Document ID: SEC-2009-1804-0001
Agency: sec
Document Type: Notice
Title: Order Granting Application for Extension of a Temporary Conditional Exemption: International Securities Exchange, LLC
Posted Date: 2009-12-23T05:00Z

[Federal Register: December 23, 2009 (Volume 74, Number 245)]
[Notices]               
[Page 68294-68297]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23de09-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61174]

 
Order Granting Application for Extension of a Temporary 
Conditional Exemption Pursuant to Section 36(a) of the Exchange Act by 
the International Securities Exchange, LLC Relating to the Ownership 
Interest of International Securities Exchange Holdings, Inc. in an 
Electronic Communications Network

December 16, 2009.

I. Introduction

    On December 22, 2008, the Securities and Exchange Commission 
(``Commission'') approved a proposal filed by the International 
Securities Exchange, LLC (``ISE'' or ``Exchange'') in connection with 
corporate transactions (the ``Transactions'') in which, among other 
things, the parent company of ISE, International Securities Exchange 
Holdings, Inc. (``ISE Holdings''), purchased a 31.54% ownership 
interest in Direct Edge Holdings LLC (``Direct Edge''), the owner and 
operator of Direct Edge ECN (``DECN''), a registered broker-dealer and 
electronic communications network (``ECN'').\1\ Following the closing 
of the Transactions (the ``Closing''), Direct Edge's wholly-owned 
subsidiary, Maple Merger Sub LLC (``Merger Sub'') began to operate a 
marketplace for the trading of U.S. cash equity securities by Equity 
Electronic Access Members of ISE (the ``Facility''), under ISE's rules 
and as a ``facility,'' as defined in Section 3(a)(2) of the Securities 
Exchange Act of 1934 (``Exchange Act''),\2\ of ISE.\3\
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    \1\ See Securities Exchange Act Release No. 59135 (December 22, 
2008), 73 FR 79954 (December 30, 2008) (order approving File No. SR-
ISE-2008-85).
    \2\ 15 U.S.C. 78c(a)(2).
    \3\ Under Section 3(a)(2) of the Act, the term ``facility,'' 
when used with respect to an exchange, includes ``its premises, 
tangible or intangible property whether on the premises or not, any 
right to the use of such premises or property or any service thereof 
for the purpose of effecting or reporting a transaction on an 
exchange (including, among other things, any system of communication 
to or from the exchange, by ticker or otherwise, maintained by or 
with the consent of the exchange), and any right of the exchange to 
the use of any property or service.''
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    DECN, which operates as an ECN and submits its limit orders to the 
Facility for display and execution, is an affiliate of ISE through ISE 
Holdings' equity interest in DE Holdings. DECN also is a facility, as 
defined in Section 3(a)(2) of the Exchange Act, of ISE because it is an 
affiliate of ISE used for the purpose of effecting and reporting 
securities transactions. Because DECN is a facility of ISE, ISE, absent 
exemptive relief,

[[Page 68295]]

would be obligated under Section 19(b) of the Exchange Act to file with 
the Commission proposed rules governing the operation of DECN's systems 
and subscriber fees.
    On December 22, 2008, the Commission exercised its authority under 
Section 36 of the Exchange Act to grant ISE a temporary exemption, 
subject to certain conditions, from the requirements under Section 
19(b) of the Exchange Act with respect to DECN's proposed rules.\4\ On 
June 19, 2009, the Commission extended this temporary exemption for an 
additional 180 days, subject to certain conditions.\5\
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    \4\ See Securities Exchange Act Release No. 59133 (December 22, 
2008), 73 FR 79940 (December 30, 2008) (``Exemption Order'').
    \5\ See Securities Exchange Act Release No. 60152 (June 19, 
2009), 74 FR 30334 (June 25, 2009) (``June Extension'').
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    On November 16, 2009, ISE filed with the Commission, pursuant to 
Rule 0-12 \6\ under the Exchange Act, an application under Section 
36(a)(1) of the Exchange Act \7\ to extend the relief granted in the 
June Extension for an additional 180 days, subject to certain 
conditions.\8\ This order grants ISE's request for a temporary 
extension of the relief provided in the June Extension, subject to the 
satisfaction of certain conditions, which are outlined below.
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    \6\ 17 CFR 240.0-12.
    \7\ 15 U.S.C. 78mm(a)(1).
    \8\ See letter from Michael J. Simon, General Counsel and 
Secretary, ISE, to Elizabeth M. Murphy, Secretary, Commission, dated 
November 16, 2009 (``Extension Request'').
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II. Application for an Extension of the Temporary Conditional Exemption 
From the Section 19(b) Rule Filing Requirements

