Document ID: SEC-2006-0357-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: International Securities Exchange, Inc.
Posted Date: 2006-03-17T05:00Z

[Federal Register: March 17, 2006 (Volume 71, Number 52)]
[Notices]               
[Page 13875-13882]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17mr06-126]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53450; File No. SR-ISE-2006-04]

 
Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Notice of Filing of Proposed Rule Change Relating to Its Proposal 
To Reorganize From Its Current Structure Into a Holding Company 
Structure

March 8, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 12, 2006, the International Securities Exchange, Inc. 
(``ISE, Inc.'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which items have been prepared by ISE, Inc. The Exchange 
filed Amendment No. 1 to the proposed rule change on March 3, 2006, and 
withdrew Amendment No. 1 on March 3, 2006. On March 3, 2006, the 
Exchange filed Amendment No. 2.\3\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Partial Amendment No. 2 dated March 3, 2006 (``Amendment 
No. 2'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    ISE, Inc. is proposing to reorganize from its current structure 
into a holding company structure as more fully described below. The 
text of the proposed rule change is available on ISE, Inc.'s Web site 
(http://www.iseoptions.com), at the principal office of ISE, Inc., and 

at the Commission's Public Reference Room. The text of Exhibit 5 of the 
proposed rule change, as well as Amendment No. 2, is also available on 
the Commission's Web site (http://www.sec.gov/rules/sro.shtml).

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, ISE, Inc. included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. ISE, Inc. has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    ISE, Inc. proposes to reorganize from the current structure of ISE, 
Inc., a Delaware corporation, into a holding company structure (the 
``Reorganization'').\4\ A holding company, International Securities 
Exchange Holdings, Inc., a Delaware corporation (``ISE Holdings''), and 
its wholly owned subsidiary, International Securities Exchange, LLC, a 
Delaware limited liability company (``ISE, LLC''), have been formed in 
contemplation of the Reorganization. Consummation of the Reorganization 
is conditioned upon satisfaction of certain conditions, including 
approval of the Reorganization by the Commission.\5\ After satisfaction 
of these conditions, ISE, Inc. will merge into ISE, LLC, with ISE, LLC 
as the surviving entity of the merger (the ``Merger''). In the Merger:
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    \4\ For a discussion of ISE, Inc.'s current capital stock and 
governance structure, see Securities Exchange Act Release No. 51029 
(January 12, 2005), 70 FR 3233 (January 21, 2005) (SR-ISE-2004-29) 
(relating to the approval of certain amendments to ISE, Inc.'s 
Certificate of Incorporation, Constitution, and ISE Rules in 
connection with ISE, Inc.'s initial public offering) (``IPO 
Order''). In connection with the initial public offering. ISE, Inc. 
filed a registration statement on Form S-1 with the Commission (File 
No. 333-117145).
    This proposed rule change includes: (a) The deletion of the 
Amended and Restated Certificate of Incorporation of ISE, Inc. 
(``ISE, Inc. Amended Certificate'') and Amended and Restated 
Constitution of ISE, Inc. (``ISE, Inc. Amended Constitution''); (b) 
the proposed Certificate of Incorporation of International 
Securities Exchange Holdings, Inc. (``Holdings Certificate``); (c) 
the proposed Bylaws of International Securities Exchange Holdings, 
Inc. (``Holdings Bylaws``); (d) the proposed Limited Liability 
Company Agreement of International Securities Exchange, LLC (``LLC 
Agreement``); (e) the proposed Constitution of International 
Securities Exchange, LLC (``LLC Constitution''); and (f) certain 
proposed amendments to the Rules of ISE, Inc. (the ``ISE Rules``) to 
reflect the Reorganization.
    \5\ ISE, Inc. has received a private letter ruling from the 
Internal Revenue Service Relating to the treatment of the proposed 
Reorganization under U.S. Federal tax law with respect to ISE, Inc., 
its stockholders, and ISE Holdings. The ruleing provides assurances 
that the Reorganization and related transactions will not result in 
any material taxes to the holders of shares of ISE, Inc. Class A 
Common Stock, par value $.01 per share (``Class A Common Stock''), 
ISE, Inc. Class B Common Stock, Series B-1, par value $.01 per share 
(``Series B-1 Common Stock''), ISE, Inc. Class B Common Stock, 
Series B-2, par value $.01 per share (``Aeries B-2 Common Stock''), 
or ISE, Inc. Class B Common Stock, Series B-3, par value $.01 per 
share (``Series B-3 Common Stock'' and together with the Series B-1 
Common Stock and Series B-2 Common Stock, the ``Class B Common 
Stock''). See Internal Revenue Service PLR-135357-04 (November 17, 
2004.
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    (1) Each outstanding share of Class A Common Stock will be 
converted into one share of ISE Holdings common stock, par value $.01 
per share (``ISE Holdings Common Stock'');
    (2) Each outstanding share of Series B-1 Common Stock will be 
converted into one PMM Right (``PMM Right''). Each PMM Right provides 
the holder with (a) the right to vote on the election of the PMM 
Directors of ISE, LLC,\6\ (b) the right to vote on any change in, 
amendment or modification of, the Core Rights \7\ or the definition of 
Core Rights, and (c) the predicate to obtaining the trading rights and 
privileges associated with each PMM Right as set forth in the LLC 
Constitution and ISE Rules for a PMM;
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    \6\ ``PMM Directors'' as defined in Section 3.2(b) of proposed 
LLC Constitution means two directors, who must be officers, 
directors, or partners of Primary Market Makers (``PMM's''), elected 
by a plurality vote of the holders of the PMM Rights voting together 
as a class.
    \7\ ``Core Rights'' as defined in Section 2.2 of proposed LLC 
Agreement means any increase in the number of authorized PMM Rights 
or CMM Rights.
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    (3) Each outstanding share of Series B-2 Common Stock will be 
converted into one CMM Right (``CMM Right''). Each CMM Right provides 
the holder with (a) the right to vote on the election of the CMM 
Directors,\8\ (b) the right to vote on any change in, amendment or 
modification of, the Core Rights or the definition of Core Rights, and 
(c) the predicate to obtaining the trading rights and privileges of 
each CMM Right as set

