[Federal Register Volume 75, Number 142 (Monday, July 26, 2010)]
[Notices]
[Pages 43584-43587]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-18158]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62515; File No. SR-EDGX-2010-02]
Self-Regulatory Organizations; EDGX Exchange, Inc; Order
Approving a Proposed Rule Change Relating to Direct Edge, Inc.
July 16, 2010.
I. Introduction
On June 3, 2010, EDGX Exchange, Inc. (``EDGX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4
[[Page 43585]]
thereunder,\2\ a proposed rule change relating to a corporate
reorganization (``Corporate Reorganization'') in which the Exchange
will become a wholly-owned subsidiary of Direct Edge, Inc. (``DEI'').
The proposed rule change was published for comment in the Federal
Register on June 16, 2010.\3\ The Commission received no comments
regarding the proposal. This order approves the proposed rule change.
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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. 62256 (June 10,
2010), 75 FR 34196.
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II. Description of the Proposal
Currently, the Exchange is a wholly-owned subsidiary of Direct Edge
Holdings, LLC (``DE Holdings'').\4\ DE Holdings, a Delaware limited
liability company, is overseen by a Board of Managers, and ownership in
DE Holdings is represented by limited liability membership interests.
The Fourth Amended and Restated Limited Liability Company Operating
Agreement of DE Holdings (``DE Holdings Operating Agreement'') refers
to the holders of these membership interests as ``Members.'' \5\
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\4\ The Amended and Restated Bylaws of EDGX (``Exchange
Bylaws'') identify this ownership structure. See Exchange Bylaws,
Article I(kk). Any changes to the Exchange Bylaws, including a
change to the provision that identifies DE Holdings as the sole
owner of the Exchange, must be filed with the Commission pursuant to
Section 19 of the Act. See 15 U.S.C. 78s. See also Securities
Exchange Act Release No. 61698 (March 12, 2010), 75 FR 13151 (March
18, 2010) (File Nos. 10-194 and 10-196) (order granting the exchange
registration applications of the Exchange and EDGA Exchange, Inc.
(``EDGA'')) (``Order''), at note 77 and accompanying text.
\5\ DE Holdings is described in greater detail in the Order,
supra note 4.
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The Exchange proposes a Corporate Reorganization in which DE
Holdings will transfer all of its equity interest in the Exchange to
DEI, a Delaware corporation.\6\ As a result, the Exchange will be a
direct, wholly-owned subsidiary of DEI following the Corporate
Reorganization. DEI, in turn, will be a direct, wholly-owned subsidiary
of DE Holdings, and DE Holdings will be the sole stockholder of DEI.
The self-regulatory functions of the Exchange will remain with the
Exchange following the Corporate Reorganization. Direct Edge ECN, LLC
d/b/a DE Route, the Exchange's routing broker/dealer, will continue to
be a wholly-owned subsidiary of DE Holdings.
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\6\ The Exchange's affiliate exchange, EDGA, also will become a
wholly-owned subsidiary of DEI. See Securities Exchange Act Release
No. 62514 (July 16, 2010) (order approving File No. SR-EDGA-2010-
02).
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The Exchange has included in its proposal the Certificate of
Incorporation of DEI (``DEI Certificate''); the Bylaws of DEI (``DEI
Bylaws''); and changes to the Amended and Restated Bylaws of EDGX
(``Exchange Bylaws'') to indicate that DEI will be the sole stockholder
of the Exchange.
III. Discussion and Commission Findings
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\7\ In
particular, the Commission finds that the proposal is consistent with
Section 6(b) of the Act,\8\ in general, and furthers the objectives of
Section 6(b)(1) of the Act,\9\ in particular, in that it is designed to
enable the Exchange to be so organized as to have the capacity to be
able to carry out the purposes of the Act and to comply, and to enforce
compliance by its members and persons associated with its members with
the provisions of the Act, the rules and regulations thereunder, and
the rules of the Exchange. In addition, the Commission finds that the
proposal is consistent with Section 6(b)(5) of the Act \10\ in that it
will result in an exchange governance structure designed to prevent
fraudulent and manipulative acts and practices, 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. In
particular, the Commission believes that the corporate governing
documents of DEI, DE Holdings, and the Exchange are designed to protect
and maintain the integrity of the self-regulatory functions of the
Exchange and to facilitate the ability of the Exchange and the
Commission to carry out their regulatory and oversight obligations
under the Act. Finally, the Commission finds that the proposal is
consistent with the requirement under Section 6(b)(3) of the Act \11\
that the rules of an exchange assure fair representation of the
exchange's members in the selection of its directors and administration
of its affairs.
