[Federal Register Volume 83, Number 36 (Thursday, February 22, 2018)]
[Notices]
[Pages 7793-7811]
[FR Doc No: 2018-03589]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82727; File No. SR-CHX-2016-20]

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.;
Order Setting Aside Action by Delegated Authority and Disapproving a
Proposed Rule Change, as Modified by Amendments No. 1 and No. 2,
Regarding the Acquisition of CHX Holdings, Inc. by North America Casin
Holdings, Inc.

February 15, 2018.

I. Introduction

    On December 2, 2016, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change in connection with the proposed
acquisition (``Proposed Transaction'') of CHX Holdings, Inc. (``CHX
Holdings'') by North America Casin Holdings, Inc. (``NA Casin
Holdings''). The Division of Trading and Markets, for the Commission
pursuant to delegated authority, approved the proposed rule change as
modified by CHX in Amendment No. 1. Pursuant to Section 4A of the
Exchange Act, and Commission Rules of Practice, we have reviewed the
action by the Division of Trading and Markets pursuant to delegated
authority. As discussed in more detail below, during the period of our
review, CHX further modified the proposed rule change in Amendment No.
2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    In conducting a de novo review of the proposed rule change--through
which CHX seeks to effect a change in ownership--the Commission is
mindful of the important role national securities exchanges, such as
CHX, play in the securities markets.\3\ Not only do they operate
trading markets, but registered national securities exchanges are also
self-regulatory organizations (``SROs'') ``charged with a public trust
to

implement and enforce the federal securities laws and rules, as well as
their own rules with respect to their members.'' \4\
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    \3\ Exchange Act Release No. 40760 (December 8, 1998), 63 FR
70844, 70881 (December 22, 1998) (``the self-regulatory role of
registered exchanges is fundamental to the enforcement of the
federal securities laws.''); and Exchange Act Release No. 50699
(November 18, 2004), 69 FR 71126, 71132 (December 8, 2004) (``As
operators of trading markets, front-line regulators of securities
firms, and standard-setters for listed issuers, national securities
exchanges . . . are critical to the integrity of the U.S. securities
markets.'').
    \4\ Exchange Act Release No. 50699, 69 FR 71126, 71131. The
Commission has long recognized the inherent potential for conflicts
between an exchange's regulatory functions as an SRO and its
responsibilities to promote the economic interests of its members
and owners. See, e.g., Exchange Act Release No. 50700 (November 18,
2004), 69 FR 71256, 71259 (December 8, 2004).
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    To minimize the potential for any person who has an ownership or
voting interest in a national securities exchange to direct its
operation so as to cause the exchange to neglect or otherwise fail to
fulfill its obligations under the Exchange Act, the rules of national
securities exchanges generally include ownership and voting
limitations.\5\ The proposed rule change before us contains such
limitations. But as described more fully below, the Commission's review
of the information before it--including, but not limited to, the
staff's experiences in gathering information to assess the proposed
rule change--leads us to conclude that CHX has not met its burden to
demonstrate that the proposed rule change is consistent with the
Exchange Act.
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    \5\ See, e.g., Exchange Act Release Nos. 79585 (December 16,
2016), 81 FR 93988 (December 22, 2016) (SR-BatsBZX-2016-68); 78119
(June 21, 2016), 81 FR 41611 (June 27, 2016) (SR-ISE-2016-11, SR-
ISEGemini-2016-05, SR-ISEMercury-2016-10); 74270 (February 13,
2015), 80 FR 9286 (February 20, 2015) (SR-NSX-2014-017); 71449
(January 30, 2014), 79 FR 6961 (February 5, 2014) (SR-EDGA-2013-34;
SR-EDGX-2013-43); 71375 (January 23, 2014), 79 FR 4771 (January 29,
2014) (SR-BATS-2013-059, SR-BYX-2013-039); 70210 (August 15, 2013),
78 FR 51758 (August 21, 2013) (SR-NYSE-2013-42, SR-NYSEMKT-2013-50
and SR-NYSEArca-2013-62); 62716 (August 13, 2010), 75 FR 51295
(August 19, 2010) (File No. 10-198); 61698 (March 12, 2010), 75 FR
13151 (March 18, 2010) (File Nos. 10-194 and 10-196) (``EDGX and
EDGA Registrations''); 58375 (August 18, 2008), 73 FR 49498 (August
21, 2008) (File No. 10-182); 56955 (December 13, 2007), 72 FR 71979,
71982-84 (December 19, 2007) (SR-ISE-2007-101); 55293 (February 14,
2007), 72 FR 8033 (February 22, 2007) (SR-NYSE-2006-120) (``NYSE
Euronext Approval Order''); 53382 (February 27, 2006), 71 FR 11251
(March 6, 2006) (SR-NYSE-2005-77); 53963 (June 8, 2006), 71 FR 34660
(June 15, 2006) (File No. SR-NSX-2006-03); 53128 (January 13, 2006),
71 FR 3550 (January 23, 2006) (File No. 10-131); 51149 (February 8,
2005), 70 FR 7531 (February 14, 2005) (SR-CHX-2004-26); and 49098
(January 16, 2004), 69 FR 3974 (January 27, 2004) (SR-Phlx-2003-73);
see also Exchange Act Release No. 50699 (November 18, 2004) 69 FR
71126, 71143 (December 8, 2004) (proposing release explaining the
purpose of ownership and voting limitations in the rules of national
securities exchanges).
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    The information before the Commission has highlighted unresolved
questions about whether the proposed new ownership structure would
comply with the ownership and voting limitations, as well as whether
certain aspects of the Proposed Transaction undermine the purpose of
those ownership and voting limitations. Nor has the Exchange shown that
it would be able to effectively monitor or enforce compliance with
these limitations upon consummation of the Proposed Transaction, as it
would be required to do in its role as an SRO under the federal
securities laws. And the review process has also raised questions about
whether the proposed ownership structure will allow the Commission to
exercise sufficient oversight of the Exchange.
    Because of these concerns, whether viewed independently or in
combination, we are unable to find that CHX has met its burden of
demonstrating that the proposed rule change is consistent with the
Exchange Act and the applicable rules and regulations thereunder. We
therefore disapprove the proposed rule change.

II. Background

A. Procedural History

    The proposed rule change was published for comment in the Federal
Register on December 12, 2016.\6\ On January 12, 2017, the Commission
instituted proceedings under Section 19(b)(2)(B) of the Exchange Act
\7\ to determine whether to approve or disapprove the proposed rule
change.\8\ The Commission received 28 comments on the proposed rule
change,\9\ and three responses from the Exchange to certain
comments.\10\ On June 6, 2017, pursuant to Section 19(b)(2) of the
Exchange Act,\11\ the Commission designated a longer period for
Commission action on proceedings to determine whether to approve or
disapprove the proposed rule change.\12\ On August 7, 2017, the
Exchange filed Amendment No. 1 to the proposed rule change.\13\ On
August 9, 2017, the Division of Trading and Markets, for the Commission
pursuant to delegated authority,\14\ approved the proposed rule change,
as modified by Amendment No. 1.\15\
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    \6\ See Exchange Act Release No. 79474 (December 6, 2016), 81 FR
89543 (``Notice'').
    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ See Exchange Act Release No. 79781, 82 FR 6669 (January 19,
2017) (``OIP'').
    \9\ See letters from: (1) Representative Robert Pittenger,
Representative Earl L. ``Buddy'' Carter, Representative Peter
DeFazio, Representative Collin Peterson, and Representative David
Joyce, dated December 22, 2016 (``Pittenger Letter 1''); (2) James
N. Hill, dated December 23, 2016 (``Hill Letter 1''); (3) John
Ciccarelli, dated January 2, 2017 (``Ciccarelli Letter''); (4)
Anonymous, dated January 3, 2017 (``Anonymous Letter 1''); (5) David
E. Kaplan, Executive Director, Global Investigative Journalism
Network, dated January 4, 2017 (``GIJN Letter''); (6) Reddy Dandolu,
Founder, Chief Executive Officer, Las Vegas Stock Exchange, dated
February 4, 2017 (``Dandolu Letter''); (7) David Ferris, Senior
Research Analyst, The Public Interest Review, dated February 16,
2017 (``Ferris Letter 1''); (8) Michael Brennan, Independent Market
Commentator, dated February 17, 2017 (``Brennan Letter''); (9)
Lawrence Bass, Individual Member, Alliance for American
Manufacturing, dated February 20, 2017 (``Bass Letter''); (10)
Steven Mayer, dated February 20, 2017 (``Mayer Letter''); (11)
William Park, dated February 21, 2017 (``Park Letter''); (12) Jason
Blake, Commentator, dated February 25, 2017; (13) John Meagher,
Freelance Journalist, dated March 1, 2017; (14) Yong Xiao, Chief
Executive Officer, North America Casin Holdings, Inc., dated March
1, 2017 (``NA Casin Holdings Letter 1''); (15) Steven Caban, dated
March 1, 2017 (``Caban Letter''); (16) Harley Seyedin, President,
American Chamber of Commerce in South China, dated March 2, 2017
(``Seyedin Letter''); (17) Salvatore Nobile, dated March 2, 2017
(``Nobile Letter''); (18) Olga Gouroudeva, dated March 3, 2017
(``Gouroudeva Letter 1''); (19) John R. Prufeta, dated March 3, 2017
(``John R. Prufeta Letter 1''); (20) Anthony J. Saliba, Saliba
Ventures Holdings, LLC, dated March 3, 2017 (``Saliba Letter 1'');
(21) Aileen Zhong, dated March 5, 2017 (``Zhong Letter 1''); (22)
Duncan Karcher, dated March 5, 2017 (``Duncan Karcher Letter 1'');
(23) Ira Gottlieb, Principal, Healthcare Practice, Mazars USA LLP,
dated March 5, 2017 (``Gottlieb Letter''); (24) James N. Hill, dated
March 6, 2017 (``Hill Letter 2''); (25) David Ferris, Senior
Research Analyst, The Public Interest Review, dated March 6, 2017
(``Ferris Letter 2''); (26) Sean Casey, dated April 24, 2017; (27)
Representative Robert Pittenger, Representative Chris Smith,
Representative Peter DeFazio, Representative Ted Yoho,
Representative Rosa DeLauro, Representative Steve King,
Representative Walter Jones, Representative David Joyce,
Representative Brian Babin, Representative Bill Posey, and
Representative Tom Marino, dated July 10, 2017 (``Pittenger Letter
2''); and (28) Senator Joe Manchin, III, dated July 20, 2017
(``Manchin Letter''). All of the comments are available at: https://www.sec.gov/comments/sr-chx-2016-20/chx201620.shtml.
    \10\ See letters from John K. Kerin, President and Chief
Executive Officer, CHX, dated January 5, 2017 (``CHX Response Letter
1''); Albert J. Kim, Vice President and Associate General Counsel,
CHX, dated January 6, 2017 (``CHX Response Letter 2'') (responding
specifically to the Ciccarelli Letter); and John K. Kerin, President
and Chief Executive Officer, CHX, dated March 6, 2017 (``CHX
Response Letter 3'').
    \11\ 15 U.S.C. 78s(b)(2).
    \12\ See Exchange Act Release No. 80864, 82 FR 26966 (June 12,
2017).
    \13\ Amendment No. 1 is available at: https://www.sec.gov/comments/sr-chx-2016-20/chx201620.shtml. See also infra note 15.
    \14\ 17 CFR 200.30-3(a)(12).
    \15\ See Exchange Act Release No. 81366, 82 FR 38734 (August 15,
2017) (``Delegated Order''). In the Delegated Order, the Commission
also described and noticed the filing of Amendment No. 1 to the
proposed rule change.
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    Pursuant to Exchange Act Section 4A\16\ and Commission Rule of
Practice 431,\17\ the Delegated Order has been stayed,\18\ and the
Commission has reviewed the delegated action. On August 18, 2017, the
Commission issued a scheduling order (``Scheduling Order''), pursuant
to Commission Rule

