
[Federal Register: November 17, 2008 (Volume 73, Number 222)]
[Notices]               
[Page 67909-67916]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17no08-101]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58918; File No. SR-ISE-2008-85]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change Relating to Changes to 
the ISE Stock Exchange Governing Documents in Connection with ISE's 
Purchase of Equity Interests in Direct Edge Holdings, Inc.

November 7, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on November 7, 2008, the International Securities 
Exchange, LLC (the ``Exchange'' or ``ISE'') filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which items have 
been prepared by the Exchange. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes, among other things, to merge the ISE Stock 
Exchange, LLC (``ISE Stock''), a Delaware limited liability company, 
with and into Maple Merger Sub, LLC (``Maple Merger Sub''), a Delaware 
limited liability company and a wholly owned subsidiary of Direct Edge 
Holdings LLC (``Direct Edge''), with Maple Merger Sub being the 
surviving entity. As part of the same transaction, International 
Securities Exchange Holdings, Inc. (``ISE Holdings'') will purchase 
equity interests in Direct Edge such that after the transactions 
contemplated by the

[[Page 67910]]

merger and purchase, ISE Holdings will have a 31.54% equity interest in 
Direct Edge. Currently, ISE Stock operates a marketplace for the 
trading of U.S. cash equities by Equity Electronic Access Members 
(``Equity EAMs'') of ISE under the rules of ISE, as a facility, as that 
term is defined in Section 3(a)(2) of the Securities Exchange Act of 
1934 (``Exchange Act'') \3\ of ISE (the ``Facility''). ISE proposes 
that, following the closing of the transaction and the merger of ISE 
Stock into Maple Merger Sub, Maple Merger Sub will operate the 
Facility.\4\ Maple Merger Sub will be wholly-owned by Direct Edge, a 
Delaware limited liability company.
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    \3\ 15 U.S.C. 78c(a)(2).
    \4\ Direct Edge is planning to file two Form 1 Applications to 
own and operate two national securities exchanges. If the Commission 
approves the Form 1 Applications, the Facility will cease 
operations.
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    ISE is a registered national securities exchange under Section 6 of 
the Exchange Act and a self-regulatory organization (``SRO''). As a 
facility of ISE, the Facility is subject to regulation by ISE and 
oversight by the Commission. ISE represents that following the 
transactions described above, it will continue to have adequate funds 
to discharge all regulatory functions related to the Facility.\5\ ISE 
will also enter into a Regulatory Services Agreement with Maple Merger 
Sub. In this filing, the Exchange is submitting to the SEC: (i) The 
Certificate of Formation and the Limited Liability Company Agreement of 
Maple Merger Sub (``LLC Agreement'') which specifically relates to the 
control and governance of Maple Merger Sub and helps to ensure that ISE 
has the authority over Maple Merger Sub to maintain ISE's 
responsibility for all regulatory functions related to the Facility; 
(ii) the Third Amended and Restated Limited Liability Company Operating 
Agreement of Direct Edge Holdings LLC (``DE Operating Agreement''); 
(iii) amendments to the ISE Holdings Certificate of Incorporation and 
Bylaws; and (iv) amendments to ISE Rules 312 and 2108. As the primary 
purpose of this rule filing is to focus on those provisions that are 
directly related to ISE's ability to perform its regulatory 
responsibility with respect to the Facility following the transactions 
described above, the Exchange's discussion in this filing will be 
limited to those relevant provisions of the LLC Agreement and the DE 
Operating Agreement. The text of the proposed rule change is available 
on the Exchange's Web site http://www.ise.com at the principal office 
of the Exchange, and at the Commission's Public Reference Room.
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    \5\ Maple Merger Sub will not be entitled to any revenue 
generated in connection with penalties, fines, and regulatory fees 
that may be assessed by ISE against Equity EAMs in connection with 
trading on ISE Stock. Rather, all regulatory fines, penalties and 
fees assessed against and paid by ISE members to ISE in connection 
with trading on ISE Stock shall remain with ISE.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