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\7\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(1).
\10\ 15 U.S.C. 78f(b)(5).
\11\ 15 U.S.C. 78f(b)(3).
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A. DEI
Following the Corporate Reorganization, DEI will be the sole
stockholder of the Exchange.\12\ Although DEI will not carry out any
regulatory functions, its activities with respect to the operation of
the Exchange must be consistent with, and must not interfere with, the
self-regulatory obligations of the Exchange. The DEI Certificate and
DEI Bylaws include certain provisions that are designed to maintain the
independence of the Exchange's self-regulatory function from DEI,
enable the Exchange to operate in a manner that complies with the
Federal securities laws, including the objectives of Sections 6(b) and
19(g) of the Act,\13\ and facilitate the ability of the Exchange and
the Commission to fulfill their regulatory and oversight obligations
under the Act.
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\12\ See Exchange Bylaws, Article I(kk).
\13\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g).
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For example, DEI submits to the jurisdiction of the Commission and
the Exchange with respect to activities relating to the Exchange,\14\
and agrees to provide the Commission and the Exchange with access to
its books and records that are related to the operation or
administration of the Exchange.\15\ In addition, to the extent they are
related to the operation or administration of the Exchange, the books,
records, premises, officers, directors, agents, and employees of DEI
will be deemed to be the books, records, premises, officers, directors,
agents, and employees of the Exchange for the purpose of, and subject
to oversight pursuant to, the Act.\16\ DEI also agrees to keep
confidential non-public information relating to the self-regulatory
function \17\ of the Exchange and not to use such information for any
non-regulatory purpose.\18\ In addition, the Board of Directors of DEI,
and DEI's officers, employees, and agents, are required to give due
regard to the preservation of the independence of the self-regulatory
function of the Exchange.\19\
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\14\ See DEI Bylaws, Article VII, Section 7.3.
\15\ See DEI Bylaws, Article V, Section 5.8(b).
\16\ Id.
\17\ This requirement to keep confidential non-public
information relating to the self-regulatory function of the Exchange
will not limit the Commission's or the Exchange's ability to access
and examine such information or limit the ability of any officers,
directors, agents, or employees of DEI to disclose such information
to the Commission or to the Exchange. See DEI Bylaws, Article V,
Section 5.8(a).
\18\ See DEI Bylaws, Article VII, Section 7.1.
\19\ See DEI Bylaws, Article V, Section 5.8(b).
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Article VII, Section 7.7 of the DE Holdings Operating Agreement
requires the approval of the DE Holdings Board of Managers and/or
Members of DE Holdings in connection with certain actions taken by DE
Holdings or a subsidiary of DE Holdings. Article
[[Page 43586]]
SIXTH of the DEI Certificate states that any action that specifically
requires the approval of the DE Holdings Board of Managers and/or
Members of DE Holdings pursuant to Article VII, Section 7.7 of the DE
Holdings Operating Agreement will require the approval of the
stockholders of DEI.\20\ Article SIXTH of the DEI Certificate further
provides, however, that nothing contained in Article VII, Section 7.7
of the DE Holdings Operating Agreement will be applicable where the
application of that provision would interfere with the effectuation of
any decisions of the DEI Board of Directors (``DEI Board'') relating to
regulatory functions of the Exchange (including disciplinary matters)
or the structure of the market 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 the Exchange regulates.\21\ For as long as DEI directly or
indirectly controls the Exchange, any change to the DEI Certificate
must be submitted to the Exchange's Board of Directors (``Exchange
Board'') and, if the amendment is required to be filed with the
Commission pursuant to Section 19(b) of the Act, the change will not be
effective until filed with, or filed with and approved by, the
Commission.\22\
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\20\ See DEI Certificate, Article SIXTH(1).
\21\ See DEI Certificate, Article SIXTH(2).
\22\ See DEI Certificate, Article EIGHTH(3).