[[Page 13876]]

forth in the LLC Constitution and ISE Rules for a CMM; and
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    \8\ ``CMM Directors'' as defined in Section 3.2(b) of proposed 
LLC Constitution means two directors, who must be officers, 
directors, or partners of Competitive Market Makers (``CMMs''), 
elected by a plurality vote of the holders of the CMM Rights voting 
together as a class.
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    (4) Each share of Series B-3 Common Stock will be converted into 
one EAM Right (``EAM Right'' and together with the PMM Rights and CMM 
Rights, the ``Exchange Rights''). Each EAM Right provides the holder 
thereof with (a) the right to vote on the election of the EAM Directors 
\9\ and (b) the predicate to obtaining the trading rights and 
privileges of such EAM Right as set forth in the LLC Constitution and 
ISE Rules for an EAM.
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    \9\ ``EAM Directors'' as defined in Section 3.2(b) of proposed 
LLC Constitution means two directors, who must be officers, 
directors, or partners of Electronic Access Members (``EAMs'') 
elected by a plurality vote of the holders of the EAM Rights voting 
together as a class. The PMM Directors, CMM Directors, and EAM 
Directors are collectively referred to as the ``Exchange 
Directors.''
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    As a result of the Merger, the holders of shares of Class A Common 
Stock will become stockholders of ISE Holdings and holders of Series B-
1 Common Stock, Series B-2 Common Stock, and Series B-3 Common Stock 
will become holders of PMM Rights, CMM Rights, and EAM Rights, 
respectively, in ISE, LLC, as further described below. Effectively, ISE 
Holdings will become the sole equity owner of ISE, LLC, and the shares 
of ISE Holdings Common Stock will in turn be publicly held. 
Furthermore, upon consummation of the Merger, the percentage of the 
outstanding shares of ISE Holdings Common Stock held after the Merger 
by each holder of Class A Common Stock will be identical to the 
percentage of Class A Common Stock that such holder held prior to the 
Merger. The percentage of Exchange Rights held after the Merger by each 
holder of Class B Common Stock will also be identical to the percentage 
of Class B Common Stock that such holder held prior to the Merger, 
giving effect to the particular series of Class B Common Stock and 
class of Exchange Rights held and to be held by such holder.
    ISE, Inc. represents that, currently, no Person, either alone or 
together with its Related Persons, owns more than 40 percent of the 
outstanding shares of any class or series of stock of ISE, Inc., and no 
member, either alone or together with its Related Persons, owns more 
than 20 percent of the outstanding shares of any class or series of 
stock of ISE, Inc.\10\ Accordingly, ISE, Inc. has no reason to believe 
that the Reorganization, as detailed above, will result in any large 
concentrations of ownership or voting power by ISE, Inc.'s current 
stockholders or members. In addition, ISE, Inc. represents that it will 
continue to have a trading concentration limit and a 20% member 
ownership limit.\11\
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    \10\ ``Person'' means an individual, partnership (general or 
limited), joint stock company, corporation, limited liability 
company, trust or unincorporated organization, or any governmental 
entity or agency or political subdivision thereof. See ISE, Inc. 
Amended Certificate, Article Fourth, Subdivision III. Currently, 
``Related Person'' means (1) With respect to any Person, all 
``affiliates'' and ``associates'' of such Person (as such terms are 
defined in Rule 12b-2 under the Act); (2) with respect to any Person 
constituting an exchange member (as defined in the ISE, Inc. Amended 
Constitution), any broker or dealer with which such Exchange Member 
is associated; and (3) any two or more Persons that have any 
agreement, arrangement, or understanding (whether or not in writing) 
to act together for the purpose of acquiring, voting, holding, or 
disposing of shares of the capital stock of ISE, Inc. See ISE, Inc. 
Amended Certificate, Article Fourth, Subdivision III. ISE, Inc. 
proposes to modify the definition of ``Related Persons'' in 
connection with the Reorganization to also include, with respect to 
any Person, any executive officer (as defined under Rule 3b-7 under 
the Act), director, general partner, manager, or managing member, as 
applicable, and, with respect to any Person that is an executive 
officer (as defined under Rule 3b-7 under the Act), director, 
general partner, manager, or managing member of a company, 
corporation, or similar entity, such company, corporation, or 
entity, as applicable. See proposed Holdings Certificate, Article 
Fourth, Subdivision III.
    \11\ For the member trading oncentration limit, see ISE Rule 
303(b), which will continue to exist after the Reorganization, and 
proposed LLC Agreement, Section 6.5. ISE, Inc. proposes to modify 
Section 6.5(a) of proposed LLC Agreement to include lessees of 
Exchange Rights and to clarify that holders and lessees of Exchange 
Rights also may not exercise any of the non-trading rights 
associated with more than 20% of such Exchange Rights. ISE, Inc. 
also notes that the Commission is in the process of reviewing issues 
relating to new ownership structures of self-regulatory 
organizations (``SROs'') and has proposed rules relating to the 
ownership of SROs, including imposing limitations on member 
ownership of an SRO or facility of an SRO. See Securities Exchange 
Act Release No. 50699 (November 18, 2004), 69 FR 71126 (December 8, 
2004).
    ISE, Inc. also notes that the Commission recently approved a 
separate proposal to amend ISE Rule 303 to increase the 20% member 
trading concentration limit to 30% for PMMs only, provided that in 
approving any PMM to exercise the trading privileges associated with 
more than 20% of the PMMs, the board of directors of ISE, Inc. (the 
``ISE, Inc. Board'') will not approve any arrangement in which the 
PMM would gain ownership or voting rights in excess of those 
permitted under the ISE, Inc. Amended Certificate or ISE, Inc. 
Amended Constitution. See Securities Exchange Act Release No. 53271 
(February 10, 2006), 71 FR 8625 (February 17, 2006). See also 
Amendment No. 2, supra note 3.
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a. Description of ISE, LLC
i. General
    ISE, LLC will be a wholly owned subsidiary of ISE Holdings. As the 
sole LLC member of ISE, LLC, ISE Holdings will have sole voting control 
over ISE, LLC, except for certain matters relating to Exchange 
Rights.\12\ Specifically, as noted below, the composition of and 
qualifications for the Board of Directors of ISE, LLC (the ``LLC 
Board'') will be the same as they are for the ISE, Inc. Board, and ISE 
Holdings will have the sole right to vote on the election of a majority 
of the members of the LLC Board. In general, however, the management 
and administration of ISE, LLC will be carried out by the LLC Board and 
by the executive officers of ISE, LLC, who will be appointed by the LLC 
Board.\13\ In addition, to further preserve the autonomy of ISE, LLC, 
all meetings of the LLC Board pertaining to the self-regulatory 
function of ISE, LLC (including disciplinary matters) or to the 
structure of the market in which ISE, LLC regulates will be closed to 
all persons other than the LLC Board and officers, staff, counsel, or 
other advisors of ISE, LLC whose participation is necessary or 
appropriate to the proper discharge of ISE, LLC's regulatory functions 
and any representative of the Commission. No members of the Board of 
Directors of ISE Holdings (the ``Holdings Board'') who are not also LLC 
Board members and no officers, staff, counsel, or advisors of ISE 
Holdings who are not also officers, staff, counsel, or advisors of ISE, 
LLC will be allowed to participate in such meetings.\14\
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    \12\ The proposed LLC Agreement only permits ISE, LLC to have 
one LLC member at any given time, and assignment of the sole LLC 
member interest is subject to Commission approval. Proposed LLC 
Agreement, Sections 2.1, 3.1, and 7.1. ISE Holdings will not have 
any voting rights with respect to the Core Rights, the election of 
Exchange Directors, or any other matters relating to the Exchange 
Rights, such as the eligibility and approval of persons to own, 
transfer or lease Exchange Rights, rulemaking, supervision of 
entities holding Exchange Rights, and the like. Proposed LLC 
Agreement, Section 2.2.
    \13\ Proposed LLC Constitution, Section 5.1(a). See also 
proposed LLC Agreement, Section 5.1.
    \14\ Proposed LLC Constitution, Section 3.2(d).
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ii. Exchange Operations
    ISE, LLC will operate as a registered ``national securities 
exchange'' under Section 6 of the Act \15\ and will maintain ISE, 
Inc.'s current regulatory authority over its members.\16\ All persons 
using ISE, LLC as an exchange will continue to be subject to the 
current ISE Rules, as proposed to be modified herein in order to 
reflect the Reorganization.\17\ ISE, LLC will continue to carry out the 
statutory responsibilities to enforce compliance of its members with 
the provisions of the Federal securities laws and ISE Rules.\18\

