
[Federal Register: March 18, 2010 (Volume 75, Number 52)]
[Notices]               
[Page 13151-13168]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18mr10-106]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61698; File Nos. 10-194 and 10-196 \1\]

 
In the Matter of the Applications of EDGX Exchange, Inc., and 
EDGA Exchange, Inc. for Registration as National Securities Exchanges; 
Findings, Opinion, and Order of the Commission

March 12, 2010.

I. Introduction

    On May 7, 2009, EDGX Exchange, Inc. (``EDGX'') and EDGA Exchange, 
Inc. (``EDGA'') (each, an ``Exchange,'' and, together, the 
``Exchanges'') each submitted to the Securities and Exchange Commission 
(``Commission'') a Form 1 application (each, a ``Form 1 Application,'' 
and, together, the ``Form 1 Applications'') under the Securities 
Exchange Act of 1934 (``Act'') seeking registration as a national 
securities exchange pursuant to Section 6 of the Act.\2\ On July 30, 
2009, each Exchange submitted Amendment No. 1 to its Form 1 
Application. Notice of the Form 1 Applications, each as modified by 
Amendment No. 1, was published for comment in the Federal Register on 
September 17, 2009.\3\ The Commission received two comment letters 
regarding the Form 1 Applications, as modified by Amendment No. 1.\4\ 
On February 11, 2010, each Exchange submitted Amendment No. 2 to its 
Form 1 Application.\5\
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    \1\ In the Notice (as defined below), EDGA Exchange, Inc. was 
assigned File No. 10-194 and EDGX Exchange, Inc. was assigned File 
No. 10-193. The EDGX Exchange, Inc. file number was subsequently 
redesignated as File No. 10-196. The EDGA Exchange, Inc. file number 
remains unchanged.
    \2\ 15 U.S.C. 78f. On September 11, 2009, the Commission issued 
an order granting EDGX and EDGA exemptive relief, subject to certain 
conditions, in connection with filing of their Form 1 applications. 
See Securities Exchange Act Release No. 60650 (September 11, 2009), 
74 FR 47828.
    \3\ See Securities Exchange Act Release No. 60651 (September 11, 
2009), 74 FR 47827 (``Notice'').
    \4\ See letters to Elizabeth M. Murphy, Secretary, Commission, 
from Joan C. Conley, Senior Vice President and Corporate Secretary, 
Nasdaq OMX Group, Inc., dated November 11, 2009 (``Nasdaq Letter'') 
and from Daniel Mathisson, Managing Director, and Vaishali Javeri, 
Director and Counsel, Credit Suisse Securities (USA) LLC, dated 
December 4, 2009 (``Credit Suisse Letter''). Direct Edge Holdings 
LLC responded to the Nasdaq Letter. See letter from William O'Brien, 
Chief Executive Officer, Direct Edge Holdings LLC, to Elizabeth M. 
Murphy, Secretary, Commission, dated November 13, 2009 (``DE 
Holdings Response'').
    \5\ In Amendment No. 2, each Exchange modified several Exhibits 
in its Form 1 Application. Specifically, each Exchange's Amendment 
No. 2:
    (a) Modifies Exhibit B to: (A) Specify the dates when the non-
U.S. Upstream Owners adopted the Supplemental Resolutions (as 
defined below); and (B) revise the proposed rules of each Exchange 
to: (i) Indicate in Rules 1.5(p), 11.9(a), 14.2(g), 14.3(d) that the 
Post-Closing Session ends at 8 p.m.; (ii) add Rule 2.3(b)-(f) 
(Member Eligibility & Registration) to require registration of 
Authorized Traders and Principals in the appropriate category of 
registration as determined by the Exchange, and make conforming 
amendments to the interpretations and policies for Rule 2.5; (iii) 
reflect Direct Edge ECN LLC's assumed name of DE Route in Rules 2.11 
and 2.12, regarding its roles as an inbound and outbound router; 
(iv) add Rule 3.21 (Customer Disclosures) to require Exchange 
members that execute trades on behalf of customers during either 
Pre-Opening or Post-Closing Sessions offered by the Exchange to 
provide customers with notice regarding the risks of trading during 
extended hours, consistent with the rules of other self-regulatory 
organizations; (v) amend Rule 11.5(a) to clarify that market orders 
are not eligible for the Pre-Opening and Post-Closing Sessions; (vi) 
add new Interpretation and Policy .01 to Rule 14.1 to explain the 
circumstances under which the Exchange will halt trading during the 
Pre-Opening and Post-Closing Sessions; (vii) amend Rule 11.11 to 
enable DTC/NSCC authorized clearing brokers to clear trades on the 
Exchange, even though they are not Exchange members; (viii) add 
section (d) to Rule 11.12 (Limitation of Liability) to establish a 
procedure to compensate Exchange members in relation to Exchange 
systems failures or a negligent act or omission of an Exchange 
employee, consistent with industry practice; (ix) revise the 
Exchange's Clearly Erroneous Trading rules (Rule 11.13) to comport 
with those filed by other registered national securities exchanges; 
and (x) add Rule 12.13 (Trading Ahead of Research Reports).
    (b) Revises Exhibit C to clarify, in the description of Direct 
Edge ECN LLC, the cessation of its capacity as an electronic 
communications network following the Exchanges' commencement of 
operations as national securities exchanges.
    (c) Modifies Exhibit E to: (A) Provide a clarification with 
respect to the Exchange's membership in various order and trade 
reporting organizations; (B) refer to the planned phase-in of 
securities to be traded on the Exchange; and (C) update a reference 
to the provision of technical systems specifications and the 
addition of a copy of the Direct Edge Next Gen FIX Specifications 
(Version 1.0) (Users Manual).
    (d) Revises Exhibit F to amend the Clearing Letter of Guarantee, 
User Agreement, Routing Agreement, and Exchange Data Vendor 
Agreement to reflect comments by potential Exchange members and 
industry practice.
    (e) Modifies Exhibit I to state that, prior to the launch of the 
Exchange, DE Holdings will make a capital contribution into the 
Exchange's capital account, and to represent that DE Holdings will 
enter into an explicit agreement with the Exchange to provide 
adequate funding for its operations.
    (f) Amends Exhibit J to state that all Directors, including 
Owner Directors and the Chief Executive Officer, will serve 
staggered three-year terms, subject to the Exchange's Bylaws.
    (g) Revises to Exhibit L to describe the Exchange's execution of 
a regulatory services agreement with the ISE LLC and the Financial 
Industry Regulatory Authority (``FINRA'') to conduct various 
regulatory services on behalf of the Exchange.
    The changes proposed in Amendment No. 2 are either not material, 
consistent with the existing rules of other registered national 
securities exchanges, or responsive to the concerns of the 
Commission.
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II. Statutory Standards

