[Federal Register: September 12, 2006 (Volume 71, Number 176)]
[Notices]
[Page 53728-53736]
[DOCID:fr12se06-92]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54399; File No. SR-ISE-2006-45]

Self-Regulatory Organizations; International Securities Exchange,
Inc.; Order Granting Accelerated Approval of Proposed Rule Change and
Notice of Filing and Order Granting Accelerated Approval of Amendment
No. 1 Thereto Relating To Establishing ISE Stock Exchange, LLC as a
Facility of the International Securities Exchange, Inc

September 1, 2006.

I. Introduction

    On July 31, 2006, the International Securities Exchange, Inc.
(``ISE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934, as amended (``Act''),\1\ and Rule 19b-
4 thereunder,\2\ a proposed rule change establishing a facility, ISE
Stock Exchange, LLC (``ISE Stock''), that would administer a fully
automated trading system for the trading of equity securities by
Electronic Access Members, or EAMs, of ISE under the rules of ISE. The
proposed rule change was published for comment in the Federal Register
on August 10, 2006.\3\ The Commission received no comments regarding
the proposal. On August 31, 2006, ISE filed Amendment No. 1 to the
proposed rule change.\4\ This order grants accelerated approval to the
proposed rule change and Amendment No. 1 thereto, and solicits comments
from interested persons on Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 54273 (August 3,
2006), 71 FR 45868.
    \4\ In Amendment No. 1, ISE made changes to the proposed rule
change to reflect changes made in the Second Amendment and Restated
Limited Liability Company Agreement (``LLC Agreement'') of ISE
Stock, and made clarifying changes to the LLC Agreement, in part, to
specifically reference ISE in various provisions, to clarify the
voting rights of Members who have transferred Units, to clarify the
details of the exception from the voting restrictions as they relate
to International Securities Exchange Holdings, Inc. (``Holdings''),
to clarify that ISE's Board must determine whether any change to the
LLC Agreement must be filed with the Commission pursuant to Section
19(b) of the Act, and to apply the call right described in Section
9.8 of the LLC Agreement to all Units.
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II. Description of the Proposal

A. Overview

    The Exchange proposes to establish ISE Stock as a facility, as that
term is defined in Section 3(a)(2) of the Act,\5\ of ISE. ISE Stock
would administer a fully automated trading system for the trading of
equity securities by Electronic Access Members, or EAMs, of ISE under
the rules of ISE. The Exchange submitted to the Commission the
Certificate of Formation of ISE Stock and the LLC Agreement. The
Certificate of Formation and the LLC Agreement are the source of ISE
Stock's governance and operating authority and, therefore, function in
a similar manner as articles of incorporation and by-laws function for
a corporation.
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    \5\ 15 U.S.C. 78c(a)(2).
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    ISE is a founding and controlling member of ISE Stock. ISE owns all
of the Class A Units of ISE Stock, representing 51% of the voting
securities of ISE Stock. In addition to its ownership stake in ISE
Stock, ISE has entered into a management agreement (the ``Management
Agreement'') with ISE Stock. Pursuant to the Management Agreement, ISE
Stock has appointed ISE as ISE Stock's manager (``Manager'') to perform
certain management, operational, and related services. As described in
Section 8.1 of the LLC Agreement, with limited exceptions, ISE, as the
Manager, would have the complete and exclusive authority to manage the
operations and affairs of ISE Stock. In addition, ISE would have
responsibility for all regulatory functions related to the facility
(including conducting market surveillance for trading on ISE Stock).
ISE Stock would have responsibility for the business operations of the
facility to the extent those activities are not inconsistent and do not
interfere with the regulatory and oversight functions of ISE.\6\
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    \6\ See Amendment No. 1 supra note 4 and LLC Agreement, Section
6.1(d).
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    The Exchange submitted to the Commission the Certificate of
Formation and the LLC Agreement of ISE Stock specifically relating to
the control and governance of ISE Stock that would ensure that ISE has
the authority within ISE Stock to maintain its responsibility for all
regulatory functions related to the ISE Stock facility.\7\ The LLC
Agreement

would ensure that the Commission and ISE would have regulatory
authority over investors and members of the advisory board of ISE Stock
(the ``Advisory Board'').\8\
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    \7\ The Board of Directors of ISE would be required to determine
if any changes to the LLC Agreement are required to be filed with
the Commission pursuant to Section 19(b) of the Act and Rule 19b-4
thereunder. See Amendment No. 1 supra note 4 and LLC Agreement,
Section 12.1.
    \8\ The Advisory Board consists of seven members, three of which
must be officers, directors, or partners of holders of the Class A
Units, and four of which must be officers, directors, or partners of
holders of the Class B Units. See LLC Agreement, Section
8.2(d)(iii).
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B. Description of LLC Membership Interests in ISE Stock

    As a limited liability company, ownership of ISE Stock is
represented by limited liability company membership interests in ISE
Stock. The holders of such membership interests are referred to as the
members (the ``Members'') of ISE Stock. The membership interests are
divided into two classes--Class A and Class B limited liability company
membership units (collectively, the ``Units''). The Units represent
equity interests in ISE Stock and entitle the holders thereof to
participate in certain of ISE Stock's allocations and distributions.
Each ``Class A Unit'' represents a limited liability company membership
interest in ISE Stock, and as a class, the holders of the Class A Units
hold fifty-one percent (51%) of the aggregate voting rights of all
Members. Each holder of a Class A Unit has a vote, in respect of each
Class A Unit held by such holder of record on each matter on which
holders of Units are entitled to vote, equal to the product of (A) 51
and (B) a fraction, whose numerator is the number of Class A Units then
held by such holder and whose denominator is the number of Class A
Units then held by all holders of Class A Units.\9\ Currently, ISE
holds all of the Class A Units, making it a fifty-one percent (51%)
owner of ISE Stock.
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    \9\ LLC Agreement, Section 3.2(a).
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    Each ``Class B Unit'' represents a limited liability company
membership interest in ISE Stock. Each holder of a Class B Unit has a
vote, in respect of each Class B Unit held by such holder of record on
each matter on which holders of Class B Units shall be entitled to vote
as specifically required by the LLC Agreement \10\ or by the Delaware
Limited Liability Company Act (``DLLCA''), equal to the product of (A)
49 and (B) a fraction, whose numerator is the number of Class B Units
then held by such holder and whose denominator is the number of Class B
Units then held by all holders of Class B Units.\11\ There are 49 Class
B Units issued and outstanding, held by 11 Class B Unit holders. ISE
represents that currently no Class B Unit holder owns more than 5
units.
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    \10\ The LLC Agreement provides holders of Class B Units the
right to vote for Class B Advisory Board Members and to vote on
certain amendments to the LLC Agreement. See LLC Agreement, Sections
3.2(b), 8.2(d)(iii), and 12.1.
    \11\ LLC Agreement, Section 3.2(b).
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C. Management of ISE Stock

