[Federal Register Volume 75, Number 115 (Wednesday, June 16, 2010)]
[Notices]
[Pages 34189-34192]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-14443]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62255; File No. SR-EDGA-2010-02]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by EDGA Exchange, Inc. Relating to Direct Edge, Inc.
June 10, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 3, 2010, EDGA Exchange, Inc. (the ``Exchange'' or ``EDGA'')
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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
EDGA proposes to make changes to its corporate structure to provide
that it will be a wholly-owned subsidiary of Direct Edge, Inc.
(``DEI'') instead of Direct Edge Holdings, LLC (``DE Holdings'').
The proposed Certificate of Incorporation of DEI (``DEI
Certificate'') is attached as Exhibit 5A, the proposed Bylaws of DEI
(``DEI Bylaws'') are attached as Exhibit 5B, and the Amended and
Restated Bylaws of EDGA (``EDGA Bylaws'') are attached as Exhibit 5C.
The text of the proposed rule change is available on the Exchange's
Web site http://www.directedge.com, on the Commission's Internet Web
site at http://www.sec.gov, 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
Background
On March 12, 2010, the Commission granted the Form 1 exchange
registration applications of EDGA and its affiliate exchange, EDGX
Exchange, Inc. (``EDGX'').\3\
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\3\ See Securities and Exchange Release No. 61698 (March 12,
2010), 75 FR 13151 (March 18, 2010) (approving File Nos. 10-194 and
10-196) (the ``Order'').
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As provided in the Form 1 application, EDGA and Direct Edge ECN,
LLC d/b/a DE Route (``DE Route''), the Exchange's routing broker/
dealer, are wholly-owned subsidiaries of DE Holdings.\4\ EDGA Bylaws
identify this ownership structure.\5\ Any changes to the EDGA Bylaws,
including any change in the provision that identifies DE Holdings as
the initial owner of EDGA, must be filed with and approved by the
Commission pursuant to Section 19 of the Act.\6\ As part of a general
corporate reorganization, EDGA is now proposing to create a new
corporation, DEI, which will be owned by DE Holdings. DEI will, in
turn, own the Exchange and be both an operating and holding company.
All of the equity of EDGA is proposed to be transferred to DEI. In
turn, DE Holdings will be the sole stockholder of DEI and thus, DEI
will be a wholly-owned subsidiary of DE Holdings. The self-regulatory
functions of EDGA will, however, continue to remain with EDGA. As
stated above, DE Route will continue to be owned directly by DE
Holdings.
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\4\ DE Holdings is a limited liability company overseen by a
board of managers. Ownership in DE Holdings is represented by
limited liability membership interests. EDGX is also a wholly-owned
subsidiary of DE Holdings.
\5\ EDGA Bylaws, Article I., Section kk.
\6\ See 15 U.S.C. 78s. See also Order at note 77 and
accompanying text.
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In connection with this corporate reorganization, the Exchange is
filing these documents with the Commission as part of Exhibit 5: (i)
The proposed DEI Certificate is attached as Exhibit 5A; (ii) the
proposed DEI Bylaws are attached as Exhibit 5B; and (iii) the
[[Page 34190]]
EDGA Bylaws are attached as Exhibit 5C.
As the primary focus of this rule filing is to focus on those
provisions that are directly related to the Exchange's ability to
perform its regulatory responsibilities following the transaction
described above, the Exchange's discussion will focus on the relevant
provisions of the documents mentioned above.
