[Federal Register Volume 84, Number 94 (Wednesday, May 15, 2019)]
[Notices]
[Pages 21841-21853]
[FR Doc No: 2019-10037]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85828; File No. 10-234]

In the Matter of the Application of Long Term Stock Exchange,
Inc.; for Registration as a National Securities Exchange; Findings,
Opinion, and Order of the Commission

May 10, 2019.

I. Introduction and Procedural History

    On November 9, 2018, Long-Term Stock Exchange, Inc. (``LTSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a Form 1 application under the Securities Exchange Act
of 1934 (``Act''), seeking registration as a national securities
exchange under Section 6 of the Act.\1\ In a letter dated December 4,
2018, LTSE consented to an extension of time for up to an additional 90
days from the date of publication of notice of LTSE's Form 1
application.\2\ Notice of the application was published for comment in
the Federal Register on December 6, 2018.\3\ The Commission has
received one comment letter on the application.\4\ On February 26,
2019, LTSE submitted Amendment No. 1 to the application.\5\ On April 3,
2019, LTSE submitted Amendment No. 2 to the application.\6\
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    \1\ 15 U.S.C. 78f.
    \2\ See Letter to Brett Redfearn, Director, Division of Trading
and Markets, Commission, from Eric Ries, dated December 4, 2018.
    \3\ See Securities Exchange Act Release No. 84709 (November 30,
2018), 83 FR 62941 (``Notice'').
    \4\ See Letter to Brent J. Fields, Secretary, Commission, from
Jeffrey P. Mahoney, General Counsel, Council of Institutional
Investors, dated January 22, 2019, available at: https://www.sec.gov/comments/10-234/10234-4844313-177202.pdf (``CII
Letter'').
    \5\ See Letter to Brett Redfearn, Director, Division of Trading
and Markets, Commission, from Annette L. Nazareth, dated February
26, 2019. In Amendment No. 1, LTSE submitted updated portions of its
Form 1, including revised Exhibits A, B, C, D, E, I, J and K.
    \6\ See Letter to Brett Redfearn, Director, Division of Trading
and Markets, Commission, from Annette L. Nazareth, dated April 3,
2019. In Amendment No. 2, LTSE updated portions of its Form 1,
including revised Exhibits A, B, C, D, H, and J.
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    The Commission has reviewed the Exchange's registration
application, as amended, together with the comment letter received, in
order to make a determination whether to grant such registration. For
the reasons set forth below, and based on the representations set forth
in LTSE's Form 1, as amended, this order approves LTSE's Form 1
application, as amended, for registration as a national securities
exchange.

II. Statutory Standards

    Pursuant to Sections 6(b) and 19(a) of the Act,\7\ the Commission
shall by order grant an application for registration as a national
securities exchange if the Commission finds, among other things, that
the proposed exchange is so organized and has the capacity to carry out
the purposes of the Act and can comply, and can enforce compliance by
its members and persons associated with its members, with the
provisions of the Act, the rules and regulations thereunder, and the
rules of the exchange.
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    \7\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively.
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    As discussed in greater detail below, the Commission finds that
LTSE's application, as amended, for exchange registration meets the
requirements of the Act and the rules and regulations thereunder.
Further, the Commission

finds that the proposed rules of LTSE are consistent with Section 6 of
the Act in that, among other things, they are designed to: (1) Assure
fair representation of the exchange's members in the selection of its
directors and administration of its affairs and provide that, among
other things, one or more directors shall be representative of
investors and not be associated with the exchange, or with a broker or
dealer; \8\ (2) prevent fraudulent and manipulative acts and practices,
promote just and equitable principles of trade, foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, and remove impediments to and perfect the mechanisms of
a free and open market and a national market system; \9\ (3) not permit
unfair discrimination between customers, issuers, or dealers; \10\ and
(4) protect investors and the public interest.\11\ The Commission also
finds that the rules of LTSE are consistent with Section 11A of the
Act.\12\ Finally, the Commission finds that LTSE's proposed rules do
not impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.\13\
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    \8\ See U.S.C. 78f(b)(3).
    \9\ See U.S.C. 78f(b)(5).
    \10\ See id.
    \11\ See id.
    \12\ 15 U.S.C. 78k-1.
    \13\ 15 U.S.C. 78f(b)(8).
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III. Discussion

A. Governance of LTSE

    LTSE Group, Inc. (``LTSEG''), a Delaware corporation, will own 100%
of the equity of LTSE and is the entity through which the individual
investors who are ultimate owners of the Exchange will hold their
ownership interests in the Exchange.\14\ LTSEG will be the primary
employer of all LTSE personnel. In addition, the stockholders who
directly own LTSEG also will directly own a separate, affiliated
Delaware-incorporated entity, LTSE Services, Inc. (``LTSE Services''),
a software business currently serving approximately 20,000 users,
mostly early stage companies.\15\ It is contemplated that the Exchange
will maintain a commercial relationship with LTSE Services, seeking to
leverage the company's technological expertise to support the
Exchange's software needs.
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    \14\ See Form 1, Exhibit C. The citations to the Exchange's Form
1 and its Exhibits hereinafter in this Order refer to the Form 1
application and its Exhibits, as amended.
    \15\ As described by the Exchange, LTSE Services provides tools
to companies and investors designed to help founders and their
employees through all stages of a company's life cycle and currently
focuses on creating user-friendly software products for its clients
that drive financial and other solutions that can be specialized or
scaled for broad commercial application, and continues to develop
new products that provide value to companies in different stages of
their life cycles. Id.
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1. LTSE Board of Directors
    The board of directors of LTSE (``Exchange Board'') \16\ will be
its governing body and will possess all of the powers necessary for the
management of its business and affairs, including governance of LTSE as
a self-regulatory organization (``SRO'').\17\ Pursuant to the LTSE
Bylaws:
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    \16\ A Director may not be subject to statutory
disqualification. See First Amended and Restated Bylaws of Long-Term
Stock Exchange, Inc. (``LTSE Bylaws''), Article III, Section 3.2(d).
    \17\ See LTSE Bylaws, Article III, Section 3.1. See also Form 1,
Exhibit J.
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     The Exchange Board initially will be composed of 6 or more
directors; \18\
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    \18\ See LTSE Bylaws, Article III, Section 3.2(a). See also Form
1, Exhibit A.
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     one director will be the Chief Executive Officer of LTSE;
\19\
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    \19\ See LTSE Bylaws, Article III, Section 3.2(b).
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     the number of Non-Industry Directors,\20\ including at
least one Independent Director,\21\ will equal or exceed the sum of the
Industry Directors \22\ and Member Representative Directors; \23\ and
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    \20\ ``Non-Industry Director'' means a Director who is an
Independent Director or any other individual who would not be an
Industry Director. See LTSE Bylaws, Article I, Section (v).
    \21\ ``Independent Director'' means a Director who has no
material relationship with the Exchange or any affiliate of the
Exchange or any Exchange Member or any affiliate of any Exchange
Member; provided, however, that an individual who otherwise
qualifies as an Independent Director shall not be disqualified from
serving in such capacity solely because such Director is a Director
of LTSE or LTSEG. See LTSE Bylaws, Article I, Section (m).
    \22\ ``Industry Director'' means, among other criteria, a
Director who is or has been within the prior three years an officer,
director or employee of a broker or dealer, excluding an outside
director or a director not engaged in the day-to-day management of a
broker or dealer. See LTSE Bylaws, Article I, Section (o), for a
description of all of the circumstances regarding when a Director
would be considered an Industry Director.
    \23\ ``Member Representative Director'' means a Director who has
been appointed as such to the initial Exchange Board pursuant to
Article III, Section 3.4(g) of the Bylaws or elected by stockholders
after having been nominated by the Member Nominating Committee or by
an Exchange Member pursuant to the Bylaws and confirmed as the
nominee of Exchange Members after majority vote of Exchange Members,
if applicable. A Member Representative Director must be an officer,
director, employee, or agent of an Exchange Member that is not a
Stockholder Exchange Member. See LTSE Bylaws, Article I, Section
(s).
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     at least 20% of the directors on the Exchange Board will
be Member Representative Directors.
    The initial Directors of the Exchange Board will be appointed by
LTSEG and will serve until the first annual meeting of
stockholders.\24\ The first annual meeting of stockholders will be held
prior to LTSE's commencement of operations as an Exchange.\25\
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    \24\ See LTSE Bylaws, Article III, Section 3.4(g).
    \25\ See LTSE Bylaws, Article IV, Section 4.1(b).
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    In addition, LTSEG will appoint the initial Nominating Committee
and Member Nominating Committee, consistent with each committee's
compositional requirements, to nominate candidates for election to the
Exchange Board.\26\ The Nominating Committee and Member Nominating
Committee, after completion of their respective duties for nominating
directors for election to the Board for that year, will recommend
candidates to serve on the succeeding year's Nominating Committee or
Member Nominating Committee, as applicable.\27\ LTSE members will have
rights to nominate and elect additional candidates for the Member
Nominating Committee pursuant to a petition process.\28\
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    \26\ See LTSE Bylaws, Article VI, Section 6.1.
    \27\ Id.
    \28\ See LTSE Bylaws, Article III, Section 3.4
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    The Nominating Committee will nominate candidates for election to
the Board at the annual stockholder meeting and all other vacant or new
Director positions on the Board.\29\ For Member Representative Director
positions, the Member Nominating Committee, composed solely of Member
Representative Members, will solicit input from LTSE members and
members may submit petition candidates.\30\ If no candidates are
nominated pursuant to a petition process, then the initial nominees
approved and submitted by the Member Nominating Committee will be
nominated as Member Representative Directors by the Nominating
Committee.\31\ If a petition process produces additional candidates,
then the candidates nominated pursuant to the petition process,
together with those nominated by the Member Nominating Committee, will
be presented to LTSE members for election to determine the final
designees for any open Member Representative Director positions.\32\ In
the event of a contested election, the candidates who receive the most
votes will be selected as the Member Representative Director designees
by the Member Nominating Committee.\33\
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    \29\ See LTSE Bylaws, Article VI, Section 6.2.
    \30\ See LTSE Bylaws, Article III, Section 3.4.
    \31\ See LTSE Bylaws, Article III, Section 3.4(e).
    \32\ Id.
    \33\ See LTSE Bylaws, Article III, Section 3.4(f).
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    The Commission believes that the LTSE governance provisions are
consistent with the Act. In particular, the Commission believes that
the