    Under sections 6(b) and 19(a) of the Act,\6\ the Commission shall 
by order grant a registration as a national securities exchange if it 
finds, among

[[Page 13152]]

other things, that the exchange is so organized and has the capacity to 
carry out the purposes of the Act and can comply, and can enforce 
compliance by, its members and persons associated with its members with 
the provisions of the Act, the rules and regulations thereunder, and 
the rules of the exchange.
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    \6\ 15 U.S.C. 78f(b) and 78s(a).
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    As discussed in greater detail below, the Commission finds that the 
Exchanges' Form 1 Applications for exchange registration meet the 
requirements of the Act and the rules and regulations thereunder. 
Further, the Commission finds that the proposed rules of the Exchanges 
are consistent with Section 6 of the Act in that, among other things, 
they are designed to: (1) Assure fair representation of an exchange's 
members in the selection of its directors and administration of its 
affairs and provide that, among other things, one or more directors 
shall be representative of investors and not be associated with the 
exchange, or with a broker or dealer; (2) 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 mechanisms of a free and open market and a national market 
system; and (3) protect investors and the public interest. The 
Commission also believes that the rules of the Exchanges are consistent 
with section 11A of the Act.\7\ Finally, the Commission finds that the 
proposed rules of the Exchanges do not impose any burden on competition 
not necessary or appropriate in furtherance of the purposes of the 
Act.\8\
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    \7\ 15 U.S.C. 78k-1.
    \8\ 15 U.S.C. 78f(b)(8).
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III. Discussion

A. Corporate Structure

    EDGX and EDGA each have applied to the Commission to register as a 
national securities exchange. EDGX and EDGA currently operate as 
separate trading platforms of Direct Edge ECN LLC (``DECN''), an 
electronic communications network (``ECN'') that is a registered 
broker-dealer. Direct Edge Holdings LLC (``DE Holdings''), a Delaware 
limited liability company, wholly owns EDGX, EDGA, and DECN. Following 
EDGX's and EDGA's commencement of operations as national securities 
exchanges, DECN will cease operations as an ECN and DECN (doing 
business as DE Route) will begin to operate as a facility of the 
Exchanges that provides outbound order routing for the Exchanges. DECN 
also will provide inbound routing services to EDGX from EDGA, and to 
EDGA from EDGX.\9\
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    \9\ See EDGX and EDGA Rules 2.11 and 2.12. See also Section 
III.G, infra.
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    As a limited liability company, DE Holdings is overseen by a Board 
of Managers (``DE Holdings Board'') and ownership in DE Holdings is 
represented by limited liability membership interests. The Fourth 
Amended and Restated Limited Liability Company Operating Agreement of 
DE Holdings (``DE Holdings Operating Agreement'') refers to the holders 
of such interests as ``Members.'' \10\ The Members of DE Holdings and 
their respective ownership interests are: International Securities 
Exchange Holdings, Inc. (``ISE Holdings'') (31.54%); \11\ Citadel 
Derivatives Group LLC (19.9%); The Goldman Sachs Group, Inc. (19.9%); 
Knight/Trimark, Inc. (19.9%); and the ISE Stock Exchange Consortium 
Members (collectively 8.76%).\12\
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    \10\ Specifically, the DE Holdings Operating Agreement defines a 
``Member'' to include any Person (i) executing the DE Holdings 
Operating Agreement as a Member of DE Holdings as of April 13, 2009; 
or (ii) subsequently admitted as an additional or substitute Member 
of DE Holdings. References to ``Members,'' as defined in the DE 
Holdings Operating Agreement and used in connection with DE 
Holdings, should be distinguished from references to ``members,'' 
the latter refers to ``members'' as defined in section 3(a)(3) of 
the Exchange Act, 15 U.S.C. 78c(a)(3).
    \11\ See Securities Exchange Act Release No. 59135 (December 22, 
2008), 73 FR 79954 (December 30, 2008) (File No. SR-ISE-2008-85) 
(order relating to ISE Holdings' purchase of an ownership interest 
in DE Holdings) (``DE Holdings Order'').
    \12\ The ISE Stock Exchange Consortium members are: Bear Rex, 
Inc.; DB US Financial Markets Holding Corporation; Canopy 
Acquisition Corporation; IB Exchange Corp.; LabMorgan Corporation; 
Merrill Lynch L.P. Holdings, Inc.; Nomura Securities International, 
Inc.; Sun Partners LLC; and VCM Capital Markets, LLC.
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1. Ownership of ISE Holdings
    ISE Holdings, the owner of a 31.54% equity interest in DE Holdings, 
is also the parent company of International Securities Exchange, LLC 
(``ISE LLC''), a national securities exchange registered under section 
6 of the Exchange Act. Following a corporate transaction in 2007 (the 
``2007 Transaction''),\13\ ISE Holdings became a wholly-owned 
subsidiary of U.S. Exchange Holdings, Inc. (``U.S. Exchange 
Holdings''), which is wholly owned by Eurex Frankfurt AG (``Eurex 
Frankfurt,'' and, with Deutsche B[ouml]rse AG, the ``German Upstream 
Owners''). Eurex Frankfurt is a wholly-owned subsidiary of Eurex 
Z[uuml]rich AG (``Eurex Z[uuml]rich''), which, in turn, is jointly 
owned by Deutsche B[ouml]rse AG and SIX Swiss Exchange AG (``SWX''), a 
wholly-owned subsidiary of SIX Group AG (SIX Group AG, SWX, and Eurex 
Z[uuml]rich are referred to collectively as the ``Swiss Upstream 
Owners,'' and the Swiss Upstream Owners and the German Upstream Owners 
are referred to collectively as the ``non-U.S. Upstream Owners''). As a 
result of ISE Holdings' purchase of an equity interest in DE 
Holdings,\14\ the non-U.S. Upstream Owners, U.S. Exchange Holdings 
(together with the non-U.S. Upstream Owners, the ``Upstream Owners''), 
and ISE Holdings acquired indirect ownership and voting interests in 
EDGX and EDGA.
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    \13\ See Securities Exchange Act Release No. 56955 (December 13, 
2007), 72 FR 71979 (December 19, 2007) (File No. SR-ISE-2007-101) 
(order relating to the 2007 Transaction) (``Eurex Order'').
    \14\ See DE Holdings Order, supra note 11.
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2. Amendments to the Corporate Resolutions of the Non-U.S. Upstream 
Owners and Corporate Governing Documents of ISE Holdings and U.S. 
Exchange Holdings
    In connection with the 2007 Transaction, each of the non-U.S. 
Upstream Owners adopted corporate resolutions (collectively, the ``2007 
Resolutions'') designed to maintain the independence of the regulatory 
functions of ISE LLC.\15\ In addition, the Amended and Restated 
Certificate of Incorporation of U.S. Exchange Holdings (``U.S. Exchange 
Holdings Certificate'') and the Amended and Restated Bylaws of U.S. 
Exchange Holdings (``U.S. Exchange Holdings Bylaws''), as well as the 
Certificate of Incorporation of ISE Holdings (``ISE Holdings 
Certificate'') and the Amended and Restated Bylaws of ISE Holdings 
(``ISE Holdings Bylaws'') included provisions designed to maintain the 
independence of the regulatory functions of ISE LLC.\16\
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    \15\ See Eurex Order, supra note 13. In 2007, the non-U.S. 
Upstream Owners were Eurex Frankfurt, Deutsche B[ouml]rse AG, Eurex 
Z[uuml]rich, SWX, SWX Group, and Verein SWX Swiss Exchange.
    \16\ In this regard, through the 2007 Resolutions and the 
corporate governing documents of ISE Holdings and U.S. Exchange 
Holdings, the Upstream Owners and ISE Holdings committed, among 
other things: That they, and each of their directors, officers, and 
employees, would comply with the federal securities laws and with 
the Commission and ISE LLC; that their directors, officers, and 
employees would give due regard to preserving the independence of 
the self-regulatory functions of ISE LLC (or in the case of the non-
U.S. Upstream Owners, that they would take reasonable steps 
necessary to cause their officers and employees involved in the 
activities of ISE LLC to give due regard to preserving the 
independence of the self-regulatory functions of ISE LLC); that 
their books and records related to the activities of ISE LLC would 
be subject at all times to inspection and copying by the Commission 
and ISE LLC, and would be deemed to be the books and records of ISE 
LLC for purposes of and subject to oversight pursuant to the U.S. 
securities laws; and, that, for so long as they controlled ISE LLC, 
any change to their governing documents would be submitted to the 
board of directors of ISE LLC and, if ISE LLC determined that such 
change was required to be filed with the Commission, such change 
would not be effective until filed with, or filed with and approved 
by the Commission, in accordance with Section 19(b) of the Act.