    As the Manager of ISE Stock, ISE would have the authority to make
all decisions regarding the business of ISE Stock and matters
concerning the Units, including whether or not to authorize
distributions.\12\ In certain limited circumstances, the Manager would
need the approval of two-thirds of the disinterested members of the
Advisory Board prior to taking certain actions.\13\ The Manager would
be responsible for the control and management of the business of ISE
Stock, and must exercise good faith and integrity in handling its
affairs.
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    \12\ LLC Agreement, Section 8.1 and 8.12.
    \13\ LLC Agreement, Section 8.7.
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    Under Section 7.1 of the LLC Agreement, other than as set forth in
the LLC Agreement or required by the DLLCA or by the Commission, the
Members do not participate in the management or control of ISE Stock's
business, they do not transact any business for ISE Stock, and they do
not have the power to act for or bind ISE Stock. All of those powers
are vested solely and exclusively in the Manager. Specifically, under
Section 8.1 of the LLC Agreement, subject to the limitations provided
in the LLC Agreement \14\ and except as specifically provided therein,
the Manager has exclusive and complete authority and discretion to
manage the operations and affairs of ISE Stock and to make all
decisions regarding the business of ISE Stock and has the power to act
for or bind ISE Stock. Any action taken by the Manager constitutes the
act of and serves to bind ISE Stock. Further, except as otherwise
specifically provided in the LLC Agreement, the Manager has all rights
and powers of a ``manager'' under the DLLCA, and has all authority,
rights and powers in the management of ISE Stock business to do any and
all other acts and things necessary, proper, convenient or advisable to
effectuate the purposes of the LLC Agreement. Lastly, under Section
8.13 of the LLC Agreement, any replacement and appointment of the
Manager, and any assignment of the rights and obligations of the
Manager under the Management Agreement, is subject to the rule filing
process pursuant to Section 19 of the Act.
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    \14\ The following actions by the Manager require the consent of
two thirds of the disinterested members of the Advisory Board:
Taking an act that would make it impossible to carry on the ordinary
business of ISE Stock; possessing ISE Stock property for purposes
other than ISE Stock business purposes; making loans to any Member
or its Related Persons; taking an act that would subject a Member to
personal liability; or engaging in transactions with the Manager or
any Member or any Related Person of the Manager or any other Member
on terms that are not reflective of an ``arms' length'' transaction.
See LLC Agreement, Section 8.7; see also Schedule A of the LLC
Agreement.
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D. Governance of ISE Stock

    Section 8.2(d)(i) of the LLC Agreement establishes the Advisory
Board of ISE Stock as a general advisory board and provides that the
Advisory Board will have no power or authority to act for ISE Stock or
to otherwise participate in the ISE Stock's management, except for
certain limited matters.\15\ Other than the matters for which approval
of the Advisory Board is specifically required by the LLC Agreement,
any actions taken by the Advisory Board are advisory only, and neither
the Manager nor any of its Related Persons are required or otherwise
bound to act in accordance with any decision, action or comments of the
Advisory Board. The Advisory Board has no power or authority to act for
ISE Stock or to otherwise participate in ISE Stock management. All
decisions, including responsibility for the management of ISE Stock,
rest with the Manager, and in no event will a member of the Advisory
Board be considered a ``manager'' of ISE Stock.
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    \15\ See LLC Agreement, Section 8.2(d) and 8.7.
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    Section 8.2(d)(ii) of the LLC Agreement provides that the purpose
of the Advisory Board is to: (1) Review and assess any potential
conflicts of interest that may arise between ISE Stock, on the one
hand, and the Manager, any Member and/or any of their respective
Related Persons,\16\ on the other hand

(including without limitation conflicts with respect to the receipt by
the Manager, or its Related Persons, of fees for services rendered to
ISE Stock); and (2) generally to consult with the Manager on ISE
Stock's progress in achieving its business objectives.
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    \16\ ``Related Person'' means (i) With respect to any Person,
any executive officer (as defined under Rule 3b-7 under the Act),
director, general partner, manager or managing member, as
applicable, and all ``affiliates'' and ``associates'' of such Person
(as such terms are defined in Rule 12b-2 under the Act); (ii) with
respect to any Person constituting an ``Exchange Member'' (as such
term is defined in the Constitution of ISE), any broker or dealer
with which such ``Exchange Member'' is associated; (iii) with
respect to any Person that is an executive officer (as defined under
Rule 3b-7 under the Act), director, general partner, manager or
managing member of a company, corporation or similar entity, such
company, corporation or entity, as applicable; and (iv) any two or
more Persons that have any agreement, arrangement or understanding
(whether or not in writing) to act together for the purpose of
acquiring, voting, holding or disposing of Units of ISE Stock. LLC
Agreement, Section 2.1 ``Definitions.''
    ``Person'' means any individual, partnership, limited liability
company, association, corporation, trust or other entity. LLC
Agreement, Section 2.1 ``Definitions.''
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    Section 8.2(d)(iii) of the LLC Agreement provides that the Advisory
Board consists of seven members. Each Member of ISE Stock may nominate
a candidate for election to serve on the Advisory Board. Three members
of the Advisory Board would be officers, directors, or partners of
holders of the Class A Units, and are to be elected annually by a
plurality of the holders of the Class A Units voting together as a
class (each a ``Class A Advisory Board Member''). Each Class A Advisory
Board member would serve for a term of one year. Four members of the
Advisory Board would be officers, directors, or partners of holders of
the Class B Units, and, except as provided below, would be elected
annually by a plurality of the holders of the Class B Units voting
together as a class (each a ``Class B Advisory Board Member''). In any
situation where an Advisory Board Member's job status changes, either
upon a significant change in the employment status at the same employer
or upon a change of employer, or if the Member employing the Advisory
Board member ceases to be a holder of Class B Units, the Advisory Board
member must tender his or her resignation to the Manager, which the
Manager, in consultation with the Advisory Board, may, but need not,
accept. Notwithstanding any of the foregoing, no Member, other than
ISE, would have more than one representative elected to the Advisory
Board during any term. The initial Class B Advisory Board Members would
serve staggered terms with (x) two of such Class B Advisory Board
Members serving two consecutive one-year terms, and (y) the other two
of such Class B Advisory Board Members serving three consecutive one-
year terms. Thereafter, each Class B Advisory Board Member would serve
for a term of one year. In no event would any Class B Advisory Board
Member serve more than three consecutive one-year terms. Each Class B
Advisory Board Member would serve until the conclusion of its one-year
term, and until such Class B Advisory Board Member's successor has been
elected, or re-elected as permitted under the LLC Agreement, by a
plurality of the holders of the Class B Units voting together as a
class, except in the event of such Class B Advisory Board Member's
earlier death, resignation, or termination.
    Under Section 8.2(e) of the LLC Agreement, ISE Stock also has
advisory committees (the ``Advisory Committees''), each consisting of
up to ten individuals who consult with ISE Stock and assist with the
development of: (i) Agency broker trading; (ii) institutional trading;
(iii) technology; and (iv) bulk quoting. As with the Advisory Board,
the Advisory Committees have no power or authority to act for ISE Stock
or to otherwise participate in management.
    These limitations on the powers of the Advisory Board and Advisory
Committees of ISE Stock will enable ISE to have complete authority over
the actions of ISE Stock, especially as they relate to regulatory
responsibilities.
    Under Section 8.2(d)(vii) of the LLC Agreement, in discharging his
or her responsibilities as a member of the Advisory Board, such member
must take into consideration the effect that ISE Stock's actions would
have on the ability of ISE Stock and ISE \17\ to carry out their
respective responsibilities under the Act and whether or not his or her
actions as a member of the Advisory Board would cause ISE Stock and ISE
to engage in conduct that fosters and does not interfere with ISE
Stock's and ISE's ability to prevent fraudulent and manipulative acts
and practices; to promote just and equitable principles of trade; to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities; to remove impediments to and
perfect the mechanisms of a free and open market and a national market
system; and, in general, to protect investors and the public
interest.\18\ Furthermore, in discharging his or her responsibilities
as a member of the Advisory Board, each member must comply with the
federal securities laws and the rules and regulations thereunder and
cooperate with ISE and the Commission pursuant to their respective
regulatory authority and the provisions of the LLC Agreement.
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    \17\ See Amendment No. 1 supra, note 4.
    \18\ Id.
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    Under Section 8.2(d)(viii) of the LLC Agreement, the Manager, in
its sole discretion, may, after appropriate notice and opportunity for
hearing, terminate an Advisory Board member: (i) In the event such
Advisory Board member has violated any provision of the LLC Agreement
or any federal or state securities law; or (ii) if the Manager
determines that such action is necessary or appropriate in the public
interest or for the protection of investors.
    These provisions would require all members of ISE Stock's Advisory
Board, regardless of their association with ISE, to adhere to
regulatory responsibilities, in that they must comply with federal
securities laws and the rules and regulations promulgated thereunder,
and cooperate with the Commission and ISE pursuant to their regulatory
authority. In addition, all members of the Advisory Board would be
required to take into consideration ISE's responsibility to comply with
the requirements under Section 6(b)(5) of the Act.\19\ Members of the
Advisory Board that do not adhere to these requirements face
termination from the ISE Stock Advisory Board and possible sanctions by
regulatory authorities.
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    \19\ See Amendment No. 1 supra, note 4.
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E. Voting Limitations of Members

