Document ID: SEC-2017-1322-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq ISE, LLC
Posted Date: 2017-08-04T04:00Z

[Federal Register Volume 82, Number 149 (Friday, August 4, 2017)]
[Notices]
[Pages 36497-36508]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-16398]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81263; File No. SR-ISE-2017-32]

Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
of Amendment No. 1 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To 
Harmonize the Corporate Governance Framework of Nasdaq ISE, LLC With 
That of The NASDAQ Stock Market LLC, NASDAQ PHLX LLC, and NASDAQ BX, 
Inc.

July 31, 2017.

I. Introduction

    On April 11, 2017, Nasdaq ISE, LLC (``ISE'' 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 May 2, 
2017.\3\ The Commission received no comments on the proposal. On June 
14, 2017, the Commission extended the time period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\4\ On July 6, 2017, the Exchange filed Amendment 
No. 1 to the proposed rule change.\5\ The

[[Page 36498]]

Commission is publishing this notice to solicit comment 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. 80530 (April 26, 
2017), 82 FR 20508 (``Notice'').
    \4\ See Securities Exchange Act Release No. 80923, 82 FR 28102 
(June 20, 2017).
    \5\ As discussed further herein, Amendment No. 1, which replaces 
the original filing in its entirety, includes, among other things: 
(1) Changes to the Exchange's proposed Limited Liability Company 
Agreement (``New LLC Agreement'') and proposed By-Laws (``New By-
Laws,'' and together with the New LLC Agreement, the ``New Governing 
Documents'') to better align these proposed documents with certain 
provisions in ISE's existing governing documents and the governing 
documents of other exchanges, including provisions concerning 
limitations on board committee powers, the confidentiality of books 
and records, the nomination of certain board directors by petition, 
and the confidentiality of board meetings pertaining to the 
Exchange's self-regulatory functions; (2) revisions to the proposed 
amendments to ISE's rules regarding ownership, voting, and transfer 
restrictions relating to certain market maker rights on the 
Exchange; (3) revisions to the related discussion of the purpose of 
the proposed changes; (4) clarification of certain aspects of the 
proposed rule changes (e.g., the nomination of Member Representative 
members to committees; and certain market maker rights and their 
related ownership, voting, and transfer restrictions); and (5) 
certain technical corrections (e.g., correcting incorrect cross 
references to Exhibits 5A, 5B, 5C, and 5D, updating the proposed 
implementation date and the description of the Exchange's most 
recent annual election of its board, and amending the proposed New 
LLC Agreement to reflect the current address of the Exchange and its 
Sole LLC Member). When the Exchange filed Amendment No. 1 with the 
Commission, it also submitted Amendment No. 1 to the public comment 
file for SR-ISE-2017-32 (available at: https://www.sec.gov/comments/sr-ise-2017-32/ise201732.htm).
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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 ISE (the ``Nasdaq Acquisition''), Nasdaq GEMX, 
LLC (``GEMX''), and Nasdaq MRX, LLC (``MRX,'' and together with ISE and 
GEMX, the ``ISE Exchanges'').\6\ 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.\7\ 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'').\8\ The Commission notes 
that the corporate governance documents of ISE, specifically its Third 
Amended and Restated Limited Liability Company Agreement (``Current LLC 
Agreement'') and its Second Amended and Restated Constitution 
(``Current Constitution'' and, together with the Current LLC Agreement, 
the ``Current Governing Documents'') are rules of the Exchange,\9\ as 
are the governing documents of ISE's Upstream Owners,\10\ which include 
certain provisions that are designed to maintain the independence of 
ISE's self-regulatory functions (as well as the self-regulatory 
functions of the Upstream Owners' other self-regulatory subsidiaries, 
i.e., the Nasdaq Exchanges).\11\
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    \6\ See 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, GEMX (f/k/a ISE 
Gemini, LLC), and MRX (f/k/a ISE Mercury, LLC)).
    \7\ See Notice, supra note 3, at 20508 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 Notice, supra note 3, at 20508-09; see also 
Nasdaq Acquisition Order, supra note 6, at 41611. ISE Holdings is 
also the sole direct owner of GEMX and MRX. See Nasdaq Acquisition 
Order, supra note 6, at 41611.
    \8\ See Notice, supra note 3, at 20508. See also Nasdaq 
Acquisition Order, supra note 6, at 41611. As a result of this 
transaction, the ISE Exchanges and the Nasdaq Exchanges became 
affiliates. See Nasdaq Acquisition Order, supra note 6, at 41611 
n.8.
    \9\ See 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).
    \10\ See Nasdaq Acquisition Order, supra note 6, at 41612; 
Securities Exchange Act Release No. 56955 (December 13, 2007), 72 FR 
71979, 71981-82 (December 19, 2007) (order approving SR-ISE-2007-
101); ISE HoldCo Order, supra note 9, at 25262.
    \11\ See, e.g., Nasdaq Acquisition Order, supra note 6, at 
41612-13; ISE HoldCo Order, supra note 9, at 25264.
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    The Exchange intends to effect a merger with a newly-formed 
Delaware limited liability company (``Merger'') under Nasdaq, Inc. that 
would result in ISE 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'').\12\ 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; \13\ (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; \14\ and (3) amend certain of its 
Rules to reflect the replacement of the Current Governing Documents 
with the New Governing Documents.\15\
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    \12\ The Rules as proposed to be amended pursuant to the 
proposed rule change are referred to herein as the ``New Rules.''
    \13\ See Notice, supra note 3, at 20508 n.5.
    \14\ Id.
    \15\ The Exchange states that its affiliates, GEMX and MRX, will 
submit nearly identical proposed rule changes. See Notice, supra 
note 3, at 20508 n.4.
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    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.\16\ 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.\17\ Thus, the provisions in the governing 
documents of these entities, which were designed to maintain the 
independence of ISE'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 to reflect the changes 
to its governing documents as described in more detail below.\18\ The 
Exchange states that it intends to implement its proposed rule change 
no later than by the end of the third quarter of 2017.\19\
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    \16\ See id. at 20508.
    \17\ See generally id.; Amendment No. 1.
    \18\ See Notice, supra note 3, at 20509 and 20522. See also 
Amendment No. 1.
    \19\ See Amendment No. 1. 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.
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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.\20\ 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,\21\ which require, among other things, that a 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 regulations 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 or 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,\22\ which requires,