requirement in the LTSE Bylaws that the number of Member Representative
Directors must be at least 20% of the Board and the means by which they
will be chosen by LTSE members provide for the fair representation of
members in the selection of directors and the administration of LTSE
and therefore are consistent with Section 6(b)(3) of the Act.\34\ As
the Commission has previously noted, this requirement helps to ensure
that members have a voice in an exchange's self-regulatory program, and
that an exchange is administered in a way that is equitable to all
those who trade on its market or through its facilities.\35\
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    \34\ 15 U.S.C. 78f(b)(3).
    \35\ See, e.g., Securities Exchange Act Release Nos. 79543
(December 13, 2016), 81 FR 92901, 92903 (December 20, 2016) (File
No. 10-227) (order granting registration of MIAX PEARL, LLC) (``MIAX
PEARL Order''); 68341 (December 3, 2012), 77 FR 73065, 73067
(December 7, 2012) (File No. 10-207) (order granting the
registration of Miami International Securities Exchange, LLC (``MIAX
Exchange'')) (``MIAX Order''); 58375 (August 18, 2008), 73 FR 49498,
49501 (August 21, 2008) (File No. 10-182) (order granting the
registration of BATS Exchange, Inc.) (``BATS Order''); and 53128
(January 13, 2006), 71 FR 3550, 3553 (January 23, 2006) (File No.
10-131) (granting the exchange registration of Nasdaq Stock Market,
Inc.) (``Nasdaq Order'').
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    In addition, with respect to the requirement that the number of
Non-Industry Directors, including at least one Independent Director,
will equal or exceed the sum of the number of Industry Directors and
Member Representative Directors, the Commission believes that the
proposed composition of the Exchange Board satisfies the requirements
in Section 6(b)(3) of the Act,\36\ which require in part that one or
more directors be representative of issuers and investors and not be
associated with a member of the exchange, or with a broker or dealer.
The Commission previously has stated that the inclusion of public, non-
industry representatives on exchange oversight bodies is an important
mechanism to support an exchange's ability to protect the public
interest.\37\ Further, the presence of public, non-industry
representatives can help to ensure that no single group of market
participants has the ability to systematically disadvantage other
market participants through the exchange governance process. The
Commission believes that public directors can provide unbiased
perspectives, which may enhance the ability of the Exchange Board to
address issues in a non-discriminatory fashion and foster the integrity
of the Exchange.
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    \36\ 15 U.S.C. 78f(b)(3).
    \37\ See, e.g., MIAX PEARL Order, supra note 35, at 92903; MIAX
Order, supra note 35, at 73067; BATS Order, supra note 35, at 49501;
and Nasdaq Order, supra note 35, at 3553.
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2. Interim Board
    LTSEG, as the sole stockholder of the Exchange, will appoint
Interim Directors of the Board (``Interim Board'') at a special meeting
of the stockholder, which will include Interim Member Representative
Directors.\38\ Upon appointment of the Interim Directors by the
stockholder, the Interim Board will meet the Board composition
requirements set forth in the LTSE Bylaws.\39\ The Interim Board
members will serve only until the first annual meeting of the
stockholders, which will be held prior to the company's commencement of
operations as an Exchange.\40\ The Exchange represents that it will
complete the full nomination, petition, and voting process set forth in
the LTSE Bylaws, which will provide persons that are approved as LTSE
members after the date that the Commission grants the Exchange's
registration as a national securities exchange with the opportunity to
participate in the selection of Member Representative Directors as
promptly as possible after the effective date of the Bylaws.\41\
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    \38\ See Form 1, Exhibit J. See also LTSE Bylaws, Article III,
Section 3.2 (stating that the Exchange Board shall consist of five
(6) or more Directors).
    \39\ See Form 1, Exhibit J.
    \40\ Id.
    \41\ Id.
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3. Exchange Committees
    LTSE has proposed to establish several committees of the Exchange
Board. Specifically, LTSE has proposed to establish the following
committees of the Exchange Board: an Audit Committee, an Appeals
Committee, and a Regulatory Oversight Committee, as well as a
Compensation Committee.\42\ In addition, LTSE has proposed to establish
a Nominating Committee and a Member Nominating Committee, as discussed
above.
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    \42\ See LTSE Bylaws, Article V, Sections 5.1 and 5.6(a). If no
Compensation Committee is elected, reference to the Compensation
Committee shall refer to the entire Board. See LTSE Bylaws, Article
V, Section 5.6(a).
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    The Appeals Committee will consist of two Independent Directors,
and one Member Representative Director.\43\ Each member of the
Regulatory Oversight Committee must be an Independent Director.\44\
Each voting member of the Compensation Committee must be an Independent
Director.\45\ Each member of the Audit Committee must be an Independent
Director.\46\
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    \43\ See LTSE Bylaws, Article V, Section 5.6(d).
    \44\ See LTSE Bylaws, Article V, Section 5.6(c).
    \45\ See LTSE Bylaws, Article V, Section 5.6(a).
    \46\ See LTSE Bylaws, Article V, Section 5.6(b). See also LTSE
Bylaws, Article III, Section 3.18(a) regarding the potential role of
the Audit Committee in conflict of interest matters.
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    Because the Executive Committee will have the powers and authority
of the Exchange Board in the management of the business and affairs of
the Exchange between meetings of the Exchange Board, its composition
must reflect that of the Exchange Board. Accordingly, the number of
Non-Industry Directors on the Executive Committee must equal or exceed
the number of Industry Directors and the percentages of Independent
Directors and Member Representative Directors on the Executive
Committee must be at least as great as the corresponding percentages of
each such class of Directors on the Exchange Board as a whole.\47\
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    \47\ See LTSE Bylaws, Article V, Section 5.6(e).
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    The Commission believes that LTSE's proposed committees, which are
similar to the committees maintained by other exchanges,\48\ are
designed to help enable the Exchange to carry out its responsibilities
under the Act and are consistent with the Act, including Section
6(b)(1), which requires, in part, an exchange to be so organized and
have the capacity to carry out the purposes of the Act.\49\
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    \48\ See, e.g., Securities Exchange Act Release No. 78101 (June
17, 2016), 81 FR 41141 (June 23, 2016) (File No. 10-222) (order
granting the registration of Investors' Exchange, LLC) (``IEX
Order''); Nasdaq Order, supra note 35; and BATS Order, supra note
35.
    \49\ 15 U.S.C. 78f(b)(1).
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B. LTSE Group and Regulation of the Exchange

    When LTSE commences operations as a national securities exchange,
it will have all of the attendant regulatory obligations under the Act.
In particular, LTSE will be responsible for the operation and
regulation of its trading system and the regulation of its members. The
Commission believes that certain provisions in the LTSE and LTSEG
governing documents are designed to facilitate the ability of LTSE to
fulfill its regulatory obligations and to help facilitate Commission
oversight of LTSE. The discussion below summarizes some of these key
provisions.
1. Ownership Structure; Ownership and Voting Limitations
    As stated above, LTSE will be wholly owned by LTSEG. The proposed
Amended and Restated Certificate of Incorporation of LTSEG (``LTSEG
Certificate'') includes restrictions on the ability to own and vote
shares of capital

stock of LTSEG.\50\ These limitations are designed to prevent any LTSEG
shareholder from exercising undue control over the operation of the
Exchange and to ensure that the Exchange and the Commission are able to
carry out their regulatory obligations under the Act.
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    \50\ These provisions are consistent with ownership and voting
limits approved by the Commission for other SROs. See, e.g., IEX
Order, supra note 48, and MIAX PEARL Order, MIAX Order, and BATS
Order, supra note 35; see also Securities Exchange Release Nos. 6068
(February 4, 2016) (File No. 10-221) (order granting exchange
registration of ISE Mercury, LLC) (``ISE Mercury Order''); 70050
(July 26, 2013), 78 FR 46622, 46624 (August 1, 2013) (File No. 10-
209) (order granting the exchange registration of ISE Gemini, LLC)
(``ISE Gemini Order''); 62158 (May 24, 2010), 75 FR 30082 (May 28,
2010) (CBOE-2008-88) (CBOE demutualization order); 53963 (June 8,
2006), 71 FR 34660 (June 15, 2006) (SR-NSX-2006-03) (NSX
demutualization order); 51149 (February 8, 2005), 70 FR 7531
(February 14, 2005) (SR-CHX-2004-26) (CHX demutualization order);
and 49098 (January 16, 2004), 69 FR 3974 (January 27, 2004) (SR-
Phlx-2003-73) (Phlx demutualization order).
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    In particular, for so long as LTSEG shall control, directly or
indirectly, a national securities exchange, no Person,\51\ either alone
or together with its Related Persons,\52\ will be permitted to
beneficially own, directly or indirectly, of record or beneficially,
shares constituting more than 40% of any class of capital stock of
LTSEG.\53\ A more restrictive condition will apply to members of the
Exchange, who will be prohibited from beneficially owning, directly or
indirectly, either alone or together with their Related Persons, more
than 20% of shares of any class of capital stock of LTSEG.\54\ If any
stockholder purports to sell, transfer, assign, pledge, or own any
shares of LTSEG in violation of these ownership limits, LTSEG will be
required (to the extent funds are legally available) to redeem the
shares in excess of the applicable ownership limit at their par
value.\55\
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    \51\ See LTSEG Certificate, Article IX, subparagraph
(A)(2)(a)(i) (defining ``Person'').
    \52\ See id. at subparagraph (A)(2)(a)(ii) (defining ``Related
Persons'').
    \53\ See id. at subparagraph (A)(2)(b)(i)(A). There are limited
exceptions to these prohibitions. See infra notes 58-63 and
accompanying text.
    \54\ See id. at subparagraph (A)(2)(b)(i)(B).
    \55\ See id. at subparagraph (A)(2)(e). The number of shares to
be redeemed is to be calculated after taking into account that the
redeemed shares will become treasury shares and will no longer be
deemed to be outstanding shares. Id. It is further provided in the
LTSEG Certificate that any shares that have been called for
redemption may not be deemed outstanding shares for the purpose of
voting or determining the total number of shares entitled to vote on
any matter. From and after the redemption date (unless LTSEG
defaults in providing funds for the payment of the redemption
price), the shares of redeemed stock which have been redeemed as per
these provisions will become treasury shares and will no longer be
deemed to be outstanding, and all rights of the holder of the
redeemed stock as a stockholder of LTSEG (except the right to
receive from LTSEG the redemption price against delivery to LTSEG of
evidence of ownership of the shares) will cease. Id. In addition, in
the event that any redemption has resulted in any additional
stockholder owning such number of shares that is in violation of the
ownership limits, LTSGE will be required to redeem those shares
pursuant to the limitation provisions. Id.
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    In addition, no Person, alone or together with its Related Persons,
will be entitled to vote or cause the voting of shares of the capital
stock of LTSEG, in person or by proxy or through any voting agreement
or other arrangement, to the extent that such shares represent in the
aggregate more than 20% of the voting power of the then issued and
outstanding capital stock of LTSEG (``Voting Limitation''), and LTSEG
will disregard any such votes purported to be cast in excess of the
Voting Limitation.\56\ Further, if any Person, either alone or together
with its Related Persons, is a party to any agreement, plan or other
arrangement relating to shares of stock of LTSEG entitled to vote in
any matter with any other Person, either alone or together with its
Related Persons, under circumstances that would result in the shares of
capital stock of LTSEG that are subject to such agreement, plan or
other arrangement not being voted on any matter or matters or any proxy
relating thereto being withheld, where the effect of such agreement,
plan or other arrangement would be to enable any Person, either alone
or together with its Related Persons, to vote, possess the right to
vote, or cause the voting of shares of the capital stock of LTSEG that
would represent more than 20% of said voting power \57\ (the
``Recalculated Voting Limitation''), then the Person, either alone or
together with its Related Persons, will not be entitled to vote or
cause the voting of shares of stock of LTSEG, in person or by proxy or
through any voting agreement or other arrangement, to the extent that
such shares represent in the aggregate more than the Recalculated
Voting Limitation, and LTSEG will disregard any such votes purported to
be case in excess of the Recalculated Voting Limitation.\58\
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    \56\ See id. at subparagraph (A)(2)(b)(i)(C).
    \57\ The text of the LTSEG Certificate stipulates that this
provision applies ``assuming that all shares of [LTSEG] that are
subject to the agreement, plan or other arrangement are not treated
as having voting power.'' Id.
    \58\ See LTSEG Certificate, Article IX, subparagraph
(A)(2)(b)(i)(C)(2). The provisions of this section of LTSEG
Certificate regarding limitations on transfer, ownership and voting
will not apply to: (a) Any solicitation of any revocable proxy from
any stockholder of LTSEG by or on behalf of LTSEG or by any officer
or director of LTSEG acting on behalf of LTSEG; or (b) any
solicitation of any revocable proxy from any stockholder of LTSEG by
another stockholder that is conducted pursuant to, and in accordance
with, Regulation 14A under the Act (other than a solicitation
pursuant to Rule 14a-2(b)(2)). See id. at subparagraph
(A)(2)(b)(i)(D). See also id. at (b)(i)(E).
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    The board of directors of LTSEG (``LTSEG Board'') will be permitted
to waive the 40% ownership limitation and the 20% voting limitation for
non-members of the Exchange, pursuant to a resolution duly adopted by
the LTSEG Board, if it makes certain determinations.\59\ Any such
waiver will not be effective unless and until approved by the
Commission.\60\ The LTSEG Board is specifically precluded from waiving
the 20% voting and ownership limits described above for members of the
Exchange and their Related Persons.\61\
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    \59\ See id. at subparagraph (A)(2)(b)(ii)(B). The required
determinations are that (a) such waiver will not impair the ability
of the Exchange to carry out its functions and responsibilities as
an ``exchange'' under the Act and the rules and regulations
promulgated thereunder; that such waiver is otherwise in the best
interests of LTSEG, its stockholders, and the Exchange; that such
waiver will not impair the ability of the Commission to enforce the
Act and the rules and regulations promulgated thereunder; and that
such Person and its Related Persons are not subject to any
applicable ``statutory disqualification'' within the meaning of
Section 3(a)(39) of the Act. See id. at subparagraphs (A)(2)(b)(ii)
and (iii). These provisions are consistent with ownership and voting
limits approved by the Commission for other SROs. See, e.g., IEX
Order, ISE Mercury Order, and ISE Gemini Order, supra note 50; MIAX
PEARL Order, MIAX Order, and BATS Order, supra note 35; and
Securities Exchange Act Release No. 61698 (March 12, 2010), 75 FR
13151 (March 18, 2010) (File Nos. 10-194 and 10-196) (order
approving DirectEdge exchanges) (``DirectEdge Exchanges Order'').
    \60\ See LTSEG Certificate, Article IX, at subparagraph
(A)(2)(b)(ii)(B).
    \61\ See id.
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    Any person that proposes to own shares of capital stock of LTSEG in
excess of the 40% ownership limitation, or vote or cause the voting of
shares of capital stock of LTSEG in person or by proxy or through any
voting agreement or other arrangement in excess of the Voting
Limitation or Recalculated Voting Limitation, as applicable, will be
required to deliver written notice to the LTSEG Board of its
intention.\62\ The notice must be delivered to the LTSEG Board not less
than 45 days (or any shorter period to which the Board expressly
consents) before the proposed ownership of such shares or the proposal
to vote or cause the voting of such shares in person or by proxy
through any voting agreement or other arrangement of its intention to
do so.\63\
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    \62\ See id. at subparagraph (A)(2)(b)(iv).
    \63\ See id.
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    The LTSEG Certificate also contains provisions that are designed to
further safeguard the ownership and voting limitations described above,
or are otherwise related to direct and indirect