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[[Page 13153]]

    The 2007 Resolutions and the corporate governing documents of U.S. 
Exchange Holdings and ISE Holdings related to ISE LLC and, by their 
terms, did not apply to additional national securities exchanges, such 
as EDGX and EDGA, that the Upstream Owners and ISE Holdings might 
control, directly or indirectly, as a result of a subsequent 
transaction. To maintain the independence of the regulatory function of 
EDGX and EDGA, each of the non-U.S. Upstream Owners has adopted 
supplemental resolutions (the ``Supplemental Resolutions'') that apply 
the 2007 Resolutions to EDGX and EDGA in the same manner and to the 
same extent as the 2007 Resolutions apply to ISE LLC.\17\ Accordingly, 
the Supplemental Resolutions, which are included in the Form 1 
Applications, extend to EDGX and EDGA the commitments that the non-U.S. 
Upstream Owners made in the 2007 Resolutions with respect to ISE 
LLC.\18\
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    \17\ The enumeration in each of the 2007 Resolutions is 
identical. The enumeration in each of the Supplemental Resolutions 
also is identical. Therefore, unless otherwise specified, reference 
herein to certain enumerated resolutions applies to all of the 2007 
Resolutions or to all of the Supplemental Resolutions, as 
applicable.
    \18\ Id.
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    In addition, the Commission has approved changes to the U.S. 
Exchange Holdings Certificate and U.S. Exchange Holdings Bylaws, and to 
the ISE Holdings Certificate and ISE Holdings Bylaws, that apply these 
governing documents to any national securities exchange, or facility 
thereof, that U.S. Exchange Holdings or ISE Holdings, as applicable, 
controls, directly or indirectly, including EDGX and EDGA.\19\
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    \19\ See Securities Exchange Act Release No. 61498 (February 4, 
2010), 75 FR 7229 (February 18, 2009) (order approving File No. SR-
ISE-2009-90) (revising the U.S. Exchange Holdings Certificate, the 
U.S. Exchange Holdings Bylaws, and the Trust Agreement among ISE 
Holdings, U.S. Exchange Holdings, and trustees) (``U.S. Exchange 
Holdings Order''); and DE Holdings Order, supra note 11 (revising 
the ISE Holdings Certificate and ISE Holdings Bylaws).
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    The Commission believes that the Supplemental Resolutions, the U.S. 
Exchange Holdings Certificate and U.S. Exchange Holdings Bylaws, as 
amended, and the ISE Holdings Certificate and ISE Holdings Bylaws, as 
amended, will assist EDGX and EDGA in fulfilling their self-regulatory 
obligations and in administering and complying with the requirements of 
the Act, as discussed in greater detail below.\20\
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    \20\ See Sections III.B. and III.C., infra.
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3. Swiss Resolutions and the 2009 Procedure
    As discussed more fully in the Eurex Order,\21\ Swiss law designed 
to protect Swiss sovereignty raised concerns about the ability of the 
Swiss Upstream Owners to provide the Commission with direct access to 
information, including books and records, related to the activities of 
ISE LLC.\22\ To avoid conflict with Swiss law and to facilitate the 
2007 Transaction, the Commission and the Swiss Federal Banking 
Commission (``SFBC'') developed a procedure (the ``2007 Procedure'') 
under which the SFBC undertook to serve as a conduit for unfiltered 
delivery of books and records of the Swiss Upstream Owners related to 
the activities of ISE LLC.\23\ Accordingly, each 2007 Resolution 
adopted by the Swiss Upstream Owners (the ``2007 Swiss Resolutions'') 
provided that, where necessitated by Swiss law, a Swiss Upstream Owner 
would provide information related to the activities of ISE LLC, 
including the books and records of such owner related to the activities 
of ISE LLC, to the Commission promptly through the SFBC.\24\ Moreover, 
oral exchanges between each Swiss Upstream Owner and the Commission 
related to the activities of ISE LLC would include the participation of 
SFBC.\25\
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    \21\ See note 13, supra.
    \22\ In particular, Art. 271 of the Swiss penal code, 
``Prohibited acts for a foreign state,'' states, in part: ``Whoever, 
without being authorized, performs acts for a foreign state on Swiss 
territory that are reserved to an authority or an official, whoever 
performs such acts for a foreign party or another foreign 
organization, whoever aids and abets such acts, shall be punished 
with imprisonment and, in serious cases, sentenced to the 
penitentiary. See Eurex Order, supra note 13, at note 58 and 
accompanying text.
    \23\ See Eurex Order, supra note 13, at note 59 and accompanying 
text. On January 1, 2009, the SFBC, the Swiss Federal Office of 
Private Insurance, and the Swiss Anti-Money Laundering Control 
Authority merged to form the Swiss Financial Markets Authority 
(``FINMA''), a new consolidated financial regulator for Switzerland. 
The Eurex Order describes the 2007 Procedure in greater detail. See 
Eurex Order, supra note 13, at notes 57-60 and accompanying text.
    \24\ See Eurex Order, supra note 13, at note 57 and accompanying 
text. The 2007 Procedure was designed to ensure that the delivery of 
books and records to the Commission was not delayed. Therefore, 
under the 2007 Procedure, the Commission's requests for books and 
records would be sent directly to the Swiss Upstream Owners and 
would not be subject to filtering or substantive review by the SFBC. 
In addition, the SFBC agreed to pass to the Commission without delay 
and without substantive review materials provided by the Swiss 
Upstream Owners that were responsive to the Commission's requests 
for information. See Eurex Order, supra note 13, at note 60.
    \25\ See Eurex Order, supra note 13, at text accompanying note 
60.
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    By its terms, the 2007 Procedure applied solely to information of 
the Swiss Upstream Owners related to the activities of ISE LLC, 
including books and records related to the activities of ISE LLC. To 
accommodate the Swiss Upstream Owners' indirect ownership and voting 
interest in EDGX and EDGA, the Commission and FINMA (the successor to 
the SFBC) have developed a procedure (the ``2009 Procedure'') that is 
substantially similar to the 2007 Procedure, except that it will apply 
to any U.S. securities exchange, or facility thereof, that ISE Holdings 
controls, directly or indirectly, including EDGX and EDGA. The 2009 
Procedure, which will become effective upon the Commission's approval 
of the Exchanges' Form 1 applications, will supersede the 2007 
Procedure.
    Under the 2009 Procedure, FINMA would serve as a conduit for the 
delivery of information of the Swiss Upstream Owners related to the 
activities of any registered national securities exchange controlled, 
directly or indirectly, by ISE Holdings, including EDGX and EDGA. The 
Commission's usual practice is to have direct access to books and 
records related to the activities of a U.S. securities exchange. 
However, subject to the condition that the Swiss Upstream Owners will 
promptly deliver such information to the Commission,\26\ coupled with 
the fact that under Bylaws of the Exchanges, all trading records of the 
Exchanges must be maintained in the United States,\27\ the Commission 
believes that the provisions of the 2007 Resolutions adopted by the 
Swiss Upstream Owners, as supplemented by the Supplemental Resolutions 
adopted by the Swiss Upstream Owners, related to the Commission's 
access to the books and records of the Swiss Upstream Owners through 
FINMA, should not result in a level of access materially different from 
that agreed to by other entities that control U.S. securities 
exchanges.\28\
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    \26\ See 2007 Swiss Resolutions 1, 3(b), 6, 7(a), 7(e), 8(a), 
8(e), and 9, and Swiss Supplemental Resolution 2.
    \27\ See Bylaws of EDGX (``EDGX Bylaws'') and Bylaws of EDGA 
(``EDGA Bylaws'' and, together with the EDGX Bylaws, the ``Exchange 
Bylaws''), Article XI, Section 4. The enumeration in the Exchange 
Bylaws is identical.
    \28\ See also Eurex Order, supra note 13, at note 66 and 
accompanying text. The Commission notes that if a non-U.S. Upstream 
Owner fails to make its books and record available to the 
Commission, the Commission could bring an action under, among other 
provisions, Section 17 of the Act, 15 U.S.C. 78q, and Rule 17a-1(b) 
thereunder, 17 CFR 240.17a-1(b), against EDGX or EDGA pursuant to 
Section 19(h) of the Act, 15 U.S.C. 78s(h).

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[[Page 13154]]

