

[Federal Register: April 28, 2006 (Volume 71, Number 82)]
[Notices]               
[Page 25260-25265]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28ap06-119]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53705; File No. SR-ISE-2006-04]

 
Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Order Approving Proposed Rule Change and Amendments No. 1 and 2 
and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 3 Relating to the Proposal to Reorganize From its Current 
Structure Into a Holding Company Structure

April 21, 2006.

I. Introduction

    On January 12, 2006, pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ the 
International Securities Exchange, Inc. (``ISE, Inc.'') filed with the 
Securities and Exchange Commission (``Commission'') a proposed rule 
change to reorganize from its current structure into a holding company 
structure (``Reorganization''). ISE, Inc. filed Amendment No. 1 on 
March 3, 2006, and withdrew Amendment No. 1 on March 3, 2006. On March 
3, 2006, ISE, Inc. filed Amendment No. 2. The proposed rule change, as 
amended, was published for comment in the Federal Register on March 17, 
2006.\3\ The Commission received no comment letters regarding the 
proposal. On April 7, 2006, ISE, Inc. filed Amendment No. 3 to the 
proposed rule change.\4\ This order approves the proposed rule change, 
as amended, grants accelerated approval to Amendment No. 3 to the 
proposed rule change, and solicits comments from interested persons on 
Amendment No. 3.
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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. 53450 (March 8, 
2006), 71 FR 13875.
    \4\ In Amendment No. 3, ISE, Inc. proposed a technical change to 
the filing. The complete text of Amendment No. 3 is available on the 
Commission's Web site (http://www.sec.gov/rules/sro.shtml), at the 

Commission's Public Reference Room, at the principal office of ISE, 
Inc., and on ISE, Inc.'s Web site (http://www.iseoptions.com).

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    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.\5\ In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with section 6(b) of 
the Act,\6\ which, among other things, requires a national securities 
exchange to be so organized and have the capacity to be able 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 and regulations thereunder, and the rules of the exchange, 
and assure the fair representation of its members in the selection of 
its directors and administration of its affairs, and provide that one 
or more directors shall be representative of issuers and investors and 
not be associated with a member of the exchange, broker, or dealer. 
Section 6(b) of the Act \7\ also requires that the rules of the 
exchange be 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.
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    \5\ 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).
    \6\ 15 U.S.C. 78f(b).
    \7\ Id.
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A. Accelerated Approval of Amendment No. 3

    The Commission also finds good cause for approving Amendment No. 3 
to the proposed rule change prior to the thirtieth day after publishing 
notice of Amendment No. 3 in the Federal

[[Page 25261]]

Register pursuant to section 19(b)(2) of the Act.\8\
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    \8\ 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.
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    In Amendment No. 3, ISE, Inc. proposes to amend ISE Rule 303, 
Supplementary Material .02, to replace a reference to the ``Certificate 
of Incorporation'' of ISE, Inc. with a reference to the ``LLC 
Agreement'' of International Securities Exchange, LLC (``ISE, LLC'') to 
reflect that, upon consummation of the Reorganization, ISE, Inc. would 
merge with, and thereafter operate as, a limited liability company.
    The Commission believes that Amendment No. 3 is non-substantive in 
nature, raises no novel issues, and is consistent with the Act. 
Therefore, the Commission finds that good cause exists to accelerate 
approval of the proposed rule change in Amendment No. 3, pursuant to 
section 19(b)(2) of the Act.\9\
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    \9\ 15 U.S.C. 78s(b)(2).
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B. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 3, including whether Amendment No. 3 
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 rule-comments@sec.gov. Please include 

File Number SR-ISE-2006-04 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2006-04. 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 ISE, Inc. 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. 3 of File Number SR-ISE-2006-04 and should be submitted 
on or before May 19, 2006.

