[Federal Register: March 18, 2010 (Volume 75, Number 52)]
[Notices]
[Page 13151-13168]
[DOCID:fr18mr10-106]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61698; File Nos. 10-194 and 10-196 \1\]

In the Matter of the Applications of EDGX Exchange, Inc., and
EDGA Exchange, Inc. for Registration as National Securities Exchanges;
Findings, Opinion, and Order of the Commission

March 12, 2010.

I. Introduction

    On May 7, 2009, EDGX Exchange, Inc. (``EDGX'') and EDGA Exchange,
Inc. (``EDGA'') (each, an ``Exchange,'' and, together, the
``Exchanges'') each submitted to the Securities and Exchange Commission
(``Commission'') a Form 1 application (each, a ``Form 1 Application,''
and, together, the ``Form 1 Applications'') under the Securities
Exchange Act of 1934 (``Act'') seeking registration as a national
securities exchange pursuant to Section 6 of the Act.\2\ On July 30,
2009, each Exchange submitted Amendment No. 1 to its Form 1
Application. Notice of the Form 1 Applications, each as modified by
Amendment No. 1, was published for comment in the Federal Register on
September 17, 2009.\3\ The Commission received two comment letters
regarding the Form 1 Applications, as modified by Amendment No. 1.\4\
On February 11, 2010, each Exchange submitted Amendment No. 2 to its
Form 1 Application.\5\
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    \1\ In the Notice (as defined below), EDGA Exchange, Inc. was
assigned File No. 10-194 and EDGX Exchange, Inc. was assigned File
No. 10-193. The EDGX Exchange, Inc. file number was subsequently
redesignated as File No. 10-196. The EDGA Exchange, Inc. file number
remains unchanged.
    \2\ 15 U.S.C. 78f. On September 11, 2009, the Commission issued
an order granting EDGX and EDGA exemptive relief, subject to certain
conditions, in connection with filing of their Form 1 applications.
See Securities Exchange Act Release No. 60650 (September 11, 2009),
74 FR 47828.
    \3\ See Securities Exchange Act Release No. 60651 (September 11,
2009), 74 FR 47827 (``Notice'').
    \4\ See letters to Elizabeth M. Murphy, Secretary, Commission,
from Joan C. Conley, Senior Vice President and Corporate Secretary,
Nasdaq OMX Group, Inc., dated November 11, 2009 (``Nasdaq Letter'')
and from Daniel Mathisson, Managing Director, and Vaishali Javeri,
Director and Counsel, Credit Suisse Securities (USA) LLC, dated
December 4, 2009 (``Credit Suisse Letter''). Direct Edge Holdings
LLC responded to the Nasdaq Letter. See letter from William O'Brien,
Chief Executive Officer, Direct Edge Holdings LLC, to Elizabeth M.
Murphy, Secretary, Commission, dated November 13, 2009 (``DE
Holdings Response'').
    \5\ In Amendment No. 2, each Exchange modified several Exhibits
in its Form 1 Application. Specifically, each Exchange's Amendment
No. 2:
    (a) Modifies Exhibit B to: (A) Specify the dates when the non-
U.S. Upstream Owners adopted the Supplemental Resolutions (as
defined below); and (B) revise the proposed rules of each Exchange
to: (i) Indicate in Rules 1.5(p), 11.9(a), 14.2(g), 14.3(d) that the
Post-Closing Session ends at 8 p.m.; (ii) add Rule 2.3(b)-(f)
(Member Eligibility & Registration) to require registration of
Authorized Traders and Principals in the appropriate category of
registration as determined by the Exchange, and make conforming
amendments to the interpretations and policies for Rule 2.5; (iii)
reflect Direct Edge ECN LLC's assumed name of DE Route in Rules 2.11
and 2.12, regarding its roles as an inbound and outbound router;
(iv) add Rule 3.21 (Customer Disclosures) to require Exchange
members that execute trades on behalf of customers during either
Pre-Opening or Post-Closing Sessions offered by the Exchange to
provide customers with notice regarding the risks of trading during
extended hours, consistent with the rules of other self-regulatory
organizations; (v) amend Rule 11.5(a) to clarify that market orders
are not eligible for the Pre-Opening and Post-Closing Sessions; (vi)
add new Interpretation and Policy .01 to Rule 14.1 to explain the
circumstances under which the Exchange will halt trading during the
Pre-Opening and Post-Closing Sessions; (vii) amend Rule 11.11 to
enable DTC/NSCC authorized clearing brokers to clear trades on the
Exchange, even though they are not Exchange members; (viii) add
section (d) to Rule 11.12 (Limitation of Liability) to establish a
procedure to compensate Exchange members in relation to Exchange
systems failures or a negligent act or omission of an Exchange
employee, consistent with industry practice; (ix) revise the
Exchange's Clearly Erroneous Trading rules (Rule 11.13) to comport
with those filed by other registered national securities exchanges;
and (x) add Rule 12.13 (Trading Ahead of Research Reports).
    (b) Revises Exhibit C to clarify, in the description of Direct
Edge ECN LLC, the cessation of its capacity as an electronic
communications network following the Exchanges' commencement of
operations as national securities exchanges.
    (c) Modifies Exhibit E to: (A) Provide a clarification with
respect to the Exchange's membership in various order and trade
reporting organizations; (B) refer to the planned phase-in of
securities to be traded on the Exchange; and (C) update a reference
to the provision of technical systems specifications and the
addition of a copy of the Direct Edge Next Gen FIX Specifications
(Version 1.0) (Users Manual).
    (d) Revises Exhibit F to amend the Clearing Letter of Guarantee,
User Agreement, Routing Agreement, and Exchange Data Vendor
Agreement to reflect comments by potential Exchange members and
industry practice.
    (e) Modifies Exhibit I to state that, prior to the launch of the
Exchange, DE Holdings will make a capital contribution into the
Exchange's capital account, and to represent that DE Holdings will
enter into an explicit agreement with the Exchange to provide
adequate funding for its operations.
    (f) Amends Exhibit J to state that all Directors, including
Owner Directors and the Chief Executive Officer, will serve
staggered three-year terms, subject to the Exchange's Bylaws.
    (g) Revises to Exhibit L to describe the Exchange's execution of
a regulatory services agreement with the ISE LLC and the Financial
Industry Regulatory Authority (``FINRA'') to conduct various
regulatory services on behalf of the Exchange.
    The changes proposed in Amendment No. 2 are either not material,
consistent with the existing rules of other registered national
securities exchanges, or responsive to the concerns of the
Commission.
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II. Statutory Standards

    Under sections 6(b) and 19(a) of the Act,\6\ the Commission shall
by order grant a registration as a national securities exchange if it
finds, among

other things, that the 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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    \6\ 15 U.S.C. 78f(b) and 78s(a).
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    As discussed in greater detail below, the Commission finds that the
Exchanges' Form 1 Applications for exchange registration meet the
requirements of the Act and the rules and regulations thereunder.
Further, the Commission finds that the proposed rules of the Exchanges
are consistent with Section 6 of the Act in that, among other things,
they are designed to: (1) Assure fair representation of an 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; (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, remove impediments to and
perfect the mechanisms of a free and open market and a national market
system; and (3) protect investors and the public interest. The
Commission also believes that the rules of the Exchanges are consistent
with section 11A of the Act.\7\ Finally, the Commission finds that the
proposed rules of the Exchanges do not impose any burden on competition
not necessary or appropriate in furtherance of the purposes of the
Act.\8\
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    \7\ 15 U.S.C. 78k-1.
    \8\ 15 U.S.C. 78f(b)(8).
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III. Discussion

A. Corporate Structure

    EDGX and EDGA each have applied to the Commission to register as a
national securities exchange. EDGX and EDGA currently operate as
separate trading platforms of Direct Edge ECN LLC (``DECN''), an
electronic communications network (``ECN'') that is a registered
broker-dealer. Direct Edge Holdings LLC (``DE Holdings''), a Delaware
limited liability company, wholly owns EDGX, EDGA, and DECN. Following
EDGX's and EDGA's commencement of operations as national securities
exchanges, DECN will cease operations as an ECN and DECN (doing
business as DE Route) will begin to operate as a facility of the
Exchanges that provides outbound order routing for the Exchanges. DECN
also will provide inbound routing services to EDGX from EDGA, and to
EDGA from EDGX.\9\
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    \9\ See EDGX and EDGA Rules 2.11 and 2.12. See also Section
III.G, infra.
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    As a limited liability company, DE Holdings is overseen by a Board
of Managers (``DE Holdings Board'') and ownership in DE Holdings is
represented by limited liability membership interests. The Fourth
Amended and Restated Limited Liability Company Operating Agreement of
DE Holdings (``DE Holdings Operating Agreement'') refers to the holders
of such interests as ``Members.'' \10\ The Members of DE Holdings and
their respective ownership interests are: International Securities
Exchange Holdings, Inc. (``ISE Holdings'') (31.54%); \11\ Citadel
Derivatives Group LLC (19.9%); The Goldman Sachs Group, Inc. (19.9%);
Knight/Trimark, Inc. (19.9%); and the ISE Stock Exchange Consortium
Members (collectively 8.76%).\12\
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    \10\ Specifically, the DE Holdings Operating Agreement defines a
``Member'' to include any Person (i) executing the DE Holdings
Operating Agreement as a Member of DE Holdings as of April 13, 2009;
or (ii) subsequently admitted as an additional or substitute Member
of DE Holdings. References to ``Members,'' as defined in the DE
Holdings Operating Agreement and used in connection with DE
Holdings, should be distinguished from references to ``members,''
the latter refers to ``members'' as defined in section 3(a)(3) of
the Exchange Act, 15 U.S.C. 78c(a)(3).
    \11\ See Securities Exchange Act Release No. 59135 (December 22,
2008), 73 FR 79954 (December 30, 2008) (File No. SR-ISE-2008-85)
(order relating to ISE Holdings' purchase of an ownership interest
in DE Holdings) (``DE Holdings Order'').
    \12\ The ISE Stock Exchange Consortium members are: Bear Rex,
Inc.; DB US Financial Markets Holding Corporation; Canopy
Acquisition Corporation; IB Exchange Corp.; LabMorgan Corporation;
Merrill Lynch L.P. Holdings, Inc.; Nomura Securities International,
Inc.; Sun Partners LLC; and VCM Capital Markets, LLC.
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1. Ownership of ISE Holdings
    ISE Holdings, the owner of a 31.54% equity interest in DE Holdings,
is also the parent company of International Securities Exchange, LLC
(``ISE LLC''), a national securities exchange registered under section
6 of the Exchange Act. Following a corporate transaction in 2007 (the
``2007 Transaction''),\13\ ISE Holdings became a wholly-owned
subsidiary of U.S. Exchange Holdings, Inc. (``U.S. Exchange
Holdings''), which is wholly owned by Eurex Frankfurt AG (``Eurex
Frankfurt,'' and, with Deutsche B[ouml]rse AG, the ``German Upstream
Owners''). Eurex Frankfurt is a wholly-owned subsidiary of Eurex
Z[uuml]rich AG (``Eurex Z[uuml]rich''), which, in turn, is jointly
owned by Deutsche B[ouml]rse AG and SIX Swiss Exchange AG (``SWX''), a
wholly-owned subsidiary of SIX Group AG (SIX Group AG, SWX, and Eurex
Z[uuml]rich are referred to collectively as the ``Swiss Upstream
Owners,'' and the Swiss Upstream Owners and the German Upstream Owners
are referred to collectively as the ``non-U.S. Upstream Owners''). As a
result of ISE Holdings' purchase of an equity interest in DE
Holdings,\14\ the non-U.S. Upstream Owners, U.S. Exchange Holdings
(together with the non-U.S. Upstream Owners, the ``Upstream Owners''),
and ISE Holdings acquired indirect ownership and voting interests in
EDGX and EDGA.
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    \13\ See Securities Exchange Act Release No. 56955 (December 13,
2007), 72 FR 71979 (December 19, 2007) (File No. SR-ISE-2007-101)
(order relating to the 2007 Transaction) (``Eurex Order'').
    \14\ See DE Holdings Order, supra note 11.
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2. Amendments to the Corporate Resolutions of the Non-U.S. Upstream
Owners and Corporate Governing Documents of ISE Holdings and U.S.
Exchange Holdings
    In connection with the 2007 Transaction, each of the non-U.S.
Upstream Owners adopted corporate resolutions (collectively, the ``2007
Resolutions'') designed to maintain the independence of the regulatory
functions of ISE LLC.\15\ In addition, the Amended and Restated
Certificate of Incorporation of U.S. Exchange Holdings (``U.S. Exchange
Holdings Certificate'') and the Amended and Restated Bylaws of U.S.
Exchange Holdings (``U.S. Exchange Holdings Bylaws''), as well as the
Certificate of Incorporation of ISE Holdings (``ISE Holdings
Certificate'') and the Amended and Restated Bylaws of ISE Holdings
(``ISE Holdings Bylaws'') included provisions designed to maintain the
independence of the regulatory functions of ISE LLC.\16\
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    \15\ See Eurex Order, supra note 13. In 2007, the non-U.S.
Upstream Owners were Eurex Frankfurt, Deutsche B[ouml]rse AG, Eurex
Z[uuml]rich, SWX, SWX Group, and Verein SWX Swiss Exchange.
    \16\ In this regard, through the 2007 Resolutions and the
corporate governing documents of ISE Holdings and U.S. Exchange
Holdings, the Upstream Owners and ISE Holdings committed, among
other things: That they, and each of their directors, officers, and
employees, would comply with the federal securities laws and with
the Commission and ISE LLC; that their directors, officers, and
employees would give due regard to preserving the independence of
the self-regulatory functions of ISE LLC (or in the case of the non-
U.S. Upstream Owners, that they would take reasonable steps
necessary to cause their officers and employees involved in the
activities of ISE LLC to give due regard to preserving the
independence of the self-regulatory functions of ISE LLC); that
their books and records related to the activities of ISE LLC would
be subject at all times to inspection and copying by the Commission
and ISE LLC, and would be deemed to be the books and records of ISE
LLC for purposes of and subject to oversight pursuant to the U.S.
securities laws; and, that, for so long as they controlled ISE LLC,
any change to their governing documents would be submitted to the
board of directors of ISE LLC and, if ISE LLC determined that such
change was required to be filed with the Commission, such change
would not be effective until filed with, or filed with and approved
by the Commission, in accordance with Section 19(b) of the Act.