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The Commission finds that these provisions in the DEI Bylaws and
DEI Certificate are consistent with the Act, and that they will assist
the Exchange in fulfilling its self-regulatory obligations and in
administering and complying with the requirements of the Act.
B. DE Holdings
In the Corporate Reorganization, DE Holdings, which currently is
the sole stockholder of the Exchange, will transfer its stock in the
Exchange to DE Holdings' wholly-owned subsidiary, DEI, which will
become the sole stockholder of the Exchange. Accordingly, DE Holdings
will be an indirect owner of the Exchange following the Corporate
Reorganization. Although DE Holdings will not carry out any regulatory
functions, its activities with respect to the operation of the Exchange
must be consistent with, and not interfere with, the self-regulatory
obligations of the Exchange.
The DE Holdings Operating Agreement, which the Commission reviewed
in connection with the Exchange's application for registration as a
national securities exchange,\23\ includes certain provisions that are
designed to maintain the independence of the Exchange's self-regulatory
function from DE Holdings, enable the Exchange to operate in a manner
that complies with the Federal securities laws, including the
objectives of Sections 6(b) and 19(g) of the Act, and facilitate the
ability of the Exchange and the Commission to fulfill their regulatory
and oversight obligations under the Act. For example, the DE Holdings
Operating Agreement provides that, for so long as DE Holdings directly
or indirectly controls the Exchange, the Managers, officers, employees,
and agents of DE Holdings shall give due regard to the preservation of
the independence of the self-regulatory function of the Exchange and
shall not take any actions that would interfere with the effectuation
of any decisions by the Exchange Board relating to the Exchange's
regulatory functions (including disciplinary matters) or which would
interfere with the ability of the Exchange to carry out its
responsibilities under the Act.\24\
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\23\ See Order, supra note 4.
\24\ See DE Holdings Operating Agreement Article XIV, Section
14.1. In addition, the DE Holdings Operating Agreement further
specifies, among other things, that: (1) DE Holdings and its
officers, Managers, employees, and agents submit to the Commission's
and the Exchange's jurisdiction with respect to activities relating
to the Exchange; (2) DE Holdings agrees to retain in confidence
information in the books and records of the Exchange reflecting
confidential information pertaining to the self-regulatory function
of the Exchange (including disciplinary matters, trading data,
trading practices, and audit information) that comes into DE
Holdings' possession; (3) the books, records, premises, officers,
Managers, agents, and employees of DE Holdings are deemed to be the
books, records, premises, officers, Managers, agents, and employees
of the Exchange for purposes of, and subject to oversight pursuant
to, the Act, to the extent that they are related to the operation or
administration of the Exchange; and (4) DE Holdings agrees to
provide the Commission and the Exchange with access to DE Holdings'
books and records that are related to the operation or
administration of the Exchange for so long as DE Holdings directly
or indirectly controls the Exchange. See DE Holdings Operating
Agreement, Article XI, Section 14.3; and Article XI, Section 11.2.
For a more complete discussion of the DE Holdings Operating
Agreement, see Order, supra note 4, at notes 40--47 and accompanying
text.
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The Commission notes that the Exchange is not proposing to amend
the DE Holdings Operating Agreement.\25\ Accordingly, the DE Holdings
Operating Agreement that the Commission reviewed in connection with the
Exchange's application for registration as a national securities
exchange, including the provisions in the DE Holdings Operating
Agreement relating to the self-regulatory function of the Exchange,
will remain in place following the Corporate Reorganization.
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\25\ For as long as DE Holdings directly or indirectly controls
the Exchange, any changes to the DE Holdings Operating Agreement
must be submitted to the Exchange Board and, if the Exchange Board
determines that such amendment is required to be filed with the
Commission pursuant to Section 19(b) of the Act, such change will
not be effective until filed with, or filed with and approved by,
the Commission. See DE Holdings Operating Agreement, Article XV,
Section 15.2(b). See also Order, supra note 4, at note 47 and
accompanying text.