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

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

1. Purpose
    The Exchange proposes, among other things, to merge ISE Stock with 
and into Maple Merger Sub, a wholly owned subsidiary of Direct Edge, 
with Maple Merger Sub being the surviving entity. As part of the same 
transaction, ISE Holdings will purchase equity interests in Direct Edge 
such that after the transactions contemplated by the merger and 
purchase, ISE Holdings will have a 31.54% equity interest in Direct 
Edge. Currently, ISE Stock operates the Facility, however, ISE proposes 
that, following the closing of the transaction and the merger of ISE 
Stock into Maple Merger Sub, Maple Merger Sub will operate the 
Facility.
    ISE is an SRO, and as a facility of ISE, the Facility is subject to 
regulation by ISE and oversight by the SEC. ISE represents that 
following the transactions described above, it will continue to have 
adequate funds to discharge all regulatory functions related to the 
Facility.\6\ ISE will also enter into a Regulatory Services Agreement 
with Maple Merger Sub. In this filing, the Exchange is submitting to 
the Commission: (i) The Certificate of Formation and LLC Agreement 
which specifically relates to the control and governance of Maple 
Merger Sub and helps to ensure that ISE has the authority over Maple 
Merger Sub to maintain ISE's responsibility for all regulatory 
functions related to the Facility; (ii) the DE Operating Agreement; 
(iii) amendments to the ISE Holdings Certificate of Incorporation and 
Bylaws; and (iv) amendments to ISE Rules 312 and 2108. As the primary 
purpose of this rule filing is to focus on those provisions that are 
directly related to ISE's ability to perform its regulatory 
responsibility with respect to the Facility following the transactions 
described above, the Exchange's discussion in this filing will be 
limited to those relevant provisions of the LLC Agreement and the DE 
Operating Agreement.
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    \6\ Maple Merger Sub will not be entitled to any revenue 
generated in connection with penalties, fines, and regulatory fees 
that may be assessed by ISE against Equity EAMs in connection with 
trading on ISE Stock. Rather, all regulatory fines, penalties and 
fees assessed against and paid by ISE members to ISE in connection 
with trading on ISE Stock shall remain with ISE.
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Maple Merger Sub

    As a limited liability company, ownership of Maple Merger Sub is 
represented by limited liability membership interests in Maple Merger 
Sub. Maple Merger Sub has only one owner, Direct Edge (the ``Sole 
Member'').

Governance of Maple Merger Sub

    Pursuant to Section 4.1 of the LLC Agreement, Maple Merger Sub will 
be managed by the Sole Member. As noted above, ISE will have regulatory 
responsibility over Maple Merger Sub and the Facility. Subject to the 
foregoing and the provisions of Section 1.6 as described below, as the 
Sole Member, Direct Edge will have the authority to make all decisions 
regarding the business of Maple Merger Sub. The Sole Member is 
responsible for the control and management of the business of Maple 
Merger Sub.
    Under Section 4.1 of the LLC Agreement, subject to the limitations 
provided in the LLC Agreement and except as specifically provided 
therein, the Sole Member shall have exclusive and complete authority 
and discretion to manage the operations and affairs of Maple Merger Sub 
and to make all decisions regarding the business of Maple Merger Sub 
and shall have the power to act for or bind Maple Merger Sub. Any 
action taken by the Sole Member shall constitute the act of and serve 
to bind Maple Merger Sub.
    The provisions contained in Section 1.6 of the LLC Agreement ensure 
that ISE has the information regarding Maple Merger Sub and the 
Facility necessary to carry out its regulatory responsibilities. 
Specifically, Section 1.6 provides that, so long as Maple Merger Sub 
operates the Facility, in the event that ISE, in its sole discretion, 
reasonably and in good

[[Page 67911]]

faith, determines that any action, transaction, or aspect of an action 
or transaction, is necessary or appropriate for, or interferes with, 
the performance or fulfillment of ISE's regulatory functions or its 
responsibilities under the Exchange Act or such action, transaction, or 
aspect of an action or transaction is specifically required by the SEC, 
(i) no such action, transaction, or aspect of an action or transaction 
shall be authorized, undertaken or effective, without ISE's prior 
approval and (ii) ISE shall have the sole and exclusive right to direct 
that any such necessary or appropriate action, as it may reasonably and 
in good faith determine in its sole discretion be taken or transaction 
be undertaken by or on behalf of Maple Merger Sub without regard to any 
other party in any capacity.
    Additionally, Section 1.6(b) provides that ISE shall receive notice 
of planned or proposed changes to Maple Merger Sub (but not to include 
changes relating solely to one or more of the following: marketing, 
administrative matters, personnel matters, social or team-building 
events, meetings of members, communications with members, finance, 
market research, real property, equipment, furnishings, personal 
property, intellectual property, insurance, contracts unrelated to the 
operation of the Facility and de minimis items) and the Facility. Any 
such changes must be affirmatively approved by ISE prior to 
implementation.
    Section 4.1 of the LLC Agreement contains limitations on the 
authority of the Sole Member. Specifically, Section 4.1 provides that 
notwithstanding any contrary provision of the LLC Agreement, and 
subject always to ISE's rights to act under Section 1.6, all actions 
taken by the Sole Member shall be governed by and subject to Sections 
7.3(a) \7\ and 7.7 of the DE Operating Agreement, which are discussed 
in detail below.
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    \7\ Section 7.3(a) of the DE Operating Agreement provides, that 
subject to Section 7.3(b), the Board may constitute any officer of 
Direct Edge as the Direct Edge's proxy, with power of substitution, 
to vote the equity of any subsidiary of Direct Edge and to exercise, 
on behalf of Direct Edge, any and all rights and powers incident to 
the ownership of that equity, including the authority to execute and 
deliver proxies, waivers and consents. Subject to Sections 7.3(b) 
and 7.7, in the absence of specific action by the Direct Edge Board, 
the Chief Executive Officer shall have authority to represent Direct 
Edge and to vote, on behalf of Direct Edge, the equity of other 
Persons, both domestic and foreign, held by Direct Edge. Subject to 
Sections 7.3(b) and 7.7, the Chief Executive Officer shall also have 
the authority to exercise any and all rights incident to the 
ownership of that equity, including the authority to execute and 
deliver proxies, waivers and consents.
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Voting Limitations of Members