of Practice 431, allowing the filing of additional statements until
September 17, 2017.\19\ The Commission received 43 comment letters
within that period, including two comment letters from the
Exchange.\20\ On November 6, 2017, the Exchange filed Amendment No. 2
to the proposed rule change.\21\ Amendment No. 2 was published for
comment in the Federal Register on November 20, 2017, and a new comment
period ending on December 5, 2017 was established, with a deadline for
the submission of rebuttals to comment of December 15, 2017.\22\ After
the Exchange filed Amendment No. 2, the Commission received an
additional 21 comment letters on the proposed rule change, as modified
by Amendments No. 1 and 2,\23\ and three response letters from the
Exchange.\24\
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    \16\ 15 U.S.C. 78d-1.
    \17\ 17 CFR 201.431.
    \18\ See letter from Secretary of the Commission to Albert
(A.J.) Kim, Vice President and Associate General Counsel, CHX, dated
August 9, 2017 (providing notice of Commission review of delegated
action and stay of order), available at https://www.sec.gov/rules/sro/chx/2017/34-81366-letter-from-secretary.pdf.
    \19\ See Exchange Act Release No. 81435, 82 FR 40187 (August 24,
2017).
    \20\ See letters from: (1) Frank Milton, dated August 15, 2017
(``Milton Letter''); (2) Richard R. Taylor, Head Trader, Taylor
Trading, dated August 15, 2017 (``Richard R. Taylor Letter''); (3)
Melanie Ayers, dated August 16, 2017 (``Ayers Letter''); (4) Walt H.
Huskey, dated August 23, 2017 (``Huskey Letter''); (5) Darrell
Simpson, dated August 23, 2017 (``Simpson Letter''); (6) Anonymous,
dated August 24, 2017 (``Anonymous Letter 2''); (7) Edward L. Jones,
dated August 24, 2017 (``Edward Jones Letter''); (8) John K. Kerin,
President & Chief Executive Officer, CHX, dated August 25, 2017
(``CHX Response Letter 4''); (9) John Carney, dated August 28, 2017
(``Carney Letter''); (10) Michael Johnson, dated August 31, 2017
(``Michael Johnson Letter 1''); (11) Michael Johnson, Director
Emeritus, Center for East Asian Political Economy, dated September
2, 2017 (``Michael Johnson Letter 2''); (12) Rick Helmer, dated
September 4, 2017 (``Helmer Letter''); (13) Ruth Day, dated
September 4, 2017 (``Day Letter''); (14) Catherine Jones, dated
September 5, 2017 (``Catherine Jones Letter''); (15) Robert Denholm,
dated September 6, 2017 (``Denholm Letter''); (16) Arthur Lee,
Analyst, U.S. Strategic Defense Think Tank, dated September 6, 2017
(``Lee Letter''); (17) Olga Gouroudeva, dated September 7, 2017
(``Gouroudeva Letter 2''); (18) Timothy Watson, Investigator,
DeepDive Background Research, dated September 8, 2017 (``Watson
Letter''); (19) Vijay Vad, dated September 8, 2017 (``Vad Letter'');
(20) Lyle Himebaugh, Managing Partner, Granite Group Advisors, dated
September 8, 2017 (``Himebaugh Letter''); (21) Duncan Karcher, dated
September 8, 2017 (``Duncan Karcher Letter 2''); (22) John Prufeta,
Chief Executive Officer and Chairman, Medical Excellence
International, LLC, dated September 11, 2017 (``John R. Prufeta
Letter 2''); (23) Aileen Zhong, dated September 11, 2017 (``Zhong
Letter 2''); (24) Robert Prufeta, Senior Vice President, Executive
Search, Solomon Page Healthcare & Life Sciences, dated September 12,
2017 (``Robert Prufeta Letter''); (25) Stella Su, dated September
12, 2017 (``Su Letter''); (26) Tracy Xu, dated September 12, 2017
(``Xu Letter''); (27) John L. Prufeta, dated September 13, 2017
(``John L. Prufeta Letter''); (28) Thomas W. Alfano, Partner, Abrams
Fensterman, dated September 13, 2017 (``Alfano Letter''); (29) Tara
Prufeta, dated September 13, 2017 (``Tara Prufeta Letter''); (30)
Rep. Randy Hultgren, Member of Congress, dated September 14, 2017
(``Hultgren Letter''); (31) Michael Johnson, Director Emeritus,
Center for East Asian Political Economy, dated September 14, 2017
(``Michael Johnson Letter 3''); (32) Cheryl Karcher, dated September
15, 2017 (``Cheryl Karcher Letter''); (33) Stephen Johnson,
Investigative Reporter, Money Network Media, dated September 15,
2017 (``Stephen Johnson Letter''); (34) Yong Xiao, Chief Executive
Officer, North America Casin Holdings, Inc., dated September 15,
2017 (``NA Casin Holdings Letter 2''); (35) Manuel Pinho, dated
September 15, 2017 (``Pinho Letter''); (36) Sandy Sapa, dated
September 15, 2017 (``Sapa Letter''); (37) Bruce Rauner, Governor of
the State of Illinois, dated September 15, 2017 (``Rauner Letter'');
(38) Peter Strotz, Analyst, Center for Government Accountability,
dated September 16, 2017 (``Strotz Letter''); (39) Susan Williams,
Risk Analyst, Blue Stone Capital, dated September 17, 2017
(``Williams Letter''); (40) Representative Robert Pittenger,
Representative Chris Smith, Representative Mo Brooks, Representative
Rosa DeLauro, Representative Walter Jones, Representative Julia
Brownley, Representative Doug LaMalfa, Representative Tom
O'Halleran, Representative Peter DeFazio, Senator Joe Manchin,
Senator Amy Klobuchar, Representative Steve King, Representative
Marcy Kaptur, Representative Austin Scott, Representative David
Joyce, Representative Glenn Grothman, Representative David Valadao,
and Representative Mike Gallagher, dated September 26, 2017
(``Pittenger Letter 3''); (41) James G. Ongena, Executive Vice
President & General Counsel, CHX, dated October 1, 2017 (``CHX
Response Letter 5''); (42) Chris Monfort, dated October 5, 2017
(``Monfort Letter''); and (43) Anonymous, dated October 8, 2017
(``Anonymous Letter 3'').
    \21\ In Amendment No. 2, the Exchange modified the proposed rule
change by: (1) Amending the proposed capitalization table for NA
Casin Holdings due to the withdrawal of three proposed equity
owners--Chongqing Jintian Industrial Co., Ltd., Chongqing Longshang
Decoration Co., Ltd., and Xian Tong Enterprises, Inc.--from the
investor group for the Proposed Transaction, see infra note 30; (2)
amending the proposed NA Casin Holdings Certificate of Incorporation
to: (i) require a supermajority vote for certain corporate actions
related to change of control of NA Casin Holdings; (ii) reflect a
recent name change of the registered agent from ``National Corporate
Research'' to ``Cogency Global, Inc.''; and (iii) modify the term
expiration years of the three classes of directors under Section (6)
of Article V; (3) amending the put agreements for Raptor Holdco LLC
(``Raptor'') and Saliba Ventures Holdings, LLC (``Saliba'') to,
among other changes, reflect the increased ownership levels for
Raptor and Saliba under the new capital structure; (4) providing a
new put agreement for Penserra Securities LLC (new Exhibit 5L),
which the Exchange states is substantively similar to the Raptor and
Saliba put agreements; and (5) amending the language of the filing
to update certain sections of the Form 19b-4 in order to conform
that language with the above changes. Amendment No. 2 is available
at: https://www.sec.gov/comments/sr-chx-2016-20/chx201620.shtml.
    \22\ See Exchange Act Release No. 82077 (November 14, 2017), 82
FR 55141 (``Amendment No. 2'').
    \23\ See letters from: (1) Samuel Garland, Regulatory Policy
Group, dated November 9, 2017 (``Garland Letter''); (2) David
Mcpherson, Market Transparency Think Tank, dated November 10, 2017
(``Mcpherson Letter''); (3) Daniel Azsai, dated November 12, 2017
(``Azsai Letter''); (4) Anonymous, dated November 12, 2017
(``Anonymous Letter 4''); (5) Richard Taylor, dated November 15,
2017 (``Richard Taylor Letter''); (6) Karl Montclair, dated November
20, 2017 (``Montclair Letter''); (7) Jeremy Johnson, Analyst,
Citizens Alliance for Better Government, dated November 22, 2017
(``Jeremy Johnson Letter''); (8) Marc Gresack, dated November 21,
2017 (``Gresack Letter''); (9) Ruben May, dated November 21, 2017
(``May Letter''); (10) Claire Salters, dated November 22, 2017
(``Salters Letter''); (11) Gordon Faux, dated November 30, 2017
(``Faux Letter''); (12) Anthony Saliba, Saliba Ventures Holdings,
LLC, dated December 1, 2017 (``Saliba Letter 2''); (13) Preston
Briley, dated December 4, 2017 (``Briley Letter''); (14) G.
Bleecher, dated December 4, 2017 (``Bleecher Letter''); (15) David
Marden, dated December 4, 2017 (``Marden Letter''); (16) Yong Xiao,
Chief Executive Officer, NA Casin Holdings, dated December 13, 2017
(``NA Casin Holdings Letter 3''); (17) Peter Strauss, Fraud
Examiner, Fraud Detection Network, dated December 2, 2017 (``Strauss
Letter''); (18) Steven Hart, Investigator, Center for Market
Transparency, dated December 15, 2017 (``Hart Letter''); (19) James
N. Hill, dated December 15, 2017 (``Hill Letter 3''); (20) Jon
Horwitz, Market Structure Specialist, Compass Research Alert, dated
December 15, 2017 (``Horwitz Letter''); and (21) Jason Friedman,
Friedman Regulatory Transparency Group, dated December 15, 2017
(``Friedman Letter'').
    \24\ See letters from John K. Kerin, President and Chief
Executive Officer, CHX, dated December 15, 2017 (``CHX Response
Letter 6''); James G. Ongena, Executive Vice President and General
Counsel, CHX, dated December 15, 2017 (``CHX Response Letter 7'');
and James G. Ongena, Executive President and General Counsel, CHX,
dated January 12, 2018 (``CHX Response Letter 8'').
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    The Commission's Rules of Practice set forth procedures for
reviewing actions made pursuant to delegated authority.\25\ Pursuant to
Rule 431(a) of the Rules of Practice, the Commission may affirm,
reverse, modify, set aside, or remand for further proceedings, in whole
or in part, the action made pursuant to delegated authority. Here, the
Commission set aside the Delegated Order and conducted a de novo review
of, and gave careful consideration to, the record, which includes,
among other items: (1) CHX's proposal and all amendments thereto; (2)
supplemental information submitted by CHX, both in the public record
and pursuant to confidential treatment requests; (3) all comments
received in connection with the proposed rule change; (4) all comments
received in connection with the Scheduling Order; and (5) information
derived from a recent staff examination of the Exchange.
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    \25\ See 17 CFR 201.431.
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B. Summary of the Proposal, as Modified by Amendments No. 1 and No. 2

    Currently, the Exchange is a wholly owned subsidiary of CHX
Holdings, and CHX Holdings is beneficially owned by 193 firms or
individuals, including certain Participants or affiliates of
Participants.\26\ Pursuant to the terms of a Merger Agreement dated
February 4, 2016, as amended on February 3, 2017, and August 29, 2017
(``Merger Agreement''), by and among NA Casin Holdings, Exchange
Acquisition Corporation (``Merger Sub''), Chongqing Casin Enterprise
Group Co., LTD. (``Chongqing Casin''), Richard G. Pane solely in his
capacity as the