Preservation of Self-Regulatory Function of EDGA
Section 7.7 of the DE Holdings' Fourth Amended and Restated Limited
Liability Company Operating Agreement (the ``DE Holdings LLC
Agreement'') identifies certain corporate actions that require the
approval of DE Holdings' Board of Managers and the members of DE
Holdings. The Sixth Article of the DEI Certificate provides that any
action requiring the approval of the DE Holdings Board of Managers and/
or members of DE Holdings pursuant to Section 7.7 of the DE Holdings
LLC Agreement shall require the approval of the stockholders of DEI (DE
Holdings is the sole stockholder of DEI). The Sixth Article of the DEI
Certificate further provides that, notwithstanding such approval,
nothing contained in Section 7.7 of the DE Holdings LLC Agreement shall
be applicable where the application of such provision or provisions
would interfere with the effectuation of any decisions by the Board of
Directors of DEI (``Board'') relating to regulatory functions of the
Exchange (including disciplinary matters) or the structure of the
market that the Exchange regulates, or would interfere with the ability
of the Exchange to carry out its responsibilities under the Act or to
oversee the structure of the market that the Exchange regulates.\7\
This Sixth Article of the DEI Certificate further provides that these
responsibilities shall include the ability of the Exchange as an SRO:
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\7\ See DEI Certificate, Article VI., Section 2.
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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
To protect investors and the public interest.\8\
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\8\ Id.
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In addition, the DEI Bylaws provide that, for so long as DEI
controls the Exchange, the Board, officers, employees and agents of DEI
must give due regard to the preservation of independence of the self-
regulatory function of the Exchange and must not interfere with its
regulatory functions (including disciplinary matters) or the ability of
the Exchange to carry out its responsibilities under the Act.\9\
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\9\ See DEI Bylaws, Article VII., Section 7.1.
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These provisions, as well as the associated notice and rule filing
requirements with respect to any person or entity that may acquire an
interest in DEI (as described below), will serve to protect the
integrity of the Exchange's self-regulatory responsibilities and the
SEC's oversight responsibilities. These provisions will also ensure
that, although DEI will not itself carry out any regulatory functions,
its activities with respect to the Exchange will be consistent with,
and not interfere with the self-regulatory obligations of the Exchange.
Ownership Limitations and Changes in Ownership
The DE Holdings LLC Agreement includes restrictions on the ability
to own and vote shares of the capital stock of DE Holdings.\10\ The DE
Holdings LLC Agreement states that no person may own, directly or
indirectly, of record or beneficially, units of interest in the
ownership of DE Holdings (``Units'') representing more than a 40%
interest in DE Holdings.\11\ In addition, the DE Holdings LLC Agreement
prohibits members of EDGX or EDGA (``Exchange Members''), 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%.\12\ Furthermore, no person,
other than International Securities Exchange Holdings, Inc., either
alone or together with its related persons, may vote or cause the
voting of Units representing more than a 20% interest in DE
Holdings.\13\ 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, then DE Holdings has the right
to redeem such Units for the lesser of the fair market value or the
book value of the Units.\14\ 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.\15\
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\10\ See the Order at 13156.
\11\ See DE Holdings LLC Agreement, Article XII., Section
12.1(a)(1).
\12\ See DE Holdings LLC Agreement, Article XII., Section
12.1(a)(2).
\13\ See DE Holdings LLC Agreement, Article XII., Section
12.1(a)(3).
\14\ See DE Holdings LLC Agreement, Article XII., Section 12.3.
\15\ See DE Holdings LLC Agreement, Article XII., Section 12.4.
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These voting and ownership restrictions in the DE Holdings LLC
Agreement are unaffected by the proposed change in corporate structure
whereby DEI will become an operating and holding company for the
Exchange. Further, such restrictions will effectively be carried over
into the new corporate structure because the DEI Certificate provides
that the sole stockholder of DEI will be DE Holdings \16\ and as
discussed below, the EDGA Bylaws indicate that DEI will be the sole
owner of EDGA.\17\ In addition, for so long as DEI indirectly or
directly controls EDGA, any amendment to the ownership requirements in
the DEI Certificate, including the provision identifying DE Holdings as
the sole stockholder of DEI, shall be submitted to the Board of
Directors of EDGA for a determination as to whether such amendment must
be filed with, or filed with and approved by, the SEC before such
amendment can become effective and in such event, such amendment shall
not be effective until filed with, or filed with and approved by, the
SEC, as the case may be.\18\
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\16\ See DEI Certificate, Article VIII., Section 4.
\17\ See EDGA Bylaws, Article I., Section kk.