4. Trust Agreement
    In connection with the 2007 Transaction, ISE implemented a Delaware 
statutory Trust (the ``Trust'') pursuant to a Trust Agreement (``2007 
Trust Agreement'') among ISE Holdings, U.S. Exchange Holdings, trustees 
(the ``Trustees''), and a Delaware trustee.\29\ By its terms, the 2007 
Trust Agreement related solely to ISE Holdings' ownership of ISE LLC, 
but not to any other national securities exchange that ISE Holdings 
might control, directly or indirectly. The Commission has approved a 
proposal \30\ that revises the 2007 Trust Agreement to replace 
references to ISE LLC with references to any national securities 
exchange or facility thereof controlled, directly or indirectly, by ISE 
Holdings, including EDGX and EDGA (the 2007 Trust Agreement, as 
amended, is referred to herein as the ``2009 Trust Agreement'').\31\ 
Except for the expanded scope of the 2007 Trust Agreement, the 2009 
Trust Agreement is substantially similar to the 2007 Trust Agreement.
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    \29\ See Eurex Order, supra note 13, at Section II.C, for a more 
detailed description of the Trust.
    \30\ See U.S. Exchange Holdings Order, supra note 19.
    \31\ The term of the Trust is perpetual, provided that ISE 
Holdings directly or indirectly controls a national securities 
exchange or a facility thereof, including EDGX or EDGA. See 2009 
Trust Agreement, Article II, Section 2.6.
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    The Trust serves two general purposes. First, for as long as ISE 
Holdings controls, directly or indirectly, a national securities 
exchange, including EDGA or EDGA, the Trust would hold capital stock of 
ISE Holdings in the event that a person obtains an ownership or voting 
interest in ISE Holdings in excess of the ownership and voting limits 
established in the ISE Holdings Certificate of Incorporation.\32\ 
Second, the Trust would hold capital stock of ISE Holdings in the event 
of a Material Compliance Event.\33\ Under the 2009 Trust Agreement, a 
``Material Compliance Event'' is any state of facts, development, 
event, circumstance, condition, occurrence, or effect that results in 
the failure of any of the non-U.S. Upstream Owners to adhere to its 
respective commitments under the 2007 Resolutions, as supplemented by 
the Supplemental Resolutions, in any material respect.\34\ The Trust 
holds a call option over the capital stock of ISE Holdings that may be 
exercised if a Material Compliance Event has occurred and continues to 
be in effect.\35\
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    \32\ See Eurex Order, supra note 13, at Section II.C. If a 
person exceeds an ownership or voting limit, then a majority of the 
capital stock of ISE Holdings that has the right by its terms to 
vote in the election of the ISE Holdings Board or on other matters 
(other than matters affecting the rights, preferences, or privileges 
of the capital stock) would automatically be transferred to the 
Trust. See ISE Holdings Certificate, Article FOURTH, Section III(c). 
See also Eurex Order, supra note 13, at note 37 and accompanying 
text.
    \33\ See Eurex Order, supra note 13, at Section II.C.
    \34\ See 2009 Trust Agreement, Article I, Section 1.1.
    \35\ See 2009 Trust Agreement, Article IV, Section 4.2. More 
specifically, if a Material Compliance Event occurs and continues to 
be in effect, the Trustees must take certain actions, including, 
after a Cure Period, the exercise of a Call Option for a transfer of 
the majority of capital stock of ISE Holdings that has the right by 
its terms to vote in the election of the ISE Holdings Board or on 
other matters. See 2009 Trust Agreement, Article IV, Section 4.2. 
See also Eurex Order, supra note 13, at note 62 and accompanying 
text.
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    For the reasons discussed in the Eurex Order in connection with the 
2007 Trust Agreement,\36\ the Commission finds that the 2009 Trust 
Agreement is designed to enable EDGX and EDGA to operate in a manner 
that complies with the federal securities laws, including the 
objectives and requirements of sections 6(b) and 19(g) of the Act,\37\ 
and to facilitate the ability of EDGX and EDGA and the Commission to 
fulfill their regulatory and oversight obligations under the Act.\38\ 
In addition, the Commission notes that the 2009 Trust Agreement, like 
the 2007 Trust Agreement, is consistent with the provisions that other 
entities that directly or indirectly own or control a self-regulatory 
organization have instituted and that have been approved by the 
Commission.\39\
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    \36\ See Eurex Order, supra note 13, at Section II.C. See also 
U.S. Exchange Holdings Order, supra note 19.
    \37\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g).
    \38\ See 2009 Trust Agreement, Articles V, VI, and VIII.
    \39\ See, e.g., Securities Exchange Act Release Nos. 55293 
(February 14, 2007), 72 FR 8033 (February 22, 2007) (File No. SR-
NYSE-2006-120) (order relating to the combination between NYSE 
Group, Inc. and Euronext N.V.); and 53382 (February 27, 2006), 71 FR 