    Under Section 7.11 of the LLC Agreement, no Person (other than
ISE), either alone or together with its Related Persons, as of any
record date for the determination of members entitled to vote on any
matter, would be entitled to: (i) Vote or cause the voting of Units
beneficially owned by such Person or its Related Persons, in person or
by proxy or through any voting agreement, plan, or arrangement, to the
extent that such Units represent in the aggregate more than twenty
percent (20%) of voting power of the then-issued and outstanding Units
(such threshold being hereinafter referred to as the ``Voting
Limitation''); or (ii) enter into any voting agreement, plan, or
arrangement that would result in Units beneficially owned by such
Person or its Related Persons, subject to such voting agreement, plan,
or arrangement not being voted on a matter, or any proxy relating
thereto being withheld, where the effect of that voting agreement,
plan, or arrangement would be to enable any Person, alone or together
with its Related Persons, to exceed the Voting Limitation. ISE Stock
must disregard any such votes purported to be cast in excess of the
Voting Limitation.
    The limitations imposed by Section 7.11 of the LLC Agreement may be
waived by the Manager, if in its sole discretion, it consented to
expressly permit such waiver of the Voting Limitation; and such waiver
was filed with, and approved by, the Commission under Section 19(b) of
the Act and shall have become effective thereunder. In granting a
waiver, the Manager must have determined that: (i) The exercise of such
voting rights or the entering of

such agreement, plan or other arrangement, as applicable, by such
Person, either alone or together with its Related Persons, will not
impair the ability of ISE Stock and ISE, as the manager, to carry out
its functions and responsibilities, including, but not limited to,
under the Act, is otherwise in the best interests of ISE Stock and its
Members; (ii) the exercise of such voting rights or the entering of
such agreement, plan or other arrangement, as applicable, by such
Person, either alone or together with its Related Persons, will not
impair the ability of the Commission to enforce the Act; \20\ (iii)
neither such Person nor its Related Persons are subject to any
applicable ``statutory disqualification'' (within the meaning of
Section 3(a)(39) of the Act); and (iv) neither such Person nor its
Related Persons is an ``Exchange Member'' (as such term is defined in
the Constitution of ISE).
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    \20\ See Amendment No. 1 supra, note 4.
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F. Ownership Limitations of Members and Changes in Ownership

    Under Section 9.2(a) of the LLC Agreement, no Person (other than
ISE), either alone or together with its Related Persons, at any time,
may own, directly or indirectly, of record or beneficially, an
aggregate amount of Units which would result in more than a twenty (20)
Percentage Interest level \21\ in ISE Stock (the ``Concentration
Limitation''). Any transfer of Units that would result in the
acquisition and holding by any Person, alone or together with its
Related Persons, of an aggregate Percentage Interest level which
crosses the threshold level of twenty percent (20%) is not valid unless
a waiver has been granted by the Manager, and such waiver may not be
granted unless such waiver is filed and approved pursuant to the rule
filing process of Section 19 of the Act.\22\
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    \21\ ``Percentage Interest'' shall mean (i) As of any time when
the number of outstanding Class B Units does not exceed 49, (x) with
respect to the Class B Units one percent (1%) (or fraction thereof)
as to each Unit (or fraction thereof) held by such holder of Class B
Units and (y) as to the holders of Class A Units, in the aggregate,
100% less the aggregate Percentage Interest of holders of Class B
Units as of such time; and as to each holder of a Class A Unit, the
product of (x) the aggregate Percentage Interest of all holders of
Class A Units and (y) a fraction, whose numerator is the number of
Class A Units then held by such holder and whose denominator is the
number of Class A Units then held by all holders of Class A Units;
and (ii) as of any time when the number of outstanding Class B Units
exceeds 49, as to each holder of a Class A Unit or Class B Unit, the
percentage equivalent of a fraction whose numerator is the number of
Units held by such holder and whose denominator is the aggregate
number of Units outstanding. LLC Agreement, Section 2.1
``Definitions.''
    \22\ See LLC Agreement, Section 9.2(b).
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    The limitations imposed by Sections 9.2(a) of the LLC Agreement may
be waived by the Manager, if in its sole discretion, it consented to
expressly permit such waiver of the Concentration Limitation; and such
waiver shall have been filed with, and approved by, the Commission
under Section 19(b) of the Act and shall have become effective
thereunder. In granting a waiver, the Manager must have determined
that: (i) Such beneficial ownership of Units by such Person, either
alone or together with its Related Persons, will not impair the ability
of ISE Stock and the Manager to carry out its functions and
responsibilities, including but not limited to, under the Act, is
otherwise in the best interests of ISE Stock and its Members; (ii) such
beneficial ownership of Units by such Person, either alone or together
with its Related Persons, will not impair the ability of the Commission
to enforce the Act; (iii) neither such Person nor its Related Persons
are subject to any applicable ``statutory disqualification'' (within
the meaning of Section 3(a)(39) of the Act); and (iv) neither such
Person nor its Related Persons is an ``Exchange Member'' (as such term
is defined in the Constitution of ISE).
    Under Section 9.1 of the LLC Agreement, no Member may sell, assign,
pledge or in any manner dispose of or create or suffer the creation of
a security interest in or any encumbrance on all or a portion of its
Units (the commission of any such act being referred to as a
``Transfer'', any person who effects a Transfer being referred to as a
``Transferor'' and any person to whom a Transfer is effected being
referred to as a ``Transferee'') except in accordance with the terms
and conditions set forth in Article 9 of the LLC Agreement. Any
Transfer or purported Transfer of a Unit in ISE Stock not made in
accordance with the LLC Agreement shall be null and void and of no
force or effect whatsoever. Furthermore, any transfer of Units that
results in a reduction of ISE's Percentage Interest level of Class A
Units or Percentage Interest level in ISE Stock below the twenty
percent (20%) threshold is subject to the rule filing process pursuant
to Section 19 of the Act.\23\
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    \23\ See LLC Agreement, Section 9.2(d).
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    Section 9.3 of the LLC Agreement provides that a Member may not
Transfer all or any portion of its Units in ISE Stock to any Person
without the consent of the Manager, which consent may be given or
withheld in the Manager's sole discretion; provided, that, subject to
Section 9.10 of the LLC Agreement, a Member may transfer all or a
portion of its Units in ISE Stock to one or more of its Permitted
Transferees \24\ without the consent of the Manager or any other Member
as long as such transfer does not otherwise violate the LLC
Agreement.\25\
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    \24\ ``Permitted Transferee'' means, with respect to another
Person, (i) Any Person directly or indirectly owning, controlling or
holding with power to vote 80% or more of the outstanding voting
securities of and equity or beneficial interests in such other
Person, (ii) any Person 80% or more of whose outstanding voting
securities and equity or beneficial interests are directly or
indirectly owned, controlled or held with power to vote by such
other Person, (iii) any Person 80% or more of whose outstanding
voting securities and equity or other beneficial interests are
directly or indirectly owned, controlled or held with power to vote
by a Person directly or indirectly owning, controlling or holding
with power to vote 80% or more of the outstanding voting securities
and equity or other beneficial interests of such other Person with
whom affiliate status is being tested, (iv) any Family Members or
Family Trusts of such Person and (v) any Member. LLC Agreement,
Section 2.1 ``Definitions.''
    ``Family Members'' means, with respect to any natural Person,
such Person's spouse, children, parents and lineal descendants of
such Person's parents. LLC Agreement, Section 2.1 ``Definitions.''
    ``Family Trusts'' means, with respect to any natural Person, a
trust benefiting solely such Person or the Family Members of such
Person. LLC Agreement, Section 2.1 ``Definitions.''
    \25\ If a Member transfers all of its Units, whether or not the
transfer is to a Permitted Transferee, such transfer must first be
approved by the Manager. See Amendment No. 1 supra, note 4 and LLC
Agreement, Section 9.3(c).
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    Under Section 9.11 of the LLC Agreement, unless a Transferee of a
Member's Units becomes a Substituted Member,\26\ such Transferee shall
have no right to obtain or require any information or account of ISE
Stock transactions, or to inspect ISE Stock's books or to vote on ISE
Stock matters.\27\ Furthermore, any successor or Transferee under the
LLC Agreement shall be subject to and bound by the LLC Agreement as if
originally a party to the LLC Agreement.
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    \26\ ``Substituted Member'' means any Person admitted to the
Company as a substituted Member pursuant to the provisions of
Article 9. LLC Agreement, Section 2.1 ``Definitions.''
    \27\ The Member retains the right to vote the Units. See
Amendment No. 1 supra, note 4 and LLC Agreement, Section 9.3(b).
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G. Regulatory Jurisdiction Over Members