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    The 2007 Resolutions and the corporate governing documents of U.S.
Exchange Holdings and ISE Holdings related to ISE LLC and, by their
terms, did not apply to additional national securities exchanges, such
as EDGX and EDGA, that the Upstream Owners and ISE Holdings might
control, directly or indirectly, as a result of a subsequent
transaction. To maintain the independence of the regulatory function of
EDGX and EDGA, each of the non-U.S. Upstream Owners has adopted
supplemental resolutions (the ``Supplemental Resolutions'') that apply
the 2007 Resolutions to EDGX and EDGA in the same manner and to the
same extent as the 2007 Resolutions apply to ISE LLC.\17\ Accordingly,
the Supplemental Resolutions, which are included in the Form 1
Applications, extend to EDGX and EDGA the commitments that the non-U.S.
Upstream Owners made in the 2007 Resolutions with respect to ISE
LLC.\18\
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    \17\ The enumeration in each of the 2007 Resolutions is
identical. The enumeration in each of the Supplemental Resolutions
also is identical. Therefore, unless otherwise specified, reference
herein to certain enumerated resolutions applies to all of the 2007
Resolutions or to all of the Supplemental Resolutions, as
applicable.
    \18\ Id.
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    In addition, the Commission has approved changes to the U.S.
Exchange Holdings Certificate and U.S. Exchange Holdings Bylaws, and to
the ISE Holdings Certificate and ISE Holdings Bylaws, that apply these
governing documents to any national securities exchange, or facility
thereof, that U.S. Exchange Holdings or ISE Holdings, as applicable,
controls, directly or indirectly, including EDGX and EDGA.\19\
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    \19\ See Securities Exchange Act Release No. 61498 (February 4,
2010), 75 FR 7229 (February 18, 2009) (order approving File No. SR-
ISE-2009-90) (revising the U.S. Exchange Holdings Certificate, the
U.S. Exchange Holdings Bylaws, and the Trust Agreement among ISE
Holdings, U.S. Exchange Holdings, and trustees) (``U.S. Exchange
Holdings Order''); and DE Holdings Order, supra note 11 (revising
the ISE Holdings Certificate and ISE Holdings Bylaws).
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    The Commission believes that the Supplemental Resolutions, the U.S.
Exchange Holdings Certificate and U.S. Exchange Holdings Bylaws, as
amended, and the ISE Holdings Certificate and ISE Holdings Bylaws, as
amended, will assist EDGX and EDGA in fulfilling their self-regulatory
obligations and in administering and complying with the requirements of
the Act, as discussed in greater detail below.\20\
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    \20\ See Sections III.B. and III.C., infra.
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3. Swiss Resolutions and the 2009 Procedure
    As discussed more fully in the Eurex Order,\21\ Swiss law designed
to protect Swiss sovereignty raised concerns about the ability of the
Swiss Upstream Owners to provide the Commission with direct access to
information, including books and records, related to the activities of
ISE LLC.\22\ To avoid conflict with Swiss law and to facilitate the
2007 Transaction, the Commission and the Swiss Federal Banking
Commission (``SFBC'') developed a procedure (the ``2007 Procedure'')
under which the SFBC undertook to serve as a conduit for unfiltered
delivery of books and records of the Swiss Upstream Owners related to
the activities of ISE LLC.\23\ Accordingly, each 2007 Resolution
adopted by the Swiss Upstream Owners (the ``2007 Swiss Resolutions'')
provided that, where necessitated by Swiss law, a Swiss Upstream Owner
would provide information related to the activities of ISE LLC,
including the books and records of such owner related to the activities
of ISE LLC, to the Commission promptly through the SFBC.\24\ Moreover,
oral exchanges between each Swiss Upstream Owner and the Commission
related to the activities of ISE LLC would include the participation of
SFBC.\25\
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    \21\ See note 13, supra.
    \22\ In particular, Art. 271 of the Swiss penal code,
``Prohibited acts for a foreign state,'' states, in part: ``Whoever,
without being authorized, performs acts for a foreign state on Swiss
territory that are reserved to an authority or an official, whoever
performs such acts for a foreign party or another foreign
organization, whoever aids and abets such acts, shall be punished
with imprisonment and, in serious cases, sentenced to the
penitentiary. See Eurex Order, supra note 13, at note 58 and
accompanying text.
    \23\ See Eurex Order, supra note 13, at note 59 and accompanying
text. On January 1, 2009, the SFBC, the Swiss Federal Office of
Private Insurance, and the Swiss Anti-Money Laundering Control
Authority merged to form the Swiss Financial Markets Authority
(``FINMA''), a new consolidated financial regulator for Switzerland.
The Eurex Order describes the 2007 Procedure in greater detail. See
Eurex Order, supra note 13, at notes 57-60 and accompanying text.
    \24\ See Eurex Order, supra note 13, at note 57 and accompanying
text. The 2007 Procedure was designed to ensure that the delivery of
books and records to the Commission was not delayed. Therefore,
under the 2007 Procedure, the Commission's requests for books and
records would be sent directly to the Swiss Upstream Owners and
would not be subject to filtering or substantive review by the SFBC.
In addition, the SFBC agreed to pass to the Commission without delay
and without substantive review materials provided by the Swiss
Upstream Owners that were responsive to the Commission's requests
for information. See Eurex Order, supra note 13, at note 60.
    \25\ See Eurex Order, supra note 13, at text accompanying note
60.
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    By its terms, the 2007 Procedure applied solely to information of
the Swiss Upstream Owners related to the activities of ISE LLC,
including books and records related to the activities of ISE LLC. To
accommodate the Swiss Upstream Owners' indirect ownership and voting
interest in EDGX and EDGA, the Commission and FINMA (the successor to
the SFBC) have developed a procedure (the ``2009 Procedure'') that is
substantially similar to the 2007 Procedure, except that it will apply
to any U.S. securities exchange, or facility thereof, that ISE Holdings
controls, directly or indirectly, including EDGX and EDGA. The 2009
Procedure, which will become effective upon the Commission's approval
of the Exchanges' Form 1 applications, will supersede the 2007
Procedure.
    Under the 2009 Procedure, FINMA would serve as a conduit for the
delivery of information of the Swiss Upstream Owners related to the
activities of any registered national securities exchange controlled,
directly or indirectly, by ISE Holdings, including EDGX and EDGA. The
Commission's usual practice is to have direct access to books and
records related to the activities of a U.S. securities exchange.
However, subject to the condition that the Swiss Upstream Owners will
promptly deliver such information to the Commission,\26\ coupled with
the fact that under Bylaws of the Exchanges, all trading records of the
Exchanges must be maintained in the United States,\27\ the Commission
believes that the provisions of the 2007 Resolutions adopted by the
Swiss Upstream Owners, as supplemented by the Supplemental Resolutions
adopted by the Swiss Upstream Owners, related to the Commission's
access to the books and records of the Swiss Upstream Owners through
FINMA, should not result in a level of access materially different from
that agreed to by other entities that control U.S. securities
exchanges.\28\
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    \26\ See 2007 Swiss Resolutions 1, 3(b), 6, 7(a), 7(e), 8(a),
8(e), and 9, and Swiss Supplemental Resolution 2.
    \27\ See Bylaws of EDGX (``EDGX Bylaws'') and Bylaws of EDGA
(``EDGA Bylaws'' and, together with the EDGX Bylaws, the ``Exchange
Bylaws''), Article XI, Section 4. The enumeration in the Exchange
Bylaws is identical.
    \28\ See also Eurex Order, supra note 13, at note 66 and
accompanying text. The Commission notes that if a non-U.S. Upstream
Owner fails to make its books and record available to the
Commission, the Commission could bring an action under, among other
provisions, Section 17 of the Act, 15 U.S.C. 78q, and Rule 17a-1(b)
thereunder, 17 CFR 240.17a-1(b), against EDGX or EDGA pursuant to
Section 19(h) of the Act, 15 U.S.C. 78s(h).

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4. Trust Agreement
    In connection with the 2007 Transaction, ISE implemented a Delaware
statutory Trust (the ``Trust'') pursuant to a Trust Agreement (``2007
Trust Agreement'') among ISE Holdings, U.S. Exchange Holdings, trustees
(the ``Trustees''), and a Delaware trustee.\29\ By its terms, the 2007
Trust Agreement related solely to ISE Holdings' ownership of ISE LLC,
but not to any other national securities exchange that ISE Holdings
might control, directly or indirectly. The Commission has approved a
proposal \30\ that revises the 2007 Trust Agreement to replace
references to ISE LLC with references to any national securities
exchange or facility thereof controlled, directly or indirectly, by ISE
Holdings, including EDGX and EDGA (the 2007 Trust Agreement, as
amended, is referred to herein as the ``2009 Trust Agreement'').\31\
Except for the expanded scope of the 2007 Trust Agreement, the 2009
Trust Agreement is substantially similar to the 2007 Trust Agreement.
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    \29\ See Eurex Order, supra note 13, at Section II.C, for a more
detailed description of the Trust.
    \30\ See U.S. Exchange Holdings Order, supra note 19.
    \31\ The term of the Trust is perpetual, provided that ISE
Holdings directly or indirectly controls a national securities
exchange or a facility thereof, including EDGX or EDGA. See 2009
Trust Agreement, Article II, Section 2.6.
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    The Trust serves two general purposes. First, for as long as ISE
Holdings controls, directly or indirectly, a national securities
exchange, including EDGA or EDGA, the Trust would hold capital stock of
ISE Holdings in the event that a person obtains an ownership or voting
interest in ISE Holdings in excess of the ownership and voting limits
established in the ISE Holdings Certificate of Incorporation.\32\
Second, the Trust would hold capital stock of ISE Holdings in the event
of a Material Compliance Event.\33\ Under the 2009 Trust Agreement, a
``Material Compliance Event'' is any state of facts, development,
event, circumstance, condition, occurrence, or effect that results in
the failure of any of the non-U.S. Upstream Owners to adhere to its
respective commitments under the 2007 Resolutions, as supplemented by
the Supplemental Resolutions, in any material respect.\34\ The Trust
holds a call option over the capital stock of ISE Holdings that may be
exercised if a Material Compliance Event has occurred and continues to
be in effect.\35\
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    \32\ See Eurex Order, supra note 13, at Section II.C. If a
person exceeds an ownership or voting limit, then a majority of the
capital stock of ISE Holdings that has the right by its terms to
vote in the election of the ISE Holdings Board or on other matters
(other than matters affecting the rights, preferences, or privileges
of the capital stock) would automatically be transferred to the
Trust. See ISE Holdings Certificate, Article FOURTH, Section III(c).
See also Eurex Order, supra note 13, at note 37 and accompanying
text.
    \33\ See Eurex Order, supra note 13, at Section II.C.
    \34\ See 2009 Trust Agreement, Article I, Section 1.1.
    \35\ See 2009 Trust Agreement, Article IV, Section 4.2. More
specifically, if a Material Compliance Event occurs and continues to
be in effect, the Trustees must take certain actions, including,
after a Cure Period, the exercise of a Call Option for a transfer of
the majority of capital stock of ISE Holdings that has the right by
its terms to vote in the election of the ISE Holdings Board or on
other matters. See 2009 Trust Agreement, Article IV, Section 4.2.
See also Eurex Order, supra note 13, at note 62 and accompanying
text.
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    For the reasons discussed in the Eurex Order in connection with the
2007 Trust Agreement,\36\ the Commission finds that the 2009 Trust
Agreement is designed to enable EDGX and EDGA to operate in a manner
that complies with the federal securities laws, including the
objectives and requirements of sections 6(b) and 19(g) of the Act,\37\
and to facilitate the ability of EDGX and EDGA and the Commission to
fulfill their regulatory and oversight obligations under the Act.\38\
In addition, the Commission notes that the 2009 Trust Agreement, like
the 2007 Trust Agreement, is consistent with the provisions that other
entities that directly or indirectly own or control a self-regulatory
organization have instituted and that have been approved by the
Commission.\39\
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    \36\ See Eurex Order, supra note 13, at Section II.C. See also
U.S. Exchange Holdings Order, supra note 19.
    \37\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g).
    \38\ See 2009 Trust Agreement, Articles V, VI, and VIII.
    \39\ See, e.g., Securities Exchange Act Release Nos. 55293
(February 14, 2007), 72 FR 8033 (February 22, 2007) (File No. SR-
NYSE-2006-120) (order relating to the combination between NYSE
Group, Inc. and Euronext N.V.); and 53382 (February 27, 2006), 71 FR
11251 (March 6, 2006) (File No. SR-NYSE-2005-77) (order relating to
the business combination of the New York Stock Exchange, Inc., and
Archipelago Holdings, Inc.). See also Eurex Order, supra note 13, at
note 111.
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B. Self-Regulatory Function of the Exchanges; Relationship Between DE
Holdings, the Upstream Owners, ISE Holdings, and the Exchanges;
Jurisdiction Over DE Holdings, ISE Holdings, and the Upstream Owners