11251 (March 6, 2006) (File No. SR-NYSE-2005-77) (order relating to 
the business combination of the New York Stock Exchange, Inc., and 
Archipelago Holdings, Inc.). See also Eurex Order, supra note 13, at 
note 111.
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B. Self-Regulatory Function of the Exchanges; Relationship Between DE 
Holdings, the Upstream Owners, ISE Holdings, and the Exchanges; 
Jurisdiction Over DE Holdings, ISE Holdings, and the Upstream Owners

1. DE Holdings
    Although DE Holdings itself will not itself carry out regulatory 
functions, its activities with respect to the operation of EDGX and 
EDGA must be consistent with, and not interfere with, the self-
regulatory obligations of EDGX and EDGA. The DE Holdings corporate 
documents include certain provisions that are designed to maintain the 
independence of the Exchanges' self-regulatory function from DE 
Holdings, enable EDGX and EDGA to operate in a manner that complies 
with the federal securities laws, including the objectives of Sections 
6(b) and 19(g) of the Act, and facilitate the ability of the Exchanges 
and the Commission to fulfill their regulatory and oversight 
obligations under the Act.\40\
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    \40\ See DE Holdings Operating Agreement Article XI, Section 
11.2; Article XII; and Article XIV.
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    For example, DE Holdings submits to the Commission's jurisdiction 
with respect to activities relating to EDGX and EDGA,\41\ and agrees to 
provide the Commission and the Exchanges with access to its books and 
records that are related to the operation or administration of the 
Exchanges.\42\ In addition, to the extent they are related to the 
operation or administration of EDGX or EDGA, the books, records, 
premises, officers, Managers, agents, and employees of DE Holdings 
shall be deemed the books, records, premises, officers, Managers, 
agents, and employees of EDGX or EDGA, as applicable, for purposes of, 
and subject to oversight pursuant to, the Act.\43\ DE Holdings also 
agrees to keep confidential non-public information relating to the 
self-regulatory function \44\ of the Exchanges and not to use such 
information for any non-regulatory purpose.\45\ In addition, the Board 
of Managers of DE Holdings, as well as its officers, employees, and 
agents, are required to give due regard to the preservation of the 
independence of the self-regulatory function of EDGX and EDGA.\46\ 
Further, the DE Holdings Operating Agreement requires that any changes 
to the DE Holdings Operating Agreement be submitted to the Boards of 
Directors of EDGX and EDGA, and, if such amendment is required to be 
filed with the Commission pursuant to Section 19(b) of the Act, such 
change shall not be effective until filed with, or filed with and 
approved by, the

[[Page 13155]]

Commission.\47\ The Commission finds that these provisions are 
consistent with the Act, and that they will assist EDGX and EDGA in 
fulfilling their self-regulatory obligations and in administering and 
complying with the requirements of the Act.
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    \41\ See DE Holdings Operating Agreement, Article XIV, Section 
14.3.
    \42\ See DE Holdings Operating Agreement, Article XI, Section 
11.2(b).
    \43\ Id.
    \44\ This requirement to keep confidential non-public 
information relating to the self-regulatory function shall not limit 
the Commission's ability to access and examine such information or 
limit the ability of any Members, Managers, officers, employees, or 
agents of DE Holdings to disclose such information to the 
Commission. See DE Holdings Operating Agreement, Article XI, Section 
11.2(a).
    \45\ Id.
    \46\ See DE Holdings Operating Agreement, Article XIV, Section 
14.1.
    \47\ See DE Holdings Operating Agreement, Article XV, Section 
15.2(b). The requirement to submit changes to the Board of an 
Exchange endures for as long as DE Holdings directly or indirectly 
controls the Exchange. Id.
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2. Upstream Owners and ISE Holdings
    Although the Upstream Owners and ISE Holdings will not carry out 
any regulatory functions, the activities of each of the Upstream Owners 
and of ISE Holdings with respect to the operation of EDGX and EDGA must 
be consistent with, and not interfere with, the self-regulatory 
obligations of EDGX and EDGA. The 2007 Resolutions, as supplemented by 
the Supplemental Resolutions, the ISE Holdings Bylaws, the ISE Holdings 
Certificate, the U.S. Exchange Holdings Certificate, and the U.S. 
Exchange Holdings Bylaws include certain provisions designed to 
maintain the independence of the self-regulatory function of EDGX and 
EDGA, enable EDGX and EDGA to operate in a manner that complies with 
the U.S. federal securities laws, including the objectives and 
requirements of Sections 6(b) and 19(g) of the Act,\48\ and facilitate 
the ability of EDGX, EDGA, and the Commission to fulfill their 
regulatory and oversight obligations under the Act.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g).
---------------------------------------------------------------------------