    Under Section 6.1(b) of the LLC Agreement, each Member acknowledges
that to the extent that they relate to the business of ISE Stock, the
books, records, premises, officers, directors, agents and employees of
Members shall be deemed to be the books, records, premises, officers,
directors, agents and employees of ISE Stock for purposes of and
subject to oversight pursuant to the Act. Furthermore, the books,
records, premises, officers, directors, agents and employees of ISE
Stock shall be deemed

to be the books, records, premises, officers, directors, agents and
employees of ISE for purposes of and subject to oversight pursuant to
the Act. In addition, the books and records of ISE Stock will be kept
within the U.S.\28\
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    \28\ LLC Agreement, Section 6.1(a).
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    Section 13.1(a) of the LLC Agreement generally provides that a
Member may not disclose any confidential information of ISE Stock or of
any other Members to any persons, except as expressly provided by the
LLC Agreement. However, Section 13.1(a) provides exceptions for, among
other things, disclosure required by the federal securities laws and
any other applicable self-regulatory organization, or in response to a
request by the Commission pursuant to the Act or by ISE. In addition,
confidential information pertaining to the self-regulatory function of
ISE (including but not limited to disciplinary matters, trading data,
trading practices and audit information) contained in the books and
records of ISE Stock shall: (i) Not be made available to any persons
(other than as provided in the next sentence) other than to those
officers, directors, employees, and agents of ISE Stock that have a
reasonable need to know the contents thereof; (ii) be retained in
confidence by ISE Stock and the officers, directors, employees and
agents of ISE Stock; and (iii) not be used for any commercial
purposes.\29\ Nothing in the LLC Agreement may be interpreted as to
limit or impede the rights of the Commission or ISE to access and
examine such confidential information pursuant to the federal
securities laws and the rules and regulations thereunder, or to limit
or impede the ability of any Member or any officers, directors,
employees or agents of ISE Stock or any Member to disclose such
confidential information to the Commission or ISE.\30\
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    \29\ LLC Agreement, Section 13.1(b).
    \30\ LLC Agreement, Section 13.1(c).
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    Under Section 6.1(c) of the LLC Agreement, ISE Stock, its Members,
and officers, directors, agents, and employees of ISE Stock and its
Members irrevocably submit to the jurisdiction of the U.S. federal
courts, the Commission and ISE, for the purposes of any suit, action or
proceeding pursuant to the U.S. federal securities laws, the rules or
regulations thereunder, directly arising out of, or relating to, ISE
Stock activities or Section 6.1 of the LLC Agreement (except that such
jurisdiction also includes Delaware for any such matter relating to the
organizational or internal affairs of ISE Stock), and waive, and agree
not to assert by way of motion, as a defense or otherwise in any such
suit, action or proceeding, any claims that it is not personally
subject to the jurisdiction of the Commission, that the suit, action or
proceeding is an inconvenient forum or that the venue of the suit,
action or proceeding is improper, or that the subject matter of the LLC
Agreement may not be enforced in or by such courts or agency.
    Under Section 6.1(d) of the LLC Agreement, ISE Stock, its Members,
the officers, directors, agents, and employees of ISE Stock and its
Members agree to comply with the federal securities laws and the rules
and regulations thereunder and cooperate with ISE and the Commission
pursuant to their respective regulatory authority and the provisions of
the LLC Agreement; and to engage in conduct that fosters and does not
interfere with ISE Stock's and ISE's \31\ ability to prevent fraudulent
and manipulative acts and practices; to promote just and equitable
principles of trade; to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities; to remove impediments to and perfect the mechanisms of a
free and open market and a national market system; and, in general, to
protect investors and the public interest.
---------------------------------------------------------------------------

    \31\ See Amendment No. 1 supra, note 4.
---------------------------------------------------------------------------

    Section 6.1(e) of the LLC Agreement provides that ISE Stock and
each Member shall take such action as is necessary to ensure that its
respective officers, directors, agents, and employees consent in
writing to the application to them of the applicable provisions of
Section 6.1 with respect to their ISE Stock-related activities.
    Under Section 7.1(b) of the LLC Agreement, the Manager may, after
appropriate notice and opportunity for hearing, suspend or terminate a
Member's voting privilege or membership: (i) In the event such Member
has violated a provision of this Agreement or any federal or state
securities law; (ii) such Member or its Related Persons are subject to
any applicable ``statutory disqualification'' (within the meaning of
Section 3(a)(39) of the Act); or (iii) if the Manager determines that
such action is necessary or appropriate in the public interest or for
the protection of investors.
    ISE believes that this provision would require Members, regardless
of the nature of their association with ISE, to adhere to regulatory
responsibilities in that they must comply with federal securities laws
and the rules and regulations thereunder, and cooperate with the
Commission and ISE pursuant to their regulatory authority or face
severe consequences such as termination of voting rights or ownership.
In addition, Members would be required to take into consideration and
facilitate ISE's and ISE Stock's ability to comply with the
requirements under Section 6(b)(5) of the Act.\32\
---------------------------------------------------------------------------

    \32\ See Amendment No. 1 supra, note 4 and LLC Agreement,
Section 6.1(d).
---------------------------------------------------------------------------

H. Fair Representation of Trading Participants

    Members of (or holders of Units in) ISE Stock are not automatically
entitled to trading privileges on the ISE Stock trading system, nor is
the purchase of Units a pre-requisite for exercising trading privileges
on the ISE Stock trading system. Rather, in order to exercise trading
privileges on the ISE Stock trading system, a broker-dealer must be an
approved EAM of ISE. There is only one type of EAM membership for both
options trading on ISE and equities trading on the ISE Stock trading
system. When an applicant is approved under ISE rules as an EAM, the
member is issued one share of Class B Common Stock, Series B-3 (a ``B-3
Share''). Under the ISE Constitution, holders of B-3 Shares, or EAMs,
have the right to elect two members (the ``B-3 Directors'') of the
Board of Directors of ISE (the ``ISE Board''). Nominees for election to
the ISE Board to serve as Industry Directors, including B-3 Directors,
are currently made by the Exchange's Nominating Committee, which is not
a committee of the ISE Board, and is comprised of representatives of
the holders of each series of Class B Common Stock. Stockholders also
may nominate Industry Director candidates for election to the ISE Board
by petition. Accordingly, since trading participants on the ISE Stock
trading system must be EAMs, and since EAMs have the right to elect B-3
Directors of the ISE Board, the Exchange believes that ISE Stock
trading system trading participants are fairly represented on the ISE
Board. Additionally, as a result of ISE's stated strategy of selling
Units to entities that will support trading on the ISE Stock trading
system, trading participants will have representation via the ISE Stock
Advisory Board.
    The Exchange proposes to modify the language in ISE Rule 312
(Limitation on Affiliation between the Exchange and Members) to clarify
that this provision covers not only the Exchange, but ISE Stock as a
facility of ISE, as well.

