Federal Register / Vol. 82, No. 194 / Tuesday, October 10, 2017 / Notices 47055 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 81422 

(August 17, 2017), 82 FR 40026 (‘‘Notice’’). 

4 In Amendment No. 1, the Exchange made a 

technical correction to a typographical error in 

proposed By-Law Article III, Section 5(c). When the 

Exchange filed Amendment No. 1 with the 

Commission, it also submitted Amendment No. 1 to 

the public comment file for SR–GEMX–2017–37 

(available at: https://www.sec.gov/comments/srgemx-2017-37/gemx201737.htm). Because 

Amendment No. 1 does not materially alter the 

substance of the proposed rule change or raise 

unique or novel regulatory issues, it is not subject 

to notice and comment. 

5See Securities Exchange Act Release No. 78119 

(June 21, 2016), 81 FR 41611 (June 27, 2016) (SR– 

ISE–2016–11; SR–ISEGemini–2016–05; SR– 

ISEMercury–2016–10) (‘‘Nasdaq Acquisition 

Order’’) (order approving Nasdaq, Inc.’s acquisition 

of ISE (f/k/a International Securities Exchange, 

LLC), GEMX (f/k/a ISE Gemini, LLC), and MRX (f/ 

k/a ISE Mercury, LLC)). 

6See Notice, supra note 3, at 40027 n.3. Exchange 

Holdings is the sole owner of ISE Holdings, Inc. 

(‘‘ISE Holdings,’’ and together with Exchange 

Holdings and Nasdaq, Inc., the ‘‘Upstream 

Owners’’), which is the sole owner of 100% of the 

Exchange’s limited liability company interests. See 

id. at 40027; see also Nasdaq Acquisition Order, 

supra note 5, at 41611. ISE Holdings is also the sole 

direct owner of ISE and MRX. See Nasdaq 

Acquisition Order, supra note 5, at 41611. 

7See Notice, supra note 3, at 40027. See also 

Nasdaq Acquisition Order, supra note 5, at 41611. 

As a result of this transaction, the ISE Exchanges 

and the Nasdaq Exchanges became affiliates. See 

Nasdaq Acquisition Order, supra note 5, at 41611 

n.8. 

8See Nasdaq Acquisition Order, supra note 5, at 

41612. 

9See, e.g., Nasdaq Acquisition Order, supra note 

5, at 41612–13. 

10The Rules as proposed to be amended pursuant 

to the proposed rule change are referred to herein 

as the ‘‘New Rules.’’ 

11See Notice, supra note 3, at 40027 n.5. 

12 Id. 

13The Exchange’s affiliates, ISE and MRX, have 

submitted nearly identical proposed rule changes. 

The Commission approved the ISE proposal, and 

the MRX proposal has been published for public 

notice and comment. See Securities Exchange Act 

Release Nos. 81263 (July 31, 2017), 82 FR 36497 

(August 4, 2017) (SR–ISE–2017–32) (‘‘ISE 

Governance Order’’) and 81795 (October 2, 2017) 

(SR–MRX–2017–18). 

14See Notice, supra note 3, at 40027. 

15See generally id. 

16See id. at 40027 and 40041–42. 

17See id. at 40027. The Exchange also states that 

it will alert its members in the form of a regulatory 

alert to provide notification of the implementation 

date. Id. 

18 In approving these proposed rule changes, the 

Commission has considered the proposed rules’ 

impact on efficiency, competition and capital 

formation. 15 U.S.C. 78c(f). 

19 15 U.S.C. 78f(b)(1) and (b)(3). 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–81802; File No. SR–GEMX– 

2017–37] 

Self-Regulatory Organizations; Nasdaq 

GEMX, LLC; Order Granting Approval 

of a Proposed Rule Change, as 

Modified by Amendment No. 1 Thereto, 

To Adopt New Corporate Governance 

and Related Processes Similar to 

Those of the Nasdaq Exchanges 

October 3, 2017. 

I. Introduction 

On August 7, 2017, Nasdaq GEMX, 

LLC (‘‘GEMX’’ or ‘‘Exchange’’) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’), pursuant 

to Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Act’’),1 and 

Rule 19b–4 thereunder,2 proposed rule 

changes to its corporate governance 

documents and trading rules to align its 

corporate governance framework to the 

structure of other exchanges owned by 

its ultimate parent company, Nasdaq, 

Inc. The proposed rule change was 

published for comment in the Federal 

Register on August 23, 2017.3 The 

Commission received no comments on 

the proposal. On September 20, 2017, 

the Exchange filed Amendment No. 1 to 

the proposed rule change.4 This order 

approves the proposed rule change, as 

modified by Amendment No. 1. 

II. Background 

On June 21, 2016, the Commission 

approved a proposed rule change 

relating to a corporate transaction in 

which Nasdaq, Inc. would become the 

ultimate parent of GEMX (the ‘‘Nasdaq 

Acquisition’’), Nasdaq ISE, LLC (‘‘ISE’’), 

and Nasdaq MRX, LLC (‘‘MRX,’’ and 

together with GEMX and ISE, the ‘‘ISE 

Exchanges’’).5 On June 30, 2016, 

pursuant to this transaction, Nasdaq, 

Inc. acquired all of the capital stock of 

U.S. Exchange Holdings, Inc. 

(‘‘Exchange Holdings’’), and thereby 

became the indirect, ultimate parent of 

the ISE Exchanges.6 Nasdaq, Inc. is also 

the ultimate parent of NASDAQ BX, Inc. 

(‘‘BX’’), The NASDAQ Stock Market 

LLC (‘‘Nasdaq’’), and NASDAQ PHLX 

LLC (‘‘Phlx’’ and, together with Nasdaq 

and BX, the ‘‘Nasdaq Exchanges’’).7 The 

Commission notes that the corporate 

governance documents of GEMX, 

specifically its Second Amended and 

Restated Limited Liability Company 

Agreement (‘‘Current LLC Agreement’’) 

and its Constitution (‘‘Current 

Constitution’’ and, together with the 

Current LLC Agreement, the ‘‘Current 

Governing Documents’’) are rules of the 

Exchange, as are the governing 

documents of GEMX’s Upstream 

Owners,8 which include certain 

provisions that are designed to maintain 

the independence of GEMX’s selfregulatory functions (as well as the selfregulatory functions of the Upstream 

Owners’ other self-regulatory 

subsidiaries, i.e., the Nasdaq 

Exchanges).9

The Exchange intends to effect a 

merger with a newly-formed Delaware 

limited liability company (‘‘Merger’’) 

under Nasdaq, Inc. that would result in 

GEMX as the surviving entity with new 

corporate governance documents. In 

connection with that Merger, the 

Exchange proposes various changes to 

its corporate governance documents and 

rules (‘‘Rules’’).10 Specifically, the 

Exchange proposes to: (1) Delete the 

Exchange’s Current LLC Agreement in 

its entirety and replace it with the New 

LLC Agreement, which is based on the 

limited liability company agreement of 

Nasdaq; 11 (2) delete the Exchange’s 

Current Constitution in its entirety and 

replace it with the New By-Laws, which 

are based on the by-laws of Nasdaq; 12

and (3) amend certain of its Rules to 

reflect the replacement of the Current 

Governing Documents with the New 

Governing Documents.13

The Exchange represents that the 

proposed changes are designed to align 

the Exchange’s corporate governance 

framework with the existing structure of 

the Nasdaq Exchanges, particularly as it 

relates to the board and committee 

structure, nomination and election 

processes, and related governance 

practices.14 The Exchange also 

represents that it is not proposing any 

amendments to its ownership structure. 

The Exchange does not propose any 

amendments to the governing 

documents of its Upstream Owners.15

Thus, the provisions in the governing 

documents of these entities, which were 

designed to maintain the independence 

of GEMX’s self-regulatory functions, 

would remain unchanged. The 

Exchange also represents that it is not 

proposing any amendments to its Rules 

at this time, other than minor clarifying 

changes and technical amendments to 

reflect the changes to its governing 

documents as described in more detail 

below.16 The Exchange states that it 

intends to implement its proposed rule 

change no later than by the end of the 

fourth quarter of 2017.17

III. Discussion and Commission 

Findings 

After careful review, the Commission 

finds that the proposed rule change, as 

modified by Amendment No. 1, is 

consistent with the requirements of the 

Act and the rules and regulations 

thereunder applicable to a national 

securities exchange.18 Specifically, as 

discussed in more detail below, the 

Commission finds that the proposed 

rule change is consistent with Sections 

6(b)(1) and 6(b)(3) of the Act,19 which 

require, among other things, that a 


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20 15 U.S.C. 78f(b)(5). 