Stockholders Representative thereunder, and CHX Holdings, Merger Sub
would merge into CHX Holdings, which would then become a wholly owned
direct subsidiary of NA Casin Holdings.\27\ Under the Merger Agreement,
current CHX Holdings stockholders would have the right to receive cash
in exchange for their shares.\28\ The Exchange would continue to be a
wholly owned subsidiary of CHX Holdings. Consummation of the Proposed
Transaction is subject to the satisfaction of certain conditions
precedent, including approval by the Commission of the proposed rule
change.\29\ The Exchange represents that, after the closing of the
Proposed Transaction, all of the outstanding and issued shares of NA
Casin Holdings would be held by the following firms and individuals
(referred to collectively as the ``upstream owners'') in the following
percentages:
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    \26\ See Notice, supra note 6, at 89544. See also CHX Rules
Article 1, Rule 1(s) (defining ``Participant'').
    \27\ See Notice, supra note 6, at 89544; and Amendment No. 2,
supra note 22, at 55143.
    \28\ See id.
    \29\ See id.
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    Upstream Owners: \30\
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    \30\ See Amendment No. 2, supra note 22, at 55142.
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     NA Casin Group, Inc. (``NA Casin Group''), a corporation
incorporated under the laws of the State of Delaware and wholly owned
by Chongqing Casin, a limited company organized under the laws of the
People's Republic of China (``PRC'')--29%
     Castle YAC Enterprises, LLC (``Castle YAC''), a limited
liability company organized under the laws of the State of New York,
the sole member of which is Jay Lu,\31\ a U.S. citizen and Vice
President of NA Casin Group--11%
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    \31\ According to the Exchange, Jay Lu is associated with an
affiliate of Chongqing Casin and is the son of Shengju Lu, the
Chairman of Chongqing Casin. See Notice, supra note 6, at 89545,
n.18. The Exchange represents that Castle YAC and NA Casin Group are
related persons for the purpose of determining the ownership and
voting concentration limits. See Amendment No. 2, supra note 22, at
55142.
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     Raptor, a limited liability company organized under the
laws of the State of Delaware--25%
     Saliba, a limited liability company organized under the
laws of the State of Illinois--24.5%
     Five members of the CHX Holdings management team, all U.S.
citizens--collectively, 8.32%, with no one person attributed more than
5%
     Penserra, a limited liability company organized under the
laws of the State of New York--2.18% \32\
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    \32\ See Amendment No. 1, supra note 13, at 7 (explaining that
Cheevers & Co., Inc., one of the original upstream owners, merged
with Penserra, with Penserra as the surviving entity).
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    After the closing of the Proposed Transaction, CHX would remain a
national securities exchange, registered under Section 6 of the
Exchange Act,\33\ and an SRO, as defined in Section 3(a)(26) of the
Exchange Act.\34\ In addition, following the closing, the Exchange's
affiliated routing broker, CHXBD, would remain a Delaware limited
liability company of which CHX Holdings would remain the sole
member.\35\
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    \33\ 15 U.S.C. 78f.
    \34\ 15 U.S.C. 78c(a)(26).
    \35\ Prior to the change of proposed capital structure noticed
in Amendment No. 2, the proposed capital structure for NA Casin
Holdings following the close of the original proposed transaction
would have been as follows: NA Casin Group, Inc.--20%; Chongqing
Jintian Industrial Co., Ltd., a corporation incorporated under the
laws of the PRC (``Chongqing Jintian'')--15%; Chongqing Longshang
Decoration Co., Ltd., a corporation incorporated under the laws of
the PRC (``Chongqing Longshang'')--14.5%; Castle YAC--19%; Raptor--
11.75%; Saliba--11.75%; Xian Tong Enterprises, Inc., a corporation
incorporated under the laws of the State of New York (``Xian
Tong'')--6.94%; five members of the CHX Holdings management team,
all U.S. citizens--0.88% (as equity incentives); and Penserra--
0.18%. See Amendment No. 2, supra note 22, at 55142.
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    To effect the Proposed Transaction, the Exchange proposes to amend
its certificate of incorporation and bylaws (``CHX Bylaws''),\36\ the
certificate of incorporation (``CHX Holdings Certificate'') and bylaws
(``CHX Holdings Bylaws'') of CHX Holdings,\37\ and the Exchange's
rules.\38\ The Exchange has also filed the following documents in
connection with the Proposed Transaction: (1) The certificate of
incorporation (``NA Casin Holdings Certificate'') and bylaws (``NA
Casin Holdings Bylaws'') of NA Casin Holdings; \39\ (2) text of a
proposed resolution of CHX Holdings' board of directors to waive
certain ownership and voting limitations to permit the Proposed
Transaction; \40\ (3) the proposed NA Casin Holdings Stockholders'
Agreement,\41\ which includes transfer-of-share provisions for the
upstream owners that provide a right of first offer, a right to acquire
interest upon change of control, and a right to purchase new
securities; and (4) put agreements between Saliba, NA Casin Group, and
NA Casin Holdings (``Saliba Put Agreement''),\42\ Raptor, NA Casin
Group, and NA Casin Holdings (``Raptor Put Agreement''),\43\ and
Penserra, NA Casin Group, and NA Casin Holdings (``Penserra Put
Agreement,'' and collectively with the Saliba and Raptor Put
Agreements, the ``Put Agreements'').\44\ The Put Agreements would grant
Saliba, Raptor, and Penserra, respectively, the right to compel NA
Casin Holdings to purchase or arrange for an unspecified third party to
purchase all or a portion of Saliba's, Raptor's, or Penserra's equity
interest in NA Casin Holdings, respectively, during a 30-day window
commencing two years after the close of the Proposed Transaction.\45\
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    \36\ See Exhibits 5C and 5D. All Exhibits to the proposed rule
change are available at: https://www.sec.gov/rules/sro/chx/chxarchive/chxarchive2016.shtml.
    \37\ See Exhibits 5A and 5B.
    \38\ See Exhibit 5E. The current CHX Holdings Certificate and
CHX Holdings Bylaws require that, for so long as CHX Holdings
controls the Exchange, either directly or indirectly, any changes to
the CHX Holdings Certificate or CHX Holdings Bylaws must be
submitted to the board of directors of the Exchange and, if the
Exchange's board determines that the change must be filed with, or
filed with and approved by, the Commission under Section 19 of the
Exchange Act and the rules thereunder, then the changes will not be
effective until filed with, or filed with and approved by, the
Commission. See Article THIRTEENTH of the current CHX Holdings
Certificate; and Article VIII of the current CHX Holdings Bylaws.
Section 19(b) of the Exchange Act and Rule 19b-4 thereunder require
an SRO to file proposed rule changes with the Commission. Although
CHX Holdings is not an SRO, those portions of its certificate of
incorporation and bylaws that are stated policies, practices, or
interpretations (as defined in Rule 19b-4 under the Exchange Act) of
the Exchange are rules of the Exchange and must therefore be filed
with the Commission pursuant to section 19(b)(4) of the Exchange Act
and Rule 19b-4 thereunder. Accordingly, the Exchange filed the CHX
Holdings Certificate and CHX Holdings Bylaws with the Commission.
    \39\ See Exhibits 5F and 5G. The proposed NA Casin Holdings
Certificate and NA Casin Holdings Bylaws require that, for so long
as NA Casin Holdings controls the Exchange, either directly or
indirectly, any change to those documents must be submitted to the
board of directors of the Exchange and, if the Exchange's board
determines that the change must be filed with, or filed with and
approved by, the Commission under Section 19 of the Exchange Act and
the rules thereunder, then the changes will not be effective until
filed with, or filed with and approved by, the Commission. See
proposed NA Casin Holdings Certificate, Article X; proposed NA Casin
Holdings Bylaws, Article 11. Although NA Casin Holdings is not an
SRO, those portions of its certificate of incorporation and bylaws
that are stated policies, practices, or interpretations (as defined
in Rule 19b-4 under the Exchange Act) of the Exchange are rules of
the Exchange and must therefore be filed with the Commission
pursuant to section 19(b)(4) of the Exchange Act and Rule 19b-4
thereunder. Accordingly, the Exchange filed the NA Casin Holdings
Certificate and NA Casin Holdings Bylaws with the Commission.
    \40\ See Exhibit 5H.
    \41\ See Exhibit 5I.
    \42\ See Exhibit 5J.
    \43\ See Exhibit 5K.
    \44\ See Exhibit 5L.
    \45\ The Put Agreements state that the price of shares sold
pursuant to each Put Agreement would be an amount equal to the total
number of shares that each stockholder determines to sell,
multiplied by the sum of the average initial price per share, plus
the amount of the preferred return, which is a certain percentage of
the average price per share per year compounded annually through the
date of the exercise of the put right, less any distributions
previously paid by NA Casin Holdings to the holders of the shares.

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

    The Exchange proposes several substantive and technical amendments
to its corporate governance documents, rules, and the governing
documents of CHX Holdings. Among other items, the proposed amendments
revise provisions in the CHX Holdings Certificate relating to ownership
and voting limitations. In addition, to govern the upstream owners, the
Exchange proposes to establish in the NA Casin Holdings Certificate
ownership and voting limitations that are identical to those contained
in the proposed CHX Holdings documents. In particular, these provisions
prohibit any Person,\46\ either alone or with its Related Persons,\47\
from beneficially owning shares of stock of CHX Holdings or NA Casin
Holdings representing in the aggregate more than 40% of the then
outstanding votes entitled to be cast on any matter unless specific
procedures are followed prior to acquiring shares in excess of the
ownership limitation.\48\ In addition, no Participant, either alone or
with its Related Persons, would be permitted at any time to
beneficially own shares of stock of CHX Holdings or NA Casin Holdings
representing in the aggregate more than 20% of the then outstanding
votes entitled to be cast on any matter.\49\ Further, no Person that is
subject to any statutory disqualification as defined in Section
3(a)(39) of the Exchange Act would be permitted at any time to
beneficially own, either alone or with its Related Persons, shares of
stock of CHX Holdings or NA Casin Holdings representing in the
aggregate more than 20% of the then outstanding votes entitled to be
cast on any matter.\50\ CHX also proposes cure provisions that would
require CHX Holdings or NA Casin Holdings, as applicable, to call
shares held in excess of these ownership limits, and to not register
any shares transferred in violation of these ownership limits.\51\
These restrictions are described herein as the ``ownership
limitations.''
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    \46\ The NA Casin Holdings Certificate and CHX Holdings
Certificate define ``Person'' to mean ``a natural person,
partnership (general or limited), corporation, limited liability
company, trust or unincorporated organization, or a governmental
entity or political subdivision thereof.'' See proposed CHX Holdings
Certificate Article FOURTH, Section (b); proposed NA Casin Holdings
Certificate Article IX, Section (4).
    \47\ CHX proposes to define the term ``Related Persons'' in the
NA Casin Holdings Certificate and CHX Holdings Certificate to mean:
(1) With respect to any Person, any executive officer (as such term
is defined in Rule 3b-7 under the Exchange Act), director, general
partner, manager or managing member, as applicable, and all
``affiliates'' and ``associates'' of such Person (as those terms are
defined in Rule 12b-2 under the Exchange Act), and other Person(s)
whose beneficial ownership of shares of stock of NA Casin Holdings
or CHX Holdings, as applicable, with the power to vote on any matter
would be aggregated with such first Person's beneficial ownership of
such stock or deemed to be beneficially owned by such first Person
pursuant to Rules 13d-3 and 13d-5 under the Exchange Act; and (2) in
the case of any Participant, for so long as CHX remains a registered
national securities exchange, such Person and any broker or dealer
with which such Person is associated; and (3) any other Person(s)
with which such Person has any agreement, an arrangement or
understanding (whether or not in writing) to act together for the
purpose of acquiring, voting, holding or disposing of shares of the
stock of NA Casin Holdings or CHX Holdings, as applicable; and (4)
in the case of a Person that is a natural person, any relative or
spouse of such Person, or any relative of such spouse, who has the
same home as such Person or who is a director or officer of NA Casin
Holdings or CHX Holdings, as applicable, or any of its parents or
subsidiaries. See proposed CHX Holdings Certificate Article FOURTH,
Section (b); and proposed NA Casin Holdings Certificate Article IX,
Section (4).
    \48\ See proposed CHX Holdings Certificate Article FOURTH,
Section (c)(i); and proposed NA Casin Holdings Certificate Article
IX, Section (9).
    \49\ See proposed CHX Holdings Certificate Article FOURTH,
Section (c)(ii); proposed NA Casin Holdings Certificate Article IX,
Section (10).
    \50\ See proposed CHX Holdings Certificate Article FOURTH,
Section (d); and proposed NA Casin Holdings Certificate Article IX,
Section (13).
    \51\ See proposed CHX Holdings Certificate Article FOURTH,
Sections (c)(i)(C), (c)(ii)-(iii), and (d); proposed NA Casin
Holdings Certificate Article IX, Sections (9)(iii), (10), (11), and
(13).
---------------------------------------------------------------------------

    In addition, both the CHX Holdings Certificate and NA Casin
Holdings Certificate contain voting restrictions that would preclude
any stockholder, either alone or with its Related Persons, from voting
more than 20% of the then outstanding shares entitled to be cast on any
matter unless specific procedures are followed prior to voting in
excess of the limitation.\52\ Similarly, no Person, either alone or
with its Related Persons, would be permitted to enter into an
agreement, plan, or other arrangement that would result in an aggregate
of more than 20% of the then outstanding votes entitled to be cast on a
matter to be voted unless specific procedures are followed prior to
entering into such an agreement, plan, or arrangement.\53\ The
certificates of incorporation would also require that CHX Holdings and
NA Casin Holdings disregard any votes cast in excess of the voting
limitations.\54\ These restrictions are described herein as the
``voting limitations.''
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    \52\ See proposed CHX Holdings Certificate Article FOURTH
(b)(i); and proposed NA Casin Holdings Certificate Article IX,
Section (5).
    \53\ See proposed CHX Holdings Certificate Article FOURTH
(b)(i); and proposed NA Casin Holdings Certificate Article IX,
Section (5).
    \54\ See proposed CHX Holdings Certificate Article FOURTH
(b)(i); and proposed NA Casin Holdings Certificate Article IX,
Section (5).
---------------------------------------------------------------------------

    Relevant to the ownership and voting limitations, the Exchange
represents that there are two sets of Related Persons among the
upstream owners: (1) Castle YAC and NA Casin Group and (2) the five
members of the CHX Holdings management team.\55\ Together, Castle YAC
and NA Casin Group would hold a 40% ownership interest in NA Casin
Holdings.\56\ The five members of the CHX Holdings management team
would collectively hold an 8.32% ownership interest.
---------------------------------------------------------------------------

    \55\ See Amendment No. 2, supra note 22, at 55142. The Exchange
represents that prior to the closing of the Proposed Transaction,
these five members of the CHX Holdings management will enter into a
voting agreement, which will require that, among other things, they
vote as a block; the Exchange asserts that the terms of this voting
agreement would render the members Related Persons. See id. at n.28.
    \56\ See id. As noted above, NA Casin Group would hold a 29%
ownership interest and Castle YAC would hold an 11% ownership
interest. See supra note 30 and accompanying text.
---------------------------------------------------------------------------

    The Exchange also has proposed revisions to the corporate
governance documents of NA Casin Holdings and CHX Holdings to provide
notice requirements with respect to changes in ownership that may
affect the ownership and voting limitations. Specifically, the NA Casin
Holdings Certificate and CHX Holdings Certificate will provide that:
(1) Each Person involved in an acquisition for shares of stock of the
corporation shall provide the corporation with written notice 14 days
prior to the closing date of any acquisition that would result in a
Person having voting rights or beneficial ownership, alone or together
with its Related Persons, of record or beneficially, of five percent or
more of the then outstanding shares of stock of the corporation
entitled to vote on any matter; (2) NA Casin Holdings and CHX Holdings
will be required to provide 10-day advance written notice to the
Commission of any such changes in ownership; (3) any Person that,
either alone or together with its Related Persons, has voting rights or
beneficial ownership of, five percent or more of the outstanding voting
shares of CHX Holdings or NA Casin Holdings (whether by acquisition or
by change in the number of shares outstanding or otherwise), will be
required, immediately upon acquiring knowledge of its ownership, to
give the board of directors of CHX Holdings or NA Casin Holdings, as
applicable, notice of such ownership; (4) any Person that, either alone
or together with its Related Persons, of record or beneficially, has
voting rights or beneficial ownership of five percent or more of NA
Casin Holdings or CHX Holdings must promptly update the corporation if
its ownership stake in or voting power regarding NA Casin Holdings or
CHX Holdings increases or decreases by one

percent or more; \57\ and (5) each Person having voting rights or
beneficial ownership of stock of NA Casin Holdings or CHX Holdings will
be required to provide prompt written notice to the corporation
regarding any changes to its Related Person status with respect to
other Persons that own voting shares of stock of the corporation.\58\
---------------------------------------------------------------------------

    \57\ See proposed NA Casin Holdings Certificate Article IX,
Section (19)(i); proposed CHX Holdings Certificate Article
Fourth(g)(i).
    \58\ See proposed NA Casin Holdings Certificate Article IX,
Section (19)(ii); proposed CHX Holdings Certificate Article
Fourth(g)(ii).
---------------------------------------------------------------------------