I. Reorganization Into a Holding Company Structure

    According to the Exchange, it intends to reorganize into a holding
company structure on September 1, 2006, in the manner described in
Securities Exchange Act Release No. 53705 (April 21, 2006) (the
``Reorganization'').\33\ Upon the Reorganization, International
Securities Exchange, LLC will become the registered ``national
securities exchange'' under Section 6 of the Act, the self-regulatory
organization (``SRO'') and continue to act as Manager of ISE Stock. ISE
Holdings shall become the holder of the Class A Units of ISE Stock.
Prior to the Reorganization, the provisions relating to, among other
things, ownership and voting limitations (and exceptions therefrom) are
applicable to ISE, as the holder of the Class A Units. Upon the
Reorganization, those same provisions are applicable to ISE Holdings,
as the holder of the Class A Units.
---------------------------------------------------------------------------

    \33\ See Securities Exchange Act Release No. 53705 (April 21,
2006), 71 FR 25260 (April 28, 2006) (SR-ISE-2006-04).
---------------------------------------------------------------------------

III. Discussion, Commission Findings, and Accelerated Approval of the
Proposed Rule Change and Amendment No. 1 Thereto

    After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\34\ In particular, the Commission finds that the
proposed rule change, as amended, is consistent with Section 6(b)(1) of
the Act,\35\ which requires a national securities exchange to be so
organized and have the capacity to carry out the purposes of the Act
and to enforce compliance by its members and persons associated with
its members with the provisions of the Act, the rules or regulations
thereunder, and the rules of the exchange. The Commission also finds
that the proposed rule change, as amended, is consistent with Section
6(b)(3) of the Act,\36\ which, among other things, requires that the
rules of an exchange ensure fair representation of its members in the
selection of its directors and administration of its affairs.
---------------------------------------------------------------------------

    \34\ In approving the proposed rule change, the Commission has
considered its impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
    \35\ 15 U.S.C. 78f(b)(1).
    \36\ 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------

    In addition, the Commission finds that the proposed rule change, as
amended, is consistent with Section 6(b)(5) of the Act,\37\ which
requires that the rules of a national securities exchange be designed
to prevent fraudulent and manipulative acts and practices; to promote
just and equitable principles of trade; to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities; to remove impediments to and perfect the mechanism of a
free and open market and a national market system; and, in general, to
protect investors and the public interest.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

A. ISE Stock as a Facility of the Exchange

    The Commission believes that the proposed rule change is consistent
with Section 6(b)(1) of the Act \38\ in that upon establishing ISE
Stock as an Exchange facility and serving as manager of ISE Stock as
described above, ISE will remain so organized, and have the capacity to
be able, to carry out the purposes of the Act. The Commission further
believes that ISE's proposal for ISE to operate ISE Stock as a facility
of ISE is properly filed under Section 19(b) of the Act and Rule 19b-4
thereunder, and that ISE Stock is not required, separate from ISE, to
apply for registration as a national securities exchange pursuant to
Section 6(a) of the Act.\39\ In addition, the Commission previously
approved a similar structure with respect to the operation of the
Boston Stock Exchange, Inc.\40\
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78f(b)(1).
    \39\ 15 U.S.C. 78f(a).
    \40\ See Securities Exchange Act Release No. 54364 (August 25,
2006), 71 FR 52185 (September 1, 2006) (SR-BSE-2006-20).
---------------------------------------------------------------------------

    Although ISE has contracted to undertake the fulfillment of SRO
responsibilities under the Act and other regulatory compliance services
for ISE Stock,\41\ ISE Stock is, however, still responsible for
assuring that its activities are consistent with the Act. Under Section
6.1(d) of the LLC Agreement, each ISE Stock Member, its officers,
directors, agents, and employees, agree to comply with federal
securities law; to cooperate with the Commission and ISE pursuant to
their regulatory authority and the provisions of the LLC Agreement; and
to engage in conduct that fosters and does not interfere with ISE Stock
or ISE's ability to 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 mechanism of a free and open market and a national market
system; and, in general, protect investors and the public interest.
Section 8.2(d)(vii) of the LLC Agreement also requires each ISE Stock
Advisory Board Member to cooperate with the Commission and ISE pursuant
to the respective authority of the Commission and ISE. These provisions
reinforce the notion that ISE Stock, as a facility of an Exchange, is
not solely a commercial enterprise; it is an integral part of an SRO
registered pursuant to the Act and, as such, is subject to obligations
imposed by the Act.
---------------------------------------------------------------------------

    \41\ See Item 10 of Exhibit 5(c) describing certain services to
be performed under the Management Agreement.
---------------------------------------------------------------------------

    These obligations endure as long as ISE Stock is a facility of the
Exchange, regardless of the size of ISE's ownership interest in ISE
Stock. ISE currently, and in the future Holdings, owns a controlling
interest in ISE Stock and, in the future, if ISE Holdings wishes to
reduce its Percentage Interest in ISE Stock to below 20 percent,\42\
pursuant to Section 9.2(d) of the LLC Agreement the Exchange would be
required to file a proposed rule change with the Commission under
Section 19(b) of the Act. Additionally, under Section 8.13(c) of the
LLC Agreement, any replacement and appointment of the Manager, and any
assignment of the rights and obligations of the Manager under the
Management Agreement, must, prior to becoming effective, have been
filed with, and approved by, the Commission. The Commission believes
that these measures would alert the Commission to a significant
reduction of ISE's interest in ISE Stock or control over the operations
of ISE Stock. Such a reduction in ownership or control could warrant
additional review of the LLC Agreement to ensure that ISE's
responsibilities as the SRO of the ISE Stock facility are not
compromised.
---------------------------------------------------------------------------

    \42\ In this instance, interest refers to interest in ISE Stock
Class A Units or overall interest in ISE Stock.
---------------------------------------------------------------------------

    The LLC Agreement includes additional provisions that make special
accommodations for ISE as the SRO of the ISE Stock facility. For
example, except for several limited exceptions,\43\ Section 8.1 of the
LLC Agreement provides that ISE as the manager will have ``exclusive
and complete authority and discretion to manage the operations and
affairs'' of ISE Stock. ISE has complete access to information through
provisions such as Sections 13.1(c) of the LLC Agreement, which allows
ISE Stock, Members, their officers, directors,

agents, and employees, to disclose to the Commission or ISE
confidential information. Furthermore, Section 7.2 of the LLC
Agreement, subject to certain exceptions, gives all of the voting
rights to Class A Units, of which ISE, and subsequently Holdings, owns
100 percent. In addition, Section 8.2(d)(iii) of the LLC Agreement
provides that the holder of Class A Units is entitled to three of the
seven seats on the ISE Stock Advisory Board.
---------------------------------------------------------------------------

    \43\ See LLC Agreement, Section 8.7 for limitations.
---------------------------------------------------------------------------

    Because ISE has proposed to operate ISE Stock as its facility,
ISE's obligations under the Act extend to its members' activities on
ISE Stock, as well as to the operation and administration of ISE Stock.
The Commission believes that Section 19 of the Act affords the
Commission the ability to determine whether ISE's proposal is
consistent with the Act, as would a separate application by ISE Stock
to register as a national securities exchange. More specifically, the
Commission believes that these provisions, described above, are
consistent with the Act and enhance the ability of ISE to carry out its
self-regulatory responsibilities with respect to its ISE Stock
facility.