changes in control. Specifically, any Person that, either alone or
together with its Related Persons beneficially owns, directly or
indirectly(whether by acquisition or a change in the number of shares
outstanding), of record or beneficially 5% or more of the then
outstanding shares of capital stock of LTSEG (excluding shares of any
class of stock that does not have the right by its terms to vote
generally in the election of members of the LTSEG Board) will be
required to immediately notify the LTSEG Board in writing of such
ownership.\64\ Thereafter, such Persons will be required to update
LTSEG of any increase or decrease of 1% or more in their previously
reported ownership percentage.\65\
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    \64\ See id. at subparagraph (A)(2)(c)(i). The notice will
require the Person's full legal name; the Person's title or status
and the date on which such title or status was acquired; the
Person's and its Related Person's) approximate ownership interest in
LTSEG; and whether the person has power, directly or indirectly, to
direct the management or policies of LTSEG, whether through
ownership of securities, by contract or otherwise. See id.
    \65\ See id. at subparagraph (A)(2)(c)(ii). Changes of less than
1% must also be reported to LTSEG if they result in such Person
crossing a 20% or 40% ownership threshold. See id. In addition, the
Exchange's rules also impose limits on affiliation between the
Exchange and a member of the Exchange. See LTSE Rule 2.210 (No
Affiliation between Exchange and any Member).
---------------------------------------------------------------------------

    The Exchange's Amended and Restated Certificate of Incorporation
(``LTSE Certificate'') does not include change of control provisions
that are similar to those in the LTSEG Certificate. However, the LTSE
Certificate explicitly provides that LTSEG will be the sole owner of
the common stock of the Exchange.\66\ Thus, if LTSEG ever proposes to
no longer be the sole owner of the Exchange, the LTSE Certificate will
be required to be amended. Any amendment to the LTSE Certificate,
including any change in the provisions that identify LTSEG as the sole
owner of the Exchange, will constitute a proposed rule change under
Section 19(b) of the Act \67\ and Rule 19b-4 \68\ thereunder that will
be required to be filed with, or filed with and approved by, the
Commission.\69\ Moreover, pursuant to the LTSE Certificate itself, any
sale, transfer or assignment by LTSEG of common stock of the Exchange
will be subject to prior approval by the Commission pursuant to the
rule filing procedure under Section 19 of the Act.\70\
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    \66\ See LTSE Certificate, Article IV.
    \67\ 15 U.S.C. 78s(b).
    \68\ 17 CFR 240.19b-4.
    \69\ See LTSE Certificate, Article VI.
    \70\ See LTSE Certificate, Article IV.
---------------------------------------------------------------------------

    Although LTSEG is not directly responsible for regulation, its
activities with respect to the operation of LTSE must be consistent
with, and must not interfere with, the self-regulatory obligations of
LTSE.\71\ As described above, the provisions applicable to direct and
indirect changes in control of LTSEG and LTSE, as well as the voting
limitation imposed on owners of LTSEG who also are LTSE members, are
designed to help prevent any owner of LTSEG from exercising undue
influence or control over the operation of the Exchange and to help
ensure that the Exchange retains a sufficient degree of independence to
effectively carry out its regulatory obligations under the Act.
---------------------------------------------------------------------------

    \71\ See, e.g., IEX Order, supra note 48.
---------------------------------------------------------------------------

    In addition, these limitations are designed to address the
conflicts of interests that might result from a member of a national
securities exchange owning interests in the exchange. As the Commission
has noted in the past, a member's ownership interest in an entity that
controls an exchange could become so large as to cast doubt on whether
the exchange may fairly and objectively exercise its self-regulatory
responsibilities with respect to such member.\72\ A member that is a
controlling shareholder of an exchange could seek to exercise that
controlling influence by directing the exchange to refrain from, or the
exchange may hesitate to, diligently monitor and conduct surveillance
of the member's conduct or diligently enforce the exchange's rules and
the federal securities laws with respect to conduct by the member that
violates such provisions. As such, the Commission believes that these
requirements are designed to minimize the potential that a person or
entity can improperly interfere with or restrict the ability of the
Exchange to effectively carry out its regulatory oversight
responsibilities under the Act.
---------------------------------------------------------------------------

    \72\ See, e.g., ISE Mercury Order, supra note 50, and IEX Order,
supra note 48; MIAX PEARL Order, MIAX Order, and BATS Order, supra
note 35; and DirectEdge Exchanges Order, supra note 59.
---------------------------------------------------------------------------

    The Commission believes that LTSE's and LTSEG's proposed governance
provisions are consistent with the Act, including Section 6(b)(1),
which requires, in part, an exchange to be so organized and have the
capacity to carry out the purposes of the Act.\73\ In particular, these
requirements are designed to minimize the potential that a person could
improperly interfere with or restrict the ability of the Commission or
the Exchange to effectively carry out their regulatory oversight
responsibilities under the Act.
---------------------------------------------------------------------------

    \73\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

2. Regulatory Independence and Oversight
    Although LTSEG will not itself carry out regulatory functions, its
activities with respect to the operation of LTSE must be consistent
with, and must not interfere with, LTSE's self-regulatory obligations.
In this regard, LTSE and LTSEG propose to adopt certain provisions in
their respective governing documents that are designed to help maintain
the independence of the regulatory functions of LTSE. These proposed
provisions are substantially similar to those included in the governing
documents of other exchanges that recently have been granted
registration.\74\ Specifically:
---------------------------------------------------------------------------

    \74\ See, e.g., IEX Order, supra note 48; MIAX Order, supra note
35. See also DirectEdge Exchanges Order, supra note 59.
---------------------------------------------------------------------------

     The directors, officers, employees, and agents of LTSEG
must give due regard to the preservation of the independence of the
self-regulatory function of LTSE and to its obligations to investors
and the general public and must not take actions which would interfere
with the effectuation of decisions by the Exchange Board relating to
its regulatory functions (including disciplinary matters) or which
would interfere with LTSE's ability to carry out its responsibilities
under the Act.\75\
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    \75\ See proposed Bylaws of LTSE Group, Inc. (``LTSEG Bylaws''),
Article X, Section 10.1. Similarly, Article III, Section 3.1(d) of
the LTSE Bylaws requires the Exchange Board, when managing the
business and affairs of LTSE, to consider the requirements of
Section 6(b) of the Act and requires each Director, officer or
employee of LTSE to comply with the federal securities laws and
regulations thereunder and cooperate with the Commission, and LTSE
pursuant to its regulatory authority. Article III, Section 3.1(e) of
the LTSE Bylaws also requires the Exchange Board, when evaluating
any proposal to take into account all factors that the Board deems
relevant, to the extent deemed relevant: the potential impact on the
integrity, continuity and stability of the national securities
exchange operated by LTSE and the other operations of LTSE, on the
ability to prevent fraudulent and manipulative acts and practices,
and on investors and the public, and whether such would promote just
and equitable principles of trade, foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to and facilitating transactions
in securities or assist in the removal of impediments to or
perfection of the mechanisms for a free and open market and a
national market system.
---------------------------------------------------------------------------

     LTSEG must comply with the federal securities laws and the
rules and regulations promulgated thereunder, and must cooperate with
the Commission and LTSE pursuant to, and to the extent of, their
respective regulatory authority. In addition, LTSEG's officers,
directors, employees, and agents must comply with the federal
securities laws and the rules and

regulations promulgated thereunder and are deemed to agree to cooperate
with the Commission and LTSE in respect of the Commission's oversight
responsibilities regarding LTSE and the self-regulatory functions and
responsibilities of LTSE, and LTSEG must take reasonable steps
necessary to cause its officers, directors, employees and agents to so
cooperate.\76\
---------------------------------------------------------------------------

    \76\ See LTSEG Bylaws, Article X, Section 10.4. Similarly,
Article V(b) of the LTSE Certificate requires LTSE's directors,
officers and employees, in discharging their respective
responsibilities, to comply with the federal securities laws and the
rules and regulations promulgated thereunder and to cooperate with
the Commission, and LTSE pursuant to its regulatory authority.
---------------------------------------------------------------------------

     LTSEG, and its officers, directors, employees, and agents
must submit to the jurisdiction of the U.S. federal courts, the
Commission, and LTSE, for purposes of any suit, action or proceeding
pursuant to the U.S. federal securities laws, and the rules and
regulations thereunder, arising out of, or relating to, LTSE
activities.\77\
---------------------------------------------------------------------------

    \77\ See LTSEG Bylaws, Article X, Section 10.5.
---------------------------------------------------------------------------

     All books and records of LTSE reflecting confidential
information pertaining to the self-regulatory function of LTSE
(including but not limited to disciplinary matters, trading data,
trading practices, and audit information) must be retained in
confidence by LTSE and its personnel, directors, officers, employees
and agents, and will not be used by LTSE for any non-regulatory
purposes and shall not be made available to any person (including,
without limitation, any LTSE member) other than to personnel of the
Commission, and those personnel of LTSE, members of committees of the
Exchange Board, members of the Exchange Board, or hearing officers and
other agents of LTSE, to the extent necessary or appropriate to
properly discharge the self- regulatory responsibilities of LTSE.\78\
Similar provisions apply to LTSEG and its directors, officers,
employees and agents.\79\
---------------------------------------------------------------------------

