) Reddy Dandolu, Founder, Chief Executive Officer, Las Vegas 
Stock Exchange, dated February 4, 2017 (``Dandolu Letter''); (7) 
David Ferris, Senior Research Analyst, The Public Interest Review, 
dated February 16, 2017 (``Ferris Letter 1''); (8) Michael Brennan, 
Independent Market Commentator, dated February 17, 2017 (``Brennan 
Letter''); (9) Lawrence Bass, Individual Member, Alliance for 
American Manufacturing, dated February 20, 2017 (``Bass Letter''); 
(10) Steven Mayer, dated February 20, 2017 (``Mayer Letter''); (11) 
William Park, dated February 21, 2017 (``Park Letter''); (12) Jason 
Blake, Commentator, The Wall Street Journal, dated February 25, 
2017; (13) John Meagher, Freelance Journalist, dated March 1, 2017; 
(14) Yong Xiao, Chief Executive Officer, North America Casin 
Holdings, Inc., dated March 1, 2017 (``NA Casin Holdings Letter''); 
(15) Steven Caban, dated March 1, 2017 (``Caban Letter''); (16) 
Harley Seyedin, President, American Chamber of Commerce in South 
China, dated March 2, 2017 (``Seyedin Letter''); (17) Salvatore 
Nobile, dated March 2, 2017 (``Nobile Letter''); (18) Olga 
Gouroudeva, dated March 3, 2017 (``Gouroudeva Letter''); (19) John 
R. Prufeta, dated March 3, 2017 (``Prufeta Letter''); (20) Anthony 
J. Saliba, Saliba Ventures Holdings, LLC, dated March 3, 2017 
(``Saliba Letter''); (21) Aileen Zhong, dated March 5, 2017 (``Zhong 
Letter''); (22) Duncan Karcher, dated March 5, 2017 (``Karcher 
Letter''); (23) Ira Gottlieb, Principal, Healthcare Practice, Mazars 
USA LLP, dated March 5, 2017 (``Gottlieb Letter''); (24) James N. 
Hill, dated March 6, 2017 (``Hill Letter 2''); (25) David Ferris, 
Senior Research Analyst, The Public Interest Review, dated March 6, 
2017 (``Ferris Letter 2''); (26) Sean Casey, dated April 24, 2017; 
(27) Representative Robert Pittenger, Representative Chris Smith, 
Representative Peter DeFazio, Representative Ted Yoho, 
Representative Rosa DeLauro, Representative Steve King, 
Representative Walter Jones, Representative David Joyce, 
Representative Brian Babin, Representative Bill Posey, and 
Representative Tom Marino, dated July 10, 2017 (``Pittenger Letter 
2''); and (28) Senator Joe Manchin, III, dated July 20, 2017 
(``Manchin Letter''). All of the comments are available at: https://www.sec.gov/comments/sr-chx-2016-20/chx201620.shtml.
    \7\ See letters from John K. Kerin, President and Chief 
Executive Officer, CHX, dated January 5, 2017 (``CHX Response Letter 
1''); Albert J. Kim, Vice President and Associate General Counsel, 
CHX, dated January 6, 2017 (``CHX Response Letter 2'') (responding 
specifically to the Ciccarelli Letter); and John K. Kerin, President 
and Chief Executive Officer, CHX, dated March 6, 2017 (``CHX 
Response Letter 3'').
    \8\ 15 U.S.C. 78s(b)(2).
    \9\ See Securities Exchange Act Release No. 80864, 82 FR 26966 
(June 12, 2017).
    \10\ In Amendment No. 1, the Exchange modified its proposal to 
respond to concerns expressed by certain commenters. Specifically, 
in Amendment No. 1, the Exchange: (1) Amends the proposed 
certificates of incorporation of CHX Holdings and NA Casin Holdings 
to require that: (a) Owners of the corporation provide notice to the 
corporation of certain changes to their ownership levels, and that 
the Exchange provide the Commission notice of certain changes; (b) 
each person having voting rights or beneficial ownership of stock of 
the corporation to promptly provide the corporation with written 
notice of any change in its status as a related person of another 
person that owns voting share of stock of the corporation; and (c) 
each stockholder of the corporation to annually attest directly to 
the Commission and the corporation as to its equity ownership level 
in the corporation and the identity of its related persons and to 
whether any agreement to act together exists between the stockholder 
and any other person for the purpose of acquiring, voting, holding, 
or disposing of shares of stock of the corporation; (2) amends the 
certificate of incorporation of CHX Holdings to: (a) Require the 
chief compliance officer of CHX Holdings to monitor compliance with 
the limitations on voting and ownership applicable to all upstream 
beneficial owners, and to ensure that each beneficial owner of the 
corporation provides the corporation with certain annual 
attestations; and (b) require that CHX Holdings will engage an 
independent and Public County Accounting Oversight Board 
(``PCAOB'')-registered auditor that will perform within one year of 
the closing date of the Transaction and every two years thereafter, 
an audit of the corporation's oversight of compliance with the 
ownership and voting limitations; (3) amends the bylaws of CHX, CHX 
Holdings, and NA Casin Holdings to require that each corporation 
contemporaneously provides the Commission with any information it 
provides to any other U.S. governmental entity or U.S. authority 
pursuant to any agreement; (4) amends the CHX Rules to: (a) Require 
that, before reporting data to Consolidated Audit Trail (``CAT'') or 
having access to CAT data, it will adopt policies and procedures to 
ensure that only CHX regulatory personnel have access to any ``CAT 
Data'' (as defined in the National Market System Plan Governing the 
Consolidated Audit Trail approved by the U.S. Securities and 
Exchange Commission on November 15, 2016, as such plan may be 
amended from time to time) and that CHX regulatory personnel would 
not provide access to any CAT Data to (i) any personnel of CHX and 
CHX Holdings (except such personnel that may also be CHX regulatory 
personnel); (ii) any personnel of NA Casin Holdings; or (iii) any 
upstream beneficial owner, regardless of citizenship of such 
personnel and owners (except such personnel that may also be CHX 
regulatory personnel); (b) confirm that any regulatory services 
agreement (``RSA'') it may enter into would comply with the U.S. 
federal securities laws at the time of the execution and on an 
ongoing basis; (c) require the chief regulatory officer of CHX to 
monitor Exchange compliance with the provision of each RSA to which 
the Exchange is party; and (d) and require the Exchange to engage an 
independent and PCAOB-registered auditor to perform within one year 
of the closing date of the Transaction and every two years 
thereafter, an audit of the Exchange's oversight of: (i) All RSAs to 
which the Exchange is a party and (ii) compliance with the CHX rule 
restricting access to CAT Data to CHX regulatory personnel; (5) 
supplements certain of its representations with certifications from 
each owner of NA Casin Holdings, attesting to CHX and the Commission 
(a) the identities of all related persons, if any; (b) that it does 
not directly, or indirectly through one or more intermediaries, 
control, and is not, directly or indirectly through one or more 
intermediaries, controlled or owned by, or under common control or 
ownership with, a governmental entity or political subdivision 
thereof; (c) that it nor any of its related persons is subject to 
any ``statutory disqualification'' as defined in Section 3(a)(39) of 
the Exchange Act; and (d) that no agreement, arrangement, or 
understanding to acquire, vote, hold, or dispose of stock of NA 
Casin Holdings, exists between such owner and any of the other 
owners of NA Casin Holdings; (6) provides a statement from each of 
the owners of NA Casin Holdings in which such owner (a) irrevocably 
submits to the jurisdiction of the U.S. federal courts, the 
Commission, and CHX, for the purposes of any suit, action or 
proceeding relating to the certifications it provided to the 
Exchange and CHX regarding among other things, its related persons, 
or arising pursuant to the U.S. federal securities laws, or the 
rules and regulations thereunder, arising out of, or relating to, 
the activities of CHX, and waive, and agree 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 U.S. federal courts, the Commission or CHX, 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 of that suit, action or proceeding may not be 
enforced in or by such courts or agency; (b) designates, authorizes 
and identifies to the Commission an agent in the U.S. for the 
service of process of a claim arising out of, or relating to, the 
activities of CHX, including the certificates it provided to the 
Exchange and the Commission; and (c) agrees to promptly inform the 
Commission in writing of any change to its designated and authorized 
agent; and (7) changes the name of one of the proposed upstream 
owners from ``Cheevers & Co., Inc.'' (``Cheevers'') to ``Penserra 
Securities, LLC'' (``Penserra'') to reflect that Cheevers merged 
with Penserra, with Penserra as the surviving entity. Amendment No. 
1 is available at: https://www.sec.gov/comments/sr-chx-2016-20/chx201620.shtml.
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II. Summary of the Proposal, As Modified by Amendment No. 1

    Currently, the Exchange is a wholly-owned subsidiary of CHX 
Holdings, and CHX Holdings is beneficially owned by 193 firms or 
individuals, including certain Participants or affiliates of 
Participants.\11\ Pursuant to the terms of an Agreement and Plan of 
Merger, dated February 4, 2016 (``Merger Agreement''), by and among NA 
Casin Holdings, Exchange Acquisition Corporation, Chongqing Casin 
Enterprise Group Co., LTD. (``Chongqing Casin''), Richard G. Pane 
solely in his capacity as the Stockholders Representative thereunder, 
and CHX Holdings, Exchange Acquisition Corporation would merge into CHX 
Holdings, which would then become a wholly-owned direct subsidiary of 
NA Casin Holdings.\12\ Current CHX Holdings stockholders would receive 
the right to receive cash in exchange for their shares under the terms 
of the Transaction.\13\ The Exchange would continue to be a wholly-
owned subsidiary of CHX Holdings. Consummation of the Transaction is 
subject to the satisfaction of certain conditions precedent, including 
approval by the Commission of the proposed rule change.\14\
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    \11\ See Notice, supra note 3, 81 FR at 89544. See also CHX 
Rules Article 1, Rule 1(s) (defining ``Participant'').
    \12\ See Notice, supra note 3, 81 FR at 89544.
    \13\ See id.
    \14\ See id.
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    The Exchange represents that, after the closing of the Transaction, 
all of the outstanding and issued shares of NA Casin Holdings would be 
held by the following firms and individuals (referred to collectively 
as the ``upstream owners'') in the following percentages:

Upstream Owners

    <bullet> NA Casin Group, Inc. (``NA Casin Group''), a corporation 
incorporated under the laws of the State of Delaware and wholly-owned 
by Chongqing Casin, a limited company organized under the laws of the 
People's Republic of China (``PRC'')--20%
    <bullet> Chongqing Jintian Industrial Co., Ltd., a corporation 
incorporated under the laws of the PRC--15%
    <bullet> Chongqing Longshang Decoration Co., Ltd., a corporation 
incorporated under the laws of the PRC--14.5%
    <bullet> Castle YAC Enterprises, LLC (``Castle YAC''), a limited 
liability company organized under the laws of the State of New York, 
the sole member of which is Jay Lu,\15\ a U.S. citizen and Vice 
President of NA Casin Group--19%
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    \15\ According to the Exchange, Jay Lu is associated with an 
affiliate of Chongqing Casin and is the son of Shengju Lu, the 
Chairman of Chongqing Casin. See Notice, supra note 3, 81 FR at 
89545, n.18. The Exchange represents that the only Related Persons 
among the upstream owners are Castle YAC and NA Casin Group. See id.
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    <bullet> Raptor Holdco LLC (``Raptor''), a limited liability 
company organized under the laws of the State of Delaware--11.75%
    <bullet> Saliba Ventures Holdings, LLC (``Saliba''), a limited 
liability company organized under the laws of the State of Illinois--
11.75%
    <bullet> Xian Tong Enterprises, Inc., a corporation incorporated 
under the laws of the State of New York--6.94%

[[Page 38736]]