    Under Section 4.4 of the LLC Agreement, no Person \8\ (other than 
the Sole Member), either alone or together with its Related Persons,\9\ 
as of any record date for the determination of members entitled to vote 
on any matter, shall be entitled to: (i) Vote or cause the voting of 
Common Interests, as defined in the LLC Agreement, 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 
Common Interests represent in the aggregate more than twenty percent 
(20%) of voting power of the then-issued and outstanding Common 
Interests (such threshold being hereinafter referred to as the ``Voting 
Limitation''); or (ii) enter into any voting agreement, plan, or 
arrangement that would result in Common Interests 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. Maple Merger 
Sub shall disregard any such votes purported to be cast in excess of 
the Voting Limitation.
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    \8\ ``Person'' means any individual, partnership, limited 
liability company, association, corporation, trust, or other entity. 
LLC Agreement Section 2.1 ``Definitions''.
    \9\ ``Related Person'' means (i) with respect to any Person, any 
executive officer (as defined under Rule 3b-7 under the Exchange 
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 Exchange Act); 
(ii) with respect to any Person constituting an ``Exchange Member'' 
(as such term is defined in the Constitution of the ISE LLC, a copy 
of which will be provided to any member of Maple Merger Sub upon 
written request therefore), 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 
Exchange 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 Common Interests; and the 
term ``beneficially owned'' and derivative or similar words shall 
have the meaning set forth in Regulation 13D-G under the Exchange 
Act. LLC Agreement Section 2.1 ``Definitions''.
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    The limitations imposed by Section 4.4 may be waived if both the 
Sole Member and ISE each consent to expressly permit such waiver of the 
Voting Limitation; and such waiver shall have been filed with, and 
approved by, the Commission under Section 19(b) of the Exchange Act and 
shall have become effective thereunder. In granting a waiver, both the 
Sole Member and ISE must have determined that: (i) The exercise of such 
voting rights or the entering of such agreement, plan or other 
arrangement, as applicable, by such Person, either alone or together 
with its Related Persons, will not impair the ability of Maple Merger 
Sub and ISE to carry out its functions and responsibilities, including, 
but not limited to, under the Exchange Act and is otherwise in the best 
interests of the Maple Merger Sub, its Members \10\ and ISE; (ii) such 
voting rights by such Person, either alone or together with its Related 
Persons, will not impair the ability of the Commission to enforce the 
Exchange 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 Exchange 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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    \10\ ``Member(s)'' means the Sole Member and all Additional 
Members admitted pursuant to Section 4.3(a). LLC Agreement Section 
2.1 ``Definitions''.
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    By specifically imposing a Voting Limitation on any Person that, 
either alone or together with its Related Persons, owns Common 
Interests that represent in the aggregate more than twenty percent 
(20%) of the voting power then entitled to be cast, ISE is ensuring 
that it is in all cases able to maintain proper control over the 
exercise of its regulatory function in relation to Maple Merger Sub, 
and is not subject to influence that may be adverse to its regulatory 
responsibilities from any Person that may control a substantial amount 
of the outstanding votes entitled to be cast on any matter. This 
provision and other related provisions relating to notice and rule 
filing requirements with respect to any Person that acquires certain 
Percentage Interest \11\ levels in Maple Merger Sub will serve to 
protect the integrity of ISE's self-regulatory responsibilities and the 
SEC's oversight responsibilities.
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    \11\ ``Percentage Interest'' shall mean, with respect to any 
Member, the ratio of the number of Common Interests held by such 
Member to the total of all of the issued and outstanding Common 
Interests, expressed as a percentage. LLC Agreement Section 2.1 
``Definitions''.
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Ownership Limitations of Members and Changes in Ownership