    \78\ See LTSE Bylaws, Article XI, Section 11.4.
    \79\ The LTSEG Bylaws also provide that all books and records of
LTSE reflecting confidential information pertaining to the self-
regulatory function of LTSE that come into the possession of LTSEG,
and the information contained in those books and records, will be
subject to confidentiality restrictions and will not be used for any
non- regulatory purposes. See LTSEG Bylaws, Article X, Section 10.2.
The LTSE and LTSEG governing documents acknowledge that requirements
to keep such information confidential shall not limit or impede the
rights of the Commission to access and examine such information or
limit the ability of officers, directors, employees, or agents of
LTSE or LTSEG to disclose such information to the Commission. See
LTSE Bylaws, Article XI, Section 11.4 and LTSEG Bylaws, Article X,
Section 10.2.
---------------------------------------------------------------------------

     The books and records of LTSE and LTSEG must be maintained
in the United States \80\ and, to the extent they are related to the
operation or administration of LTSE, LTSEG's books and records will be
subject at all times to inspection and copying by the Commission and
LTSE.\81\
---------------------------------------------------------------------------

    \80\ See LTSE Bylaws, Article XI, Section 11.4; and LTSEG Bylaws
Article X, Section 10.3.
    \81\ See LTSEG Bylaws, Article X, Section 10.3.
---------------------------------------------------------------------------

     Furthermore, to the extent they are related to the
operation or administration of LTSE, the books, records, premises,
officers, directors, employees, and agents of LTSEG will be deemed to
be the books, records, premises, officers, directors, employees, and
agents of LTSE, for purposes of, and subject to oversight pursuant to,
the Act.\82\
---------------------------------------------------------------------------

    \82\ See LTSEG Bylaws, Article X, Section 10.3.
---------------------------------------------------------------------------

     LTSEG will take reasonable steps necessary to cause its
officers, directors, employees, and agents, prior to accepting a
position as an officer, director, employee or agent (as applicable) to
consent in writing to the applicability of provisions regarding non-
interference, confidentiality, books and records, compliance and
cooperation, jurisdiction, and regulatory obligations, with respect to
their activities related to LTSE.\83\
---------------------------------------------------------------------------

    \83\ See LTSEG Bylaws, Article X, Section 10.6.
---------------------------------------------------------------------------

     The LTSEG Certificate and Bylaws require that, so long as
LTSEG controls LTSE, any changes to those documents must be submitted
to the Exchange Board for approval, and, if such change is required to
be filed with the Commission pursuant to Section 19(b) of the Act and
the rules and regulations thereunder, such change shall not be
effective until filed with and effective by operation of law, or filed
with, and approved by, the Commission.\84\
---------------------------------------------------------------------------

    \84\ See LTSEG Certificate, Article IX, Section (A)1; and LTSEG
Bylaws, Article IX.
---------------------------------------------------------------------------

    The Commission believes that the provisions discussed in this
section, which are designed to help ensure the independence of LTSE's
regulatory function and facilitate the ability of LTSE to carry out its
regulatory responsibilities under, and operate in a manner consistent
with, the Act, are appropriate and consistent with the requirements of
the Act, particularly with Section 6(b)(1), which requires, in part, an
exchange to be so organized and have the capacity to carry out the
purposes of the Act.\85\
---------------------------------------------------------------------------

    \85\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    Further, Section 19(h)(1) of the Act \86\ provides the Commission
with the authority ``to suspend for a period not exceeding twelve
months or revoke the registration of [an SRO], or to censure or impose
limitations upon the activities, functions, and operations of [an SRO],
if [the Commission] finds, on the record after notice and opportunity
for hearing, that [the SRO] has violated or is unable to comply with
any provision of the Act, the rules or regulations thereunder, or its
own rules or without reasonable justification or excuse has failed to
enforce compliance . . . '' with any such provision by its members
(including associated persons thereof). If the Commission were to find,
or become aware of, through staff review and inspection or otherwise,
facts indicating any violations of the Act, including without
limitation Sections 6(b)(1) and 19(g)(1),\87\ these matters could
provide the basis for a disciplinary proceeding under Section 19(h)(1)
of the Act.
---------------------------------------------------------------------------

    \86\ See 15 U.S.C. 78s(h)(1).
    \87\ 15 U.S.C. 78f(b)(1); 15 U.S.C. 78s(g)(1).
---------------------------------------------------------------------------

    The Commission also notes that, even in the absence of the
governance provisions described above, under Section 20(a) of the Act
any person with a controlling interest in LTSE would be jointly and
severally liable with and to the same extent that LTSE is liable under
any provision of the Act, unless the controlling person acted in good
faith and did not directly or indirectly induce the act or acts
constituting the violation or cause of action.\88\ In addition, Section
20(e) of the Act creates aiding and abetting liability for any person
who knowingly provides substantial assistance to another person in
violation of any provision of the Act or rule thereunder.\89\ Further,
Section 21C of the Act authorizes the Commission to enter a cease-and-
desist order against any person who has been ``a cause of'' a violation
of any provision of the Act through an act or omission that the person
knew or should have known would contribute to the violation.\90\ These
provisions are applicable to all entities' dealings with LTSE,
including LTSEG.
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 78t(a).
    \89\ 15 U.S.C. 78t(e).
    \90\ 15 U.S.C. 78u-3.
---------------------------------------------------------------------------

3. Regulatory Oversight Committee
    The regulatory operations of LTSE will be monitored by the
Regulatory Oversight Committee of the Exchange Board. The Regulatory
Oversight Committee will consist of at least three members, all of whom
must be Independent Directors.\91\ The Regulatory Oversight Committee
will be responsible for overseeing the adequacy and effectiveness of
LTSE's regulatory and SRO responsibilities, assessing

LTSE's regulatory performance, and assisting the Exchange Board (and
committees of the Exchange Board) in reviewing LTSE's regulatory plan
and the overall effectiveness of LTSE's regulatory functions.\92\
---------------------------------------------------------------------------

    \91\ See LTSE Bylaws, Article V, Sections 5.2(a) and 5.6(c). The
Regulatory Oversight Committee is responsible for reviewing LTSE's
regulatory budget, and also will meet regularly with the Chief
Regulatory Officer.
    \92\ See LTSE Bylaws, Article V, Section 5.6(c).
---------------------------------------------------------------------------

    Further, a Chief Regulatory Officer (``CRO'') of LTSE will have
general supervision over LTSE's regulatory operations, including
responsibility for overseeing LTSE's surveillance, examination, and
enforcement functions and for administering any regulatory services
agreements with another self-regulatory organization to which LTSE is a
party.\93\ The Regulatory Oversight Committee, in consultation with the
Chief Executive Officer of LTSE, will be responsible for establishing
the goals, assessing the performance, fixing the compensation of the
CRO and for recommending personnel actions involving the CRO and senior
regulatory personnel.\94\
---------------------------------------------------------------------------

    \93\ See LTSE Bylaws, Article VII, Section 7.9.
    \94\ See LTSE Bylaws, Article V, Section 5.6(c). To the extent
that the Chief Executive Officer of LTSE has any indirect
supervisory responsibility for the role or function of the CRO,
including but not limited to, implementation of the budget for the
regulatory function or regulatory personnel matters, the Regulatory
Oversight Committee will take all steps reasonably necessary to
ensure that the Chief Executive Officer does not compromise the
regulatory autonomy and independence of the CRO or the regulatory
function. Id.
---------------------------------------------------------------------------

4. Regulatory Funding and Services
    As a prerequisite for the Commission's granting of an exchange's
application for registration, an exchange must be organized and have
the capacity to carry out the purposes of the Act.\95\ Specifically, an
exchange must be able to enforce compliance by its members, and persons
associated with its members, with the federal securities laws and rules
thereunder and the rules of the exchange.\96\ The discussion below
summarizes how LTSE proposes to conduct and structure its regulatory
operations.
---------------------------------------------------------------------------

    \95\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
    \96\ See id. See also Section 19(g) of the Act, 15 U.S.C.
78s(g).
---------------------------------------------------------------------------

a. Regulatory Funding
    To help ensure that LTSE has and will continue to have adequate
funding to be able to meet its responsibilities under the Act, LTSE
represents that, if the Commission approves LTSE's application for
registration as a national securities exchange, LTSEG will allocate
sufficient assets to LTSE to enable the Exchange's operation.\97\
Specifically, LTSE represents that LTSEG will make a cash contribution
to LTSE of $5,000,000, in addition to any previously-provided in-kind
contributions, such as legal, regulatory, and infrastructure-related
services.\98\
---------------------------------------------------------------------------

    \97\ See Form 1, Exhibit I.
    \98\ See id.
---------------------------------------------------------------------------

    LTSE also represents that such cash and in-kind contributions from
LTSEG will be adequate to operate LTSE, including the regulation of the
Exchange, and that LTSEG and LTSE will enter into an agreement that
requires LTSEG to provide adequate funding for the Exchange's
operations, including the regulation of the Exchange.\99\
---------------------------------------------------------------------------

    \99\ See id. LTSE represents that this agreement will provide
that LTSE will receive all fees, including regulatory fees and
trading fees, payable by LTSE's members, as well as any funds
received from any applicable market data fees and tape revenue, and
will further provide that LTSEG will reimburse LTSE for its costs
and expenses to the extent that the Exchange's assets are
insufficient to meet its costs and expenses. Id.
---------------------------------------------------------------------------

    Further, any ``Regulatory Funds'' received by LTSE will not be used
for non-regulatory purposes or distributed to LTSEG, but rather will be
applied to fund the regulatory operations of LTSE, or, as applicable,
used to pay restitution and disgorgement to customers as part of a
regulatory proceeding.\100\ Any excess non-regulatory funds, as solely
determined by LTSE, will be remitted to LTSEG in accordance with LTSE
Bylaws.\101\
---------------------------------------------------------------------------

    \100\ See LTSE Bylaws, Article X, Section 10.4. LTSE Bylaws,
Article I(bb) defines ``Regulatory Funds'' as ``fees, fines, or
penalties derived from the regulatory operations of [LTSE],'' but
such term does not include ``revenues derived from listing fees,
market data revenues, transaction revenues, or any other aspect of
the commercial operations of [LTSE], even if a portion of such
revenues are used to pay costs associated with the regulatory
operations of [LTSE].'' This definition is consistent with the rules
of other SROs. See, e.g., Amended and Restated By-Laws of MIAX
Exchange, Article 1(ll); By-Laws of NASDAQ PHLX LLC, Article I(ii);
and By-Laws of NASDAQ BX, Inc., Article I(ii).
    \101\ See Form 1, Exhibit I. See also LTSE Bylaws, Article XI,
Section 11.5. Further, LTSE will not be required to pay any
dividends if payment of such dividends would violate the Act or any
other applicable law. See id.
---------------------------------------------------------------------------

b. Regulatory Contract with FINRA
    Although LTSE will be an SRO with all of the attendant regulatory
obligations under the Act, it has represented to the Commission that it
intends to enter into a Regulatory Services Agreement (``RSA'') with
FINRA, under which FINRA as a regulatory services provider will perform
certain regulatory functions on LTSE's behalf.\102\ Specifically, LTSE
represents that FINRA will perform certain regulatory surveillance of
trading activity on LTSE and conduct various regulatory services on
behalf of LTSE, which are expected to include performance of
investigation, disciplinary, and hearing services.\103\ Notwithstanding
the RSA, LTSE will retain legal responsibility for the regulation of
its members and its market and the performance of FINRA as its
regulatory services provider. Because LTSE anticipates entering into an
RSA with FINRA, it has not made provisions to fulfill the regulatory
services that would be undertaken by FINRA. Accordingly, the Commission
is conditioning the operation of LTSE on a final RSA that specifies the
services that will be provided to LTSE.
---------------------------------------------------------------------------