[[Page 13877]]

 ISE, LLC will continue to be required to approve any changes to ISE 
Rules and governing documents of ISE, LLC and to file any such changes 
with the Commission pursuant to Section 19(b) of the Act and Rule 19b-4 
thereunder.\19\
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    \15\ 15 U.S.C. 78f.
    \16\ For purposes of the Act, the holders or lessees of Exchange 
Rights will be deemed ``members'' of ISE, LLC.
    \17\ ISE, Inc. is proposing to amend the ISE Rules to, among 
other things, change references to ``Class B common stock,'' ``Class 
B stockholders,'' ``shares,'' and similar or derivative words to 
``Exchange Rights,'' ``Exchange Rights holders,'' and ``Rights'' and 
the like.
    \18\ In addition, in discharging his or her responsibilities as 
a member of the LLC Board, each director shall take into 
consideration the effect that his or her actions would have on the 
ability of ISE, LLC to carry out its responsibilities under the Act 
and on the ability of ISE, LLC to engage in conduct that fosters and 
does not interfere with ISE, LLC's ability 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, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanisms of a 
free and open market and a national market system, and in general, 
to protect investors and the public interest. In discharging his or 
her responsibilities as a member of the LLC Board, each director 
also shall comply with the Federal securities laws and rules and 
regulations thereunder and cooperate with the Commission. Proposed 
LLC Agreement, Section 5.1(b).
    \19\ 15 U.S.C. 78s(b) and 17 CFR 240.19b-4.
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    In addition, ISE, LLC is proposing to adopt a new ISE Rule 312, 
which will provide that, without prior Commission approval, ISE, LLC or 
any entity with which it is affiliated shall not, directly or 
indirectly through one or more intermediaries, acquire or maintain an 
ownership interest in a Member or non-member owner, and a Member or 
non-member owner shall not be or become an affiliate of ISE, LLC or an 
affiliate of any affiliate of ISE, LLC. Nothing in the new ISE Rule 312 
will prohibit a Member or non-member owner from acquiring or holding 
any equity interest in ISE Holdings, Inc. that is permitted by the 
Holdings Certificate or prohibit any Member from being or becoming an 
affiliate of ISE, LLC or an affiliate of any affiliate of ISE, LLC 
solely by reason of any officer, director, or partner of such Member 
being or becoming an Exchange Director pursuant to the LLC 
Constitution.\20\
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    \20\ The term ``Member,'' as proposed to be defined in ISE Rule 
100, means an organization that has been approved to exercise 
trading rights associated with Exchange Rights.
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    All confidential information pertaining to the self-regulatory 
function of ISE, LLC (including but not limited to disciplinary 
matters, trading data, trading practices, and audit information) 
contained in books and records of ISE, LLC shall: (1) Not be made 
available to any persons (other than as provided below) other than to 
those officers, directors, employees, and agents of ISE, LLC that have 
a reasonable need to know the contents thereof; (2) be retained in 
confidence by ISE, LLC and the officers, directors, employees, and 
agents of ISE, LLC; and (3) not be used for any commercial purposes. 
Nothing in the LLC Agreement shall be interpreted to limit or impede 
the rights of the Commission to access and examine such confidential 
information pursuant to the Federal securities laws and rules and 
regulations thereunder or to limit or impede the ability of any 
officers, directors, employees, or agents of ISE, LLC to disclose such 
confidential information to the Commission.\21\
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    \21\ Proposed LLC Agreement, Section 4.1(b).
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    As the registered SRO, ISE, LLC will continue to have ultimate 
responsibility for the administration and enforcement of the rules 
governing its options business operations. The regulatory relationship 
that ISE, Inc. currently maintains with the National Association of 
Securities Dealers (``NASD'') will not be affected by the 
Reorganization, and ISE, LLC, as the successor-in-interest to ISE, 
Inc., will continue to have the same regulatory relationship with the 
NASD.\22\ The Reorganization will not affect the current disciplinary 
process. ISE, LLC's disciplinary process will be the same as the 
process for ISE, Inc. and will continue to be governed by the Business 
Conduct Committee, which is comprised of members.\23\ All decisions 
with respect to the listing and delisting of options and related 
products will continue to be made in accordance with ISE Rules.
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    \22\ See Securities Exchange Act Release No. 4781 (May 14, 
2003), 68 FR 27869 (May 21, 2003) (approving an agreement pursuant 
to Rule 17d-2 of the Act between the NASD and ISE, Inc.).
    \23\ Currently, the Chief Regulatory Officer of ISE, Inc. 
authorizes the institution of disciplinary actions, and ISE, Inc., 
with the assistance of the NASD staff, if appropriate, conducts 
disciplinary proceedings before the Business Conduct Committee. 
Decisions of the Business Conduct Committee may be appealed to the 
Committee for Review of ISE, Inc., which is composed of directors of 
ISE, Inc.
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    ISE, Inc. currently is a participant in various national market 
system plans, including the Options Price Reporting Authority, which 
provides options price reporting, and the Options Intermarket Linkage 
Plan, which addresses intermarket options trading. After the 
Reorganization, ISE, LLC proposes to continue to participate in these 
plans and have a representative serve on the committees overseeing 
these plans.
iii. Organization, Management and Governance of ISE, LLC
    Since ISE, LLC will be the surviving entity in the Merger, the LLC 
Agreement and the LLC Constitution will function as the charter and 
bylaws of the surviving entity. ISE, Inc. represents that the 
provisions of the LLC Agreement and LLC Constitution are substantively 
the same as the current ISE, Inc. Amended Certificate and ISE, Inc. 
Amended Constitution, respectively, insofar as exchange operations and 
structure and corporate governance are concerned.\24\ ISE, LLC will 
continue to have a similar interpretation regarding the payment of 
``dividends'' to ``stockholders,'' except that the interpretation will 
relate to distributions to the sole LLC member and holders of Exchange 
Rights. Specifically, ISE, LLC will interpret ISE Rules to require that 
any revenue it receives from regulatory fees or penalties will be 
segregated and applied to fund the legal, regulatory, and surveillance 
operations of ISE, LLC and will not be used to pay distributions to the 
sole LLC member or holders of Exchange Rights, except in the event of 
liquidation of ISE, LLC, in which case the sole LLC member will be 
entitled to the distribution of ISE, LLC's remaining assets.\25\
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    \24\ See IPO Order, supra note 4. In addition, while the ISE, 
Inc. Amended Constitution currently only requires that no officers 
may be holders of shares of Class B Common Stock or affiliated with 
an exchange member, ISE, LLC will require that no officers or 
employees of ISE, LLC may be holders of Exchange Rights or 
affiliated with an Exchange Member. Proposed LLC Constitution, 
Section 4.5. ISE, Inc. also is codifying its current practice of 
prohibiting the transfer or lease of fractional portions of any 
Exchange Rights. Proposed LLC Constitution, Sections 12.1, 12.2, and 
12.4.
    \25\ See Securities Exchange Act Release No. 45803 (April 23, 
2002), 67 FR 21306 (April 30, 2002) (adopting this interpretation in 
connection with ISE, Inc.'s demutualization).
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    As is the case currently with respect to the ISE, Inc. Board, the 
LLC Board will be comprised of 15 members,\26\ eight of whom will be 
Non-Industry Directors \27\ elected by ISE Holdings as the sole LLC 
member, six of whom will be Exchange Directors elected by a plurality 
of the holders of the Exchange Rights, and the Chief Executive Officer