B. Changes in Control of ISE

    The Commission believes that the restrictions in the LLC Agreement
on changes in control of ISE Stock and the restrictions on the change
in Manager (the entity that controls the operations of ISE Stock) are
sufficient to enable ISE to carry out its self-regulatory
responsibilities and should permit the Commission to fulfill its
responsibilities under the Act.
    Schedule A of the LLC Agreement lists all ISE Stock Members, the
number of units each holds, and the percentage of ownership in ISE
Stock that such units represent. A change to this schedule, which is
part of the LLC Agreement (as is the case with any other change to the
LLC Agreement), would need to be filed with the Commission if the Board
of ISE determines that it is required under Section 19(b) of the Act
and Rule 19b-4 thereunder.\44\ In addition, Section 9.2(a) and (b) of
the LLC Agreement provides that no person (other than ISE or Holdings)
\45\ may cross the 20 percent ownership threshold without a waiver from
ISE, as manager, and such approval could not be granted without the
filing and approval of a proposed rule change with the Commission
pursuant to Section 19(b) of the Act.\46\
---------------------------------------------------------------------------

    \44\ See LLC Agreement, Section 12.1.
    \45\ This exception for Holdings only applies as long as the
concentration limitation provision found in Article Fourth,
Subdivision III(a) of the ISE, Inc. Certificate of Incorporation is
in place and as long as ISE is a wholly-owned subsidiary of
Holdings.
    \46\ Such a waiver may not be granted to Persons or Related
Persons subject to ``statutory disqualification'' (within the
meaning of Section 3(a)(39) of the Act) or Exchange Members (as such
term is defined in the Constitution of ISE). See LLC Agreement,
Section 9.2(c).
---------------------------------------------------------------------------

    As noted, ISE, and in the future Holdings, currently owns all of
the Class A Units, and Section 7.2 of the LLC Agreement, subject to
certain exceptions, gives all of the voting rights to Class A Units. In
addition, Section 8.2(d)(iii) of the LLC Agreement provides that the
holder of Class A Units is entitled to three of the seven seats on the
ISE Stock Advisory Board. If ISE, or in the future Holdings, wishes to
reduce its interest in ISE Stock to below 20 percent,\47\ pursuant to
Section 9.2(d) of the LLC Agreement, it would be required to file a
proposed rule change under Section 19(b) of the Act.
---------------------------------------------------------------------------

    \47\ In this instance, interest refers to interest in ISE Class
A Units or overall interest in ISE Stock.
---------------------------------------------------------------------------

    As noted in the Voting Limitations section supra, under Section
7.11 of the LLC Agreement, no Person (other than ISE), either alone or
together with its Related Persons, may exceed the Voting Limitation or
enter into any voting agreement that would result in Units beneficially
owned by such Person or its Related Persons not being voted where the
effect would be to enable any Person, alone or together with its
Related Persons, to exceed the Voting Limitation. The limitations
imposed by Section 7.11 of the LLC Agreement may be waived by the
Manager after such waiver is filed with, and approved by, the
Commission under Section 19(b) of the Act. However, such a waiver may
not be granted to Persons or Related Persons subject to ``statutory
disqualification'' (within the meaning of Section 3(a)(39) of the Act)
or Exchange Members (as such term is defined in the Constitution of
ISE).\48\
---------------------------------------------------------------------------

    \48\ See LLC Agreement, Section 7.11(c).
---------------------------------------------------------------------------

    Additionally, as noted, Section 8.1 of the LLC Agreement, with
limited exceptions, grants exclusive and complete authority over the
operations and affairs of ISE Stock to ISE as the Manager. Under
Section 8.13(c) of the LLC Agreement, any replacement and appointment
of the Manager, and any assignment of the rights and obligations of the
Manager under the Management Agreement, must, prior to becoming
effective, have been filed with, and approved by, the Commission.
    In conclusion, the Commission believes that Sections 7.2, 8.1,
8.4(a) and (b), 8.13(c), 9.2(a), (b), and (d), and 12.1 of the LLC
Agreement, together with the requirements of Section 19(b) of the Act
and Rule 19b-4 thereunder, provide the Commission with sufficient
authority over changes in control of ISE to enable the Commission to
carry out its regulatory oversight responsibilities with respect to ISE
and the ISE Stock facility.

C. Regulatory Jurisdiction Over ISE Stock and Its Members

    The Commission believes that the terms of the LLC Agreement provide
the Commission and ISE with sufficient regulatory jurisdiction over the
controlling parties and Members to carry out their respective
responsibilities under the Act. In Section 6.1(b) of the LLC Agreement,
each Member acknowledges that, to the extent that they are related to
the business of ISE Stock, the books, records, premises, officers,
directors, agents, and employees of the Member are deemed to be the
books, records, premises, officers, directors, agents, and employees of
ISE for the purpose of and subject to oversight pursuant to the Act.
Furthermore, the books, records, premises, officers, directors, agents,
and employees of ISE Stock are deemed to be the books, records,
premises, officers, directors, agents, and employees of ISE. This
provision would enable the Commission to exercise its authority under
Section 19(h)(4) \49\ of the Act with respect to the officers,
directors, agents, and employees of all Members, since all such
officers, directors, agents, and employees, and officers, directors,
agents, and employees of ISE Stock, to the extent that they are acting
in matters related to ISE Stock activities, would be deemed to be the
officers, directors, agents, and employees of ISE itself. Furthermore,
the books and records of any ISE Member, to the extent that they are
related to ISE Stock activities, are subject to the Commission's
examination authority under Section 17(b)(1) of the Act,\50\ as these
records would be deemed to be the records of ISE itself.
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78s(h)(4). Section 19(h)(4) authorizes the
Commission, by order, to remove from office or censure any officer
or director of a national securities exchange if it finds, after
notice and an opportunity for hearing, that such officer or director
has: (i) Willfully violated any provision of the Act or the rules
and regulations thereunder, or the rules of a national securities
exchange; (ii) willfully abused his or her authority; or (iii)
without reasonable justification or excuse, failed to enforce
compliance with any such provision by a member or person associated
with a member of the national securities exchange.
    \50\ 15 U.S.C. 78q(b)(1).
---------------------------------------------------------------------------

    In addition, in Section 6.1(c) of the LLC Agreement, ISE Stock, its
Members, its officers, directors, agents, and employees, and the
officers, directors,

agents, and employees of its Members irrevocably submit to the
jurisdiction of the Commission, for the purposes of any suit, action or
proceeding pursuant to the U.S. federal securities laws and the rules
or regulations thereunder, arising out of or relating to ISE Stock
activities. In addition, ISE Stock, its Members, and each officer,
director, agent, and employee of ISE and its Members, must waive as a
defense or otherwise in any such suit, action, or proceeding, any claim
that it is not personally subject to the jurisdiction of the
Commission; that the suit, action or proceeding is an inconvenient
forum; that the venue is improper; or that the subject matter of the
suit, action, or proceeding may not be enforced by such courts or
agency.\51\ Moreover, pursuant to Section 6.1(e) of the LLC Agreement,
ISE Stock and each Member are required to take such action as is
necessary to ensure that ISE Stock and its Member's officers,
directors, agents, and employees consent to the application of these
requirements with respect to their ISE Stock-related activities.
Finally, under Section 6.1(d) of the LLC Agreement, ISE Stock, and its
Members, officers, directors, agents, and employees, and the officer,
directors, agents, and employees of its Members agrees to cooperate
with the Commission and ISE pursuant to their respective regulatory
authority.
---------------------------------------------------------------------------

    \51\ See LLC Agreement, Section 6.1(c).
---------------------------------------------------------------------------

    The Commission also notes that, even in the absence of these
provisions of the LLC Agreement, Section 20(a) of the Act \52\ provides
that any person with a controlling interest in ISE Stock would be
jointly and severally liable with and to the same extent that ISE Stock
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.
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78t(a).
---------------------------------------------------------------------------

    The Commission believes that, together, these provisions grant the
Commission sufficient jurisdictional authority over ISE Stock and its
Members. Moreover, ISE is required to enforce compliance with these
provisions because they are ``rules of the exchange'' within the
meaning of Section 3(a)(27) of the Act.\53\ A failure on the part of
ISE to enforce its rules could result in suspension or revocation of
registration under Section 19(h)(1) of the Act.\54\
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78c(a)(27).
    \54\ 15 U.S.C. 78s(h)(1).
---------------------------------------------------------------------------