    \102\ See Form 1, Exhibit L. See also LTSE Rules 1.160(jj) and
6.170.
    \103\ See Form 1, Exhibit L.
---------------------------------------------------------------------------

    The Commission believes that it is consistent with the Act for LTSE
to contract with FINRA to perform certain examination, enforcement, and
disciplinary functions.\104\ These functions are fundamental elements
of a regulatory program, and constitute core self-regulatory functions.
The Commission believes that FINRA has the expertise and experience to
perform these functions for LTSE.\105\ However, LTSE, unless relieved
by the Commission of its responsibility, bears the self-regulatory
responsibilities and primary liability for self-regulatory failures,
not the SRO retained to perform regulatory functions on LTSE's
behalf.\106\ In performing these regulatory functions, however, FINRA
may nonetheless bear liability for causing or aiding and abetting the
failure of LTSE to perform its regulatory functions.\107\ Accordingly,
although FINRA will not act on its own behalf under its SRO
responsibilities in carrying out these regulatory services for LTSE,
FINRA may have secondary liability if, for example, the Commission
finds that the contracted functions are being performed so inadequately
as to cause a violation of the federal securities laws or rules
thereunder by LTSE.\108\
---------------------------------------------------------------------------

    \104\ For example, IEX, MIAX Exchange, MIAX PEARL, LLC, Nasdaq
MRX, LLC, Cboe EDGA Exchange, Inc., Cboe EDGX Exchange Inc., and
Cboe BZX Exchange, Inc. (``Cboe BZX'') have entered into RSAs with
FINRA.
    \105\ See, e.g., IEX Order, supra note 48; DirectEdge Exchanges
Order, supra note 59; and Nasdaq Order, supra note 35. The
Commission notes that the Commission is not approving the RSA or any
of its specific terms.
    \106\ See Section 19(g)(1) of the Act, 15 U.S.C. 78s(g)(1).
    \107\ For example, if failings by FINRA have the effect of
leaving LTSE in violation of any aspect of LTSE's self-regulatory
obligations, LTSE would bear direct liability for the violation,
while FINRA may bear liability for causing or aiding and abetting
the violation. See, e.g., IEX Order, supra note 48; Nasdaq Order and
BATS Order, supra note 35; and DirectEdge Exchanges Order, supra
note 59.
    \108\ See, e.g., IEX Order, supra note 48, and Nasdaq Order,
supra note 35.

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

c. Rule 17d-2 Agreements
    Section 19(g)(1) of the Act,\109\ among other things, requires
every SRO registered as either a national securities exchange or
national securities association to comply with the Act, the rules and
regulations thereunder, and the SRO's own rules, and, absent reasonable
justification or excuse, enforce compliance by its members and persons
associated with its members, unless the SRO is relieved of this
responsibility pursuant to Section 17(d) or Section 19(g)(2) of the
Act.\110\ Rule 17d-2 of the Act permits SROs to propose joint plans to
allocate regulatory responsibilities amongst themselves for their
common rules with respect to their common members.\111\ These
agreements, which must be filed with and declared effective by the
Commission, generally cover areas where each SRO's rules substantively
overlap, including such regulatory functions as personnel registration
and sales practices. Without this relief, the statutory obligation of
each individual SRO could result in a pattern of multiple examinations
of broker-dealers that maintain memberships in more than one SRO.\112\
Such regulatory duplication would add unnecessary expenses for common
members and their SROs.\113\
---------------------------------------------------------------------------

    \109\ 15 U.S.C. 78s(g)(1).
    \110\ 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), respectively.
    \111\ See Section 17(d)(1) of the Act and Rule 17d-2 thereunder,
15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2, respectively. Section
17(d)(1) of the Act allows the Commission to relieve an SRO of
certain responsibilities with respect to members of the SRO who are
also members of another SRO (``common members''). Specifically,
Section 17(d)(1) allows the Commission to relieve an SRO of its
responsibilities to: (i) Receive regulatory reports from such
members; (ii) examine such members for compliance with the Act and
the rules and regulations thereunder, and the rules of the SRO; or
(iii) carry out other specified regulatory responsibilities with
respect to such members.
    \112\ Section 17(d) was intended, in part, to eliminate
unnecessary multiple examinations and regulatory duplication with
respect to common members. See Securities Exchange Act Release No.
12935 (October 28, 1976), 41 FR 49091 (November 8, 1976) (``Rule
17d-2 Adopting Release'').
    \113\ See id.
---------------------------------------------------------------------------

    A Rule 17d-2 plan that is declared effective by the Commission
relieves the specified SRO of those regulatory responsibilities
allocated by the plan to another SRO.\114\ Many SROs have entered into
Rule 17d-2 agreements.\115\ LTSE has represented to the Commission that
LTSE and FINRA intend to file a Rule 17d-2 agreement with the
Commission covering common members of LTSE and FINRA.\116\ This
agreement will allocate to FINRA regulatory responsibility, with
respect to common members, for specified regulatory and enforcement
matters arising out of specified common rules and specified provisions
of the Act and the rules and regulations thereunder. In addition, LTSE
has represented to the Commission that it intends to join all
applicable Rule 17d-2 plans, as applicable and in the interest of its
members and their ``Sponsored Participants''--entities whose access to
LTSE is authorized in advance by one or more members in accordance with
LTSE rules,\117\ including the multi-party Rule 17d-2 plan for the
allocation of regulatory responsibilities with respect to certain
Regulation NMS Rules and the multi-party Rule 17d-2 plan for the
surveillance, investigation, and enforcement of common insider trading
rules.\118\
---------------------------------------------------------------------------

    \114\ See Rule 17d-2 Adopting Release, supra note 112.
    \115\ See, e.g., Securities Exchange Act Release Nos. 83696
(July 24, 2018), 83 FR 35682 (July 27, 2018) (FINRA/MIAX Exchange/
MIAX PEARL); 77321 (March 8, 2016), 81 FR 13434 (March 14, 2016)
(File No. 4-697) (FINRA/ISE Mercury, LLC); 73641 (November 19,
2014), 79 FR 70230 (November 25, 2014) (File No. 4-678) (FINRA/MIAX
Exchange); 70053 (July 26, 2013), 78 FR 46656 (August 1, 2013) (File
No. 4-663) (FINRA/Topaz Exchange n/k/a ISE Gemini, LLC); 59218
(January 8, 2009), 74 FR 2143 (January 14, 2009) (File No. 4-575)
(FINRA/Boston Stock Exchange, Inc.); 58818 (October 20, 2008), 73 FR
63752 (October 27, 2008) (File No. 4-569) (FINRA/BATS Exchange,
Inc.); 55755 (May 14, 2007), 72 FR 28087 (May 18, 2007) (File No. 4-
536) (National Association of Securities Dealers, Inc. (``NASD'') n/
k/a FINRA) and Chicago Board of Options Exchange, Inc. concerning
the CBOE Stock Exchange, LLC); 55367 (February 27, 2007), 72 FR 9983
(March 6, 2007) (File No. 4-529) (NASD/International Securities
Exchange, LLC); and 54136 (July 12, 2006), 71 FR 40759 (July 18,
2006) (File No. 4-517) (NASD/Nasdaq).
    \116\ See Form 1, Exhibit E.
    \117\ Id.
    \118\ See id. See also Securities Exchange Act Release No. 65991
(December 16, 2011), 76 FR 79714 (December 22, 2011) (File No. 4-
566) (notice of filing and order approving and declaring effective
an amendment to the multi-party Rule 17d-2 plan relating to the
surveillance, investigation, and enforcement of insider trading
rules).
---------------------------------------------------------------------------

    Because LTSE anticipates entering into these Rule 17d-2 agreements,
it has not made provision to fulfill the regulatory obligations that
would be undertaken by FINRA and other SROs under these agreements with
respect to common members.\119\ Accordingly, the Commission is
conditioning the operation of LTSE on approval by the Commission of a
Rule 17d-2 agreement that allocates the above specified matters, and
the approval of an amendment to the existing multi-party Rule 17d-2
plans specified above to add LTSE as a party.
---------------------------------------------------------------------------

    \119\ For common members, the regulatory obligations will be
covered by the Rule 17d-2 agreements, and for LTSE members that are
not also members of FINRA, the regulatory obligations will be
covered by the RSA.
---------------------------------------------------------------------------

C. LTSE Trading System

    LTSE will operate a fully automated electronic order book, and will
not maintain or operate a physical trading floor. Only broker-dealer
members of LTSE and entities that enter into market access arrangements
with members (collectively, ``Users'') will have access to the LTSE
system.\120\ Users will be able to electronically submit orders to buy
or sell securities listed or traded on the Exchange through a variety
of systems.\121\ LTSE will allow firms to register as market makers
with affirmative and negative market making obligations.\122\
---------------------------------------------------------------------------

    \120\ To obtain authorized access to the LTSE System, each User
must enter into a User Agreement with LTSE. See LTSE Rule 11.130(a).
    \121\ For a discussion of the means of access to LTSE, see LTSE
Form 1, Exhibit E, Section 1.
    \122\ See LTSE Rules 11.150 through 11.154. LTSE's rules
relating to market makers are similar to the rules of other national
securities exchanges. See, e.g., IEX Rules 11.150 through 11.154;
and Cboe BZX Rules 11.5 through 11.8.
---------------------------------------------------------------------------

    Users may submit orders to the Exchange as Limit Orders or Market
Orders, with the following order parameters: Displayed; Reserve; Non-
Displayed; Odd Lot; Mixed Lot; LTSE Only; Minimum Quantity; and Inter-
market Sweep.\123\ Orders may be submitted with the following time-in-
force instructions: Immediate-or-Cancel; Day; Good `til Extended Day;
System Session; and Good `til Time.\124\ Users may submit orders with
the display instructions of Displayed, Non-Displayed, or Reserve, but
orders submitted without display instructions will be fully
displayed.\125\ Displayed orders will be displayed on an anonymous
basis at a specified price.\126\ Orders will be classified as a Round
Lot, Odd Lot, or Mixed Lot.\127\ Users may also choose to designate
orders with an Anti-Internalization Group Identifier modifier for anti-
internalization purposes to prevent executions against resting opposite
side orders originating from the same market participant
identifier.\128\ All of these order types and parameters are similar to
order types and parameters approved by the Commission and currently
available on other national securities exchanges.\129\
---------------------------------------------------------------------------

    \123\ See LTSE Rule 11.190(a)-(b).
    \124\ See LTSE Rule 11.190(c).
    \125\ See LTSE Form 1, Exhibit E, Section 2, and LTSE Rule
11.190(b)(1)-(3).
    \126\ See LTSE Form 1, Exhibit E, Section 1.
    \127\ See LTSE Form 1, Exhibit E, Section 2, and LTSE Rule
11.180.
    \128\ See LTSE Form 1, Exhibit E, Section 2, and LTSE Rule
11.190(e).
    \129\ See, e.g., IEX Rule 11.190.