    Furthermore, Article VIII of the NA Casin Holdings Certificate sets
forth a supermajority vote requirement for certain corporate
actions.\59\ Specifically, Article VIII, Section (2) provides that
except as otherwise prohibited by applicable law, the affirmative vote
of the holders of at least 85% of the then outstanding NA Casin
Holdings voting shares entitled to be cast on such matter is required
for the following: (1) Any merger or consolidation of NA Casin Holdings
or any subsidiary with any or any other corporation or other entity;
(2) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with
any other corporation or other entity, of all or substantially all of
the assets of NA Casin Holdings or any subsidiary; (3) the issuance or
transfer by NA Casin Holdings or any subsidiary (in one transaction or
a series of transactions) of any securities of NA Casin Holdings or any
subsidiary that would result in any an individual, corporation,
partnership, joint venture, limited liability company, governmental or
regulatory body, unincorporated organization, trust, association or
other entity: (i) Owning a majority of the shares of the common stock
of NA Casin Holdings or (ii) owning a majority of the shares of voting
stock of any subsidiary, unless the owner is NA Casin Holdings or a
subsidiary; (4) the adoption of any plan or proposal for the
liquidation or dissolution of NA Casin Holdings that is not the result
of a transaction contemplated by the prior provisions; (5) any
reclassification of securities (including any reverse stock split),
recapitalization of NA Casin Holdings or any merger or consolidation of
NA Casin Holdings with any of its subsidiaries or any other transaction
which has the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of equity or
convertible securities of NA Casin Holdings or any subsidiary with the
result that the owner or indirect owner of such shares becomes the
holder of a majority of the shares of common stock of NA Casin
Holdings; or (6) any agreement, contract, or other arrangement
providing for any one or more of the previously listed actions.\60\
---------------------------------------------------------------------------

    \59\ See Amendment No. 2, supra note 22, at 55144.
    \60\ See id. Moreover, such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that a
lesser percentage may be permitted, by applicable law. See id.
---------------------------------------------------------------------------

    Additionally, CHX is amending the CHX Holdings Bylaws,\61\ CHX
Bylaws,\62\ and NA Casin Holdings Bylaws,\63\ to adopt provisions in
each respective document to require that each of CHX Holdings, CHX, and
NA Casin Holdings, as applicable, contemporaneously provide the
Commission with any information it provides to any other U.S.
governmental entity or U.S. authority pursuant to any agreement.
---------------------------------------------------------------------------

    \61\ See proposed CHX Holdings Bylaws, Article XIII, Section
13.1.
    \62\ See proposed CHX Bylaws, Article XIII, Section 13.1.
    \63\ See proposed NA Casin Holdings Bylaws, Article 10, Section
10.1.3.
---------------------------------------------------------------------------

    The proposed rule change also includes changes to CHX Holdings' and
the Exchange's certificates of incorporation and bylaws addressing,
among other items, board and committee composition and procedures,
procedures regarding stockholder meetings, consent to U.S. federal
court and Commission jurisdiction, and Commission access to corporate
books and records related to the activities of the Exchange. The
proposed rule change also adopts provisions in the new NA Casin
Holdings Certificate and NA Casin Holdings Bylaws relating to these
matters.

III. Discussion and Commission Findings

    Under Section 19(b)(2)(C) of the Exchange Act, the Commission must
approve the proposed rule change of an SRO if the Commission finds that
the proposed rule change is consistent with the requirements of the
Exchange Act and the applicable rules and regulations thereunder; if it
does not make such a finding, the Commission must disapprove the
proposed rule change.\64\ Additionally, under Rule 700(b)(3) of the
Commission's Rules of Practice, the ``burden to demonstrate that a
proposed rule change is consistent with the Exchange Act and the rules
and regulations issued thereunder . . . is on the self-regulatory
organization that proposed the rule change.'' \65\ The description of a
proposed rule change, its purpose and operation, its effect, and a
legal analysis of its consistency with applicable requirements must all
be sufficiently detailed and specific to support an affirmative
Commission finding.\66\ Any failure of a self-regulatory organization
to provide the information elicited by Form 19b-4 may result in the
Commission not having a sufficient basis to make an affirmative finding
that a proposed rule change is consistent with the Exchange Act and the
rules and regulations issued thereunder that are applicable to the
self-regulatory organization.\67\
---------------------------------------------------------------------------

    \64\ See 15 U.S.C. 78s(b)(2)(C)(i).
    \65\ 17 CFR 201.700(b)(3).
    \66\ Id.
    \67\ Id.
---------------------------------------------------------------------------

    Section 6(b)(1) of the Exchange Act requires a national securities
exchange to be so organized and have the capacity to be able to carry
out the purposes of the Exchange Act and to comply, and enforce
compliance by its members, with the provisions of the Exchange Act and
its own rules.\68\ This encompasses not only a requirement that an
exchange have the capacity to perform its functions as a self-
regulatory organization, but also that it is so organized as to allow
for sufficient Commission oversight.\69\ Section 6(b)(5) of the
Exchange Act requires that the rules of a national securities exchange
be designed, in general, to protect investors and the public
interest.\70\
---------------------------------------------------------------------------

    \68\ 15 U.S.C. 78f(b)(1).
    \69\ Id.
    \70\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In reviewing the proposed rule change, the Commission has analyzed
information provided by the Exchange, both in its public filings and
subject to confidential treatment requests, as well as information
derived from a recent staff examination of the Exchange.\71\ Based on
the information before the Commission, for each of the reasons
discussed below (whether viewed independently or in combination), we
are unable to find that the Exchange has met its burden to show that
the proposed rule change is consistent with the Exchange Act and the
applicable

rules and regulations thereunder. Accordingly, we disapprove the
proposed rule change.\72\
---------------------------------------------------------------------------

    \71\ The Commission has also carefully considered the issues
raised by commenters in its analysis of the information before it,
and a more detailed description of the comments received, as well as
the Exchange's responses, is included in the Appendix. As noted in
the OIP (see OIP, supra note 8, at 6671), questions have been raised
about the identity and veracity of a commenter. See GIJN Letter,
supra note 9; see also CHX Response Letter 2 regarding the submitter
of the Ciccarelli Letter, supra note 10. Additionally, four comment
letters have been submitted anonymously. See Anonymous Letter 1,
supra note 9; Anonymous Letters 2 & 3, supra note 20; Anonymous
Letter 4, supra note 23. Our analysis and conclusions, however, do
not depend on the identity or affiliation of the author of the
Ciccarelli Letter or the veracity of the assertions in such letter,
or the identity of any particular commenter more generally. Rather,
the Commission has considered the substance of the concerns raised
by commenters in light of the information before it.
    \72\ In disapproving the proposed rule change, as modified by
Amendments No. 1 and No. 2, the Commission has considered the
proposed rule change's impact on efficiency, competition, and
capital formation, see 15 U.S.C. 78c(f), and the points raised by
the Exchange with regard to this consideration. The Exchange asserts
that the Proposed Transaction would: (1) Result in substantial
capital investment into the Exchange, which will better enable the
Exchange to compete within the highly competitive U.S. securities
market and better enable the Exchange to further the objectives of
the Exchange Act (see Notice, supra note 6, at 89559); (2) enhance
competition among the equity securities markets and provide new
trading and capital formation opportunities for market participants
and the investing public (see Notice, supra note 6, at 89558-59);
and (3) enhance cooperation between market participants from the two
largest economies in the world, encourage additional international
trading and listings in the U.S., and enhance the ability of CHX to
continue to provide innovative trading functionalities and to offer
new capital formation opportunities for emerging growth companies
(see CHX Response Letter 3, supra note 10, at 2-3). The Commission
has considered the Exchange's assertions and the discussion of these
issues in the comments. See also Appendix, infra note 142. We note
that the basis of the Exchange's assertion that approving the
Proposed Transaction would encourage additional international
trading and listings is unclear and the Exchange has not provided
any quantitative analysis to support this assertion. But even if the
proposed rule change has the potential to promote efficiency,
competition and/or capital formation, for the reasons discussed
below, the Commission must disapprove the proposed rule change in
light of its inability, on the current record, to find that it is
consistent with the Exchange Act.
---------------------------------------------------------------------------

A. Procedural Matters

    Section 19(b)(2)(D) of the Exchange Act requires the Commission to
``issue an order'' approving or disapproving a proposed rule change
within 240 days.\73\ The Delegated Order was issued within that time
period.\74\ We disagree with the Exchange's assertions that: (1) The
stay of that order pending Commission review ``nullified'' its
effectiveness, and (2) the approval of the Exchange's original proposed
rule--since superseded by the Exchange's amended filing--remains in
effect.
---------------------------------------------------------------------------

    \73\ See 15 U.S.C. 78s(b)(2)(D).
    \74\ See supra note 15.
---------------------------------------------------------------------------

    First, nothing about a stay vitiates the issuance of the underlying
order. Moreover, at the time Congress enacted the time restrictions in
Section 19(b)(2)(D) of the Exchange Act, it was known that the
Commission could delegate authority to approve SRO rule filings
pursuant to Exchange Act Section 4A, and that such delegated actions
could be reviewed by the Commission, either at the request of a person
aggrieved or on the Commission's own initiative.\75\ To construe
Section 19(b)(2)(D) as requiring Commission review of an order by
delegated authority to be completed within 240 days would undermine
both the specific deadlines set forth in the statute and the
Commission's ability to delegate functions. It would also leave the
Commission insufficient time to engage in the independent, thoughtful
analysis required by both the Exchange Act and the Administrative
Procedure Act in cases in which either the Commission orders, or an
aggrieved party seeks, review.
---------------------------------------------------------------------------

    \75\ See 15 U.S.C. 78d-1 (enacted in 1987).
---------------------------------------------------------------------------

    Nor is such a construction necessary to fulfill Congress's purpose
in enacting the statutory timelines. Congress intended to
``streamline'' the rule filing process \76\ and to encourage the
Commission ``to employ a more transparent and rapid process for
consideration of rule changes.'' \77\ This purpose has been achieved.
With rare exception, rule filings are determined, by delegated
authority or otherwise, within 240 days.\78\ Only a few delegated
orders have been subject to Commission review.\79\
---------------------------------------------------------------------------

    \76\ H.R. Rep. No. 111-517, at 727 (2010) (Conf. Rep.).
    \77\ S. Rep. No. 111-176, at 106 (2010).
    \78\ During fiscal year 2017, 302 rule filings were either
approved or disapproved pursuant to Section 19(b)(2). All of these
were acted on, by delegated authority or otherwise, within the
statutory time frame.
    \79\ Of the 302 rule filings that were either approved or
disapproved in fiscal year 2017, four were brought before the
Commission for review. Three of those were brought before the
Commission on its own initiative, while one was subject to petitions
for review filed by aggrieved persons.
---------------------------------------------------------------------------

    Finally, the proposed rule change now before the Commission differs
from that addressed in the Delegated Order because the Exchange itself
filed a material amendment to its original proposal after the
Commission review of the delegated authority action began. The
practical implications of the Exchange's assertion that the original
proposed rule is in effect--either by operation of law due to a failure
to effectively meet the statutory time restrictions or because the
delegated order approving the original proposed rules governs--are
unclear. The transaction contemplated by the Exchange's original
proposal was never consummated, and the revised proposal currently
before the Commission contemplates a materially different transaction.
Indeed, the actions of the Exchange make it clear that there is no
substance to this argument. The Exchange itself opted to amend
materially its prior proposal rather than submitting a new proposed
rule change to alter the proposed rules it now argues had already been
approved.\80\
---------------------------------------------------------------------------

    \80\ The Exchange also argues that the length of review is
inconsistent with Rule 103(a) of the Commission's Rules of Practice
and is inconsistent with Section 3(f) of the Exchange Act. Rule
103(a) provides that the Rules of Practice ``shall be construed and
administered to secure the just, speedy, and inexpensive
determination of every proceeding.'' We do not believe that the
Commission's review violates this general principle in light of the
material amendment made by the Exchange to the proposed rule change
during the pendency of Commission review, the substantial comments
received on the proposed rule change and amendments thereto, and, as
discussed below, the fact that questions about the compliance of the
proposed ownership structure with the Exchange's ownership voting
limitations and the ability of the Exchange and the Commission to
exercise sufficient oversight in the future remain outstanding.
Moreover, the Exchange misconstrues Section 3(f), which does not
focus on the efficiency of the Commission review process. Instead,
it focuses on whether the proposed rule promotes efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f) (``Whenever
pursuant to this title the Commission is engaged in . . . the review
of a rule of a self-regulatory organization, and is required to
consider or determine whether an action is necessary or appropriate
in the public interest, the Commission shall also consider . . .
whether the action will promote efficiency, competition, and capital
formation.'') (emphasis added).
---------------------------------------------------------------------------

B. Discussion of Substantive Findings

1. The Proposed Transaction's Compliance With the Ownership and Voting
Limitations
    As discussed above, in order to minimize the potential for persons
who have ownership or voting interests in a national securities
exchange to direct its operation so as to cause the exchange to neglect
or otherwise fail to fulfill its obligations under the Exchange Act,
the rules of such exchanges include ownership and voting limitations,
as well as mechanisms to monitor for compliance with those limits.\81\
Here, the Exchange's proposed ownership and voting limitations--which
would govern the proposed upstream owners--are contained in the NA
Casin Holdings Certificate.\82\ And proposed changes to the corporate
governance documents and rules of CHX Holdings provide for ongoing
information collection and monitoring to ensure future compliance with
these limitations, pursuant to Section 6(b)(1) of the Exchange Act.
---------------------------------------------------------------------------