21See Current LLC Agreement. 

22See id. The Current Constitution also defines 

ISE Holdings as the Sole LLC Member of the 

Exchange and permits assignment of its LLC 

interest as provided in the Current LLC Agreement. 

See Current Constitution, Section 1.1. 

23See Current LLC Agreement, Section 7.1. 

24See New LLC Agreement, Schedule A; and New 

By-Laws, Article I(f). 

25See New LLC Agreement, Section 20. Pursuant 

to Section 7.1 of the Current LLC Agreement, ISE 

Holdings may only assign all (but not less than all) 

of its ownership interest, and any assignment of ISE 

Holdings’ interest in GEMX would similarly be 

subject to approval by the Commission pursuant to 

the rule filing procedures under Section 19 of the 

Act. 

26See Nasdaq Acquisition Order, supra note 5, at 

41612–17 (discussing provisions, including voting 

and ownership limitations, in the governing 

documents of Nasdaq, Inc. and other Upstream 

Owners that are designed to maintain the 

independence of their self-regulatory subsidiaries); 

Securities Exchange Act Release No. 53705 (April 

21, 2006), 71 FR 25260, 25262–63 (April 28, 2006) 

(‘‘ISE HoldCo Order’’) (order approving SR–ISE– 

2006–04) (discussing voting and ownership 

limitations in the governing documents of ISE 

Holdings); Securities Exchange Act Release No. 

70050 (July 26, 2013), 78 FR 46622, 46622–23, 

46625, 46627–29 (August 1, 2013) (‘‘GEMX 

Approval Order’’) (granting GEMX’s application for 

registration as a national securities exchange and 

discussing the provisions in the governing 

documents of ISE Holdings and other Upstream 

Owners that are designed to preserve the selfregulatory function of GEMX); and Securities 

Exchange Act Release No. 76998 (January 29, 2016), 

81 FR 6066, 6067, 6069, 6071–73 (February 4, 2016) 

(‘‘Mercury Exchange Approval’’) (approving the 

registration of ISE Mercury, LLC as a national 

securities exchange and discussing the provisions 

in the governing documents of ISE Holdings and 

other Upstream Owners that are designed to 

preserve the self-regulatory function of the national 

securities exchanges they control, which includes 

GEMX). 

27 15 U.S.C. 78(b)(1). 

28See Notice, supra note 3, at 40033–36. 

29See id. 

30See Current LLC Agreement, Article II, Section 

2.2 and Article V, Sections 5.1 and 5.7; and Current 

Constitution, Article III, Section 3.1. 

31See New LLC Agreement, Sections 7, 8, and 

9(a). 

32See New LLC Agreement, Section 9(b). 

33See Current LLC Agreement, Article II, Section 

2.2; and Current Constitution, Article V, Section 

5.1. 

34See New LLC Agreement, Section 9(a). 

35See id. A ‘‘Member Representative Director’’ 

will be defined as a Director who has been elected 

or appointed after having been nominated by the 

Member Nominating Committee or by an Exchange 

Member pursuant to the New By-Laws and may be, 

but is not required to be, an officer, director, 

employee, or agent of an Exchange Member. See 

New By-Laws, Article I(r). 

national securities exchange be so 

organized and have the capacity to carry 

out the purposes of the Act, and to 

comply and enforce compliance by its 

members and persons associated with 

its members, with the provisions of the 

Act, the rules and regulation 

thereunder, and the rules of the 

exchange, and assure the fair 

representation of its members and 

persons associated with its members in 

the selection of its directors and 

administration of its affairs, and provide 

that one of more directors shall be 

representative of issuers and investors 

and not be associated with a member of 

the exchange, broker, or dealer. Further, 

the Commission finds that the proposed 

rule change is consistent with Section 

6(b)(5) of the Act,20 which requires, 

among other things, that the rules of a 

national securities exchange be 

designed to prevent fraudulent and 

manipulative acts and practices; to 

promote just and equitable principles of 

trade; to foster cooperation and 

coordination with persons engaged in 

regulating, clearing, settling, and 

processing information with respect to, 

and facilitating transactions in 

securities; 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. 

A. Ownership of the Exchange 

GEMX is currently structured as a 

Delaware limited liability company 

(‘‘Delaware LLC’’) 21 and, as discussed 

above, is a wholly-owned subsidiary of 

ISE Holdings. ISE Holdings, in turn is a 

wholly-owned subsidiary of Exchange 

Holdings, which is wholly-owned by 

Nasdaq, Inc. Pursuant to the Current 

LLC Agreement, ISE Holdings is defined 

as the Sole LLC Member.22 As the Sole 

LLC Member, ISE Holdings may assign 

all (but not less than all) of its interest 

in the Exchange, subject to prior 

approval by the Commission pursuant 

to the rule filing procedures under 

Section 19 of the Act.23

Pursuant to the proposed rule change, 

GEMX will be merged with a newly 

formed Delaware LLC, whereby GEMX 

will be the surviving entity, governed by 

the New Governing Documents. ISE 

Holdings will continue to be the direct 

owner of GEMX and will be defined as 

the ‘‘Company Member’’ or ‘‘Sole LLC 

Member’’ in the New LLC Agreement 

and New By-Laws.24 Additionally, 

pursuant to the New LLC Agreement, 

ISE Holdings will not be permitted to 

assign, in whole or in part, its limited 

liability company interest in the 

Exchange, unless such transfer or 

assignment is filed with and approved 

by the Commission pursuant to the rule 

filing procedures under Section 19 of 

the Act.25

The Commission believes that the 

proposed restrictions on ISE Holdings’ 

assignment of its ownership interest in 

GEMX, taken together with restrictions 

on voting and ownership limitations in 

the governing documents of GEMX’s 

Upstream Owners that were previously 

approved by the Commission,26 are 

designed to minimize the potential that 

a person could improperly interfere 

with, or restrict the ability of, the 

Commission or GEMX to effectively 

carry out its regulatory oversight 

responsibilities under the Act. The 

Commission also notes that the 

restrictions on transfer of ownership 

interest in the Exchange will be similar 

to those currently in place. In this 

regard, the Commission believes the 

proposed rule change is consistent with 

Section 6(b)(1) of the Act 27 in 

particular, which requires that an 

exchange be organized and have the 

capacity to be able to carry out the 

purposes of the Act and to comply, and 

to enforce compliance by its members 

and persons associated with its 

members, with the provisions of the 

Act, the rules and regulations 

thereunder, and the rules of the 

exchange. 

B. Governance of the Exchange 

The Exchange proposes to replace 

certain provisions pertaining to 

governance of the Exchange with related 

provisions that are based on provisions 

currently in the Nasdaq LLC Agreement 

and Nasdaq By-Laws.28 These changes 

include, among others, provisions 

governing: The composition of the 

Exchange’s board of directors (‘‘Board’’ 

or ‘‘Board of Directors,’’ and each 

member of the Board of Directors a 

‘‘Director’’); the process for nominating, 

electing, and removing Directors; the 

filling of vacancies on the Exchange’s 

Board; the Exchange’s board committee 

structure; and regulatory independence 

of the Exchange.29

1. Board of Directors: Powers and 

Composition 

Under the New Governing 

Documents, and consistent with the 

Current LLC Agreement,30 the business 

and affairs of the Exchange will be 

managed under the discretion of its 

Board, which will be vested with the 

power to do any and all acts necessary 

or for the furtherance of the purposes 

described in the New LLC Agreement, 

including fulfilling the Exchange’s selfregulatory responsibilities as set forth in 

the Act.31 The new Board will also have 

the power to bind the Exchange and 

delegate powers,32 as it does today.33

ISE Holdings, as the Sole LLC 

Member, may determine at any time, in 

its sole and absolute discretion, the 

number of Directors to constitute the 

Board of Directors.34 However, at least 

20% of the Directors must be ‘‘Member 

Representative Directors’’ 35 and the 


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36See New By-Laws, Article III, Section 2(a). A 

‘‘Non-Industry Director’’ will be defined as a 

Director (excluding an officer of the Exchange 

serving as a Director (‘‘Staff Director’’)) who is (i) 

a Public Director; (ii) an officer, director, or 

employee of an issuer of securities listed on the 

Exchange; or (iii) any other individual who would 

not be an Industry Director. See New By-Laws, 

Article I(w). A ‘‘Public Director’’ will be defined as 

a Director who has no material business 

relationship with a broker or dealer, the Exchange 

or its affiliates, or FINRA. See New By-Laws, Article 

I(z). An ‘‘Industry Director’’ will be defined as a 

Director with direct ties to the securities industry 

as a result of connections to a broker-dealer, the 

Exchange or its affiliates, FINRA, or certain service 

providers to such entities. See Notice, supra note 

3, at 40035 n.78. See also New By-Laws, Article 

I(m). 