II. Description and Discussion

    ISE, Inc., a Delaware corporation and publicly-traded company,\10\ 
proposes to reorganize into a holding company structure. ISE, Inc. has 
formed International Securities Exchange Holdings, Inc., a Delaware 
corporation (``ISE Holdings''), and its wholly owned subsidiary, ISE, 
LLC, a Delaware limited liability company, in contemplation of the 
Reorganization. After satisfaction of certain conditions, including 
approval of the Reorganization by the Commission, ISE, Inc. will merge 
into ISE, LLC, with ISE, LLC as the surviving entity of the merger 
(``Merger'').
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    \10\ See Securities Exchange Act Release No. 51029 (January 12, 
2005), 70 FR 3233 (January 21, 2005) (SR-ISE-2004-29) (discussing 
ISE, Inc.'s current capital stock and governance structure).
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    As a result of the Merger, ISE Holdings will effectively become the 
sole equity owner of ISE, LLC, and the shares of ISE Holdings common 
stock (``ISE Holdings Common Stock'') will in turn be publicly held. 
The holders of shares of ISE, Inc. Class A Common Stock (``Class A 
Common Stock'') will become holders of ISE Holdings Common Stock, and 
holders of ISE, Inc. Class B Common Stock, Series B-1 (``Series B-1 
Common Stock''), ISE, Inc. Class B Common Stock, Series B-2 (``Series 
B-2 Common Stock''), and ISE, Inc. Class B Common Stock, Series B-3 
(``Series B-3 Common Stock'') \11\ will become holders of PMM Rights, 
CMM Rights, and EAM Rights, respectively.\12\ Upon consummation of the 
Merger, the percentage of the outstanding shares of ISE Holdings Common 
Stock held after the Merger by each holder of Class A Common Stock will 
be identical to the percentage of Class A Common Stock that such holder 
held prior to the Merger. The percentage of Exchange Rights held after 
the Merger by each holder of Class B Common Stock also will be 
identical to the percentage of Class B Common Stock that such holder 
held prior to the Merger.
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    \11\ The Series B-1 Common Stock, Series B-2 Common Stock, and 
Series B-3 Common Stock are herein collectively referred to as the 
``Class B Common Stock.''
    \12\ See proposed Limited Liability Company Agreement of ISE, 
LLC (``LLC Agreement''), Section 6.2, for the definition of ``PMM 
Rights,'' ``CMM Rights,'' and ``EAM Rights.'' PMM Rights, CMM 
Rights, and EAM Rights are herein collectively referred to as the 
``Exchange Rights.''
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    As is currently the case with respect to ISE, Inc. and its shares 
of Class B Common Stock,\13\ ISE, LLC will require ownership of an 
Exchange Right as a predicate to obtaining the trading rights and 
privileges associated with such Exchange Right.\14\ Where still 
relevant and practical, ISE, Inc. has preserved certain rights of the 
holders of Class B Common Stock following the Reorganization. As a 
result, holders of PMM and CMM Rights will be entitled to vote on any 
change in, amendment, or modification of the same Core Rights to which 
the holders of Series B-1 Common Stock and Series B-2 Common Stock are 
entitled with respect to ISE, Inc.\15\ In addition, holders of Exchange 
Rights will continue to be entitled to vote with respect to any 
amendments to the LLC Agreement or the proposed Constitution of ISE, 
LLC (``LLC Constitution'') that would alter or change the powers, 
preferences, or special rights of one or more series of Exchange Rights 
so as to affect them adversely.\16\ Further, as discussed below, 
holders of Exchange Rights will continue to be entitled to elect six 
Exchange Directors of the board of directors of ISE, LLC (``LLC 
Board'').\17\
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    \13\ Amended and Restated Certificate of Incorporation of ISE, 
Inc. (``ISE, Inc. Amended Certificate''), Article Fourth, 
Subdivision II(b)(ii).
    \14\ LLC Agreement, Section 6.2.
    \15\ See LLC Agreement, section 2.2, for the definition of 
``Core Rights.'' Core Rights means any increase in the number of 
authorized PMM Rights or CMM Rights.
    \16\ LLC Agreement, section 8.1, and LLC Constitution, section 
10.1. The sole LLC member (ISE Holdings) will have a similar right 
to approve amendments to the LLC Constitution or LLC Agreement if 
such amendments would alter or change the powers, preferences, or 
special rights of the sole LLC member so as to affect it adversely. 
Id.
    \17\ Because ISE, LLC will have limited liability members 
instead of stockholders, ISE Holdings (as the sole LLC member) and 
the holders of Exchange Rights will not have voting, dividend, or 
liquidation rights typically associated with common stock under 
state law.
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    The proposed rule change includes: (a) The elimination of the ISE, 
Inc. Amended Certificate and the Amended and Restated Constitution of 
ISE, Inc. (``ISE, Inc. Amended Constitution''); (b) the Certificate of 
Incorporation of ISE

[[Page 25262]]

Holdings (``Holdings Certificate'') and the bylaws of ISE Holdings 
(``Holdings Bylaws''); (c) the LLC Agreement and the LLC Constitution; 
and (d) certain amendments to the Rules of ISE, Inc. (``ISE Rules'') to 
reflect the Reorganization.\18\
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    \18\ ISE, Inc. is proposing to amend the ISE Rules to, among 
other things, change references to ``Class B common stock,'' ``Class 
B stockholders,'' ``shares,'' and similar or derivative words to 
``Exchange Rights,'' ``Exchange Rights holders,'' and ``Rights'' and 
the like.
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A. ISE Holdings