    \81\ See supra note 5 and accompanying text.
    \82\ See proposed NA Casin Holdings Certificate Article IX,
Sections (5) (prohibiting any person, either alone or with its
Related Persons from voting or causing the voting of shares of stock
of the NA Casin Holdings representing in the aggregate more than 20%
of the then outstanding votes entitled to be cast on any matter) and
(9) (prohibiting any person, either alone or with its Related
Persons, from beneficially owning shares of stock of NA Casin
Holdings representing in the aggregate more than 40% of the then
outstanding votes entitled to be cast on any matter). As explained
supra note 39, those portions of NA Casin Holdings' certificate of
incorporation and bylaws that are stated policies, practices, or
interpretations of the Exchange are rules of the Exchange.
---------------------------------------------------------------------------

    In its original filing, the Exchange represented that the Proposed
Transaction complied with these

ownership and voting limitations, stating that the only Related Persons
among the proposed upstream owners were Castle YAC and NA Casin Group,
which would collectively hold a 39% interest in NA Casin Holdings.
Commenters, however, asserted that NA Casin Group had undisclosed
connections, financial and otherwise, to other proposed upstream owners
such that it could exercise undue influence over the Exchange.\83\ In
an effort to clarify the relationships among the proposed investors in
the consortium and to verify the source of funds used for the Proposed
Transaction by the various entities involved--including whether NA
Casin Group or related entities were providing, directly or indirectly,
undisclosed funding for other proposed upstream owners' participation
in the Proposed Transaction--Commission staff reviewed information
derived from an ongoing examination of CHX and, beginning in July of
2017, requested additional documents and information from CHX.
---------------------------------------------------------------------------

    \83\ See Appendix, infra notes 112-117 and accompanying text.
---------------------------------------------------------------------------

    CHX responded with documents and information, accompanied by a
request for confidential treatment, that gave rise to additional
questions. In a series of follow-up requests for information pertaining
to the proposed upstream owners, Commission staff continued to seek
additional information from CHX.\84\ While CHX provided documents and
information in response to the staff's successive requests, the
information made available to the Commission was insufficient to verify
the ultimate source of the funds certain of the proposed upstream
owners were using to fund their part of the transaction. It also raised
questions about potential undisclosed connections between purportedly
unrelated members of the investor consortium.
---------------------------------------------------------------------------

    \84\ The staff orally requested information from CHX on July 27,
2017, and August 4, 2017, and provided CHX with a written document
request on September 18, 2017.
---------------------------------------------------------------------------

    For example, the information provided, as well as information
derived from the Commission staff's own due diligence, indicated
potential connections between Shengju Lu, his son Jay Lu (who controls
Castle YAC), or Chongqing Casin (the entity Shengju Lu controls) on one
hand and the funds used by one of the members of the original investor
consortium, Xian Tong, on the other hand. It appeared from Commission
staff research and a review of certain bank records and supporting
documents provided by the Exchange that Xian Tong received funding from
an individual and entities that may have familial and financial
connections to Shengju Lu or Jay Lu (neither of whom, according to
representations submitted by the Exchange, was a Related Person to Xian
Tong).
    As another example, the funds used by Chongqing Longshang and
Chongqing Jintian to fund their respective shares of the Proposed
Transaction were purportedly derived from payments owed to them under
pre-existing business contracts. But the amount of each of those
payments (which approximated the amount of their respective levels of
investment in the Proposed Transaction), and the timing of their
receipt of those payments, raised questions about whether they were, in
fact, bona fide payments under those business contracts.
    Shortly after Commission staff requested additional documents and
information in an attempt to resolve questions about the source of
funds used by these three entities and whether there were, in fact,
undisclosed connections between those funds and other proposed
investors, Chongqing Jintian, Chongqing Longshang, and Xian Tong
withdrew from the Proposed Transaction.\85\ CHX then stated that it was
unable to provide certain documents and information the Commission
staff requested regarding those proposed owners,\86\ leaving various
questions unanswered.
---------------------------------------------------------------------------

    \85\ Commenters and the Exchange disagreed regarding the reason
for these investors' withdrawal. Compare, e.g., Appendix, infra
notes 244-247 and accompanying text with notes 278-282 and
accompanying text.
    \86\ While NA Casin Holdings and the Exchange contend that these
investors provided all of the information requested by staff, this
is not borne out by the confidential record before the Commission.
See NA Casin Holdings Letter 2, supra note 20, at 2; and CHX
Response Letter 7, supra note 24, at 2.
---------------------------------------------------------------------------

    The significance of these unanswered questions to the Commission's
review did not disappear with the withdrawal of the former proposed
upstream owners. Although Xian Tong, Chongqing Longshang, and Chongqing
Jintian are no longer parties to the Proposed Transaction, as described
in Amendment No. 2, Shengju Lu and Chongqing Casin remain central to
the Proposed Transaction. Together with Jay Lu's Castle YAC, they would
control the largest block (40%) of the outstanding shares in NA Casin
Holdings following consummation of the Proposed Transaction. If, in
fact, Shengju Lu or Chongqing Casin had undisclosed relationships with,
or provided undisclosed funding directly or indirectly to, the
withdrawn investors, the representations made in connection with the
initial rule filing and Amendment No. 1 would have been inaccurate.
That potential (and unresolved) inaccuracy, in turn, would raise
questions about the accuracy of the representations made regarding the
current structure of the Proposed Transaction and its compliance with
the ownership and voting limitations.\87\ Thus, regardless of the
reasons for the withdrawal of these three members of the original
investment consortium, their withdrawal and CHX's inability to provide
the information requested by Commission staff prior to that withdrawal
leaves the Commission unable to resolve questions that bear on its
assessment of the current structure of the Proposed Transaction.
---------------------------------------------------------------------------

    \87\ In response to comments raising questions about potential
undisclosed relationships between the original upstream owners, the
Exchange pointed to opinions of counsel provided to the Commission
regarding the proposed upstream owners as well as to the approval of
the Proposed Transaction by the Committee for Foreign Investment in
the United States (``CFIUS''). But the opinions of counsel proffered
by the Exchange expressly relied upon, and assumed the accuracy and
completeness of, certificates, letters and oral and written
statements and representations provided by others, including the
investors themselves. They are therefore insufficient to obviate the
questions raised by the specific facts before us. Similarly, it is
not clear from the record available to us that CFIUS's consideration
of national security concerns included an analysis of the
relationship between the proposed upstream owners in light of the
Exchange's ownership and voting limitations.
---------------------------------------------------------------------------

    These concerns about the possibility of, and the risks posed by,
undisclosed relationships are exacerbated by the terms of the Put
Agreements, which heighten the potential for circumvention of the
ownership limitations.\88\ Under those agreements, Raptor, Saliba, and
Penserra can sell their shares to NA Casin Holdings, or an unspecified
third-party purchaser, after 24 months for a guaranteed return on their
investment. These entities--which would collectively receive 51.68% of
NA Casin Holdings' outstanding shares in the Proposed Transaction--
therefore appear to be taking only minimal economic risk, with the bulk
of the economic risk appearing to be borne by the remaining investors,
primarily Chongqing Casin and its related entities. Said another way,
while their proposed ownership is described as including a substantial
purchase of equity with a put option, in many ways, from an economic
perspective, this portion of the Proposed Transaction resembles a loan
arrangement with an option to convert the loan into equity (which, as
described below, would be acquired at a discounted price vis-[agrave]-
vis the price

paid by other investors in the Proposed Transaction). This raises
concerns, which the Exchange has not allayed, both about the economic
realities of the Proposed Transaction and about whether the ownership
group would as a practical matter be dominated by those entities that
appear to be bearing the bulk of the risk of equity ownership.\89\
---------------------------------------------------------------------------

    \88\ Commenters also raised this concern. See, e.g., Appendix,
infra notes 223-230, and accompanying text.
    \89\ Questions about the economic realities of the Proposed
Transaction, as well as the appearance that certain investors may
have an out-sized influence over the Exchange--in circumvention of
the purpose of the ownership and voting limitations--are compounded
by the pricing structure of the Proposed Transaction, which was
provided to the Commission subject to confidential treatment
requests. For example, investors are paying significantly different
amounts for shares that appear to have the same rights. The proposed
investors who are parties to the Put Agreements are paying
significantly less, reinforcing the appearance that they are taking
less risk in the Proposed Transaction. NA Casin Group and Castle
YAC, in turn, are paying significantly more than the other
investors, on a per share basis. Therefore, the ownership
percentages may not accurately reflect the relative investment
amounts committed or risks undertaken by the various entities. This
raises concerns that the percentage of ownership does not accurately
reflect the investors' relative influence over the Exchange.
---------------------------------------------------------------------------

    The Exchange states that concerns about circumvention of the
ownership and voting limitations are mitigated by the fact that NA
Casin Holdings cannot compel exercise of the puts. But regardless of
who initiates any transactions triggered by the Put Agreements, the
proposed investors who are parties to those agreements are guaranteed a
return on a discounted investment. In other words, the Exchange's
arguments regarding the voluntary nature of the Put Agreements do not
fully take into account or explain the underlying and asymmetric
economic relationship between the investors who have the benefit of
puts and those who do not. The Exchange also asserts that the Put
Agreements are similar to other such agreements that have been approved
by the Commission.\90\ But the economic substance of the prior
agreements the Exchange cites as comparable is materially different
from the substance present here. The Miami International Securities
Exchange, LLC (``MIAX'') agreements do not provide for a guaranteed
return on investors' initial purchase price.\91\ Rather, they allow for
a put option at a fixed percentage of fair market value at the time of
the sale, which may not lead to the receipt of a premium on
investment.\92\ And, while there may be--as the Exchange asserts--
reasonable business purposes for the premium guaranteed by the terms of
the Put Agreements here, neither the Exchange nor the proposed upstream
owners have sufficiently explained what those purposes are.\93\
---------------------------------------------------------------------------

    \90\ See Appendix, infra notes 303-304 and accompanying text.
See also Appendix, infra note 288 and accompanying text.
    \91\ See Appendix, infra note 303 and accompanying text.
    \92\ See id.
    \93\ See Appendix, infra note 304 and accompanying text (stating
only that there are ``legitimate and well-established business
purposes'' for the Put Agreements); NA Casin Holdings Letter 3,
supra note 23, at 3 (stating that the Put Agreements serve as a
``liquidity mechanism'' and ``provide a window of opportunity for
certain investors to exit their investment during a brief window two
years after the closing''); and Saliba Letter 2, supra note 23, at 3
(explaining the Put Agreements but not explaining why they were put
in place).
---------------------------------------------------------------------------

    Commission staff's inability to obtain sufficient documentation to
verify the relationships between, and the source of funds used by, the
original and subsequent proposed upstream owners leaves us unable to
find that the Exchange has met its burden of showing that--upon
consummation of the Proposed Transaction--the Exchange would be
organized in compliance with its own rules and, accordingly, unable to
find that the Exchange has met its burden of showing that the proposed
rule change is consistent with Section 6(b)(1) of the Exchange Act.
2. Monitoring for Future Compliance With the Exchange's Own Rules
    The fact that the Commission staff's extensive, iterative requests
to the Exchange during the review process resulted in an insufficient
basis for us to find that the Proposed Transaction complies with the
ownership and voting limitations separately calls into question the
Exchange's ability to ensure ongoing compliance with those limitations.
If approved, the proposed rule change would require extensive
information gathering and monitoring in order to ensure continuing
compliance with the ownership and voting limitations. For example, the
Exchange would be required to monitor compliance with:
     Voting limits on a person (individually or with its
Related Persons) subject to any statutory disqualification;
     a requirement that CHX Holdings or NA Casin Holdings call
shares held in excess of ownership limits;
     a prohibition on registering shares transferred in
violation of ownership limits;
     procedural requirements to ensure compliance with the
voting limitations; and
     a range of notice requirements relating to various changes
in ownership or Related Person status.\94\
---------------------------------------------------------------------------

    \94\ See supra notes 57-58 and accompanying text.

Similarly, if the Put Agreements are exercised, the Exchange would be
required to ensure that any new investors satisfy the many restrictions
on ownership (including on ownership by Related Persons).
    The inability of the Exchange to obtain documents and information
necessary for it and the Commission to resolve key questions regarding
the funding of, and relationships between, upstream investors--
notwithstanding its strong incentive to do so in light of the pending
Commission review of the proposed rule change--raises significant
doubts about the Exchange's ability to engage in this extensive
monitoring following approval of the Proposed Transaction.\95\ We
therefore find that the Exchange has not provided a sufficient basis
for us to conclude that it would be able to ensure compliance with the
ownership and voting limitations following consummation of the Proposed
Transaction.\96\
---------------------------------------------------------------------------

    \95\ Commenters express similar concerns, asserting that it
would be difficult, if not impossible, for the Exchange and the
Commission to monitor compliance with these rules after approval and
consummation of the Proposed Transaction. See, e.g., Appendix, infra
note 152 and accompanying text.
    \96\ The Exchange asserts that its board, which is subject to
independence requirements under the Exchange Act, would approve
future material changes to the Exchange. See Appendix, infra note
163 and accompanying text. Given the Exchange's inability to obtain
information necessary to ascertain whether potential investors
satisfied the proposed ownership limitations, we question whether
the Exchange or its board would be able to monitor for such changes,
much less ensure that any such changes are made only following
approval by the board. The Exchange also notes that the upstream
owners pledge to maintain relevant books and records in the United
States, thus allowing it and the Commission to monitor compliance.
See also CHX Response Letter 6, supra note 24, at 3. In light of the
Exchange's difficulty obtaining necessary information in connection
with the Proposed Transaction and for the additional reasons
described in Subsection 4, below, we are not persuaded that the
potential availability of books and records in the United States
adequately addresses the concerns described in this section.
---------------------------------------------------------------------------

    As a result, the Commission is unable to find on the current record
that the Exchange has met its burden \97\ of showing that the proposed
rule change is consistent with the requirement under Section 6(b)(1)
that the Exchange be so organized and have the capacity to comply with
its own rules.
---------------------------------------------------------------------------