    On November 16, 2009, ISE requested that the Commission exercise 
its authority under Section 36 of the Exchange Act to temporarily 
extend, subject to certain conditions, the temporary conditional 
exemption granted in the June Extension from the rule filing procedures 
of Section 19(b) of the Exchange Act in connection with ISE Holdings' 
equity ownership interest in DE Holdings and the continued operation of 
DECN as a facility of ISE.\9\
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    \9\ See Extension Request at 1.
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    The Extension Request notes that on May 7, 2009, EDGA Exchange, 
Inc., and EDGX Exchange, Inc. (together, the ``Exchange 
Subsidiaries''), two wholly-owned subsidiaries of DE Holdings, filed 
with the Commission Form 1 applications (the ``Form 1 Applications'') 
to register as national securities exchanges under Section 6 of the 
Exchange Act.\10\ According to the Extension Request, DECN intends to 
file a ``Cessation of Operations Report'' with the Commission and to 
cease operations as an ECN shortly following any Commission approval of 
the Form 1 Applications and the Exchange Subsidiaries commencing 
operations as national securities exchanges.\11\
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    \10\ Id. at 2. The Form 1 Applications have been published for 
notice and comment. See Securities Exchange Act Release No. 60651 
(September 11, 2009), 74 FR 47827 (September 17, 2009) (``Form 1 
Applications Notice'').
    \11\ See Extension Request at 2.
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    Because DECN will cease operations as an ECN if the Commission 
approves the Form 1 Applications, ISE expects that DECN will continue 
to operate as a facility of ISE for a relatively brief period.\12\ In 
addition, ISE believes that it would be unduly burdensome and 
inefficient to require DECN's operating rules to be separately subject 
to the Section 19(b) rule filing process because the published rules of 
the Exchange Subsidiaries ``substantially align with DECN's operations 
in practice and DECN is only operating temporarily as a facility of ISE 
while the Commission considers the Form 1 Applications.'' \13\
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    \12\ Id.
    \13\ Id.
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    ISE has asked the Commission to exercise its authority under 
Section 36 of the Exchange Act to grant ISE a 180-day extension of the 
June Extension's relief, subject to certain conditions, from the 
Section 19(b) rule filing requirements that otherwise would apply to 
DECN as a facility of ISE.\14\ The extended temporary conditional 
exemption would commence immediately and would permit the continued 
operation of DECN while the Commission considers the Form 1 
Applications that, if approved, would allow the Exchange Subsidiaries 
to operate in place of DECN.\15\ ISE believes that the extended 
temporary conditional exemption will help to ensure an orderly 
transition from DECN to the proposed Exchange Subsidiaries.\16\
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    \14\ Id.
    \15\ According to ISE, it would be impracticable for DECN to 
display its limit orders other than on the Facility. See Extension 
Request at 2-3.
    \16\ See Extension Request at 3.
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    ISE states, in addition, that the extended exemption will not 
diminish the Commission's ability to monitor ISE and DECN.\17\ In this 
regard, ISE notes that to the extent that ISE makes changes to its 
systems, including the Facility, during the extended temporary 
exemption period, or thereafter, it remains subject to Section 19(b) 
and thus obligated to file proposed rule changes with the 
Commission.\18\ Further, in the Extension Request, ISE commits to 
satisfying certain conditions, as outlined below, which are identical 
to the conditions in the Exemption Order and the June Extension.\19\ 
For example, as a condition to the extended temporary exemption, ISE 
will be required to submit proposed rule changes with respect to any 
material changes to DECN's functions during the exemption period.\20\ 
ISE notes, however, that neither ISE nor DECN anticipates any material 
changes to DECN's functionality during the extended temporary exemption 
period.\21\
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    \17\ Id.
    \18\ Id.
    \19\ ISE also represents that it has complied with the 
conditions in the Exemption Order and the June Extension and that it 
will continue to comply with these conditions during any extension 
of the relief granted. See Extension Request at 3.
    \20\ See Extension Request at note 6.
    \21\ See Extension Request at note 5.
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III. Order Granting Extension of Temporary Conditional Section 36 
Exemption