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C. Ownership and Control of the Exchange, DEI, and DE Holdings
Following the Corporate Reorganization, DEI will be the sole
stockholder of the Exchange. The Exchange Bylaws identify this
ownership structure.\26\ Any changes to the Exchange Bylaws, including
any change in the provision that identifies DEI as the sole stockholder
of the Exchange, must be filed with and approved by the Commission
pursuant to Section 19 of the Act.\27\ Similarly, the DEI Certificate
identifies DE Holdings as the sole stockholder of DEI.\28\ For as long
as DEI directly or indirectly controls the Exchange, any amendment to
the DEI Certificate, including an amendment to the provision that
identifies DE Holdings as the sole stockholder of DEI, must be
submitted to the Exchange Board and, if the Exchange Board determines
that the amendment must be filed with, or filed with and approved by
the Commission, before the amendment may be effective under Section 19
of the Act, then the proposed amendment will not be effective until it
is filed with, or filed with and approved by, the Commission.\29\
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\26\ See Exchange Bylaws, Article I(kk).
\27\ See 15 U.S.C. 78s.
\28\ See DEI Certificate, Article EIGHTH(4).
\29\ See DEI Certificate, Article EIGHTH(3).
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In addition, as discussed in greater detail in the Order,\30\ the
DE Holdings Operating Agreement includes restrictions on the ability to
own and vote the capital stock of DE Holdings.\31\ These limitations
apply for so long as DE Holdings directly or indirectly controls the
Exchange.\32\ The limitations, which are designed to prevent any Member
of DE Holdings from exercising undue control over the operation of the
Exchange and to assure that the Exchange and the Commission are able to
effectively carry out their regulatory and oversight obligations under
the Act, generally prohibit any person, other than International
Securities Exchange Holdings, Inc., from owning interests representing
more than
[[Page 43587]]
40% of DE Holdings or from voting interests representing more than 20%
of DE Holdings. In addition, the limitations prohibit any member of the
Exchange from owning interests representing more than 20% of DE
Holdings.
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\30\ See Order, supra note 4, at notes 65-88 and accompanying
text.
\31\ See DE Holdings Operating Agreement, Article XII.
\32\ See DE Holdings Operating Agreement, Article XII, Section
12.1(a).
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The Commission believes that these provisions in the governing
documents of the Exchange, DEI, and DE Holdings should minimize the
potential that a person could improperly interfere with or restrict the
ability of the Commission or the Exchange to effectively carry out
their regulatory and oversight responsibilities under the Act.
D. Electing Directors and Certain Committee Members of the Exchange
Currently, the DE Holdings Operating Agreement requires DE
Holdings, in its capacity as the sole stockholder of the Exchange, to
vote all of the outstanding equity of the Exchange owned by DE Holdings
and entitled to vote in an election to be voted in favor of the
election of (1) those directors nominated by the Nominating Committee
of the Exchange (``Exchange Nominating Committee''); and (2) those
nominees for the Exchange Nominating Committee and the Exchange Member
Nominating Committee nominated in accordance with the governance
documents of the Exchange.\33\ Because DE Holdings will no longer be a
stockholder of the Exchange following the Corporate Reorganization, the
Exchange notes that these requirements will no longer apply to DE
Holdings.
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\33\ See DE Holdings Operating Agreement, Article VII, Section
7.3(b).
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However, the DEI Bylaws require DEI, in its capacity as the sole
stockholder of the Exchange, to cause all outstanding equity of the
Exchange owned by DEI and entitled to vote in an election to be voted
in favor of the election of (1) those directors nominated by the
Exchange Nominating Committee; and (2) those nominees for the Exchange
Nominating Committee and the Exchange Member Nominating Committee
nominated in accordance with the governance documents of the
Exchange.\34\ Through these requirements in the DEI Bylaws, the
Commission believes that the same procedures governing the election of
Exchange directors and Exchange member directors that the Commission
approved in the Order will continue to apply following the Corporate
Reorganization.\35\ Accordingly, the Commission finds that the proposal
is consistent with the requirement in Section 6(b)(3) of the Act that
the rules of the Exchange provide for the fair representation of its
members in the selection of directors and the administration of the
Exchange.
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\34\ See DEI Bylaws, Article II, Section 2.15(b).
\35\ See Order, supra note 4, at notes 94-120 and accompanying
text, for a discussion of the Exchange's procedures for nominating
directors and Exchange member directors.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\36\ that the proposed rule change (File No. SR-EDGX-2010-02) is
approved.
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\36\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
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\37\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-18158 Filed 7-23-10; 8:45 am]
BILLING CODE 8010-01-P