    \97\ See supra notes 65-67 and accompanying text.
---------------------------------------------------------------------------

    We are also not moved by the Exchange's suggestion that we should
be comfortable with the proposed ownership arrangements, including the
puts and the discount, and nonetheless approve the proposed rule change
because we have broad oversight authority, will receive notice of the
transfer of shares, and can take recourse to mitigate non-compliance
with the

ownership and voting limitations in the future through suspending,
censuring, or deregistering CHX as an SRO pursuant to Section 19(h)(1)
of the Exchange Act.\98\ In other words, the Exchange is arguing that
we should not be concerned about the risk of subsequent transfers that
are inconsistent with the Exchange Act, or an inability on its part to
monitor for such transactions, because we have the authority to take
action to prevent any such transfers in the future. But Section
19(b)(2)(C) of the Exchange Act requires disapproval of a proposed rule
change in the absence of an affirmative finding by the Commission that
the rule change is consistent with the Exchange Act and rules and
regulations thereunder. This includes a finding of consistency with
Section 6(b)(1) of the Exchange Act. Our ability to seek recourse for
future violations (assuming they are reported to us or we are otherwise
able to detect them) is not a sufficient basis on which to make this
finding if we are unable to find, at the time we consider the proposed
rule change, that the proposed rules as implemented would meet this
requirement.\99\ As discussed above, we are unable to conclude that the
proposed rules meet the requirement.
---------------------------------------------------------------------------

    \98\ See Appendix, infra note 307 and accompanying text.
    \99\ Similarly, the Exchange asserts that its board, which is
subject to independence requirements under the Exchange Act, would
approve future material changes to the Exchange. See Appendix, infra
note 163 and accompanying text. But in light of the particular
questions raised in our review of the Proposed Transaction, we do
not believe a general assurance that we can rely on future board
processes is sufficient to resolve these concerns.
---------------------------------------------------------------------------

3. The Supermajority Approval Requirement
    The Commission is also unable to find that the provision in the NA
Casin Holdings Certificate requiring supermajority approval for certain
transactions is consistent with Section 6(b)(1) of the Exchange Act. As
discussed above, the NA Casin Holdings Certificate would require
approval by the holders of 85% of the shares of the company's common
stock to undertake certain corporate transactions related to NA Casin
Holdings or any of its subsidiaries, including CHX Holdings and the
Exchange.\100\ In effect, this provision would allow each stockholder
that holds 15% or more of the voting stock of NA Casin Holdings to veto
certain transactions, including those designed to raise capital to fund
the regulatory operations of the Exchange.\101\ Based on its terms,
such a veto appears contrary to the goal underlying voting limitations:
Preventing a single stockholder from exercising undue influence over a
national securities exchange or interfering with its SRO obligations.
And there is nothing in the record that otherwise explains why this
provision does not undermine that regulatory goal. Moreover, the
introduction of the supermajority restriction after the withdrawal of
three of the original proposed investors, and the revisions to the
pricing structure of the Proposed Transaction, reinforces the concerns
discussed above regarding whether certain investors could in effect
dominate the ownership group.\102\ Therefore, based on the current
record, the Commission is unable to find that the proposed rule change
is consistent with Section 6(b)(1) of the Exchange Act.
---------------------------------------------------------------------------

    \100\ See supra notes 59-60 and accompanying text.
    \101\ The Exchange has acknowledged the importance of raising
additional capital to further capitalize the Exchange so that it may
continue to meet its regulatory obligations. See Notice, supra note
6, at 89549.
    \102\ This requirement also limits the extent to which the
compliance of CHX's board with independence requirements can be seen
as mitigating concerns about undue influence by certain
stockholders, as the Exchange contends.
---------------------------------------------------------------------------

4. Ability To Conduct Sufficient Oversight
    Finally, the Exchange's inability to obtain sufficient information
to ensure compliance with the ownership and voting limitations during
the rule filing process leaves us unable to find that the proposed
transaction satisfies Section 6(b)(1)'s requirement that an exchange
have the capacity to carry out the purposes of the Exchange Act, which
includes allowing for sufficient Commission oversight.
    Congress has charged the Commission ``with supervising the exercise
of . . . self-regulatory power in order to [ensure] that it is used
effectively to fulfill the responsibilities assigned to the self-
regulatory agencies[.]'' \103\ Access to books and records plays an
integral role in the Commission's exercise of such oversight. To
facilitate that access, Exchange Act Rule 17a-1(c) requires every
national securities exchange, ``upon request of any representative of
the Commission, [to] promptly furnish to the possession of such
representative copies of any documents required to be kept and
preserved by it[.]'' \104\
---------------------------------------------------------------------------

    \103\ S. Rep. No. 94-75, at 23 (1975).
    \104\ 17 CFR 240.17a-1; see also 15 U.S.C. 78q(b)(1).
---------------------------------------------------------------------------

    The Exchange asserts that it will be able to ensure that the
Commission has access to such books and records, notwithstanding the
significant role played by foreign investors in the Proposed
Transaction. In particular, the Exchange notes that the remaining
foreign upstream owner has submitted to United States jurisdiction and
that this owner pledges to maintain relevant books and records in the
United States. But we are unable to conclude that these assurances are
sufficient to support a finding that the proposed rule change is
consistent with the requirements of the Exchange Act, including the
provisions of Section 17(b)(1) and Exchange Act Rule 17a-1.
    Because under the terms of the Proposed Transaction the most
significant stockholder of NA Casin Holdings would be wholly owned by a
foreign entity, material portions of the relevant records may not be
under the Exchange's control. As a result, the judgment about which of
those books and records are sufficiently related to the activities of
the Exchange that they must be maintained in the United States would
rest in the first instance with the foreign indirect upstream
owner.\105\ Indeed, the Exchange was unable to obtain necessary
information about sources of funds for, and relationships between,
certain investors in the Proposed Transaction, which further supports
our conclusion that the Exchange has not demonstrated that it will be
able to identify or access books and records that may relate to
ownership of the Exchange or to its activities, much less to ensure
that such books and records are in fact kept in the United States.
---------------------------------------------------------------------------

    \105\ The Commission periodically encounters difficulties in
arranging for the on-site review of, or production of, books and
records held by foreign entities due to a variety of reasons,
including privacy and blocking statutes and difficulties in
obtaining assistance from foreign authorities in connection with
inspections and examinations. Chinese entities, even those seeking
to be directly regulated by the Commission, have presented
significant challenges in connection with ensuring compliance with
these requirements. See, e.g., Matter of Dagong Global Credit Rating
Co., Ltd., Rel. No. 34-62968 (September 22, 2010).
---------------------------------------------------------------------------

    This concern is particularly significant in our analysis because
the nature of the reviews that we and the Exchange must conduct--
including monitoring compliance with the ownership and voting
limitations and compliance with Exchange Act requirements more
broadly--requires prompt access to documents. Without the assurance of
such access, neither the Commission nor the Exchange will be able to
reliably assess compliance with the requirements in the proposed
corporate documents, to look behind the attestations made by
stockholders, or to monitor compliance with the ownership and voting
limitations more broadly.

    We have approved exchange rules that may, at least theoretically,
raise similar questions about access to books and records.\106\ We also
recognize that some exchange rules do not provide for the maintenance
of such books and records in the United States.\107\ The Proposed
Transaction, however, raises particular concerns not present in these
other transactions approved by the Commission. Unlike approved rule
changes for other exchanges, the proposed rule change here does not
include specific provisions to facilitate and incentivize non-U.S.
exchange owners to provide the Commission access to books and
records.\108\
---------------------------------------------------------------------------

    \106\ See, e.g., Exchange Act Release No. 66871 (April 27,
2012), 77 FR 26323 (May 3, 2012) (approving the application of BOX
Options Exchange, which had Canadian upstream ownership, for
registration as a national securities exchange); NYSE Euronext
Approval Order, supra note 5 (approving proposed rule changes
designed to effect the combination of the NYSE Group, Inc. and the
Dutch company Euronext); 56955 (December 13, 2007), 72 FR 71979,
71982-84 (December 19, 2007) (SR-ISE-2007-101) (approving a proposed
rule change designed to effect a transaction in which ISE became a
wholly owned subsidiary of Eurex Frankfurt AG, which has Swiss and
German upstream ownership) (``ISE Approval Order''); and EDGX and
EDGA Registrations, supra note 5 (approving the applications of EDGX
Exchange, Inc. and EDGA Exchange, Inc., which were partially,
indirectly owned by ISE, for registration as national securities
exchanges).
    \107\ See, e.g., Exchange Act Release No. 66871 (April 27,
2012), 77 FR 26323 (May 3, 2012); NYSE Euronext Approval Order,
supra note 5; ISE Approval Order, supra note 106; and EDGX and EDGA
Registrations, supra note 5.
    \108\ See, e.g., ISE Approval Order, supra note 106, at 71983-84
(describing a procedure developed between the Commission and the
Swiss Federal Banking Commission to facilitate access to books and
records and noting that the failure of a non-U.S. upstream owner to
adhere to its commitment to provide access to books and records
would trigger a call option that would cause the non-U.S. upstream
owners to lose control of the exchange); EDGX and EDGA
Registrations, supra note 5, at 13153 (noting that the safeguards
described in the ISE Order would apply equally to books and records
related to EDGX and EDGA).
---------------------------------------------------------------------------

    Because we cannot conclude, on the current record, that such access
will be assured or that the Exchange will be able to satisfy Rule 17a-
1(c), we are unable to find that the proposed rule change is consistent
with Section 6(b)(1)'s requirement that the Exchange be so organized
and have the capacity to comply with the Exchange Act, and to perform
its functions as a self-regulatory organization, which includes
allowing for sufficient Commission oversight.
    Separately, we note that Section 6(b)(5) of the Exchange Act
requires that the rules of a national securities exchange be designed,
in general, to protect investors and the public interest. Here, the
proposed rules are designed to effect the Proposed Transaction as
currently structured and, if approved, the amended rules would be
implemented through consummation of the Proposed Transaction. In light
of the concerns discussed above regarding the effect of the Proposed
Transaction on the ability of the Exchange and the Commission to ensure
regulatory compliance now and in the future, as well as concerns raised
by the confidential information, we cannot determine that the rules, as
proposed, meet this requirement. Congress has stressed the importance
of Commission oversight to ensure that such self-regulatory authority
``is not used in a manner inimical to the public interest or unfair to
private interests.'' \109\ Given the uncertainty about our access to
sufficient information to fulfill this role, the Commission is
currently unable to find that the proposed rule change is designed to
protect investors and the public interest as required by Section
6(b)(5).
---------------------------------------------------------------------------

    \109\ S. Rep. No. 94-75, at 23 (1975).
---------------------------------------------------------------------------

* * * * *
    A number of other issues have been raised by commenters in arguing
that the proposed rule change should be disapproved, including
questions about the involvement of the Chinese government or the impact
of Chinese foreign investment in an SRO or in U.S. markets more
generally. On the record before us, for the independently sufficient
reasons discussed in more detail above, we have concluded that the
Exchange has not met its burden to show that approval of the proposed
rule change is appropriate. Accordingly, it is not necessary for us to
consider either the relevance of such foreign investment concerns to
our statutory review of this proposed rule change or the merits of the
concerns themselves.

IV. Conclusion

    For the reasons set forth above, the Commission does not find,
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed
rule change, as modified by Amendments No. 1 and No. 2, is consistent
with the requirements of the Exchange Act and the rules and regulations
thereunder applicable to a national securities exchange, and in
particular, with Sections 6(b)(1) and 6(b)(5) of the Exchange Act.
    It is therefore ordered, pursuant to Rule 431 of the Commission's
Rules of Practice, that the earlier action taken by delegated
authority, Exchange Act Release No. 81366, (August 8, 2017), 82 FR
38734 (August 15, 2017), is set aside and, pursuant to Section 19(b)(2)
of the Exchange Act, that the proposed rule change (SR-CHX-2016-20), as
modified by Amendments No. 1 and No. 2, be, and hereby is, disapproved.

    By the Commission.
Brent J. Fields,
Secretary.