D. Restrictions on ISE Stock Members

    The Commission believes that the restriction on voting trust
agreements in Section 7.11(a) of the LLC Agreement is reasonable and
consistent with the Act. In the absence of such a provision,
unaffiliated parties could act in concert and evade the LLC Agreement's
provisions regarding changes in control of ISE Stock. In addition, the
LLC Agreement treats as belonging to a single person any ISE Stock
Units held by affiliated parties of the person.\55\ A voting trust
agreement would not necessarily be inconsistent with the Act, but any
Members (other than ISE or, in the future, Holdings) wishing to
establish a voting trust agreement first would need the consent of the
Manager,\56\ a consent that may not be given unless the Manager files a
proposed rule change, thus affording the Commission an opportunity to
review the matter.
---------------------------------------------------------------------------

    \55\ See LLC Agreement, Sections 9.2(a).
    \56\ Such a waiver may not be granted to any Person or Related
Person subject to ``statutory disqualification'' (within the meaning
of Section 3(a)(39) of the Act) or any Person or Related Person who
are Exchange Members (as such term is defined in the Constitution of
ISE). See LLC Agreement, Sections 7.11(c).
---------------------------------------------------------------------------

    In addition, the Commission believes that the ownership
concentration limit described above, which prohibits a person (other
than ISE or in the future Holdings) along with a related person from
owning directly or indirectly more than 20 percent of the outstanding
units of ISE Stock \57\ absent a waiver, and would apply to those
persons trading on the ISE Stock trading system, together with the
provision that restricts the ability of Members to vote interests in
excess of 20 percent, absent a waiver,\58\ are reasonable and
consistent with the Act.\59\ Moreover, Exchange members (as defined in
the ISE Constitution) would be prohibited from owning more than 20
percent. It is common for members who trade on an exchange to have
ownership interests in the exchange. However, a member's interest 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. A member that is also a controlling shareholder of an
exchange or its facility might be tempted to exercise that controlling
influence by directing the exchange to refrain from diligently
surveilling the member's conduct or from punishing any conduct that
violates the rules of the exchange or the federal securities laws. An
exchange also might be reluctant to surveil and enforce its rules
zealously against a member that controls and has a large economic
interest in the Exchange.
---------------------------------------------------------------------------

    \57\ See LLC Agreement, Section 9.2(a).
    \58\ Neither the voting nor ownership limitation waiver may be
granted to any Person or Related Person subject to ``statutory
disqualification'' (within the meaning of Section 3(a)(39) of the
Act) or any Person or Related Person who are Exchange Members (as
such term is defined in the Constitution of ISE). See LLC Agreement,
Sections 9.2(c) and 7.11(c).
    \59\ The Commission believes that this provision would require
ISE Stock to aggregate the interest of Members in ISE Stock and any
indirect interest in ISE Stock through Members' interest in
Holdings. See LLC Agreement, Section 9.2(a).
---------------------------------------------------------------------------

E. Accelerated Approval of Proposed Rule Change and Amendment No. 1

    The Commission finds good cause for approving this proposed rule
change, and Amendment No. 1 thereto, before the thirtieth day after the
publication of notice thereof in the Federal Register pursuant to
Section 19(b)(2) of the Act.\60\ The proposed rule change was published
for a full comment period and no comments were received. In addition,
the Commission notes that the proposed rule change, as amended, is
substantially similar to the structure previously approved by the
Commission.\61\ That proposal was also published for a full comment
period and the Commission received no comments on the proposal.
Furthermore, accelerating approval of this proposed rule change, as
amended, should benefit investors by permitting ISE to establish,
without undue delay, an additional venue for the trading of equity
securities for market participants, thereby increasing competition and
efficiency. Lastly, the Commission believes that Amendment No. 1 serves
to clarify and enhance the proposal. For these reasons, the Commission
therefore finds good cause exists to accelerate approval of the
proposed rule change, and Amendment No. 1 thereto.\62\
---------------------------------------------------------------------------

    \60\ 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2) of the
Act, the Commission may not approve any proposed rule change, or
amendment thereto, prior to the thirtieth day after the date of
publication of the notice thereof, unless the Commission finds good
cause for so doing.
    \61\ See Securities Exchange Act Release No. 54364 (August 25,
2006), 71 FR 52185 (September 1, 2006) (SR-BSE-2006-20).
    \62\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 1, including whether Amendment No. 1
is consistent with the Act. Comments may be submitted by any of the
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to<EMAIL_ADDRESS>Please include

File Number SR-ISE-2006-45 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2006-45. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all

written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
Amendment No. 1 of File Number SR-ISE-2006-45 and should be submitted
on or before October 3, 2006.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\63\ that the proposed rule change (SR-ISE-2006-45) and Amendment
No. 1 thereto are approved on an accelerated basis.
---------------------------------------------------------------------------

    \63\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\64\
---------------------------------------------------------------------------

    \64\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
[FR Doc. E6-15054 Filed 9-11-06; 8:45 am]

BILLING CODE 8010-01-P


[Federal Register Volume 76, Number 175 (Friday, September 9, 2011)]
[Notices]
[Pages 55996-55998]
[FR Doc No: 2011-23102]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65257; File No. SR-Phlx-2011-123]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change Relating to the Quarterly Trading
Requirements Applicable to Registered Options Traders

September 2, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given
that on August 24, 2011, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II,
and III, below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange, pursuant to Section 19(b)(1) of the Act \3\ and Rule
19b-4 thereunder,\4\ proposes to amend Commentary .01 of Rule 1014,
Obligations and Restrictions Applicable to Specialists and Registered
Options Traders, to change the quarterly trading requirements
applicable to Registered Options Traders, as described below.
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
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    The text of the proposed rule change is available on the Exchange's
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings,
at the principal office of the Exchange, and at the Commission's Public
Reference Room.

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

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

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

1. Purpose
    The purpose of the proposed rule change is to strengthen the
Exchange's quarterly trading requirement to encourage liquidity-
providing activity by market makers on the Exchange. The general term
``market makers'' on the Exchange includes specialists and ROTs. ROTs
can be either Streaming Quote Traders (``SQTs''), Remote SQTs
(``RSQTs'') or non-SQT ROTs. The quarterly trading requirements apply
to two types of ROTs: SQTs and non-SQT ROTs. Specialists and RSQTs are
subject to different requirements. By definition, non-SQT ROTs do not
``stream'' quotes, meaning send quotes electronically to the Exchange;
instead, pursuant to Commentary .18 of Rule 1014, they submit limit
orders electronically and respond to Floor Brokers verbally.
    Currently, Rule 1014 contains two quarterly trading requirements--
in person and in assigned. First,