[[Page 36499]]

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.
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    \20\ 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).
    \21\ 15 U.S.C. 78f(b)(1) and (b)(3).
    \22\ 15 U.S.C. 78f(b)(5).
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A. Ownership of the Exchange

    ISE is currently structured as a Delaware limited liability company 
(``Delaware LLC'') \23\ 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.\24\ 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.\25\
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    \23\ See Current LLC Agreement.
    \24\ See 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.
    \25\ See Current LLC Agreement, Section 7.1.
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    Pursuant to the proposed rule change, ISE will be merged with a 
newly formed Delaware LLC, whereby ISE will be the surviving entity, 
governed by the New Governing Documents. ISE Holdings will continue to 
be the direct owner of ISE and will be defined as the ``Company 
Member'' or ``Sole LLC Member'' in the New LLC Agreement and New By-
Laws.\26\ 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.\27\
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    \26\ See New LLC Agreement, Schedule A; and New By-Laws, Article 
I(f).
    \27\ See 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 ISE would similarly be subject to approval 
by the Commission pursuant to the rule filing procedures under 
Section 19 of the Act.
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    The Commission believes that the proposed restrictions on ISE 
Holdings' assignment of its ownership interest in ISE, taken together 
with restrictions on voting and ownership limitations in the governing 
documents of ISE's Upstream Owners that were previously approved by the 
Commission,\28\ are designed to minimize the potential that a person 
could improperly interfere with, or restrict the ability of, the 
Commission or ISE 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 \29\ 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.
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    \28\ See Nasdaq Acquisition Order, supra note 6, 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); ISE HoldCo Order, supra note 9, at 25262-
63 (discussing voting and ownership limitations in the governing 
documents of ISE Holdings); see also 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 ISE).
    \29\ 15 U.S.C. 78(b)(1).
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B. Governance of the Exchange

    With the replacement of the Current Governing Documents with the 
New Governing Documents, 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.\30\ 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; its board committee structure; and regulatory 
independence of the Exchange.\31\ As noted above, the Exchange intends 
that the New Governing Documents would be implemented no later than by 
the end of the third quarter of 2017.\32\
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    \30\ See Notice, supra note 3, at 20514-17; and Amendment No. 1.
    \31\ See Notice, supra note 3, at 20514-17; and Amendment No. 1.
    \32\ See supra note 19 and accompanying text.
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1. Board of Directors: Powers and Composition
    Under the New Governing Documents and consistent with the Current 
LLC Agreement,\33\ 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 self-regulatory responsibilities as set forth in the 
Act.\34\ The new Board will also have the power to bind the Exchange 
and delegate powers,\35\ as it does today.\36\
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    \33\ See 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.
    \34\ See New LLC Agreement, Sections 7, 8, and 9(a).
    \35\ See New LLC Agreement, Section 9(b).
    \36\ See Current LLC Agreement, Article II, Section 2.2; and 
Current Constitution, Article V, Section 5.1.
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    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.\37\ At least 20% of the Directors shall be 
``Member Representative Directors.'' \38\ Additionally, the Board of 
Directors must include a 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), that equals or exceeds the sum of 
the number of Industry Directors and Member Representative 
Directors.\39\

[[Page 36500]]

Additionally, up to two Staff Directors \40\ may be elected to the 
Board.\41\ A Director may not be subject to a statutory 
disqualification.\42\ 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.\43\
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    \37\ See New LLC Agreement, Section 9(a).
    \38\ See 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).
    \39\ See 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 20516 n.69. See also New By-Laws, Article I(m).
    \40\ See New By-Laws, Article I(m); see also Notice, supra note 
3, at 20516 n.72 and accompanying text.
    \41\ See Current LLC Agreement, Article II, Section 2.2.
    \42\ See New LLC Agreement, Section 9(a).
    \43\ See 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.
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    As discussed in more detail below,\44\ 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.\45\ The Member 
Nominating Committee will nominate candidates for each Member 
Representative Director position on the Board,\46\ 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'' \47\ under the New By-Laws.\48\ If an Exchange Member \49\ 
submits a timely and duly executed written nomination to the Secretary 
of the Exchange, additional candidates may be added to the List of 
Candidates \50\ for the Member Representative Director positions.\51\ 
These candidates, together with candidates nominated by the Member 
Nominating Committee, will then be presented to Exchange Members for 
election.\52\ The Nominating Committee will nominate candidates for all 
other vacant or new Director positions on the Board.\53\
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    \44\ See infra notes 65-68, 70-71, and accompanying text.
    \45\ See Notice, supra note 3, at 20517. 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 20520-
21 (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 By-Laws, 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 By-Laws, 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 Company or its affiliates, or FINRA. 
See New By-Laws, Article I(aa).
    \46\ Pursuant 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).
    \47\ Pursuant 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 By-Laws, 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 102 and accompanying text. See also 
Amendment No. 1.
    In Amendment No. 1, the Exchange clarifies the description of 
the functions of the Member Nominating Committee. Specifically, the 
Exchange clarifies 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 Amendment No. 1.
    \48\ See New By-Laws, Article III, Section 6(b).
    \49\ ``Exchange Member'' will be defined as any registered 
broker or dealer that has been admitted to membership in the 
national securities exchange operated by ISE. See New By-Laws, 
Article 1(u).
    \50\ ``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 52, for the definition of ``Contested Election.''
    \51\ See New By-Laws, Article II, Section 1(b). See also 
Amendment No. 1.
    \52\ 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, six directors 
on the Board are officers, directors, or partners of Exchange 
members, and are elected by a plurality of the holders of Exchange 
Rights (``Exchange Directors''), of which two must be elected by 
holders of PMM Rights, two must be elected by holders of CMM Rights, 
and two must be elected by holders of EAM Rights. See Notice, supra 
note 3, at 20510. 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 20510. 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 20510 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.
    \53\ See New By-Laws, Article III, Section 6(b).
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    The Commission believes that the proposed composition of the 
Exchange's Board satisfies the requirements in Section 6(b)(3) of the 
Act,\54\ 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.\55\ 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,\56\ 
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