Appendix: Summary of Comments and the Exchange's Response

    In total, the Commission received 90 comment letters on the
proposal and 8 response letters from the Exchange.\110\ Sixty-nine
of these comments and five of these responses were submitted prior
to the Exchange filing Amendment No. 2. Twenty-one of these comments
were submitted in response to the Commission noticing Amendment No.
2, and the Exchange submitted three rebuttals in response to those
comments.
---------------------------------------------------------------------------

    \110\ See supra notes 9, 10, 20, 23, and 24.
---------------------------------------------------------------------------

A. Summary of Comments and Exchange's Response Prior to the Filing of
Amendment No. 2

    As explained above, in Amendment No. 2, the Exchange noticed,
among other items, a change in the proposed capital structure for
the upstream owners.\111\ In the comment letters that were received
prior to the filing of Amendment No. 2, several commenters expressed
concern about the original proposed capital structure of CHX as it
related to the ownership and voting limitations. Some of these
commenters questioned the identities of the proposed upstream owners
and the validity of the Exchange's representation that there were no
Related Persons among the proposed upstream owners other than Castle
YAC and NA Casin Group.\112\ Several commenters also questioned the
Exchange's representations regarding the backgrounds and identities
of the upstream owners.\113\ In addition, commenters asserted that,
contrary to the Exchange's representations, several of those

proposed upstream owners may be affiliated.\114\ Some of these
commenters stated that, after the closing of the Proposed
Transaction, approximately 99% of the voting stock in CHX would be
controlled by what the commenters believe to be Chinese entities or
affiliated shell nominees.\115\ Several of these commenters stated
that they believe that the ownership post consummation of the
Proposed Transaction would deviate from the 40% ownership
limitation.\116\
---------------------------------------------------------------------------

    \111\ See supra note 21.
    \112\ See Ciccarelli Letter, supra note 9; Ferris Letter 1,
supra note 9; Ferris Letter 2, supra note 9; Brennan Letter, supra
note 9; Mayer Letter, supra note 9; Bass Letter, supra note 9, at 2-
4; and Strotz Letter, supra note 20. Another commenter asserted:
``[m]urky Chinese ownership laws, poor property ownership rights and
deficient IP protection rules'' make it ``unclear who would actually
own CHX under Chinese law.'' See Park Letter, supra note 9, at 4.
    \113\ See Ciccarelli Letter, supra note 9, at 2-9; Mayer Letter,
supra note 9; Brennan Letter, supra note 9, at 1-2; Ferris Letter 1,
supra note 9, at 2-3; Ferris Letter 2, supra note 9, at 1-3; Park
Letter, supra note 9, at 2; Bass Letter, supra note 9, at 2-4;
Milton Letter, supra note 20; Simpson Letter, supra note 20, at 2-3;
Carney Letter, supra note 20, at 1-2; Michael Johnson Letter 1,
supra note 20, at 4-5; Williams Letter, supra note 20; Strotz
Letter, supra note 20; Watson Letter, supra note 20, at 3; Michael
Johnson Letter 3, supra note 20, at 1-3; and Stephen Johnson Letter,
supra note 20. In addition, one commenter stated that the
Information Statement CHX sent to its stockholders in connection
with the Proposed Transaction represented that two entities, Beijing
Guoli Energy Investment Co. Ltd. and Beijing Casin Investment
Holding Co. Ltd, which were not disclosed in the proposed rule
change, would be involved in the Proposed Transaction. See Anonymous
Letter 2, supra note 20, at 1.
    \114\ See Ciccarelli Letter, supra note 9, at 2-3; Ferris Letter
1, supra note 9, at 2-3; Bass Letter, supra note 9, at 2; Ferris
Letter 2, supra note 9, at 4; and Carney Letter, supra note 20, at
1. See also Mayer Letter, supra note 9 (asserting that certain of
the proposed upstream owners are shell companies put in place by
Chongqing Casin to avoid ``explicit violation'' of the 40% ownership
limitation, and should be examined for independence from Chongqing
Casin).
    \115\ See Ciccarelli Letter, supra note 9, at 1-2. See also
Ferris Letter 2, supra note 9, at 4; and Bass Letter, supra note 9,
at 3.
    \116\ See Brennan Letter, supra note 9, at 1; Ciccarelli Letter,
supra note 9, at 2; Ferris Letter 1, supra note 9, at 1; Bass
Letter, supra note 9, at 1; Ferris Letter 2, supra note 9, at 4.
---------------------------------------------------------------------------

    Several commenters also opined that the proposed upstream
ownership of CHX was opaque.\117\ Some of these commenters stated
their views that approval of the proposal would have promoted the
improper consolidation of ownership and coordinate voting control
over CHX, and also materially harm the public trust in the
independent and objective operation of U.S. capital markets.\118\
These commenters expressed a belief that the Proposed Transaction
would have concentrated ownership and voting power under Chongqing
Casin and its ``coordinate'' investment entities in China.\119\ And
commenters expressed concern that the Commission would have been
unable to monitor the ownership structure of Chongqing Casin after
approval because they believed that the Commission would have little
or no insight and transparency into what the commenters stated are
government-dominated Chinese markets.\120\ The commenters expressed
a belief that this scenario would leave CHX open to undue, improper,
and possibly state-driven influence via coordinated voting control
by its upstream ownership.\121\ Seven commenters also expressed
concern about the source of funding for the Proposed
Transaction.\122\
---------------------------------------------------------------------------

    \117\ See Pittenger Letter 2, supra note 9, at 1; Bass Letter,
supra note 9, at 1-5; Mayer Letter, supra note 9; Ciccarelli Letter,
supra note 9, at 1-4; Ferris Letter 1, supra note 9, at 1-4; Ferris
Letter 2, supra note 9, at 1-5; Simpson Letter, supra note 20, at 2;
Lee Letter, supra note 20; Strotz Letter, supra note 20, at 2;
Anonymous Letter 3, supra note 20, at 1. See also Hill Letter 2,
supra note 9 (stating that ``it is easy to become confused about
exactly who wants to own this exchange'').
    \118\ See Pittenger Letter 2, supra note 9, at 1.
    \119\ See id.
    \120\ See id. See also Anonymous Letter 3, supra note 20, at 1-2
(stating the voting and ownership limitations are ``meaningless''
because there is no ``verifiable mechanism'' to monitor such
limitations).
    \121\ See Pittenger Letter 2, supra note 9, at 1.
    \122\ See Park Letter, supra note 9, at 2-3 (stating that none
of the foreign upstream owners are on the published State
Administration of Foreign Exchange's list of entities that ``have
applied and received approvals for foreign currencies'' and
questioning the legitimacy of the funds being used to pay for the
Proposed Transaction); Ferris Letter 1, supra note 9, at 2; Ferris
Letter 2, supra note 9, at 3; Bass Letter, supra note 9, at 3;
Carney Letter, supra note 20, at 1; Williams Letter, supra note 20;
Strotz Letter, supra note 20, at 2; Watson Letter, supra note 20, at
2. In response, NA Casin Holdings asserted that the investors have
available the necessary funds to close the Proposed Transaction, and
that the Chinese stockholders have obtained necessary approvals from
the State Administration of Foreign Exchange of China required to
transfer funds to NA Casin Holdings. See NA Casin Holdings Letter 2,
supra note 20, at 2.
---------------------------------------------------------------------------

    In addition, one commenter stated that as a result of the
proposed ownership, there would have been ``reputational risks'' for
CHX, and that ``compliance frustrations'' related to the Foreign
Corrupt Practices Act and Anti-Money Laundering rules would have
been at the ``front and center'' in the Commission's oversight of
CHX.\123\ Accordingly, the commenters stated that, given these
actual or potential outcomes, the Proposed Transaction appeared
inconsistent with Sections 6(b)(l) and 6(b)(5) of the Exchange
Act.\124\
---------------------------------------------------------------------------

    \123\ See Park Letter, supra note 9, at 3. See also Ferris
Letter 2, supra note 9, at 2 (stating that concerns over possible
money laundering are not addressed by NA Casin and therefore are
conceded).
    \124\ See Park Letter, supra note 9, at 3-4.
---------------------------------------------------------------------------

    Commenters also expressed concern about the ability of the
Commission to exercise regulatory oversight over the Exchange
following the closing of the Proposed Transaction.\125\ One
commenter questioned whether the Commission could effectively
regulate the Exchange and protect the market from abuses if the
Commission staff did not know, and could not independently confirm,
the backgrounds of what the commenter characterized as ``Chinese
shell companies'' involved in the Proposed Transaction.\126\ Another
commenter argued that for the sake of the public interest, the
Commission should take extreme caution in reviewing the proposed
rule change and reject the Exchange's representations, which the
commenter believed to be misleading.\127\ Two commenters, in support
of the proposed rule change, stated their beliefs that compliance
will be ``strong'' regardless of the upstream owners.\128\
---------------------------------------------------------------------------

    \125\ See Pittenger Letters 1 and 2, supra note 9, at 2;
Ciccarelli Letter, supra note 9, at 1-2; Bass Letter, supra note 9,
at 1; and Ferris Letter 1, supra note 9, at 4.
    \126\ See Brennan Letter, supra note 9, at 1.
    \127\ See Ferris Letter 1, supra note 9, at 4.
    \128\ See John L. Prufeta Letter, supra note 20; and Tara
Prufeta Letter, supra note 20. These commenters also asserted that
the voting control risk is ``mitigated by [NA Casin Group's]
decision to have less voting power.'' See id.
---------------------------------------------------------------------------

    In response to these concerns, the Exchange stated that it did
not misrepresent any facts regarding the Proposed Transaction.\129\
The Exchange reaffirmed the representations that it made in the
Notice that the only Related Persons among the upstream owners were
Castle YAC and NA Casin Group, that there were no other Related
Persons among the original proposed upstream owners, and that none
of the upstream owners directly, or indirectly through one or more
intermediaries, controlled, or was controlled by, or was under
common control with, a governmental entity or subdivision
thereof.\130\ The Exchange asserted that each of these
representations was supported by an opinion of counsel provided by
outside counsel for CHX to the Commission, subject to a confidential
treatment request.\131\ The Exchange, NA Casin Holdings, and one of
the proposed upstream owners also asserted that some of the comment
letters contained false accusations regarding the identity,
ownership, relationships, and business activities of certain
upstream owners.\132\ In addition, the Exchange, NA Casin Holdings,
and several other commenters asserted that the proposed upstream
owners are reputable businesses.\133\ The Exchange also stated that
the author of the Ciccarelli Letter was employing deception and
xenophobia, and was attempting to undermine the Commission's rule
filing process and the integrity of the government. The Exchange
also requested that the Commission consider the Ciccarelli Letter
``absolutely unpersuasive.'' \134\
---------------------------------------------------------------------------

    \129\ See CHX Response Letter 2, supra note 10, at 2, 5-6.
    \130\ See id. at 5. NA Casin Holdings also asserted that there
were no other Related Persons among the investors other than Castle
YAC and NA Casin Group. See NA Casin Holdings Letter 2, supra note
20, at 2.
    \131\ See CHX Response Letter 2, supra note 10, at 5.
    \132\ See CHX Response Letter 3, supra note 10, at 3-5; Saliba
Letter 1, supra note 9, at 2; NA Casin Holdings Letter 1, supra note
9, at 7; NA Casin Holdings Letter 2, supra note 20, at 2.
    \133\ See CHX Response Letter 3, supra note 10, at 3; NA Casin
Holdings Letter 1, supra note 9, at 7; NA Casin Holdings Letter 2,
supra note 20, at 3; Gouroudeva Letter 1, supra note 9; Gouroudeva
Letter 2, supra note 20; John R. Prufeta Letter 1, supra note 9; and
Su Letter, supra note 20; and Xu Letter, supra note 20.
    \134\ See CHX Response Letter 2, supra note 10, at 6.
---------------------------------------------------------------------------

    The Exchange further asserted that it provided detailed
information regarding the upstream owners to CFIUS and that CFIUS
determined that there are no unresolved national security concerns
with respect to the Proposed Transaction.\135\ In response to this
assertion, some of the commenters stated that CFIUS's approval of
the Proposed Transaction has no relevance to the Commission's
determination because CFIUS's review focuses solely on national
security concerns, and does not relate to the ownership and voting
restrictions applicable to exchanges.\136\ The Exchange responded

that, with respect to the financial services sector, CFIUS review
involves an examination of the potential disruptions to U.S. stock
markets or the U.S. financial system as a whole, cybersecurity
vulnerabilities, and the vulnerabilities associated with the fact
that the U.S. business obtains and preserves personal
information.\137\ The Exchange also stated that CFIUS review
includes a full and detailed assessment of the foreign investing
entities, including all of their individual senior executives and
major stockholders, and the extent of any foreign government control
over the investors.\138\ The Exchange asserted that CFIUS conducted
a thorough, deep, and wide-ranging investigation of the Proposed
Transaction and the proposed upstream owners, and that it concluded
that there were no unresolved national security concerns.\139\
---------------------------------------------------------------------------

    \135\ See CHX Response Letter 2, supra note 10, at 5; CHX
Response Letter 3, supra note 10, at 6; and CHX Response Letter 4,
supra note 20, at 3. Other commenters also pointed to the CFIUS
approval in support of the Proposed Transaction. See Richard R.
Taylor Letter, supra note 20; Catherine Jones Letter, supra note 20,
at 1; John R. Prufeta Letter 2, supra note 20; Hultgren Letter,
supra note 20, at 2; NA Casin Holdings Letter 2, supra note 20, at
2-3; and Rauner Letter, supra note 20.
    \136\ See Ferris Letter 1, supra note 9, at 3; Brennan Letter,
supra note 9, at 2; and Bass Letter, supra note 9, at 4-5. See also
Strotz Letter, supra note 20, at 2 (stating that the CFIUS approval
``does not permit Casin and CHX to lie to the SEC''). Another
commenter expressed concern that CFIUS disregarded the concerns of
Congress when it closed its review of the Proposed Transaction. See
Hill Letter 2, supra note 9. In a comment letter submitted after the
filing of Amendment No. 2, this commenter expressed a view that
Congress has also ``recognize[d] flaws, deficiencies and
partisanship of [CFIUS].'' See Hill Letter 3, supra note 23.
    \137\ See CHX Response Letter 3, supra note 10, at 6.
    \138\ See id.
    \139\ See id.
---------------------------------------------------------------------------

    Commenters expressed further concern about whether the Chinese
government could have influence or control over the Exchange and its
upstream owners.\140\ Some of these commenters asserted that one of
the proposed upstream owners has ties to the Chinese
government.\141\ Several commenters also questioned whether the
Chinese government could influence Chongqing Casin, stating that
Chongqing Casin is involved in a number of Chinese market sectors
that require close ties to the state, such as environmental
protection.\142\
---------------------------------------------------------------------------