[[Page 13878]]

of ISE, LLC.\28\ Each year, the Nominating Committee, which is not a 
committee of the LLC Board, will nominate the Exchange Directors, and 
the Corporate Governance Committee, which is a committee of the LLC 
Board, will nominate the Non-Industry Directors.\29\ Holders of 
Exchange Rights also may nominate Exchange Directors by petition.\30\ 
The initial members of the LLC Board were the individuals serving as 
directors of ISE, Inc. on the date of formation of ISE, LLC.\31\ 
Similar to the manner of election of the current ISE, Inc. Board, at 
the first annual meeting of the sole LLC member and holders of Exchange 
Rights and at each subsequent annual meeting, ISE Holdings will elect 
the Non-Industry Directors, and holders of Exchange Rights will elect 
the Exchange Directors, to serve until the next annual meeting or until 
their successors are elected and qualified.\32\ The Chairman of the LLC 
Board is a Non-Industry Director who is elected by the LLC Board. Each 
director of ISE, LLC holds office for a term of two years, except the 
Chief Executive Officer of ISE, LLC who holds office for a term of one 
year or such earlier time as such person no longer serves as Chief 
Executive Officer. The directors, other than the Chief Executive 
Officer, are divided into two classes, designated as Class I and Class 
II directors. At each annual meeting, the successors of the class of 
directors whose term expires at that meeting will be elected to hold 
office for a term expiring at the annual meeting held in the second 
year following the year of their election and until their successors 
are elected and qualified. If there is a vacancy on the LLC Board, the 
vacancy will be filled by the LLC Board, and the person chosen to fill 
the vacancy will serve until the expiration of the term of office of 
the class to which such person was elected. No Exchange Director may 
serve more than three consecutive terms, and, after a two-year hiatus, 
may be eligible to serve as an Exchange Director again.\33\
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    \26\ ISE, Inc. proposes that the number of members of the LLC 
Board may only be changed by the LLC Board with the approval of the 
affirmative vote of the holders of two-thirds of the then 
outstanding Exchange Rights. Proposed LLC Constitution, Section 3.2. 
Currently, the number of ISE, Inc. Board members can only be changed 
by the ISE, Inc. Board with the approval of the affirmative vote of 
the holders of two-thirds of the voting power of the then 
outstanding shares of Class A Common Stock. ISE, Inc. Amended 
Certificate, Article Seventh.
    \27\ ``Non-Industry Director'' means a director that meets the 
requirements of ``non-industry representative.'' Proposed LLC 
Constitution, Section 3.2(b). 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. Proposed LLC Constitution, Section 13.1(w). 
These definitions are the same as the current definitions. See ISE, 
Inc. Amended Constitution, Sections 3.2(b) and 14.1(q).
    \28\ Proposed LLC Agreement, Section 5.2 and proposed LLC 
Constitution, Section 3.2(b). Pursuant to Section 4.6 of proposed 
LLC Constitution, the Chief Executive Officer of ISE, LLC is elected 
by the LLC Board and will be nominated by the LLC Board for a 
directorship by virtue of his or her office.
    \29\ See proposed LLC Constitution, Section 3.10. See also ISE, 
Inc. Amended Constitution, Section 3.10.
    \30\ ISE, Inc. represents that the petition process following 
the Reorganization will be substantially similar to the petition 
process in place currently for ISE, Inc., except that petitions 
submitted for nominees for Exchange Directors of ISE, LLC will not 
be required to contain all the information that is required to be 
disclosed pursuant to Regulation 14A under the Act since ISE, LLC 
will not be subject to the proxy requirements under the Act. In 
addition, for purposes of determining whether a person has been 
nominated for election by petition by the requisite percentage set 
forth in the proposed LLC Constitution, no Exchange Member, alone or 
together with its affiliates, may account for more than fifty 
percent (50%) of the signatures of the holders of outstanding 
Exchange Rights of the series entitled to elect such person, and any 
such signatures by such Exchange Member, alone or together with its 
affiliates, in excess of such fifty percent (50%) limitation shall 
be disregarded. Id.
    \31\ The current directors of ISE, LLC are the same directors of 
ISE, Inc. immediately following the 2005 Annual Meeting of 
Stockholders of ISE, Inc.
    \32\ See proposed LLC Constitution, Section 3.2(c). See also 
Amendment No. 2, supra note 3.
    \33\ Proposed LLC Constitution, Section 3.2(e). ISE, Inc. did 
not impose term limits on Non-Industry Directors, and ISE, LLC does 
not propose to do so, though the ISE, LLC Corporate Governance 
Committee may determine whether and how to provide for such term 
limits at a later time.
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    ISE, LLC will have a Finance & Audit Committee, a Corporate 
Governance Committee, and a Compensation Committee, all of which will 
be governed by charters.\34\ As is currently the case with respect to 
ISE, Inc. and its shares of Class B Common Stock, ISE, LLC will require 
ownership of an Exchange Right as a predicate to obtaining the trading 
rights and privileges associated with such Exchange Right.\35\ Holders 
of PMM and CMM Rights will be entitled to the same Core Rights to which 
the holders of Series B-1 Common Stock and Series B-2 Common Stock are 
entitled with respect to ISE, Inc.\36\
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    \34\ Proposed LLC Constitution, Sections 5.4, 5.5 and 5.6. ISE, 
Inc. proposes that the LLC Board may designate additional committees 
by resolution passed by a majority of the whole LLC Board. Proposed 
LLC Constitution, Section 5.1. Currently, the ISE, Inc. Board may 
designate additional committees by a resolution of a majority of a 
quorum. ISE, Inc. Amended Constitution, Section 5.1
    \35\ ISE, Inc. Amended Certificate, Article Fourth, Subdivision 
II(b)(ii) and proposed LLC Agreement, Section 6.2.
    \36\ ISE, Inc. Amended Certificate, Article Fourth, Subdivision 
II(b)(v)(B) and proposed LLC Agreement, Section 6.3(b).
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    ISE, LLC will have officers, including a President and Chief 
Executive Officer, Chief Operating Officer, Chief Financial Officer, 
Chief Information Officer, Chief Regulatory Officer, and Chief 
Marketing Officer, who will manage the business and affairs of ISE, 
LLC, subject to the oversight of the LLC Board and, in some cases, the 
approval of ISE Holdings as the sole LLC member.\37\ The initial 
officers of ISE, LLC will be the individuals currently serving as the 
officers of ISE, Inc.
---------------------------------------------------------------------------