[[Page 36501]]

process.\57\ 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.\58\
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    \54\ 15 U.S.C. 78f(b)(3).
    \55\ The Commission also notes that it previously found the 
compositional requirements for the board of directors of Nasdaq, 
upon which ISE's proposed requirements are based, to be consistent 
with Act. See Nasdaq Exchange Order, supra note 52, at 3553.
    \56\ See, e.g., Regulation of Exchanges and Alternative Trading 
Systems, Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844 (December 22, 1998) (``Regulation ATS Release'').
    \57\ See, 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).
    \58\ See, 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 
52, 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).
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    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,\59\ because it provides for the fair 
representation of members in the selection of directors and the 
administration of ISE. 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.'' \60\ 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.\61\ 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.\62\
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    \59\ 15 U.S.C. 78f(b)(3).
    \60\ Id.
    \61\ See, e.g., Nasdaq Exchange Order, supra note 52; and 
Securities Exchange Act Release No. 58375 (August 18, 2008), 73 FR 
49498 (August 21, 2008) (order granting the exchange registration of 
BATS Exchange, Inc.).
    \62\ 15 U.S.C. 78f(b)(3).
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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 ISE Boards and 
the Nasdaq Exchanges (the ``Post-Acquisition Board'').\63\ ISE also 
states its belief that the Post-Acquisition Board satisfied the 
composition requirements contained in both the Current Constitution and 
the New By-Laws.\64\ The Exchange states that the terms of the 
Directors on the Post-Acquisition Board ended at the 2017 Annual 
Election,\65\ and that all of the Directors on the 2017 Board are 
Directors that served on the Post-Acquisition 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,\66\ 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.\67\ 
Pursuant to the proposal, the 2017 Board will serve until the 
Exchange's first annual election of Directors in accordance with the 
processes under the New Governing Documents in 2018 (``2018 
Board'').\68\
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    \63\ See Notice, supra note 3, at 20516.
    \64\ See Amendment No. 1.
    \65\ The 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.
    \66\ The 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 43, 46, and 51-53 and accompanying 
text.
    \67\ See Amendment No. 1. 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 third quarter of 
2017. See Amendment No. 1; see also supra note 18 and accompanying 
text.
    \68\ See Notice, supra note 3, at 20517. See also Amendment No. 
1.
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    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.\69\ 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, as required by Section 
3.2(b) of the Current Constitution, and were elected by a plurality of 
the holders of ``Exchange Rights.'' \70\ 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.\71\ 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 
voice in the Exchange's use of its self-regulatory authority.\72\ 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.\73\ Additionally, the Commission notes that, under the 
Current Governing Documents, the 2017 Board will be required to include 
two Directors that are ``Public Directors.'' \74\
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    \69\ See supra notes 54-62 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).
    \70\ See Amendment No. 1. See also Notice, supra note 3, at 
20510 and 20513-14 (discussing the Exchange's current process for 
the nomination and election of Directors, including the Exchange 
Directors).
    ``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(q). See also Rules 100(a)(11), 
100(a)(14), and 100(a)(36); and Current Constitution, Sections 
13.1(g), 13.1(l), and 13.1(bb). Under the New Rules, ``Exchange 
Rights'' will be defined in New Rule 100(a)(19) as the PMM Rights, 
CMM Rights, and EAM Rights, which will be defined in New Rules 
100(a)(39), 100(a)(11), and 100(a)(15), respectively, and as 
discussed further below. See infra Section III.C. (discussing 
amendments to the Exchange's Rules).
    \71\ See Amendment No. 1; Securities Exchange Act Release No. 
42455 (February 24, 2000), 65 FR 11401 (March 2, 2000) (``ISE 
Exchange Approval'') (granting ISE's application for registration as 
a national securities exchange); and ISE HoldCo Order, supra note 9, 
at 25265.
    \72\ See Notice, supra note 3 at 20517. See also Amendment No. 
1.
    \73\ See Amendment No. 1.
    \74\ See 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(cc).
    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(w).
    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(t).

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[[Page 36502]]

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'').\75\ 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,\76\ and a Quality of Markets 
Committee (``QMC'').\77\ 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.\78\ 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.\79\
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    \75\ See 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 Amendment No. 1.
    \76\ See New By-Laws, Article III, Section 6(b). See also supra 
note 45 (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).
    \77\ See New By-Laws, Article III, Section 6(c). See also infra 
note 102 and accompanying text (describing the compositional 
requirements of the QMC).
    \78\ See New LLC Agreement, Section 9(g)(v).
    \79\ See id. See also Amendment No. 1. 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 Amendment No. 1.
---------------------------------------------------------------------------

    The Exchange proposes that the Executive Committee be an optional 
committee, to be appointed only if deemed necessary by the Board.\80\ 
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.\81\
---------------------------------------------------------------------------

    \80\ See New By-Laws, Article III, Section 5(a).
    \81\ See id.
---------------------------------------------------------------------------

    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.\82\ 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.
---------------------------------------------------------------------------

    \82\ See New By-Laws, Article III, Section 5(b).
---------------------------------------------------------------------------

    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 
\83\ and Nasdaq's rules.\84\ 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.\85\ 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.\86\ The Exchange also 
notes that the unconsolidated financial statements of the Exchange will 
still be prepared for each fiscal year.\87\
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    \83\ See U.S.C. 78j-1(m).
    \84\ See 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.
    \85\ See Notice, supra note 3, at 20519.
    \86\ See id.
    \87\ See 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).
---------------------------------------------------------------------------

    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.\88\ The ROC will 
consist of three members, each of whom must be a Public Director and an 
``independent director,'' as defined in Nasdaq Rule 5605.\89\
---------------------------------------------------------------------------

    \88\ See 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 
20520.
    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 ISE 
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.
    \89\ See New By-Laws, Article III, Section 5(c).
---------------------------------------------------------------------------

    Pursuant to the New By-Laws, the Exchange will also have a Chief 
Regulatory Officer (``CRO''), as it does currently.\90\ The new CRO 
will have general responsibility for the supervision of the regulatory 
operations

[[Page 36503]]

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.\91\
---------------------------------------------------------------------------

    \90\ See Notice, supra note 3, at 20521 (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 By-Laws, 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.
    \91\ See New By-Laws, Article IV, Section 7. The CRO may also 
serve as the General Counsel of the Exchange. Id.
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    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.\92\
---------------------------------------------------------------------------