    In 1996, Congress gave the Commission greater flexibility to 
regulate trading systems, such as DECN, by granting the Commission 
broad authority to exempt any person from any of the provisions of the 
Exchange Act and to impose appropriate conditions on their 
operation.\22\ Specifically, NSMIA added Section 36(a)(1) to the 
Exchange Act, which provides that ``the Commission, by rule, 
regulation, or order, may conditionally or unconditionally exempt any 
person, security, or transaction, or any class or classes of persons, 
securities, or transactions, from any provision or provisions of [the 
Exchange Act] or of any rule or regulation thereunder, to the extent 
that such exemption is necessary or appropriate in the public interest, 
and is consistent with the protection of investors.'' \23\ In enacting 
Section 36, Congress indicated that it expected that ``the Commission 
will use this authority to promote efficiency, competition and capital 
formation.'' \24\ It particularly intended to give the Commission 
sufficient flexibility to respond to changing market and competitive 
conditions:
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    \22\ 15 U.S.C. 78mm(a). Section 36 of the Exchange Act was 
enacted as part of the National Securities Markets Improvements Act 
1996, Pub. L. No. 104-290 (``NSMIA'').
    \23\ 15 U.S.C. 78mm(a)(1).
    \24\ H.R. Rep. No. 104-622, 104th Cong., 2\d\ Sess. 38 (1996).

    The Committee recognizes that the rapidly changing marketplace 
dictates that effective regulation requires a certain amount of 
flexibility. Accordingly, the bill grants the SEC general exemptive 
authority under both the Securities Act and the Securities Exchange 
Act. This exemptive authority will allow the Commission the 
flexibility to

[[Page 68296]]

explore and adopt new approaches to registration and disclosure. It 
will also enable the Commission to address issues relating to the 
securities markets more generally. For example, the SEC could deal 
with the regulatory concerns raised by the recent proliferation of 
electronic trading systems, which do not fit neatly into the 
existing regulatory framework.\25\
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    \25\ S. Rep. No. 104-293, 104th Cong., 2\d\ Sess. 15 (1996).