37See New By-Laws, Article I(m); see also Notice, 

supra note 3, at 40036 n.81 and accompanying text. 

38See New By-Laws, Article III, Section 2(a). 

39See New By-Laws, Article III, Section 2(b). If 

the remaining term of office of a removed Director 

is not more than six months, the Board will not be 

deemed to be in violation of the Article III, Section 

2(a) composition requirements during the vacancy 

by virtue of such vacancy. See id. 

40See infra notes 61–64, 66–67, and 

accompanying text. 

41See Notice, supra note 3, at 40037. The 

Nominating Committee will consist of no fewer 

than six and no more than nine members. The 

number of Non-Industry members on the 

Nominating Committee shall equal or exceed the 

number of Industry members on the Nominating 

Committee. If the Nominating Committee consists 

of six members, at least two shall be Public 

members, and if the Nominating Committee 

consists of seven or more members, at least three 

shall be Public members. The Member Nominating 

Committee shall consist of no fewer than three and 

no more than six members. All members of the 

Member Nominating Committee shall be a current 

associated person of a current Exchange Member, 

and the Board will appoint such individuals after 

appropriate consultation with representatives of 

Exchange Members. See New By-Laws, Article III, 

Sections 6(b)(i) and (iii). See also Notice, supra note 

3, at 40040 (discussing the compositional 

requirements for, and responsibilities of, the 

Nominating Committee and Member Nominating 

Committee). 

An ‘‘Industry member’’ will be a member of any 

committee appointed by the Board that is associated 

with a broker-dealer as defined in the New ByLaws, Article I(n). A ‘‘Non-Industry member’’ will 

be defined as a member of any committee appointed 

by the Board who is (i) a Public member; (ii) an 

officer or employee of an issuer of securities listed 

on the Exchange; or (iii) any other individual who 

would not be an Industry member. See New ByLaws, Article I(x). A ‘‘Public member’’ will be 

defined as a member of any committee appointed 

by the Board who has no material business 

relationship with a broker or dealer, the Exchange 

or its affiliates, or FINRA. See New By-Laws, Article 

I(aa). 

42Pursuant to the New By-Laws, Member 

Representative Directors shall be elected to the 

Board on an annual basis. See New By-Laws, 

Article II, Section 1(a). 

43Pursuant to the New By-Laws, a ‘‘Member 

Representative member’’ will be defined as a 

member of any committee appointed by the Board 

who has been elected or appointed after having 

been nominated by the Member Nominating 

Committee pursuant to the By-Laws. See New ByLaws, Article I(s). As discussed further below, the 

required inclusion of such representatives on 

certain committees, and the process by which they 

are to be selected, is designed to comply with the 

fair representation requirements of Section 6(b)(3) 

of the Act. See infra note 98 and accompanying text. 

See also Notice, supra note 3, at 40034–35, 40042. 

The Exchange states that the new Member 

Nominating Committee is responsible for: (i) The 

nomination for election of Member Representative 

Directors to the Board and (ii) the nomination for 

appointment of Member Representative members to 

the committees requiring such members. See 

Notice, supra note 3, at 40040. 

44See New By-Laws, Article III, Section 6(b). 

45 ‘‘Exchange Member’’ will be defined as any 

registered broker or dealer that has been admitted 

to membership in the national securities exchange 

operated by GEMX. See New By-Laws, Article 1(u). 

46 ‘‘List of Candidates’’ will be defined as the list 

of candidates for Member Representative Director 

positions to be elected on an Election Date. See 

New By-Laws, Article 1(p). 

‘‘Election Date’’ will be defined as a date selected 

by the Board on an annual basis, on which 

Exchange Members may vote with respect to 

Member Representative Directors in the event of a 

Contested Election. See New By-Laws, Article 1(k). 

See also infra note 48 for the definition of 

‘‘Contested Election.’’ 

47See New By-Laws, Article II, Section 1(b). See 

also Notice, supra note 3, at 40033. 

48 If there is only one candidate for each Member 

Representative Director position to be elected on 

the annual election date, the Member 

Representative Directors shall be elected by ISE 

Holdings as the Sole LLC Member. If, as a result of 

the nomination and petition process, there are more 

Member Representative Directors candidates than 

the number of positions to be elected, each 

Exchange Member shall have the right to cast one 

vote for each Member Representative Director, and 

the candidates who receive the most votes shall be 

elected to the Member Representative Director 

positions. An Exchange Member, however, either 

alone or together with its affiliates, may not cast 

votes representing more than 20% of the votes cast 

for a candidate. See New By-Laws, Article II, 

Section 1(c) and Section 2. See also New By-Laws, 

Article 1(g) (defining ‘‘Contested Election’’ as an 

election for one or more Member Representative 

Directors for which the number of candidates on the 

List of Candidates exceeds the number of positions 

to be elected). 

Under the Exchange’s Current Governing 

Documents, at least 30% of the directors on the 

Board are officers, directors, or partners of 

Exchange members (currently, six directors), and 

are elected by a plurality of the holders of Exchange 

Rights (the ‘‘Industry Directors,’’ or, as referred to 

herein, ‘‘Exchange Directors’’), of which at least one 

must be elected by holders of PMM Rights, one 

must be elected by holders of CMM Rights, and one 

must be elected by holders of EAM Rights; 

provided, however, that the number of each type of 

Exchange Director will always be equal to one 

another. See Notice, supra note 3, at 40029. See also 

Current Constitution, Article III, Section 3.2. The 

Exchange states that this current structure was 

adopted to comply with the fair representation 

requirements of Section 6(b) of the Act. See Notice, 

supra note 3, at 40029. Because they give members 

a voice in the Exchange’s use of its self-regulatory 

authority, the Exchange believes that Exchange 

Directors serve the same function as Member 

Representative Directors on the boards of the 

Nasdaq Exchanges. See id. 

The Exchange notes that the Commission has 

previously found the Nasdaq LLC Agreement’s (1) 

20% Member Representative Director requirement, 

and (2) election process, provide fair representation 

of Nasdaq members, consistent with the 

requirements of Section 6(b) of the Act. See Notice, 

supra note 3, at 40029 n.18 (citing Securities 

Exchange Act Release No. 53128 (January 13, 2006), 

71 FR 3550, 3553 (January 23, 2006) (‘‘Nasdaq 

Exchange Order’’) (granting the exchange 

registration of Nasdaq Stock Market, Inc.). The 

Commission notes that the Board compositional 

requirements and the process for electing Member 

Representative Directors in the New Governing 

Documents are based on the parallel requirements 

in the Nasdaq LLC Agreement and are identical to 

those recently approved by the Commission for ISE. 

See ISE Governance Order, supra note 13, at 36499– 

501. 

49See New By-Laws, Article III, Section 6(b). 

number of ‘‘Non-Industry Directors,’’ 

including at least one ‘‘Public Director’’ 

and at least one ‘‘issuer representative’’ 

(or if the Board consists of ten or more 

Directors, at least two issuer 

representatives), must equal or exceed 

the sum of the number of Industry 

Directors and Member Representative 

Directors.36 Additionally, up to two 

Staff Directors may be elected to the 

Board.37 A Director may not be subject 

to a statutory disqualification.38 A 

Director will be removed upon a 

determination by the Board, by a 

majority vote of the remaining Directors, 

that the Director no longer satisfies the 

classification for which the Director was 

elected and that the Director’s 

continued service on the Board would 

violate the board composition 

requirements.39

As discussed in more detail below,40

the current Board was elected at the 

Exchange’s 2017 annual election of its 

Board (the ‘‘2017 Annual Election,’’ and 

such Board the ‘‘2017 Board’’), which 

was held on June 19, 2017, pursuant to 

the Current Governing Documents. 