    <bullet> Five members of the CHX Holdings management team, all U.S. 
citizens--0.88% (as equity incentives)
    <bullet> Penserra, a limited liability company organized under the 
laws of the State of New York--0.18% \16\
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    \16\ See id. at 89544-55; see Amendment No. 1, supra note 10, at 
7 (explaining that Cheevers merged with Penserra, with Penserra as 
the surviving entity).
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    After the closing of the Transaction, CHX would remain a national 
securities exchange, registered under Section 6 of the Exchange 
Act,\17\ and a self-regulatory organization (``SRO''), as defined in 
Section 3(a)(26) of the Exchange Act.\18\ In addition, following the 
closing, the Exchange's affiliated routing broker, CHXBD, would remain 
a Delaware limited liability corporation of which CHX Holdings would 
remain the sole member.
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    \17\ 15 U.S.C. 78f.
    \18\ 15 U.S.C. 78c(a)(26).
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    To effect the Transaction, the Exchange proposes to amend its 
certificate of incorporation and bylaws (``CHX Bylaws''),\19\ the 
certificate of incorporation (``CHX Holdings Certificate'') and bylaws 
(``CHX Holdings Bylaws'') of CHX Holdings,\20\ and the Exchange's 
rules.\21\ The Exchange has also filed the following documents in 
connection with the Transaction: (1) the certificate of incorporation 
(``NA Casin Holdings Certificate'') and bylaws (``NA Casin Holdings 
Bylaws'') of NA Casin Holdings; \22\ (2) text of a proposed resolution 
of CHX Holdings' board of directors to waive certain ownership and 
voting limitations to permit the Transaction; \23\ (3) the proposed NA 
Casin Holdings Stockholders' Agreement,\24\ which includes transfer-of-
share provisions for the upstream owners that provide a right of first 
offer, a right to acquire interest upon change of control, and a right 
to purchase new securities; and (4) put agreements between Saliba, NA 
Casin Group, and NA Casin Holdings (``Saliba Put Agreement''),\25\ and 
Raptor, NA Casin Group, and NA Casin Holdings (``Raptor Put 
Agreement''),\26\ which would grant Saliba and Raptor, respectively, 
the right to compel NA Casin Holdings to purchase or arrange for an 
unspecified third-party to purchase a specified amount of Saliba's or 
Raptor's equity interest in NA Casin Holdings, respectively.
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    \19\ See Exhibits 5C and 5D. All Exhibits to the proposed rule 
change are available at: https://www.sec.gov/rules/sro/chx/chxarchive/chxarchive2016.shtml.
    \20\ See Exhibits 5A and 5B.
    \21\ See Exhibit 5E. The current CHX Holdings Certificate and 
CHX Holdings Bylaws require that, for so long as CHX Holdings 
controls the Exchange, either directly or indirectly, any changes to 
the CHX Holdings Certificate or CHX Holdings Bylaws must be 
submitted to the board of directors of the Exchange and, if the 
Exchange's board determines that the change must be filed with, or 
filed with and approved by, the Commission under Section 19 of the 
Exchange Act and the rules thereunder, then the changes will not be 
effective until filed with, or filed with and approved by, the 
Commission. See Article THIRTEENTH of the current CHX Holdings 
Certificate; and Article VIII of the current CHX Holdings Bylaws. 
Section 19(b) of the Exchange Act and Rule 19b-4 thereunder require 
an SRO to file proposed rule changes with the Commission. Although 
CHX Holdings is not an SRO, its certificate of incorporation and 
bylaws are rules of the Exchange if they are stated policies, 
practices, or interpretations (as defined in Rule 19b-4 under the 
Exchange Act) of the exchange, and must therefore be filed with the 
Commission pursuant to section 19(b)(4) of the Exchange Act and Rule 
19b-4 thereunder. Accordingly, the Exchange filed the CHX Holdings 
Certificate and CHX Holdings Bylaws with the Commission.
    \22\ See Exhibits 5F and 5G. The proposed NA Casin Holdings 
Certificate and NA Casin Holdings Bylaws require that, for so long 
as NA Casin Holdings controls the Exchange, either directly or 
indirectly, any change to those documents must be submitted to the 
board of directors of the Exchange and, if the Exchange's board 
determines that the change must be filed with, or filed with and 
approved by, the Commission under Section 19 of the Exchange Act and 
the rules thereunder, then the changes will not be effective until 
filed with, or filed with and approved by, the Commission. See 
proposed NA Casin Holdings Certificate, Article X; proposed NA Casin 
Holdings Bylaws, Article 11. Although NA Casin Holdings is not an 
SRO, its certificate of incorporation and bylaws are rules of the 
Exchange if they are stated policies, practices, or interpretations 
(as defined in Rule 19b-4 under the Exchange Act) of the exchange, 
and must therefore be filed with the Commission pursuant to section 
19(b)(4) of the Exchange Act and Rule 19b-4 thereunder. Accordingly, 
the Exchange filed the NA Casin Holdings Certificate and NA Casin 
Holdings Bylaws with the Commission.
    \23\ See Exhibit 5H.
    \24\ See Exhibit 5I.
    \25\ See Exhibit 5J.
    \26\ See Exhibit 5K.
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    The Exchange proposes several substantive and technical amendments 
to its corporate governance documents, rules, and the governing 
documents of CHX Holdings. Among other items, the proposed amendments 
revise provisions in the CHX Holdings Certificate relating to ownership 
and voting limitations.\27\ In addition, to govern the upstream owners, 
the Exchange proposes to establish in the NA Casin Holdings' 
Certificate ownership and voting limitations that are identical to 
those contained in the proposed CHX Holdings documents.\28\ In 
particular, these provisions prohibit any Person,\29\ either alone or 
with its Related Persons,\30\ from beneficially owning shares of stock 
of CHX Holdings or NA Casin Holdings representing in the aggregate more 
than 40% of the then outstanding votes entitled to be cast on any 
matter unless specific procedures are followed prior to acquiring 
shares in excess of the ownership limitation.\31\ In addition, no 
Participant, either alone or with its Related Persons, would be 
permitted at any time to beneficially own shares of stock of CHX 
Holdings or NA Casin Holdings representing in the aggregate more than 
20% of the then outstanding votes entitled to be cast on any 
matter.\32\ Further, no Person that is subject to any statutory 
disqualification as defined in Section 3(a)(39) of the Exchange Act 
would be permitted at any time to beneficially own, either alone or 
with its Related Persons, shares of stock of CHX Holdings or NA Casin 
Holdings representing in the aggregate more than 20% of the then 
outstanding votes entitled to be cast on any matter.\33\ CHX also 
proposes cure provisions that would require CHX Holdings or NA Casin 
Holdings, as applicable, to call shares held in excess of these 
ownership limits, and to not register any shares transferred in 
violation of these

[[Page 38737]]

ownership limits.\34\ These restrictions are described herein as the 
``ownership limitations.''
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    \27\ See infra Section III.A.
    \28\ See id.
    \29\ The NA Casin Holdings Certificate and CHX Holdings 
Certificate define ``Person'' to mean ``a natural person, 
partnership (general or limited), corporation, limited liability 
company, trust or unincorporated organization, or a governmental 
entity or political subdivision thereof.'' See proposed CHX Holdings 
Certificate Article FOURTH, Section (b); proposed NA Casin Holdings 
Certificate Article IX, Section (4).
    \30\ CHX proposes to define the term ``Related Persons'' in the 
NA Casin Holdings Certificate and CHX Holdings Certificate to mean: 
(1) With respect to any Person, any executive officer (as such term 
is defined in Rule 3b-7 under the Exchange Act), director, general 
partner, manager or managing member, as applicable, and all 
``affiliates'' and ``associates'' of such Person (as those terms are 
defined in Rule 12b-2 under the Exchange Act), and other Person(s) 
whose beneficial ownership of shares of stock of NA Casin Holdings 
or CHX Holdings, as applicable, with the power to vote on any matter 
would be aggregated with such first Person's beneficial ownership of 
such stock or deemed to be beneficially owned by such first Person 
pursuant to Rules 13d-3 and 13d-5 under the Exchange Act; and (2) in 
the case of any Participant, for so long as CHX remains a registered 
national securities exchange, such Person and any broker or dealer 
with which such Person is associated; and (3) any other Person(s) 
with which such Person has any agreement, an arrangement or 
understanding (whether or not in writing) to act together for the 
purpose of acquiring, voting, holding or disposing of shares of the 
stock of NA Casin Holdings or CHX Holdings, as applicable; and (4) 
in the case of a Person that is a natural person, any relative or 
spouse of such Person, or any relative of such spouse, who has the 
same home as such Person or who is a director or officer of NA Casin 
Holdings or CHX Holdings, as applicable, or any of its parents or 
subsidiaries. See proposed CHX Holdings Certificate Article FOURTH, 
Section (b); and proposed NA Casin Holdings Certificate Article IX, 
Section (4).
    \31\ See proposed CHX Holdings Certificate Article FOURTH, 
Section (c)(i); and proposed NA Casin Holdings Certificate Article 
IX, Section (9).
    \32\ See proposed CHX Holdings Certificate Article FOURTH, 
Section (c)(ii); proposed NA Casin Holdings Certificate Article IX, 
Section (10).
    \33\ See proposed CHX Holdings Certificate Article FOURTH, 
Section (d); and proposed NA Casin Holdings Certificate Article IX, 
Section (13).
    \34\ See proposed CHX Holdings Certificate Article FOURTH, 
Sections (c)(i)(C), (c)(ii)-(iii), and (d); proposed NA Casin 
Holdings Certificate Article IX, Sections (9)(iii), (10), (11), and 
(13).
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    In addition, both the CHX Holdings Certificate and NA Casin 
Holdings Certificate contain voting restrictions that would preclude 
any stockholder, either alone or with its Related Persons, from voting 
more than 20% of the then outstanding shares entitled to be cast on any 
matter unless specific procedures are followed prior to voting in 
excess of the limitation.\35\ Similarly, no Person, either alone or 
with its Related Persons, would be permitted to enter into an 
agreement, plan, or other arrangement that would result in an aggregate 
of more than 20% of the then outstanding votes entitled to be cast on a 
matter to not be voted unless specific procedures are followed prior to 
entering into such an agreement, plan, or arrangement.\36\ The 
certificates of incorporation would also require that CHX Holdings and 
NA Casin Holdings disregard any votes cast in excess of the voting 
limitations.\37\ These restrictions are described herein as the 
``voting limitations.''
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    \35\ See proposed CHX Holdings Certificate FOURTH (b)(i); and 
proposed NA Casin Holdings Certificate Article IX, Section (5).
    \36\ See id.
    \37\ See id.
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    In addition, the Exchange has proposed revisions to the corporate 
governance documents of NA Casin Holdings and CHX Holdings to provide 
notice requirements with respect to changes in ownership that may 
affect the ownership and voting limitations. Specifically, the NA Casin 
Holdings Certificate and CHX Holdings Certificate will provide that: 
(1) Each Person involved in an acquisition for shares of stock of the 
corporation shall provide the corporation with written notice 14 days 
prior to the closing date of any acquisition that would result in a 
Person having voting rights or beneficial ownership, alone or together 
with its Related Persons, of record or beneficially, of five percent or 
more of the then outstanding shares of stock of the corporation 
entitled to vote on any matter; (2) NA Casin Holdings and CHX Holdings 
will be required to provide 10-day advance written notice to the 
Commission of any such changes in ownership; (3) any Person that, 
either alone or together with its Related Persons, has voting rights or 
beneficial ownership of, five percent or more of the outstanding voting 
shares of CHX Holdings or NA Casin Holdings (whether by acquisition or 
by change in the number of shares outstanding or otherwise), will be 
required, immediately upon acquiring knowledge of its ownership, to 
give the board of directors of CHX Holdings or NA Casin Holdings, as 
applicable, notice of such ownership; (4) any Person that, either alone 
or together with its Related Persons, of record or beneficially, has 
voting rights or beneficial ownership of five percent or more of NA 
Casin Holdings or CHX Holdings must promptly update the corporation if 
its ownership stake in or voting power regarding NA Casin Holdings or 
CHX Holdings increases or decreases by one percent or more;\38\ and (5) 
each Person having voting rights or beneficial ownership of stock of 
the NA Casin Holdings or CHX Holdings will be required to provide 
prompt written notice to the corporation regarding any changes to its 
Related Person status with respect to other Persons that own voting 
shares of stock of the corporation.\39\
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    \38\ See proposed NA Casin Holdings Certificate Article IX, 
Section (19)(i); proposed CHX Holdings Certificate Article 
Fourth(g)(i).
    \39\ See proposed NA Casin Holdings Certificate Article IX, 
Section (19)(ii); proposed CHX Holdings Certificate Article 
Fourth(g)(ii).
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    Furthermore, CHX is amending the CHX Holdings Bylaws,\40\ CHX 
Bylaws,\41\ and NA Casin Holdings Bylaws,\42\ to adopt provisions in 
each respective document to require that each of CHX Holdings, CHX, and 
NA Casin Holdings, as applicable, contemporaneously provide the 
Commission with any information it provides to any other U.S. 
governmental entity or U.S. authority pursuant to any agreement.
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    \40\ See proposed CHX Holdings Bylaws, Article XIII, Section 
13.1.
    \41\ See proposed CHX Bylaws, Article XIII, Section 13.1
    \42\ See proposed NA Casin Holdings Bylaws, Article 10, Section 
10.1.3.
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    The proposed rule change also includes changes to CHX Holdings' and 
the Exchange's certificates of incorporation and bylaws addressing, 
among other items, board and committee composition and procedures, 
procedures regarding stockholder meetings, consent to U.S. federal 
court and Commission jurisdiction, and Commission access to certain 
corporate books and records.\43\ The proposed rule change also adopts 
provisions in the new NA Casin Holdings Certificate and NA Casin 
Holdings Bylaws relating to these matters.\44\
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    \43\ See infra Sections III.A and III.B.
    \44\ See id.
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III. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change, 
comments on the proposal, and the commitments undertaken by the 
Exchange in Amendment No. 1, which was filed to respond to 
comments.\45\ The Commission has also considered additional information 
provided by the Exchange, some of which was provided on a confidential 
basis. Based on this consideration, the Commission finds that the 
proposed rule change is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder applicable to a 
national securities exchange.\46\ In particular, the Commission finds 
that the proposed rule change is consistent with Sections 6(b)(1) and 
6(b)(3) of the Exchange Act,\47\ which require, among other things, 
that: (1) A national securities exchange be organized and have the 
capacity to be able to carry out the purposes of the Exchange Act and 
to enforce compliance by its members and persons associated with its 
members with the provisions of the Exchange Act, the rules and 
regulations thereunder, and the rules of the exchange; and (2) the 
rules of a national securities exchange assure the fair representation 
of its members in the selection of its directors and administration of 
its affairs, and provide 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 Commission also finds 
that the proposal is consistent with Section 6(b)(5) of the Exchange 
Act,\48\ which requires that the rules of a national securities 
exchange be designed to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.
---------------------------------------------------------------------------

    \45\ See Amendment No. 1, supra note 10, at 5.
    \46\ In approving this proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \47\ 15 U.S.C. 78f(b)(1) and f(b)(3).
    \48\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission notes that, as discussed below, several commenters 
assert that the proposed rule change is inconsistent with Sections 
6(b)(1) and 6(b)(5) of the Exchange Act because they believe that the 
proposed ownership structure is opaque and therefore it would be 
difficult for the Exchange to monitor for compliance with the Exchange 
Act and the rules of the Exchange,\49\ and for the Commission to 
exercise regulatory oversight, following

[[Page 38738]]

the closing of the Transaction.\50\ After careful consideration, as 
discussed further below, the Commission believes that the commenters' 
concerns are adequately addressed by the following safeguards: The 
ownership and voting limitations as well as the related monitoring 
provisions and related remedies; the notice requirements regarding 
changes in ownership and Related Person relationships; provisions 
relating to compliance with U.S. law; consents to jurisdiction; 
requirements to give due regard to the regulatory obligations and 
functions of the Exchange; and provisions ensuring access to books and 
records.\51\
---------------------------------------------------------------------------

    \49\ See infra note 85 and accompanying text.
    \50\ See infra notes 91-95 and accompanying text.
    \51\ See infra Section III.A.
---------------------------------------------------------------------------

A. Voting and Ownership Limitations; Consent to Jurisdiction; Due 
Regard; Books and Records

    As noted above,\52\ under the terms of the Transaction, CHX will 
continue to be a wholly-owned subsidiary of CHX Holdings, and CHX 
Holdings will become a wholly-owned subsidiary of NA Casin Holdings. 
Furthermore, NA Casin Holdings will be owned by a consortium of both 
U.S. and non-U.S. entities.\53\
---------------------------------------------------------------------------

    \52\ See supra notes 12-14 and accompanying text.
    \53\ See supra note 16 and accompanying text.
---------------------------------------------------------------------------