    Under Section 7.2(a) of the LLC Agreement, no Person (other than 
the Sole Member), either alone or together with its Related Persons, at 
any time, may own, directly or indirectly, of

[[Page 67912]]

record or beneficially, an aggregate amount of Common Interests which 
would result in more than twenty percent (20%) Percentage Interest 
level in Maple Merger Sub (the ``Concentration Limitation'').
    Section 7.2(b) states that the Concentration Limitation shall apply 
to each Person (other than the Sole Member) unless and until: (i) Such 
Person shall have delivered to the Sole Member and ISE a notice in 
writing, not less than 45 days (or such shorter period as the Sole 
Member and ISE shall expressly consent to) prior to the acquisition of 
any Common Interests that would cause such Person (either alone or 
together with its Related Persons) to exceed the Concentration 
Limitation, of such Person's intention to acquire such ownership; (ii) 
the Sole Member and ISE shall each have consented to expressly permit 
such ownership; and (iii) such waiver shall have been filed with, and 
approved by, the SEC under Section 19(b) of the Exchange Act and shall 
have become effective thereunder.
    Section 7.2(c) states that in exercising their discretion under 
Section 7.2(b), the Sole Member and ISE shall have determined that (i) 
such beneficial ownership of Common Interests by such Person, either 
alone or together with its Related Persons, will not impair the ability 
of the Maple Merger Sub and ISE to carry out its functions and 
responsibilities, including but not limited to, under the Exchange Act 
and is otherwise in the best interests of the Maple Merger Sub, its 
Members and ISE; (ii) such beneficial ownership of Common Interests by 
such Person, either alone or together with its Related Persons, will 
not impair the ability of the SEC to enforce the Exchange 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 Exchange Act); and (iv) neither such Person nor 
its Related Persons is an ``Exchange Member'' (as such term is defined 
in the Constitution of the ISE). In making the determinations referred 
to in the immediately preceding sentence, the Sole Member and ISE may 
impose such conditions and restrictions on such Person and its Related 
Persons owning any Common Interests entitled to vote on any matter as 
the Sole Member and ISE may each deem necessary, appropriate or 
desirable in furtherance of the objectives of the Exchange Act and the 
governance of Maple Merger Sub.
    Beginning after Commission approval of this proposed rule change, 
Maple Merger Sub shall provide the Commission with written notice ten 
(10) days prior to the closing date of any transaction that results in 
a Person's Percentage Interest, alone or together with any Related 
Persons, meeting or crossing the threshold level of 5% or the 
successive 5% Percentage Interest levels of 10% and 15%.
    ISE believes that these provisions provide the Commission with the 
authority to review and subject to public comment any substantial 
transfer of ownership that may have the potential to affect ISE's 
regulatory responsibilities regarding the Facility.
    ISE believes that these transfer restrictions, together with the 
Voting Limitation and Concentration Limitation, are adequately designed 
to prohibit any Person, either alone or with its Related Persons, from 
having the power to control a substantial number of outstanding votes 
entitled to be cast on any matter, and more importantly, that may be 
adverse to ISE's regulatory oversight responsibilities. Moreover, ISE 
believes that these provisions serve to protect the integrity of ISE's 
and the Commission's regulatory oversight responsibilities and allows 
the Commission to review the acquisition of substantial ownership or 
voting power by any Person.

Regulatory Jurisdiction Over Sole Member

    ISE will regulate Maple Merger Sub as an operator of a facility of 
the Exchange. ISE has responsibility under the Exchange Act for the 
Facility. The Sole Member of Maple Merger Sub, as owner and operator of 
the Facility, will also be subject to the SEC's jurisdiction. In this 
regard, Section 10.2 of the LLC Agreement provides that the Sole Member 
acknowledges that to the extent that they are related to the business 
of Maple Merger Sub or the Facility, the books, records, premises, 
officers, directors, agents and employees of the Sole Member shall be 
deemed to be the books, records, premises, officers, directors, agents 
and employees of ISE for purposes of and subject to oversight pursuant 
to the Exchange Act. Furthermore, the books, records, premises, 
officers, directors, agents and employees of Maple Merger Sub shall be 
deemed to be the books, records, premises, officers, directors, agents 
and employees of the ISE for purposes of and subject to oversight 
pursuant to the Exchange Act. In addition, the books and records of 
Maple Merger Sub will be kept within the U.S.\12\
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    \12\ LLC Agreement, Section 10.2(a).
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    Section 10.3(a) requires that confidential information pertaining 
to Maple Merger Sub, the Facility or 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 Maple Merger Sub 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 the Maple Merger Sub 
that have a reasonable need to know the contents thereof; (ii) be 
retained in confidence by the Maple Merger Sub and the officers, 
directors, employees and agents of the Maple Merger Sub; and (iii) not 
be used for any commercial purposes. Nothing in the LLC Agreement shall 
be interpreted as to limit or impede the rights of the Commission 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 officers, directors, employees or agents 
of Maple Merger Sub to disclose such confidential information to the 
Commission.\13\
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    \13\ LLC Agreement, Section 10.3.
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    ISE believes that these provisions would help to ensure the Sole 
Member and Maple Merger Sub's books and records by the Commission and, 
to the extent the Sole Member and Maple Merger Sub's books and records 
relate to the operation or administration of the Facility would help 
enable the Commission to carry out its regulatory responsibilities 
regarding Maple Merger Sub.
    Under Section 10.2(c) of the LLC Agreement, Maple Merger Sub, its 
Members, the Facility and officers, directors, agents, and employees of 
Maple Merger Sub 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, Maple Merger Sub or the Facility activities or Section 
10.2 of the LLC Agreement (except that such jurisdictions shall also 
include Delaware for any such matter relating to the organizational or 
internal affairs of Maple Merger Sub), and waives, and agrees 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