    \37\ Under Delaware law, certain events such as a sale of all or 
substantially all of the assets, merger, or liquidation of ISE, LLC 
may require the approval of ISE Holdings.
---------------------------------------------------------------------------

    The organizational documents of ISE, LLC will differ from the ISE, 
Inc.'s organizational documents in several notable respects. Because 
ISE, LLC is not a corporation and has limited liability members instead 
of stockholders, ISE Holdings and Exchange Right holders will not have 
voting, dividend, and liquidation rights typically associated with 
common stock under state corporate law.\38\ For example, the LLC Act 
does not statutorily confer the same or similar voting rights on 
limited liability members as are conferred to stockholders, pursuant to 
the Delaware General Corporation Law. Accordingly, following the 
Reorganization, the sole LLC member and the Exchange Right holders will 
not statutorily be entitled to vote on certain items with respect to 
which the holders of Class A and Class B Common Stock would have had a 
voting right (i.e., an increase or decrease in the aggregate number of 
authorized shares of Class A or Class B Common Stock, a change in par 
value, and any alteration or change in the powers, preferences, or 
special rights of the shares so as to affect them adversely).
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    \38\ Because Exchange Rights will not have ``par value'' 
following the Reorganization, holders of EAMs also will not be 
entitled to a return of the $0.01 par value per share upon 
withdrawal from ISE, LLC. Additionally, the holders of Exchange 
Rights will not be ``members'' of ISE, LLC for purposes of the 
Delaware Limited Liability Company Act (the ``LLC Act''). Proposed 
LLC Agreement, Section 6.1.
---------------------------------------------------------------------------

    ISE, Inc. notes that some of these items are irrelevant in the 
context of a wholly-owned limited liability company (e.g., the notion 
of par value and certain Class A holder voting rights that instead will 
be relevant at the ISE Holdings level), but where still relevant and 
practical, ISE, Inc. has attempted to preserve in proposed LLC 
Agreement and proposed LLC Constitution certain rights of the holders 
of Class B Common Stock following the Reorganization. As a result, 
holders of Exchange Rights will continue to be entitled to vote with 
respect to the Core Rights (that is, any increase in the number of PMM 
Rights or CMM Rights to be approved by holders of a majority of PMM 
Rights, voting as a separate class, and CMM Rights, voting as a 
separate class) and with respect to any amendments that would alter or 
change the powers, preferences, or special rights of one or more series 
of Exchange Rights so as to affect them adversely (to be approved by 
holders of a majority of Exchange Rights entitled to vote thereon).\39\
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    \39\ The sole LLC member will have a similar right to approve 
amendments to the proposed LLC Constitution if such amendments would 
alter or change the powers, preferences, or special rights of the 
sole LLC member so as to affect it adversely. Proposed LLC 
Agreement, Section 8.1 and proposed LLC Constitution, Section 10.1.
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    Also, since ISE, LLC will have ISE Holdings as its sole LLC member, 
ISE, Inc. deems certain of the antitakeover

[[Page 13879]]