1. ISE Holdings as Sole Member
    ISE, LLC will be a wholly owned subsidiary of ISE Holdings. ISE 
Holdings will have sole voting control over ISE, LLC, except for 
certain matters relating to Exchange Rights.\19\ Section 19(b) of the 
Act \20\ and Rule 19b-4 thereunder \21\ require a self-regulatory 
organization (``SRO'') to file proposed rule changes with the 
Commission. Although ISE Holdings is not an SRO, certain provisions of 
the Holdings Certificate and Holdings Bylaws are rules of an exchange 
\22\ if they are stated policies, practice, or interpretations, as 
defined in Rule 19b-4 of the Act,\23\ of the exchange, and must be 
filed with the Commission pursuant to section 19(b) of the Act \24\ and 
Rule 19b-4 thereunder.\25\ Accordingly, ISE, Inc. has filed the 
Holdings Certificate and Holdings Bylaws with the Commission.\26\
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    \19\ ISE Holdings will not have any voting rights with respect 
to the Core Rights, the election of PMM Directors, CMM Directors, or 
EAM Directors, or any other matters relating to the Exchange Rights, 
such as the eligibility and approval of persons to own, transfer or 
lease Exchange Rights, rulemaking, supervision of entities holding 
Exchange Rights, and the like. See LLC Agreement, section 2.2. See 
also LLC Constitution, section 3.2(b), for the definitions of ``PMM 
Director,'' ``CMM Director,'' and ``EAM Director.'' The PMM 
Directors, CMM Directors, and EAM Directors are herein collectively 
referred to as the ``Exchange Directors.''
    \20\ 20 15 U.S.C. 78s(b).
    \21\ 17 CFR 240.19b-4.
    \22\ See section 3(a)(27) of the Act, 15 U.S.C. 78c(a)(27).
    \23\ 17 CFR 240.19b-4.
    \24\ 15 U.S.C. 78s(b).
    \25\ 17 CFR 240.19b-4.
    \26\ If ISE Holdings decides to amend the Holdings Certificate 
or the Holdings Bylaws, the Board of Directors of ISE Holdings 
(``Holdings Board'') must submit such amendment to the LLC Board, 
and if the LLC Board determines that such amendment is required to 
be filed with, or filed with and approved by, the Commission before 
the same may be effective pursuant to section 19 of the Act and the 
rules thereunder, such amendment shall not be effective until filed 
with, or filed with and approved by, the Commission, as the case may 
be. See Holdings Certificate, Article Sixteenth, and Holdings 
Bylaws, Section 10.1.
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2. Ownership and Voting Limitations; Changes in Control of ISE, LLC
    The Holdings Certificate and Holdings Bylaws will include 
substantially the same ownership and voting limitations that are 
contained in the ISE, Inc. Amended Certificate and ISE, Inc. Amended 
Constitution.\27\ Specifically, the Holdings Certificate provides that 
no Person,\28\ either alone or together with its Related Persons,\29\ 
may own, directly or indirectly, shares of the capital stock of ISE 
Holdings constituting more than 40 percent of the outstanding shares of 
any class or series of capital stock of ISE Holdings.\30\ Further, the 
Holdings Certificate provides that no Member,\31\ either alone or 
together with its Related Persons, may own, directly or indirectly, 
shares of the capital stock of ISE Holdings constituting more than 20 
percent of the outstanding shares of any class or series of capital 
stock of ISE Holdings.\32\ The Holdings Certificate also provides that 
no Person, either alone or together with its Related Persons, may, 
directly or indirectly, vote or cause the voting of shares of the 
capital stock of ISE Holdings representing more than 20 percent of the 
voting power of any class or series of the then issued and outstanding 
capital stock of ISE Holdings.\33\ If a Person, either alone or with 
its Related Persons, beneficially owns shares of stock of ISE Holdings 
in violation of the relevant ownership limitation, ISE Holdings will 
apply substantially the same corrective procedures that were previously 
approved by the Commission.\34\ Also, as is currently the case with 
respect to ISE, Inc., if any stockholder purports to vote or cause the 
voting of shares of the capital stock of ISE Holdings that would 
violate the relevant voting limitation, then the ISE, Holdings will not 