[[Page 67913]]

hereof may not be enforced in or by such courts or agency.
    Under Section 10.2(d) of the LLC Agreement, Maple Merger Sub, its 
Members, the Facility and officers, directors, agents, and employees of 
Maple Merger Sub and its Members agree to comply with the federal 
securities laws and the rules and regulations thereunder and shall 
cooperate with ISE pursuant to its regulatory authority and the 
provisions of the LLC Agreement and the Commission; and to engage in 
conduct that fosters and does not interfere with 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.
    Section 10.2(e) provides that Maple Merger Sub and each Member 
shall take such action as is necessary to ensure that Maple Merger 
Sub's and such Member's officers, directors and employees consent in 
writing to the application to them of the applicable provisions of 
Section 10.2(b), (c) and (d), as applicable, with respect to their 
Maple Merger Sub-related activities.
    The Exchange believes that these provisions will serve as notice to 
the Sole Member and Maple Merger Sub that they will be subject to the 
jurisdiction of the U.S. federal courts, the Commission and the ISE. It 
is imperative that regulatory cooperation is assured from the Sole 
Member, Maple Merger Sub and the Facility, regardless of their business 
location, country of domicile or other circumstance which the 
Commission may deem to have the potential to be adverse to the 
regulatory responsibilities and interests of the ISE, the Commission, 
or the U.S. federal courts. Accordingly, these provisions ensure that, 
should an occasion arise that requires regulatory cooperation or 
jurisdictional submission from the Sole Member or Maple Merger Sub; 
such party's cooperation will be forthcoming and uncontested.

Fair Representation of Trading Participants, or EAMs

    ISE believes that the Maple Merger Sub company structure assures 
the fair representation of ISE Members, its trading participants, in 
the selection of its directors and administration of its affairs, and 
satisfies Commission requirements in 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.
    In order to exercise trading privileges on ISE Stock, 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 ISE 
Stock. When an applicant is approved under ISE rules as an EAM, the 
member is issued an EAM Exchange Right. Under the ISE Constitution, 
holders of EAM Exchange Rights, or EAMs, have the right to elect two 
members (the ``EAM Directors'') of the Board of Directors of ISE (the 
``ISE Board''). Nominees for election to the ISE Board to serve as 
Industry Directors, including EAM 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 EAM 
Exchange Right. ISE Members also may nominate Industry Director 
candidates for election to the ISE Board by petition. Accordingly, 
since trading participants on ISE Stock must be EAMs, and since EAMs 
have the right to elect EAM Directors of the ISE Board, the ISE 
believes that ISE Stock trading participants are fairly represented on 
the ISE Board.