1. DE Holdings
    Although DE Holdings itself will not itself carry out regulatory
functions, its activities with respect to the operation of EDGX and
EDGA must be consistent with, and not interfere with, the self-
regulatory obligations of EDGX and EDGA. The DE Holdings corporate
documents include certain provisions that are designed to maintain the
independence of the Exchanges' self-regulatory function from DE
Holdings, enable EDGX and EDGA to operate in a manner that complies
with the federal securities laws, including the objectives of Sections
6(b) and 19(g) of the Act, and facilitate the ability of the Exchanges
and the Commission to fulfill their regulatory and oversight
obligations under the Act.\40\
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    \40\ See DE Holdings Operating Agreement Article XI, Section
11.2; Article XII; and Article XIV.
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    For example, DE Holdings submits to the Commission's jurisdiction
with respect to activities relating to EDGX and EDGA,\41\ and agrees to
provide the Commission and the Exchanges with access to its books and
records that are related to the operation or administration of the
Exchanges.\42\ In addition, to the extent they are related to the
operation or administration of EDGX or EDGA, the books, records,
premises, officers, Managers, agents, and employees of DE Holdings
shall be deemed the books, records, premises, officers, Managers,
agents, and employees of EDGX or EDGA, as applicable, for purposes of,
and subject to oversight pursuant to, the Act.\43\ DE Holdings also
agrees to keep confidential non-public information relating to the
self-regulatory function \44\ of the Exchanges and not to use such
information for any non-regulatory purpose.\45\ In addition, the Board
of Managers of DE Holdings, as well as its officers, employees, and
agents, are required to give due regard to the preservation of the
independence of the self-regulatory function of EDGX and EDGA.\46\
Further, the DE Holdings Operating Agreement requires that any changes
to the DE Holdings Operating Agreement be submitted to the Boards of
Directors of EDGX and EDGA, and, if such amendment is required to be
filed with the Commission pursuant to Section 19(b) of the Act, such
change shall not be effective until filed with, or filed with and
approved by, the

Commission.\47\ The Commission finds that these provisions are
consistent with the Act, and that they will assist EDGX and EDGA in
fulfilling their self-regulatory obligations and in administering and
complying with the requirements of the Act.
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    \41\ See DE Holdings Operating Agreement, Article XIV, Section
14.3.
    \42\ See DE Holdings Operating Agreement, Article XI, Section
11.2(b).
    \43\ Id.
    \44\ This requirement to keep confidential non-public
information relating to the self-regulatory function shall not limit
the Commission's ability to access and examine such information or
limit the ability of any Members, Managers, officers, employees, or
agents of DE Holdings to disclose such information to the
Commission. See DE Holdings Operating Agreement, Article XI, Section
11.2(a).
    \45\ Id.
    \46\ See DE Holdings Operating Agreement, Article XIV, Section
14.1.
    \47\ See DE Holdings Operating Agreement, Article XV, Section
15.2(b). The requirement to submit changes to the Board of an
Exchange endures for as long as DE Holdings directly or indirectly
controls the Exchange. Id.
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2. Upstream Owners and ISE Holdings
    Although the Upstream Owners and ISE Holdings will not carry out
any regulatory functions, the activities of each of the Upstream Owners
and of ISE Holdings with respect to the operation of EDGX and EDGA must
be consistent with, and not interfere with, the self-regulatory
obligations of EDGX and EDGA. The 2007 Resolutions, as supplemented by
the Supplemental Resolutions, the ISE Holdings Bylaws, the ISE Holdings
Certificate, the U.S. Exchange Holdings Certificate, and the U.S.
Exchange Holdings Bylaws include certain provisions designed to
maintain the independence of the self-regulatory function of EDGX and
EDGA, enable EDGX and EDGA to operate in a manner that complies with
the U.S. federal securities laws, including the objectives and
requirements of Sections 6(b) and 19(g) of the Act,\48\ and facilitate
the ability of EDGX, EDGA, and the Commission to fulfill their
regulatory and oversight obligations under the Act.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g).
---------------------------------------------------------------------------

    For example, the Upstream Owners and ISE Holdings provide that each
such Upstream Owner, and ISE Holdings, will comply with the U.S.
federal securities laws and the rules and regulations thereunder and
cooperate with the Commission and EDGX and EDGA.\49\ Also, each board
member, officer, and employee of the Upstream Owners, and of ISE
Holdings, in discharging his or her responsibilities, will comply with
the U.S. federal securities laws and the rules and regulations
thereunder, cooperate with the Commission, and cooperate with EDGX and
EDGA.\50\ In discharging his or her responsibilities as a board member
of an Upstream Owner, or of ISE Holdings, each such member must, to the
fullest extent permitted by applicable law, take into consideration the
effect that the actions of the Upstream Owner or ISE Holdings, as
applicable, would have on the ability of EDGX and EDGA to carry out
their responsibilities under the Act.\51\ In addition, each of the
Upstream Owners and ISE Holdings, and their board members, officers,
and employees, must give due regard to the preservation of the
independence of the self-regulatory function of EDGX and EDGA (or in
the case of the non-U.S. Upstream Owners, that they will take
reasonable steps necessary to cause their officers and employees
involved in the activities of EDGX and EDGA to give due regard to
preserving the independence of the self-regulatory functions of EDGX
and EDGA).\52\
---------------------------------------------------------------------------

    \49\ See Resolution 1 and Supplemental Resolution 2(a); U.S.
Exchange Holdings Certificate, Article ELEVENTH; and ISE Holdings
Certificate, Article THIRTEENTH.
    \50\ See Resolutions 7(a) and 8(a) and Supplemental Resolutions
2(b) and (c); U.S. Exchange Holdings Certificate, Article TENTH; and
ISE Holdings Certificate, Article TENTH. The Resolutions also
provide that each non-U.S. Upstream Owner will take reasonable steps
necessary to cause each person who subsequently becomes a board
member of the non-U.S. Upstream Owner to agree in writing to certain
matters included in the Resolutions. See Resolution 7 and
Supplemental Resolution 2(b).
    \51\ Resolution 7(f) and Supplemental Resolution 2(b); U.S.
Exchange Holdings Certificate, Article TENTH; and ISE Holdings
Certificate, Article TENTH.
    \52\ See Resolutions 5, 7(d), and 8(d) and Supplemental
Resolution 2; U.S. Exchange Holdings Certificate, Article TWELFTH;
and ISE Holdings Bylaws, Article I, Section 1.5.
---------------------------------------------------------------------------

    Further, the non-U.S. Upstream Owners (along with their respective
board members, officers, and employees), U.S. Exchange Holdings, and
ISE Holdings agree to keep confidential, to the fullest extent
permitted by applicable law, all confidential information pertaining to
the self-regulatory function of EDGX and EDGA, including, but not
limited to, confidential information regarding disciplinary matters,
trading data, trading practices, and audit information, contained in
the books and records of EDGX or EDGA and not use such information for
any commercial \53\ purposes.\54\ In addition, books and records of the
non-U.S. Upstream Owners related to the activities of EDGX and EDGA
will at all times be made available for, and books and records of U.S.
Exchange Holdings and ISE Holdings will be subject at all times to,
inspection and copying by the Commission, EDGX, and EDGA.\55\ Books and
records of U.S. Exchange Holdings related to the activities of EDGX and
EDGA, and the books and records of ISE Holdings, will be maintained
within the United States.\56\ Moreover, for so long as each of the
Upstream Owners or ISE Holdings directly or indirectly controls EDGX or
EDGA, the books, records, officers, directors (or equivalent), and
employees of each of the Upstream Owners or of ISE Holdings will be
deemed to be the books, records, officers, directors, and employees of
EDGX or EDGA, as applicable.\57\ Finally, for so long as U.S. Exchange
Holdings or ISE Holdings directly or indirectly control EDGX or EDGA,
the premises of U.S. Exchange Holdings and ISE Holdings will be deemed
to be the premises of EDGX or EDGA.\58\
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    \53\ The Commission believes that any non-regulatory use of such
information would be for a commercial purpose.
    \54\ See Resolutions 6, 7(e), and 8(e), and Supplemental
Resolution 2; U.S. Exchange Holdings Certificate, Article
FOURTEENTH; and ISE Holdings Certificate, Article ELEVENTH.
    \55\ See Resolution 3 and Supplemental Resolution 2(a); U.S.
Exchange Holdings Certificate, Article FIFTEENTH; and ISE Holdings
Certificate, Article TWELFTH. See Section II.A.3, supra, for a
discussion of the 2009 Procedure through which the Swiss Upstream
Owners would make available their books and records relating to the
activities of the Exchanges.
    \56\ See U.S. Exchange Holdings Certificate, Article FIFTEENTH;
and ISE Holdings Bylaws, Article I, Section 1.3.
    \57\ See Resolutions 3 and 8(c) and Supplemental Resolutions
2(a) and (c); U.S. Exchange Holdings Certificate, Article FIFTEENTH;
and ISE Holdings Certificate, Article TWELFTH.
    \58\ See U.S. Exchange Holdings Certificate, Article FIFTEENTH;
and ISE Holdings Certificate, Article TWELFTH.
---------------------------------------------------------------------------

    To the extent involved in the activities of EDGX or EDGA, each of
the non-U.S. Upstream Owners, its board members, officers, and
employees, irrevocably submit to the jurisdiction of the U.S. federal
courts and the Commission for purposes of any action arising out of, or
relating to, the activities of EDGX or EDGA.\59\ Likewise, U.S.
Exchange Holdings, its officers and directors, and employees whose
principal place of business and residence is outside of the United
States, to the extent such directors, officers, or employees are
involved in the activities of EDGX or EDGA, irrevocably submit to the
jurisdiction of the U.S. federal courts and the Commission for purposes
of any action arising out of, or relating to, the activities of EDGX or
EDGA.\60\ Similarly, ISE Holdings and its officers, directors,
employees, and agents irrevocably submit to the jurisdiction of the
U.S. federal courts and the Commission for purposes of any action
arising out of, or relating to, EDGX or EDGA.\61\
---------------------------------------------------------------------------

    \59\ See Resolutions 2, 7(b), and 8(b) and Supplemental
Resolution 2.
    \60\ See U.S. Exchange Holdings Bylaws, Article VI, Section 16.
    \61\ See ISE Holdings Bylaws, Article I, Section 1.4.
---------------------------------------------------------------------------

    Finally, the 2007 Resolutions, as supplemented by the Supplemental
Resolutions, the U.S. Exchange Holdings Certificate, the U.S. Exchange
Holdings Bylaws, the ISE Holdings Certificate, and the ISE Holdings
Bylaws each require that any change to the applicable document
(including any action by the non-U.S. Upstream

Owners that would have the effect of changing the Supplemental
Resolutions or the 2007 Resolutions) be submitted to the Boards of EDGX
and EDGA.\62\ If such change must be filed with, or filed with and
approved by, the Commission under Section 19 of the Act,\63\ and the
rules thereunder, then such change shall not be effective until filed
with, or filed with and approved by, the Commission.\64\ The Commission
finds that these provisions are consistent with the Act, and that they
will assist EDGX and EDGA in fulfilling their self-regulatory
obligations and in administering and complying with the requirements of
the Act.
---------------------------------------------------------------------------

    \62\ See Supplemental Resolution 3; U.S. Exchange Holdings
Certificate, Article SIXTEENTH; U.S. Exchange Holdings Bylaws,
Article VI, Section 9; ISE Holdings Certificate, Article FOURTEENTH;
and ISE Holdings Bylaws, Article X, Section10.1.
    \63\ 15 U.S.C. 78s.
    \64\ See Supplemental Resolution 3; U.S. Exchange Holdings
Certificate, Article SIXTEENTH; U.S. Exchange Holdings Bylaws,
Article VI, Section 9; ISE Holdings Certificate, Article FOURTEENTH;
and ISE Holdings Bylaws, Article X, Section10.1. The requirement to
submit changes to the Board of an Exchange endures for as long as
the Upstream Owners or ISE Holdings directly or indirectly control
the Exchange. Id.
---------------------------------------------------------------------------

3. Controlling Persons
    Under Section 20(a) of the Act, any person with a controlling
interest in EDGX or EDGA would be jointly and severally liable with and
to the same extent that EDGX or EDGA 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. 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. 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. These provisions are
applicable to all entities controlling the Exchanges, including the
Trust, DE Holdings, ISE Holdings, and the Upstream Owners.