honor such vote to the extent that such provision would be 
violated.\35\
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    \27\ ISE, Inc. represents that currently, no Person, either 
alone or together with its Related Persons, owns more than 40 
percent of the outstanding shares of any class or series of capital 
stock of ISE, Inc., and no member, either alone or together with its 
Related Persons, owns more than 20 percent of the outstanding shares 
of any class or series of capital stock of ISE, Inc. ISE, Inc. 
therefore represents that there is no reason to believe that the 
Reorganization will result in any large concentrations of ownership 
or voting power by ISE, Inc.'s current stockholders or members.
    \28\ See Holdings Certificate, Article Fourth, Subdivision III, 
for the definition of ``Person.''
    \29\ See ISE, Inc. Amended Certificate, Article Fourth, 
Subdivision III, for the current definition of ``Related Person'' 
and Holdings Certificate, Article Fourth, Subdivision III, for the 
proposed modification to the definition of ``Related Persons'' in 
connection with the Reorganization. Currently, ``Related Person'' 
means (1) with respect to any Person, all ``affiliates'' and 
``associates'' of such Person (as such terms are defined in Rule 
12b-2 under the Act); (2) with respect to any Person constituting an 
exchange member (as defined in the ISE, Inc. Amended Constitution), 
any broker or dealer with which such Exchange Member is associated; 
and (3) 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 shares of the capital stock of ISE, Inc. ISE, Inc. proposes to 
modify the definition of ``Related Persons'' in connection with the 
Reorganization to also include, 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, 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.
    \30\ Holdings Certificate, Article Fourth, Subdivision III(a).
    \31\ The term ``Member,'' as proposed to be defined in ISE Rule 
100, means an organization that has been approved to exercise 
trading rights associated with Exchange Rights.
    \32\ Holdings Certificate, Article Fourth, Subdivision III(a).
    \33\ Holdings Certificate, Article Fourth, Subdivision III(b).
    \34\ ISE, Inc. Amended Certificate, Article Fourth, Subdivision 
III(c).
    \35\ Holdings Certificate, Article Fourth, Subdivision III(d).
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    ISE, LLC also will continue to have a 20 percent limit with respect 
to Exchange Rights.\36\ Specifically, no holder or lessee of Exchange 
Rights, together with any affiliate, may own (or exercise any of the 
non-trading rights associated with) more than 20 percent of the PMM 
Rights, the CMM Rights, or the EAM Rights.\37\
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    \36\ LLC Agreement, section 6.5(a).
    \37\ Id.
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    Members that trade on an exchange traditionally have ownership 
interests in such exchange. As the Commission has noted in the past, 
however, a member's interest in an exchange could become so large as to 
cast doubt on whether the exchange can fairly and objectively exercise 
its self-regulatory responsibilities with respect to that member.\38\ A 
member that is a controlling shareholder of an exchange might be 
tempted to exercise that controlling influence by directing the 
exchange to refrain from, or the exchange may hesitate to, diligently 
monitor and surveil the member's conduct or diligently enforce its 
rules and the federal securities laws with respect to conduct by the 
member that violates such provisions.
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    \38\ See Securities Exchange Act Release Nos. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006) (File No. 10-131); 51149 
(February 8, 2005), 70 FR 7531 (February 14, 2005) (SR-CHX-2004-26); 
49718 (May 17, 2004), 69 FR 29611 (May 24, 2004) (SR-PCX-2004-08); 
49098 (January 16, 2004), 69 FR 3974 (January 27, 2004) (SR-Phlx-
2003-73); and 49067 (January 13, 2004), 69 FR 2761 (January 20, 
2004) (SR-BSE-2003-19).
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    In addition, as proposed, ISE, LLC will be a wholly owned 
subsidiary of ISE Holdings. The LLC Agreement identifies this ownership 
structure.\39\