provisions in the ISE, Inc. organizational documents less necessary for 
ISE, LLC. Specifically, ISE, LLC's organizational documents will not: 
(1) Deny the right of ISE Holdings to call a special meeting; (2) 
require ``advance notice'' of ISE Holdings'' or Exchange Right holders' 
proposals; (3) except as described herein, impose an ownership or 
voting limitation on ISE Holdings (or any corrective mechanism with 
respect to any ownership limitation); \40\ or (4) require any super-
majority votes with respect to certain significant matters, such as 
mergers.\41\
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    \40\ ISE, Inc. notes that ownership and voting limitations will 
not be relevant to a wholly owned subsidiary of a holding company, 
although ISE Holdings itself will have substantially the same 
ownership and voting limitations that ISE, Inc. currently has, as 
described below. Additionally, as stated earlier, ISE, LLC will 
continue to have a trading concentration limit and 20% member 
ownership limit pursuant to ISE Rule 303(b), except as described 
herein, and proposed LLC Agreement, Section 6.5. See supra note 11 
for a discussion of certain modifications to ISE Rule 303(b) 
approved in a separate rule filing by the Commission. See also 
Amendment No. 2, supra note 3.
    \41\ For the text of the current antitakeover provisions, see 
ISE, Inc. Amended Certificate, Article Eighth and ISE, Inc. Amended 
Constitution, Section 2.2 (pertaining to calling a special meeting); 
ISE, Inc. Amended Constitution, Section 2.7 (pertaining to ``advance 
notice'' provisions); ISE, Inc. Amended Certificate, Article Fourth, 
Subdivision III (pertaining to ownership and voting limitations); 
and ISE, Inc. Amended Certificate, Article Seventh (pertaining to 
super-majority votes). In addition, because ISE, LLC will be a 
wholly-owned subsidiary of ISE Holdings, and ISE Holdings will be 
entitled to elect a majority of the LLC Board, it is deemed less 
necessary to allow the sole LLC member to amend the proposed LLC 
Constitution (currently, ISE, Inc. stockholders representing at 
least a majority of the voting power may amend the ISE, Inc. Amended 
Constitution). However, the sole LLC member has the right to approve 
amendments to proposed LLC Constitution if such amendments would 
alter or change the powers, preferences, or special rights of the 
sole LLC member so as to affect it adversely. For the text of the 
current power to amend the ISE, Inc. Amended Constitution, see ISE, 
Inc. Amended Constitution, Section 11.1. For the text of the 
proposed power to amend the LLC Constitution, see proposed LLC 
Constitution, Section 10.1.
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b. Description of ISE Holdings
i. General
    ISE Holdings will be governed by the Holdings Certificate and the 
Holdings Bylaws. ISE Holdings will not cause ISE, LLC to be operated in 
a manner inconsistent with ISE, LLC's regulatory and oversight 
functions.\42\ The Holdings Certificate and Holdings Bylaws, as well as 
the LLC Agreement and LLC Constitution, are intended to ensure that the 
Reorganization will not unduly interfere with or restrict the ability 
of ISE, LLC or the Commission to effectively carry out their respective 
regulatory oversight responsibilities under the Act and generally to 
enable ISE, LLC to operate in a manner that complies with the Federal 
securities laws, including furthering the objectives of Section 6(b)(5) 
of the Act.\43\ In addition, ISE Holdings and its officers, directors, 
employees, and agents will be required to submit to the jurisdiction of 
the U.S. Federal courts, the Commission, and ISE, LLC for the purposes 
of any suit, action, or proceeding, pursuant to the U.S. Federal 
securities laws and the rules or regulations thereunder arising out of, 
or relating to, the activities of ISE, LLC and will waive any claims of 
inconvenient forum or improper venue.\44\
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    \42\ In particular, ISE Holdings, its officers, directors, and 
employees will give due regard to the preservation of the 
independence of the self-regulatory function of ISE, LLC and will 
not interfere with the effectuation of any decision by the LLC Board 
relating to such function. Proposed Holdings Bylaws, Section 1.5.
    \43\ 15 U.S.C. 78f(b)(5).
    \44\ Proposed Holdings Bylaws, Section 1.4. ISE Holdings and its 
officers, directors, employees, and agents will also maintain an 
agent for service of process in the U.S. Id.
---------------------------------------------------------------------------

    The ISE Holdings Common Stock will have the traditional features of 
common stock, including voting, dividend, and liquidation rights.\45\ 
Except as described below, the holders of ISE Holdings Common Stock 
will be entitled to vote on all matters submitted to the stockholders 
for a vote, and, except as discussed below, each holder will have one 
vote per share of ISE Holdings Common Stock owned.\46\ As discussed 
further below, holders of ISE Holdings Common Stock will be subject to 
substantially the same ownership and voting limitations with respect to 
ISE Holdings Common Stock to which the holders of Class A Common Stock 
currently are subject.
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    \45\ ISE Holdings will be authorized to pay dividends to the 
stockholders of ISE Holdings as and when declared by the Holdings 
Board.
    \46\ ISE Holdings may issue preferred stock in the future, the 
terms of which will be determined by the Holdings Board.
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ii. Organization, Management and Governance of ISE Holdings
    ISE Holdings will be governed under the direction of the Holdings 
Board. The number of directors shall be fixed by resolution of the 
Holdings Board and is expected to be nine immediately following the 
Reorganization.\47\ Each year, the Corporate Governance Committee of 
ISE Holdings will nominate candidates for election as directors for the 
class of directors standing for election at the ISE Holdings annual 
meeting of stockholders.\48\ As required by the New York Stock 
Exchange, Inc. (the ``NYSE''), where the Class A Common Stock currently 
trades and where ISE, Inc. intends that the ISE Holdings Common Stock 
will be listed and traded, a majority of the directors of ISE Holdings 
must be deemed ``independent'' within the meaning of the NYSE's listing 
standards.\49\ The directors of ISE Holdings, other than the Chief 
Executive Officer of ISE Holdings, will be divided into two classes and 
will be elected by a plurality of the votes cast by stockholders at 
each annual meeting of stockholders at which a quorum is present.\50\ 
The directors will serve staggered two-year terms, with the term of 
office of one class expiring each year.\51\ The Chief Executive Officer 
will hold office for a term of one year or such earlier time as such 
person no longer serves as Chief Executive Officer.\52\ The Chairman of 
the Holdings Board will be elected by the Holdings Board. If there is a 
vacancy on the Holdings Board, the vacancy will be filled by the 
Holdings Board, and the person elected to fill the vacancy will serve 
until the expiration of the term of office of the class to which such 
person was elected.\53\
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    \47\ The Holdings Board is currently comprised of two directors; 
one is the Chief Executive Officer of ISE, Inc., and the other is 
the Secretary of ISE, Inc.
    \48\ Proposed Holdings Bylaws, Section 3.10(c).
    \49\ Section 303A of the NYSE Listed Company Manual.
    \50\ Proposed Holdings Certificate, Article Fifth.
    \51\ Id. ISE, Inc. represents that it will address term limits, 
if any, in ISE Holdings' Corporate Governance Principles to be 
adopted in connection with the Reorganization.
    \52\ Id.
    \53\ Proposed Holdings Bylaws, Section 3.3.
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    ISE Holdings will have officers, including a President and Chief 
Executive Officer, Chief Operating Officer, Chief Financial Officer, 
Chief Information Officer, General Counsel, and Chief Marketing 
Officer, who will manage the business and affairs of ISE Holdings, 
subject to the oversight of the Holdings Board. The initial officers of 
ISE Holdings will be the individuals currently serving as officers of 
ISE, Inc.
    ISE Holdings will have a Board Executive Committee, Finance & Audit 
Committee, Compensation Committee, and a Corporate Governance 
Committee. The Finance & Audit, Compensation, and Corporate Governance 
committees will be governed by charters that comply with the NYSE's 
listing standards.
    The Holdings Certificate and Holdings Bylaws will contain 
substantially the same ownership limitations (including the same 
corrective mechanisms), voting limitations, and antitakeover provisions 
\54\ that are contained in the