C. Ownership and Voting Limitations; Changes in Control of the
Exchanges

    The DE Holdings Certificate includes restrictions on the ability to
own and vote shares of the capital stock of DE Holdings.\65\ These
limitations are designed to prevent any Member of DE Holdings from
exercising undue control over the operation of the Exchanges and to
assure that the Exchanges and the Commission are able to carry out
their regulatory obligations under the Act. Similarly, the corporate
governing documents of ISE Holdings include ownership and voting
limitations (respectively, the ``ISE Holdings Ownership Limit'' and the
``ISE Holdings Voting Limit'') that apply for so long as ISE Holdings
controls, directly or indirectly, a national securities exchange,
including EDGX or EDGA. The Resolutions and Supplemental Resolutions of
the non-U.S. Upstream Owners, and the U.S. Exchange Holdings
Certificate of Incorporation, include provisions requiring these
entities to take reasonable steps necessary to cause ISE Holdings to be
in compliance with the ISE Holdings Ownership Limit and the ISE
Holdings Voting Limit.
---------------------------------------------------------------------------

    \65\ These provisions are consistent with ownership and voting
limits approved by the Commission for other self-regulatory
organizations. See e.g., Securities Exchange Act Release Nos. 58375
(August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10-182)
(order granting the exchange registration of BATS Exchange, Inc.)
(``BATS Exchange Order''); 53963 (June 8, 2006), 71 FR 34660 (June
15, 2006) (File No. SR-NSX-2006-03) (``NSX Demutualization Order'');
51149 (February 8, 2005), 70 FR 7531 (February 14, 2005) (File No.
SR-CHX-2004-26) (``CHX Demutualization Order''); and 49098 (January
16, 2004), 69 FR 3974 (January 27, 2004) (File No. SR-Phlx-2003-73)
(``Phlx Demutualization Order'').
---------------------------------------------------------------------------

1. DE Holdings
    Generally, no person, other than ISE Holdings, either alone or
together with its related persons,\66\ may own, directly or indirectly,
of record or beneficially, Units representing more than a 40%
Percentage Interest in DE Holdings.\67\ In addition, the DE Holdings
Operating Agreement prohibits members of the EDGX or EDGA, either alone
or together with their related persons, from owning, directly or
indirectly, of record or beneficially, Units representing a Percentage
Interest in DE Holdings of more than 20%.\68\ Further, no person, other
than ISE Holdings, either alone or together with its related persons,
may vote or cause the voting of Units representing more than a 20%
Percentage Interest in DE Holdings.\69\ If any Member of DE Holdings
purports to transfer Units in violation of the ownership limits, or to
vote or cause the voting of Units in violation of the voting limits, DE
Holdings has the right to redeem such Units for the lesser of the fair
market value or the book value of the Units.\70\ In addition, DE
Holdings will not honor any vote that would violate the voting
limitations, and any Units that would violate the voting limitation
will not be entitled to vote to the extent of the violation.\71\
---------------------------------------------------------------------------

    \66\ See DE Holdings Operating Agreement, Article I, Section
1.1.
    \67\ See DE Holdings Operating Agreement, Article XII, Section
12.1(a). A Percentage Interest is the ratio of the number of Units
held to the total of all of the issued and outstanding Units,
expressed as a percentage. See DE Holdings Operating Agreement,
Article I, Section 1.1. The ownership and voting limitations in
Article XII, Section 12.1(a) of the DE Holdings Operating Agreement
will not apply to ISE Holdings for as long as ISE LLC is a wholly-
owned subsidiary of ISE Holdings and ISE Holdings is subject to
ownership and voting limitations comparable to those set forth in
Article XII, Section 12.1(a). See DE Holdings Operating Agreement,
Article XII, Section 12.1(a)(3). The comparable ownership and voting
limitations for ISE Holdings are included in Article FOURTH, Section
III of the ISE Holdings Certificate. See also notes 89-91, infra,
and accompanying text.
    \68\ See DE Holdings Operating Agreement, Article XII, Section
12.1(a)(2).
    \69\ See DE Holdings Operating Agreement, Article XII, Section
12.1(a)(3).
    \70\ See DE Holdings Operating Agreement, Article XII, Section
12.3.
    \71\ See DE Holdings Operating Agreement, Article XII, Section
12.4.
---------------------------------------------------------------------------

    The DE Holdings Board may waive the 40% ownership limitation
applicable to persons who are not Exchange members and the 20% voting
limitation pursuant to an amendment to the DE Holdings Operating
Agreement adopted by the DE Holdings Board if the DE Holdings Board
makes certain findings.\72\ Any such amendment will not be effective
unless it is filed with and approved by the Commission.\73\ However, as
long as DE Holdings directly or indirectly controls an Exchange, the DE
Holdings Board may not waive the ownership and voting limitations above
20% for Exchange members or their related persons.\74\
---------------------------------------------------------------------------

    \72\ See DE Holdings Operating Agreement, Article XII, Section
12.1(b).
    \73\ Id.
    \74\ These provisions are consistent with waiver of ownership
and voting limits approved by the Commission for other SROs. See
e.g., BATS Exchange Order, NSX Demutualization Order, and CHX
Demutualization Order, supra note 65; and Securities Exchange Act
Release No. 49718 (May 17, 2004), 69 FR 29611 (May 24, 2004) (File
No. SR-PCX-2004-08).
---------------------------------------------------------------------------

    Exchange members that trade on an exchange traditionally have
ownership interests in such exchange. As the Commission has noted in
the past, however, a member's interest in an exchange could become so
large as to cast doubt on whether the exchange can fairly and
objectively exercise its self-regulatory responsibilities with respect
to that member.\75\ A member that is a controlling shareholder of an
exchange

might be tempted to exercise that controlling influence by directing
the exchange to refrain from, or the exchange may hesitate to,
diligently monitor and surveil the member's conduct or diligently
enforce its rules and the federal securities laws with respect to
conduct by the member that violates such provisions.
---------------------------------------------------------------------------

    \75\ See, e.g., Securities Exchange Act Release Nos. 53128
(January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10-131)
(``Nasdaq Exchange Order''); and 53382 (February 27, 2006), 71 FR
11251 (March 6, 2006) (SR-NYSE-2005-77) (``NYSE/Archipelago Merger
Approval Order'').
---------------------------------------------------------------------------

    In addition, as proposed, the Exchanges will be wholly-owned
subsidiaries of DE Holdings. The Amended and Restated Bylaws of EDGX
and EDGA (together, the ``Exchanges Amended and Restated Bylaws'')
identify this ownership structure.\76\ Any changes to the Exchanges
Amended and Restated Bylaws, including any change in the provision that
identifies DE Holdings as the initial owner of the Exchanges, must be
filed with and approved by the Commission pursuant to Section 19 of the
Act.\77\
---------------------------------------------------------------------------

    \76\ See Exchanges Amended and Restated Bylaws Article I(jj).
The enumeration in the Amended and Restated Bylaws of EDGX and EDGA
is identical.
    \77\ See 15 U.S.C. 78s.
---------------------------------------------------------------------------

    The Commission believes that these provisions are consistent with
the Act. These requirements should minimize the potential that a person
could improperly interfere with or restrict the ability of the
Commission or the Exchanges to effectively carry out their regulatory
oversight responsibilities under the Act.
    In its comment letter, Nasdaq raises questions relating to the
ownership and control of EDGX and EDGA, in particular, and of national
securities exchanges in general. In this regard, Nasdaq urges the
Commission to re-examine the voting and ownership limits applicable to
owners of national securities exchanges and to adopt consistent rules
that would apply to all national securities exchanges and alternative
trading systems.\78\ In addition, Nasdaq asks the Commission to
consider the possibility that multiple owners, each holding a 20%
ownership interest, could have common interests that cause them to act
in concert on a consistent basis.\79\ In the case of EDGX and EDGA,
Nasdaq believes that ``the bias inherent in concentrated dealer
control'' could affect the operation of the Exchanges and of their
Member/owners, thereby requiring the Commission to review all proposed
rule changes of the Exchanges for possible bias.\80\
---------------------------------------------------------------------------

    \78\ See Nasdaq Letter, supra note 4, at 3. Credit Suisse,
however, believes that Commission rules governing the ownership
structure of alternative trading systems are unnecessary and would
be inconsistent with the goals of Regulation ATS. See Credit Suisse
Letter, supra note 4. The Commission does not believe that the
consideration of the Exchanges' applications for exchange
registration are the appropriate forum for considering this issue.
    \79\ Id. at 4. In this regard, Nasdaq notes that three broker-
dealers each hold a 19.9% ownership interest in DE Holdings. See
Nasdaq Letter, supra note 4, at 2.
    \80\ See Nasdaq Letter, supra note 4, at 4.
---------------------------------------------------------------------------

    As discussed above,\81\ the DE Holdings Operating Agreement
includes restrictions on the ability to own and vote Units in DE
Holdings. The Commission believes that these limitations, which are
consistent with the ownership and voting limits that the Commission has
approved for other SROs,\82\ are reasonably designed to prevent any
member of DE Holdings, including the Member/owners, from exercising
undue control over the operation of the Exchanges. In addition, the
Commission believes that the composition of the Exchanges' Boards of
Directors, which must at all times include a majority of Independent
Directors, could help to counteract the influence of the Exchanges'
Member/owners.\83\ With respect to Nasdaq's concern regarding the need
to scrutinize proposed rule changes of EDGX and EDGA for possible bias
in favor of the Exchanges' Member/owners, the Commission notes that
that it will review proposed rule changes by the Exchanges, as it
reviews the proposed rule changes of all other national securities
exchanges, to evaluate whether the proposed rules are consistent with
Act, in general, and, in particular, with the requirements of Section
6(b)(5) of the Act.\84\
---------------------------------------------------------------------------

    \81\ See notes 65-77, supra, and accompanying text.
    \82\ See note 65, supra.
    \83\ See Exchanges Amended and Restated Bylaws, Article III,
Section 2(b). The composition of the Exchanges' Boards is discussed
in greater detail in Section II.D.1., infra.
    \84\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Nasdaq also expresses concern regarding potential unfair advantages
resulting from exchanges of information between the Exchanges and their
Member/owners.\85\ In particular, Nasdaq questions how the Exchanges
will implement the provisions of Exchange Rules 2.10 and 2.11\86\ and
Exchange Amended and Restated Bylaws Article XI which, among other
things, restrict the flow of confidential information between the
Exchanges and other persons, in light of the potential presence of
representatives of each of the controlling owners on the Exchange
Boards. The Commission notes that Exchange Rules 2.10 and 2.11 are
comparable to rules adopted by other national securities exchanges \87\
and that Article XI, Section 3 of the Exchange Amended and Restated
Bylaws is comparable to bylaw provisions adopted by other national
securities exchanges.\88\ The Commission notes that each Exchange, like
all national securities exchanges, has the obligation under Section
6(b)(1) of the Act to comply with its rules and to enforce compliance
by Exchange Members with, among other things, the rules of the Exchange
and the federal securities laws. Accordingly, if either Exchange learns
of a failure to maintain the confidentiality of information pertaining
to its self-regulatory function, as required by the Exchanges Amended
and Restated Bylaws and the DE Holdings Operating Agreement, such
Exchange would be required to take appropriate action to address the
failure to comply with the applicable requirements of its governing
documents. In addition, the Commission also monitors national
securities exchanges with respect to their members' compliance with the
rules of the exchange.
---------------------------------------------------------------------------

    \85\ See Nasdaq Letter, supra note 4, at 5.
    \86\ Exchange Rule 2.10, ``Affiliation between Exchange and a
Member,'' generally prohibits an Exchange from acquiring an
ownership interest in a Member, and a Member from becoming an
affiliate of the Exchange, without prior Commission approval.
Exchange Rule 2.10 allows an Exchange Member to be a Director of the
Exchange or of DE Holdings. In addition, Exchange Rule 2.10 allows
each Exchange to be an affiliate of DECN. Exchange Rule 2.11,
``Direct Edge ECN LLC as Outbound Router,'' addresses DECN's
function as the outbound router for the Exchanges. Exchange Rules
2.10 and 2.11 are discussed in greater detail in Section III.G,
infra.
    \87\ See, e.g., BATS Rules 2.10 and 2.11; and NSX Rules 2.10 and
2.11. Exchange Rules 2.10 and 2.11 are discussed in greater detail
in Section III.G, infra.
    \88\ See, e.g., Article XI, Section 3 of the Amended and
Restated Bylaws of BATS Exchange, Inc.
---------------------------------------------------------------------------