[[Page 25263]]

Any changes to the LLC Agreement, including any changes to the 
provision that identifies ISE Holdings as the sole LLC member, must be 
filed with and approved by the Commission pursuant to Section 19 of the 
Act.\40\ Further, any assignment of its interest in ISE, LLC by ISE 
Holdings will be subject to prior Commission approval pursuant to 
section 19 of the Act.\41\
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    \39\ The LLC Agreement only permits ISE, LLC to have one LLC 
member at any given time, and identifies ISE Holdings as the sole 
LLC member. See preamble to the LLC Agreement and sections 2.1 and 
3.1.
    \40\ 15 U.S.C. 78s.
    \41\ LLC Agreement, section 7.1.
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    The Commission finds that the ownership and voting limitations in 
the Holding Certificate and the change in control provisions and limit 
on Exchange Rights in the LLC Agreement are consistent with the Act. 
These requirements should minimize the potential that a person could 
improperly interfere with or restrict the ability of the Commission or 
ISE, LLC to effectively carry out their regulatory oversight 
responsibilities under the Act.

B. Exchange Operations and Independence of Self-Regulatory Function of 
ISE, LLC

    Upon consummation of the Merger, ISE, LLC will be the successor to 
the registration of ISE, Inc. as a national securities exchange. ISE, 
LLC thus will operate as the registered national securities exchange 
under section 6 of the Act \42\ and be responsible for enforcing its 
member compliance with the Federal securities laws and ISE Rules.\43\ 
Further, all decisions with respect to the listing and delisting of 
options and related products will continue to be made in accordance 
with ISE Rules. ISE, Inc. also represents that provisions of the LLC 
Agreement and LLC Constitution dealing with exchange operations are 
substantively the same as the current ISE, Inc. Amended Certificate and 
ISE, Inc. Amended Constitution, respectively.
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    \42\ 15 U.S.C. 78f.
    \43\ Under the Act, the holders or lessees of Exchange Rights 
are ``members'' of ISE, LLC. See section 3(a)(3) of the Act, 15 
U.S.C. 78c(a)(3). However, the holders of Exchange Rights are not 
``members'' for purposes of the Delaware Limited Liability Company 
Act or the LLC Agreement. LLC Agreement, section 6.1.
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    As an SRO, ISE, LLC will have ultimate responsibility for the 
administration and enforcement of the rules governing its options 
business operations. ISE, Inc. represents that the regulatory 
relationship that it currently maintains with the National Association 
of Securities Dealers (``NASD'') will not be affected by the 
Reorganization and that ISE, LLC, as the successor-in-interest to ISE, 
Inc., will continue to have the same relationship with the NASD.\44\ 
ISE, LLC's disciplinary process will be the same as the process for 
ISE, Inc. and will be carried out by the Business Conduct Committee 
which is composed of members.\45\ Likewise, ISE, Inc. represents that 
ISE, LLC will participate in various national market system plans, 
including the Options Price Reporting Authority and the Options 
Intermarket Linkage Plan, in which ISE, Inc. is currently a 
participant.
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    \44\ See Securities Exchange Act Release No. 4781 (May 14, 
2003), 68 FR 27869 (May 21, 2003) (approving a plan pursuant to Rule 
17d-2 of the Act between NASD and ISE, Inc.).
    \45\ Currently, the Chief Executive Officer (``CEO'') of ISE, 
Inc. authorizes the institution of disciplinary actions, and ISE, 
Inc., with the assistance of the NASD staff, if appropriate, 
conducts disciplinary proceedings before the Business Conduct 
Committee. Decisions of the Business Conduct Committee may be 
appealed to the Committee for Review of ISE, Inc., which is composed 
of directors of ISE, Inc.
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    Certain provisions in the LLC Agreement, LLC Constitution, and ISE 
Rules are designed to facilitate the ability of ISE, LLC to fulfill its 
regulatory obligations under the Act and to help ensure the 
independence of its regulatory function from its market operations and 
other commercial interests. Specifically, the LLC Constitution provides 
that all meetings of the LLC Board pertaining to the self-regulatory 
function of ISE, LLC or to the structure of the market that ISE, LLC 
regulates will be closed to all persons other than the LLC Board and 
officers, staff, counsel, or other advisors of ISE, LLC whose 
participation is necessary or appropriate to the proper discharge of 
ISE, LLC's regulatory functions and any representative of the 
Commission. No members of the Holdings Board who are not also LLC Board 
members, and no officers, staff, counsel, or advisors of ISE Holdings 
who are not also officers, staff, counsel, or advisors of ISE, LLC, 
will be allowed to participate in such meetings.\46\
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    \46\ LLC Constitution, section 3.2(d).
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    In addition, the LLC Agreement provides that, in discharging his or 
her responsibilities as a member of the LLC Board, each director shall 
take into consideration the effect that his or her actions would have 
on the ability of ISE, LLC to carry out its responsibilities under the 
Act.\47\ Further, in discharging his or her responsibilities as a 
member of the LLC Board or as an officer or employee of ISE, LLC, each 
director, officer, or employee shall comply with the federal securities 
laws and rules and regulations thereunder and cooperate with the 
Commission.\48\ The LLC Agreement also provides that all confidential 
information pertaining to the self-regulatory function of ISE, LLC 
contained in books and records of ISE, LLC shall not be made available 
to any persons other than to those officers, directors, employees, and 
agents of ISE, LLC that have a reasonable need to know the contents 
thereof, be retained in confidence by such parties, and not be used for 
any commercial purposes.\49\
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    \47\ LLC Agreement, section 5.1(b).
    \48\ Id.
    \49\ LLC Agreement, section 4.1(b). The Commission believes that 
any non-regulatory use of such information would be for a commercial 
purpose.
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    The Commission further notes that ISE has taken steps to safeguard 
the use of regulatory monies. In particular, ISE, LLC will interpret 
ISE Rules to require that any revenue it receives from regulatory fees 
or penalties will be segregated and applied to fund the legal, 
regulatory, and surveillance operations of ISE, LLC and will not be 
used to pay distributions to the sole LLC member (ISE Holdings) or 
holders of Exchange Rights, except in the event of liquidation of ISE, 
LLC, in which case the sole LLC member will be entitled to the 
distribution of ISE, LLC's remaining assets.\50\
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    \50\ See Securities Exchange Act Release No. 45803 (April 23, 
2002), 67 FR 21306 (April 30, 2002).
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    Finally, proposed ISE Rule 312 provides that, without prior 
Commission approval, ISE, LLC or any entity with which it is affiliated 
shall not, directly or indirectly through one or more intermediaries, 
acquire or maintain an ownership interest in a Member or non-member 
owner. In addition, pursuant to ISE Rule 312, a Member or non-member 
owner shall not be or become an affiliate of ISE, LLC or an affiliate 
of any affiliate of ISE, LLC.\51\ Moreover, the LLC Constitution 
prohibits officers or employees of ISE, LLC from being holders of 
Exchange Rights or being affiliated with a Member.\52\ The Commission 
believes that these provisions mitigate its concerns about the 
potential for unfair competition and conflicts of interest between an 
exchange's self-regulatory obligations and its commercial interest. The 
Commission also believes that ISE Rule 312 minimizes the potential for 
unfair competitive advantage that the affiliated member could have by 
virtue of informational or operational