When the New Governing Documents 

become operative, the 2017 Board will 

appoint a Nominating Committee and a 

Member Nominating Committee.41 The 

Member Nominating Committee will 

nominate candidates for each Member 

Representative Director position on the 

Board,42 as well as nominate candidates 

for appointment by the Board for each 

vacant or new position on a committee 

that is to be filled with a ‘‘Member 

Representative member’’ 43 under the 

New By-Laws.44 If an Exchange 

Member 45 submits a timely and duly 

executed written nomination to the 

Secretary of the Exchange, additional 

candidates may be added to the List of 

Candidates 46 for the Member 

Representative Director positions.47

These candidates, together with 

candidates nominated by the Member 

Nominating Committee, will then be 

presented to Exchange Members for 

election.48 The Nominating Committee 

will nominate candidates for all other 

vacant or new Director positions on the 

Board.49

The Commission believes that the 

proposed composition of the Exchange’s 

Board satisfies the requirements in 


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50 15 U.S.C. 78f(b)(3). 

51The Commission also notes that it previously 

found the compositional requirements for the board 

of directors of Nasdaq, upon which GEMX’s 

proposed requirements are based, to be consistent 

with Act. See Nasdaq Exchange Order, supra note 

48, at 3553. See also ISE Governance Order, supra 

note 13, at 36500–01 (approving identical 

requirements for ISE). 

52See, e.g., Regulation of Exchanges and 

Alternative Trading Systems, Securities Exchange 

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

70844 (December 22, 1998). 

53See, e.g., Securities Exchange Act Release No 

68341 (December 3, 2012), 77 FR 73065, 73067 

(December 7, 2012) (‘‘MIAX Exchange Order’’) 

(granting the exchange registration of the Miami 

International Securities Exchange LLC). 

54See, e.g., Securities Exchange Act Release No. 

53382 (February 27, 2006), 71 FR 11251, 11261 

(March 6, 2006) (order approving the New York 

Stock Exchange, Inc.’s business combination with 

Archipelago Holdings, Inc.); Nasdaq Exchange 

Order, supra note 48, at 3553; and Securities 

Exchange Act Release No. 62716 (August 13, 2010), 

75 FR 51295, 51298 (August 19, 2010) (approving 

the application of BATS Y-Exchange, Inc. for 

registration as a national securities exchange); and 

ISE Governance Order, supra note 13, at 36501. 

55 Id. 

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

57See, e.g., Nasdaq Exchange Order, supra note 

48; Securities Exchange Act Release No. 58375 

(August 18, 2008), 73 FR 49498 (August 21, 2008) 

(order granting the exchange registration of BATS 

Exchange, Inc.); and ISE Governance Order, supra 

note 13, at 36501. 

58 15 U.S.C. 78f(b)(3). 

59See Notice, supra note 3, at 40036. 

60See id. 

61The Exchange states that it held its 2017 

Annual Election on June 19, 2017, in accordance 

with the nomination, petition, and voting processes 

set forth in the Current Governing Documents. See 

id. 

62The Commission notes that if the Board of 

Directors in place at the time the New Governing 

Documents become effective does not satisfy the 

requirements in the New Governing Documents, the 

Exchange would need to comply with the 

procedures for removing Directors and filling 

vacancies pursuant to the New Governing 

Documents. See, e.g., supra notes 39, 42, and 47– 

49 and accompanying text. 

63See Notice, supra note 3, at 40036. As 

discussed above, the Exchange proposes that, if 

approved, the New Governing Documents would be 

made effective no later than by the end of the fourth 

quarter of 2017. See id. at 40027; see also supra 

note 16 and accompanying text. 

64See Notice, supra note 3, at 40037. 

65See supra notes 50–58 and accompanying text 

(discussing the requirements of Section 6(b)(3) and 

the Commission’s belief that the compositional 

requirements for the Board of Directors, and the 

process for electing such Directors under the New 

Governing Documents, are consistent with those 

requirements). 

66See Notice, supra note 3, at 40029 and 40032– 

33 (discussing the Exchange’s current process for 

the nomination and election of Directors, including 

the Exchange Directors). See also supra note 48. 

‘‘Exchange Rights’’ currently means, collectively, 

PMM Rights, CMM Rights, and EAM Rights, which 

are the trading and other rights associated with the 

Exchange’s three classes of membership. See Rule 

100(a)(17); Current LLC Agreement, Article VI; and 

Current Constitution, Section 13.1(n). See also 

Rules 100(a)(12), 100(a)(15), and 100(a)(36); and 

Current Constitution, Sections 13.1(f), 13.1(j), and 

13.1(y). Under the New Rules, ‘‘Exchange Rights’’ 

will be defined in New Rule 100(a)(20) as the PMM 

Rights, CMM Rights, and EAM Rights, which will 

be defined in New Rules 100(a)(41), 100(a)(12), and 

100(a)(16), respectively, and as discussed further 

below. See infra Section III.C. (discussing 

amendments to the Exchange’s Rules). 

67See Notice, supra note 3, at 40036; GEMX 

Approval Order, supra note 26. 

Section 6(b)(3) of the Act,50 which 

requires in part that one or more 

directors be representative of issuers 

and investors and not be associated with 

a member of the exchange, or with a 

broker or dealer.51 The Commission 

previously has stated that the inclusion 

of public, non-industry representatives 

on exchange oversight bodies is an 

important mechanism to support an 

exchange’s ability to protect the public 

interest,52 and that they can help to 

ensure that no single group of market 

participants has the ability to 

systematically disadvantage others 

through the exchange governance 

process.53 As it has previously stated, 

the Commission believes that public 

directors can provide unbiased 

perspectives, which may enhance the 

ability of the Board to address issues in 

a non-discriminatory fashion and foster 

the integrity of the Exchange.54

Section 6(b)(3) of the Act requires that 

‘‘the rules of the exchange assure a 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.’’ 55 The 

Commission also believes that the 

proposed requirement that at least 20% 

of the Directors be Member 

Representative Directors, and the means 

by which they will be chosen by 

Exchange Members, is consistent with 

Section 6(b)(3) of the Act.56 As the 

Commission previously has noted, this 

statutory requirement helps to ensure 

that members have a voice in the 

Exchange’s use of its self-regulatory 

authority, and that the Exchange is 

administered in a way that is equitable 

to all those persons who trade on its 

markets or through its facilities.57 In 

addition, the Commission believes that 

the requirement that at least one 

director be a Public Director and one an 

issuer representative satisfies the 

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

Act.58

2. Transition From Current Board 

Election Process to the New Election 

Process 

In its filing, the Exchange states that, 

when it was acquired by Nasdaq, Inc., 

there were a number of harmonizing 

changes to its Board that resulted in a 

complete overlap of directors on the 

Boards of GEMX and the Nasdaq 

Exchanges (the ‘‘Post-Acquisition 

Board’’).59 GEMX also states its belief 

that the Post-Acquisition Board satisfied 

the composition requirements contained 

in both the Current Constitution and the 

New By-Laws.60 The Exchange states 

that the terms of the Directors on the 

Post-Acquisition Board ended at the 

2017 Annual Election,61 and that all of 

the Directors on the 2017 Board are 

Directors that served on the PostAcquisition Board. The Exchange 

believes that the 2017 Board satisfies 

both the board composition 

requirements in the Current Governing 

Documents, as well as in the New 

Governing Documents,62 and that once 

the New Governing Documents become 

operative, no additional actions with 

respect to the 2017 Board will be 

required under the Delaware Limited 

Liability Company Act.63 Pursuant to 

the proposal, the 2017 Board will serve 

until the Exchange’s first annual 

election of Directors in 2018 (‘‘2018 

Board’’) in accordance with the 

processes under the New Governing 

Documents.64

The Commission believes the 

Exchange’s proposal to allow the 2017 

Board to continue serving until the 2018 

Board would be elected pursuant to the 

process in the New Governing 

Documents is consistent with the Act, 

and in particular Section 6(b)(3) of the 

Act.65 The Exchange states that, 

although the 2017 Board was not 

nominated or voted upon in accordance 

with the New Governing Documents, it 

believes that the composition of the 

2017 Board is consistent with the Act, 

as it still provides for the fair 

representation of members and has one 

or more directors that are representative 

of issuers and investors and not 

associated with a member of the 

exchange, broker, or dealer. Specifically, 

the Exchange states that six Directors 

are officers, directors, or partners of 

Exchange members, and were elected by 

a plurality of the holders of ‘‘Exchange 

Rights,’’ as required by Section 3.2(b) of 

the Current Constitution.66 These 

Exchange Directors were subject to the 

full petition and voting process by 

membership in accordance with Articles 

II and III of the Current Constitution, 

which process the Commission 

previously found to satisfy the 

requirements of the Act.67 The 

Exchange believes that the Exchange 

Directors serve the same function as the 

Member Representative Directors under 

the proposed board structure, as both 

directorships give Exchange members a 

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68See Notice, supra note 3, at 40036. 