2. ISE Holdings and the Upstream Owners
(a) ISE Holdings
    The governing documents of ISE Holdings also include ownership and
voting limitations that apply for so long as ISE Holdings controls,
directly or indirectly, a national securities exchange (a ``Controlled
National Securities Exchange''), or facility thereof, including EDGX or
EDGA. In particular, the ISE Holdings Certificate provides that, for so
long as ISE Holdings controls, directly or indirectly, a Controlled
National Securities exchange, no person, either alone or together with
its related persons, may own, directly or indirectly, of record or
beneficially, more than 40% (or 20% if the person is a member of an
exchange controlled by ISE Holdings) of the capital stock of ISE
Holdings that has the right by its terms to vote in the election of the
Board of Directors of ISE Holdings (``ISE Holdings Board'') or on other
matters (other than matters affecting the rights, preferences, or

privileges of the capital stock) (``ISE Holdings Ownership
Limit'').\89\ In addition, for so long as ISE Holdings controls,
directly or indirectly, a Controlled National Securities Exchange, no
person, either alone or together with its related persons, may,
directly or indirectly, vote or cause the voting of more than 20% of
the ISE Holdings capital stock that has the right by its terms to vote
in the election of the ISE Holdings Board or on other matters (other
than matters affecting the rights, preferences, or privileges of the
capital stock) (``ISE Holdings Voting Limit'').\90\
---------------------------------------------------------------------------

    \89\ See ISE Holdings Certificate, Article FOURTH, Section III.
    \90\ Id. If a person exceeds an ISE Holdings Ownership or ISE
Holdings Voting Limit, a majority of the capital stock of ISE
Holdings that has the right by its terms to vote in the election of
the ISE Holdings Board or on other matters (other than matters
affecting the rights, preferences or privileges of the capital
stock) would automatically be transferred to the Trust. See ISE
Holdings Certificate, Article FOURTH, Section III(c). See also Eurex
Order, supra note 13, at note 36 and at notes 70-114 and
accompanying text.
---------------------------------------------------------------------------

    Article XI of the ISE Holdings Bylaws, which originally was adopted
in connection with the Eurex Transaction, waives the ISE Holdings
Ownership Limits and the ISE Holdings Voting Limits to allow the
Upstream Owners to own and vote all of the common stock of ISE
Holdings.\91\ Article XI, Section 11.1(b) states that, in waiving the
ISE Holdings Ownership Limits and the ISE Holdings Voting Limits to
permit the Upstream Owners to own and vote the capital stock of ISE
Holdings, the ISE Holdings Board has determined, with respect to each
Upstream Owner, that: (i) Such waiver will not impair the ability of
ISE Holdings and each Controlled National Securities Exchange to carry
our their respective functions and responsibilities under the Act; (ii)
such waiver is in the best interests of ISE Holdings, its stockholders,
and each Controlled National Securities Exchange; (iii) such waiver
will not impair the ability of the Commission to enforce the Act; (iv)
neither the Upstream Owner nor any of its related persons is subject to
a statutory disqualification (within the meaning of Section 3(a)(39) of
the Act); and (v) neither the Upstream Owner nor any of its related
persons is a member of such Controlled National Securities Exchange.
---------------------------------------------------------------------------

    \91\ The ISE Holdings Certificate allows the ISE Holdings Board
to waive the ISE Holdings Ownership Limit and the ISE Holdings
Voting Limit pursuant to an amendment to the ISE Holdings Bylaws,
provided that the ISE Holdings Board makes certain determinations.
See ISE Holdings Certificate, Article FOURTH, Sections III(a)(i)(A)
III(a)(i)(B) and III(b)(i). Article XI of the ISE Holdings Bylaws
was adopted in connection with the Eurex Transaction, when ISE LLC
was the sole national securities exchange controlled by ISE
Holdings. See Eurex Order, supra note 13. Article XI, Section
11.1(b) was subsequently amended to apply to any Controlled National
Securities Exchange. See DE Holdings Order, supra note 11.
---------------------------------------------------------------------------

    Because Article XI, Section 11.1(b) requires the ISE Holdings
Board, in waiving the ISE Holdings Ownership Limit and the ISE Holdings
Voting Limit, to have determined, with respect to each Upstream Owner,
that, among other things, such waiver will not impair the ability of
EDGX and EDGA to carry out their functions and responsibilities under
the Act, or impair the Commission's ability to enforce the Act, the
Commission believes that the Upstream Owners' exercise of ownership and
voting control of ISE Holdings will not impair the ability of the
Commission or of EDGX and EDGA to discharge their respective
responsibilities under the Act.
(b) Upstream Owners
    To facilitate compliance with the ISE Holdings Ownership Limit and
the ISE Holdings Voting Limit, the Resolutions of the non-U.S. Upstream
Owners, as supplemented by the Supplemental Resolutions, provide that
each such owner will take reasonable steps necessary to cause ISE
Holdings to be in compliance with the ISE Holdings Ownership Limit and
the ISE Holdings Voting Limit.\92\ Likewise, the U.S. Exchange Holdings
Certificate provides that, for so long as U.S. Exchange Holdings
directly or indirectly controls a national securities exchange,
including EDGX or EDGA, U.S. Exchange Holdings will take reasonable
steps necessary to cause ISE Holdings to be in compliance with the ISE
Holdings Ownership Limit and the ISE Holdings Voting Limit.\93\ The
Commission believes that these provisions in the Resolutions, as
supplemented by the Supplemental Resolutions, and in the U.S. Exchange
Holdings Certificate should minimize the potential that a person could
improperly interfere with, or restrict the ability of, the Commission
or EDGX or EDGA to effectively carry out their regulatory
responsibilities under the Act.
---------------------------------------------------------------------------

    \92\ See Resolution 4 and Supplemental Resolution 2(a).
    \93\ See U.S. Exchange Holdings Certificate, Article THIRTEENTH.
---------------------------------------------------------------------------

D. EDGX and EDGA

    EDGX and EDGA each have applied to the Commission to register as a
national securities exchange. As part of their exchange applications,
EDGX and EDGA have filed their Certificates of Incorporation (together,
the ``Exchange Certificates'') and the Exchanges Amended and Restated
Bylaws.\94\ In these documents, among other things, the Exchanges
establish the composition of their respective Boards of Directors
(each, an ``Exchange Board,'' and, together, the ``Exchange Boards'')
and the committees of the Exchanges.
---------------------------------------------------------------------------

    \94\ The enumeration in the EDGX Certificate and the EDGX
Amended and Restated Bylaws are the same as the enumeration in the
EDGA Certificate and the EDGA Amended and Restated Bylaws,
respectively.
---------------------------------------------------------------------------

1. Exchange Boards
    Each Exchange Board will be the governing body of its Exchange and
will possess all of the powers necessary for the management of the
business and affairs of the Exchange and the execution of the
Exchange's responsibilities as a self-regulatory organization
(``SRO''). Under the Exchanges Amended and Restated Bylaws, each
Exchange Board initially will be composed of 19 Directors, including:
\95\
---------------------------------------------------------------------------

    \95\ See Exchanges Amended and Restated Bylaws, Article III,
Section 2(a). An Exchange Board may add or remove Director
positions, provided that, among other things, the number of
Directors positions will not be fewer than seven nor more than 25.
See Exchanges Amended and Restated Bylaws, Article III, Section
2(b).
---------------------------------------------------------------------------

     The Chief Executive Officer (``CEO'') of EDGX or EDGA, as
applicable; \96\
---------------------------------------------------------------------------

    \96\ See Exchanges Amended and Restated Bylaws, Article III,
Section 2(a)(i).
---------------------------------------------------------------------------

     Four Owner Directors; \97\
---------------------------------------------------------------------------

    \97\ See Exchanges Amended and Restated Bylaws, Article III,
Section 2(a)(ii). The Designating Owners of DE Holdings (i.e.,
Members of DE Holdings that hold at least a 15% Percentage Interest
in DE Holdings) select the Owner Directors. See Exchanges Amended
and Restated Bylaws, Articles I(k) and III, Section 2(b).
---------------------------------------------------------------------------

     Ten Independent Directors; \98\ and
---------------------------------------------------------------------------

    \98\ See Exchanges Amended and Restated Bylaws, Article III,
Section 2(a)(iii). An Independent Director is a Director who has no
material relationship with (i) the Exchange or any Affiliate of the
Exchange, or (ii) any Exchange Member or Affiliate of any Exchange
Member; provided, however, that an individual who otherwise
qualifies as an Independent Director will not be disqualified from
serving in such capacity solely because such Director is a Director
of the Exchange, DE Holdings, or, the case of EDGA, a Director of
EDGX and, in the case of EDGX, a Director of EDGA. See Exchanges
Amended and Restated Bylaws, Article I(u).
---------------------------------------------------------------------------

     Four Exchange Member Directors.\99\
---------------------------------------------------------------------------

    \99\ See Exchanges Amended and Restated Bylaws, Article III,
Section 2(a)(iv). An Exchange Member Director is an officer,
director, employee or agent of an Exchange Member who is elected in
accordance with the procedures set forth in Article III, Section 4
of the Exchanges Amended and Restated Bylaws. See Exchanges Amended
and Restated Bylaws, Article I(q).
---------------------------------------------------------------------------

    In addition, at all times, at least 20% of the Directors of each
Exchange Board will be Exchange Member Directors and the majority of
the Directors of each Exchange Board will be Independent
Directors.\100\
---------------------------------------------------------------------------

    \100\ See Exchanges Amended and Restated Bylaws, Article III,
Section 2(b).

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

    Following approval of the Form 1 Applications, DE Holdings, as the
sole owner of the common stock of the Exchanges, will elect Directors
in accordance with the Exchange Certificates and the Exchanges Amended
and Restated Bylaws.\101\ The first annual meeting of the stockholders
of each Exchange will be held prior to the Exchanges' commencement of
operations as national securities exchanges.\102\ At the first annual
stockholders' meeting, the stockholders will elect Directors of the
Exchanges pursuant to the Exchange Certificates and the Exchanges
Amended and Restated Bylaws. Therefore, prior to commencing operations
as national securities exchanges, the Members of the Exchanges will
have the opportunity to participate in the selection of Exchange Member
Directors.\103\
---------------------------------------------------------------------------

    \101\ See Form 1 Applications, Exhibit J, Response 2.
    \102\ See Exchanges Amended and Restated Bylaws, Article IV,
Section 1(b).
    \103\ See Exchanges Amended and Restated Bylaws, Article III,
Sections 2 and 4.
---------------------------------------------------------------------------

    DE Holdings will appoint the initial Nominating Committee \104\ and
the Exchange Member Nominating Committee \105\ for each Exchange, which
will serve until the first annual meeting of stockholders.\106\ Each of
the Nominating Committee and the Exchange Member Nominating Committee,
after completion of its respective duties for nominating directors for
election to the Board of EDGX or EDGA, as applicable, for that year,
will nominate candidates to serve on the succeeding year's Nominating
Committee or Member Nominating Committee, as applicable.\107\
Additional candidates for the Member Nominating Committee may be
nominated and elected by each Exchange's Members pursuant to a petition
process.\108\
---------------------------------------------------------------------------

    \104\ The Nominating Committee will consist solely of three
Independent Directors. See Exchanges Amended and Restated Bylaws,
Article VI, Section 2. Because the Exchanges Amended and Restated
Bylaws are substantially the same, the discussion of the Exchanges'
committees applies to both Exchanges.
    \105\ Each member of the Exchange Member Nominating Committee
will qualify as an Exchange Member Director, although the committee
member is not required to be a Director. See Exchanges Amended and
Restated Bylaws, Article VI, Section 3. An Exchange Member Director
is an officer, director, employee, or agent of an Exchange Member,
other than an Exchange Member that maintains an ownership interest
in DE Holdings, who is elected as a Director in accordance with
Article III, Section 4 of the Exchanges Amended and Restated Bylaws.
See Exchanges Amended and Restated Bylaws, Article I(q) and (z).
    \106\ See Exchanges Amended and Restated Bylaws, Article VI,
Section 1.
    \107\ Id.
    \108\ Id.
---------------------------------------------------------------------------