Commentary .01 requires that in order for an ROT (other than an RSQT or
a Remote Specialist) to receive specialist margin treatment for off-
floor orders in any calendar quarter, the ROT must execute the greater
of 1,000 contracts or 80% of his total contracts that quarter in person
(not through the use of orders) and 75% of his total contracts that
quarter in assigned options.
    Second, the ``in assigned'' quarterly trading requirement in
Commentary .03 requires that, except for unusual circumstances, at
least 50% of the trading activity in any quarter (measured in terms of
contract volume) of an ROT (other than an RSQT) shall ordinarily be in
classes of options to which he is assigned. Temporarily undertaking the
obligations of paragraph (c) at the request of a member of the Exchange
in non assigned classes of options shall not be deemed trading in non
assigned option contracts.
    Furthermore, Commentary .13 further provides that, within each
quarter, an ROT must execute in person, and not through the use of
orders, a specified number of contracts, such number to be determined
from time to time by the Exchange. Options Floor Procedure Advice
(``Advice'') B-3, Trading Requirements, establishes a quarterly
requirement to trade the greater of 1,000 contracts or 50% of contract
volume in person; pursuant to the Exchange's minor rule violation and
enforcement plan, it establishes a fine schedule for violations
thereof, as well as for violations of the quarterly trading requirement
in assigned options contained in Commentary .03. These are not
changing.
    The Exchange proposes to amend Commentary .01 to adopt a new
quarterly requirement such that an ROT (other than an RSQT or a Remote
Specialist) is required to trade 1,000 contracts and 300 transactions
on the Exchange each quarter. Transactions executed in the trading
crowd where the contra-side is an ROT are not included. This
requirement is a pure trading requirement, not limited, like the
existing trading requirements, to assigned options \5\ and in person
trading.\6\ Accordingly, the new trading requirement can be fulfilled
with trades and contracts that are not in assigned options and not
executed in person, although, of course, the existing trading
requirements respecting ``in assigned'' options and in person trading
must still be met. The new trading requirement is comprised of both a
1,000 contract requirement similar to the existing trading requirement
in Commentary .01, as well as a 300 transaction requirement. Both
requirements must be met each quarter. The Exchange believes that a
requirement to execute 300 transactions per quarter is more likely to
result in regular market-making activity, rather than just fulfilling a
contract-based requirement, which can be achieved in one or two trades.
For instance, during the course of 62 trading days in the first quarter
of 2011, an ROT would have been required to, if the proposed new
trading requirement were in effect, execute around five transactions
per day in order to comply with the proposed 300 transaction
requirement in that quarter. Accordingly, the Exchange believes that
this new trading requirement should increase the likelihood that an ROT
is actively providing liquidity in a given quarter.
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    \5\ See Rule 1014.03.
    \6\ See Rule 1014.01.
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    The Exchange proposes to exclude from the contracts and
transactions required by the new trading requirement, in each quarter,
any transactions executed in the trading crowd where the contra-side is
an ROT in order to focus market making efforts on providing the sort of
liquidity that will attract customers (including broker-dealers and
professionals) to the Exchange. Specifically, the Exchange believes
that this new requirement will encourage the regular posting of
liquidity. Of course, ROTs will continue to be able to participate in
crowd trades as well, and those crowd trades will count towards the new
trading requirement, unless the contra-side is another ROT. ROT-to-ROT
trades in the crowd are certainly permissible on the Exchange, but the
Exchange seeks to better target liquidity and attract order flow by
casting the new trading requirement in these terms. For example, ROTs
participating in ``strategy'' trades \7\ could continue to participate
in these, of course, but they would not, if involving an ROT as the
contra-side and occurring on the trading floor, count toward the new
trading requirement. The new trading requirement would include
electronic transactions where the contra-side is another ROT, because
ROTs cannot predict whether their electronic orders will trade against
other ROTs, such that they would be unable to determine in advance
whether the quarterly requirement would be met.
---------------------------------------------------------------------------

    \7\ For example, these include transactions done to achieve a
dividend arbitrage involving the purchase, sale and exercise of in-
the-money options of the same class, executed immediately prior to
the date on which the underlying stock goes ex-dividend. See
Securities Exchange Act Release No. 63957 (February 24, 2011, 76 FR
11551 (March 2, 2011) (SR-Phlx-2011-20).
---------------------------------------------------------------------------

    The Exchange is also proposing to amend the in person trading
requirement in Commentary .01 in two ways. First, the Exchange proposes
to exclude transactions executed in the trading crowd where the contra-
side is an ROT from the existing in person trading requirement for the
same reasons as discussed above. The Exchange believes that having
another trading requirement (this ``in person'' requirement, in
addition to the new trading requirement discussed above) that focuses
on activity other than in crowd ROT-to-ROT transactions should
encourage the providing of liquidity. By excluding ROT-to-ROT crowd
trades, including those involving dividend, merger and short interest
strategies, the Exchange believes that ROTs will be encouraged to
better focus their market making, similar to the new trading
requirement.
    Secondly, the current in person trading requirement in Commentary
.01 uses the term ``not through the use of orders'' when describing the
in person trading requirement. At this time, the Exchange proposes to
permit non-SQT ROTs to use orders entered in person to meet the in
person trading requirement. The only other way to participate in trades
other than through the use of orders is by quoting; while SQTs quote
electronically by ``streaming'' quotations into the Exchange, non-SQT
ROTs quote verbally in response to floor brokers representing orders in
the trading crowd verbally. The limitation on the use of orders with
respect to non-SQT ROTs is obsolete, as, over time, following the
movement toward a more electronic trading platform in options, it has
become difficult for such ROTs to comply with the trading requirement
without using orders. In order to comply with their quarterly trading
requirements, non-SQT ROTs have to proactively enter orders that
provide or take liquidity. Some time ago, ROTs were able to place their
liquidity on the book by verbally informing the specialist; this is no
longer the case, so non-SQT ROTs can only meet the in person
requirement by participating in crowd trades, which they cannot
control, in terms of frequency.
    Under this proposal, SQTs would continue to be subject to an in
person trading requirement that cannot be met using orders. The
Exchange believes that this is reasonable and appropriate because SQTs,
by definition, stream (or electronically submit) quotations to the
Exchange to provide liquidity and comply with their market making
obligations. The Exchange does not

believe that loosening the ``in person'' trading requirement to permit
the use of orders by SQTs is necessary.
    The Exchange believes that the proposed new trading requirement
coupled with the proposed changes to the existing ``in person'' trading
requirement should encourage a more regular presence and thus result in
more active market making. Similarly, excluding transactions where the
contra-side is another ROT should encourage more regular and active
market making. For example, a non-SQT ROT would not be able to include
transactions involving dividend, merger and short interest strategies
where the contra-side is another ROT, which is often the case;
accordingly, these large transactions would not alleviate the ROT's in
person quarterly trading requirement and would encourage active market
making to reach that number.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act \8\ in general, and furthers the objectives of Section
6(b)(5) of the Act \9\ in particular, in that it is designed to promote
just and equitable principles of trade, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general to protect investors and the public interest,
by (i) Adopting a new trading requirement, which should, in turn,
strengthen the quarterly trading requirements for ROTs, and (ii)
updating the in person trading requirement to permit non-SQT ROTs to
use in person orders due to changes in electronic trading over time.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.

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

    No written comments were either solicited or received.

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

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) As the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number SR-Phlx-2011-123 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2011-123. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-Phlx-2011-123 and should be
submitted on or before September 30, 2011.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-23102 Filed 9-8-11; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 81, Number 179 (Thursday, September 15, 2016)]
[Notices]
[Page 63478]
[FR Doc No: 2016-22207]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. RM16-17-000]

Data Collection for Analytics and Surveillance and Market-Based
Rate Purposes; Notice of Posting of Staff's Technical Workshop Notes

    On August 11, 2016, Commission staff held a technical workshop to
review the draft data dictionary attached to the Notice of Proposed
Rulemaking in this docket (RM16-17).\1\ The workshop provided a forum
for interactive, detailed discussion of the elements contained in the
draft data dictionary.
---------------------------------------------------------------------------

    \1\ Data Collection for Analytics and Surveillance and Market-
Based Rate Purposes, FERC Stats. & Regs. ] 32,717 (2016).
---------------------------------------------------------------------------

    This notice announces that Staff's notes on the technical workshop
have been posted to the Commission's Web site. These notes are an
informal summary of the key points from the workshop and are not
intended to be an official transcript of the proceedings. The notes can
be found on the event page for the workshop under the `Related Files'
heading. A link to the event page is provided below: http://www.ferc.gov/EventCalendar/EventDetails.aspx?ID=8416&CalType=%20&CalendarID=116&Date=08/11/2016&View=Listview.
    For additional information, please contact David Pierce of FERC's
Office of Enforcement at<PHONE_NUMBER> or send an email to<EMAIL_ADDRESS>
    Dated: September 9, 2016.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2016-22207 Filed 9-14-16; 8:45 am]
 BILLING CODE 6717-01-P