    The rules of each exchange provide for limitations on ownership and 
voting rights, which are designed to prevent any stockholder from 
exercising undue control over the operation of an exchange and to 
assure that the exchange and the Commission are able to carry out their 
regulatory obligations under the Exchange Act. Here, CHX represents 
that the CHX Holdings Certificate and the NA Casin Holdings Certificate 
contain substantially identical ownership and voting limitations (other 
than the requirement that NA Casin Holdings take reasonable to steps to 
cause CHX Holdings to be in compliance with the voting and ownership 
limitations contained in the CHX Holdings Certificate).\54\ Under the 
proposal, the board of directors of CHX Holdings would waive CHX 
Holdings' 40% ownership limitation with respect to the proposed 
acquisition by NA Casin Holdings so that NA Casin Holdings could own 
100% of CHX Holdings.\55\ But the relevant ownership and voting 
limitations will be contained in the NA Casin Holdings Certificate. The 
Commission notes that these limitations are designed to prevent any 
stockholder from exercising undue control over the operation of CHX and 
to assure that CHX and the Commission are able to carry out their 
regulatory obligations under the Exchange Act. The proposed governing 
documents of CHX Holdings and NA Casin Holdings contain provisions 
relating to compliance with U.S. law, consent to jurisdiction, due 
regard to the regulatory obligations and functions of the Exchange, and 
books and records that are designed to address CHX's ability to carry 
out its regulatory obligations and the Commission to exercise its 
regulatory oversight over CHX after the acquisition.
---------------------------------------------------------------------------

    \54\ See supra notes 28-37 and accompanying text.
    \55\ See infra Section III.D.
---------------------------------------------------------------------------

1. Proposed Ownership and Voting Limitations
    With regard to ownership, the NA Casin Holdings Certificate 
restricts the ability of any Person, either alone or with its Related 
Persons, to vote or own shares of stock of NA Casin Holdings above 
certain thresholds. Specifically, the NA Casin Holdings Certificate 
provides that unless otherwise provided, no Person, either alone or 
with its Related Persons, shall be permitted at any time to 
beneficially own shares of stock of NA Casin Holdings representing in 
the aggregate more than 40% of the then outstanding votes entitled to 
be cast on any matter.\56\ In addition, the NA Casin Holdings 
Certificate prohibits any Participant, either alone or with its Related 
Persons, from beneficially owning shares of stock of NA Casin Holdings 
representing in the aggregate more than 20% of the then outstanding 
votes entitled to be cast on any matter.\57\ The NA Casin Holdings 
Certificate also prohibits a Person that is subject to any statutory 
disqualification as defined in Section 3(a)(39) of the Exchange Act 
from at any time beneficially owning, either alone or with its Related 
Persons, shares of stock of NA Casin Holdings representing in the 
aggregate more than 20% of the then outstanding votes entitled to be 
cast on any matter.\58\
---------------------------------------------------------------------------

    \56\ See proposed NA Casin Holdings Certificate Article IX, 
Section (9).
    \57\ See proposed NA Casin Holdings Certificate Article IX, 
Section (10).
    \58\ See proposed NA Casin Holdings Certificate Article IX, 
Section (13).
---------------------------------------------------------------------------

    The NA Casin Holdings Certificate provides that if any Person, 
either alone or with its Related Persons, intends on acquiring 
ownership in excess of these ownership limitations, such Person must 
provide the board of directors of NA Casin Holdings with advance 
notice, the board must adopt a resolution permitting such ownership, 
and such resolution must be filed with and approved by the Commission 
under Section 19(b) of the Exchange Act.\59\ In addition, the NA Casin 
Holdings and CHX Holdings Certificates both provide that the Commission 
will be given prior notice of any acquisition that would result in a 
Person, alone or together with its Related Persons, owning or voting 
five percent or more of the voting stock of the NA Casin Holdings or 
CHX Holdings, as applicable.\60\
---------------------------------------------------------------------------

    \59\ See proposed NA Casin Holdings Certificate Article IX, 
Section (9)(i)-(ii).
    \60\ See proposed NA Casin Holdings Certificate Article IX, 
Section (19)(i); proposed CHX Holdings Certificate Article 
FOURTH(g)(i).
---------------------------------------------------------------------------

    In addition, the NA Casin Holdings Certificate provides that, if 
any Person, either alone or with its Related Persons, at any time 
beneficially owns shares of stock of NA Casin Holdings in excess of the 
ownership limitations described above and such proposed ownership has 
not been approved by the board of directors of NA Casin Holdings and 
the Commission in accordance with the NA Casin Holdings 
Certificate,\61\ NA Casin Holdings will call from such Person and its 
Related Persons the number of shares of stock of NA Casin Holdings 
entitled to vote on any matter that exceeds the ownership limitation at 
a price equal to the par value of the shares of stock.\62\ In addition, 
the NA Casin Holdings Certificate provides that NA Casin Holdings will 
not register the purported transfer of any shares of its stock in 
violation of the 40% ownership limitation set forth in Article IX, 
Section (9).\63\
---------------------------------------------------------------------------

    \61\ See proposed NA Casin Holdings Certificate Article IX, 
Section (9)(i)-(ii).
    \62\ See proposed NA Casin Holdings Certificate Article IX, 
Sections (9)(iii), (10), and (13).
    \63\ See proposed NA Casin Holdings Certificate Article IX, 
Section (11).
---------------------------------------------------------------------------

    The NA Casin Holdings Certificate also contains voting 
restrictions. It provides that no Person, either alone or with its 
Related Persons, as of any record date for the determination of 
stockholders entitled to vote on any matter, shall be entitled to vote 
or cause the voting of shares of stock of NA Casin Holdings, in person 
or by proxy or through any voting agreement or other arrangement, to 
the extent such shares represent in the aggregate more than 20% of the 
then outstanding votes entitled to be cast on such matter.\64\ The NA 
Casin Holdings Certificate also provides that NA Casin Holdings will 
disregard any votes cast in excess of the voting limitation.\65\ 
Further, the NA Casin Holdings Certificate requires NA Casin Holdings 
to take reasonable steps necessary to cause CHX Holdings to comply with 
the voting and ownership

[[Page 38739]]

limitations set forth in the CHX Holdings Certificate.\66\
---------------------------------------------------------------------------

    \64\ See proposed NA Casin Holdings Certificate Article IX, 
Section (5).
    \65\ See id.
    \66\ See proposed NA Casin Holdings Certificate Article IX, 
Section (4).
---------------------------------------------------------------------------

    Relevant to the ownership and voting limitations, the Exchange 
represents that the only Related Persons among the upstream owners are 
Castle YAC and NA Casin Group.\67\ Together, Castle YAC and NA Casin 
Group would hold a 39% ownership interest in NA Casin Holdings, which 
is lower than the 40% ownership limitation. In addition, they would not 
be permitted to exercise their collective voting interest in excess of 
the 20% voting limitation. In connection with the proposed rule change, 
the Exchange has submitted to the Commission and to CHX a certification 
from each of the upstream owners attesting: (1) To the identities of 
its Related Persons; (2) that such owner does not directly, or 
indirectly through one or more intermediaries, control, and is not, 
directly or indirectly through one or more intermediaries, controlled 
or owned by, or under common control or ownership with, a governmental 
entity or political subdivision thereof; (3) that no agreement, 
arrangement, or understanding for the purpose of acquiring, voting, 
holding, or disposing of stock of NA Casin Holdings exist between the 
stockholder and any of the upstream owners; and (4) that neither such 
owner nor any of its Related Persons is subject to any applicable 
``statutory disqualification'' as defined in Section 3(a)(39) of the 
Exchange Act.\68\
---------------------------------------------------------------------------

    \67\ See supra note 15.
    \68\ See Amendment No. 1, supra note 10 at Exhibit 2.
---------------------------------------------------------------------------

    In addition, by September 1, 2018, and for every year thereafter, 
each stockholder of NA Casin Holdings and CHX Holdings would be 
required to submit to the Commission and the corporation an attestation 
regarding: (1) Its equity ownership level in the corporation and the 
identity of its Related Persons and (2) the existence of any agreement, 
arrangement or understanding (whether or not in writing) between the 
stockholder and any other person to act together for the purpose of 
acquiring, voting, holding or disposing of shares of stock of the 
corporation.\69\ The Exchange further represents that the NA Casin 
Holdings Stockholders' Agreement and the Raptor and Saliba put 
agreements would not violate the proposed ownership and voting 
limitations.\70\
---------------------------------------------------------------------------

    \69\ See Amendment No. 1, supra note 10, at 9-10 (see CHX 
Holdings Certificate, Article FOURTH(h); NA Casin Holdings 
Certificate, Article IX, Section (20)).
    \70\ See Notice, supra note 3, 81 FR at 89545. The put 
agreements contemplate that the closing of the purchase of shares 
pursuant to the put agreements may be delayed in the event that the 
parties need to seek regulatory approval. See Saliba Put Agreement, 
Section 3(c); Raptor Put Agreement, Section 3(c). In accordance with 
Article IX, Section (9) of the NA Casin Holdings Certificate, if 
exercise of the put agreements would result in any party owning more 
than 40% of the outstanding voting stock in NA Casin Holdings, the 
parties would need to seek approval of NA Casin Holdings' board of 
directors to waive the 40% ownership limitation and the proposed 
rule change approving such waiver would need to be filed with and 
approved by the Commission. Therefore, before the exercise of the 
put rights could close and transfer shares in violation of the 40% 
ownership limitation, the Commission would have an opportunity to 
evaluate whether the transfer of shares would be consistent with the 
Exchange Act. Accordingly, these put rights should not result in any 
entity holding over 40% of ownership without first receiving 
Commission approval.
---------------------------------------------------------------------------

2. Proposed Provisions on Consent to Jurisdiction; Books and Records; 
Due Regard
    Proposed Article IX, Section 2 of the NA Casin Holdings Certificate 
and proposed Section 3.4 of the CHX Holdings Bylaws provide that each 
of NA Casin Holdings and CHX Holdings, respectively, and its officers, 
directors, employees, and agents, by virtue of their acceptance of 
their positions, shall comply with the federal securities laws and 
rules and regulations thereunder and shall cooperate, and shall take 
reasonable steps necessary to cause its agents to cooperate, with 
respect to such agents' activities related to CHX, with the Commission 
and the Exchange, pursuant to, and to the extent of, CHX's regulatory 
authority. In addition, pursuant to proposed Article 10, Section 10.1 
of the NA Casin Holdings Bylaws and Article III, Section 3.5 of the CHX 
Holdings Bylaws, each entity and its officers, directors, employees, 
and agents, by virtue of their acceptance of their positions, submit to 
the jurisdiction of the U.S. federal courts, the Commission, and the 
Exchange, and agree to maintain an agent in the U.S. for service of 
process of a claim arising out of, or relating to, the activities of 
the Exchange.
    In addition, CHX has filed a statement from each of the upstream 
owners in which each such owner (1) irrevocably submits to the 
jurisdiction of the U.S. federal courts, the Commission, and CHX, for 
the purposes of any suit, action or proceeding relating to the 
certification it provided to the Commission and CHX arising pursuant to 
the U.S. federal securities laws, or the rules and regulations 
thereunder, arising out of, or relating to, the activities of CHX, and 
waive, and agree 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 U.S. federal courts, 
the Commission or CHX, 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 of that suit, action or 
proceeding may not be enforced in or by such courts or agency; (2) 
designates, authorizes and identifies to the Commission an agent in the 
U.S. for the service of process of a claim arising out of, or relating 
to, the activities of CHX, including the certificates provided to CHX 
and the Commission regarding, among other things, its ownership level 
and Related Person status; and (3) agrees to promptly inform the 
Commission in writing of any change to its designated and authorized 
agent.\71\
---------------------------------------------------------------------------

    \71\ See Amendment No. 1, supra note 10, at Exhibit 2.
---------------------------------------------------------------------------

    CHX Holdings also proposes to amend its certificate of 
incorporation to state that its chief compliance officer shall (1) 
monitor compliance with the ownership and voting limitations applicable 
to all upstream beneficial owners and (2) ensure that each beneficial 
owner of the corporation provides certain annual attestations.\72\ The 
CHX Holdings Certificate also provides that CHX Holdings shall engage 
an independent and PCAOB-registered auditor that will perform within 
one year of the closing date of the Transaction, and every two years 
thereafter, an audit of CHX Holdings' oversight of compliance with the 
ownership and voting limitations.\73\
---------------------------------------------------------------------------

    \72\ See Amendment No. 1, supra note 10, at 10; proposed CHX 
Holdings Certificate, Article FOURTH(i)(i).
    \73\ See Amendment No. 1, supra note 10, at 10; proposed CHX 
Holdings Certificate, Article FOURTH(i)(ii).
---------------------------------------------------------------------------

    Proposed Article IX, Section 3 of the NA Casin Holdings Certificate 
and proposed Article III, Section 3.1 of the CHX Holdings Bylaws 
require that, for as long as NA Casin Holdings and CHX Holdings control 
the Exchange, each of NA Casin Holdings and CHX Holdings, respectively, 
and its board of directors, officers, employees, and agents, shall give 
due regard to the preservation of the independence of the self-
regulatory function of the Exchange and to its obligations to investors 
and the general public, and shall not take any actions that would 
interfere with the effectuation of any decisions by the board of 
directors of the Exchange relating to its regulatory functions 
(including enforcement and disciplinary matters) or the structure of 
the market

[[Page 38740]]

that the Exchange regulates or that would interfere with the ability of 
the Exchange to carry out its responsibilities under the Exchange Act.
    Proposed Article IX, Sections 3 and 17 of the NA Casin Holdings 
Certificate and proposed Sections 3.1 and 3.3 of the CHX Holdings 
Bylaws provide that each entity's respective books and records related 
to the activities of the Exchange will be maintained within the U.S. 
Proposed Article IX, Section 17 of the NA Casin Holdings Certificate 
and proposed Section 3.3 of the CHX Holdings Bylaws also provide that 
for so long as NA Casin Holdings and CHX Holdings control, directly or 
indirectly, the Exchange, the books, records, premises, officers, 
directors, and employees of the NA Casin Holdings and CHX Holdings, 
respectively, will be deemed to be the books, records, premises, 
officers, directors, and employees of the Exchange for the purposes of 
and subject to oversight pursuant to the Exchange Act, but only to the 
extent that such books and records are related to, or such officers, 
directors, and employees are involved in, the activities of the 
Exchange. These provisions further provide that the NA Casin Holdings 
and CHX Holdings books and records relating to the activities of 
Exchange will also be subject at all times to inspection and copying by 
the Commission and the Exchange. In addition, proposed Article IX, 
Section 16 of the NA Casin Holdings Certificate and proposed Article 
III, Section 3.2 of the CHX Holdings Bylaws require each entity to 
maintain the confidentiality of all confidential information pertaining 
to the self-regulatory functions of the Exchange (including, but not 
limited to, confidential information regarding disciplinary matters, 
trading data, trading practices and audit information) contained in the 
books and records of the Exchange that come into the possession of each 
entity and preclude each entity from using such confidential 
information for any non-regulatory purpose.\74\
---------------------------------------------------------------------------