[[Page 25264]]

advantages, or the ability to receive preferential treatment.\53\
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    \51\ ISE Rule 312 also provides that it does not prohibit a 
Member or non-member owner from acquiring or holding any equity 
interest in ISE Holdings that is permitted by the Holdings 
Certificate. Further, ISE Rule 312 does not prohibit any Member from 
being or becoming an affiliate of ISE, LLC or an affiliate of any 
affiliate of ISE, LLC solely by reason of any officer, director, or 
partner of such Member being or becoming an Exchange Director 
pursuant to the LLC Constitution.
    \52\ LLC Constitution, section 4.5.
    \53\ See Securities Exchange Act Release No. 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (order approving the business 
combination of New York Stock Exchange, Inc. and Archipelago 
Holdings, Inc.).
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    The Commission finds that the proposed organization of ISE, LLC is 
consistent with the Act, particularly with section 6(b)(1),\54\ which 
requires that an exchange be so organized and have the capacity to 
carry out the purposes of the Act.
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    \54\ 15 U.S.C. 78f(b)(1).
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C. Relationship of ISE Holdings to ISE, LLC; Jurisdiction Over ISE 
Holdings

    Following the Reorganization, ISE Rules, LLC Agreement, and LLC 
Constitution will reflect ISE, LLC's status as a wholly owned 
subsidiary of ISE Holdings, under management of the ISE, LLC Board and 
its designated officers and with self-regulatory obligations pursuant 
to ISE, LLC's registration as a national securities exchange.
    As the sole owner of ISE, LLC, ISE Holdings' activities must be 
consistent with, and not interfere with, ISE, LLC's obligations under 
the Act. Certain provisions in the Holdings Certificate and Holdings 
Bylaws are designed to enable ISE, LLC to operate in a manner that 
complies with federal securities laws, including the objectives of 
sections 6(b) and 19(g) of the Act,\55\ and facilitate the ability of 
ISE, LLC and the Commission to fulfill their regulatory and oversight 
obligations under the Act.
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    \55\ 15 U.S.C. 78f(b) and 78s(g).
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    For example, the Holdings Certificate provides that ISE, Holdings, 
each director of the Holdings Board, and each officer or employee of 
ISE Holdings shall comply with the Federal securities laws and rules 
and regulations thereunder and shall cooperate with ISE, LLC and the 
Commission.\56\ In addition, in discharging his or her responsibilities 
as a member of the Holdings Board, each director of the Holdings Board 
shall take into consideration the effect that ISE Holdings' actions 
would have on the ability of ISE, LLC to carry out its responsibilities 
under the Act.\57\ ISE Holdings and its officers, directors, and 
employees also shall give due regard to the preservation of the 
independence of the self-regulatory function of ISE, LLC and to ISE, 
LLC's obligations under the Act and the rules thereunder and shall not 
take any actions which he or she knows or reasonably should have known 
would interfere with the effectuation of any decisions by the LLC Board 
relating to ISE, LLC's regulatory functions or which would adversely 
affect the ability of ISE, LLC to carry out ISE, LLC's responsibilities 
under the Act.\58\ Further, all confidential information pertaining to 
the self-regulatory function of ISE, LLC contained in books and records 
of ISE, LLC that shall come into the possession of ISE Holdings shall 
not be made available to any Persons other than to officers, directors, 
employees, and agents of ISE Holdings that have a reasonable need to 
know, be retained in confidence by such parties, and not be used for 
any commercial purposes.\59\
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    \56\ Holdings Certificate, Article Twelfth and Article 
Fifteenth. ISE Holdings also shall take reasonable steps necessary 
to cause its agents to cooperate with ISE, LLC and the Commission 
with respect to such agents' activities related to ISE, LLC. 
Holdings Certificate, Article Fifteenth.
    \57\ Holdings Certificate, Article Twelfth.
    \58\ Holdings Bylaws, section 1.5. ISE Holdings also will take 
reasonable steps necessary to cause its officers, directors, and 
employees, prior to accepting a position as such, to consent in 
writing to the applicability to them of Article Twelfth, Article 
Thirteenth, and Article Fourteenth of Holdings Certificate and 
sections 1.4 and 1.5 of Holdings Bylaws, as applicable, with respect 
to their activities related to ISE, LLC. Holdings Bylaws, section 
1.6.
    \59\ Holdings Certificate, Article Thirteenth. The Commission 
believes that any non-regulatory use of such information would be 
for a commercial purpose.
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    In addition, ISE Holdings' books and records will be subject at all 
times to inspection and copying by the Commission and are deemed to be 
the books and records of ISE, LLC for purposes of and subject to 
oversight pursuant to the Act, in each case to the extent they relate 
to the exchange business of ISE, LLC.\60\ ISE Holdings and its 
officers, directors, employees, and agents will also submit to the 
jurisdiction of the U.S. Federal courts, the Commission, and ISE, LLC 
with respect to activities relating to ISE, LLC.\61\
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    \60\ Holdings Certificate, Article Fourteenth.
    \61\ Holdings Bylaws, section 1.4. ISE Holdings and its 
officers, directors, employees, and agents will also maintain an 
agent for service of process in the U.S. Id.
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    The Holdings Certificate and Holdings Bylaws also provide that any 
amendment to the Holdings Certificate or Holdings Bylaws must be 
submitted by the Holdings Board to the LLC Board. If the LLC Board 
determines that such amendment is required, under section 19 of the Act 
\62\ and the rules promulgated thereunder, to be filed with, or filed 
with and approved by, the Commission, then such amendment will not 
become effective until filed with, or filed and approved by, the 
Commission.\63\ The Commission finds that these provisions are 
consistent with the Act, and that they will support ISE, LLC's ability 
to fulfill its self-regulatory obligations and administer and comply 
with the requirements of the Act.
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    \62\ 15 U.S.C. 78s.
    \63\ Holdings Certificate, Article Sixteenth, and Holdings 
Bylaws, section 10.1.
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    Under section 20(a) of the Act,\64\ any person with a controlling 
interest in ISE, LLC would be jointly and severally liable with, and to 
the same extent that, ISE, LLC is liable under any provision of the 
Act, unless the controlling person acted in good faith and did not 
directly or indirectly induce the act or acts constituting the 
violation or cause of action. In addition, section 20(e) of the Act 
\65\ creates aiding and abetting liability for any person who knowingly 
provides substantial assistance to another person in violation of any 
provision of the Act or rule thereunder. Further, section 21C of the 
Act \66\ authorizes the Commission to enter a cease-and-desist order 
against any person who has been a ``cause of'' a violation of any 
provision of the Act through an act or omission that the person knew or 
should have known would contribute to the violation. These provisions 
are applicable to ISE Holdings' dealings with ISE, LLC.
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    \64\ 15 U.S.C. 78t(a).
    \65\ 15 U.S.C. 78t(e).
    \66\ 15 U.S.C. 78u-3.
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D. Governance of ISE, LLC