\18\ See DEI Certificate, Article VIII., Section 3.
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The Exchange proposes to amend its bylaws to require that the sole
stockholder of the Exchange will be DEI.\19\ Any changes to the EDGA
Bylaws, including any change in the provision that identifies DEI as
the sole owner of EDGA, must be filed with and approved by the
Commission pursuant to Section 19 of the Act.\20\ This ownership
requirement, together with the DE Holdings' and DEI's voting and
ownership restrictions described above, is designed to prevent any
Exchange Member or other person from exercising undue control over the
operation of the Exchange through DEI and further assures that the
Exchange and the Commission will be able to carry out their respective
regulatory obligations under the Act. The Exchange believes that these
requirements should minimize the potential that a person could
improperly interfere with or restrict the ability of the Commission or
[[Page 34191]]
the Exchange to effectively carry out their respective regulatory
oversight responsibilities under the Act.
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\19\ See EDGA Bylaws, Article I., Section kk.
\20\ See 15 U.S.C. 78s. See also Order at note 77 and
accompanying text.
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Jurisdiction and Regulatory Oversight
The DEI Certificate and DEI Bylaws will contain several provisions
designed to protect the independence of the self-regulatory function of
the Exchange.
DEI's officers and directors are deemed to be the officers and
directors of the Exchange.\21\ Article VII of the DEI Bylaws further
states that DEI's Board and its officers, employees, and agents shall
give due regard to the preservation of independence of the self-
regulatory function of the Exchange and shall not interfere with the
effectuation of any decisions by the Exchange's Board of Directors
relating to its regulatory functions (including disciplinary matters)
or which would interfere with the ability of the Exchange to carry out
its responsibilities under the Act.\22\ In addition, the DEI Bylaws
further provide that DEI shall comply with the U.S. federal securities
laws and rules and regulations thereunder and shall cooperate with the
SEC and the Exchange.\23\ The DEI Bylaws also provide that DEI's
officers, directors, employees and agents shall be deemed to agree to
(i) comply with the U.S. federal securities laws and the rules and
regulations thereunder; and (ii) to cooperate with the SEC and the
Exchange in respect of the SEC's oversight responsibilities regarding
the Exchange and the self-regulatory functions and responsibilities of
the Exchange. In addition, DEI shall take reasonable steps necessary to
cause its officers, directors, employees and agents to so
cooperate.\24\
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\21\ See DEI Bylaws, Article V., Section 5.8(b).
\22\ See DEI Bylaws, Article VII., Section 7.1.
\23\ See DEI Bylaws, Article VII., Section 7.2.
\24\ Id.
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Furthermore, DEI and its officers, directors, employees and agents
will be deemed to irrevocably submit to the jurisdiction of the U.S.
federal courts, the SEC, and the Exchange for purposes of any suit,
action, or proceeding pursuant to the U.S. federal securities laws or
the rules or regulations thereunder relating to or arising out of the
activities of the Exchange.\25\ In addition, those same parties shall
be deemed to 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 they are not personally subject to the jurisdiction of the United
States federal courts, the SEC, and the Exchange 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 that
suit, action or proceeding may not be enforced in or by such courts or
agency.\26\
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\25\ See DEI Bylaws, Article VII., Section 7.3.
\26\ Id.
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These provisions ensure that, should an occasion arise that
requires regulatory cooperation or jurisdictional submission from DEI,
such cooperation will be forthcoming and uncontested.
Books and Records
The Bylaws of DEI contain a number of provisions designed to ensure
that the Exchange has sufficient access to the books and records of
DEI. According to the DEI Bylaws, the books and records of DEI are
deemed to be the books and records of the Exchange to the extent they
are related to the operation or administration of the Exchange.\27\ In
addition, for as long as DEI controls the Exchange, DEI's books and
records shall be subject at all times to inspection and copying by the
SEC and the Exchange, provided that such books and records are related
to the operation or administration of the Exchange.\28\
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\27\ See DEI Bylaws, Article V., Section 5.8(b).