DE Operating Agreement

    As discussed above, Direct Edge will be the sole owner of Maple 
Merger Sub, and Maple Merger Sub will operate the Facility as a 
facility of ISE. Because the Facility will be a facility of ISE, ISE 
will have regulatory responsibility under the Exchange Act for the 
Facility. Because Direct Edge is the sole owner of the operator of the 
ISE's Facility, the DE Operating Agreement will include certain 
provisions that are designed to preserve the independence of the ISE's 
self-regulatory function with respect to the Facility, enable the 
Facility to operate in a manner that complies with the federal 
securities laws, including the objectives of Section 6(b) and 19(g) of 
the Exchange Act and facilitate the ability of the Exchange and the 
Commission to fulfill their regulatory and oversight obligations over 
the Facility under the Exchange Act.
    For example, Section 7.7 of the DE Operating Agreement which 
contains provisions requiring supermajority and majority votes of the 
Board of Directors of Direct Edge in connection with certain activities 
that could apply to the ISE as the entity with regulatory 
responsibility for the Facility, provides that nothing in Section 7.7 
will be applicable where the application of the provision would 
interfere with the effectuation of any decisions by the ISE Board 
relating to its regulatory functions (including disciplinary matters) 
or the structure of the market ISE regulates or would interfere with 
the ability of ISE to carry out its responsibilities under the Exchange 
Act as determined by the ISE Board, which functions or responsibilities 
include the ability of the ISE as a self-regulatory organization 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. In addition, Section 7.7(i) provides 
that a member of Direct Edge may transfer its ownership interest 
without the approval of the Direct Edge Board or any members of Direct 
Edge if such transfer is required to comply with the requirements of a 
governmental entity or any self-regulatory organization.
    The DE Operating Agreement also includes ownership and voting 
limitations. For example, Section 12.1 of the DE Operating Agreement 
relates to ownership and voting concentration limitations and provides 
that no Person, either alone or together with its Related Persons (as 
defined in the DE Operating Agreement): (i) May own, directly or 
indirectly, of record or beneficially, equity units of the Sole Member 
representing in the aggregate a percentage interest of more than 40%; 
(ii) may, if they are a holder of EAM Rights (as defined in the LLC 
Agreement), own, directly or indirectly, of record or beneficially, 
equity units of the Sole Member representing in the aggregate a 
percentage interest of more than 20%; and (iii) may, directly, 
indirectly or pursuant to any voting trust, agreement, plan or other 
arrangement, vote or cause the voting of equity units or give any 
consent or proxy with respect to equity units of the Sole Member 
representing a percentage interest of more than 20%, nor may they enter 
into any agreement, plan or other arrangement with any other Person, 
either alone or together with Related Persons, under circumstances that 
would result in the equity units that are subject to such agreement, 
plan or other arrangement not being voted on any matter or matters or 
any proxy relating thereto being withheld, where the effect of such 
agreement, plan or other

[[Page 67914]]