    \92\ See New By-Laws, Article III, Section 5(c).
---------------------------------------------------------------------------

    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.\93\ 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.\94\
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    \93\ See Notice, supra note 3, at 20519 & n.95 (citing the 
Regulatory Oversight Committee Charter of Nasdaq, Phlx, and BX, 
available at http://ir.nasdaq.com/corporate-governance-document.cfm?DocumentID=1097).
    \94\ See id. at 20519.
---------------------------------------------------------------------------

    The Exchange also proposes to eliminate its current Compensation 
Committee and its Corporate Governance Committee.\95\ 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.\96\ 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.\97\ The Corporate Governance 
Committee is primarily charged with: (i) Nominating candidates for all 
vacant or new non-industry representative positions on the Board, (ii) 
overseeing the Exchange's regulatory activities and program, and (iii) 
overseeing and evaluating the governance of the Exchange.\98\ 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.\99\
---------------------------------------------------------------------------

    \95\ See id. at 20519-20.
    \96\ See id. at 20519. See also Current Constitution, Section 
5.6.
    \97\ See Notice, supra note 3, at 20519.
    \98\ See id. at 20520. See also Current Constitution, Section 
5.4.
    \99\ See Notice, supra note 3, at 20520.
---------------------------------------------------------------------------

    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.\100\
---------------------------------------------------------------------------

    \100\ See New By-Laws, Article III, Section 6(c). See also supra 
notes 46-53 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 49-52 and 
accompanying text.
    The Commission notes that under the New By-Laws, 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.
---------------------------------------------------------------------------

    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.\101\ 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.\102\
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    \101\ See New By-Laws, Article III, Section 6(c)(i).
    \102\ See New By-Laws, Article III, Section 6(c)(ii). See also 
Notice, supra note 3, at 20521; Amendment No. 1.
    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 Amendment No. 1. 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.
---------------------------------------------------------------------------

    The Commission believes that the Exchange's proposed committees, 
which are similar to the committees maintained by other exchanges,\103\ 
are designed to help enable the Exchange to carry out its 
responsibilities under the Act and 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.\104\ 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.\105\
---------------------------------------------------------------------------

    \103\ See, 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.
    \104\ 15 U.S.C. 78f(b)(1).
    \105\ See 15 U.S.C. 78f(b)(3).
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4. Regulatory Independence
    Certain provisions in ISE's Current Governing Documents, and those 
of its Upstream Owners, are designed to help maintain the independence 
of the regulatory functions of the Exchange.\106\ The New Governing 
Documents similarly include provisions designed to help maintain the 
independence of the regulatory functions of ISE,\107\ which provisions 
are substantially similar to those included in the governing documents 
of other exchanges.\108\ Specifically:
---------------------------------------------------------------------------

    \106\ See, e.g., Nasdaq Acquisition Order, supra note 4, 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 9, at 25263-64.
    \107\ See Notice, supra note 3, at 20524. The Commission notes 
that the Exchange did not propose any amendments to the governing 
documents of its Upstream Owners.
    \108\ See, e.g., Nasdaq Exchange Order, supra note 52; MIAX 
Exchange Order, supra note 57; Mercury Exchange Approval, supra note 
28.
---------------------------------------------------------------------------

     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

[[Page 36504]]

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.\109\
---------------------------------------------------------------------------

    \109\ See New By-Laws, Article III, Section 3. See also 
Amendment No. 1. In Amendment No. 1, the Exchange proposes to 
clarify in Article III, Section 3 of the New By-Laws the factors to 
be considered by the Board when evaluating any proposal. See id. 
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 self-regulatory organization 
registered pursuant to, and subject to the obligations imposed by, 
the Act. See Notice, supra note 3, at 20517; Amendment No. 1.
---------------------------------------------------------------------------

     All books and records of ISE 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 ISE and its officers, directors, employees and agents; 
shall not be made available to persons other than to those officers, 
directors, employees, and agents of ISE that have a reasonable need to 
know; and will not be used for any non-regulatory purpose.\110\
---------------------------------------------------------------------------

    \110\ The corresponding provision in ISE'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 20512; 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 Amendment No. 
1.
    Pursuant to Amendment No. 1, the Exchange is not proposing that 
ISE, and the Board on behalf of ISE, 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. Sec.  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 Amendment 
No. 1. Although such provisions are in the Nasdaq LLC Agreement (see 
Nasdaq LLC Agreement, Section 16), they are not in the Current 
Governing Documents of ISE.
    The Commission believes that the proposed provisions relating to 
the books and records of the Exchange are designed to maintain the 
independence of ISE'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 57; Mercury Exchange Approval, supra note 28.
     The Commission also notes that the governing documents of ISE's 
Upstream Owners provide that all books and records of ISE reflecting 
confidential information pertaining to the self-regulatory 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).
---------------------------------------------------------------------------

     The Exchange proposes that, as is currently the case, the 
books and records of ISE must be maintained in the United States \111\ 
and are subject at all times to examination by the Commission pursuant 
to the federal securities laws and the rules and regulations 
thereunder.\112\
---------------------------------------------------------------------------

    \111\ See New LLC Agreement, Section 16; see also Current LLC 
Agreement, Article IV, Section 4.1.
    \112\ See 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 ISE 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 Amendment No. 1. 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 
self-regulatory function of the Exchange. See Notice, supra note 3, 
at 20512 & n.38.
    ISE 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 20512 
n.38.
---------------------------------------------------------------------------

     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.\113\
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    \113\ See New LLC Agreement, Section 27; New By-Laws, 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 that the Board may adopt emergency 
by-laws.
---------------------------------------------------------------------------

     Additionally, as is currently the case pursuant to the 
Current LLC Agreement,\114\ Section 15 of the New LLC Agreement would 
prohibit the Exchange from using Regulatory Funds to pay 
dividends.\115\
---------------------------------------------------------------------------

    \114\ See Current LLC Agreement, Article III, Section 3.3.
    \115\ Specifically, 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 (ISE Holdings) 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.
    ISE 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 Amendment No. 1.
---------------------------------------------------------------------------

    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.\116\
---------------------------------------------------------------------------

    \116\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    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 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,\117\ 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

[[Page 36505]]

and the rules and regulations thereunder.
---------------------------------------------------------------------------

    \117\ Id.; 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    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.\118\ 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.\119\
---------------------------------------------------------------------------