    \74\ These provisions also state that they shall not be 
interpreted as to limit or impeded the rights of the Commission or 
the Exchange to access and examine such confidential information 
pursuant to the federal securities laws and the rules and 
regulations promulgated thereunder or the ability of any officers, 
directors, employees or agents of each entity to disclose such 
confidential information to the Commission or the Exchange.
---------------------------------------------------------------------------

    Finally, proposed Article IX, Section 18 of the NA Casin Holdings 
Certificate and proposed Article III, Section 3.7 of the CHX Holdings 
Bylaws provide that for so long as a stockholder shall maintain a 
direct or indirect equity interest in the Exchange: (1) The books, 
records, officers, directors (or equivalent), and employees of the 
stockholder shall be deemed to be the books, records, officers, 
directors, and employees of the Exchange for purposes of and subject to 
oversight pursuant to the Exchange Act to the extent that such books 
and records are related to, or such officers, directors (or equivalent) 
and employees are involved in, the activities of the Exchange; (2) the 
stockholder's books and records related to the activities of the 
Exchange shall at all times be made available for inspection and 
copying by the Commission and the Exchange; and (3) the stockholder's 
books and records related to the activities of the Exchange shall be 
maintained within the United States.
    CHX also proposes to amend its rules to require the Exchange to 
confirm that any RSA to which the Exchange is a party must comply with 
the U.S. federal securities laws, and the rules and regulations 
thereunder, at the time of the execution of the RSA and on an ongoing 
basis.\75\ In addition, CHX is amending its rules to require that its 
chief regulatory officer monitor Exchange compliance with the 
provisions of each RSA to which the Exchange is a party.\76\ CHX also 
proposes to amend its rules to require that, before reporting data to 
CAT or having access to CAT Data, the Exchange will adopt policies and 
procedures to ensure that only CHX ``Authorized Personnel'' \77\ have 
access to any CAT Data, and that CHX regulatory personnel would not 
provide access to any CAT Data to the following persons, regardless of 
citizenship: (1) Any personnel of CHX and CHX Holdings that are not 
Authorized Personnel; (2) any personnel of NA Casin Holdings; or (3) 
any upstream beneficial owners of the Exchange that are not Authorized 
Personnel.\78\ Further, CHX proposes to amend its rules to provide that 
it will engage an independent and PCAOB-registered auditor that would 
perform, within one year after the closing of the Transaction and every 
two years thereafter, an audit of CHX's oversight of: (1) Any RSA; and 
(2) compliance with the policies and procedures relating to access to 
CAT Data.\79\
---------------------------------------------------------------------------

    \75\ See proposed CHX Rules Article 24, Rule 2(a).
    \76\ See proposed CHX Rules Article 24, Rule 2(b).
    \77\ For purposes of proposed CHX Rule Article 24, Rule 1, CHX 
defines ``Authorized Personnel'' to mean (1) regulatory, compliance 
and legal personnel of the Exchange and (2) information technology 
personnel of the Exchange working under the supervision of 
regulatory, compliance or legal personnel of the Exchange.
    \78\ See proposed CHX Rules Article 24, Rule 1(b).
    \79\ See proposed CHX Rules Article 24, Rule 3(a).
---------------------------------------------------------------------------

3. Summary of Comments and the Exchange's Response
    The Commission received comments regarding the proposed rule change 
generally, and the ownership and voting limitations and corporate 
governance provisions in particular. First, several commenters express 
concern about the proposed ownership structure of CHX following the 
close of the Transaction as it relates to the ownership and voting 
limitations. Some of these commenters question the identities of the 
proposed upstream owners and the validity of the Exchange's 
representation that there are no Related Persons among the proposed 
upstream owners other than Castle YAC and NA Casin Group.\80\ Several 
commenters also question the Exchange's representations regarding the 
backgrounds and identities of the upstream owners.\81\ In addition, 
commenters assert that contrary to the Exchange's representations, 
several of the proposed upstream owners may be affiliated.\82\ Some of 
these commenters state that, after the closing of the Transaction, 
approximately 99% of the voting stock in CHX would be controlled by 
what the commenters believe to be Chinese entities or affiliated shell 
nominees.\83\ Several of these commenters state that they believe that 
the post-Transaction ownership would deviate from the 40% ownership 
limitation.\84\
---------------------------------------------------------------------------

    \80\ See Ciccarelli Letter, supra note 6; Ferris Letter 1, supra 
note 6; Ferris Letter 2, supra note 6; Brennan Letter, supra note 6; 
Mayer Letter, supra note 6; Bass Letter, supra note 6, at 2-4. 
Another commenter asserts: ``[m]urky Chinese ownership laws, poor 
property ownership rights and deficient IP protection rules'' make 
it ``unclear who would actually own CHX under Chinese law.'' See 
Park Letter, supra note 6, at 4.
    \81\ See Ciccarelli Letter, supra note 6, at 2-9; Mayer Letter, 
supra note 6; Brennan Letter, supra note 6, at 1-2; Ferris Letter 1, 
supra note 6, at 2-3; Ferris Letter 2, supra note 6, at 1-3; Park 
Letter, supra note 6, at 2; and Bass Letter, supra note 6, at 2-4.
    \82\ See Ciccarelli Letter, supra note 6, at 2-3; Ferris Letter 
1, supra note 6, at 2-3; Bass Letter, supra note 6, at 2; and Ferris 
Letter 2, supra note 6, at 4. See also Mayer Letter, supra note 4 
(asserting that certain of the proposed upstream owners are shell 
companies put in place by Chongqing Casin to avoid ``explicit 
violation'' of the 40% ownership limitation, and should be examined 
for independence from Chongqing Casin).
    \83\ See Ciccarelli Letter, supra note 6, at 1-2. See also 
Ferris Letter 2, supra note 6, at 4; and Bass Letter, supra note 6, 
at 3.
    \84\ See Brennan Letter, supra note 6, at 1; Ciccarelli Letter, 
supra note 6, at 2; Ferris Letter 1, supra note 6, at 1; Bass 
Letter, supra note 6, at 1; Ferris Letter 2, supra note 6, at 4.
---------------------------------------------------------------------------

    Several commenters also opine that the proposed upstream ownership 
of

[[Page 38741]]

CHX is opaque.\85\ Some of these commenters state their views that 
approval of the proposal would promote the improper consolidation of 
ownership and coordinate voting control over CHX, and also materially 
harm the public trust in the independent and objective operation of 
U.S. capital markets.\86\ These commenters believe that the Transaction 
would concentrate ownership and voting power under Chongqing Casin and 
its ``coordinate'' investment entities in China, and with little or no 
insight and transparency into what the commenters state are government-
dominated Chinese markets, the commenters believe that the Commission 
will be unable to monitor the ownership structure of Chongqing Casin 
after approval.\87\ The commenters believe that this scenario would 
leave CHX open to undue, improper, and possibly state driven influence 
via coordinated voting control by its upstream ownership.\88\ In 
addition, one commenter states that as a result of the proposed 
ownership, there would be ``reputational risks'' for CHX, and that 
``compliance frustrations'' related to the Foreign Corrupt Practices 
Act and Anti-Money Laundering rules would be at the ``front and 
center'' in the Commission's oversight of CHX.\89\ Accordingly, the 
commenters state that, given these actual or potential outcomes, the 
Transaction appears inconsistent with Sections 6(b)(l) and 6(b)(5) of 
the Exchange Act.\90\
---------------------------------------------------------------------------

    \85\ See Pittenger Letter 2, supra note 6, at 1; Bass Letter, 
supra note 6 at 1-5; Mayer Letter, supra note 6; Ciccarelli Letter, 
supra note 6, at 1-4; Ferris Letter 1, supra note 6, at 1-4; Ferris 
Letter 2, supra note 6, at 1-5. See also Hill Letter 2, supra note 6 
(stating that ``it is easy to become confused about exactly who 
wants to own this exchange'').
    \86\ See Pittenger Letter 2, supra note 6, at 1.
    \87\ See id.
    \88\ See Pittenger Letter 2, supra note 6, at 1.
    \89\ See Park Letter, supra note 6, at 3. See also Ferris Letter 
2, supra note 6, at 2 (stating that concerns over possible money 
laundering are not addressed by NA Casin, therefore are conceded).
    \90\ See id.
---------------------------------------------------------------------------

    Commenters also express concern about the ability of the Commission 
to exercise regulatory oversight over the Exchange following the 
closing of the Transaction.\91\ One commenter questions whether the 
Commission can effectively regulate the Exchange and protect the market 
from abuses if the Commission staff does not know, and cannot 
independently confirm, the backgrounds of what the commenter 
characterizes as ``Chinese shell companies'' involved in the 
Transaction.\92\ Another commenter argues that for the sake of the 
public interest, the Commission should take extreme caution in 
reviewing the proposed rule change and reject the Exchange's 
representations, which the commenter believes to be misleading.\93\
---------------------------------------------------------------------------

    \91\ See Pittenger Letters 1 and 2, supra note 6, at 2; 
Ciccarelli Letter, supra note 6, at 1-2; Bass Letter, supra note 6, 
at 1; and Ferris Letter 1, supra note 6, at 4.
    \92\ See Brennan Letter, supra note 6, at 1. In addition, three 
commenters express concern about the source of funding for the 
Transaction. See Park Letter, supra note 6, at 2-3 (stating that 
none of foreign upstream owners are on the published State 
Administration of Foreign Exchange's list of entities that ``have 
applied and received approvals for foreign currencies'' and 
questioning the legitimacy of the funds being used to pay for the 
Transaction); Ferris Letter 1, supra note 6, at 2; Ferris Letter 2, 
supra note 6, at 3; and Bass Letter, supra note 6, at 3.
    \93\ See Ferris Letter 1, supra note 6, at 4.
---------------------------------------------------------------------------

    In response to these concerns, the Exchange states that it has not 
misrepresented any facts regarding the Transaction.\94\ It also states 
that 50.5% of CHX will be indirectly owned by U.S. citizens.\95\ The 
Exchange reaffirms the representations that it made in the Notice that 
the only Related Persons among the upstream owners are Castle YAC and 
NA Casin Group, that there are no other Related Persons among the 
upstream owners, and that none of the upstream owners directly, or 
indirectly through one or more intermediaries, controls, or is 
controlled by, or is under common control with, a governmental entity 
or subdivision thereof.\96\ The Exchange asserts that each of these 
representations is supported by an opinion of counsel provided to the 
Commission by outside counsel for CHX on a confidential basis.\97\ The 
Exchange, NA Casin Holdings, and one of the proposed upstream owners 
also assert that some of the comment letters contain false accusations 
regarding the identity, ownership, relationships, and business 
activities of certain upstream owners.\98\ In addition, the Exchange, 
NA Casin Holdings, and two other commenters assert that the proposed 
upstream owners are reputable businesses.\99\
---------------------------------------------------------------------------

    \94\ See CHX Response Letter 2, supra note 7, at 2, 5-6. The 
Exchange states that, as described in the Notice, Xian Tong 
Enterprises, Inc. and Castle YAC are controlled by U.S. citizens, 
Quiling Luo and Jay Lu, respectively. See id. at 4-6.
    \95\ See id. at 2.
    \96\ See id. at 5.
    \97\ See id.
    \98\ See CHX Response Letter 3, supra note 7, at 3-5; Saliba 
Letter, supra note 6, at 2; NA Casin Holdings Letter, supra note 6, 
at 7.
    \99\ See CHX Response Letter 3, supra note 7, at 3; NA Casin 
Holdings Letter, supra note 6, at 7; Gouroudeva Letter, supra note 
6; and Prufeta Letter, supra note 6.
---------------------------------------------------------------------------

    Moreover, the Exchange asserts that it provided detailed 
information regarding the upstream owners to the Committee for Foreign 
Investment in the United States (``CFIUS'') and the Exchange asserts 
that CFIUS determined that there are no unresolved national security 
concerns with respect to the Transaction.\100\ In response to this 
assertion, some of the commenters state that CFIUS's approval of the 
Transaction has no relevance to the Commission's determination because 
CFIUS's review focuses solely on national security concerns, and does 
not relate to the ownership and voting restrictions applicable to 
exchanges.\101\ The Exchange responds that, with respect to the 
financial services sector, CFIUS review involves an examination of the 
potential disruptions to U.S. stock markets or the U.S. financial 
system as a whole, cybersecurity vulnerabilities, and the 
vulnerabilities associated with the fact that the U.S. business obtains 
and preserves personal information.\102\ The Exchange also states that 
CFIUS review includes a full and detailed assessment of the foreign 
investing entities, including all of their individual senior executives 
and major stockholders, and the extent of any foreign government 
control over the investors.\103\ The Exchange again asserts that CFIUS 
conducted a thorough, deep, and wide-ranging investigation of the 
Transaction and the proposed upstream owners, and that it concluded 
that there were no unresolved national security concerns.\104\
---------------------------------------------------------------------------

    \100\ See CHX Response Letter 2, supra note 7 at 5; and CHX 
Response Letter 3, supra note 7, at 6.
    \101\ See Ferris Letter 1, supra note 6, at 3; Brennan Letter, 
supra note 6, at 2; and Bass Letter, supra note 6, at 4-5. Another 
commenter expresses concern that CFIUS disregarded the concerns of 
Congress when it closed its review of the Transaction. See Hill 
Letter 2, supra note 6.
    \102\ See CHX Response Letter 3, supra note 7, at 6.
    \103\ See id.
    \104\ See id.
---------------------------------------------------------------------------

    Furthermore, commenters express concern about whether the Chinese 
government could have influence or control over the Exchange and its 
upstream owners.\105\ Some of these commenters assert that one of the 
proposed upstream owners has ties to the Chinese government.\106\ 
Several commenters question whether the Chinese government could 
influence

[[Page 38742]]