    Each Exchange's Nominating Committee will nominate candidates for
each director position (other than Owner Directors, Exchange Member
Directors, and the director position filled by the CEO), and DE
Holdings, as the sole shareholder, will elect those directors. Each
Exchange's Member Nominating Committee will nominate candidates for
each Exchange Member Director on the Exchange Board.\109\ Members of
EDGX and EDGA may nominate additional candidates for the Exchange
Member Director positions pursuant to a petition process.\110\ If no
candidates are nominated pursuant to a petition process, then each
Exchange's Nominating Committee will nominate the initial nominees of
the Member Nominating Committee as Exchange Member Directors.\111\ If a
petition process produces additional candidates, then the candidates
nominated pursuant to the petition process, together with those
nominated by each Exchange's Member Nominating Committee, will be
presented to Exchange Members for election to determine the final
nomination of Exchange Member Directors.\112\ Each Exchange's
Nominating Committee will nominate the candidates who receive the most
votes as Exchange Member Directors.\113\ DE Holdings, as the sole
shareholder, will elect those candidates nominated by each Exchange's
Nominating Committee as Exchange Member Directors.\114\
---------------------------------------------------------------------------

    \109\ The Exchange Member Nominating Committee will solicit
comments from Exchange members for the purpose of approving and
submitting names of candidates for election to the position of
Exchange Member Director. See Exchanges Amended and Restated Bylaws,
Article III, Section 4.
    \110\ See Exchanges Amended and Restated Bylaws, Article III,
Section 4(c). The petition must be signed by Exchange Member
Representatives representing 10% or more of the Exchange members. No
Exchange member, together with its Affiliates, may account for more
than 50% of the signatures endorsing a particular candidate. Id.
    \111\ See Exchanges Amended and Restated Bylaws, Article III,
Section 4(e).
    \112\ See Exchanges Amended and Restated Bylaws, Article III,
Section 4(e) and (f). Each Exchange Member will have the right to
cast one vote for each available Exchange Member Director
nomination, provided that any such vote must be cast for a person on
the List of Candidates, and no Exchange Member, together with its
Affiliates, may account for more than 20% of the votes cast for a
candidate. See Exchanges Amended and Restated Bylaws, Article III,
Section 4(f).
    \113\ See Exchanges Amended and Restated Bylaws, Article III,
Section 4(f).
    \114\ Id.
---------------------------------------------------------------------------

    The Commission believes that the requirement in the Exchanges
Amended and Restated By-Laws that 20% of the directors be Exchange
Member Directors and the means by which they are chosen by Members
provides for the fair representation of members in the selection of
directors and the administration of the Exchanges consistent with the
requirement in Section 6(b)(3) of the Act.\115\ As the Commission has
previously noted, this requirement helps to ensure that members have a
voice in the use of self-regulatory authority, and that an exchange is
administered in a way that is equitable to all those who trade on its
market or through its facilities.\116\
---------------------------------------------------------------------------

    \115\ 15 U.S.C. 78f(b)(3).
    \116\ See, e.g., Nasdaq Exchange Registration Order and NYSE/
Archipelago Merger Approval Order, supra note 75, and BATS Exchange
Order, supra note 65.
---------------------------------------------------------------------------

    The Commission has previously stated its belief that the inclusion
of public, non-industry representatives on exchange oversight bodies is
critical to an exchange's ability to protect the public interest.\117\
Further, public, non-industry representatives 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
unique, unbiased perspectives, which should enhance the ability of the
Exchange Boards to address issues in a non-discriminatory fashion and
foster the integrity of the Exchanges.\118\ The Commission believes
that the composition of the Exchange Boards satisfy the requirements in
Section 6(b)(3) of the Act,\119\ which requires 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.\120\
---------------------------------------------------------------------------

    \117\ See, e.g., Regulation of Exchanges and Alternative Trading
Systems, Securities Exchange Act Release No. 40760 (December 8,
1998), 63 FR 70844 (December 22, 1998) (``Regulation ATS Release'').
    \118\ See Nasdaq Exchange Registration Order and NYSE/
Archipelago Merger Approval Order, supra note 75, and BATS Exchange
Order, supra note 65.
    \119\ 15 U.S.C. 78f(b)(3).
    \120\ See Form 1 Applications, Exhibit J, Response 2 (stating
that at least one Independent Director will be a public non-industry
representative not associated with a member of the Exchange or with
a broker or dealer, as required by Section 6(b)(3) of the Act).
---------------------------------------------------------------------------

2. Exchange Committees
    In the Exchanges Amended and Restated Bylaws, the Exchanges have
proposed to establish several committees. Specifically, each Exchange
has proposed to establish the following committees whose members the
Exchange Boards, after consultation with the Chairman, may designate: a
Compensation Committee; \121\ an Audit

Committee; \122\ an Executive Committee; \123\ a Regulatory Oversight
Committee; and an Appeals Committee.\124\ In addition, each Exchange
has proposed to establish a Nominating Committee \125\ and a Member
Nominating Committee, which will be elected on an annual basis by a
vote of the stockholders.\126\ For the reasons discussed above, the
Commission believes that the Exchanges' proposed committees should
enable the Exchanges to carry out their responsibilities under the Act
and are consistent with the Act.
---------------------------------------------------------------------------

    \121\ The Compensation Committee will consist of three
Independent Directors. See Exchanges Amended and Restated Bylaws,
Article V, Section 5(a).
    \122\ The Audit Committee, which will have at least three
members, will consist solely of Directors, including a majority of
Independent Directors, and an Independent Director will serve as
Chairman of the Audit Committee. See Exchanges Amended and Restated
Bylaws, Article V, Sections 2(a) and 5(b).
    \123\ The Regulatory Oversight Committee will have at least
three members and will consist solely of Independent Directors. See
Exchanges Amended and Restated Bylaws, Article V, Sections 2(a) and
5(c).
    \124\ The Appeals Committee will consist of two Independent
Directors and one Exchange Member Director. See Exchanges Amended
and Restated Bylaws, Article V, Section 5(d).
    \125\ See Exchanges Amended and Restated Bylaws, Article VI,
Sections 1 and 2, and Section II.D.1., supra.
    \126\ See Exchanges Amended and Restated Bylaws, Article VI,
Sections 1 and 3, and Section II.D.1., supra.
---------------------------------------------------------------------------

E. Regulation of EDGX and EDGA

    As a prerequisite for the Commission's approval of an exchange's
application for registration, an exchange must be organized and have
the capacity to carry out the purposes of the Act.\127\ Among other
requirements, an exchange must be able to enforce compliance by its
members, and persons associated with its members, with the federal
securities laws and the rules of the exchange.\128\
---------------------------------------------------------------------------

    \127\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
    \128\ Id. See also Section 19(g) of the Act, 15 U.S.C. 78s(g).
---------------------------------------------------------------------------

1. Membership
    Membership on the Exchanges will be open to any registered broker
or dealer that is a member of another registered national securities
exchange or association, or any natural person associated with such a
registered broker or dealer.\129\ To be eligible for membership in the
Exchanges, a person must be, and remain, a member of another registered
national securities exchange or association.\130\
---------------------------------------------------------------------------

    \129\ See Exchange Rules 2.3(a) and 2.5(a)(4).
    \130\ Id.
---------------------------------------------------------------------------

    For a temporary 90-day period after approval of the Exchanges' Form
1 Applications, an applicant that is an active member of another
registered national securities exchange or the Financial Industry
Regulatory Authority, Inc. (``FINRA'') and is a current or former
subscriber to DECN will be able to apply through an expedited process
to become a member of one or both Exchanges, and to register with the
Exchange(s) all of its associated persons whose registrations are
active at the time the Exchanges are approved as national securities
exchanges, by submitting waive-in application forms, including
membership agreements.\131\ EDGX or EDGA may request additional
documentation in addition to the waive-in application form in order to
determine whether a waive-in applicant meets the Exchange's
qualification standards.\132\ All of the firm's associated persons who
are registered in categories recognized by Exchange rules would become
registered persons of an Exchange member firm.\133\
---------------------------------------------------------------------------

    \131\ See Exchange Rule 2.4. The BATS Exchange also provided a
waive-in application process. See BATS Rule 2.4.
    \132\ Id.
    \133\ Id.
---------------------------------------------------------------------------

    All other applicants (and after the 90-day period has ended, those
that could have waived in through the expedited process) may apply for
membership in one or both Exchanges by submitting a full membership
application to the Exchange(s).\134\ Applications for association with
an Exchange Member shall be submitted to the Exchange(s) on Form U-4
and such other forms as the Exchanges may prescribe.\135\
---------------------------------------------------------------------------

    \134\ See Exchange Rule 2.6.
    \135\ See Exchange Rule 2.6(b).
---------------------------------------------------------------------------

    Each Exchange will receive and review all applications for
membership in the Exchange. If an Exchange is satisfied that the
applicant is qualified for membership, the Exchange will promptly
notify the applicant, in writing, of such determination, and the
applicant will be a member of the Exchange.\136\ If an Exchange is not
satisfied that the applicant is qualified for membership, the Exchange
shall promptly notify the applicant of the grounds for denial.\137\
Once an applicant is a member of an Exchange, it must continue to
possess all the qualifications set forth in the Exchange's rules. When
an Exchange has reason to believe that an Exchange member or associated
person of a member fails to meet such qualifications, the Exchange may
suspend or revoke such person's membership or association.\138\
---------------------------------------------------------------------------

    \136\ See Exchange Rule 2.6(c).
    \137\ See Exchange Rule 2.6(d).
    \138\ See Exchange Rule 2.7; see also Exchange Rules Chapters
VII and VIII.
---------------------------------------------------------------------------

    Appeal of a staff denial, suspension, or termination of membership
will be heard by the Appeals Committee of EDGX or EDGA, as
applicable.\139\ Decisions of the Appeals Committee will be made in
writing and will be sent to the parties to the proceeding.\140\ The
decisions of the Appeals Committee will be subject to review by the
applicable Exchange Board, on its own motion, or upon written request
by the aggrieved party or by the Chief Regulatory Officer
(``CRO'').\141\ The Exchange Board will have sole discretion to grant
or deny the request.\142\ The Exchange Board will conduct the review of
the Appeals Committee's decision and may affirm, reverse, or modify the
Appeals Committee's decision.\143\ An Exchange Board's decision is
final.\144\
---------------------------------------------------------------------------

    \139\ See Exchange Rule 10.3; see also Exchanges Amended and
Restated Bylaws Article V, Section 5(d).
    \140\ See Exchange Rule 10.4(d).
    \141\ See Exchange Rule 10.5(a).
    \142\ Id.
    \143\ See Exchange Rule 10.5(b).
    \144\ Id. Membership decisions are subject to review by the
Commission. See Exchange Rule 10.7 and Section 19(d) of the Act, 15
U.S.C. 78s(d).
---------------------------------------------------------------------------

    The Commission finds that the membership rules of EDGX and EDGA
\145\ are consistent with section 6 of the Act,\146\ specifically
section 6(b)(2) of the Act,\147\ which requires that a national
securities exchange have rules that provide that any registered broker
or dealer or natural person associated with such broker or dealer may
become a member and any person may become associated with an exchange
member. The Commission notes that pursuant to section 6(c) of the Act,
an exchange must deny membership to any person, other than a natural
person, that is not a registered broker or dealer, any natural person
that is not, or is not associated with, a registered broker or dealer,
and registered broker-dealers that do not satisfy certain standards,
such as financial responsibility or operational capacity. As registered
exchanges, the Exchanges must independently determine if an applicant
satisfies the standards set forth in the Act, regardless of whether an
applicant is a member of another SRO.\148\
---------------------------------------------------------------------------

    \145\ In its comment letter, Nasdaq states that EDGX and EDGA
should be required to amend their rules governing the registration
of associated persons of members to address certain deficiencies.
See Nasdaq Letter, supra note 4, at 7. EDGX and EDGA have revised
their member registration rules accordingly. See Exchange Rule 2.3
and Amendment No. 2.
    \146\ 15 U.S.C. 78f.
    \147\ 15 U.S.C. 78f(b)(2).
    \148\ See Nasdaq Exchange Registration Order, supra note 75.