arrangement would be to enable any Person, either alone or together 
with their Related Persons, to vote, possess the right to vote or cause 
the voting of equity units of the Sole Member that would represent a 
percentage interest of more than 20%. The concentration limitations set 
forth in Section 12.1 of the DE Operating Agreement do not apply to ISE 
Holdings for so long as ISE is a wholly owned subsidiary of ISE 
Holdings. The limitations set forth in (i) and (iii) above may be 
waived by the board of managers of the Sole Member by amendment to the 
DE Operating Agreement adopted by the board of managers if, in 
connection with the adoption of such amendment, the board adopts a 
resolution stating that that the board has determined that the 
amendment: (i) Will not impair the ability of ISE to carry out its 
functions and responsibilities under the Exchange Act and the rules and 
regulations thereunder, (ii) is otherwise in the best interests of the 
Sole Member and its members and the Maple Merger Sub; and (iii) will 
not impair the ability of the SEC to enforce the Exchange Act and the 
rules and regulations thereunder. Such amendment shall not be effective 
unless it is filed with and approved by the SEC. In making the 
determinations referred to in Section 12.1(b), the board of managers of 
the Sole Member may impose on the Person in question and its Related 
Persons such conditions and restrictions as it may in its sole 
discretion deem necessary, appropriate or desirable in furtherance of 
the objectives of the Exchange Act, and the rules under the Exchange 
Act, and the governance of the Maple Merger Sub.
    The DE Operating Agreement contains a number of provisions designed 
to ensure that ISE has sufficient access to the books and records of 
the Sole Member. For example, Section 11.2 of the DE Operating 
Agreement relates to access to and preservation of confidentiality of 
the books and records and other confidential information and provides 
that the books, records, premises, officers, managers, agents and 
employees of the Sole Member shall be deemed to be the books, records, 
premises, officers, managers, agents and employees of ISE to the extent 
that they are related to the operation or administration of Maple 
Merger Sub for purposes of and subject to oversight pursuant to the 
Exchange Act. Furthermore, for as long as the Sole Member controls, 
directly or indirectly, Maple Merger Sub, the books and records, as 
well as any confidential information of the Maple Merger Sub relating 
to the self regulatory function of the ISE, shall be subject at all 
times to inspection and copying by the SEC and ISE provided that such 
books and records are related to the operation or administration of 
Maple Merger Sub. Section 11.2 of the DE Operating Agreement also 
provides for the confidentiality of all books and records of the Maple 
Merger Sub that reflect confidential information pertaining to the self 
regulatory function of ISE and that such books and records shall not be 
used for any non-regulatory purposes.
    The DE Operating Agreement contains a number of provisions 
specifically related to the SRO function. For example, Section 14.1 of 
the DE Operating Agreement provides that the managers, officers, 
employees and agents of the Sole Member shall not take any actions that 
would interfere with the effectuation of any decisions by ISE in its 
capacity as an SRO relating to its regulatory functions (including 
disciplinary matters) or which would interfere with the ability of ISE 
in its capacity as an SRO to carry out its responsibilities under the 
Exchange Act. Section 14.2 of the DE Operating Agreement provides that 
the Sole Member shall cooperate with the SEC and ISE, as applicable, 
pursuant to and to the extent of their respective regulatory authority. 
The officers, managers, employees and agents of the Sole Member 
additionally are deemed to agree to: (i) Comply with the U.S. federal 
securities laws and the rules and regulations thereunder and (ii) 
cooperate with the SEC and ISE in respect of the SEC's oversight 
responsibilities regarding Maple Merger Sub and ISE and the self-
regulatory functions and responsibilities of ISE. Section 14.3 of the 
DE Operating Agreement provides that the Sole Member and its officers, 
managers, employees and agents, by virtue of their acceptance of such 
position, shall be deemed to irrevocably submit to the jurisdiction of 
the United States federal courts, the SEC and ISE, as applicable, for 
the purposes of any suit, action or proceeding pursuant to the U.S. 
federal securities laws and the rules and regulations thereunder 
arising out of, or relating to, the activities of Maple Merger Sub, and 
by virtue of their acceptance of any such position, shall be deemed to 
waive, and agree not to assert by way of motion, as a defense or 
otherwise in any such suit, action or proceeding, any claims that it or 
they are not personally subject to the jurisdiction of the United 
States federal courts, the SEC or ISE that the suit, action or 
proceeding is an inconvenient forum or that the venue of the suit, 
action or proceeding is improper, or that the subject matter of that 
suit, action or proceeding may not be enforced in or by such courts or 
agency. The Sole Member and its officers, managers, employees and 
agents also agree that they will maintain an agent, in the United 
States, for the service of process of a claim arising out of, or 
relating to, the activities of Maple Merger Sub, and agree to notify 
the other parties hereto of the name and address of such agent.
    Finally, the DE Operating Agreement contains provisions designed to 
ensure that any changes to the DE Operating Agreement be first reviewed 
by ISE to determine whether such change must be filed with the SEC. For 
example, Section 15.2 of the DE Operating Agreement provides that 
before any amendment to any provision of the DE Operating Agreement 
shall be effective, such amendment shall be submitted to ISE and if ISE 
determines that such amendment must be filed with, or filed with and 
approved by, the SEC before the amendment may be effective under 
Section 19 of the Exchange Act and the rules promulgated under the 
Exchange Act or otherwise, then the proposed amendment to the DE 
Operating Agreement shall not be effective until filed with, or filed 
with and approved by, the SEC, as the case may be.

ISE Holding's Certificate of Incorporation and Bylaws

    The Exchange proposes to amend certain provisions of the 
Certificate of Incorporation and Bylaws (together the ``Corporate 
Documents'') of ISE Holdings in connection with the contemplated 
ownership and operation of two (2) national securities exchanges by 
Direct Edge. As a result of ISE Holdings owning a 31.54% equity 
interest in Direct Edge and possessing certain contractual rights and 
obligations with respect to Direct Edge, ISE Holdings may, in the 
future, control, indirectly subsidiary exchanges of Direct Edge. 
Accordingly, the Exchange proposes to broaden certain references that 
are currently limited to ISE (the sole registered national securities 
exchange controlled by ISE Holdings) to cover these two contemplated 
Direct Edge subsidiary exchanges. Thus, the Exchange proposes to 
replace certain references to ISE with each ``Controlled National 
Securities Exchange.'' These references appear in the ownership and 
voting limitations sections of the Corporate Documents, as well as 
other miscellaneous sections, including, but not limited to, the 
confidentiality section, the books and records section,

[[Page 67915]]

the compliance with laws section and the amendments section.