    As noted above, in December 2008 the Commission exercised its 
Section 36 exemptive authority to grant ISE a temporary exemption, 
subject to certain conditions, from the 19(b) rule filing requirements 
in connection with the Transaction.\26\ On June 19, 2009, the 
Commission extended ISE's temporary exemption for an additional 180 
days.\27\ In addition, the Commission previously granted similar 
exemptive relief in connection with Nasdaq's acquisition of Brut, LLC, 
the operator of the Brut ECN.\28\
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    \26\ See Exemption Order, supra note 4.
    \27\ See June Extension, supra note 5.
    \28\ See Securities Exchange Act Release No. 50311 (September 3, 
2004), 69 FR 54818 (September 10, 2004). Although granting the ISE's 
Extension Request would result in a temporary exemption longer than 
the exemption granted in connection with Nasdaq's acquisition of 
Brut, LLC, the Commission believes that an extended exemption is 
warranted, in this case, to provide adequate time to address the 
regulatory issues raised by ISE's ownership structure. In this 
regard, the Commission notes that, as a result of ISE's equity 
ownership interest in Direct Edge, the non-U.S. owners of ISE will 
have an indirect ownership interest in Direct Edge and in the 
Exchange Subsidiaries, as well as in ISE. When the Commission 
approved the 2007 transaction in which ISE Holdings became a wholly-
owned indirect subsidiary of Eurex Frankfurt AG, the corporate 
governing documents of ISE Holdings and its parent company, U.S. 
Exchange Holdings, and corporate resolutions adopted by the non-U.S. 
owners, included provisions (the ``Regulatory Provisions'') designed 
to maintain the independence of the regulatory function of ISE, the 
sole national securities exchange then owned by ISE Holdings. See 
Securities Exchange Act Release No. 56955 (December 13, 2007), 72 FR 
71979 (December 19, 2007) (File No. SR-ISE-2007-101). In connection 
with ISE Holdings' subsequent purchase of an ownership interest in 
Direct Edge, ISE has filed proposed changes to the governing 
documents of ISE Holdings and U.S. Exchange Holdings that apply the 
Regulatory Provisions to any national securities exchange, or 
facility thereof, controlled, directly or indirectly, by ISE 
Holdings. See, e.g., Securities Exchange Act Release Nos. 59135 
(December 22, 2008), 73 FR 79954 (December 30, 2008) (File No. SR-
ISE-2008-85) (approving changes to the Certificate of Incorporation 
and Bylaws of ISE Holdings); and 61005 (November 16, 2009) (notice 
of filing of File No. SR-ISE-2009-90) (proposing changes to Trust 
Agreement and to the Certificate of Incorporation and Bylaws of U.S. 
Exchange Holdings). Similarly, the Form 1 Applications included 
forms of supplemental corporate resolutions, to be adopted by the 
non-U.S. owners prior to any Commission approval of the Form 1 
Applications. These supplemental corporate resolutions will apply 
the Regulatory Provisions to the Exchange Subsidiaries. Accordingly, 
the amended corporate governing documents of ISE Holdings and U.S. 
Exchange Holdings, and the supplemental corporate resolutions of the 
non-U.S. owners, will apply to the Exchange Subsidiaries following 
any Commission approval of the Form 1 Applications. In light of the 
time required to amend the corporate governing documents of ISE 
Holdings and U.S. Exchange Holdings, and to supplement the corporate 
resolutions of the non-U.S. owners, the Commission believes that it 
is appropriate to grant the ISE's Extension Request.
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    Section 19(b)(1) of the Exchange Act requires a self-regulatory 
organization (``self-regulatory organization'' or ``SRO''), including 
ISE, to file with the Commission its proposed rule changes accompanied 
by a concise general statement of the basis and purpose of the proposed 
rule change. Once a proposed rule change has been filed with the 
Commission, the Commission is required to publish notice of it and 
provide an opportunity for public comment. The proposed rule change may 
not take effect unless approved by the Commission by order, unless the 
rule change is within the class of rule changes that are effective upon 
filing pursuant to Section 19(b)(3)(A) of the Act.\29\
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    \29\ 15 U.S.C. 78s(b)(3)(A).
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    Section 19(b)(1) of the Exchange Act defines the term ``proposed 
rule change'' to mean ``any proposed rule or rule change in, addition 
to, or deletion from the rules of [a] self-regulatory organization.'' 
Pursuant to Section 3(a)(27) and 3(a)(28) of the Exchange Act, the term 
``rules of a self-regulatory organization'' means (1) the constitution, 
articles of incorporation, bylaws and rules, or instruments 
corresponding to the foregoing, of an SRO, and (2) such stated 
policies, practices and interpretations of an SRO (other than the 
Municipal Securities Rulemaking Board) as the Commission, by rule, may 
determine to be necessary or appropriate in the public interest or for 
the protection of investors to be deemed to be rules. Rule 19b-4(b) 
under the Exchange Act,\30\ defines the term ``stated policy, practice, 
or interpretation'' to mean generally ``any material aspect of the 
operation of the facilities of the self-regulatory organization or any 
statement made available to the membership, participants, or specified 
persons thereof that establishes or changes any standard, limit, or 
guideline with respect to rights and obligations of specified persons 
or the meaning, administration, or enforcement of an existing rule.''
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    \30\ 17 CFR 240.19b-4(b).
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    The term ``facility'' is defined in Section 3(a)(2) of the Exchange 
Act, with respect to an exchange, to include ``its premises, tangible 
or intangible property whether on the premises or not, any right to use 
such premises or property or any service thereof for the purpose of 
effecting or reporting a transaction on an exchange (including, among 
other things, any system of communication to or from the exchange, by 
ticker or otherwise, maintained by or with the consent of the 
exchange), and any right of the exchange to the use of any property or 
service.''
    In its Extension Request, ISE acknowledges that since the Closing, 
Merger Sub has operated the Facility as a facility of ISE.\31\ Absent 
an exemption, Section 19(b) of the Exchange Act and Rule 19b-4 
thereunder would require ISE to file proposed rules with the Commission 
to allow ISE to operate DECN as a facility of ISE.
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    \31\ See Extension Request at 1. As discussed above, ISE owns a 
31.54% ownership interest in DE Holdings, the sole owner of Merger 
Sub.
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    In its Extension Request, ISE notes that the Exchange Subsidiaries 
have filed Form 1 Applications, which have been published for 
comment,\32\ and that DECN intends to cease operations as an ECN 
shortly after any Commission approval of the Form 1 Applications and 
the Exchange Subsidiaries' commencement of operations as national 
securities exchanges.\33\ Accordingly, ISE expects that DECN will 
continue to operate as a facility of ISE for a relatively brief period 
of time.\34\ ISE represents that it has complied with the conditions in 
the Exemption Order and the June Extension and that it will continue to 
comply with these conditions during an extension of the relief granted 
in the June Extension.\35\
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    \32\ See Form 1 Applications Notice, supra note 10.
    \33\ See Extension Request at 2. The Commission must approve an 
application for registration as a national securities exchange, or 
institute proceedings to determine whether the application should be 
denied, within 90 days of publication of notice of filing of the 
application, or within such longer period as to which the applicant 
consents. See Exchange Act Section 19(a)(1), 15 U.S.C. 78s(a)(1).
    \34\ Id. at 2.
    \35\ Id. at 3.
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    The Commission believes that it is appropriate to grant a temporary 
extension of the relief provided in the June Extension, subject to the 
conditions described below, to allow DECN to continue to operate as a 
facility of ISE without being subject to the rule filing requirements 
of Section 19(b) of the Exchange Act for a temporary period.\36\ 
Accordingly, the Commission has determined to grant ISE's request for 
an extension of the relief provided in the June Extension, subject to 
certain conditions, for a period not to exceed