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

2. Regulatory Independence
    Each Exchange has proposed several measures to help ensure the
independence of its regulatory function from its market operations and
other commercial interests. The regulatory operations of each Exchange
will be supervised by the Exchange's CRO and monitored by its
Regulatory Oversight Committee.\149\ The Regulatory Oversight
Committees of each Exchange will consist of three members, each of whom
must be an Independent Director.\150\ Each Exchange's Regulatory
Oversight Committee will be responsible for monitoring the adequacy and
effectiveness of the Exchange's regulatory program, assessing the
Exchange's regulatory performance, and assisting the Exchange Board in
reviewing the Exchange's regulatory plan and the overall effectiveness
of the Exchange's regulatory functions.\151\ Each Exchange's Regulatory
Oversight Committee also will meet with the Exchange's CRO in executive
session at regularly scheduled meetings and at any time upon request of
the CRO or any member of the Regulatory Oversight Committee.\152\
---------------------------------------------------------------------------

    \149\ See Exchanges Amended and Restated Bylaws, Article V,
Section 5(c).
    \150\ See Exchanges Amended and Restated By-Laws Articles I(u)
and V, Sections 2(a) and 5(c).
    \151\ See Exchanges Amended and Restated By-Laws Article V,
Section 5(c).
    \152\ See Exchanges Amended and Restated By-Laws Article VII,
Section 9.
---------------------------------------------------------------------------

    Each Exchange proposes that its CRO have general supervision of the
regulatory operations of the Exchange, including overseeing
surveillance, examination, and enforcement functions.\153\ The CRO also
will administer any regulatory services agreement with another SRO to
which the Exchange is a party.\154\ The CRO of each Exchange will be an
Executive Vice President or Senior Vice President of the Exchange, and
also may serve as the Exchange's General Counsel.\155\
---------------------------------------------------------------------------

    \153\ Id.
    \154\ Id.
    \155\ Id. See Nasdaq Exchange Registration Order, supra note 75.
---------------------------------------------------------------------------

    In addition, each Exchange has taken steps designed to provide
sufficient funding for the Exchange to carry out its responsibilities
under the Act. Specifically, each Exchange has represented that: (1) DE
Holdings will allocate sufficient operational assets and make a capital
contribution to the Exchange's capital account prior to the launch of
the Exchange; (2) such an allocation and contribution will be adequate
to operate the Exchange, including the regulation of the Exchange; and
(3) there will be an explicit agreement between the Exchange and DE
Holdings that requires DE Holdings to provide adequate funding for each
Exchange's operations, including the regulation of the Exchange.\156\
In addition, the Amended and Restated Bylaws of each Exchange provides
that revenues received by the Exchange from fees derived from its
regulatory function or regulatory penalties will not be used for non-
regulatory purposes or distributed to the stockholders, but rather,
will be applied to fund the legal and regulatory operations of the
Exchange (including surveillance and enforcement activities), or will
be used to pay restitution and disgorgement of funds intended for
customers.\157\
---------------------------------------------------------------------------

    \156\ See Amendment No. 2, supra note 5.
    \157\ See Exchanges Amended and Restated Bylaws Article X,
Section 4.
---------------------------------------------------------------------------

3. Regulatory Contracts
    Although the Exchanges will be SROs with all of the attendant
regulatory obligations under the Act, EDGX and EDGA each have stated
that they entered into a regulatory contract with FINRA and a
regulatory contract with ISE LLC (each, a ``Regulatory Contract,'' and,
together, the ``Regulatory Contracts''), under which FINRA and ISE will
perform certain regulatory functions on behalf of EDGX and EDGA.\158\
Specifically, each Exchange states that FINRA will assist Exchange
staff on registration issues on an as-needed basis, investigate
potential violations of each Exchange's rules or federal securities
laws related to activity on the Exchange, conduct examinations related
to market conduct on the Exchange by Members, assist the Exchanges with
disciplinary proceedings pursuant to each Exchange's rules, including
issuing charges and conducting hearings, and provide dispute resolution
services to Exchange Members on behalf of the Exchanges, including
operation of each Exchange's arbitration program. Each Exchange also
represents that FINRA will provide the Exchange with access to FINRA's
WebCRD system, and will assist with programming Exchange-specific
functionality relating to such system.\159\ With respect to the
Regulatory Contracts with ISE, each Exchange states that ISE will
perform surveillance including, but not limited to, reviews respecting
trading through protected quotes, locked and crossed markets,
manipulation, wash trades, marking the close, customer complaints,
frontrunning, trading ahead of customer orders, and anti-spoofing.\160\
Notwithstanding the Regulatory Contracts, each Exchange acknowledges it
will retain ultimate legal responsibility for the regulation of its
members and its market.\161\
---------------------------------------------------------------------------

    \158\ See Exchange Rule 13.7; see also Amendment No. 2. Pursuant
to the applicable provisions of the Freedom of Information Act, 5
U.S.C. 552, and Commission regulations thereunder, 17 CFR 200.83,
the Exchanges have requested confidential treatment for the
Regulatory Contracts.
    \159\ See Amendment No. 2, supra note 5.
    \160\ Each Exchange also states that ISE surveillance will work
closely with the market operations and legal/compliance groups of
the Exchange, when needed, to perform error trade reviews. See
Amendment No. 2, supra note 5.
    \161\ See Exchange Rule 13.7 and Amendment No. 2, supra note 5.
---------------------------------------------------------------------------

    The Commission believes that it is consistent with the Act to allow
the Exchanges to contract with FINRA and ISE to perform examination,
enforcement, and disciplinary functions.\162\ These functions are
fundamental elements to a regulatory program, and constitute core self-
regulatory functions. The Commission believes that FINRA and ISE have
the expertise and experience to perform these functions on behalf of
the Exchanges.\163\
---------------------------------------------------------------------------

    \162\ See, e.g., Regulation ATS Release, supra note 117. See
also Securities Exchange Act Release Nos. 50122 (July 29, 2004), 69
FR 47962 (August 6, 2004) (SR-Amex-2004-32) (order approving rule
that allowed Amex to contract with another SRO for regulatory
services) (``Amex Regulatory Services Approval Order''); 57478
(March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004)
(``NOM Approval Order''); Nasdaq Exchange Registration Order, supra
note 75; and BATS Exchange Order, supra note 65.
    \163\ See, e.g., Amex Regulatory Services Approval Order, supra
note 162; NOM Approval Order, supra note 162; and Nasdaq Exchange
Registration Order, supra note 75. The Commission notes that the
Regulatory Contracts are not before the Commission and, therefore,
the Commission is not acting on them.
---------------------------------------------------------------------------

    At the same time, each Exchange, unless relieved by the Commission
of its responsibility,\164\ bears the ultimate responsibility for self-
regulatory responsibilities and primary liability for self-regulatory
failures, not the SRO retained to perform regulatory functions on the
Exchange's behalf. In performing these regulatory functions, however,
the SROs retained to perform regulatory functions may nonetheless bear
liability for causing or aiding and abetting the failure of EDGX or
EDGA to perform its

regulatory functions.\165\ Accordingly, although FINRA and ISE will not
act on their own behalf under their SRO responsibilities in carrying
out these regulatory services for the Exchanges, as SROs retain to
perform regulatory functions, they 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 by EDGX or EDGA.\166\
---------------------------------------------------------------------------

    \164\ 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. 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. 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. See also
Section III.E.4, infra.
    \165\ For example, if failings by the SRO retained to perform
regulatory functions have the effect of leaving an Exchange in
violation of any aspect of the Exchange's self-regulatory
obligations, the Exchange would bear direct liability for the
violation, while the SRO retained to perform regulatory functions
may bear liability for causing or aiding and abetting the violation.
See, e.g., Nasdaq Exchange Registration Order, supra note 75; BATS
Exchange Order, supra note 65; and Securities Exchange Act Release
No. 42455 (February 24, 2000), 65 FR 11388 (March 2, 2000) (File No.
10-127) (order approving the International Securities Exchange LLC's
application for registration as a national securities exchange).
    \166\ Id.
---------------------------------------------------------------------------

    Because the exhibits to the Regulatory Contacts, including the
Exchange and Commission rules covered by the Regulatory Contracts, have
not yet been finalized, the Commission is conditioning the operation of
EDGX and EDGA as exchanges on the finalization of the provisions in the
Regulatory Contracts that will specify the Exchange and Commission
rules for which FINRA and ISE will provide regulatory functions.\167\
---------------------------------------------------------------------------

    \167\ Alternatively, the Exchanges could demonstrate that they
have the ability to fulfill their regulatory obligations.
---------------------------------------------------------------------------

4. 17d-2 Agreement
    Section 19(g)(1) of the Act \168\ requires every SRO to examine its
members and persons associated with its members and to enforce
compliance with the federal securities laws and the SRO's own rules,
unless the SRO is relieved of this responsibility pursuant to section
17(d) of the Act.\169\ Section 17(d) was intended, in part, to
eliminate unnecessary multiple examinations and regulatory duplication
with respect to members of more than one SRO (``common members'').\170\
Rule 17d-2 of the Act permits SROs to propose joint plans allocating
regulatory responsibilities concerning common members.\171\ These
agreements, which must be filed with and approved by the Commission,
generally cover such regulatory functions as personnel registration,
branch office examinations, and sales practices. Commission approval of
a Rule 17d-2 plan relieves the specified SRO of those regulatory
responsibilities allocated by the plan to another SRO.\172\ Many
existing SROs have entered into such agreements.\173\
---------------------------------------------------------------------------

    \168\ 15 U.S.C. 78s(g)(1).
    \169\ 15 U.S.C. 78q(d).
    \170\ See Securities Exchange Act Release No. 12935 (October 28,
1976), 41 FR 49091 (November 8, 1976) (``Rule 17d-2 Adopting
Release'').
    \171\ 17 CFR 240.17d-2.
    \172\ See Rule 17d-2 Adopting Release, supra note 170.
    \173\ See, e.g., Securities Exchange Act Release Nos. 13326
(March 3, 1977), 42 FR 13878 (March 14, 1977) (NYSE/Amex); 13536
(May 12, 1977), 42 FR 26264 (May 23, 1977) (NYSE/BSE); 14152
(November 9, 1977), 42 FR 59339 (November 16, 1977) (NYSE/CSE);
13535 (May 12, 1977), 42 FR 26269 (May 23, 1977) (NYSE/CHX); 13531
(May 12, 1977), 42 FR 26273 (May 23, 1977) (NYSE/PSE); 14093
(October 25, 1977), 42 FR 57199 (November 1, 1977) (NYSE/Phlx);
15191 (September 26, 1978), 43 FR 46093 (October 5, 1978) (NASD/BSE,
CSE, CHX and PSE); 16858 (May 30, 1980), 45 FR 37927 (June 5, 1980)
(NASD/BSE, CSE, CHX and PSE); 42815 (May 23, 2000), 65 FR 34762 (May
31, 2000) (NASD/ISE); and 54136 (July 12, 2006), 71 FR 40759 (July
18, 2006) (NASD/Nasdaq).
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    EDGX and EDGA each have represented to the Commission that each
Exchange and FINRA intend to file Rule 17d-2 agreements with the
Commission covering common members of EDGX or EDGA, as applicable, and
FINRA. These agreements would allocate to FINRA regulatory
responsibility, with respect to common members, for the following:
     FINRA will examine common members of EDGX or EDGA, as
applicable, and FINRA for compliance with federal securities laws,
rules and regulations, and rules of the Exchange that the Exchange has
certified as identical or substantially similar to FINRA rules.
     FINRA will investigate common members of EDGX or EDGA, as
applicable, and FINRA for violations of federal securities laws, rules
or regulations, or Exchange rules that the Exchange has certified as
identical or substantially identical to a FINRA rule.
     FINRA will enforce compliance by common members with the
federal securities laws, rules and regulations, and the rules of EDGX
or EDGA, as applicable, that the Exchange has certified as identical or
substantially similar to FINRA rules.
    Because EDGX and EDGA anticipate entering into this Rule 17d-2
agreement, they have not made provision to fulfill the regulatory
obligations that would be undertaken by FINRA under these agreements
with respect to common members of EDGX or EDGA, as applicable, and
FINRA.\174\ Accordingly, the Commission is conditioning the operation
of the Exchanges on approval by the Commission of the Rule 17d-2
agreements between each Exchange and FINRA that allocate the above
specified matters to FINRA.\175\
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    \174\ The Commission notes that regulation that is to be covered
by the Rule 17d-2 agreements for common members will be carried out
by FINRA under the Regulatory Contracts for EDGX or EDGA members
that are not also members of FINRA.
    \175\ Alternatively, EDGX and EDGA could demonstrate that they
have the ability to fulfill their regulatory obligations.
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5. Discipline and Oversight of Members
    As noted above, as a prerequisite for Commission approval of an
exchange's application for registration, an exchange must be organized
and have the capacity to carry out the purposes of the Act. Among other
requirements, an exchange must be able to enforce compliance by its
members and persons associated with its members with federal securities
laws and the rules of the exchange.\176\ As noted above, pursuant to
the Regulatory Contracts, FINRA will perform many of the initial
disciplinary processes on behalf of the Exchanges.\177\ For example,
FINRA will investigate potential securities laws violations, issue
complaints, and conduct hearings pursuant to the rules of the
Exchanges. Appeals from disciplinary decisions will be heard by each
Exchange's Appeals Committee,\178\ and the Appeals Committee's decision
shall be final. In addition, each Exchange Board may on its own
initiative order review of a disciplinary decision.\179\
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    \176\ See 15 U.S.C. 78f(b)(1).
    \177\ See Section III.E.5, supra.
    \178\ See Exchange Rule 8.10(b).
    \179\ See Exchange Rule 8.10(c).
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    The Exchanges Amended and Restated Bylaws and the Exchanges' rules
provide that each Exchange has disciplinary jurisdiction over its
members so that it can enforce its members' compliance with its rules
and the federal securities laws.\180\ Each Exchange's rules also permit
it 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.\181\ Each Exchange's rules also provide for the imposition of
fines for certain minor rule violations in lieu of commencing
disciplinary proceedings.\182\ Accordingly, as a condition to the
operation of the Exchanges, a Minor Rule Violation Plan (``MRVP'')
filed by each Exchange under