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

    The LTSE system will continuously and automatically match orders
pursuant to price/display/time priority, with displayed orders and
displayed portions of orders having precedence over non-displayed
orders and non-displayed portions of orders at the same price without
regard to time.\130\ LTSE will also utilize certain collars and
constraints in an effort to reduce the occurrence of erroneous
trades.\131\ With respect to the price of executions that would occur
on LTSE, the LTSE system is designed to comply with the order
protection requirements of Rule 611 of Regulation NMS \132\ by
requiring that, for any execution to occur on LTSE during regular
trading hours, the price must be equal to, or better than, the
``protected quotation,'' unless an exception to Rule 611 applies.\133\
Orders may be executed on the Exchange during the Regular Market
Session or during Pre- and Post-Market Sessions; \134\ however, some
order types and functionality are available only during the Regular
Market Session.\135\
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    \130\ See LTSE Rule 11.220(a)(1).
    \131\ See LTSE Rule 11.190(f) (describing the Order Collar,
Crossed Market Collar, One-Sided Market Handling, and Zero Markets
Handling) and LTSE Form 1, Exhibit E, Section 3. See also LTSE Rule
11.270 (Clearly Erroneous Executions).
    \132\ 17 CFR 242.611.
    \133\ See LTSE Rule 11.230(a)(2). See also 17 CFR 242.600(b)(58)
(defining ``protected quotation'').
    \134\ LTSE's Pre-Market Session will run from 8:00 a.m. ET to
9:30 a.m. ET, and its Post-Market Session will run from 4:00 p.m. ET
to 5:00 p.m. ET. See LTSE Rule 1.160(bb)-(cc).
    \135\ See LTSE Rules 11.110(a) and 11.230(a)(2).
---------------------------------------------------------------------------

    In addition, LTSE's rules are designed to address locked and
crossed markets, as required by Rule 610(d) of Regulation NMS,\136\ in
that they are designed not to disseminate interest that would lock or
cross a protected quote, require Users to reasonably avoid displaying
interest that locks or crosses any protected quotation, and are
reasonably designed to assure the reconciliation of locked or crossed
interest.\137\
---------------------------------------------------------------------------

    \136\ 17 CFR 242.610(d).
    \137\ See LTSE Rule 11.310. See also LTSE Rule 11.190(g)
(relating to price sliding functionality to avoid violations of Rule
610(d) of Regulation NMS, 17 CFR 242.610(d)).
---------------------------------------------------------------------------

    LTSE will conduct an opening process for non-LTSE-listed securities
at the start of its regular market session, and Users who wish to
participate in the opening process may enter appropriately designated
orders for queuing in the system.\138\ LTSE's rules also contemplate
auction processes for any securities that may be listed on LTSE, which
include Opening Auctions, Closing Auctions, IPO and Halt Auctions, and
Volatility Auctions.\139\
---------------------------------------------------------------------------

    \138\ See LTSE Rule 11.231.
    \139\ See LTSE Rule 11.350.
---------------------------------------------------------------------------

    Initially, LTSE will not offer any outbound routing
functionality;\140\ thus, all orders submitted to LTSE will be treated
as LTSE Only,\141\ though limit orders may also include the execution
instructions of Inter-Market Sweep Order, if appropriate.\142\
---------------------------------------------------------------------------

    \140\ See LTSE Form 1, Exhibit E, Section 2.
    \141\ See LTSE Rule 11.190(b)(6).
    \142\ See LTSE Rule 11.190(b)(12).
---------------------------------------------------------------------------

    The Commission finds that LTSE's trading rules are consistent with
the Act and, in particular, the Section 6(b)(5) requirement that an
exchange's rules be designed to promote just and equitable principles
of trade, remove impediments to and perfect the mechanisms of a free
and open market and a national market system, and protect investors and
the public interest.\143\
---------------------------------------------------------------------------

    \143\ See 15 U.S.C. 78f(b)(5). The Commission notes that LTSE's
trading rules, including its rules relating to market makers, order
types and parameters, priority, execution, and opening and auction
processes, are similar to existing exchanges' trading rules. See,
e.g., Chapter 11 of the IEX rule book.
---------------------------------------------------------------------------

    As a national securities exchange, LTSE will be a trading center
whose quotations can be ``automated quotations'' under Rule
600(b)(3).\144\ In turn, LTSE is designed to be an ``automated trading
center'' under Rule 600(b)(4) whose best-priced, displayed quotation
would be a ``protected quotation'' under Rules 600(b)(57) and
600(b)(58), and for purposes of Rule 611.\145\
---------------------------------------------------------------------------

    \144\ See LTSE Rule 11.240(c).
    \145\ See 17 CFR 242.600(b)(57)-(58) and 17 CFR 242.611.
---------------------------------------------------------------------------

    At the same time, to meet their regulatory responsibilities under
Rule 611(a) of Regulation NMS, such other trading centers will be
required to have sufficient notice of new protected quotations, as well
as all necessary information (such as final technical
specifications).\146\ The Commission believes that it would be a
reasonable policy and procedure under Rule 611(a) to require that
industry participants begin treating LTSE's best bid and best offer as
a protected quotation as soon as possible but no later than 90 days
after the date of this order, or such later date as LTSE begins
operation as a national securities exchange. The Commission notes that
it has taken the same position with other new equities exchanges.\147\
---------------------------------------------------------------------------

    \146\ See Securities Exchange Act Release No. 53829 (May 18,
2006), 71 FR 30038, 30041 (May 24, 2006) (File No. S7-10-04)
(extending the compliance dates for Rule 610 and Rule 611 of
Regulation NMS under the Act).
    \147\ See, e.g., BATS Order at 49505, supra note 35 and
DirectEdge Exchanges Order at 13163, supra note 59.
---------------------------------------------------------------------------

D. Discipline and Oversight of Members

    As noted above, one prerequisite for the Commission's grant of an
exchange's application for registration is that a proposed exchange
must be so organized and have the capacity to be able to carry out the
purposes of the Act.\148\ Specifically, an exchange must be able to
enforce compliance by its members and persons associated with its
members with the federal securities laws and rules thereunder and the
rules of the exchange.\149\ As also noted above, pursuant to the
proposed RSA with FINRA, FINRA will perform many of the initial
disciplinary processes on behalf of LTSE.\150\ For example, FINRA will
investigate potential securities laws violations, issue complaints, and
conduct hearings pursuant to LTSE rules. Appeals from disciplinary
decisions will be heard by the LTSE Appeals Committee \151\ and the
LTSE Appeals Committee's decision shall be final.\152\ In addition, the
Exchange Board on its own initiative may order review of a disciplinary
decision.\153\
---------------------------------------------------------------------------

    \148\ See 15 U.S.C. 78f(b)(1).
    \149\ See id.
    \150\ See supra notes 102-103 and accompanying text. See also
LTSE Rule 9.001 (noting that LTSE and FINRA are parties to a
regulatory contract, pursuant to which FINRA will perform certain
functions described in the Rule 9.000 Series on behalf of LTSE).
    \151\ See LTSE Rule 1.160(u).
    \152\ See LTSE Rule 9.349(c) (providing, among other things,
that if the Exchange Board does not call the disciplinary proceeding
for review, the proposed written decision of the LTSE Appeals
Committee shall become final).
    \153\ See LTSE Rule Series 9.350.
---------------------------------------------------------------------------

    The LTSE Bylaws and LTSE rules provide that the Exchange has
disciplinary jurisdiction over its members so that it can enforce its
members' compliance with its rules and the federal securities laws and
rules.\154\ The Exchange's rules also permit LTSE to sanction members
for violations of its rules and violations of the federal securities
laws and rules by, among other things, expelling or suspending members,
limiting members' activities, functions, or operations, fining or
censuring members, or suspending or barring a person from being
associated with a member, or any other fitting sanction.\155\ LTSE's
rules also provide for the imposition of fines for certain minor rule
violations in lieu of commencing disciplinary proceedings.\156\
Accordingly, as a condition to the operation of LTSE, a Minor Rule
Violation Plan (``MRVP'') filed by LTSE under Act Rule 19d-

1(c)(2) must be declared effective by the Commission.\157\
---------------------------------------------------------------------------

    \154\ See generally LTSE Bylaws, Article X and LTSE Rules
Chapters 8 and 9.
    \155\ See LTSE Rule 2.120.
    \156\ See LTSE Rule 9.216(b).
    \157\ 17 CFR 240.19d-1(c)(2).
---------------------------------------------------------------------------

    The Commission finds that the LTSE Bylaws and rules concerning its
disciplinary and oversight programs are consistent with the
requirements of Sections 6(b)(6) and 6(b)(7) \158\ of the Act in that
they provide fair procedures for the disciplining of members and
persons associated with members. The Commission further finds that the
rules of LTSE provide it with the ability to comply, and with the
ability to enforce compliance by its members and persons associated
with its members, with the provisions of the Act, the rules and
regulations thereunder, and the rules of LTSE.\159\
---------------------------------------------------------------------------

    \158\ 15 U.S.C. 78f(b)(6) and (b)(7).
    \159\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

E. Listing and Trading on LTSE

1. Registration Under Section 12(b) of the Act
    Once LTSE begins operations as a national securities exchange, a
security will be considered for listing on LTSE only if such security
is registered pursuant to Section 12(b) of the Act \160\ or such
security is subject to an exemption.\161\ An issuer may register a
security pursuant to Section 12(b) by submitting to LTSE a listing
application that provides certain required information.\162\ LTSE will
review the listing application and, if the listing application is
approved, will certify to the Commission that it has approved the
security for listing and registration.\163\ Registration of the
security will become effective thirty days after the receipt of such
certification by the Commission or within a shorter period of time as
the Commission may determine.\164\ Once registration is effective, the
security is eligible for listing on LTSE.\165\
---------------------------------------------------------------------------

    \160\ 15 U.S.C. 78l(b).
    \161\ 15 U.S.C. 78l(c); LTSE Rule 14.203.
    \162\ 15 U.S.C. 78l(b); LTSE Rule 14.202. Prior to submitting a
listing application to LTSE, the issuer will be required to
participate in a free confidential pre-application eligibility
review, in which LTSE will determine whether the issuer meets its
listing criteria and is eligible to submit a listing application.
See LTSE Rule 14.201, which is based on the equivalent Rule 14.201
of IEX's rules.
    \163\ See LTSE Rule 14.203(f); 15 U.S.C. 78l(d).
    \164\ 15 U.S.C. 78l(d).
    \165\ See LTSE Rule 14.203(f); 15 U.S.C. 78l(d).
---------------------------------------------------------------------------

2. Initial and Continuing Listing Standards
    The Commission finds that LTSE's proposed initial and continuing
listing standards are consistent with the requirements of the Act. With
respect to the standards relating to the listing and delisting of
companies, including procedures and prerequisites for initial and
continued listing on LTSE, the obligations of issuers with securities
listed on LTSE, as well as rules describing the application and
qualification process, LTSE's proposed listing rules for securities are
virtually identical to those of IEX.\166\ With respect to LTSE Rule
14.201, which is substantially similar to the analogous rule of IEX,
LTSE requires a company seeking the initial listing of one or more
classes of securities on LTSE to participate in a free confidential
pre-application eligibility review to determine whether the company
meets LTSE's listing criteria and, if, upon completion of this review,
LTSE determines that a company is eligible for listing, LTSE will
notify that company in writing that it has been cleared to submit an
original listing application. The Commission notes that, if, upon
completion of this review, the Exchange determines that a company is
ineligible for listing, the company may request a review of LTSE's
determination pursuant to the process set forth in LTSE Rule
9.555.\167\
---------------------------------------------------------------------------

    \166\ LTSE 's proposed initial and continuing listing standards
for securities to be listed and traded on LTSE are virtually
identical to the current rules for IEX, except that LTSE will not
have listing criteria for exchange-traded funds, portfolio
depository receipts, and index fund shares. The Commission has
previously determined that the initial and continuing listing
standards of IEX are consistent with the Act. See LTSE Rules,
Chapter 14 and IEX Rules, Chapter 14.
    \167\ See Amendment No. 2, supra note 6.
---------------------------------------------------------------------------