Chongqing Casin, stating that Chongqing Casin is involved in a number 
of Chinese market sectors that require close ties to the state, such as 
environmental protection.\107\ The commenters assert that Chinese 
markets are non-transparent and ``heavily dominated'' by the Chinese 
State Council and that companies in China often receive significant 
illegal subsidies from the government and are used as conduits for the 
Chinese Communist Party to ``disrupt and distort foreign markets, 
businesses, and governments.'' \108\ Some commenters also state that 
Chongqing Casin's financial assets were originally state-controlled, 
and that its chairman sits on an industry council overseen directly by 
the mayor of the Chongqing Municipality.\109\ These commenters state 
that, in particular, Chinese ownership or involvement presents risks as 
Chinese government-sponsored cyber-attacks have been conducted to 
devalue foreign businesses and steal intellectual property and 
proprietary data; the commenters assert that this has cost American 
companies billions of dollars annually.\110\ Commenters also state that 
the Transaction may present financial security risks to investors and 
the U.S. marketplace.\111\ Some commenters believe that the proposal 
will materially harm the public trust in the independent and objective 
operation of U.S. capital markets.\112\ Similarly, another commenter 
believes that the proposal is a threat to Americans' faith in the 
U.S.'s national financial market infrastructure.\113\ One commenter 
also raises concerns that a bad actor with access to an exchange's data 
could use information available through brokerage records and the 
Consolidated Audit Trail to engage in spear phishing, blackmail 
attempts, and other similar attacks.\114\ In response, the Exchange 
states that CFIUS investigated the Transaction and ``determined that 
there were no unresolved national security concerns with respect to the 
[p]roposed Transaction.'' \115\ Furthermore, some commenters believe 
that the Transaction would benefit the U.S. capital markets and have 
positive economic effects.\116\ The Exchange also states that the 
Transaction will enable it to accelerate implementation of its 
strategic plan, which includes implementing a primary listing program 
focused on capital formation for emerging growth companies.\117\
---------------------------------------------------------------------------

    \105\ See Pittenger Letter 1, supra note 6, at 1-2; Pittenger 
Letter 2, supra note 6, at 1; Bass Letter at 4, supra note 6; Mayer 
Letter, supra note 6; and Hill Letter 2, supra note 6.
    \106\ See Pittenger Letter 1, supra note 6, at 1-2; Bass Letter, 
supra note 6, at 4 (asserting that Chongqing Casin could be 40% 
owned and controlled by Chinese government entities and Chinese 
government officials); Mayer Letter, supra note 6; and Hill Letter 
2, supra note 6 (asserting that the Chinese government may be a 
minority stockholder in one of the upstream owners and that the 
Chinese government should not be given protections afforded to 
SROs).
    \107\ See Pittenger Letter 1, supra note 6, at 1. See also 
Pittenger Letter 2, supra note 6, at 1 (stating that the Chinese 
government dominates all sectors of society and consistently fails 
to abide by international agreements).
    \108\ See Pittenger Letter 1, supra note 6, at 1. In addition, 
some commenters express concern that the Exchange may list 
securities of Chinese companies following the Transaction, citing 
recent accounting and disclosure violations by Chinese companies. 
See Mayer Letter, supra note 6; and Park Letter, supra note 6. But 
see Nobile Letter, supra note 6 (stating that listing of legitimate 
foreign entities on a U.S. platform strictly regulated under 
Commission rules and regulations will instill confidence in 
prospective investors who normally shy away from trading and 
engaging in foreign exchanges due to well-intentioned concerns 
regarding lack of regulation or the perception thereof). The 
Commission notes that the Exchange does not currently list such 
companies, and the proposed rule change under consideration would 
not modify the Exchange's listing rules. Thus any new listings would 
be subject to the rules of the Exchange, and any changes to the 
Exchange's listing rules would be subject to Commission review under 
to Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder.
    \109\ See Pittenger Letter 1, supra note 6, at 1.
    \110\ See id.
    \111\ See Pittenger Letters 1 and 2, supra note 6, at 1; Manchin 
Letter, supra note 6, at 1; Anonymous Letter, supra note 6; and 
Dandolu Letter, supra note 6.
    \112\ See Pittenger Letter 2, supra note 6, at 1.
    \113\ See Manchin Letter, supra note 6, at 1.
    \114\ See Anonymous Letter, supra note 6.
    \115\ CHX Response Letter 1, supra note 7, at 5.
    \116\ See Caban Letter, supra note 6 (stating that having an 
exchange that would help attract additional foreign investment in 
Chicago is an important way to help create well-paying jobs); NA 
Casin Holdings Letter, supra note 6, at 8 (stating that the 
Transaction will help establish links between the capital markets of 
China and the U.S. and explaining how the Transaction will attract 
Chinese investors to buy stocks listed on CHX and companies in Asia 
to list their stock on CHX); Seyedin Letter, supra note 6, at 1 
(stating the beliefs that the Transaction will make CHX an important 
bridge between capital markets in US and China and that connecting 
US and Chinese stock markets would allow the US to benefit further 
from China's growth); Nobile Letter, supra note 6 (stating that the 
Transaction will result in some very clear benefits to the global 
financial community and that Casin Group may seek less well known, 
but legitimate foreign entities that would be listed on a U.S. 
platform strictly regulated under Commission rules and regulations); 
Gouroudeva Letter, supra note 6 (stating the belief that ownership 
of CHX by a respected Chinese company will greatly increase direct 
Chinese investment into the U.S. economy.); Prufeta Letter, supra 
note 6 (stating the belief that the Transaction will provide a 
unique and exceedingly valuable window to major cross-border 
investment between the world's largest economies); Saliba Letter, 
supra note 6, at 2 (stating that in order for the U.S. financial 
markets to remain at the forefront globally, the U.S. must 
continually innovate and attract business from all over the globe, 
which the Transaction will enable); Zhong Letter, supra note 6 
(expressing support for the Transaction because, among other 
reasons, there are positive effects of trade and commerce between 
top Chinese companies and U.S.-based companies and that trade is the 
fundamental basis for positive foreign relations); Karcher Letter, 
supra note 6 (expressing support for investment by Chinese companies 
in the U.S. because the increased ties through trade will benefit 
both countries); and Gottlieb Letter, supra note 6 (stating that the 
Transaction will provide a needed opportunity and valuable window 
for cross-border investments and world economies).
    \117\ See CHX Response Letter 1, supra note 7, at 2; CHX 
Response Letter 3, supra note 7, at 2-3.
---------------------------------------------------------------------------

    Another commenter expresses concern that the proposed upstream 
ownership leaves CHX and U.S. markets open to ``undetectable 
manipulation'' by Chongqing Casin and the Chinese government.\118\ In 
response, the Exchange affirms that no prospective investor controls, 
is controlled by, or is under common control with, a governmental 
entity or any political subdivision thereof, including the Chinese 
government.\119\
---------------------------------------------------------------------------

    \118\ See Mayer Letter, supra note 6.
    \119\ See CHX Response Letter 1, supra note 7, at 2.
---------------------------------------------------------------------------

    In addition, some commenters express concern that the Saliba Put 
Agreement and the Raptor Put Agreement could create voting collusion 
between Raptor and Saliba, resulting in a combined 24% voting interest 
that exceeds the 20% voting limitation.\120\ The Exchange responds that 
under the terms of the put agreements, NA Casin Holdings could not 
compel Saliba or Raptor to exercise its respective put option and that, 
in the event that either put agreement is exercised, CHX rules would 
require the resulting ownership structure to comport with the ownership 
and voting limitations.\121\ Some of the commenters assert that Raptor 
is Saliba's nominee or business partner.\122\ NA Casin Holdings and 
Saliba respond that Raptor and Saliba have never had any relationship, 
are located in different cities, and are owned by different 
families.\123\ In addition, one commenter asserts that these put 
agreements are specifically designed to skirt the Commission's exchange 
ownership restrictions, which would give Chongqing Casin virtual 
control over the Exchange.\124\ In response, the Exchange explains that 
the put agreements only grant Saliba and Raptor the right to exercise 
their respective put options and do not grant NA Casin Holdings the 
right to compel the exercise of those rights.\125\ The

[[Page 38743]]

Exchange also notes that any exercise of the put rights would be 
subject to compliance with the ownership and voting limitations.\126\
---------------------------------------------------------------------------

    \120\ See Brennan Letter, supra note 6, at 2; Mayer Letter, 
supra note 6; Ferris Letter 1, supra note 6, at 2; Ferris Letter 2, 
supra note 6, at 3-4; Bass Letter, supra note 6, at 2; and Park 
Letter, supra note 6, at 4.
    \121\ See CHX Response Letter 2, supra note 7, at 6.
    \122\ See Ferris Letter 1, supra note 6, at 2, n. 5; and Brennan 
Letter, supra note 6, at 2.
    \123\ See NA Casin Holdings Letter, supra note 6, at 7; and 
Saliba Letter, supra note 6, at 2.
    \124\ See Ciccarelli Letter, supra note 6, at 3.
    \125\ See CHX Response Letter 2, supra note 7, at 6. In 
addition, some commenters assert that a conflict of interest exists 
because one of the upstream owners, Anthony Saliba, serves on the 
Exchange's and CHX Holdings' boards of directors. See Brennan 
Letter, supra note 6, at 2-3; Ferris Letter 1, supra note 6, at 2; 
Ferris Letter 2, supra note 6, at 5; Bass Letter, supra note 6, at 
2; and Park Letter, supra note 6, at 4. In response, the Exchange 
notes that its current rules require a CHX board position to be 
reserved for certain CHX Holdings stockholders and asserts that 
there is no unresolved conflict of interest because Mr. Saliba 
recused himself from all material CHX Holdings and CHX board votes 
related to the Transaction. See CHX Response Letter 3, supra note 7, 
at 5.
    \126\ See CHX Response Letter 2, supra note 7, at 6.
---------------------------------------------------------------------------

    Moreover, two commenters express concern that CHX and the 
Commission may not be aware of or able to control future transfers of 
ownership or voting in contravention of the ownership and voting 
limitations.\127\ One of these commenters asserts that there are little 
to no controls in place at the upstream corporate ownership level that 
would prevent the upstream owners from transferring their voting power 
in CHX to even more opaque owners or ownership that involves the 
Chinese government.\128\ The other commenter asserts that neither the 
Exchange nor the Commission would know if capital stock in China is 
being consolidated, resold, collateralized, or collusively voted in 
violation of the 20% voting limitation.\129\ The commenter expresses 
concern that collusion or changes in ownership that are unknown to the 
Exchange or the Commission could hinder the Exchange's and the 
Commission's obligations to prevent conflicts of interest and improper 
influence under Section 6(b)(5) of the Exchange Act.\130\ In addition, 
the commenter asserts that the upstream owners are not being required 
to amend their governing documents to restrict collusive voting or 
resale of the Exchange.\131\
---------------------------------------------------------------------------

    \127\ See Ciccarelli Letter, supra note 6, at 1; and Mayer 
Letter, supra note 6.
    \128\ See Ciccarelli Letter, supra note 6, at 2.
    \129\ See Mayer Letter, supra note 6. The commenter asserts that 
restricting voting of shares would not remedy ``back-room voting 
collusion, share re-sale or collateralization to an unknown party or 
state entity in China.'' See id.
    \130\ See id.
    \131\ See id.
---------------------------------------------------------------------------

    In response, the Exchange states that to the contrary, the 
governing documents of NA Casin Holdings and CHX Holdings do indeed 
restrict the voting and sale of the Exchange.\132\ In addition, as 
noted above, the Exchange affirms its representation that no 
prospective owner or any of its Related Persons would maintain an 
equity interest, or exercise voting power, in violation of the 
ownership and voting limitations.\133\ The Exchange also responds that 
the proposed governance documents for NA Casin Holdings and CHX 
Holdings provide robust enforcement mechanisms for the ownership and 
voting limitations, and that the CHX board's composition would be 
required to meet certain independence requirements.\134\ The Exchange 
also notes that the CHX rules and Exchange Act contain various 
provisions that would facilitate the ability of U.S. regulators, 
including the Commission, to monitor, compel, and enforce compliance by 
each of the upstream owners.\135\
---------------------------------------------------------------------------

    \132\ See CHX Response Letter 1, supra note 7, at 3-4; and CHX 
Response Letter 2, supra note 7, at 2-3.
    \133\ See CHX Response Letter 1, supra note 7, at 3; and CHX 
Response Letter 2, supra note 7, at 2.
    \134\ See CHX Response Letter 1, supra note 7, at 3. See also 
CHX Response Letter 2, supra note 7, at 3.
    \135\ See CHX Response Letter 2, supra note 7, at 2-4 
(specifically noting: (1) The ownership and voting limitations; (2) 
provisions in which the upstream owners consent to U.S. regulatory 
jurisdiction and agree to maintain an agent in the U.S. for service 
of process; and (3) provisions requiring the upstream owners to 
maintain their books and records related to CHX in the U.S. and to 
refrain from interfering with, and to give due consideration to, the 
SRO function of CHX). See also CHX Response Letter 3, supra note 7, 
at 2.
---------------------------------------------------------------------------

    Commenters also express concern about the ability of the Commission 
to exercise regulatory oversight over the Exchange following the 
closing of the Transaction.\136\ Characterizing the proposed upstream 
ownership of CHX as ``opaque,'' several commenters state that approval 
of the proposal would strip the Commission of its ability to carry out 
its statutorily mandated oversight of exchange ownership.\137\ These 
commenters also state that given ongoing concerns with the severe lack 
of transparency in China, the commenters have substantial concerns 
related to the Commission's ability to monitor and regulate the 
upstream ownership of Chongqing Casin.\138\ These commenters note that 
neither Chongqing Casin nor any of its coordinate foreign entities have 
provided U.S. regulators with any power to monitor or regulate their 
activities with respect to CHX.\139\ These commenters further state 
that, in the past, Chinese entities have limited visibility into post-
acquisition activities and have attempted to interpose arguments--such 
as sovereign immunity or limits to the extraterritorial application of 
U.S. laws--to avoid compliance with U.S. regulatory requirements.\140\ 
The commenters believe that these actions erode investor trust and 
adversely affect U.S. regulatory interests.\141\
---------------------------------------------------------------------------

    \136\ See Pittenger Letters 1 and 2, supra note 6, at 2; 
Ciccarelli Letter, supra note 6, at 1-2; Bass Letter, supra note 6, 
at 1; and Ferris Letter 1, supra note 6, at 4.
    \137\ See Pittenger Letter 2, supra note 6, at 1.
    \138\ See id.
    \139\ See id. at 2.
    \140\ See id.
    \141\ See id.
---------------------------------------------------------------------------

    Similarly, another commenter opines that what the commenter cites 
as the Chinese government's continued rejection of fundamental free-
market norms and property rights of private citizens makes the 
commenter strongly doubt whether an Exchange operating under the direct 
control of a Chinese entity can be trusted to self-regulate now and in 
the future.\142\ The commenter states that while the harms caused by NA 
Casin Group's acquisition of the CHX may not become apparent 
immediately, allowing this acquisition to proceed could have a 
devastating effect on the health of U.S. financial markets, which the 
commenter states are ``the envy of the world.'' \143\ The commenter 
further states that the commenter remains unconvinced of the following: 
(1) That no prospective investor is influenced or controlled by the 
Chinese government; (2) that Exchange rules could stand against the 
levels of deceit employed by the Chinese government; and (3) that the 
Chinese government would not employ influence to affect exchange 
decisions or votes.\144\
---------------------------------------------------------------------------