Act Rule 19d-1(c)(2) must be declared effective by the Commission.\183\
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    \180\ See generally Exchanges Amended and Restated Bylaws
Article X and Exchange Rules Chapters II and VIII.
    \181\ See Exchange Rules 2.2 and 8.1(a).
    \182\ See Exchange Rule 8.15.
    \183\ 17 CFR 240.19d-1(c)(2).
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    The Commission finds that the Exchanges Amended and Restated By-
Laws and the rules of each Exchange concerning the Exchange's
disciplinary and oversight programs are consistent with the
requirements of sections 6(b)(6) and 6(b)(7) \184\ 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 EDGX and EDGA are designed to provide the Exchanges with the
ability to comply, and with the authority to enforce compliance by
their members and persons associated with their members, with the
provisions of the Act, the rules and regulations thereunder, and the
rules of the Exchanges.\185\
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    \184\ 15 U.S.C. 78f(b)(6) and (b)(7).
    \185\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
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F. Trading Systems of EDGX and EDGA

1. Trading Rules
    Each Exchange will operate a fully automated electronic order book.
Members of EDGX and EDGA and entities that enter into sponsorship
arrangements with such members (collectively, ``Users'') will have
access to the systems of EDGX and EDGA (each, an ``EDGX System,'' an
``EDGA System,'' or an ``Exchange System,'' and, together, the
``Exchange Systems'').\186\ Users will be able to electronically submit
market and various types of limit orders to EDGX or EDGA from remote
locations.\187\ All orders submitted to the Exchanges will be displayed
unless designated otherwise by the Exchange member submitting the
order. Displayed orders will be displayed on an anonymous basis at a
specified price. Non-displayed orders will not be displayed but will be
ranked in an Exchange System at a specified price.\188\ The Exchanges'
Systems will continuously and automatically match orders pursuant to
price/time priority, except that displayed orders will have priority
over non-displayed orders at the same price.\189\
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    \186\ To obtain authorized access to the Exchange Systems, each
User must enter into a User Agreement with the Exchange(s). See
Exchange Rule 11.3(a).
    \187\ One proposed order type is the Step-up Order, which is a
market or limit order with the instruction that the Exchange System
display the order to Users at or within the National Best Bid or
Offer (``NBBO'') price pursuant to Exchange Rule 11.9(b)(1)(C). See
Exchange Rule 11.5(c)(11). Prior to routing to away markets, or
cancellation per the order's instructions, Step-up Orders will be
displayed to Users, in a manner that is separately identifiable from
other Exchange orders, at or within the NBBO price for a period of
time not to exceed 500 milliseconds, as determined by the Exchange.
See Exchange Rule 11.9(a)(1)(C). In its comment letter, Nasdaq notes
that the Commission recently has proposed a rule amendment to
prohibit the use of this type of order, known as a flash order, and
questions whether the Commission should approve the Form 1
Applications with an order type that ``would become illegal if the
Commission's flash order ban is adopted.'' See Nasdaq Letter, supra
note 4, at 6. The Commission notes that it has not acted on its
proposal to prohibit the use of flash orders. The Commission also
notes that the Exchanges will be required to comply with any
Commission rules regarding flash orders and that the Exchanges have
represented that they will do so. See letter from William O'Brien,
Chief Executive Officer, DE Holdings, DECN, EDGX, and EDGA, to James
Brigagliano, Co-Acting Director, Division of Trading and Markets,
Commission, dated August 10, 2009.
    \188\ The rules of EDGX and EDGA do not provide for specialists
or market makers.
    \189\ See Exchange Rule 11.8.
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    Each Exchange System is designed to comply with Rule 611 of
Regulation NMS \190\ by requiring that, for any execution to occur on
the Exchange during regular trading hours, the price must be equal to,
or better than, any ``protected quotation'' within the meaning of
Regulation NMS (``Protected Quotation''), unless an exception to Rule
611 of Regulation NMS applies.\191\ Each Exchange will direct any
orders or portion of orders that cannot be executed in their entirety
to away markets for execution, unless the terms of the orders direct
the Exchange not to route such orders away.\192\
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    \190\ 17 CFR 242.611.
    \191\ See Exchange Rule 11.9(a).
    \192\ See Exchange Rule 11.9(b)(2).
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    Each Exchange intends to operate as an automated trading center in
compliance with Rule 600(b)(4) of Regulation NMS.\193\ Each Exchange
will display automated quotations at all times except in the event that
a systems malfunction renders the Exchange's System incapable of
displaying automated quotations.\194\ Each Exchange has designed its
rules relating to orders, modifiers, and order execution to comply with
the requirements of Regulation NMS, including an immediate-or-cancel
functionality.\195\ These rules include accepting orders marked as
intermarket sweep orders, which will allow orders so designated to be
automatically matched and executed without reference to Protected
Quotations at other trading centers,\196\ and routing orders marked as
intermarket sweep orders by a User to a specific trading center for
execution.\197\ In addition, each Exchange's rules address locked and
crossed markets,\198\ as required by Rule 610(d) of Regulation
NMS.\199\ The Commission believes that the Exchanges' rules are
consistent with the Act, in particular with the requirements of Rule
610(d) and Rule 611 of Regulation NMS.
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    \193\ 17 CFR 242.600(b)(4).
    \194\ See Exchange Rule 11.9(d); see also 17 CFR 242.600(b)(3).
    \195\ See Exchange Rules 11.5 and 11.9; see also 17 CFR
242.600(b)(3).
    \196\ See Exchange Rule 11.5(d)(1).
    \197\ See Exchange Rule 11.5(d)(2).
    \198\ See Exchange Rule 11.16.
    \199\ 17 CFR 242.610(d).
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    As stated above, each Exchange intends to operate as an automated
trading center and have its best bid and best offer be a Protected
Quotation.\200\ To meet their regulatory responsibilities under Rule
611(a) of Regulation NMS, market participants must have sufficient
notice of new Protected Quotations, as well as all necessary
information (such as final technical specifications).\201\ Therefore,
the Commission believes that it would be a reasonable policy and
procedure under Rule 611(a) for industry participants to begin treating
each Exchange's best bid and best offer as a Protected Quotation within
90 days after the date of this order, or such later date as the
Exchange begins operations as national securities exchange.
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    \200\ 17 CFR 242.600(b)(58).
    \201\ See Securities Exchange Act Release No. 53829 (May 18,
2006), 71 FR 30038, 30041 (May 24, 2006).
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2. Section 11 of the Act
    Section 11(a)(1) of the Act \202\ 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 discretion
(collectively, ``covered accounts''), unless an exception applies. Rule
11a2-2(T) under the Act,\203\ 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 the
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;\204\ (iii) may not be affiliated with the executing

member; and (iv) with respect to an account over which the member 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.
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    \202\ 15 U.S.C. 78k(a)(1).
    \203\ 17 CFR 240.11a2-2(T).
    \204\ The member may, however, participate in clearing and
settling the transaction. See 1978 Release, infra note 206.
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    In letters to the Commission,\205\ each Exchange requested that the
Commission concur with its conclusion that Exchange members entering
orders into each respective Exchange System satisfy the requirements of
Rule 11a2-2(T). For the reasons set forth below, the Commission
believes that EDGA members entering orders into the EDGA System and
EDGX members entering orders into the EDGX System would satisfy the
conditions of the Rule.
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    \205\ See letter from Eric W. Hess, General Counsel and
Secretary, EDGA Exchange, to Elizabeth Murphy, Secretary,
Commission, dated February 11, 2010; and letter from Eric W. Hess,
General Counsel and Secretary, EDGX Exchange, to Elizabeth Murphy,
Secretary, Commission, dated February 11, 2010 (collectively,
``Exchange 11(a) Request Letters'').
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    The rule's first condition is that orders for covered accounts be
transmitted from off the exchange floor. Each Exchange System receives
orders electronically through remote terminals or computer-to-computer
interfaces. In the context of other 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.\206\ Because each
Exchange System receives orders electronically through remote terminals
or computer-to-computer interfaces, the Commission believes that each
System satisfies the off-floor transmission requirement.
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    \206\ See, e.g., Securities Exchange Act Release Nos. 59154
(December 23, 2008) 73 FR 80468 (December 31, 2008) (SR-BSE-2008-48)
(order approving proposed rules of NASDAQ OMX BX); 49068 (January
13, 2004), 69 FR 2775 (January 20, 2004) (order approving the Boston
Options Exchange as an options trading facility of the Boston Stock
Exchange); 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001)
(order approving Archipelago Exchange as electronic trading facility
of the Pacific Exchange (``PCX'')); 29237 (May 24, 1991), 56 FR
24853 (May 31, 1991) (regarding NYSE's Off-Hours Trading Facility);
15533 (January 29, 1979), 44 FR 6084 (January 31, 1979) (regarding
the American Stock Exchange (``Amex'') Post Execution Reporting
System, the Amex Switching System, the Intermarket Trading System,
the Multiple Dealer Trading Facility of the Cincinnati Stock
Exchange, the PCX Communications and Execution System, and the
Philadelphia Stock Exchange (``Phlx'') Automated Communications and
Execution System (``1979 Release'')); and 14563 (March 14, 1978), 43
FR 11542 (March 17, 1978) (regarding the NYSE's Designated Order
Turnaround System (``1978 Release'')).
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    Second, the rule requires that the member not participate in the
execution of its order. Each Exchange represents that at no time
following the submission of an order is a member able to acquire
control or influence over the result or timing of an order's
execution.\207\ According to each Exchange, the execution of a member's
order is determined solely by what orders, bids, or offers are present
in each system at the time the member submits the order and on the
priority of those orders, bids and offers.\208\ Accordingly, the
Commission believes that Exchange members do not participate in the
execution of orders submitted into the Exchange Systems.
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    \207\ See Exchange 11(a) Request Letters, supra note 205. The
member may only cancel or modify the order, or modify the
instructions for executing the order, but only from off the 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 1978 Release, supra note 206 (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'').
    \208\ Id.
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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 Exchange Systems, 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.\209\ Each Exchange
represents that the design of its Exchange System ensures that no
member has any special or unique trading advantage in the handling of
its orders after transmitting its orders to the Exchange.\210\ Based on
the Exchanges' representations, the Commission believes that the
Exchange Systems satisfy this requirement.
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    \209\ In considering the operation of automated execution
systems operated by an exchange, the Commission noted that while
there is no independent executing exchange member, the execution of
an order is automatic once it has been transmitted into each 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 206.
    \210\ See Exchange 11(a) Request Letters, supra note 205.
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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).\211\ Each Exchange represents that Exchange 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.\212\
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    \211\ 17 CFR 240.11a2-2(T)(a)(2)(iv). 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 person 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 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 206(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'').
    \212\ See Exchange 11(a) Request Letters, supra note 205
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G. Section 11A of the Act

    Section 11A of the Act and the rules thereunder form the basis of
our national market system and impose requirements on exchanges to
implement its objectives. Specifically, national securities exchanges
are required, under Rule 601 of Regulation NMS,\213\ to file
transaction reporting plans regarding transactions in listed equity and
Nasdaq securities that are executed on their facilities. Currently
registered exchanges satisfy this requirement by participating in the
Consolidated Transaction Association Plan (``CTA Plan'') for listed
equities and the Joint Self-Regulatory Organization Plan Governing the
Collection, Consolidation and Dissemination of Quotation and
Transaction Information for Nasdaq-Listed Securities Traded on
Exchanges on an Unlisted Trading Privileges Basis (``Nasdaq UTP Plan'')
for Nasdaq securities.\214\ Before the Exchanges can begin operating as
exchanges, each must join these plans as a participant.
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    \213\ 17 CFR 242.601.
    \214\ These plans also satisfy the requirement in Rule 603 that
national securities exchanges and national securities associations
act jointly pursuant to an effective national market system plan to
disseminate consolidated information, including a national best bid
and offer, and quotations for and transactions in NMS stocks. See 17
CFR 242.603. See also Nasdaq Exchange Registration Order, supra note
75.
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    National securities exchanges are required, under Rule 602 of
Regulation

NMS,\215\ to collect bids, offers, quotation sizes and aggregate
quotation sizes from those members who are responsible broker or
dealers. National securities exchanges must then make this information
available to vendors at all times when the exchange is open for
trading. The current exchanges satisfy this requirement by
participating in the Consolidated Quotation System Plan (``CQ Plan'')
for listed equity securities and the Nasdaq UTP Plan for Nasdaq
securities. Before EDGX and EDGA can begin operating as exchanges, each
must join the CQ Plan as a participant, in addition to the CTA Plan and
the Nasdaq UTP Plan.
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    \215\ 17 CFR 242.602.
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    Finally, national securities exchanges must make available certain
order execution information pursuant to Rule 605 of Regulation
NMS.\216\ Current exchanges have standardized the required disclosure