3. Corporate Governance Standards
    LTSE has proposed corporate governance standards in connection with
securities to be listed and traded on LTSE that are substantially
similar to the corporate governance listing standards of other
exchanges.\168\ Included in these standards are rules requiring a
majority of directors on a listed issuer's board to be independent;
rules and independence requirements relating to audit and compensation
committees and the oversight of nominations; and rules requiring listed
issuers to adopt codes of conduct applicable to all their directors,
officers and employees.\169\ The Commission finds that LTSE's proposed
corporate governance standards for listed issuers contained in LTSE's
proposed rules are consistent with the Act.\170\ The Commission further
finds that LTSE's rules satisfy the requirements of Section 10A(m) of
the Act and Rule 10A-3 thereunder and Section 10C of the Act and Rule
10C-1 thereunder, relating to audit and compensation committees,
respectively.\171\ The Commission believes that LTSE's corporate
governance standards for listed issuers that require a fully
independent audit committee are designed to promote independent and
objective review and oversight of the accounting and auditing practices
of listed issuers and to enhance audit committee independence,
authority, and responsibility by implementing the standards set forth
in Rule 10A-3.\172\ In addition, the Commission believes that LTSE's
proposed requirements relating to independent compensation committees
for listed issuers would benefit investors by implementing the
standards set forth in Rule 10C-1, which requires that the independent
directors of a listed issuer oversee executive compensation matters,
consider independence criteria before retaining compensation advisers
and have responsibility for the appointment, compensation and oversight
of these advisers.\173\ The corporate governance standards embodied in
the listing rules of national securities exchanges, in particular, play
an important role in assuring that companies listed for trading on the
exchanges' markets observe good governance practices, including a
reasoned, fair, and impartial approach for determining the compensation
of corporate executives.\174\ The Commission believes that the
Exchange's rules will foster greater transparency, accountability, and
objectivity in the oversight of compensation practices of listed
issuers and in the decision-making processes of their compensation
committees.\175\
---------------------------------------------------------------------------

    \168\ See proposed LTSE Rule Series 14.440, and see, e.g.,
Nasdaq Rule Series 5600 and IEX Rule series 14.400.
    \169\ See proposed LTSE Rules 14.405 and 14.406.
    \170\ The Commission notes that it has previously determined
that the corporate governance standards of other exchanges, with
which LTSE's proposed rules are commensurate, are consistent with
the Act. See, e.g., Securities Exchange Act Release No. 48745
(November 4, 2003), 68 FR 64154 (November 12, 2003) and IEX Order,
supra note 48.
    \171\ See 15 U.S.C. 78f(b)(5); 15 U.S.C. 78j-1(m); 15 U.S.C.
78j-3; 17 CFR 240.10A-3; 17 CFR 240.10C-1.
    \172\ See Securities Exchange Act Release No. 47654 (April 9,
2003), 68 FR 18788 (April 16, 2003).
    \173\ See Securities Exchange Act Release No. 67220 (June 20,
2012), 77 FR 38422, 38425 (June 27, 2012).
    \174\ See, e.g., Securities Exchange Act Release No. 68640
(January 11, 2013), 78 FR 4554, 4563 (January 22, 2013)(approving
SR-NASDAQ-2012-109 relating to rules for compensation committees for
listed companies, upon which LTSE's proposed rules for compensation
committees are based).
    \175\ See id. (finding Nasdaq compensation committee rules
consistent with the Act). See also Securities Exchange Act Release
No. 68639 (January 11, 2013), 78 FR 4570 (January 22, 2013) (order
approving NYSE's compensation committee rules, which was cited by
Nasdaq as precedent for a subsequent amendment to its own rules that
was filed on an immediately effective basis;) see Securities Act
Release No. 71037 (December 11, 2013), 78 FR 76179 (December 16,
2013) (SR-NASDAQ-2013-147).

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

    As noted above, the Commission received one comment letter on
LTSE's Form 1 application. In its comment letter, the Council of
Institutional Investors (``CII'') advised that it could not support
LTSE's Form 1 application for two reasons. First, CII stated that the
corporate governance requirements in LTSE's Form 1 application
(specifically, its ``Voting Rights Policy'' \176\) would ``permit newly
public companies to have multi-class structures with unequal voting
rights in conflict with [CII's] membership approved policies supporting
a one share, one vote structure'' with ``no sunsets on such
structures.'' \177\ Second, CII stated that LTSE's Form 1 application
``does not include any information about LTSE's reported plans to
update its application to include time-phased voting rights as a core
element of its proposed corporate governance listing standards.'' \178\
In addition, CII set forth its concerns about time-phased voting
rights, including disproportionate empowerment of long-term
stakeholders and challenges in tracking ownership of those with super-
voting rights.\179\
---------------------------------------------------------------------------

    \176\ See LTSE Rule 14.413, Supplementary Material .01.
    \177\ CII Letter at 1-2.
    \178\ Id.
    \179\ CII Letter at 6-7.
---------------------------------------------------------------------------

    The issues raised in the CII Letter do not provide a basis for the
Commission to reject LTSE's Form 1 application. Commission rules do not
mandate that the rules of a national securities exchange must provide
for a ``one share, one vote'' requirement for listed issuers. In
approving the current rules governing the voting rights of shareholders
of common stock listed on the NYSE, American Stock Exchange (``Amex''),
or included on Nasdaq, the Commission stated that the new rules would
protect investors from disparate voting rights plans that resulted in
disenfranchisement.\180\ At the same time, however, the Commission
stated that the new voting rights rules would provide flexibility to
listed companies to devise their corporate capital structure by
permitting disparate voting rights plans that do not disenfranchise
existing shareholders and that a company could, for example, have a
permissible dual class structure resulting from an initial public
offering or the issuance of lower voting stock.\181\ The Commission
notes that the Voting Rights Policy, as set forth in LTSE's proposed
listing standards, is consistent with the current voting rights
provisions of NYSE and Nasdaq, as acknowledged by CII in its
letter.\182\ Other national securities exchanges that provide for the
listing of equity securities also maintain shareholder voting rights
provisions consistent with the NYSE and Nasdaq rules.\183\ As noted
above, Commission rules do not mandate a ``one share, one vote''
requirement for listed issuers.
---------------------------------------------------------------------------

    \180\ See Securities Exchange Act Release No. 35121 (December
19, 1994), 59 FR 66570 (December 27, 1994) (order approving rules
regarding shareholder voting rights for NYSE, Amex, and National
Association of Securities Dealers, Inc., on behalf of Nasdaq)
(``1994 Approval Order'').
    \181\ Id.
    \182\ CII Letter at 8. See also 1994 Approval Order, supra note
180.
    \183\ See, e.g., Securities Exchange Act Release No. 37481(July
25, 1996), 61 FR 40270 (August 1, 1996) (approving a similar voting
rights provision for Chicago Stock Exchange, Inc., n/k/a NYSE
Chicago, Inc.; the provision is now contained in Rules of NYSE
Chicago, Inc., Article 22, Rule 20). See also IEX Rule 14.413,
Supplementary Material .01, which appears to be the model for the
LTSE's proposed Voting Rights Policy.
---------------------------------------------------------------------------

    For the forgoing reasons, the Commission believes that it is
appropriate to approve LTSE's Form 1 application with the inclusion of
the Voting Rights Policy. With respect to the CII's concerns about
time-phased voting rights, no such rights are proposed by LTSE in its
Form 1 application. Once LTSE is registered as a national securities
exchange, LTSE is required to file any changes to its rules as a
proposed rule change under Section 19(b) of the Act and Rule 19b-
4,\184\ and the public will be provided notice and given the
opportunity to provide comments on any such proposed rule change.
---------------------------------------------------------------------------

    \184\ 15 U.S.C. 78s(b) and 17 CFR 240.19b-4.
---------------------------------------------------------------------------

4. Trading Pursuant to Unlisted Trading Privileges
    As an exchange, LTSE will be permitted by Section 12(f) of the Act
\185\ to extend unlisted trading privileges to securities listed and
registered on other national securities exchanges, subject to
Commission rules. In particular, Rule 12f-5 under the Act requires an
exchange that extends unlisted trading privileges to securities to have
in effect a rule or rules providing for transactions in the class or
type of security to which the exchange extends unlisted trading
privileges.\186\ The Commission notes that Chapter 14 of LTSE's rules
provides for transactions in securities that meet specified criteria.
Accordingly, pursuant to Section 12(f) of the Act and Rule 12f-5
thereunder, the Exchange will be permitted to extend unlisted trading
privileges to securities of the same class, subject to the trading
rules of the Exchange.\187\
---------------------------------------------------------------------------

    \185\ 15 U.S.C. 78l(f).
    \186\ See 17 CFR 240.12f-5. See also Securities Exchange Act
Release No. 35737 (April 21, 1995), 60 FR 20891 (April 28, 1995)
(File No. S7-4-95) (adopting Rule 12f-5 under the Act).
    \187\ See proposed LTSE Rule 11.120, which states: ``Any classes
of securities listed or admitted to unlisted trading privileges on
the Exchange shall be eligible to become designated for trading on
the Exchange in accordance with the Rules of Chapter 14.'' LTSE's
rules currently do not provide for the trading of exchange-traded
funds, portfolio depository receipts, and index fund shares, or for
the trading of options, security futures, or other similar
instruments.
---------------------------------------------------------------------------

F. Section 11(a) of the Act

    Section 11(a)(1) of the Act \188\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises investment discretion
(collectively, ``covered accounts'') unless an exception applies. Rule
11a2-2(T) under the Act,\189\ known as the ``effect versus execute''
rule, provides exchange members with an exemption from the Section
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member,
subject to certain conditions, to effect transactions for covered
accounts by arranging for an unaffiliated member to execute
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (i) Must transmit the order from off the exchange
floor; (ii) may not participate in the execution of the transaction
once it has been transmitted to the member performing the
execution;\190\ (iii) may not be affiliated with the executing member;
and (iv) with respect to an account over which the member or an
associated person has investment discretion, neither the member nor its
associated person may retain any compensation in connection with
effecting the transaction except as provided in the Rule.
---------------------------------------------------------------------------

    \188\ 15 U.S.C. 78k(a)(1).
    \189\ 17 CFR 240.11a2-2(T).
    \190\ This prohibition also applies to associated persons. The
member may, however, participate in clearing and settling the
transaction.
---------------------------------------------------------------------------

    In a letter to the Commission, LTSE requested that the Commission
concur with LTSE's conclusion that LTSE members that enter orders into
the LTSE trading system satisfy the requirements of Rule 11a2-
2(T).\191\ For the reasons set forth below, the Commission believes
that LTSE members entering orders into the LTSE trading system will
satisfy the requirements of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \191\ See Letter from Eric Ries, Chief Executive Officer, LTSE,
to Brent Fields, Director, Office of the Secretary, and Brett
Redfearn, Director, Division of Trading and Markets, Commission,
dated March 8, 2019 (``LTSE 11(a) Letter'').