    The corporate governance provisions of the LLC Agreement and LLC 
Constitution are substantively the same as the current the ISE, Inc. 
Amended Certificate and ISE, Inc. Amended Constitution, respectively.
    Although ISE Holdings will have sole voting control over ISE, LLC 
(except for certain matters relating to Exchange Rights),\67\ the 
management and administration of ISE, LLC will be carried out by the 
LLC Board and by the executive officers of ISE, LLC.\68\ Among other 
officers, ISE, LLC will have a President and CEO and a Chief Regulatory 
Officer that will manage the business and affairs of ISE, LLC, subject 
to the oversight of the ISE, LLC Board.\69\
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    \67\ See supra note 19.
    \68\ See LLC Constitution, Section 5.1(a). See also LLC 
Agreement, Section 5.1.
    \69\ In some cases this management will be subject to the 
approval of ISE Holdings as the sole LLC member. ISE, Inc. 
represents that, under Delaware law, certain events such as the sale 
of all or substantially all of the assets, merger, or liquidation of 
ISE, LLC may require the approval of ISE Holdings.
    The initial officers of ISE, LLC will be the individuals 
currently serving as the officers of ISE, Inc. Further, ISE, LLC 
will have a Finance & Audit Committee, a Corporate Governance 
Committee, and a Compensation Committee, all of which will be 
governed by charters. LLC Constitution, sections 5.4, 5.5, and 5.6.

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[[Page 25265]]