    \140\ See Pittenger Letter 1, supra note 9, at 1-2; Pittenger
Letter 2, supra note 9, at 1; Bass Letter, supra note 9, at 4; Mayer
Letter, supra note 9; Hill Letter 2, supra note 9; Jones Letter,
supra note 20; Lee Letter, supra note 20; Michael Johnson Letter 1,
supra note 20, at 1; Michael Johnson Letter 2, supra note 20, at 3;
Michael Johnson Letter 3, supra note 20, at 3; Pittenger Letter 3,
supra note 20, at 1; and Anonymous Letter 3, supra note 20, at 2-3.
One commenter also stated that there are ties between Chongqing
Casin and Chinese government officials. See Simpson Letter, supra
note 20, at 1-2. NA Casin Holdings denied that there are such ties,
and asserted that Chongqing Casin is a privately-owned company. See
NA Casin Holdings Letter 2, supra note 20, at 3.
    \141\ See Pittenger Letter 1, supra note 9, at 1-2; Bass Letter,
supra note 9, at 4 (asserting that Chongqing Casin could be 40%
owned and controlled by Chinese government entities and Chinese
government officials); Mayer Letter, supra note 9; Hill Letter 2,
supra note 9 (asserting that the Chinese government may be a
minority stockholder in one of the upstream owners and that the
Chinese government should not be given protections afforded to
SROs); and Simpson Letter, supra note 20, at 2 (asserting that
Chongqing Casin is 40% owned and controlled by Chinese government
officials). In response, NA Casin Holdings asserted that the
allegation that Chongqing Casin is 40% owned and controlled by
Chinese government officials is false, and that 74.36% of Chongqing
Casin is owned by Shengju Lu and the balance is owned by other
persons involved in the management of Chongqing Casin. See NA Casin
Holdings Letter 2, supra note 20, at 4.
    \142\ See Pittenger Letter 1, supra note 9, at 1. See also
Pittenger Letter 2, supra note 9, at 1 (stating that the Chinese
government dominates all sectors of society and consistently fails
to abide by international agreements). Additionally, several
commenters expressed concerns about the risks posed by CHX's plans
to list shares of Chinese companies. See, e.g., Pittenger Letter 1,
supra note 9, at 1; Mayer Letter, supra note 9; Park Letter, supra
note 9; Milton Letter, supra note 20; Anonymous Letter 3, supra note
20, at 2. However, one commenter and the Exchange asserted that the
listing of Chinese companies would be beneficial. See Nobile Letter,
supra note 9; and CHX Response Letter 5, supra note 20, at 2-3. The
Commission notes that the Exchange does not currently list shares of
such companies, and the proposed rule change under consideration
would not modify the Exchange's listing rules. Any future changes to
the Exchange's listing rules would be subject to Commission review
under to Section 19(b)(1) of the Exchange Act and Rule 19b-4
thereunder. In addition, as a practical matter, to restart its
primary listing program, the Exchange would likely seek an amendment
to Rule 146 under the Securities Act of 1933 to obtain ``covered
securities'' status for the stocks it lists.
---------------------------------------------------------------------------

    Commenters also asserted that Chongqing Casin owns an entity
that has large outstanding debts to a Chinese-government controlled
bank, and that Chongqing Casin has been using its stock and the
stock of its subsidiaries to collateralize those loans, which make
Chongqing Casin subject to Chinese government control.\143\ NA Casin
Holdings responded that Chongqing Casin has not used the equity of
CHX or CHX Holdings as collateral for any financing or borrowing in
connection with the Proposed Transaction.\144\
---------------------------------------------------------------------------

    \143\ See Michael Johnson Letter 1, supra note 20; Michael
Johnson Letter 2, supra note 20; Watson Letter supra note 20, at 1;
Michael Johnson Letter 3, supra note 20, at 1-2; and Anonymous
Letter 3, supra note 20, at 2. These and other commenters also
expressed general concerns about the financial status of Casin
Development, an affiliate of Chongqing Casin, and asserted that its
trading has been halted by Chinese regulators. See Watson Letter,
supra note 20, at 1; Williams Letter, supra note 20; and Strotz
Letter, supra note 20, at 1 (asserting that the trading in the stock
has remained halted). NA Casin Holdings responded that Casin
Development has a strong asset base and a healthy business, and that
due to the announcement of a major asset transfer, Casin Development
applied to the Shenzhen Stock Exchange to suspend its share trading.
See NA Casin Holdings Letter 2, supra note 20, at 6.
    \144\ See NA Casin Holdings Letter 2, supra note 20, at 2.
---------------------------------------------------------------------------

    Commenters also stated that Chongqing Casin's financial assets
were originally state-controlled, and that its chairman sits on an
industry council overseen directly by the mayor of the Chongqing
Municipality.\145\ These commenters stated that, in particular,
Chinese ownership or involvement presents risks as Chinese
government-sponsored cyber-attacks have been conducted to devalue
foreign businesses and steal intellectual property and proprietary
data; the commenters asserted that this has cost American companies
billions of dollars annually.\146\ Commenters stated that the
Proposed Transaction may therefore present financial security risks
to investors and the U.S. marketplace.\147\ Some commenters
expressed a belief that the proposal will materially harm the public
trust in the independent and objective operation of U.S. capital
markets.\148\ Another commenter expressed a belief that the proposal
is a threat to Americans' faith in the U.S.'s national financial
market infrastructure.\149\ One commenter also raised concerns that
a bad actor with access to an exchange's data could use information
available through brokerage records and the Consolidated Audit Trail
to engage in spear phishing, blackmail attempts, and other similar
attacks.\150\
---------------------------------------------------------------------------

    \145\ See Pittenger Letter 1, supra note 9, at 1.
    \146\ See id. See also Huskey Letter, supra note 20 (expressing
concern that the Proposed Transaction could allow China a ``sinister
entry point'' into the U.S. financial system). Other commenters
expressed general concern about Chinese involvement in the Proposed
Transaction. See Day Letter, supra note 20; and Sapa Letter, supra
note 20.
    \147\ See Pittenger Letters 1 and 2, supra note 9, at 1; Manchin
Letter, supra note 9, at 1; Anonymous Letter 1, supra note 9; and
Dandolu Letter, supra note 9. See also Watson Letter, supra note 20,
at 3 (asserting that the Proposed Transaction is a cyber security
threat); Monfort Letter, supra note 20 (expressing opposition to the
Proposed Transaction based on national security concerns); and
Anonymous Letter 3, supra note 20, at 1.
    \148\ See Pittenger Letter 2, supra note 9, at 1.
    \149\ See Manchin Letter, supra note 9, at 1.
    \150\ See Anonymous Letter 1, supra note 9.
---------------------------------------------------------------------------

    Another commenter expressed concern that the original proposed
upstream ownership structure would have left CHX and U.S. markets
open to ``undetectable manipulation'' by Chongqing Casin and the
Chinese government.\151\ Several commenters expressed a belief that
it will be impossible for the Commission to fully monitor Chinese
government involvement or manipulation over CHX.\152\ These
commenters further asserted that no mitigation steps can fully
insulate CHX's activities and ensure that the U.S.'s interests are
protected, not only in line with the intent of the Exchange Act, but
also with the U.S.'s broader national security interests.\153\ The
commenters stated that the Chinese government has been unwilling to
compromise and agree to U.S. transparency standards in their markets
and that the Chinese entities involved in the Proposed Transaction
have not yielded themselves to full U.S. jurisdiction or agreed to
make their records available to the Exchange to ensure compliance
with ownership and voting limitations, as the commenters state have
been historically done in international transactions of this
nature.\154\ In addition, a commenter believes that the ownership of
a U.S. exchange could provide enormous new opportunities for Chinese
firms to list on U.S. markets and expose U.S. investors to new and
unknown risks; these commenters advocated that the Proposed
Transaction must be evaluated not only for its present impact, but
its potential impact as well.\155\
---------------------------------------------------------------------------

    \151\ See Mayer Letter, supra note 9.
    \152\ See Pittenger Letter 3, supra note 20, at 1.
    \153\ See id.
    \154\ See id. at 2.
    \155\ See id.
---------------------------------------------------------------------------

    In response, CHX denied the claim that it would be impossible
for the Commission to fully monitor Chinese government

involvement or manipulation over the Exchange.\156\ CHX interpreted
the commenters' statement to be implying that Chinese foreign
investment should never be allowed in the U.S. because it is
inherently risky and impossible to fully monitor and disagreed with
that premise.\157\ CHX reiterated that none of the proposed Chinese
investors are owned or controlled by the Chinese government,\158\
and stated that this fact has been vetted by the Exchange, outside
counsel, and CFIUS.\159\ CHX also emphasized CFIUS's approval in
response to concerns about access to the Consolidated Audit
Trail.\160\ And CHX disagreed with the statement that there are no
mitigation steps that can fully insulate the Exchange's activities
and ensure that the U.S.'s interests are protected.\161\ CHX first
noted that the original capital structure of the Proposed
Transaction would have resulted in the Exchange being majority owned
by U.S. citizens; it also asserted that the proposed ownership
limitation, voting limitation, and cure provisions would ensure that
no stockholder would exercise undue influence over the
Exchange.\162\ CHX also pointed to the fact that members of the CHX
board must meet certain independence requirements and that material
changes to the Exchange must be approved by both the CHX board
subject to such independence requirements and the SEC.\163\ CHX
further stated that, pursuant to the Exchange Act, CHX is subject to
direct and rigorous oversight by the SEC, which CHX stated entails,
among other things, frequent examinations of various aspects of CHX
operations by Commission staff, including security and trading
protocols, as well as Commission approval of certain regulatory,
operational and strategic initiatives prior to implementation by
CHX.\164\
---------------------------------------------------------------------------

    \156\ See CHX Response Letter 5, supra note 20, at 1.
    \157\ See id.
    \158\ CHX Response Letter 1, supra note 10, at 2; CHX Response
Letter 5, supra note 20, at 1.
    \159\ CHX Response Letter 5, supra note 20, at 1-2. But see
supra note 87.
    \160\ CHX Response Letter 1, supra note 10, at 5.
    \161\ See id. at 2.
    \162\ See id.
    \163\ See id.
    \164\ See id.
---------------------------------------------------------------------------

    CHX also disagreed with the commenters' claim that the Chinese
entities involved in the Proposed Transaction had not yielded
themselves to full U.S. jurisdiction or agreed to make their records
available to the Exchange to ensure compliance with ownership and
voting limitations.\165\ CHX noted that the Chinese upstream owners
had agreed to permanently and irrevocably submit to the jurisdiction
of the Commission and the U.S. courts, and had appointed registered
agents in the U.S. for the service of process.\166\ CHX also stated
that the upstream owners agreed to open books and records, as well
as agreeing to keep records related to the Exchange here in the
United States.\167\
---------------------------------------------------------------------------

    \165\ See CHX Response Letter 5, supra note 20, at 3.
    \166\ See id.
    \167\ See id.
---------------------------------------------------------------------------

    CHX next responded to commenters' prediction that Chinese
ownership of a U.S. exchange could provide enormous new
opportunities for Chinese firms to list on U.S. markets and expose
U.S. investors to new and unknown risks.\168\ CHX agreed that the
Proposed Transaction will provide enormous new opportunities for
Chinese firms to list on U.S. markets, and stated that this is why
it viewed the Chinese investors as strategically important to the
Proposed Transaction.\169\ CHX further stated that many firms in
China desire a listing on a foreign exchange, and that the U.S. is
seen as the ``gold standard.'' \170\ CHX stated that it strongly
believes that listing quality Chinese companies in the U.S.,
according to the U.S. listing rules, using U.S. accounting
standards, and under the regulatory supervision of the Commission is
by far the safest way for U.S. investors to get exposure to the
growing Chinese market.\171\
---------------------------------------------------------------------------

    \168\ See id. at 2-3.
    \169\ See id.
    \170\ See id.
    \171\ See id. See also infra note 175.
---------------------------------------------------------------------------

    The Exchange also stated that the Proposed Transaction will
enable it to accelerate implementation of its strategic plan, which
includes implementing a primary listing program focused on capital
formation for emerging growth companies.\172\ The Exchange further
asserted that the Proposed Transaction would help empower it to meet
its strategic goals and enhance its participation in the national
market system.\173\ The Exchange also expressed a belief that by
enabling the Exchange to expand its listing program, the Proposed
Transaction would promote efficiency and capital formation in the
U.S. market.\174\ Furthermore, a number of other commenters
expressed a belief that the Proposed Transaction would benefit the
U.S. capital markets and have positive economic effects.\175\
---------------------------------------------------------------------------

    \172\ See CHX Response Letter 1, supra note 10, at 2; CHX
Response Letter 3, supra note 10, at 2-3.
    \173\ See CHX Response Letter 4, supra note 20, at 5.
    \174\ See id.
    \175\ See Caban Letter, supra note 9 (stating that having an
exchange that would help attract additional foreign investment in
Chicago is an important way to help create well-paying jobs); NA
Casin Holdings Letter 1, supra note 9, at 8 (stating that the
Proposed Transaction will help establish links between the capital
markets of China and the U.S. and explaining how the Proposed
Transaction will attract Chinese investors to buy stocks listed on
CHX and companies in Asia to list their stock on CHX); Seyedin
Letter, supra note 9, at 1 (stating the beliefs that the Proposed
Transaction will make CHX an important bridge between capital
markets in the U.S. and China and that connecting U.S. and Chinese
stock markets would allow the U.S. to benefit further from China's
growth); Nobile Letter, supra note 9 (stating that the Proposed
Transaction will result in some very clear benefits to the global
financial community and that NA Casin Group may seek less well
known, but legitimate foreign entities that would be listed on a
U.S. platform strictly regulated under Commission rules and
regulations); Gouroudeva Letter 1, supra note 9 (stating the belief
that ownership of CHX by a respected Chinese company will greatly
increase direct Chinese investment into the U.S. economy.); John R.
Prufeta Letter 1, supra note 9 (stating the belief that the Proposed
Transaction will provide a unique and exceedingly valuable window to
major cross-border investment between the world's largest
economies); Saliba Letter 1, supra note 9, at 2 (stating that in
order for the U.S. financial markets to remain at the forefront