69See id. 

70See Current Constitution, Section 3.2(b). 

Pursuant to the Exchange’s Current Constitution, 

a ‘‘Public Director’’ means a non-industry 

representative who has no material relationship 

with a broker or dealer or any affiliate of a broker 

or dealer or the Exchange or any affiliate of the 

Exchange. See Current Constitution, Sections 3.2(b) 

and 13.1(z). 

The term ‘‘non-industry representative’’ means 

any person who would not be considered an 

‘‘industry representative,’’ as well as (i) a person 

affiliated with a broker or dealer that operates solely 

to assist the securities-related activities of the 

business of non-member affiliates, or (ii) an 

employee of an entity that is affiliated with a broker 

or dealer that does not account for a material 

portion of the revenues of the consolidated entity, 

and who is primarily engaged in the business of the 

non-member entity. See Current Constitution, 

Section 13.1(u). 

The term ‘‘industry representative’’ means a 

person who is an officer, director, or employee of 

a broker or dealer or who has been employed in any 

such capacity at any time within the prior three (3) 

years, as well as a person who has a consulting or 

employment relationship with or has provided 

professional services to the Exchange and a person 

who had any such relationship or provided any 

such services to the Exchange at any time within 

the prior three (3) years. See Current Constitution, 

Section 13.1(r). 

71See New By-Laws, Article III, Section 5. 

The Exchange states that the proposed provisions 

relating to the standing committees are substantially 

similar to the provisions in Section 9(g) of the 

Nasdaq LLC Agreement with respect to standing 

committees. See Notice, supra note 3, at 40030. 

72See New By-Laws, Article III, Section 6(b). See 

also supra note 41 (describing the compositional 

requirements of these committees). 

The Board may also designate additional 

committees consisting of one or more Directors or 

other persons. See New LLC Agreement, Section 

9(g). 

73See New By-Laws, Article III, Section 6(c). See 

also infra note 98 and accompanying text 

(describing the compositional requirements of the 

QMC). 

74See New LLC Agreement, Section 9(g)(v). 

75See id. See also Notice, supra note 3, at 40031. 

The Exchange notes that the proposed limitation is 

based on substantially similar language in Section 

5.2(ii) of MRX’s Constitution and is intended to 

assure the fair administration and governance of the 

Exchange. The Exchange does not have this 

limitation in Section 5.2 of its Current Constitution 

with respect to any Board committees set up by 

Board resolution, and is therefore proposing to 

follow the more current MRX standard. See Notice, 

supra note 3, at 40031 n.35. 

76See New By-Laws, Article III, Section 5(a). 

77See id. 

78See New By-Laws, Article III, Section 5(b). 

79See U.S.C. 78j–1(m). 

80See Nasdaq, Inc. By-Laws, Section 4.13(g). 

The current Finance and Audit Committee must 

be composed of at least three (3) and not more than 

five (5) directors, all of whom must be non-industry 

representatives and must be ‘‘financially literate’’ as 

determined by the Board. See Current Constitution, 

Article V, Section 5.5. 

81See Notice, supra note 3, at 40038. 

82See id. 

83See id. The Commission notes that registered 

national securities exchanges have an ongoing 

requirement to comply with the requirements of 

Form 1, which include filing audited financial 

statements with the Commission on an annual 

basis. See Form 1, General Instructions A.2 and 

Exhibit I, 17 CFR 249.1; and 17 CFR 240.6a–2(b)(1) 

(requiring a national securities exchange to file each 

year, as an amendment to its Form 1, Exhibit I 

(which requires a Form 1 applicant to file audited 

financial statements), as of the latest fiscal year of 

the exchange). 

84See New By-Laws, Article III, Section 5(c). 

Currently, the Exchange’s regulatory oversight 

activities are performed by the Exchange’s 

Corporate Governance Committee, which will not 

exist under the new governance structure. See 

Notice, supra note 3, at 40039–40. 

The Exchange also states that regulatory oversight 

functions formerly performed by the Finance and 

Audit Committee may be assumed by the ROC, and 

that like the ROCs of the Nasdaq Exchanges, the 

GEMX ROC, because of its broad authority to 

oversee the adequacy and effectiveness of the 

Exchange’s self-regulatory responsibilities, will be 

able to maintain oversight over controls in tandem 

with the Nasdaq Audit Committee’s overall 

oversight responsibilities. See id. at 40038. 

regulatory authority.68 The Exchange 

also notes that only its corporate 

governance structure would change 

under the proposed rule change, and 

that its membership has remained 

substantially the same both before and 

after the 2017 Annual Election.69

Additionally, the Commission notes 

that, under the Current Governing 

Documents, the 2017 Board is required 

to include one Director that is a ‘‘Public 

Director.’’ 70

3. Committees of the Board 

Pursuant to the New By-Laws, the 

Exchange may establish committees 

composed solely of Directors. 

Specifically, the Exchange may establish 

an Executive Committee and a Finance 

Committee, and shall establish a 

Regulatory Oversight Committee 

(‘‘ROC’’).71 The Exchange shall also 

establish certain committees not 

composed solely of Directors. 

Specifically, the Exchange shall 

establish a Nominating Committee and 

a Member Nominating Committee, 

which would be elected on an annual 

basis by ISE Holdings, as the Sole LLC 

Member,72 and a Quality of Markets 

Committee (‘‘QMC’’).73 The New LLC 

Agreement will provide that, to the 

extent provided in the resolution of the 

Board, any committee that consists 

solely of one or more Directors shall 

have and may exercise all the powers 

and the authority of the Board in the 

management of the business and affairs 

of the Exchange.74 The powers of any 

such committee would, however, be 

limited with respect to approving any 

matters pertaining to the self-regulatory 

function of the Exchange or relating to 

the structure of the market the Exchange 

regulates.75

The Exchange proposes that the 

Executive Committee be an optional 

committee, to be appointed only if 

deemed necessary by the Board.76

Because the Executive Committee will 

have the powers and authority of the 

Board in the management of the 

business and affairs of the Exchange 

between meetings of the Board, its 

composition must reflect that of the 

Board. Accordingly, if established, the 

number of Non-Industry Directors on 

the Executive Committee must equal or 

exceed the number of Industry Directors 

and the percentages of Public Directors 

and Member Representative Directors 

must be at least as great as the 

corresponding percentages on the Board 

as a whole.77

The Board would retain oversight of 

the financial operations of the Exchange 

instead of delegating these functions to 

a standing committee, but would have 

the option to appoint a Finance 

Committee at the Board’s discretion.78

The Finance Committee would advise 

the Board with respect to the oversight 

of the financial operations and 

conditions of the Exchange, including 

recommendations for the Exchange’s 

annual operating and capital budgets 

and proposed changes to the rates and 

fees charged by the Exchange. 

The Exchange proposes to eliminate 

its current Finance and Audit 

Committee and to have the committee’s 

functions performed by Nasdaq, Inc.’s 

Audit Committee (‘‘Nasdaq Audit 

Committee’’), which is composed of at 

least three directors of Nasdaq, Inc., all 

of whom must satisfy the standards for 

independence set forth in Section 

10A(m) of the Act 79 and Nasdaq’s 

rules.80 The Exchange notes that the 

Nasdaq Audit Committee has broad 

authority to review the financial 

information that will be provided to 

shareholders of Nasdaq, Inc. and others; 

systems of internal controls; and audit, 

financial reporting, and legal and 

compliance processes.81 The Exchange 

states that, to the extent the current 

Finance and Audit Committee oversees 

the Exchange’s financial reporting 

process, its activities are duplicative of 

the activities of the Nasdaq Audit 

Committee, which is also charged with 

providing oversight over financial 

reporting and independent auditor 

selection for Nasdaq, Inc. and all of its 

subsidiaries.82 The Exchange also notes 

that the unconsolidated financial 

statements of the Exchange will still be 

prepared for each fiscal year.83

The Exchange will also have a 

Regulatory Oversight Committee 

(‘‘ROC’’) under the New Governing 

Documents, which will have broad 

authority to oversee the adequacy and 

effectiveness of the Exchange’s 

regulatory and self-regulatory 

responsibilities.84 The ROC will consist 

of three members, each of whom must 


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85See New By-Laws, Article III, Section 5(c). 