    As is the case currently with respect to the board of directors of 
ISE, Inc. (``ISE, Inc. Board''), the LLC Board will be composed of 15 
members,\70\ eight of whom will be Non-Industry Directors,\71\ six of 
whom will be Exchange Directors, and the CEO of ISE, LLC.\72\ Each 
year, the Nominating Committee \73\ will nominate the Exchange 
Directors and the Corporate Governance Committee will nominate the Non-
Industry Directors.\74\ At the first annual meeting of the sole LLC 
member (ISE Holdings) and holders of Exchange Rights, and at each 
subsequent annual meeting, ISE Holdings will elect the eight Non-
Industry Directors (rather than the holders of the Class A Common 
Stock, as is currently the case), and holders of Exchange Rights will 
elect the six Exchange Directors, to serve until the next annual 
meeting or until their successors are elected and qualified.\75\ The 
Chairman of the LLC Board will be a Non-Industry Director who is 
elected by the LLC Board.
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    \70\ ISE, Inc. proposes that the number of members of the LLC 
Board may only be changed by the LLC Board with the approval of the 
affirmative vote of the holders of two-thirds of the then 
outstanding Exchange Rights. LLC Constitution, section 3.2.
    \71\ See LLC Constitution, section 3.2(b), for the definition of 
``Non-Industry Director'' and section 13.1(w), for the definition of 
``non-industry representative.'' These definitions are the same as 
the current definitions. See ISE, Inc. Amended Constitution, 
sections 3.2(b) and 14.1(q), respectively. Further, as is currently 
the case, at least 2 Non-Industry Directors will be required to be 
public representatives. See LLC Constitution, Section 3.2(b)(iv).
    \72\ LLC Agreement, section 5.2, and LLC Constitution, section 
3.2(b). ISE, Inc. represents that the initial members of the LLC 
Board were the individuals serving as directors of ISE, Inc. on the 
date of formation of ISE, LLC.
    \73\ The proposed Nominating Committee will be composed of one 
representative of PMM Rights, one representative of CMM Rights, and 
one representative of EAM Rights. See LLC Constitution, section 
5.3(a). This composition is essentially the same as the current 
Nominating Committee of ISE, Inc. See ISE, Inc. Amended 
Constitution, section 5.3(a).
    \74\ The proposed Corporate Governance Committee will be 
composed of three, and no more than eight, Non-Industry Directors. 
See LLC Constitution, section 5.4. This is the same as the current 
Corporate Governance Committee. See ISE, Inc. Amended Constitution, 
section 5.4.
    \75\ LLC Constitution, section 3.2(c).
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    As is currently the case, each director of ISE, LLC will hold 
office for a two-year term, except the CEO of ISE, LLC will hold office 
for a one-year term or such earlier time as such person no longer 
serves as the CEO. The directors, other than the CEO, will be divided 
into two classes.\76\ If there is a vacancy on the LLC Board, the 
vacancy will be filled by the LLC Board, and the person chosen to fill 
the vacancy will serve until the expiration of the term of office of 
the class to which such person was elected. No Exchange Director may 
serve more than three consecutive terms, and, after a two-year hiatus, 
may again be eligible to serve as an Exchange Director.\77\
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    \76\ At each annual meeting, the successors of the class of 
directors whose term expires at that meeting will be elected to hold 
office for a term expiring at the annual meeting held in the second 
year following the year of their election and until their successors 
are elected and qualified.
    \77\ LLC Constitution, section 3.2(e). ISE, Inc. did not impose 
term limits on Non-Industry Directors, and ISE, LLC does not propose 
to do so, though the ISE, LLC Corporate Governance Committee may 
determine whether and how to provide for such term limits at a later 
time.
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    Holders of Exchange Rights also may continue to nominate Exchange 
Directors by petition. ISE, Inc. represents that the petition process 
following the Reorganization will be substantially similar to the 
petition process currently in place for ISE, Inc. However, for purposes 
of determining whether a person has been nominated for election by 
petition by the requisite percentage set forth in the LLC Constitution, 
no Member, alone or together with its affiliates, may account for more 
than 50 percent of the signatures of the holders of outstanding 
Exchange Rights of the series entitled to elect such person.\78\
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    \78\ LLC Constitution, section 3.10. Petitions submitted for 
nominees for Exchange Directors of ISE, LLC also will not be 
required to contain all the information that is required to be 
disclosed pursuant to Regulation 14A under the Act, because ISE, LLC 
will not be subject to the proxy requirements under the Act.
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    The proposed governance structure of ISE, LLC following the 
Reorganization will be substantially the same as the governance 
structure currently in place for ISE, Inc. The Commission therefore 
finds that proposed governance structure, including the composition of 
the LLC Board and the selection of directors, continue to satisfy the 
requirements of the Act, including sections 6(b)(1) and 6(b)(3) of the 
Act.\79\
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    \79\ 15 U.S.C. 78f(b)(1) and 78f(b)(3). The Commission notes 
that it is in the process of reviewing a range of governance issues 
relating to SROs, including possible steps to strengthen the 
framework for, and ways to improve the transparency of, the 
governance procedures of all SROs and has proposed rules in 
furtherance of this goal. Depending upon the results of the proposed 
rules, ISE, LLC may be required to make changes to further 
strengthen its governance structure. The Commission also believes 
that the LLC Board should continue to monitor and evaluate ISE, 
LLC's governance structure and processes on an ongoing basis, and 
propose further changes as appropriate. See Securities Exchange Act 
Release No. 50699 (November 18, 2004), 69 FR 71126 (December 8, 
2004).
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III. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and rules and 
regulations thereunder applicable to the national securities exchange.
    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\80\ that the proposed rule change (SR-ISE-2006-04), as amended, is 
approved, and Amendment No. 3 is approved on an accelerated basis.
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    \80\ 15 U.S.C. 78s(b)(2).
    \81\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\81\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-6411 Filed 4-27-06; 8:45 am]

BILLING CODE 8010-01-P