    \118\ See, 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).
    \119\ See Notice, supra note 3, at 20512.
---------------------------------------------------------------------------

C. Related Rule Amendments

    While voting rights with respect to Directors will be governed by 
the New Governing Documents, as is the case today under the Current 
Governing Documents,\120\ the Current Governing Documents also afford 
certain additional rights to the holders of PMM Rights and CMM Rights 
(PMM Rights and CMM Rights, each as defined below, and together, 
``Market Maker Rights''), namely: \121\ (i) the right to vote on any 
change in, amendment to, or modification of the Core Rights or the 
definition of ``Core Rights''; \122\ and (ii) the right to transfer or 
lease Market Maker Rights upon approval of the Exchange.\123\ The 
Exchange represents that these rights reflect ISE's original membership 
structure, where the original Market Maker Rights provided the holders 
thereof with an equity ownership interest in ISE, as well as trading 
rights on the Exchange.\124\ The Exchange states, however, that today 
the Market Maker Rights do not confer any equity ownership in the 
Exchange and are, for all practical purposes, rights to trade on the 
Exchange.\125\ As such, the Exchange believes that the provisions 
governing the trading privileges of PMMs,\126\ CMMs,\127\ and EAMs 
\128\ are more appropriately located in its Rules rather than its 
governance documents. Accordingly, the Exchange proposes to import into 
its Rules certain provisions relating to Market Maker Rights, as well 
as Exchange Rights,\129\ currently found in the Current Governing 
Documents.\130\ 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; or (ii) relocate or memorialize in the 
Rules certain rights and protections afforded to the Market Marker 
Rights holders, which today are primarily found in the Current 
Governing Documents.\131\ The Exchange represents that the holders of 
Exchange Rights will continue to have the same trading privileges they 
currently hold as PMMs, CMMs, and EAMs under its Rules, and the new 
Board structure of the Exchange will not change any trading 
privileges.\132\
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    \120\ The Commission notes, however, that in the case of a 
Contested Election for Member Representative Directors, which is 
discussed above, instead of electing Directors by class, as is the 
case under the Current Governing Documents, each PMM, CMM, and EAM 
Rights holder would cast one vote. See supra note 52 and 
accompanying text.
    \121\ See Notice, supra note 3, at 20510.
    \122\ See Current LLC Agreement, Section 6.3(b) and Current 
Constitution, Section 10.1. ``Core Rights'' represent the voting 
rights with respect to any increase in the number of authorized 
Market Maker Rights. See Current LLC Agreement, Section 2.2. The 
number of authorized PMM Rights and CMM Rights are 10 and 160, 
respectively. See Current LLC Agreement, Section 6.1.
    \123\ See Current LLC Agreement, Article VI and Current 
Constitution, Article XII. According to the Exchange, most of the 
transfer and lease provisions in the Current Governing Documents are 
also already in the current Rule 300 Series. See Notice, supra note 
3, at 20510 n.26.
     The Commission notes that holders of Exchange Rights also 
currently have the right to vote on amendments to the Current LLC 
Agreement or Current By-Laws, if the amendment would alter or change 
the powers, preferences, or special rights of one or more series of 
Exchange Rights so as to affect them adversely. See Current LLC 
Agreement, Article VIII, Section 8.1 and Current Constitution, 
Article X, Section 10.1.
    \124\ See Notice, supra note 3, at 20510 & n.27 (citing ISE 
Exchange Approval, supra note 71).
    The Exchange notes that all of the initial Market Maker Rights 
provided the rights holders with an equity ownership interest in ISE 
as well as trading rights on the Exchange. As such, those rights 
were transferable or leasable to approved persons or entities (i.e., 
Exchange members or non-member owners as provided in Rule 300(a)). 
Additionally, in the past, holders of the Market Maker Rights had 
the right to vote on corporate actions, such as increasing the 
number of memberships in a class (akin to the voting rights related 
to ``Core Rights'' today). The Exchange states that, from the 
beginning, the holders of EAM Rights had no equity interest in the 
Exchange and only had rights to trade on the Exchange, and that 
those rights were not transferable by the holders, and could only be 
held by Exchange members. The Exchange has since demutualized and 
reorganized into a holding company structure, all of which resulted 
in the separation of the equity ownership rights in the Exchange 
(currently all held by ISE Holdings as the Sole LLC Member) from the 
trading privileges on the Exchange (currently held by PMMs, CMMs, 
and EAMs). The holders of PMM Rights and CMM Rights still retain, 
however, the ability to transfer those rights. See, e.g., Rule 
307(a); Current LLC Agreement, Section 6.4; and Current 
Constitution, Sections 12.1(c), 12.2(c), and 12.3(b). See also 
Notice, supra note 3, at 20510 & n.27, 20511.
    \125\ See Notice, supra note 3, at 20511.
    \126\ See infra note 140 for the definition of the term, 
``PMM.''
    \127\ See infra note 136 for the definition of the term, 
``CMM.''
    \128\ See infra note 138 for the definition of the term, 
``EAM.''
    \129\ See supra note 70 for the definition of the term 
``Exchange Rights.''
    \130\ The Exchange provides that all the provisions governing 
the transfer and lease of Market Maker Rights in the Current 
Governing Documents are substantially set forth in the Rules.
    \131\ See Notice, supra note 3, at 20511. The Exchange also 
proposes certain technical, non-substantive changes, such as 
changing the term ``Constitution'' to ``By-Laws.''
    \132\ See id.
---------------------------------------------------------------------------

    Specifically, the Exchange proposed changes to its Rules to, among 
other things:
     Relocate the concept of CMM Rights from the Current LLC 
Agreement \133\ to New Rule 100(a)(11), which will state that the term 
``CMM Rights'' means the transferable rights held by a Competitive 
Market Maker or a ``non-member owner'' (as that term is defined in Rule 
300(a)),\134\ and provide in New Rule 100(a)(11) that there are 160 
authorized CMM Rights, as is currently set forth in Section 6.1(a) of 
the Current LLC Agreement.\135\
---------------------------------------------------------------------------