[[Page 13880]]

ISE, Inc. Amended Certificate and ISE, Inc. Amended Constitution.\55\ 
If a Person, either alone or with its Related Persons,\56\ beneficially 
owns shares of stock of ISE Holdings in violation of the relevant 
ownership limitation, ISE Holdings will apply substantially the same 
corrective procedures that were approved by the Commission in 
connection with ISE, Inc.'s initial public offering.\57\ ISE, Inc. 
believes that the ownership and voting limitations will prevent any 
stockholder or group of stockholders acting together from exercising 
undue control over the operation of ISE, LLC.\58\ Specifically, ISE, 
Inc. believes that these ownership and voting limitations are designed 
to prohibit any Person, either alone or with its Related Persons, from 
having the power to control a substantial number of outstanding votes 
entitled to be cast on any matter without Commission review and, more 
importantly, that may be adverse to ISE, LLC's or the Commission's 
regulatory oversight responsibilities. ISE, Inc. also believes that 
these provisions serve to protect the integrity of ISE, LLC's and the 
Commission's regulatory oversight responsibilities and allow the 
Commission to review, and subject to public notice and comment, the 
acquisition of substantial ownership or voting power by any stockholder 
or group of stockholders.
---------------------------------------------------------------------------

    \54\ The antitakeover provisions relate to such things as 
special meetings of stockholders, required stockholder vote with 
respect to certain actions, and advance notice of stockholder 
proposals (including the nomination of directors). Proposed Holdings 
Bylaws, Article II.
    \55\ See IPO Order, supra note 4. For the sake of clarity, ISE, 
Inc. notes that the Special Trustee (as defined in the ISE, Inc. 
Amended Certificate and proposed Holdings Certificate) who holds the 
Excess Shares (as defined in the ISE, Inc. Amended Certificate and 
proposed Holdings Certificate) is currently ISE, Inc. and, after the 
Reorganization, will be ISE Holdings and that in each instance, ISE, 
Inc. and ISE Holdings can also appoint a special trustee who is 
unaffiliated with it or any Person or Related Person owning Excess 
Shares. ISE, Inc. Amended Certificate, Article Fourth, Subdivision 
III(c)(ii) and proposed Holdings Certificate, Article Fourth, 
Subdivision III(c)(ii).
    \56\ See supra note 10.
    \57\ See supra note 4 (implementing corrective procedures 
relating to the ownership limitations) and ISE, Inc. Amended 
Certificate, Article Fourth, Subdivision III(c) (setting forth the 
corrective procedures relating to the ownership limitations).
    \58\ ISE, Inc. also believes that, much like the 20% member 
ownership limitation, the 20% voting limitation cannot be waived by 
the Holdings Board with respect to members.
---------------------------------------------------------------------------

iii. Exchange-Related Matters
    Pursuant to the Holdings Certificate, in discharging his or her 
responsibilities as a member of the Holdings Board, each director shall 
take into consideration the effect that ISE Holdings's actions would 
have on the ability of ISE, LLC to carry out its responsibilities under 
the Act and on the ability of ISE, LLC and ISE Holdings to engage in 
conduct that fosters and does not interfere with ISE, LLC's and ISE 
Holdings' ability 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, processing information with respect to and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanisms of a free and open market and a national market 
system, and, in general, to protect investors and the public 
interest.\59\ In addition, in discharging his or her responsibilities 
as a member of the Holdings Board, each director shall comply with the 
Federal securities laws and rules and regulations thereunder and 
cooperate with ISE, LLC and the Commission.\60\ Furthermore, in 
discharging his or her responsibilities as an officer or employee of 
ISE Holdings, each officer or employee shall comply with the Federal 
securities laws and rules and regulations thereunder and shall 
cooperate with ISE, LLC and the Commission.\61\
---------------------------------------------------------------------------

    \59\ Proposed Holdings Certificate, Article Twelfth.
    \60\ Id.
    \61\ Id.
---------------------------------------------------------------------------

    Moreover, for so long as ISE Holdings controls, directly or 
indirectly, ISE, LLC, each officer, director, and employee of ISE 
Holdings shall give due regard to the preservation of the independence 
of the self-regulatory function of ISE, LLC and to ISE, LLC's 
obligations under the Act and the rules thereunder, including, without 
limitation, Section 6(b) of the Act \62\ and shall not take any actions 
which he or she knows or reasonably should have known would interfere 
with the effectuation of any decisions by the LLC Board relating to 
ISE, LLC's regulatory functions (including disciplinary matters) or 
which would adversely affect the ability of ISE, LLC to carry out ISE, 
LLC's responsibilities under the Act.\63\
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    \62\ 15 U.S.C. 78f(b).
    \63\ Proposed Holdings Bylaws, Section 1.5. ISE Holdings also 
will take reasonable steps necessary to cause its officers, 
directors, and employees prior to accepting a position as such to 
consent in writing to the applicability to them of Article Twelfth, 
Article Thirteenth and Article Fourteenth of proposed Holdings 
Certificate and Sections 1.4 and 1.5 of proposed Holdings Bylaws, as 
applicable, with respect to their activities related to ISE, LLC. 
Proposed Holdings Bylaws, Section 1.6.
---------------------------------------------------------------------------

    ISE, Inc. believes that these provisions would help ensure that 
directors, officers, and employees of ISE Holdings are cognizant of, 
and take into account, when carrying out their duties and 
responsibilities as directors, officers, and employees of ISE Holdings, 
the fact that ISE Holdings would operate an exchange that is subject to 
regulatory oversight by the Commission and that the ISE, LLC is 
required to be operated in compliance with Federal securities laws. 
ISE, Inc. believes that these provisions also would help ensure that 
the Commission is able to effectively fulfill its regulatory 
obligations with respect to ISE, LLC.
    Pursuant to the Holdings Certificate and Holdings Bylaws, for so 
long as ISE Holdings controls, directly or indirectly, ISE, LLC, any 
amendment to the Holdings Certificate and Holdings Bylaws must be 
submitted by the Holdings Board to the LLC Board and, if the LLC Board 
determines that such amendment is required, under Section 19 of the Act 
\64\ and the rules promulgated thereunder, to be filed with, or filed 
with and approved by, the Commission before such amendment may be 
effective under Section 19 of the Act and the rules promulgated 
thereunder, then such amendment shall not be filed with the Secretary 
of State of the State of Delaware until filed with, or filed and 
approved by, the Commission, as the case may be.\65\ In short, if the 
LLC Board determines that an amendment to the Holdings Certificate and 
Holdings Bylaws must be filed with, or filed with and approved by, the 
Commission as a proposed rule change pursuant to Section 19 of the Act 
and Rule 19b-4 thereunder,\66\ such amendment will not become effective 
until it becomes effective pursuant to the Rule 19b-4 filing process.
---------------------------------------------------------------------------