ISE Rules

    The Exchange proposes to amend the language in Rule 312 (Limitation 
on Affiliation between the Exchange and Members) to reflect that this 
provision now covers Maple Merger Sub, as an operator of the Facility.
    Subsequent to the effectuation of the transactions discussed above, 
ISE Holdings will have a 31.54% equity interest in Direct Edge, which 
wholly owns and operates Direct Edge ECN LLC (``DE ECN'') which 
displays its quotes on ISE. DE ECN currently, and will continue to 
after the transactions are effected, routes orders into ISE Stock. Due 
to the combination of ISE Holdings owning a 31.54% equity interest in 
DE ECN's parent company, Direct Edge, and DE ECN routing orders into 
ISE Stock, DE ECN will be deemed to be a facility of ISE, as that term 
is defined in Section 3(a)(2) of the Exchange Act.
    Further, upon closing of the transaction, ISE and Maple Merger Sub 
will be affiliated with DE ECN, which is a member of ISE and a wholly 
owned subsidiary of Direct Edge.
    Recognizing that the Commission has previously expressed concern 
regarding (1) the potential for conflicts of interest in instances 
where an exchange is affiliated with one of its members, and (2) the 
potential for informational advantages that could place an affiliated 
member of an exchange at a competitive advantage vis-[agrave]-vis the 
other non-affiliated members, ISE proposes to amend Rule 312 to permit 
the proposed affiliation subject to several conditions and limitations.
    Accordingly, the Exchange is proposing to adopt subsection (b) to 
Rule 312 to require that for so long as the Exchange is affiliated with 
DE ECN or DE ECN is a facility of the Exchange: \14\ (1) Financial 
Industry Regulatory Authority (``FINRA''), a self-regulatory 
organization unaffiliated with the Exchange or any of its affiliates, 
will carry out oversight and enforcement responsibilities as the 
designated examining authority designated by the Commission pursuant to 
Rule 17d-1 of the Exchange Act with the responsibility for examining DE 
ECN for compliance with applicable financial responsibility rules; (2) 
the Exchange shall contract with a non-affiliated self-regulatory 
organization to regulate and oversee the activities of DE ECN, pursuant 
to Rule 17d-2 under the Exchange Act; (3) the Exchange shall provide 
said non-affiliated self-regulatory organization with information 
regarding all exception reports, alerts, complaints, trading errors, 
cancellations, investigations, and enforcement matters (collectively, 
``Exceptions'') in which DE ECN is identified as a participant that has 
potentially violated Exchange or SEC rules, in an easily accessible 
manner, and said non-affiliated self-regulatory organization shall 
provide a report to the Exchange quantifying Exceptions on not less 
than a quarterly basis; (4) the Exchange, on behalf of Direct Edge, 
shall establish and maintain procedures and internal controls 
reasonably designed to ensure that DE ECN does not develop or implement 
changes to its systems on the basis of nonpublic information obtained 
as a result of its affiliation with the Exchange until such information 
is available generally to similarly situated members of the Exchange in 
connection with the provision of inbound order routing to the Exchange; 
(5) in the event that DE ECN acts as an introducing broker for 
subscribers of DE ECN who are not members of the Exchange, then DE 
ECN's role as introducing broker is limited to its role as introducing 
broker to DE ECN; (6) DE ECN will not engage in any business other than 
operating as an ECN and other than acting as an introducing broker as 
described above; (7) the affiliation of DE ECN is subject to the 
conditions set forth above and is granted on a temporary basis, for not 
longer than one year from the date of Commission approval of this 
filing.
---------------------------------------------------------------------------

    \14\ E-mail from Joseph W. Ferrarro III, Associated General 
Counsel, Exchange, to Heidi Pilpel, Attorney, Division of Trading 
and Markets, Commission, dated November 7, 2008.
---------------------------------------------------------------------------

    The Exchange proposes to adopt subsection (c) of ISE Rule 2108 
(Order Routing and Route Out Facility) to expand the scope of the rule 
to cover DE ECN. Specifically, proposed Rule 2108(c), requires that the 
books, records, premises, officers, directors, agents, and employees of 
the DE ECN, as a facility of the Exchange, shall be deemed to be the 
books, records, premises, officers, directors, agents, and employees of 
the Exchange for purposes of and subject to oversight pursuant to the 
Exchange Act. The books and records of the DE ECN, as a facility of the 
Exchange, shall be subject at all times to inspection and copying by 
the Exchange and the Commission.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Exchange Act,\15\ in general, 
and with Sections 6(b)(1) and (b)(5) of the Exchange Act,\16\ in 
particular, in that the proposal enables the Exchange and the Facility 
to be so organized as to have the capacity to be able to carry out the 
purposes of the Exchange Act and to comply with and enforce compliance 
by members and persons associated with members with provisions of the 
Exchange Act, the rules and regulations thereunder, and SRO rules, and 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78f.
    \16\ 15 U.S.C. 78f(b)(1), (5).
---------------------------------------------------------------------------

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

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

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. by order approve such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act.

[[Page 67916]]

Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (www.sec.gov/
rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-ISE-2008-85 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2008-85. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ISE-2008-85 and should be 
submitted on or before December 8, 2008.
---------------------------------------------------------------------------

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

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-27157 Filed 11-14-08; 8:45 am]

BILLING CODE 8011-01-P