86See Notice, supra note 3, at 40041 (noting that, 

although not expressly in its Current Governing 

Documents, the position of Chief Regulatory Officer 

has long existed at the Exchange). See also New ByLaws, Article IV, Section 7. 

In addition to the CRO, pursuant to the New LLC 

Agreement, the Exchange’s officers will include: A 

Chief Executive Officer, a President, Vice 

Presidents, a Chief Regulatory Officer, a Secretary, 

an Assistant Secretary, a Treasurer, and an 

Assistant Treasurer. See New By-Laws, Article IV, 

Sections 4–11. 

87See New By-Laws, Article IV, Section 7. The 

CRO may also serve as the General Counsel of the 

Exchange. Id. 

88See New By-Laws, Article III, Section 5(c). 

89See Notice, supra note 3, at 40039 & n.104 

(citing the Regulatory Oversight Committee Charter 

of Nasdaq, Phlx, and BX, available at http://

ir.nasdaq.com/corporate-governancedocument.cfm?DocumentID=1097). 

90See id. at 40039. 

91See id. at 40039–40. 

92See id. at 40039. See also Current Constitution, 

Section 5.6. 

93See Notice, supra note 3, at 40039. 

94See id. See also Current Constitution, Section 

5.4. 

95See Notice, supra note 3, at 40039–40. 

96See New By-Laws, Article III, Section 6(b). See 

also supra notes 42–49 and accompanying text. 

Additional candidates for the Member Nominating 

Committee may be nominated and elected by 

Exchange Members pursuant to a petition process. 

See supra notes 45–48 and accompanying text. 

The Commission notes that under the New ByLaws, the Member Nominating Committee shall 

nominate candidates for each Member 

Representative Director position to be elected by 

Exchange Members or the Sole LLC Member, and 

for appointment by the Board for each vacant or 

new position on any committee that is to be filled 

with a Member Representative member. See New 

By-Laws, Article III, Section 6. 

97See New By-Laws, Article III, Section 6(c)(i). 

98See New By-Laws, Article III, Section 6(c)(ii). 

See also Notice, supra note 3, at 40040. 

The Exchange also states that the function of 

Member Representative members on committees is 

to provide members a voice in the administration 

of the Exchange’s affairs on certain committees that 

are responsible for providing advice on any matters 

pertaining to the Exchange’s self-regulatory 

function or relating to its market structure. See 

Notice, supra note 3, at 40034. In order to ensure 

that its members have the opportunity to formally 

provide input on matters that are important to 

them, the Exchange states that at least 20% of the 

persons serving on any such committees will be 

individuals who will have been appointed by the 

Member Nominating Committee and will be 

representative of the Exchange’s membership. See 

id. 

99See, e.g., Nasdaq By-Laws Article III, Sections 

5–6; BX By-Laws, Article IV, Sections 4.13–14; Phlx 

By-Laws, Article V, Sections 5–2 to –3; ISE By-Laws 

Article III, Sections 5–6. 

100 15 U.S.C. 78f(b)(1). 

101See 15 U.S.C. 78f(b)(3). 

102See, e.g., GEMX Approval Order, supra note 

26, at 46627–29, Nasdaq Acquisition Order, supra 

note 5, at 41613–16; Securities Exchange Act 

Release No. 56955 (December 13, 2007), 72 FR 

71979 (December 19, 2007) (SR–ISE–2007–101) 

(order approving acquisition of ISE Holdings by 

Eurex Frankfurt); and ISE HoldCo Order, supra note 

26, at 25263–64. 

103See Notice, supra note 3, at 40042. The 

Commission notes that the Exchange did not 

propose any amendments to the governing 

documents of its Upstream Owners. 

be a Public Director and an 

‘‘independent director,’’ as defined in 

Nasdaq Rule 5605.85

Pursuant to the New By-Laws, the 

Exchange will also have a Chief 

Regulatory Officer (‘‘CRO’’), as it does 

currently.86 The new CRO will have 

general responsibility for the 

supervision of the regulatory operations 

of the Exchange and will meet with the 

ROC in executive session at regularly 

scheduled meetings of the ROC, and at 

any time upon request of the CRO or 

any member of the ROC.87

The ROC will assess the Exchange’s 

regulatory performance, assist the Board 

in reviewing the regulatory plan and the 

overall effectiveness of the Exchange’s 

regulatory functions, review the 

Exchange’s regulatory budget and 

inquire into the adequacy of resources 

available in the budget for regulatory 

activities, and be informed about the 

compensation and promotion or 

termination of the CRO.88

The Exchange also proposes that the 

Internal Audit Department of Nasdaq, 

Inc. (‘‘Nasdaq Internal Audit 

Department’’) would report to the Board 

on all Exchange-related internal audit 

matters and direct such reports to the 

new ROC.89 In addition, to ensure that 

the Board retains authority to direct the 

Nasdaq Internal Audit Department’s 

activities with respect to the Exchange, 

the Nasdaq Internal Audit Department’s 

written procedures will stipulate that 

the ROC may, at any time, direct the 

Nasdaq Internal Audit Department to 

conduct an audit of a matter of concern 

and report the results of the audit both 

to the ROC and the Nasdaq Audit 

Committee.90

The Exchange also proposes to 

eliminate its current Compensation 

Committee and its Corporate 

Governance Committee.91 The 

Compensation Committee is primarily 

charged with reviewing and approving 

compensation policies and plans for the 

Chief Executive Officer and other senior 

executive officers of the Exchange.92

Under the new governance structure, 

the functions of the Compensation 

Committee will be performed by 

Nasdaq, Inc.’s management 

compensation committee or, to the 

extent that policies, programs, and 

practices must be established for any 

Exchange officers or employees who are 

not also officers or employees of 

Nasdaq, Inc., the full Board.93 The 

Corporate Governance Committee is 

primarily charged with: (i) Nominating 

candidates for all vacant or new nonindustry representative positions on the 

Board, (ii) overseeing the Exchange’s 

regulatory activities and program, and 

(iii) overseeing and evaluating the 

governance of the Exchange.94 Under 

the new governance structure, the 

functions of the Corporate Governance 

Committee will be performed by the 

new Nominating Committee, the new 

ROC, or, if required, the full Board.95

As discussed above, the Nominating 

Committee and Member Nominating 

Committee will have responsibility for, 

among other things, nominating 

candidates for election to the Board. On 

an annual basis, the members of these 

committees will nominate candidates 

for the succeeding year’s respective 

committees to be elected by ISE 

Holdings.96

Finally, the Quality of Markets 

Committee (‘‘QMC’’) will have the 

following functions: (i) To provide 

advice and guidance to the Board on 

issues relating to the fairness, integrity, 

efficiency, and competitiveness of the 

information, order handling, and 

execution mechanisms of the Exchange 

from the perspective of investors, both 

individual and institutional, retail firms, 

market making firms, and other market 

participants; and (ii) to advise the Board 

with respect to national market system 

plans and linkages between the facilities 

of the Exchange and other markets.97 At 

least 20% of the QMC must be 

composed of Member Representative 

members, and the Non-Industry 

members on the QMC must equal or 

exceed the sum of Industry members 

and Member Representative members.98

The Commission believes that the 

Exchange’s proposed committees, which 

are similar to the committees 

maintained by other exchanges,99 are 

consistent with the Act, including 

Section 6(b)(1), which requires, in part, 

an exchange to be so organized and have 

the capacity to carry out the purposes of 

the Act.100 The Commission further 

believes that the Exchange’s proposed 

committees, including their 

composition and the means by which 

committee members will be chosen, are 

consistent with Section 6(b)(3) of the 

Act because relevant committees 

provide for the fair representation of 

members in the administration of the 

Exchange’s affairs.101

4. Regulatory Independence 

Certain provisions in GEMX’s Current 

Governing Documents, and those of its 

Upstream Owners, are designed to help 

maintain the independence of the 

regulatory functions of the Exchange.102

The New Governing Documents 

similarly include provisions designed to 

help maintain the independence of the 

regulatory functions of GEMX,103 which 


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104See, e.g., Nasdaq Exchange Order, supra note 

48; MIAX Exchange Order, supra note 53; Mercury 

Exchange Approval, supra note 26; ISE Governance 

Order, supra note 13. 