    \64\ 15 U.S.C. 78s.
    \65\ Proposed Holdings Certificate, Article Sixteenth and 
proposed Holdings Bylaws, Section 10.1.
    \66\ 15 U.S.C. 78s and 17 CFR 19b-4.
---------------------------------------------------------------------------

    ISE, Inc. believes that these provisions would help to preserve the 
ability of ISE, LLC to carry out its regulatory responsibilities under 
the Act and would help to provide the Commission with the ability to 
review and subject to public notice and comment any changes in proposed 
Holdings Certificate and proposed Holdings Bylaws that could have the 
potential to affect ISE, LLC's and the Commission's regulatory 
responsibilities regarding ISE, LLC.
    Pursuant to proposed Holdings Certificate, all confidential 
information pertaining to the self-regulatory function of ISE, LLC 
(including but not limited to disciplinary matters, trading data, 
trading practices, and audit information) contained in books and 
records of ISE, LLC that shall come into the possession of ISE Holdings 
shall: (1) Not be made available to any Persons (other than as provided 
below) other than to those

[[Page 13881]]

officers, directors, employees, and agents of ISE Holdings that have a 
reasonable need to know the contents thereof; (2) be retained in 
confidence by ISE Holdings and the officers, directors, employees, and 
agents of ISE Holdings; and (3) not be used for any commercial 
purposes. Nothing in the Holdings Certificate shall be interpreted to 
limit or impede the rights of the Commission to access and examine such 
confidential information pursuant to the Federal securities laws and 
rules and regulations thereunder or to limit or impede the ability of 
any officers, directors, employees, or agents of ISE Holdings to 
disclose such confidential information to the Commission.\67\
---------------------------------------------------------------------------

    \67\ Proposed Holdings Certificate, Article Thirteenth.
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    For so long as ISE Holdings controls, directly or indirectly, ISE, 
LLC, the books, records, premises, officers, directors, and employees 
of ISE Holdings shall be deemed to be the books, records, premises, 
officers, directors, and employees of ISE, LLC for purposes of and 
subject to oversight pursuant to the Act but only to the extent they 
relate to the exchange business of ISE, LLC.\68\ In addition, the books 
and records of ISE, LLC and ISE Holdings will be kept within the 
U.S.\69\ ISE, Inc. believes that these provisions would help to ensure 
access to ISE Holdings' books and records by the Commission and, to the 
extent ISE Holdings' books and records relate to the operation or 
administration of ISE, LLC, would help enable the Commission to carry 
out its regulatory responsibilities regarding ISE, LLC.
---------------------------------------------------------------------------

    \68\ Proposed Holdings Certificate, Article Fourteenth.
    \69\ Proposed Holdings Bylaws, Section 1.3.
---------------------------------------------------------------------------

    Pursuant to proposed Holdings Certificate, ISE Holdings shall 
comply with the Federal securities laws and rules and regulations 
thereunder and shall cooperate with ISE, LLC and the Commission, 
pursuant to their respective regulatory authority.\70\ In addition, ISE 
Holdings shall take reasonable steps necessary to cause its agents to 
cooperate with ISE, LLC and the Commission, pursuant to their 
respective regulatory authority with respect to such agents' activities 
related to ISE, LLC.\71\ ISE, Inc. believes that these provisions would 
help to ensure that ISE Holdings will not interfere with the 
Commission's regulatory responsibilities by ensuring that ISE Holdings 
will comply with Federal securities laws, cooperates with ISE, LLC and 
the Commission pursuant to their respective regulatory authority, and 
takes reasonable steps to ensure that its agents do not interfere with 
the Commission's ability to carry out its regulatory responsibilities.
---------------------------------------------------------------------------

    \70\ Proposed Holdings Certificate, Article Fifteenth.
    \71\ Id.
---------------------------------------------------------------------------

    ISE, Inc. believes that the Reorganization will permit ISE, LLC to 
continue ISE, Inc.'s current function as a national securities exchange 
while its corporate parent, ISE Holdings, may, through greater 
organizational flexibility, facilitate access to capital markets, 
promote new business opportunities, facilitate future acquisitions and 
the formation of strategic alliances, and create a framework for future 
growth.
2. Statutory Basis
    ISE, Inc. believes that the proposed rule change is consistent with 
the requirements of the Act and the rules and regulations thereunder 
that are applicable to a national securities exchange and, in 
particular, with the requirements of Section 6(b) of the Act.\72\ The 
Exchange believes that the proposal is consistent with the requirement 
under Section 6(b)(1) of the Act \73\ that an exchange be so organized 
and has the capacity to be able to carry out the purposes of the Act 
and to comply, and (subject to any rule or order of the Commission 
pursuant to Section 17(d) \74\ or 19(g)(2) \75\ of the Act) 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. ISE, Inc. also believes this proposed rule 
change furthers the objective of Section 6(b)(5) of the Act \76\ that 
an exchange have rules that, among other things, are designed to remove 
impediments to and perfect the mechanism for a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \72\ 15 U.S.C. 78f(b). See also Amendment No. 2, supra note 3.
    \73\ 15 U.S.C. 78f(b)(1).
    \74\ 15 U.S.C. 78q(d).
    \75\ 15 U.S.C. 78s(g)(2).
    \76\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    ISE, Inc. believes that the proposed rule change does not impose 
any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    ISE, Inc. has not solicited, and does not intend to solicit, 
comments on this proposed rule change. ISE, Inc. has not received any 
unsolicited written comments from members or other interested parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such other period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve the proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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 e-mail to rule-comments@sec.gov. Please include 

File No. SR-ISE-2006-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2006-04. This file 
number should be included on the subject line if e-mail 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 Commissions 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

[[Page 13882]]

available for inspection and copying in the Commission's Public 
Reference Room. Copies of such filing also will be available for 
inspection and copying at the principal office of the ISE. 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-2006-04 and should be 
submitted by April 7, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\77\
---------------------------------------------------------------------------

    \77\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
[FR Doc. E6-3855 Filed 3-16-06; 8:45 am]

BILLING CODE 8010-01-P