\28\ Id.
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The DEI Bylaws also provide that, to the fullest extent permitted
by applicable law, all confidential information pertaining to the self-
regulatory function of the Exchange (including but not limited to
disciplinary matters, trading data, trading practices and audit
information) contained in the books and records of the Exchange that
shall come into the possession of DEI shall:
Be retained in confidence by DEI, its stockholders,
officers, directors, employees and agents; and
Not be used for any non-regulatory purposes.\29\
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\29\ See DEI Bylaws, Article V., Section 5.8(a).
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The foregoing, however, shall not limit or impede the rights of the
SEC or the Exchange 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 DEI stockholders,
officers, directors, employees or agents to disclose such confidential
information to the SEC or the Exchange.\30\ DEI's books and records
shall be subject at all times to inspection and copying by (a) the SEC
and (b) any Exchange, provided that such books and records are related
to the operation or administration of the Exchange.\31\ In addition,
DEI's books and records shall be maintained within the United
States.\32\
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\30\ Id.
\31\ See DEI Bylaws, Article V., Section 5.8(b).
\32\ See DEI Bylaws, Article VII., Section 7.5.
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Voting the Equity of EDGA
Currently, the DE Holdings LLC Agreement provides that DE Holdings
shall, in its capacity as the sole stockholder of EDGA, cause all
outstanding equity of EDGA owned by DE Holdings and entitled to vote
with respect to an election to be voted in accordance with the EDGA
Bylaws.\33\ Inasmuch as DE Holdings will no longer be a stockholder of
EDGA upon the consummation of this transaction, such requirements will
no longer be applicable to DE Holdings.
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\33\ See DE Holdings LLC Agreement, Article VII., Section
7.3(b).
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As DEI will now be the sole stockholder of EDGA, DEI shall cause
all outstanding equity of EDGA owned by DEI and entitled to vote with
respect to an election to be voted in accordance with the EDGA
Bylaws.\34\ Under Section 2.15(b) of the DEI Bylaws, with respect to
any election of directors, other than ``Owner Directors,'' \35\ or
members of the Nominating Committee or Exchange Member Nominating
Committee of the Exchange, DEI shall cause all outstanding equity of
the Exchange owned by DEI and entitled to vote to elect: (i) only those
nominees for the Nominating Committee and for the Exchange Member
Nominating Committee that are nominated in accordance with the EDGA
Bylaws; and (ii) only those directors nominated by the Nominating
Committee of the Exchange. Under Section 2.15(c) of the DEI Bylaws,
with respect to ``Owner Directors,'' DEI shall take all actions in its
capacity as a stockholder of the Exchange to vote or consent with
respect to matters concerning an Owner Director according to the
written instructions of the relevant member of DE Holdings that is
entitled to nominate such Owner Director.
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\34\ See DEI Bylaws, Article II., Section 2.15(b).
\35\ ``Owner Director'' is defined in Article I., Section (z) of
the EDGA Bylaws as a Director nominated by a member of DE Holdings
that holds at least a 15% percentage interest in DE Holdings and
that is elected by the stockholders of the Exchange.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\36\ in general, and with
Sections 6(b)(1) and (b)(5) of the Act,\37\ in particular, in that the
proposal enables the Exchange to be so organized as to have the
capacity to be able to carry out the purposes of the
[[Page 34192]]
Act and to comply with and enforce compliance by members and persons
associated with members with provisions of the Act, the rules and
regulations thereunder, and SRO rules, and is 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.
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\36\ 15 U.S.C. 78f.
\37\ 15 U.S.C. 78f(b)(3), [sic] (5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule does not impose any burden on competition that is
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
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such 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 will:
(A) By order approve 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 protected]. Please include
File Number SR-EDGA-2010-02 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-EDGA-2010-02. 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 such filing also will be available for
inspection and copying at the principal office of EDGA. 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-EDGA-2010-02 and should be
submitted on or before July 7, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
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\38\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-14443 Filed 6-15-10; 8:45 am]
BILLING CODE 8010-01-P