    \142\ See Manchin Letter, supra note 6, at 1.
    \143\ See id. at 1-2.
    \144\ See id. at 2.
---------------------------------------------------------------------------

    Furthermore, another commenter asserts that, due to jurisdiction 
limitations and transparency concerns, under the current proposal, the 
Commission would not be able to exercise proper regulatory 
oversight.\145\ Some commenters also express concern about the ability 
of U.S. regulators to access the books and records of the Chinese-owned 
upstream owners.\146\ Two commenters state that they believe that the 
proposed foreign upstream owners will not submit to U.S. 
jurisdiction.\147\ Another commenter states its view that foreign 
ownership of the Exchange may result in lax enforcement of its 
rules.\148\
---------------------------------------------------------------------------

    \145\ See Ciccarelli Letter, supra note 6, at 1-2.
    \146\ See Bass Letter, supra note 6, at 5; and Ferris Letter 1, 
supra note 6, at 4. See also Pittenger Letter 1, supra note 6, at 2 
(asserting that the Public Company Accounting Oversight Board must 
be able to ``penetrate Chinese opacity'' before a Chinese firm is 
allowed to purchase an American stock exchange).
    \147\ See Ciccarelli Letter, supra note 6, at 3-4; and Mayer 
Letter, supra note 6.
    \148\ See Hill Letter 2, supra note 6. This commenter also 
alleges that the Exchange has a record of non-compliance with 
regulations and failure to fully enforce its rules.
---------------------------------------------------------------------------

    The Exchange responds that it believes that its rules are 
consistent with the requirements of the Exchange Act, and that its 
rules and the Exchange Act contain various provisions that would 
facilitate the ability of U.S. regulators, including the Commission,

[[Page 38744]]

to monitor, compel, and enforce compliance by each of the upstream 
owners. In particular, upstream owners would be required to adhere to 
the ownership and voting limitations, submit to U.S. regulatory 
jurisdiction and maintain agents in the U.S. for the service of 
process, maintain open books and records related to their ownership of 
CHX and keep such books and records in the U.S., and refrain from 
interfering with, and give due consideration to, the SRO function of 
the Exchange.\149\ The Exchange also asserts that, pursuant to the 
Exchange Act, the Exchange is subject to ``direct and rigorous'' 
oversight by the Commission, which, the Exchange describes as including 
among other things, frequent examinations of various aspects of its 
operations by Commission staff, including security and trading 
protocols, as well as the requirement for Commission approval of 
certain regulatory, operational, and strategic initiatives prior to 
implementation by the Exchange.\150\
---------------------------------------------------------------------------

    \149\ See CHX Response Letter 1, supra note 7, at 4; and CHX 
Response Letter 2, supra note 7, at 3-4.
    \150\ See CHX Response Letter 2, supra note 7, at 3-4.
---------------------------------------------------------------------------

    In addition, NA Casin Holdings asserts that extensive regulatory 
and governance safeguards would empower the Commission and the Exchange 
to prevent any influence over the Exchange and its operations that is 
improper or a violation of U.S. securities laws and regulations.\151\ 
Other commenters express confidence that the regulatory controls 
currently in place are adequate to monitor the proposed investors.\152\
---------------------------------------------------------------------------

    \151\ See NA Casin Holdings Letter, supra note 6, at 1-2. 
Specifically, NA Casin Holdings observes that 50% of the board of 
the Exchange would be required to consist of ``Non-Industry 
Directors'' (which NA Casin Holdings notes is defined in the CHX 
Bylaws), who cannot be employed by any affiliate of CHX.
    \152\ See Prufeta Letter, supra note 6 (stating that ``the 
continual scrutiny of the US financial system is both essential and 
firmly in place'' and that the commenter believes that ``all the 
controls necessary to monitor the investment group exist now and 
will be sufficient''). See also Zhong Letter, supra note 6 
(expressing confidence that the current controls of the U.S. 
regulatory system serve as an ``effective check and balance'' on 
both foreign and domestic investors); Karcher Letter, supra note 6 
(stating that commenter ``trust[s] [the Commission's] process much 
more than relying on the ad hominum attacks [the commenter] read[s] 
within the comments section'').
---------------------------------------------------------------------------

4. Commission Findings
    The Commission believes that, in light of the proposed restrictions 
on the ownership and voting of stockholders, the above-discussed 
corporate governance provisions relating to compliance with U.S. law, 
consent to jurisdiction, due regard to the regulatory obligations and 
functions of the Exchange, and books and records, and the statements 
from the upstream owners committing to submit to jurisdiction and 
designating an agent for service of process, the proposed rule change 
is consistent with the requirements of Section 6(b) of the Exchange 
Act. The Commission believes that the proposed ownership and voting 
limitations are reasonably designed to prevent any stockholder from 
exercising undue control over the operation of NA Casin Holdings, and 
in turn, over the operation of the Exchange. The Commission also notes 
that these ownership and voting limitations are consistent with those 
approved by the Commission for other SROs \153\ (including for other 
SROs with foreign ownership),\154\ and believes that they are 
reasonably designed to assure that the Exchange and the Commission are 
able to carry out their regulatory obligations under the Exchange Act 
and in administering and complying with the requirements of the 
Exchange Act. Moreover, the Commission believes that the proposed 
ownership and voting limits are reasonably designed to eliminate the 
potential that the control of the Exchange by one or few stockholders 
would improperly interfere with or impair the ability of the Commission 
or the Exchange to effectively carry out their regulatory oversight 
responsibilities under the Exchange Act.
---------------------------------------------------------------------------

    \153\ See, e.g., Securities Exchange Act Release Nos. 79585 
(December 16, 2016), 81 FR 93988 (December 22, 2016) (SR-BatsBZX-
2016-68) (approving similar restrictions in connection with the 
merger of Bats Global Markets, Inc. and CBOE Holdings, Inc.) 
(``BATS-CBOE Approval Order''); 78119 (June 21, 2016), 81 FR 41611 
(June 27, 2016) (SR-ISE-2016-11, SR-ISE Gemini-2016-05, SR-ISE 
Mercury-2016-10) (approving similar restrictions proposed in 
connection with Nasdaq, Inc. becoming the indirect parent of 
International Securities Exchange, ISE Gemini, LLC, and ISE Mercury, 
LLC); 74270 (February 13, 2015), 80 FR 9286 (February 20, 2015) (SR-
NSX-2014-017) (approving similar restrictions in connection with 
National Stock Exchange, Inc. becoming a wholly-owned subsidiary of 
National Stock Exchange Holdings, Inc.) (``NSX Approval Order''); 
71449 (January 30, 2014), 79 FR 6961 (February 5, 2014) (SR-EDGA-
2013-34; SR-EDGX-2013-43) (approving similar restrictions in 
connection with the merger of BATS Global Markets, Inc. and Direct 
Edge Holdings LLC); 71375 (January 23, 2014), 79 FR 4771 (January 
29, 2014) (SR-BATS-2013-059, SR-BYX-2013-039) (approving similar 
restrictions in connection with the merger of BATS Global Markets, 
Inc. and Direct Edge Holdings LLC); 70210 (August 15, 2013), 78 FR 
51758 (August 21, 2013) (SR-NYSE-2013-42, SR-NYSEMKT-2013-50 and SR-
NYSEArca-2013-62) (approving similar restrictions in connection with 
NYSE Euronext Holdings, LLC becoming a wholly-owned subsidiary of 
Intercontinental Exchange Group, Inc.); 62716 (August 13, 2010), 75 
FR 51295 (August 19, 2010) (File No. 10-198) (approving similar 
restrictions in connection with the registration Bats BYX Exchange, 
Inc. as a national securities exchange); 61698 (March 12, 2010), 75 
FR 13151 (March 18, 2010) (File Nos. 10-194 and 10-196) (approving 
similar restrictions in connection with the registrations of EDGX 
Exchange, Inc. and EDGA Exchange, Inc. as national securities 
exchanges) (``EDGX and EDGA Registrations''); 58375 (August 18, 
2008), 73 FR 49498 (August 21, 2008) (File No. 10-182) (approving 
similar restrictions in connection with the registration of BATS 
Exchange, Inc. as a national securities exchange); 56955 (December 
13, 2007), 72 FR 71979, 71982-84 (December 19, 2007) (SR-ISE-2007-
101) (approving similar restrictions in connection with 
International Securities Exchange Holdings, Inc. becoming a wholly-
owned indirect subsidiary of Eurex Frankfurt AG) (``ISE Approval 
Order''); 55293 (February 14, 2007), 72 FR 8033 (February 22, 2007) 
(SR-NYSE-2006-120) (approving similar restrictions in connection 
with the combination of NYSE Group, Inc. and Euronext N.V.) (``NYSE 
Euronext Approval Order''); 53382 (February 27, 2006), 71 FR 11251 
(March 6, 2006) (SR-NYSE-2005-77) (approving similar restrictions in 
connection with the merger of New York Stock Exchange, Inc. and 
Archipelago); 53963 (June 8, 2006), 71 FR 34660 (June 15, 2006) 
(File No. SR-NSX-2006-03) (approving similar restrictions in 
connection with the demutualization of the National Stock Exchange); 
53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 
10-131) (approving similar restrictions in connection with the 
registration the Nasdaq Stock Market LLC as a national securities 
exchange); 51149 (February 8, 2005), 70 FR 7531 (February 14, 2005) 
(SR-CHX-2004-26) (approving similar restrictions in connection with 
the demutualization of CHX); and 49098 (January 16, 2004), 69 FR 
3974 (January 27, 2004) (SR-Phlx-2003-73) (approving similar 
restrictions in connection with the demutualization of the 
Philadelphia Stock Exchange, Inc.).
    \154\ See, e.g., NYSE Euronext Approval Order, supra note 153; 
EDGX and EDGA Registrations, supra note 153; and ISE Approval Order, 
supra note 153.
---------------------------------------------------------------------------

    In addition to being designed to eliminate the potential of any 
stockholder from exercising undue control over the Exchange, the 
Commission also notes that other proposed ownership and voting 
limitations applicable to members of the Exchange are designed to 
address the conflicts of interests that might result from a member of a 
national securities exchange owning interests in the exchange.\155\ As 
the Commission has noted in the past, a member's interest in an 
exchange could become so large as to cast doubts on whether the 
exchange may fairly and objectively exercise its self-regulatory 
responsibilities with respect to such member.\156\ A member that is a 
controlling stockholder of an exchange could seek to exercise that 
controlling influence by directing the exchange to refrain from, or the 
exchange may hesitate to, diligently monitor and conduct surveillance 
of the member's conduct or diligently enforce the exchange's rules and 
the federal securities laws with respect to conduct by the member that 
violates such provisions. As such, these restrictions

[[Page 38745]]

on Exchange members' ownership and voting of NA Casin Holdings stock 
are expected to minimize the potential that a person or entity can 
improperly interfere with or restrict the ability of CHX to effectively 
carry out its regulatory oversight responsibilities under the Exchange 
Act.
---------------------------------------------------------------------------

    \155\ See supra note 57 and accompanying text.
    \156\ See, e.g., BATS-CBOE Order, supra note 153, at 93990.
---------------------------------------------------------------------------

    The Commission also believes that the proposed rule change, as 
modified by Amendment No. 1, is reasonably designed to: (1) Safeguard 
against violations of the ownership and voting limitations and (2) 
facilitate the ability of the Exchange to comply with its 
responsibilities under the Exchange Act. In particular, the Commission 
notes the requirements that: (1) Certain stockholders of CHX Holdings 
and NA Casin Holdings must notify the corporation of changes to the 
stockholder's voting power or ownership; \157\ (2) the chief compliance 
officer of CHX Holdings monitor for compliance with the limits on 
ownership and voting applicable to the upstream beneficial owners; 
\158\ and (3) CHX Holdings hire an independent and PCAOB-registered 
auditor to regularly monitor CHX Holdings' oversight of those 
limits.\159\ The Commission believes this will assist CHX Holdings in 
exercising its oversight obligations of the ownership and voting limits 
after the closing of the Transaction.
---------------------------------------------------------------------------

    \157\ See supra note 38 and accompanying text.
    \158\ See supra note 72 and accompanying text.
    \159\ See supra note 73 and accompanying text.
---------------------------------------------------------------------------

    With regards to commenters' concerns that the upstream owners in 
fact may be Related Persons,\160\ or that the upstream owners may vote 
or act collusively,\161\ or may be under the control of a foreign 
government,\162\ CHX has responded to these concerns by providing 
certifications from each of the upstream owners, each of which: 
Identifies its Related Persons; states that it does not directly, or 
indirectly through one or more intermediaries, control, and is not, 
directly or indirectly through one or more intermediaries, controlled 
or owned by, or under common control or ownership with, a governmental 
entity or political subdivision thereof; and attests that no agreement, 
arrangement, or understanding exists between the stockholder and any 
other person for the purpose of acquiring, voting, holding or disposing 
of shares of stock of NA Casin Holdings.\163\ In response to these 
concerns, as well as commenters' concerns regarding the ability of the 
Exchange to exercise its self-regulatory obligations and monitor for 
compliance with its ownership and voting limitations after the closing 
of the Transaction,\164\ the Commission notes that: (1) By September 1, 
2018, and every year thereafter, each stockholder of NA Casin Holdings 
as well as CHX Holdings will be required to submit directly to the 
Commission and the corporation an attestation as to (a) its equity 
ownership level in the corporation and the identity of its Related 
Persons and (b) the existence of any agreement, arrangement or 
understanding (whether or not in writing) to act together exists 
between the stockholder, on the one hand, and any other person, on the 
other hand, for the purpose of acquiring, voting, holding or disposing 
of shares of stock of the corporation; \165\ (2) the chief compliance 
officer of CHX Holdings will monitor for compliance with the 
corporation's voting and ownership limitations and ensure that each of 
the upstream owners provides to the Commission and CHX on a yearly 
basis relevant attestations; \166\ (3) within one year of the closing 
of the Transaction and every two years thereafter, an independent 
auditor will audit CHX Holdings' oversight of compliance with such 
voting and ownership limitations; \167\ and (4) each of the upstream 
owners has irrevocably submitted to the jurisdiction of U.S. federal 
courts, the Commission and CHX, designated and authorized an agent in 
the United States for service of process, and committed to promptly 
inform the Commission in writing of any change of its designated and 
authorized agent.\168\ The Commission believes that these requirements 
are reasonably designed to assist the Exchange in monitoring for and 
enforcing compliance with the voting and ownership limitations.
---------------------------------------------------------------------------