    For example, the Upstream Owners and ISE Holdings provide that each 
such Upstream Owner, and ISE Holdings, will comply with the U.S. 
federal securities laws and the rules and regulations thereunder and 
cooperate with the Commission and EDGX and EDGA.\49\ Also, each board 
member, officer, and employee of the Upstream Owners, and of ISE 
Holdings, in discharging his or her responsibilities, will comply with 
the U.S. federal securities laws and the rules and regulations 
thereunder, cooperate with the Commission, and cooperate with EDGX and 
EDGA.\50\ In discharging his or her responsibilities as a board member 
of an Upstream Owner, or of ISE Holdings, each such member must, to the 
fullest extent permitted by applicable law, take into consideration the 
effect that the actions of the Upstream Owner or ISE Holdings, as 
applicable, would have on the ability of EDGX and EDGA to carry out 
their responsibilities under the Act.\51\ In addition, each of the 
Upstream Owners and ISE Holdings, and their board members, officers, 
and employees, must give due regard to the preservation of the 
independence of the self-regulatory function of EDGX and EDGA (or in 
the case of the non-U.S. Upstream Owners, that they will take 
reasonable steps necessary to cause their officers and employees 
involved in the activities of EDGX and EDGA to give due regard to 
preserving the independence of the self-regulatory functions of EDGX 
and EDGA).\52\
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    \49\ See Resolution 1 and Supplemental Resolution 2(a); U.S. 
Exchange Holdings Certificate, Article ELEVENTH; and ISE Holdings 
Certificate, Article THIRTEENTH.
    \50\ See Resolutions 7(a) and 8(a) and Supplemental Resolutions 
2(b) and (c); U.S. Exchange Holdings Certificate, Article TENTH; and 
ISE Holdings Certificate, Article TENTH. The Resolutions also 
provide that each non-U.S. Upstream Owner will take reasonable steps 
necessary to cause each person who subsequently becomes a board 
member of the non-U.S. Upstream Owner to agree in writing to certain 
matters included in the Resolutions. See Resolution 7 and 
Supplemental Resolution 2(b).
    \51\ Resolution 7(f) and Supplemental Resolution 2(b); U.S. 
Exchange Holdings Certificate, Article TENTH; and ISE Holdings 
Certificate, Article TENTH.
    \52\ See Resolutions 5, 7(d), and 8(d) and Supplemental 
Resolution 2; U.S. Exchange Holdings Certificate, Article TWELFTH; 
and ISE Holdings Bylaws, Article I, Section 1.5.
---------------------------------------------------------------------------

    Further, the non-U.S. Upstream Owners (along with their respective 
board members, officers, and employees), U.S. Exchange Holdings, and 
ISE Holdings agree to keep confidential, to the fullest extent 
permitted by applicable law, all confidential information pertaining to 
the self-regulatory function of EDGX and EDGA, including, but not 
limited to, confidential information regarding disciplinary matters, 
trading data, trading practices, and audit information, contained in 
the books and records of EDGX or EDGA and not use such information for 
any commercial \53\ purposes.\54\ In addition, books and records of the 
non-U.S. Upstream Owners related to the activities of EDGX and EDGA 
will at all times be made available for, and books and records of U.S. 
Exchange Holdings and ISE Holdings will be subject at all times to, 
inspection and copying by the Commission, EDGX, and EDGA.\55\ Books and 
records of U.S. Exchange Holdings related to the activities of EDGX and 
EDGA, and the books and records of ISE Holdings, will be maintained 
within the United States.\56\ Moreover, for so long as each of the 
Upstream Owners or ISE Holdings directly or indirectly controls EDGX or 
EDGA, the books, records, officers, directors (or equivalent), and 
employees of each of the Upstream Owners or of ISE Holdings will be 
deemed to be the books, records, officers, directors, and employees of 
EDGX or EDGA, as applicable.\57\ Finally, for so long as U.S. Exchange 
Holdings or ISE Holdings directly or indirectly control EDGX or EDGA, 
the premises of U.S. Exchange Holdings and ISE Holdings will be deemed 
to be the premises of EDGX or EDGA.\58\
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    \53\ The Commission believes that any non-regulatory use of such 
information would be for a commercial purpose.
    \54\ See Resolutions 6, 7(e), and 8(e), and Supplemental 
Resolution 2; U.S. Exchange Holdings Certificate, Article 
FOURTEENTH; and ISE Holdings Certificate, Article ELEVENTH.
    \55\ See Resolution 3 and Supplemental Resolution 2(a); U.S. 
Exchange Holdings Certificate, Article FIFTEENTH; and ISE Holdings 
Certificate, Article TWELFTH. See Section II.A.3, supra, for a 
discussion of the 2009 Procedure through which the Swiss Upstream 
Owners would make available their books and records relating to the 
activities of the Exchanges.
    \56\ See U.S. Exchange Holdings Certificate, Article FIFTEENTH; 
and ISE Holdings Bylaws, Article I, Section 1.3.
    \57\ See Resolutions 3 and 8(c) and Supplemental Resolutions 
2(a) and (c); U.S. Exchange Holdings Certificate, Article FIFTEENTH; 
and ISE Holdings Certificate, Article TWELFTH.
    \58\ See U.S. Exchange Holdings Certificate, Article FIFTEENTH; 
and ISE Holdings Certificate, Article TWELFTH.
---------------------------------------------------------------------------