[[Page 68297]]

180 days. The Commission finds that the temporary extended conditional 
exemption from the provisions of Section 19(b) of the Exchange Act is 
appropriate in the public interest and is consistent with the 
protection of investors. In particular, the Commission believes that 
the temporary extended exemption should help promote efficiency and 
competition in the market by allowing DECN to continue to operate as an 
ECN for a limited period of time while the Commission considers the 
Form 1 Applications. In this regard, the Commission notes ISE's belief 
that it would be unduly burdensome and inefficient to require DECN's 
operating rules to be separately subjected to the Section 19(b) rule 
filing and approval process because DECN will operate only temporarily 
as a facility of ISE while the Commission considers the Form 1 
Applications. In addition, the Commission notes that the Form 1 
Applications, which include the rules of the Exchange Subsidiaries, 
were published for comment on September 17, 2009.\37\ According to ISE, 
the rules of the Exchange Subsidiaries ``substantially align'' with 
DECN's operations in practice.\38\ Accordingly, the publication of the 
Form 1 Applications should help to mitigate any concerns regarding 
transparency with respect to the rules under which DECN operates 
temporarily as a facility of ISE.
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    \36\ In granting this relief, the Commission makes no finding 
regarding whether ISE's operation of DECN as a facility would be 
consistent with the Exchange Act.
    \37\ See Securities Exchange Act Release No. 60651 (September 
11, 2009), 74 FR 47827 (September 17, 2009).
    \38\ See Exemption Request at 2.
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    To provide the Commission with the opportunity to review and act 
upon any proposal to change DECN's fees or to make material changes to 
DECN's operations as an ECN during the period covered by the extended 
temporary exemption, as well as to ensure that the Commission's ability 
to monitor ISE and DECN is not diminished by the extended temporary 
exemption, the Commission is imposing the following conditions while 
the extended temporary exemption is in effect.\39\ The Commission 
believes such conditions are necessary and appropriate in the public 
interest for the protection of investors. Therefore, the Commission is 
granting to ISE an extended temporary exemption, pursuant to Section 36 
of the Exchange Act, from the rule filing requirements imposed by 
Section 19(b) of the Exchange Act as set forth above, provided that ISE 
and DECN comply with the following conditions:
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    \39\ See Extension Request at note 6.
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    (1) DECN remains a registered broker-dealer under Section 15 of the 
Exchange Act \40\ and continues to operate as an ECN;
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    \40\ 15 U.S.C. 78o.
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    (2) DECN operates in compliance with the obligations set forth 
under Regulation ATS;
    (3) DECN and ISE continue to operate as separate legal entities;
    (4) ISE files a proposed rule change under Section 19 of the 
Exchange Act \41\ if any material changes are sought to be made to 
DECN's operations. A material change would include any changes to a 
stated policy, practice, or interpretation regarding the operation of 
DECN or any other event or action relating to DECN that would require 
the filing of a proposed rule change by an SRO or an SRO facility; \42\
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    \41\ 15 U.S.C. 78s.
    \42\ See Section 19(b) of the Exchange Act and Rule 19b-4 
thereunder. The Commission notes that a material change would 
include, among other things, changes to DECN's operating platform; 
the types of securities traded on DECN; DECN's types of subscribers; 
or the reporting venue for trading that takes place on DECN. The 
Commission also notes that any rule filings must set forth the 
operation of the DECN facility sufficiently so that the Commission 
and the public are able to evaluate the proposed changes.
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    (5) ISE files a proposed rule change under Section 19 of the 
Exchange Act if DECN's fee schedule is sought to be modified; and
    (6) ISE treats DECN the same as other ECNs that participate in the 
Facility, and, in particular, ISE does not accord DECN preferential 
treatment in how DECN submits orders to the Facility or in the way its 
orders are displayed or executed.\43\
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    \43\ See Extension Request at note 6.
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    In addition, the Commission notes that the Financial Industry 
Regulatory Authority is currently the Designated Examining Authority 
for DECN.
    For the reasons discussed above, the Commission finds that the 
extended temporary conditional exemptive relief requested by ISE is 
appropriate in the public interest and is consistent with the 
protection of investors.
    It is ordered, pursuant to Section 36 of the Exchange Act,\44\ that 
the application for an extended temporary conditional exemption is 
granted for a period of 180 days, effective immediately.
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    \44\ 15 U.S.C. 78mm.

    By the Commission.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-30426 Filed 12-22-09; 8:45 am]

BILLING CODE 8011-01-P