105See New By-Laws, Article III, Section 3. See 

also Notice, supra note 3, at 40037. Article III, 

Section 3 of the New By-Laws sets forth the factors 

to be considered by the Board when evaluating any 

proposal. See New By-Laws, Article III, Section 3. 

Further, the Exchange states that Article III, Section 

3 of the New By-Laws recognizes the Exchange’s 

status as a self-regulatory organization, and the 

provisions of Section 3, taken together, are designed 

to reinforce the notion that the Exchange is not 

solely a commercial enterprise, but rather a selfregulatory organization registered pursuant to, and 

subject to the obligations imposed by, the Act. See 

Notice, supra note 3, at 40037. 

106The corresponding provision in GEMX’s 

Current LLC Agreement prohibits the use of 

confidential information for any commercial 

purpose. See Current LLC Agreement, Article IV, 

Section 4.1(b). The Exchange proposes to modify 

the standard to prohibit the use of such information 

for any non-regulatory purpose. See Notice, supra 

note 3, at 40031 n.42; New LLC Agreement, Section 

16. The Exchange states that this change is intended 

to replicate Section 4.1(b)(iii) of MRX’s LLC 

Agreement, to emphasize the independence of the 

Exchange’s regulatory function from its commercial 

interests. See Notice, supra note 3, at 40031 n. 42. 

The Exchange is not proposing that GEMX, and 

the Board on behalf of GEMX, shall not have the 

right to keep confidential from ISE Holdings, as the 

Sole LLC Member, any information that the Board 

would otherwise be permitted to keep confidential 

from the Sole LLC Member pursuant to Section 18– 

305(c) of the Delaware Limited Liability Company 

Act, 6 Del. C. § 18–101. Additionally, the Exchange 

is not proposing that ISE Holdings, as the Sole LLC 

Member and the Exchange’s authorized 

representative, shall have an explicit right to 

examine the Exchange’s books, records, and 

documents during normal business hours. See 

Notice, supra note 3, at 40031. Although such 

provisions are in the Nasdaq LLC Agreement (see 

Nasdaq LLC Agreement, Section 16), they are not 

in the Current Governing Documents of GEMX. 

The Commission believes that the proposed 

provisions relating to the books and records of the 

Exchange are designed to maintain the 

independence of GEMX’s self-regulatory function, 

and are consistent with the Act. The Commission 

notes that these provisions are substantially similar 

to those the Commission has previously found to 

be consistent with the Act in the context of the 

corporate governance structures of other exchanges. 

See, e.g., MIAX Exchange Order, supra note 53; 

Mercury Exchange Approval, supra note 26; ISE 

Governance Order, supra note 13. 

The Commission also notes that the governing 

documents of GEMX’s Upstream Owners provide 

that all books and records of GEMX reflecting 

confidential information pertaining to the selfregulatory function of the Exchange will be subject 

to confidentiality restrictions. See Certificate of 

Incorporation of ISE Holdings, Article Eleventh; 

Certificate of Incorporation of U.S. Exchange 

Holdings, Article Fourteenth; By-Laws of Nasdaq, 

Inc., Article XII, Section 12.1(b). 

107See New LLC Agreement, Section 16; see also 

Current LLC Agreement, Article IV, Section 4.1. 

108See New LLC Agreement, Section 16. The 

Commission notes that, as is currently the case, the 

requirement to keep such information confidential 

shall not limit the Commission’s ability to access 

and examine such information or limit the ability 

of officers, directors, employees, or agents of GEMX 

to disclose such information to the Commission. 

See id. See also Current LLC Agreement, Article IV, 

Section 4.1(b). 

The Exchange states that certain provisions in 

Section 16 of the New LLC Agreement are 

substantially similar to provisions in Section 16 of 

the Nasdaq LLC Agreement. See Notice, supra note 

3, at 40031 n.40. The Exchange also states that it 

is retaining in the New LLC Agreement certain 

provisions from its Current LLC Agreement that are 

not in the governing documents of the Nasdaq 

Exchanges, such as those relating to where the 

Exchange’s books and records must be maintained 

and who may access the books and records, in 

particular those books and records that contain 

confidential information pertaining to the selfregulatory function of the Exchange. See Notice, 

supra note 3, at 40031 & n. 41. 

GEMX also states that the Nasdaq Exchanges will 

separately file proposed rule changes to harmonize 

the books and records provisions in their respective 

governing documents with the language in Section 

16 of the New LLC Agreement. See Notice, supra 

note 3, at 40031 n.41. 

109See New LLC Agreement, Section 27; New ByLaws, Article VIII, Section 1. 

The Commission notes that, although the Current 

Constitution and Current LLC Agreement do not 

include a similar, explicit requirement regarding 

the filing of amendments pursuant to Section 19 of 

the Act, the Current Constitution and Current LLC 

Agreement, as rules of the Exchange, are 

nonetheless subject to the requirements of Section 

19 of the Act and the rules and regulations 

thereunder. 

Additionally, pursuant to the New By-Laws, 

either the Sole LLC Member or the vote of a 

majority of the whole Board may enact amendments 

to the By-Laws, and the Board may adopt 

emergency by-laws. 

110See Current LLC Agreement, Article III, 

Section 3.3. 

111Specifically, pursuant to Section 15 of the 

New LLC Agreement, Regulatory Funds shall not be 

used non-regulatory purposes, but rather shall be 

used to fund the legal, regulatory, and surveillance 

operations of the Exchange, and the Exchange shall 

not make a distribution to the Sole LLC Member 

using Regulatory Funds. See New LLC Agreement, 

Section 15. 

Consistent with Section 3.3 of the Current LLC 

Agreement, Schedule A of the New LLC Agreement 

defines ‘‘Regulatory Funds’’ as fees, fines, or 

penalties derived from the regulatory operations of 

the Exchange. However, Regulatory Funds do not 

include revenues derived from listing fees, market 

data revenues, transaction revenues, or any other 

aspect of the commercial operations of the 

Exchange even if a portion of such revenues are 

used to pay costs associated with the regulatory 

operations of the Exchange. See New LLC 

Agreement, Schedule A. 

GEMX states that the Nasdaq Exchanges will 

separately file proposed rule changes to harmonize 

the distribution provisions in their respective 

governing documents with the language in Section 

15 of the New LLC Agreement. See Notice, supra 

note 3, at 40031 n. 38. 

112 15 U.S.C. 78f(b)(1). 

provisions are substantially similar to 

those included in the governing 

documents of other exchanges.104

Specifically: 

• The Exchange Board will be 

required, when evaluating any proposal, 

to take into account all factors that the 

Board deems relevant, including, 

without limitation, (1) the potential 

impact on: The integrity, continuity, 

and stability of the national securities 

exchange operated by the Exchange and 

the other operations of the Exchange; 

the ability to prevent fraudulent and 

manipulative acts and practices; and 

investors and the public, and (2) 

whether such proposal would promote 

just and equitable principles of trade, 

foster cooperation and coordination 

with persons engaged in regulating, 

clearing, settling, processing 

information with respect to, and 

facilitating transactions in securities, or 

assist in the removal of impediments to 

or the perfection of the mechanisms for 

a free and open market and a national 

market system.105

• All books and records of GEMX 

reflecting confidential information 

pertaining to the self-regulatory function 

of the Exchange (including but not 

limited to disciplinary matters, trading 

data, trading practices, and audit 

information) shall be retained in 

confidence by GEMX and its officers, 

directors, employees and agents; shall 

not be made available to persons other 

than to those officers, directors, 

employees, and agents of GEMX that 

have a reasonable need to know; and 

will not be used for any non-regulatory 

purpose.106

• The Exchange proposes that, as is 

currently the case, the books and 

records of GEMX must be maintained in 

the United States 107 and are subject at 

all times to examination by the 

Commission pursuant to the federal 

securities laws and the rules and 

regulations thereunder.108

• Under the New LLC Agreement and 

New By-Laws, any amendments to those 

documents will not become effective 

until filed with, or filed with and 

approved by, the Commission, as 

required under Section 19 of the Act 

and the rules promulgated 

thereunder.109

• Additionally, as is currently the 

case pursuant to the Current LLC 

Agreement,110 Section 15 of the New 

LLC Agreement would prohibit the 

Exchange from using Regulatory Funds 

to pay dividends.111

The Commission believes that the 

provisions discussed in this section, 

which are designed to help ensure the 

independence of the Exchange’s 

regulatory function and facilitate the 

ability of the Exchange to carry out its 

responsibility and operate in a manner 

consistent with the Act, are appropriate 

and consistent with the requirements of 

the Act, particularly with Section 

6(b)(1), which requires, in part, an 

exchange to be so organized and have 

the capacity to carry out the purposes of 

the Act.112

The Commission finds that proposed 

process regarding amendments to the 

New Governing Documents is consistent 

with Section 6(b)(1) of the Act, because 

it reflects the obligation of the Board to 


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47062 Federal Register / Vol. 82, No. 194 / Tuesday, October 10, 2017 / Notices 

113 Id.; 17 CFR 240.19b–4. 

114See, e.g., Securities Exchange Act Release No. 