    \133\ See Current LLC Agreement, Article VI, Section 6.2(b).
    \134\ CMM Rights are transferable rights. The holders of CMM 
Rights may lease or sell these rights in accordance with the 
Exchange's rules and Current Governing Documents. As discussed 
above, all Exchange Rights (i.e., PMM, CMM, and EAM Rights) convey 
voting rights and trading privileges on the Exchange. From ISE's 
inception, however, only the holders of the PMM Rights and CMM 
Rights could transfer the voting rights and trading privileges 
associated with such Market Maker Rights, while the voting rights 
and trading privileges associated with the EAM Rights have never 
been transferable. See supra note 124.
     The term ``non-member owners'' is defined as individuals and 
organizations that are not Members of the Exchange, or that are 
otherwise Members, but do not seek to exercise trading privileges 
associated with the Market Maker Rights that they own. See Rule 
300(a).
     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)(26).
    \135\ See Current LLC Agreement, Article VI, Section 6.1(a).
---------------------------------------------------------------------------

     Relocate to New Rule 100(a)(12) the definition of 
``Competitive Market Maker,'' \136\ which is currently only defined in 
Section 13.1(g) of the Current Constitution.
---------------------------------------------------------------------------

    \136\ The 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)(12).
---------------------------------------------------------------------------

     Relocate the concept of EAM Rights to New Rule 100(a)(15), 
which will state that the term ``EAM Rights'' means the non-
transferable rights held by an Electronic Access Member.\137\
---------------------------------------------------------------------------

    \137\ EAM Rights are non-transferable. Accordingly, the holders 
of EAM Rights may not lease or sell these rights (unlike PMM and CMM 
Rights, which are transferable). See Current Constitution Article 
XII, Section 12.3. See also Notice, supra note 3, at 20522 n.111.
     The current definition of EAM Rights in Rule 100(a)(14) refers 
to Article VI of the Current LLC Agreement.

---------------------------------------------------------------------------

[[Page 36506]]

     Relocate to New Rule 100(a)(16) the definition of 
``Electronic Access Member,'' \138\ which is currently only defined in 
Section 13.1(l) of the Current Constitution.
---------------------------------------------------------------------------

    \138\ The 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)(16).
---------------------------------------------------------------------------

     Relocate the definitions for ``Exchange Transaction,'' 
``good standing,'' and ``System'' from the Current Constitution to the 
Rules,\139\ and delete Rule 100(a)(22), defining ``LLC Agreement,'' as 
that term would no longer be used in the Rules, as amended by the 
proposed rule change.
---------------------------------------------------------------------------

    \139\ ``Exchange Transaction'' would be relocated from Section 
13.1(r) of the Current Constitution to New Rule 100(a)(20), ``good 
standing'' from Section 13.1(s) of the Current Constitution to New 
Rule 100(a)(23), and ``System'' from Section 13.1(gg) of the Current 
Constitution to New Rule 100(a)(53).
---------------------------------------------------------------------------

     Relocate the concept of PMM Rights from Article VI of the 
Current LLC Agreement to New Rule 100(a)(39), which will state that the 
term ``PMM Rights'' means the transferable rights held by a Primary 
Market Maker or a ``non-member owner'' (as that term is defined in Rule 
300(a)), and will state that there are 10 authorized PMM Rights, as is 
currently set forth in Section 6.1(a) of the Current LLC Agreement.
     Relocate to New Rule 100(a)(40) the definition for 
``Primary Market Maker'' \140\ from Section 13.1(bb) of the Current 
Constitution.
---------------------------------------------------------------------------

    \140\ The 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)(40).
---------------------------------------------------------------------------

    The Exchange also proposed to add as new paragraphs (d) and (e) in 
New Rule 300 certain protections in the Current Governing Documents 
that relate to the Market Maker Rights. First, new paragraph (d) 
preserves the concept of Core Rights from the Current Governing 
Documents, and states that any increase in the number of authorized PMM 
or CMM Rights must be approved by the affirmative vote of the holders 
of at least a majority of the then outstanding PMM Rights, voting as a 
class, and the affirmative vote of the holders of at least a majority 
of the then outstanding CMM Rights, voting as a class, 
respectively.\141\ Second, new paragraph (e) states that any amendments 
to the New Governing Documents that would alter or change the powers, 
preferences, or special rights of one or more series of PMM Rights or 
CMM Rights must also be approved by the holders of a majority of such 
PMM or CMM Rights, as applicable. As such, to the extent they relate to 
the Market Maker Rights holders, paragraph (e) preserves the existing 
amendment rights from the Current Governing Documents.\142\
---------------------------------------------------------------------------

    \141\ See New Rule 300(d). See also supra note 122 and 
accompanying text (discussing the current Core Rights).
    \142\ See New Rule 300(e). See also Current LLC Agreement, 
Section 8.1 and Current Constitution, Section 10.1. As the Exchange 
notes, the proposed amendment rights for the Market Maker Rights 
holders in Rule 300(e) are broader than the ones contained in the 
Current Governing Documents because they will apply for all 
amendments that affect the powers, preferences, or special rights of 
one or more series of PMM Rights or CMM Rights, rather than solely 
to the amendments that adversely affect these Market Maker Rights. 
See Notice, supra note 3, at 20523 n.114. See also supra note 123. 
The Commission also notes that any such amendment would also be 
subject to the voting concentration limitation in the New 
Supplementary Material .02 to Rule 303, described below (see infra 
notes 143-145 and accompanying text), as well as the requirements of 
Section 19 of the Act and the rules and regulations thereunder (see 
New LLC Agreement, Section 27; New By-Laws, Article VIII, Section 
1).
---------------------------------------------------------------------------

    The Exchange also proposes to explicitly set forth in its Rules the 
ownership and voting limitations for the holders of Market Maker 
Rights.\143\ Today, a holder or lessee of Exchange Rights, together 
with any affiliate, is restricted from owning (or exercising any of the 
non-trading rights associated with) more than 20% of the PMM Rights or 
CMM Rights.\144\ Consistent with the current limitation, the Exchange 
proposes to replace the current Supplementary Material .02 to Rule 303 
with New Supplementary Material .02, to state that, ``[i]n addition to 
the trading concentration limits contained in [Rule 303], no holder or 
lessee of Market Maker Rights, together with any affiliate, may gain 
ownership or voting rights in excess of 20% of the outstanding PMM 
Rights or CMM Rights, as applicable.'' \145\ The Exchange also states 
that the New Governing Documents will not have any provisions related 
to the Market Maker Rights.\146\
---------------------------------------------------------------------------