    To the extent involved in the activities of EDGX or EDGA, each of 
the non-U.S. Upstream Owners, its board members, officers, and 
employees, irrevocably submit to the jurisdiction of the U.S. federal 
courts and the Commission for purposes of any action arising out of, or 
relating to, the activities of EDGX or EDGA.\59\ Likewise, U.S. 
Exchange Holdings, its officers and directors, and employees whose 
principal place of business and residence is outside of the United 
States, to the extent such directors, officers, or employees are 
involved in the activities of EDGX or EDGA, irrevocably submit to the 
jurisdiction of the U.S. federal courts and the Commission for purposes 
of any action arising out of, or relating to, the activities of EDGX or 
EDGA.\60\ Similarly, ISE Holdings and its officers, directors, 
employees, and agents irrevocably submit to the jurisdiction of the 
U.S. federal courts and the Commission for purposes of any action 
arising out of, or relating to, EDGX or EDGA.\61\
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    \59\ See Resolutions 2, 7(b), and 8(b) and Supplemental 
Resolution 2.
    \60\ See U.S. Exchange Holdings Bylaws, Article VI, Section 16.
    \61\ See ISE Holdings Bylaws, Article I, Section 1.4.
---------------------------------------------------------------------------

    Finally, the 2007 Resolutions, as supplemented by the Supplemental 
Resolutions, the U.S. Exchange Holdings Certificate, the U.S. Exchange 
Holdings Bylaws, the ISE Holdings Certificate, and the ISE Holdings 
Bylaws each require that any change to the applicable document 
(including any action by the non-U.S. Upstream

[[Page 13156]]

Owners that would have the effect of changing the Supplemental 
Resolutions or the 2007 Resolutions) be submitted to the Boards of EDGX 
and EDGA.\62\ If such change must be filed with, or filed with and 
approved by, the Commission under Section 19 of the Act,\63\ and the 
rules thereunder, then such change shall not be effective until filed 
with, or filed with and approved by, the Commission.\64\ The Commission 
finds that these provisions are consistent with the Act, and that they 
will assist EDGX and EDGA in fulfilling their self-regulatory 
obligations and in administering and complying with the requirements of 
the Act.
---------------------------------------------------------------------------

    \62\ See Supplemental Resolution 3; U.S. Exchange Holdings 
Certificate, Article SIXTEENTH; U.S. Exchange Holdings Bylaws, 
Article VI, Section 9; ISE Holdings Certificate, Article FOURTEENTH; 
and ISE Holdings Bylaws, Article X, Section10.1.
    \63\ 15 U.S.C. 78s.
    \64\ See Supplemental Resolution 3; U.S. Exchange Holdings 
Certificate, Article SIXTEENTH; U.S. Exchange Holdings Bylaws, 
Article VI, Section 9; ISE Holdings Certificate, Article FOURTEENTH; 
and ISE Holdings Bylaws, Article X, Section10.1. The requirement to 
submit changes to the Board of an Exchange endures for as long as 
the Upstream Owners or ISE Holdings directly or indirectly control 
the Exchange. Id.
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3. Controlling Persons
    Under Section 20(a) of the Act, any person with a controlling 
interest in EDGX or EDGA would be jointly and severally liable with and 
to the same extent that EDGX or EDGA is liable under any provision of 
the Act, unless the controlling person acted in good faith and did not 
directly or indirectly induce the act or acts constituting the 
violation or cause of action. In addition, Section 20(e) of the Act 
creates aiding and abetting liability for any person who knowingly 
provides substantial assistance to another person in violation of any 
provision of the Act or rule thereunder. Further, section 21C of the 
Act authorizes the Commission to enter a cease-and-desist order against 
any person who has been ``a cause of'' a violation of any provision of 
the Act through an act or omission that the person knew or should have 
known would contribute to the violation. These provisions are 
applicable to all entities controlling the Exchanges, including the 
Trust, DE Holdings, ISE Holdings, and the Upstream Owners.

C. Ownership and Voting Limitations; Changes in Control of the 
Exchanges

    The DE Holdings Certificate includes restrictions on the ability to 
own and vote shares of the capital stock of DE Holdings.\65\ These 
limitations are designed to prevent any Member of DE Holdings from 
exercising undue control over the operation of the Exchanges and to 
assure that the Exchanges and the Commission are able to carry out 
their regulatory obligations under the Act. Similarly, the corporate 
governing documents of ISE Holdings include ownership and voting 
limitations (respectively, the ``ISE Holdings Ownership Limit'' and the 
``ISE Holdings Voting Limit'') that apply for so long as ISE Holdings 
controls, directly or indirectly, a national securities exchange, 
including EDGX or EDGA. The Resolutions and Supplemental Resolutions of 
the non-U.S. Upstream Owners, and the U.S. Exchange Holdings 
Certificate of Incorporation, include provisions requiring these 
entities to take reasonable steps necessary to cause ISE Holdings to be 
in compliance with the ISE Holdings Ownership Limit and the ISE 
Holdings Voting Limit.
---------------------------------------------------------------------------

    \65\ These provisions are consistent with ownership and voting 
limits approved by the Commission for other self-regulatory 
organizations. See e.g., Securities Exchange Act Release Nos. 58375 
(August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10-182) 
(order granting the exchange registration of BATS Exchange, Inc.) 
(``BATS Exchange Order''); 53963 (June 8, 2006), 71 FR 34660 (June 
15, 2006) (File No. SR-NSX-2006-03) (``NSX Demutualization Order''); 
51149 (February 8, 2005), 70 FR 7531 (February 14, 2005) (File No. 
SR-CHX-2004-26) (``CHX Demutualization Order''); and 49098 (January 
16, 2004), 69 FR 3974 (January 27, 2004) (File No. SR-Phlx-2003-73) 
(``Phlx Demutualization Order'').
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1. DE Holdings
    Generally, no person, other than ISE Holdings, either alone or 
together with its related persons,\66\ may own, directly or indirectly, 
of record or beneficially, Units representing more than a 40% 
Percentage Interest in DE Holdings.\67\ In addition, the DE Holdings 
Operating Agreement prohibits members of the EDGX or EDGA, either alone 
or together with their related persons, from owning, directly or 
indirectly, of record or beneficially, Units representing a Percentage 
Interest in DE Holdings of more than 20%.\68\ Further, no person, other 
than ISE Holdings, either alone or together with its related persons, 
may vote or cause the voting of Units representing more than a 20% 
Percentage Interest in DE Holdings.\69\ If any Member of DE Holdings 
purports to transfer Units in violation of the ownership limits, or to 
vote or cause the voting of Units in violation of the voting limits, DE 
Holdings has the right to redeem such Units for the lesser of the fair 
market value or the book value of the Units.\70\ In addition, DE 
Holdings will not honor any vote that would violate the voting 
limitations, and any Units that would violate the voting limitation 
will not be entitled to vote to the extent of the violation.\71\
---------------------------------------------------------------------------