51029 (January 12, 2005), 70 FR 3233, 3241 (January 

21, 2005) (SR–ISE–2004–29) (approving an ISE rule 

interpretation that requires that revenues received 

from regulatory fees or regulatory penalties be 

segregated and applied to fund the legal, regulatory, 

and surveillance operations of the Exchange and 

not used to pay dividends to the holders of Class 

A Common Stock). 

115See Notice, supra note 3, at 40031. 

116The Exchange states that all such changes are 

non-substantive, primarily changing terminology, 

such as changing the term ‘‘Constitution’’ to ‘‘ByLaws’’ and removing references to the ‘‘Current LLC 

Agreement.’’ See id. at 40041. 

117See id. at 40029. The Exchange provides that 

all the provisions governing the trading privileges 

associated with the Exchange Rights in the Current 

Governing Documents are substantially set forth in 

the Rules. See id. The Commission notes that, 

currently on GEMX, the Exchange Rights do not 

convey any ownership rights and only provide for 

voting rights for representation, through Exchange 

Directors, on the Board and the ability to transact 

on the Exchange. The Exchange represents that, 

under its Rules, the holders of Exchange Rights will 

continue to have the same trading privileges they 

currently hold as PMMs, CMMs, and EAMs, and the 

new Board structure of the Exchange will not 

change any trading privileges. Further, under the 

New Governing Documents, the holders of 

Exchange Rights will continue to have voting rights 

for representation on the Board through the election 

of Member Representative Directors. See id. at 

40029–30. 

118See Current LLC Agreement, Article VI, 

Section 6.2(b). 

119CMM Rights are non-transferable rights. The 

holders of CMM Rights may not lease or sell these 

rights. As discussed above, all Exchange Rights (i.e., 

PMM, CMM, and EAM Rights) convey only voting 

rights and trading privileges on the Exchange. See 

Notice, supra note 3, at 40041 n.120. 

120The term ‘‘Competitive Market Maker’’ 

(referred to herein as ‘‘CMM’’) will be defined to 

mean a Member that is approved to exercise trading 

privileges associated with CMM Rights. See New 

Rule 100(a)(13). 

The term ‘‘Member’’ means an organization that 

has been approved to exercise trading rights 

associated with Exchange Rights. See current Rule 

100(a)(23); New Rule 100(a)(28). 

121See supra note 119. 

122The term ‘‘Electronic Access Member’’ 

(referred to herein as ‘‘EAM’’) will be defined to 

mean a Member that is approved to exercise trading 

privileges associated with EAM Rights. See New 

Rule 100(a)(17). 

123 ‘‘Exchange Transaction’’ would be relocated 

from Section 13.1(o) of the Current Constitution to 

New Rule 100(a)(21), ‘‘good standing’’ from Section 

13.1(p) of the Current Constitution to New Rule 

100(a)(24), and ‘‘System’’ from Section 13.1(dd) of 

the Current Constitution to New Rule 100(a)(55). 

124The term ‘‘Primary Market Maker’’ (referred to 

herein as ‘‘PMM’’) will be defined to mean a 

Member that is approved to exercise trading 

privileges associated with PMM Rights. See New 

Rule 100(a)(42). 

125 15 U.S.C. 78f(b)(1). 

126 15 U.S.C. 78s(b)(2). 

127 17 CFR 200.30–3(a)(12). 

ensure compliance with the rule filing 

requirements under the Act. 

Additionally, the Commission finds 

these changes to be consistent with 

Section 19(b)(1) of the Act and Rule 

19b–4 thereunder,113 which require that 

a self-regulatory organization file with 

the Commission all proposed rules, as 

well as all proposed changes in, 

additions to, and deletions of its 

existing rules. These provisions clarify 

that amendments to the New Governing 

Documents constitute proposed rule 

changes within the meaning of Section 

19(b)(2) of the Act and Rule 19b–4 

thereunder, and are subject to the filing 

requirements of Section 19 of the Act 

and the rules and regulations 

thereunder. 

The Commission also finds that the 

prohibition on the use of regulatory 

fines, fees, or penalties to fund 

dividends is consistent with Section 

6(b)(1) of the Act, because it will further 

the Exchange’s ability to effectively 

comply with its statutory obligations 

and is designed to ensure that the 

regulatory authority of the Exchange is 

not improperly used.114 This restriction 

on the use of regulatory funds is 

intended to preclude the Exchange from 

using its authority to raise Regulatory 

Funds for the purpose of benefiting its 

shareholders.115

C. Related Rule Amendments 

The Exchange proposes to amend its 

Rules to reflect the changes to its 

constituent documents through the 

adoption of the New Governing 

Documents to replace the Current 

Governing Documents. The Exchange 

states that it is amending its Rules to: (i) 

Clarify any Rules that cross-reference 

the Current Governing Documents in the 

rule text, since those documents are 

being replaced by the New Governing 

Documents; 116 or (ii) relocate in the 

Rules the definitions for a number of 

defined terms used in the Rules that 

currently refer back to the Current LLC 

Agreement or the Current Constitution 

for their meanings.117

Specifically, the Exchange proposed 

changes to its Rules to, among other 

things: 

• Relocate the concept of CMM Rights 

from the Current LLC Agreement 118 to 

New Rule 100(a)(12), which will state 

that the term ‘‘CMM Rights’’ means the 

non-transferable rights held by a 

Competitive Market Maker.119

• Relocate to New Rule 100(a)(13) the 

definition of ‘‘Competitive Market 

Maker,’’ 120 which is currently only 

defined in Section 13.1(f) of the Current 

Constitution. 

• Relocate the concept of EAM Rights 

to New Rule 100(a)(16), which will state 

that the term ‘‘EAM Rights’’ means the 

non-transferable rights held by an 

Electronic Access Member.121

• Relocate to New Rule 100(a)(17) the 

definition of ‘‘Electronic Access 

Member,’’ 122 which is currently only 

defined in Section 13.1(j) of the Current 

Constitution. 

• Relocate the definitions for 

‘‘Exchange Transaction,’’ ‘‘good 

standing,’’ and ‘‘System’’ from the 

Current Constitution to the Rules,123

and delete Rule 100(a)(22A), defining 

‘‘LLC Agreement,’’ as that term would 

no longer be used in the Rules, as 

amended by the proposed rule change. 

• Relocate the concept of PMM Rights 

from Article VI of the Current LLC 

Agreement to New Rule 100(a)(41), 

which will state that the term ‘‘PMM 

Rights’’ means the non-transferable 

rights held by a Primary Market Maker. 

• Relocate to New Rule 100(a)(42) the 

definition for ‘‘Primary Market 

Maker’’ 124 from Section 13.1(y) of the 

Current Constitution. 

The Commission believes that the 

proposed changes to GEMX’s Rules are 

consistent with the Act and, in 

particular Section 6(b)(1) of the Act,125

which requires among other things that 

a national securities exchange be so 

organized and have the capacity to carry 

out the purposes of the Act. The 

Commission notes that many of the 

proposed changes to GEMX’s Rules are 

technical in nature, such as 

renumbering of Rules or conforming 

terminology to reflect the replacement 

of the Current Governing Documents 

with the New Governing Documents. 

The Commission also notes that, as 

described above, the Exchange proposes 

to relocate definitions for a number of 

defined terms used in the Rules from 

the Current Governing Documents into 

the Rules. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,126 that the 

proposed rule change (SR–GEMX–2017– 

37), as modified by Amendment No. 1, 

be, and hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.127

Robert W. Errett, 

Deputy Secretary. 

[FR Doc. 2017–21669 Filed 10–6–17; 8:45 am] 

BILLING CODE 8011–01–P 


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