    \160\ See supra notes 80-84 and accompanying text.
    \161\ See supra notes 120 and 129 and accompanying text.
    \162\ See supra note 105 and accompanying text.
    \163\ See supra note 69 and accompanying text.
    \164\ See supra notes 87, 127-131, and 138-139 and accompanying 
text.
    \165\ See supra note 69 and accompanying text. See also infra 
note 185 and accompanying text.
    \166\ See supra note 72 and accompanying text.
    \167\ See supra note 79 and accompanying text.
    \168\ See infra note 71 and accompanying text.
---------------------------------------------------------------------------

    The Commission also notes that although neither NA Casin Holdings 
nor CHX Holdings would directly perform any regulatory function, their 
activities with respect to the operation of the Exchange must be 
consistent with, and must not interfere with, the self-regulatory 
obligations of the Exchange and the Commission's oversight of the 
Exchange. The Commission believes that the above-discussed corporate 
governance provisions of the NA Casin Holdings Certificate, the NA 
Casin Holdings Bylaws, and the CHX Holdings Bylaws relating to 
compliance with U.S. law, consent to jurisdiction, due regard to the 
regulatory obligations and functions of the Exchange, and books and 
records are reasonably designed to allow: (1) CHX to independently 
perform its self-regulatory function; (2) CHX to operate in a manner 
that complies with federal securities laws, including Sections 6(b) and 
19(g) of the Exchange Act; \169\ and (3) the Commission to fulfill its 
regulatory and oversight obligations under the Exchange Act with 
respect to the Exchange.\170\ The Commission believes that these 
provisions should assist CHX in fulfilling its self-regulatory 
obligations in administering and complying with the requirements of the 
Exchange Act.
---------------------------------------------------------------------------

    \169\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g), respectively.
    \170\ The Commission notes that these requirements are 
consistent with other such provisions previously approved by the 
Commission. See supra note 153.
---------------------------------------------------------------------------

    In response to commenters' concerns regarding the ability of CHX 
and the Commission to exercise jurisdiction over the upstream 
owners,\171\ the Commission notes that each upstream owner has 
irrevocably submitted to the jurisdiction of the U.S. federal courts, 
the Commission, and CHX for the purposes of any action relating to the 
certification to the Commission and CHX regarding its ownership levels 
and Related Persons, among other things, or the activities of CHX, and 
designated an agent for the service of process of such claims.\172\ The 
Commission believes that this will enhance the ability of the 
Commission to fulfill its regulatory and oversight obligations and of 
CHX to fulfill its self-regulatory obligations under the Exchange Act.
---------------------------------------------------------------------------

    \171\ See supra notes 145 and 147 and accompanying text.
    \172\ See Amendment No. 1, supra note 10, Exhibit 2.
---------------------------------------------------------------------------

    As discussed above, various commenters express concern about the 
identity and motives of the upstream owners and, in light of these 
issues, the Commission's ability to effectively regulate the 
Exchange.\173\ Based on the information in the record,\174\ the

[[Page 38746]]

Commission believes that the proposed requirements applicable to the 
Exchange, CHX Holdings, and NA Casin Holdings are reasonably designed 
to allow the Commission to oversee the Exchange and for CHX to 
independently discharge its SRO responsibilities.\175\ In particular, 
the Commission notes that, under the NA Casin Holdings Certificate, for 
as long as a stockholder maintains a direct or indirect equity interest 
in the Exchange, (1) the books, records, officers, directors (or 
equivalent) and employees of the stockholder will be deemed to be the 
books, records, officers, directors, and employees of the Exchange for 
purposes of and subject to oversight pursuant to the Exchange Act to 
the extent that such books and records are related to, or such 
officers, directors (or equivalent) and employees are involved in, the 
activities of the Exchange; (2) the stockholder's books and records 
related to the activities of the Exchange must be made available for 
inspection and copying by the Commission and the Exchange at all times; 
and (3) the stockholder's books and records related to the activities 
of the Exchange must be maintained within the United States. The 
Commission also notes that the upstream owners have irrevocably 
submitted to the jurisdiction of U.S. federal courts, the Commission, 
and CHX.\176\
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    \173\ See supra note 92 and accompanying text.
    \174\ CHX makes representations regarding the identities of the 
upstream owners, the relationships between the upstream owners, and 
their relationship to the Chinese government. Specifically, the 
Exchange states that the only Related Persons among the Indirect 
Upstream Owners are Castle YAC and NA Casin Group; there are no 
other Related Persons among the Indirect Upstream Owners; none of 
the Indirect Upstream Owners directly, or indirectly through one or 
more intermediaries, controls, or is controlled by, or is under 
common control with, a governmental entity or any political 
subdivision thereof. See Notice, supra note 3, 81 FR at 89545.
    \175\ As CHX states, the Commission directly oversees national 
securities exchanges (such as CHX), which are subject to inspections 
that examine various aspects of their exchange operations and which 
must submit for prior Commission approval certain regulatory, 
operational, and strategic initiatives. See supra note 150 and 
accompanying text. In light of the description of the owners 
provided by CHX, the Commission agrees with NA Casin that the 
Commission's jurisdiction coupled with the proposed governance 
safeguards will empower the Commission and the Exchange to prevent 
any influence over CHX and its operations that is improper or a 
violation of U.S. securities laws and regulations. See supra note 
151 and accompanying text.
    \176\ See supra note 71 and accompanying text.
---------------------------------------------------------------------------

    Commenters also express concern regarding the potential for 
malfeasance whether by individuals or on behalf of government 
actor.\177\ We note that the Exchange stated that CFIUS investigated 
the Transaction and the upstream owners, and concluded that there are 
no unresolved national security concerns. Furthermore, in response to 
commenters' concerns regarding potential financial security risks of 
the proposed ownership structure,\178\ the Commission notes that CHX 
will limit access to CAT Data to only CHX regulatory personnel.\179\ In 
addition, the requirement that CHX engage an independent auditor to 
monitor for CHX's oversight of compliance with the policies and 
procedures relating to access to CAT Data will assist CHX in meeting 
its self-regulatory obligations.\180\
---------------------------------------------------------------------------

    \177\ See supra notes 108-112, and 114 and accompanying text.
    \178\ These concerns are discussed above. See supra notes 111-
114.
    \179\ See supra note 78 and accompanying text.
    \180\ This requirement is discussed above. See supra note 79 and 
accompanying text.
---------------------------------------------------------------------------

    In addition, if NA Casin Holdings, CHX Holdings, or CHX provides 
information of any kind to a U.S. governmental entity or U.S. authority 
pursuant to any agreement, then the company will contemporaneously 
provide such information to the Commission as well.\181\ The Commission 
believes that receiving such information will further assist the 
Commission in fulfilling its mission to oversee and regulate the 
Exchange by helping to ensure that the Commission is aware of 
activities--by CHX, CHX Holdings, NA Casin Holdings, and perhaps the 
upstream beneficial owners--that may be relevant under the Exchange 
Act.
---------------------------------------------------------------------------

    \181\ See supra notes 40-42 and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that CHX's rule changes requiring it to 
confirm that any RSA it may enter into will comply with U.S. federal 
securities laws and the rules and regulations thereunder,\182\ that its 
chief regulatory officer will monitor provisions of the RSA on an on-
going basis,\183\ and that it will engage an independent and PCAOB-
registered auditor that would perform oversight of the RSA within one 
year after the closing of the Transaction and every two years 
thereafter,\184\ respond to concerns and will assist the Exchange in 
complying with federal securities laws and monitoring for compliance 
with federal securities laws on an on-going basis.
---------------------------------------------------------------------------

    \182\ See supra note 75 and accompanying text.
    \183\ See supra note 76 and accompanying text.
    \184\ See supra note 79 and accompanying text.
---------------------------------------------------------------------------

    Furthermore, the Commission notes that the attestations submitted 
by the stockholders of NA Casin Holdings, and the annual attestations 
that will be submitted by the shareholders of NA Casin Holdings and CHX 
Holdings starting September 1, 2018, will be made directly to the 
Commission, and therefore potential liability for misrepresentations 
would attach.\185\ Additionally, to the extent that CHX (a) violated 
any provision of the Exchange Act, including Section 19(b), any rule or 
regulation under the Exchange Act, or any Exchange rule, (b) is unable 
to comply with any provision of the Exchange Act, any rule or 
regulation under the Exchange Act, or any Exchange rule, or (c) without 
reasonable justification or excuse failed to enforce compliance with 
any such provision by any Participant or person associated with a 
Participant, the Commission may take action to either revoke or suspend 
for up to 12 months its registration as a national securities exchange 
or limit CHX's activities, functions, and operations.\186\ Further, to 
the extent that any officer or director of the Exchange either 
willfully violated any provision of the Exchange Act, including Section 
19(b), any rule or regulation under the Exchange Act, or any Exchange 
rule, or without reasonable justification or excuse failed to enforce 
compliance with any such provision by any Participant or person 
associated with a Participant, the Commission may take action to remove 
such person from office.\187\
---------------------------------------------------------------------------

    \185\ See, e.g., 18 U.S.C. 1001.
    \186\ See 15 U.S.C. 78s(h)(1).
    \187\ See 15 U.S.C. 78s(h)(4).
---------------------------------------------------------------------------

    Finally, the Commission notes that: (1) Under Section 20(a) of the 
Exchange Act, any person with a controlling interest in CHX shall be 
jointly and severally liable with and to the same extent that the CHX 
is liable under any provision of the Exchange 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; (2) Section 20(e) of the Exchange Act creates aiding and 
abetting liability for any person who knowingly provides substantial 
assistance to another person in violation of any provision of the Act 
or rule thereunder; and (3) Section 21C of the Exchange Act authorizes 
the Commission to enter a cease-and-desist order against any person who 
has been ``a cause of'' a violation of any provision of the Exchange 
Act through an act or omission that the person knew or should have 
known would contribute to the violation.
    For these reasons, the Commission believes that the proposed rule 
change--including restrictions on the ownership and voting of 
stockholders and the above-discussed corporate governance provisions 
relating to compliance with U.S. law, consent to jurisdiction, due 
regard to the regulatory obligations and functions of the Exchange, and 
books and records, and statements from the upstream owners committing 
to submit to jurisdiction--is consistent with the Exchange Act, 
including Section 6(b)(1).

[[Page 38747]]

B. Board Composition and Procedures; Committees; Special Meetings of 
the Stockholders

    The Exchange proposes to amend the composition of the CHX and CHX 
Holdings boards of directors, and to make other changes to the 
governance of these entities. For example, CHX proposes that the CHX 
board of directors consist of at least 10 and not more than 25 
directors.\188\ The CHX board of directors would be comprised as 
follows: (1) The Chief Executive Officer of CHX; (2) at least 50% Non-
Industry Directors \189\ (at least one of whom must be an Independent 
Director \190\); (3) such number of Participant Directors \191\ as 
necessary to comprise at least 20% of the board; and (4) such number of 
CHX Holdings Directors \192\ as necessary to comprise at least 20% of 
the board.\193\ The directors (other than the Chief Executive Officer) 
shall serve one-year terms, and any director may be removed from office 
by a majority vote of the stockholders at any time with or without 
cause, provided that any Participant Director or CHX Holdings Director 
may only be removed for cause.\194\
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    \188\ See proposed CHX Bylaws Article III, Section 3.2.
    \189\ CHX would define ``Non-Industry Director'' as a member of 
the board who is (1) an Independent Director (as defined below); or 
(2) any other individual who would not be an Industry Director (as 
defined in Article I, Section 1.1(m) of the CHX Bylaws). See 
proposed CHX Bylaws Article I, Section 1.1(n).
    \190\ CHX would define ``Independent Director'' as a member of 
the board that the board has determined to have no material 
relationship with the Exchange or any affiliate of the Exchange or 
any Participant or any affiliate of any such Participant other than 
as a member of the board. See proposed CHX Bylaws Article I, Section 
1.1(l).
    \191\ CHX would define ``Participant Director'' as a director 
who is a Participant or a director, officer, managing member or 
partner of an entity that is or is an affiliate of, a Participant. 
See proposed CHX Bylaws Article I, Section 1.1(g).
    \192\ CHX would define ``CHX Holdings Director'' as a member of 
the Board who is a director of CHX Holdings, Inc. See proposed CHX 
Bylaws Article I, Section 1.1(g).
    \193\ See CHX Bylaws Article III, Section 3.2(b).
    \194\ Under the CHX Bylaws, ``cause'' means only (a) a breach of 
a director's duty of loyalty to the corporation or its stockholders, 
(b) acts or omissions not in good faith or which involve intentional 
misconduct or a knowing violation of law, (c) actions resulting in 
liability under Section 174 of the General Corporation Law of 
Delaware, or (d) transactions from which a director derived an 
improper personal benefit. See proposed CHX Bylaws Article III, 
Section 3.8.
---------------------------------------------------------------------------

    In addition, CHX proposes to amend its bylaws to require that the 
board's Regulatory Oversight Committee be composed entirely of Non-
Industry Directors.\195\ The proposed CHX Bylaws also require that the 
Nominating and Governance Committee will have four members and be 
comprised of at least two Non-Industry Directors, and set forth the 
process that the Nominating and Governance Committee will follow in 
submitting nominees for board positions.\196\ Among other things, the 
proposed CHX Bylaws also provide that a majority of the directors would 
constitute a quorum,\197\ action by the board requires a majority of 
directors,\198\ and that vacancies on the board may be filled by a 
majority of directors then in office, or by a sole remaining director, 
except that vacancies in the Participant Director or CHX Holding 
director position must be recommended by the Participant Director 
Nominating Committee, or the CHX Holdings board, as applicable.\199\ In 
addition, CHX proposes that special meetings of its stockholders may be 
called at any time by the board of directors or the chief executive 
officer, or upon written notice to CHX by the stockholders holding one-
third of the votes entitled to be cast.\200\
---------------------------------------------------------------------------

    \195\ See CHX Bylaws Article V, Section 5.7.
    \196\ See proposed CHX Bylaws Article III, Section 3.6. In 
addition, proposed CHX Bylaws Article V, Section 5.11 provides that 
the Participant Director Nominating Committee will be composed 
solely of Participant Directors or representatives of Participant 
Directors and will be responsible for submitting names of candidates 
for the position of Participant Director.
    \197\ See proposed CHX Bylaws Article III, Section 3.13.
    \198\ See id.
    \199\ See proposed CHX Bylaws Article III, Section 3.7.
    \200\ See proposed CHX Bylaws Article IV, Section 4.2.
---------------------------------------------------------------------------