    \143\ See New Supplementary Material .02 to Rule 303.
    \144\ See Current LLC Agreement, Section 6.5(a). See also 
Amendment No. 1.
     Under the Current LLC Agreement, a holder or lessee of Exchange 
Rights, together with any affiliate, is also restricted from owning 
(or exercising any of the non-trading rights associated with) more 
than 20% of the EAM Rights. As discussed above, under the New 
Governing Documents, a 20% voting limitation will apply to all 
Exchange Members with respect to participation in Contested 
Elections, and only holders of PMM and CMM Rights will have a right 
to vote on certain amendments to the New Governing Documents. See 
supra notes 52 and 142 and accompanying text.
    \145\ See New Supplementary Material .02 to Rule 303. See also 
Amendment No. 1.
    The Exchange states that this voting limitation will be 
calculated by class (i.e., 20% of outstanding PMM Rights or CMM 
Rights, as applicable) when Market Maker Rights holders are voting 
on Core Rights or on certain amendments to the New Governing 
Documents, which is how the voting limitation is applied on the 
Exchange today. See Amendment No. 1. As it relates to voting on the 
Member Representative Directors only, in the event of a Contested 
Election, the Exchange states that members will now vote as one 
class. As such, an Exchange Member (together with any affiliates) 
may not cast votes representing more than 20% of the votes cast for 
a candidate. See id. See also New By-Laws, Article II, Section 2.
     New Supplementary Material .02 to Rule 303 will replace the 
Current Supplementary Material .02 to Rule 303, which states that in 
approving any PMM to exercise the trading privileges associated with 
more than 20% of the outstanding PMM Membership, the Board will not 
approve any arrangement in which such PMMs would gain ownership or 
voting rights in excess of those permitted under the Exchange's 
Current LLC Agreement or Current Constitution.
    \146\ See Amendment No. 1.
---------------------------------------------------------------------------

    The Commission notes that, because the only remaining voting rights 
associated with PMM Rights and CMM Rights will be the Core Rights and 
the right to vote on certain amendments to the New Governing Documents, 
as described above, the voting limitation in Supplementary Material .02 
to New Rule 303 will only apply to voting on those matters. Voting on 
the election of Member Representative members will be governed by 
Article II of the New By-Laws, as described above.\147\
---------------------------------------------------------------------------

    \147\ See supra notes 46-53 and accompanying text.
---------------------------------------------------------------------------

    In the context of a lease of Market Maker Rights, the Exchange 
proposes to add a requirement in New Rule 308 that the holder of Market 
Maker Rights must, as is currently required by Section 12.4(b) of the 
Current Constitution, retain the Core Rights associated with such 
Market Maker Rights and not transfer such voting rights to the lessee. 
Section 12.4(b) of the Current Constitution also provides that, under a 
lease agreement, the lessor may retain the voting rights with respect 
to the PMM Rights and CMM Rights or may transfer such voting rights, 
other than the Core Rights, to the lessee. Currently, the voting rights 
associated with the PMM Rights and CMM Rights that may be retained or 
transferred are the right to vote in the election of Exchange Directors 
and the right to vote on amendments to the Current Governing Documents 
that may adversely affect Market Maker Rights.\148\ Pursuant to the New 
Governing Documents, a holder of Market Maker Rights will continue to 
have the option of retaining or transferring the right to vote on 
certain amendments to the New Governing

[[Page 36507]]

Documents. With respect to the right to vote in the case of a Contested 
Election, the Exchange provides that those voting rights will be 
transferable under a lease agreement for the holders of Market Maker 
Rights who are also members of the Exchange.\149\ Non-member owners, 
who are required to lease out their Market Maker Rights pursuant to 
Rule 300(b) will no longer have voting rights with respect to Directors 
that represent Exchange Members.\150\ The Commission notes that the 20% 
concentration limitation on voting described above will continue to 
apply in the case of any transfer of the right to vote in Contested 
Elections.
---------------------------------------------------------------------------

    \148\ See Amendment No.1. See also Current LLC Agreement, 
Article VI, Section 6.3 and Article VIII, Section 8.1; and Current 
Constitution, Article X, Section 10.1
    \149\ See Amendment No. 1.
    \150\ See id.
---------------------------------------------------------------------------

    The Exchange also proposes to amend New Rule 308 to memorialize the 
manner in which Market Maker Rights may be subleased. Specifically, the 
Exchange proposes that a lessee of a Market Maker membership in good 
standing may sublease such membership to a Member with the permission 
of the owner.\151\ The Exchange states that this is consistent with the 
Exchange's current practice and will not change the manner in which 
Market Maker Rights are subleased, but will clarify that such rights 
may be subleased to an Exchange Member only.\152\ Additionally, the 
Exchange proposes to relocate to the New Rules the requirement from the 
Current Constitution that a lessor of Market Maker Rights must retain 
the Core Rights.\153\
---------------------------------------------------------------------------

    \151\ See id.
    \152\ Id. See also New Rule 308.
    \153\ See Notice, supra note 3, at 20523. See also Amendment No. 
1; and New Rule 308.
---------------------------------------------------------------------------

    The Exchange also proposes to clarify that, for the holders of 
Market Maker Rights who are also members of the Exchange, the right to 
vote on Directors representing Exchange Members will continue to be 
transferable under a lease agreement.\154\ Non-member owners, who are 
required to lease out their Market Maker Rights pursuant to Rule 
300(b), will not have voting rights with respect to electing Member 
Representative Directors.\155\ The Exchange states that all voting 
rights other than Core Rights will remain transferable under a lease 
agreement, and that New Rule 308(b)(4) requires a lease agreement of 
Market Maker Rights to include provisions for which party will exercise 
the voting rights associated with the Market Maker Rights being 
leased.\156\ Accordingly, apart from being relocated from the Current 
Constitution to the Rules, the Exchange represents that the proposed 
amendment to New Rule 308 will not change the current transfer rights 
associated with Market Maker Rights, other than as described above with 
respect to non-member owners.\157\
---------------------------------------------------------------------------

    \154\ See Amendment No. 1.
    \155\ As described above, under the New By-Laws, in the case of 
a Contested Election, each Exchange Member shall have the right to 
cast one vote for each Member Representative Director. See New By-
Laws, Article II, Section 2. See also supra note 52; Amendment No. 
1.
    \156\ See Amendment No. 1.
    \157\ See id.
---------------------------------------------------------------------------