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

    The Rule's first requirement is that orders for covered accounts be
transmitted from off the exchange floor. In the context of automated
trading systems, the Commission has found that the off-floor
transmission requirement is met if a covered account order is
transmitted from a remote location directly to an exchange's floor by
electronic means.\192\ LTSE has represented that LTSE does not have a
physical trading floor, and the LTSE trading system will receive orders
from members electronically through remote terminals or computer-to-
computer interfaces.\193\ The Commission believes that the LTSE trading
system satisfies this off-floor transmission requirement.
---------------------------------------------------------------------------

    \192\ See, e.g., Nasdaq Order, supra note 35; Securities
Exchange Act Release Nos. 61419 (January 26, 2010), 75 FR 5157
(February 1, 2010) (SR-BATS-2009-031) (approving BATS options
trading); 59154 (December 23, 2008), 73 FR 80468 (December 31, 2008)
(SR-BSE-2008-48) (approving equity securities listing and trading on
BSE); 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-
NASDAQ-2007-004 and SR-NASDAQ-2007-080) (approving NOM options
trading); 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001)
(SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May 24,
1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-53)
(approving NYSE's Off-Hours Trading Facility); and 15533 (January
29, 1979), 44 FR 6084 (January 31, 1979) (``1979 Release'').
    \193\ See LTSE 11(a) Letter, supra note 191.
---------------------------------------------------------------------------

    Second, the Rule requires that the member and any associated person
not participate in the execution of its order after the order has been
transmitted. LTSE represented that at no time following the submission
of an order is a member or an associated person of the member able to
acquire control or influence over the result or timing of the order's
execution.\194\ According to LTSE, the execution of a member's order is
determined solely by what quotes and orders are present in the system
at the time the member submits the order, and the order priority based
on the LTSE rules.\195\ Accordingly, the Commission believes that an
LTSE member and its associated persons do not participate in the
execution of an order submitted to the LTSE trading system.\196\
---------------------------------------------------------------------------

    \194\ See id. LTSE notes that a member may cancel or modify the
order, or modify the instructions for executing the order, after the
order has been transmitted, provided that such cancellations or
modifications are transmitted from off an exchange floor. The
Commission has stated that the non-participation requirement is
satisfied under such circumstances so long as such modifications or
cancellations are also transmitted from off the floor. See
Securities Exchange Act Release No. 14563 (March 14, 1978), 43 FR
11542 (March 17, 1978) (``1978 Release'') (stating that the ``non-
participation requirement does not prevent initiating members from
canceling or modifying orders (or the instructions pursuant to which
the initiating member wishes orders to be executed) after the orders
have been transmitted to the executing member, provided that any
such instructions are also transmitted from off the floor'').
    \195\ See LTSE 11(a) Letter, supra note 191. The Commission
notes that LTSE has proposed rules for the registration,
obligations, and operation of market makers on LTSE. LTSE has
represented that market makers, if any, will submit quotes in the
form of orders in their assigned symbols.
    \196\ See, e.g., BATS Order at 49505, supra note 35 and
DirectEdge Exchanges Order at 13164, supra note 59.
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    Third, Rule 11a2-2(T) requires that the order be executed by an
exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that this requirement is satisfied
when automated exchange facilities, such as the LTSE trading system,
are used, as long as the design of these systems ensures that members
do not possess any special or unique trading advantages in handling
their orders after transmitting them to the exchange.\197\ LTSE has
represented that the design of the LTSE trading system ensures that no
member has any special or unique trading advantage in the handling of
its orders after transmitting its orders to LTSE.\198\ Based on LTSE's
representation, the Commission believes that the LTSE trading system
satisfies this requirement.
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    \197\ See, e.g., BATS Order at 49505, supra note 35 and
DirectEdge Exchanges Order at 13164, supra note 59. In considering
the operation of automated execution systems operated by an
exchange, the Commission noted that, while there is not an
independent executing exchange member, the execution of an order is
automatic once it has been transmitted into the system. Because the
design of these systems ensures that members do not possess any
special or unique trading advantages in handling their orders after
transmitting them to the exchange, the Commission has stated that
executions obtained through these systems satisfy the independent
execution requirement of Rule 11a2-2(T). See 1979 Release, supra
note 192.
    \198\ See LTSE 11(a) Letter, supra note 191.
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    Fourth, in the case of a transaction effected for an account with
respect to which the initiating member or an associated person thereof
exercises investment discretion, neither the initiating member nor any
associated person thereof may retain any compensation in connection
with effecting the transaction, unless the person authorized to
transact business for the account has expressly provided otherwise by
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\199\ LTSE members trading for covered accounts over
which they exercise investment discretion must comply with this
condition in order to rely on the rule's exemption.\200\
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    \199\ See, e.g., BATS Order at 49505, supra note 35 and
DirectEdge Exchanges Order at 13164, supra note 59. In addition,
Rule 11a2-2(T)(d) requires a member or associated person authorized
by written contract to retain compensation, in connection with
effecting transactions for covered accounts over which such member
or associated persons thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member or any associated person
thereof in connection with effecting transactions for the account
during the period covered by the statement. See 17 CFR 240.11a2-
2(T)(d). See also 1978 Release, supra note 194 (stating ``[t]he
contractual and disclosure requirements are designed to assure that
accounts electing to permit transaction-related compensation do so
only after deciding that such arrangements are suitable to their
interests'').
    \200\ LTSE represented that it will advise its membership
through the issuance of an Information Circular that those members
trading for covered accounts over which they exercise investment
discretion must comply with this condition in order to rely on the
rule's exemption. See LTSE 11(a) Letter, supra note 191.
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G. Exemption From Section 19(b) of the Act With Regard to FINRA and
NYSE Rules Incorporated by Reference

    LTSE proposes to incorporate by reference certain FINRA and NYSE
rules as LTSE rules.\201\ Thus, for certain LTSE rules, Exchange
members will comply with an LTSE rule by complying with the FINRA or
NYSE rule referenced therein.\202\ In connection with its

proposal to incorporate FINRA and NYSE rules by reference, LTSE
requested, pursuant to Rule 240.0-12,\203\ an exemption under Section
36 of the Act from the rule filing requirements of Section 19(b) of the
Act for changes to those LTSE rules that are effected solely by virtue
of a change to a cross-referenced FINRA or NYSE rule.\204\ LTSE
proposes to incorporate by reference categories of rules (rather than
individual rules within a category) that are not trading rules. LTSE
agrees to provide written notice to its members whenever a proposed
rule change to a FINRA or NYSE rule that is incorporated by reference
is proposed and whenever any such proposed change is approved by the
Commission or otherwise becomes effective.\205\
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    \201\ See LTSE Rule 1.170. See Letter from Eric Ries, Chief
Executive Officer, LTSE, to Brent Fields, Director, Office of the
Secretary, and Brett Redfearn, Director, Division of Trading and
Markets, Commission, dated March 8, 2019 (``Exemption Request
Letter''). See also Letter from Eric Ries, Chief Executive Officer,
LTSE, to Vanessa Countryman, Acting Directors, Office of the
Secretary, and Brett Redfearn, Director of Division of Trading and
Markets, Commission, dated April 16, 2019 (``Exemption Request
Letter Addendum'').
    \202\ LTSE proposes to incorporate by reference the 12000 and
13000 Series of the FINRA Manual (Code of Arbitration Procedures for
Customer Disputes and Code of Arbitration Procedures for Industry
Disputes). See LTSE Rule 12.110 (Arbitration). In addition, LTSE
proposes to incorporate by reference FINRA Rules 4360 (Fidelity
Bonds), 2090 (Know Your Customer), 2111 (Suitability), 2241
(Research Analysts and Research Reports), 2210 (Communications with
the Public), 3230 (Telemarketing), 4560 (Short-Interest Reporting),
4110 (Capital Requirements), 4120 (Regulatory Notification and
Business Curtailment), 4140 (Audit), 4511 (General Requirements),
4512 (Customer Account Information), 4513 (Records of Written
Customer Complaints), 3130 (Annual Certification of Compliance and
Supervisory Procedures), 3210 (Accounts At Other Broker-Dealers and
Financial Institutions), 5310 (Best Execution and Interpositioning),
5270 (Front Running of Block Transactions), 4590 (Synchronization of
Member Business Clocks), 7440 (Recording of Order Information), 7450
(Order Data Transmission Requirements), 2268 (Requirements When
Using Predispute Arbitration Agreements for Customer Accounts). See
LTSE Rules 2.240 (Fidelity Bonds), 3.150 (Know Your Customer), 3.170
(Suitability), 3.230 (Payments Involving Publications that Influence
the Market Price of a Security), 3.280 (Communications with
Customers and the Public), 3.292 (Telemarketing), 3.293 (Short-
Interest Reporting), 4.110 (Capital Compliance), 4.120 (Regulatory
Notification and Business Curtailment), 4.140 (Audit), 4.511
(General Requirements), 4.512 (Customer Account Information), 4.513
(Record of Written Customer Complaints), 5.130 (Annual Certification
of Compliance and Supervisory Procedures), 5.170 (Transactions for
or by Associated Persons), 10.220 (Best Execution and
Interpositioning), 10.260 (Front Running of Block Transactions),
11.420(c), (d) and (e) (Order Audit Trail System Requirements),
12.110 (Arbitration), respectively. LTSE also proposes to
incorporate by reference certain definitions from NYSE Rule 7410.
See LTSE Rule 11.420(a) (Order Audit Trail System Requirements).
    \203\ See 17 CFR 240.0-12.
    \204\ See Exemption Request Letter and Exemption Request Letter
Addendum, supra note 201.
    \205\ LTSE will provide such notice through a posting on the
same website location where LTSE posts its own rule filings pursuant
to Rule 19b-4 under the Act, within the required time frame. The
website posting will include a link to the location on the FINRA or
NYSE website where FINRA's or NYSE's proposed rule change is posted.
See id.
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    Using its authority under Section 36 of the Act,\206\ the
Commission is hereby granting LTSE's request for an exemption, pursuant
to Section 36 of the Act, from the rule filing requirements of Section
19(b) of the Act with respect to the rules that LTSE proposes to
incorporate by reference. \207\ This exemption is conditioned upon LTSE
providing written notice to its members whenever FINRA or the NYSE
proposes to change a rule that LTSE has incorporated by reference. The
Commission believes that this exemption is appropriate in the public
interest and consistent with the protection of investors because it
will promote more efficient use of Commission and SRO resources by
avoiding duplicative rule filings based on simultaneous changes to
identical rules of more than one SRO.
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    \206\ 15 U.S.C. 78mm.
    \207\ The Commission previously exempted certain SROs from the
requirement to file proposed rule changes under Section 19(b) of the
Act. See, e.g., IEX Order, supra note 48; ISE Mercury Order, supra
note 50; MIAX Pearl Order, MIAX Pearl Order and BATS Order, supra
note 35; DirectEdge Exchanges Order, supra note 59.
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H. Conclusion

    It is ordered that the application of LTSE for registration as a
national securities exchange be, and it hereby is, granted.
    It is furthered ordered that operation of LTSE is conditioned on
the satisfaction of the requirements below:
    A. Participation in National Market System Plans. LTSE must join
the Consolidated Tape Association Plan, the Consolidated Quotation
Plan, the Nasdaq UTP Plan, the National Market System Plan Establishing
Procedures Under Rule 605 of Regulation NMS, the Regulation NMS Plan to
Address Extraordinary Market Volatility, the Plan for the Selection and
Reservation of Securities Symbols, and the National Market System Plan
Governing the Consolidated Audit Trail.
    B. Intermarket Surveillance Group. LTSE must join the Intermarket
Surveillance Group.
    C. Minor Rule Violation Plan. A MRVP filed by LTSE under Rule 19d-
1(c)(2) must be declared effective by the Commission.\208\
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    \208\ 17 CFR 240.19d-1(c)(2).
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    D. Rule 17d-2 Agreement. An agreement pursuant to Rule 17d-2 \209\
that allocates regulatory responsibility for those matters specified
above \210\ must be approved by the Commission, or LTSE must
demonstrate that it independently has the ability to fulfill all of its
regulatory obligations.
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    \209\ 17 CFR 240.17d-2.
    \210\ See supra notes 116-117 and accompanying text.
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    E. Participation in Multi-Party Rule 17d-2 Plans. LTSE must become
a party to the multi-party Rule 17d-2 agreements concerning the
surveillance, investigation, and enforcement of common insider trading
rules.
    F. RSA. LTSE must finalize the provisions of the RSA with its
regulatory services provider, as described above, that will specify the
LTSE and Commission rules for which the regulatory services provider
will provide certain regulatory functions, or LTSE must demonstrate
that it independently has the ability to fulfill all of its regulatory
obligations.
    It is further ordered, pursuant to Section 36 of the Act,\211\ that
LTSE shall be exempted from the rule filing requirements of Section
19(b) of the Act with respect to the FINRA and NYSE rules that LTSE
proposes to incorporate by reference into LTSE's rules, subject to the
conditions specified in this Order.
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    \211\ 15 U.S.C. 78mm.

    By the Commission.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-10037 Filed 5-14-19; 8:45 am]
 BILLING CODE 8011-01-P