

[Federal Register: September 12, 2006 (Volume 71, Number 176)]
[Notices]               
[Page 53728-53736]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12se06-92]                         

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SECURITIES AND EXCHANGE COMMISSION

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

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

September 1, 2006.

I. Introduction

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

A. Overview

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

[[Page 53729]]

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

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

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

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

[[Page 53730]]

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

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

[[Page 53731]]

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

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

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

[[Page 53732]]

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

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

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

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

H. Fair Representation of Trading Participants

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

[[Page 53733]]

I. Reorganization Into a Holding Company Structure

    According to the Exchange, it intends to reorganize into a holding 
company structure on September 1, 2006, in the manner described in 
Securities Exchange Act Release No. 53705 (April 21, 2006) (the 
``Reorganization'').\33\ Upon the Reorganization, International 
Securities Exchange, LLC will become the registered ``national 
securities exchange'' under Section 6 of the Act, the self-regulatory 
organization (``SRO'') and continue to act as Manager of ISE Stock. ISE 
Holdings shall become the holder of the Class A Units of ISE Stock. 
Prior to the Reorganization, the provisions relating to, among other 
things, ownership and voting limitations (and exceptions therefrom) are 
applicable to ISE, as the holder of the Class A Units. Upon the 
Reorganization, those same provisions are applicable to ISE Holdings, 
as the holder of the Class A Units.
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    \33\ See Securities Exchange Act Release No. 53705 (April 21, 
2006), 71 FR 25260 (April 28, 2006) (SR-ISE-2006-04).
---------------------------------------------------------------------------

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

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\34\ In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(1) of 
the Act,\35\ which requires a national securities exchange to be so 
organized and have the capacity to carry out the purposes of the Act 
and to enforce compliance by its members and persons associated with 
its members with the provisions of the Act, the rules or regulations 
thereunder, and the rules of the exchange. The Commission also finds 
that the proposed rule change, as amended, is consistent with Section 
6(b)(3) of the Act,\36\ which, among other things, requires that the 
rules of an exchange ensure fair representation of its members in the 
selection of its directors and administration of its affairs.
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    \34\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \35\ 15 U.S.C. 78f(b)(1).
    \36\ 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------

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

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

A. ISE Stock as a Facility of the Exchange

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

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

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

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

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

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

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

[[Page 53734]]

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

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

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

B. Changes in Control of ISE

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

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

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

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

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

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

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

C. Regulatory Jurisdiction Over ISE Stock and Its Members

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

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

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

[[Page 53735]]

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

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

    The Commission also notes that, even in the absence of these 
provisions of the LLC Agreement, Section 20(a) of the Act \52\ provides 
that any person with a controlling interest in ISE Stock would be 
jointly and severally liable with and to the same extent that ISE Stock 
is liable under any provision of the Act, unless the controlling person 
acted in good faith and did not directly or indirectly induce the act 
or acts constituting the violation or cause of action.
---------------------------------------------------------------------------

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

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

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

D. Restrictions on ISE Stock Members

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

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

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

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

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

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

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

IV. Solicitation of Comments

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

[[Page 53736]]

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-2006-45 on the subject line.

Paper Comments

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

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

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

V. Conclusion

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

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

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

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

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

BILLING CODE 8010-01-P