    The Exchange also proposes to amend New Rule 802(b) to provide 
that, if a Primary Market Maker fulfills its obligations as a Primary 
Market Maker under the Rules, the Exchange will not reallocate the 
options classes to which such Primary Market Maker is appointed, unless 
otherwise requested by the Primary Market Maker; and would provide that 
the foregoing will not limit or affect the Exchange's responsibility 
under Rule 802(d) to reallocate any options classes in the interests of 
a fair and orderly market.\158\ The Exchange states that this proposal 
is consistent with the manner in which products are allocated to PMMs 
on the Exchange today.\159\ According to the Exchange, today, when ISE 
lists new options classes, it allocates them to one of its PMMs under 
Rule 802, and that pursuant to delegated authority by the Board, an 
Allocation Committee, which consists of employees of the Exchange 
(``Allocation Committee''), makes allocation decisions according to the 
guidelines contained in Rule 802.\160\ The Exchange also states that 
the Allocation Committee has not reallocated the products appointed to 
a PMM since the Exchange's inception for reasons other than as provided 
in the proposed rule, and as such, the proposed changes are simply to 
memorialize a longstanding practice on the Exchange.\161\
---------------------------------------------------------------------------

    \158\ See New Rule 802(b)(2).
    \159\ See Notice, supra note 3, at 20523.
    \160\ See id.
    \161\ See id.
---------------------------------------------------------------------------

    The Commission believes that the proposed changes to ISE's Rules 
are consistent with the Act and, in particular Section 6(b)(1) of the 
Act,\162\ 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 ISE'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 and provisions related to Market Maker Rights 
from the Current Governing Documents into the Rules. The Commission 
believes that the proposed changes to ISE's Rules that would prohibit a 
holder or lessee of Market Maker Rights, together with any affiliate, 
from gaining ownership or voting rights in excess of 20% of the 
outstanding PMM Rights or CMM Rights, as applicable, are consistent 
with the Act. The Commission has previously stated that a regulatory 
concern can arise if a member's interest in an exchange becomes so 
large as to cast doubt on whether the exchange can fairly and 
objectively exercise its self-regulatory responsibilities with respect 
to that member.\163\ The Commission has stated, for example, that a 
member that directly or indirectly controls an exchange might be 
tempted to exercise that controlling influence by directing the 
exchange to refrain from diligently monitoring and surveilling the 
member's conduct or diligently enforcing its rules and the federal 
securities laws with respect to conduct by the member that violates 
such provisions.\164\ The Commission believes that the proposal would 
not give rise to concerns about the Exchange's ability to effectively 
carry out its regulatory responsibilities under the Act because the 
proposed rules change preserves existing ownership and voting 
limitations.
---------------------------------------------------------------------------

    \162\ 15 U.S.C. 78f(b)(1).
    \163\ See, e.g., ISE HoldCo Order, supra note 9, at 25262 n.38 
and accompanying text.
    \164\ See, e.g., id. at 25262.
---------------------------------------------------------------------------

IV. Accelerated Approval

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\165\ to approve the proposal, as modified by Amendment No. 1, 
prior to the 30th day after publication of Amendment No. 1 in the 
Federal Register. In Amendment No. 1, ISE revises the original proposal 
to make certain changes discussed in greater detail above. Notably, in 
Amendment No. 1, ISE revises its proposal to (1) make changes to the 
Exchange's New LLC Agreement and New By-Laws to better align these 
proposed documents with certain provisions in ISE's existing governing 
documents and the governing documents of other exchanges, including 
those concerning limitations on board committee powers, the 
confidentiality of books and records, the nomination of certain board 
directors by petition, and the confidentiality of board meetings; (2) 
revise the proposed

[[Page 36508]]

amendments to ISE's rules regarding ownership, voting, and transfer 
restrictions relating to certain market maker rights on the Exchange; 
(3) revise the related discussion of the purpose of the proposed 
changes; (4) add clarification to the description of the proposal 
regarding the operation of certain provisions; and (5) make certain 
technical corrections. The Commission believes that Amendment No. 1 
does not raise any novel regulatory issues and instead better aligns 
ISE's proposed New Governing Documents with certain provisions in its 
Current Governing Documents and the governing documents of other 
exchanges that were previously approved by the Commission.\166\ As 
discussed more fully above, certain provisions of ISE's New Governing 
Documents, as modified by Amendment No. 1, are designed to facilitate 
the ability of ISE to maintain the independence of its self-regulatory 
function, enable it to operate in a manner that complies with the 
federal securities laws, and facilitate the ability of ISE and the 
Commission to fulfill their regulatory and oversight obligations under 
the Act.\167\ The Commission further believes that Amendment No. 1 
provides additional clarity in the rule text and the description of the 
proposal, which is consistent with ISE's original proposal and supports 
ISE's analysis of how its proposal is consistent with the Act, thus 
facilitating the Commission's ability to make the findings set forth 
above to approve the proposal. Accordingly, the Commission finds that 
good cause exists to approve the proposal, as modified by Amendment No. 
1, on an accelerated basis.
---------------------------------------------------------------------------

    \165\ 15 U.S.C. 78s(b)(2).
    \166\ See, e.g., Securities Exchange Act Release Nos. 70050 
(July 26, 2013), 78 FR 46622 (August 1, 2013) (granting GEMX's (f/k/
a Topaz Exchange, LLC) application for registration as a national 
securities exchange); and Mercury Exchange Approval, supra note 28.
    \167\ See supra Section III.B.4 (discussing, for example, 
certain provisions in ISE's New Governing Documents that are 
designed to help maintain the independence of the regulatory 
functions of the Exchange).
---------------------------------------------------------------------------

V. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-ISE-2017-32 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2017-32. 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 the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ISE-2017-32 and should be 
submitted on or before August 25, 2017.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\168\ that theproposed rule change (SR-ISE-2017-32), as modified by 
Amendment No. 1, be, and hereby is, approved on an accelerated basis.
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    \168\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\169\
Eduardo A. Aleman,
Assistant Secretary.
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    \169\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2017-16398 Filed 8-3-17; 8:45 am]
 BILLING CODE 8011-01-P