    With respect to CHX Holdings, CHX proposes that the number of 
directors on the board be established by resolution, eliminating the 
requirement that the board have no less than 10 and no more than 16 
directors.\201\ CHX also proposes to eliminate the three classes of CHX 
Holdings directors and their associated three-year staggered terms and 
to instead provide that each CHX Holdings Director shall hold office 
until his or her successor is elected and qualified or until his or her 
earlier resignation or removal.\202\ In addition, CHX proposes to amend 
the CHX Holdings Bylaws to change the required number of directors on 
the Nominating and Governance Committee from six to one or more 
directors.\203\ CHX also proposes that special meetings of the CHX 
Holdings stockholders may be called at any time by the board of 
directors or the Chief Executive Officer, or upon written notice to CHX 
Holdings by the stockholders holding one-third of the votes entitled to 
be cast.\204\ In addition, CHX proposes that any director or the entire 
board of directors may be removed, with or without cause, by the 
holders of a majority of the shares then entitled to vote.\205\
---------------------------------------------------------------------------

    \201\ See proposed CHX Holdings Bylaws Article II, Section 
2.2(a).
    \202\ See proposed CHX Holdings Bylaws Article II, Section 
2.2(c).
    \203\ See proposed CHX Holdings Bylaws Article II, Section 2.3.
    \204\ See proposed CHX Holdings Bylaws Article IV, Section 4.2.
    \205\ See proposed CHX Holdings Bylaws Article II, Section 2.16.
---------------------------------------------------------------------------

    With respect to NA Casin Holdings, its proposed certificate of 
incorporation contains provisions that, according to the Exchange, are 
designed to ensure that a new NA Casin Holdings board is elected by the 
upstream owners as soon as practicable after closing of the 
Transaction, as well as provisions to facilitate the ability of NA 
Casin Holdings to maintain board members that are experienced with the 
operation of the Exchange.\206\ Specifically, within 30 days after the 
consummation of the Transaction, NA Casin Holdings must convene a 
special meeting of its stockholders for the purpose of electing a new 
board of directors.\207\ The NA Casin Holdings board will be divided 
into three classes from and after that initial special meeting, with 
the term of each Class I director expiring in 2017, the term of each 
Class II director expiring in 2018, and the term of each Class III 
director expiring in 2019.\208\ Other than those initial terms, each 
director will serve for a term ending on the date of the third annual 
meeting following the meeting at which such director was elected.\209\ 
The number of directors on the NA Casin Holdings board will be 
determined by the board of directors.\210\ The Exchange asserts that 
the proposed class board structure of NA Casin Holdings would ensure 
overlap of board member terms, which would provide continuity and 
stability in the board's composition and, thereby, facilitate the 
ability of the NA Casin Holdings board to meet its obligations with 
regard to CHX as set forth in Article IX of the NA Casin Holdings 
Certificate.\211\
---------------------------------------------------------------------------

    \206\ See Notice, supra note 3, 81 FR at 89556.
    \207\ See proposed NA Casin Holdings Certificate Article V, 
Section (5).
    \208\ See proposed NA Casin Holdings Certificate Article V, 
Section (6).
    \209\ See id.
    \210\ See proposed NA Casin Holdings Bylaws Article 3, Section 
3.2.
    \211\ See Notice, supra note 3, 81 FR at 89556.
---------------------------------------------------------------------------

    The Commission believes that the proposed changes to the CHX Bylaws 
related to the structure, composition, and committee composition of 
CHX's board of directors are consistent with Section 6(b)(3) of the 
Exchange Act in that they assure the fair representation of CHX members 
on the CHX board and

[[Page 38748]]

in the administration of exchange affairs, and provide 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. In 
particular, the Commission finds that the requirement that at least 20% 
of the board be comprised of Participant Directors is consistent with 
the fair representation requirements under Section 6(b)(3) In addition, 
the Commission finds that the proposed provisions of the CHX, CHX 
Holdings, and NA Casin Holdings governing documents relating to the 
proposed structure, composition, and governance of their boards of 
directors,\212\ are consistent with Section 6(b)(1) of the Exchange Act 
in that they are designed to assist the Exchange in fulfilling its 
self-regulatory obligations and in administering and complying with the 
requirements of the Exchange Act. For example, the Commission believes 
that the requirement that the CHX board of directors be comprised of at 
least 50% Non-Industry Directors, and that the CHX Regulatory Oversight 
Committee be comprised entirely of Non-Industry Directors, is 
consistent with Section 6(b)(1) because it reduces the likelihood of 
conflicts of interest and therefore, enables the independence of the 
Exchange in administering and complying with the requirements of the 
Exchange Act. The Commission emphasizes that following the Transaction, 
the board of directors of the Exchange--not its parent companies or the 
upstream owners \213\--will continue to be the governing body of the 
Exchange and possess all the authority necessary for the management of 
the business and affairs of the Exchange and the execution of the 
responsibilities of the Exchange as an SRO.
---------------------------------------------------------------------------

    \212\ See supra Section III.B.
    \213\ One commenter asserts that foreigners will be ultimately 
in charge of oversight of enforcement of trading rules and 
regulations on CHX. See Hill Letter 2, supra note 6. As discussed 
above, the Commission believes the proposal is designed to mitigate 
the ability of stockholders from exercising undue influence over CHX 
through the ownership structure, the governance arrangements, the 
attestations of the stockholders, and the requirements for CHX 
Holdings to monitor the ownership structure on an ongoing basis.
---------------------------------------------------------------------------

C. Future Amendments to the Governing Documents of CHX Holdings and NA 
Casin Holdings

    The Exchange also has proposed to harmonize provisions under the 
CHX Holdings Bylaws, the CHX Holdings Certificate, the NA Casin 
Holdings Certificate, and the NA Casin Holdings Bylaws regarding the 
effectuation of amendments to those documents. The proposed CHX 
Holdings Bylaws, proposed CHX Holdings Certificate, NA Casin Holdings 
Bylaws, and NA Casin Holdings Certificate provide that, for so long as 
CHX Holdings and NA Casin Holdings control CHX, they must submit any 
changes to their bylaws or certificates of incorporation to the board 
of directors of CHX.\214\ If the board of directors of CHX determines 
that the changes must be filed with or filed with and approved by the 
Commission under Section 19 of the Exchange Act and the rules 
thereunder, then the proposed changes would not be effective until 
filed with or filed with and approved by the Commission, as the case 
may be.\215\
---------------------------------------------------------------------------

    \214\ See proposed CHX Holdings Certificate Article ELEVENTH; 
proposed CHX Holdings Bylaws Article VIII; proposed NA Casin 
Holdings Certificate Article X; proposed NA Casin Bylaws, Article 
11.1.
    \215\ See id.
---------------------------------------------------------------------------

    The Commission believes that these provisions are consistent with 
the Exchange Act because they enable continued oversight of CHX 
Holdings and NA Holdings by the Exchange and the Commission, which 
should help assure that the Exchange remains organized in a manner that 
will allow it to fulfill its self-regulatory obligations and to comply 
with the requirements of the Exchange Act.

D. Waiver of CHX Holdings' Ownership and Voting Limitations

    With respect to the Transaction, pursuant to the CHX Holdings 
Certificate, CHX has filed for approval of a waiver of certain 
restrictions on ownership and voting contained in the CHX Holdings 
Certificate. Specifically, the current certificate prohibits, among 
other things: (1) Any Person, either alone or together with its Related 
Persons, from owning, directly or indirectly, of record or 
beneficially, shares of stock of the CHX Holdings representing in the 
aggregate more than 40% of the then outstanding votes entitled to be 
cast on any matter; and (2) any Person, either alone or together with 
its Related Persons, from directly, indirectly or pursuant to any 
voting trust, agreement, plan or other arrangement, voting or causing 
the voting of shares of the capital stock (whether such shares be 
common stock or preferred stock) of CHX Holdings or giving any consent 
or proxy with respect to shares representing more than 20% of the 
voting power of the then issued and outstanding capital stock of CHX 
Holdings.\216\ A waiver of these ownership and voting limitations is 
required to effect the Transaction because, after the closing of the 
Transaction, CHX Holdings would become a wholly-owned subsidiary of NA 
Casin Holdings. CHX states that the board of directors of CHX Holdings 
adopted resolutions necessary to waive the ownership and voting 
limitations, and that Commission approval of the proposed rule change 
will effectuate a waiver of these requirements under the CHX Holdings 
Bylaws.\217\
---------------------------------------------------------------------------

    \216\ See CHX Holdings Certificate Article FIFTH, Sections 
(b)(ii)(A) and (C). The CHX Holdings board of directors may waive 
these voting and ownership limitations, if, in connection with 
taking such action, the board of directors adopts a resolution 
determining that: (1) The waiver will not impair the ability of CHX 
to carry out its functions and responsibilities as an ``exchange'' 
under the Exchange Act, and the rules under the Exchange Act; (2) 
the waiver is otherwise in the best interests of CHX Holdings, its 
stockholders, and CHX; (3) the waiver will not impair the ability of 
the Commission to enforce the Exchange Act; and (4) the action will 
not be effective until approved by the Commission. See CHX Holdings 
Certificate Article FIFTH, Section (b)(iii)(B).
    \217\ See Notice, supra note 3, 81 FR at 89551-52.
---------------------------------------------------------------------------

    The Commission believes that it is consistent with the Exchange Act 
to allow NA Casin Holdings to own and vote all of the outstanding 
common stock of CHX Holdings. In particular, NA Casin Holdings will be 
subject to the ownership and voting limitations described above, which 
are consistent with CHX Holdings' current ownership and voting 
limitations.\218\ In addition, and as discussed above, CHX Holdings and 
NA Casin Holdings have also included in their corporate documents 
certain provisions designed to maintain the independence of the 
Exchange's regulatory functions.\219\ Accordingly, the Commission 
believes that the revised rules of the Exchange, including the 
corporate documents of NA Casin Holdings, CHX Holdings, and the 
Exchange, are reasonably designed to support the ability of the 
Exchange to carry out its responsibilities under the Exchange Act and 
the rules and regulations promulgated thereunder and the Commission to 
enforce the Exchange Act and the rules and regulations promulgated 
thereunder.
---------------------------------------------------------------------------

    \218\ See text accompanying notes 28-33.
    \219\ See supra Section III.A.
---------------------------------------------------------------------------

    Going forward, the proposed CHX Holdings Certificate provides that, 
for any Person to acquire ownership or exercise voting rights in excess 
of the ownership and voting limitations: \220\ (1) Such Person must 
deliver, not less than 45 days prior to such acquisition of ownership 
or exercise of voting rights, a notice in writing to the board of 
directors expressing its intention to

[[Page 38749]]

acquire such ownership or exercise such voting rights; (2) the CHX 
Holdings board must resolve to expressly permit such ownership or 
exercise of voting rights; \221\ and (3) such resolution must be filed 
with and approved by the Commission under Section 19(b) of the Exchange 
Act.\222\ The proposed NA Casin Holdings Certificate contains 
substantially identical provisions.\223\ The Commission believes that 
these provisions are reasonably designed to assist the Exchange in 
fulfilling its self-regulatory obligations, and in administering and 
complying with the requirements of the Exchange Act, by ensuring that 
the Commission will review and approve, if appropriate, any future 
change in ownership or voting power that gives rise to its concerns 
about a stockholder exercising undue control over the operation of the 
Exchange.\224\ Similarly, the Commission believes that this protection 
against such future changes in ownership or voting concentration 
without careful Commission review and approval is reasonably designed 
to promote just and equitable principles of trade and to protect 
investors and the public interest under the standards set forth in 
Section 6(b)(5) of the Exchange Act. The Commission also notes that 
these requirements for acquiring ownership or exercising voting rights 
in excess of the ownership and voting limitations are consistent with 
other such provisions previously approved by the Commission.\225\
---------------------------------------------------------------------------

    \220\ The ownership and voting of CHX Holdings stock would 
continue to be subject to certain limitations discussed above 
following the Transaction. See supra notes 57-66 and accompanying 
text.
    \221\ The CHX Holdings Bylaws require that the board must make a 
determination that: (1) Such acquisition of ownership or exercise of 
voting rights will not impair any of CHX Holdings' or the Exchange's 
ability to discharge its responsibilities under the Exchange Act and 
the rules and regulations thereunder and is otherwise in the best 
interests of CHX Holdings and its stockholders; (2) such acquisition 
of ownership or exercise of voting rights will not impair the 
Commission's ability to enforce the Exchange Act; and (3) neither 
such Person nor any of its Related Persons is subject to any 
statutory disqualification as defined in Section 3(a)(39) of the 
Exchange Act. See CHX Holdings Certificate Article FOURTH, Sections 
(b)(iii) and (c)(i)(B).
    \222\ See CHX Holdings Certificate Article FOURTH, Sections 
(b)(ii)-(iii) and (c)(ii)(A)-(B).
    \223\ See NA Casin Holdings Certificate Article IX, Sections 
(6)-(7), and (9).
    \224\ See supra Section III.A.
    \225\ See, e.g., NSX Approval Order, supra note 153, 80 FR at 
9288-89.
---------------------------------------------------------------------------

IV. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
to the proposed rule change is consistent with the Exchange Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#2d5f584148004e4240404843595e6d5e484e034a425b"><span class="__cf_email__" data-cfemail="443631282169272b2929212a3037043721276a232b32">[email protected]</span></a>. Please include 
File Number SR-CHX-2016-20 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CHX-2016-20. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of this filing will also 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-CHX-2016-20 and should be 
submitted on or before September 5, 2017.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the 30th day after the 
date of publication of notice of Amendment No. 1 in the Federal 
Register. As noted above, Amendment No. 1 does not change the structure 
or purpose of the proposed rule change as it was previously published 
for notice and comment.\226\ Rather, the Exchange modified its proposed 
rule change to address certain concerns raised by commenters. The 
Commission believes that an additional notice and comment period for 
Amendment No. 1 before approval of the proposed rule change would not 
be in furtherance of the public interest or the protection of 
investors. Accordingly, the Commission finds good cause, pursuant to 
Section 19(b)(2) of the Exchange Act,\227\ to approve the proposed rule 
change, as modified by Amendment No. 1, on an accelerated basis.
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    \226\ See supra note 10.
    \227\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with the 
Exchange Act and the rules and regulations thereunder applicable to a 
national securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act \228\ that the proposed rule change (SR-CHX-2016-20), as 
modified by Amendment No. 1, be, and hereby is, approved on an 
accelerated basis.
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    \228\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\229\
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    \229\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2017-17179 Filed 8-14-17; 8:45 am]
 BILLING CODE 8011-01-P


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