    \66\ See DE Holdings Operating Agreement, Article I, Section 
1.1.
    \67\ See DE Holdings Operating Agreement, Article XII, Section 
12.1(a). A Percentage Interest is the ratio of the number of Units 
held to the total of all of the issued and outstanding Units, 
expressed as a percentage. See DE Holdings Operating Agreement, 
Article I, Section 1.1. The ownership and voting limitations in 
Article XII, Section 12.1(a) of the DE Holdings Operating Agreement 
will not apply to ISE Holdings for as long as ISE LLC is a wholly-
owned subsidiary of ISE Holdings and ISE Holdings is subject to 
ownership and voting limitations comparable to those set forth in 
Article XII, Section 12.1(a). See DE Holdings Operating Agreement, 
Article XII, Section 12.1(a)(3). The comparable ownership and voting 
limitations for ISE Holdings are included in Article FOURTH, Section 
III of the ISE Holdings Certificate. See also notes 89-91, infra, 
and accompanying text.
    \68\ See DE Holdings Operating Agreement, Article XII, Section 
12.1(a)(2).
    \69\ See DE Holdings Operating Agreement, Article XII, Section 
12.1(a)(3).
    \70\ See DE Holdings Operating Agreement, Article XII, Section 
12.3.
    \71\ See DE Holdings Operating Agreement, Article XII, Section 
12.4.
---------------------------------------------------------------------------

    The DE Holdings Board may waive the 40% ownership limitation 
applicable to persons who are not Exchange members and the 20% voting 
limitation pursuant to an amendment to the DE Holdings Operating 
Agreement adopted by the DE Holdings Board if the DE Holdings Board 
makes certain findings.\72\ Any such amendment will not be effective 
unless it is filed with and approved by the Commission.\73\ However, as 
long as DE Holdings directly or indirectly controls an Exchange, the DE 
Holdings Board may not waive the ownership and voting limitations above 
20% for Exchange members or their related persons.\74\
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    \72\ See DE Holdings Operating Agreement, Article XII, Section 
12.1(b).
    \73\ Id.
    \74\ These provisions are consistent with waiver of ownership 
and voting limits approved by the Commission for other SROs. See 
e.g., BATS Exchange Order, NSX Demutualization Order, and CHX 
Demutualization Order, supra note 65; and Securities Exchange Act 
Release No. 49718 (May 17, 2004), 69 FR 29611 (May 24, 2004) (File 
No. SR-PCX-2004-08).
---------------------------------------------------------------------------

    Exchange members that trade on an exchange traditionally have 
ownership interests in such exchange. As the Commission has noted in 
the past, however, a member's interest in an exchange could become so 
large as to cast doubt on whether the exchange can fairly and 
objectively exercise its self-regulatory responsibilities with respect 
to that member.\75\ A member that is a controlling shareholder of an 
exchange

[[Page 13157]]

might be tempted to exercise that controlling influence by directing 
the exchange to refrain from, or the exchange may hesitate to, 
diligently monitor and surveil the member's conduct or diligently 
enforce its rules and the federal securities laws with respect to 
conduct by the member that violates such provisions.
---------------------------------------------------------------------------

    \75\ See, e.g., Securities Exchange Act Release Nos. 53128 
(January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10-131) 
(``Nasdaq Exchange Order''); and 53382 (February 27, 2006), 71 FR 
11251 (March 6, 2006) (SR-NYSE-2005-77) (``NYSE/Archipelago Merger 
Approval Order'').
---------------------------------------------------------------------------

    In addition, as proposed, the Exchanges will be wholly-owned 
subsidiaries of DE Holdings. The Amended and Restated Bylaws of EDGX 
and EDGA (together, the ``Exchanges Amended and Restated Bylaws'') 
identify this ownership structure.\76\ Any changes to the Exchanges 
Amended and Restated Bylaws, including any change in the provision that 
identifies DE Holdings as the initial owner of the Exchanges, must be 
filed with and approved by the Commission pursuant to Section 19 of the 
Act.\77\
---------------------------------------------------------------------------

    \76\ See Exchanges Amended and Restated Bylaws Article I(jj). 
The enumeration in the Amended and Restated Bylaws of EDGX and EDGA 
is identical.
    \77\ See 15 U.S.C. 78s.
---------------------------------------------------------------------------

    The Commission believes that these provisions are consistent with 
the Act. These requirements should minimize the potential that a person 
could improperly interfere with or restrict the ability of the 
Commission or the Exchanges to effectively carry out their regulatory 
oversight responsibilities under the Act.
    In its comment letter, Nasdaq raises questions relating to the 
ownership and control of EDGX and EDGA, in particular, and of national 
securities exchanges in general. In this regard, Nasdaq urges the 
Commission to re-examine the voting and ownership limits applicable to 
owners of national securities exchanges and to adopt consistent rules 
that would apply to all national securities exchanges and alternative 
trading systems.\78\ In addition, Nasdaq asks the Commission to 
consider the possibility that multiple owners, each holding a 20% 
ownership interest, could have common interests that cause them to act 
in concert on a consistent basis.\79\ In the case of EDGX and EDGA, 
Nasdaq believes that ``the bias inherent in concentrated dealer 
control'' could affect the operation of the Exchanges and of their 
Member/owners, thereby requiring the Commission to review all proposed 
rule changes of the Exchanges for possible bias.\80\
---------------------------------------------------------------------------

    \78\ See Nasdaq Letter, supra note 4, at 3. Credit Suisse, 
however, believes that Commission rules governing the ownership 
structure of alternative trading systems are unnecessary and would 
be inconsistent with the goals of Regulation ATS. See Credit Suisse 
Letter, supra note 4. The Commission does not believe that the 
consideration of the Exchanges' applications for exchange 
registration are the appropriate forum for considering this issue.
    \79\ Id. at 4. In this regard, Nasdaq notes that three broker-
dealers each hold a 19.9% ownership interest in DE Holdings. See 
Nasdaq Letter, supra note 4, at 2.
    \80\ See Nasdaq Letter, supra note 4, at 4.
---------------------------------------------------------------------------

    As discussed above,\81\ the DE Holdings Operating Agreement 
includes restrictions on the ability to own and vote Units in DE 
Holdings. The Commission believes that these limitations, which are 
consistent with the ownership and voting limits that the Commission has 
approved for other SROs,\82\ are reasonably designed to prevent any 
member of DE Holdings, including the Member/owners, from exercising 
undue control over the operation of the Exchanges. In addition, the 
Commission believes that the composition of the Exchanges' Boards of 
Directors, which must at all times include a majority of Independent 
Directors, could help to counteract the influence of the Exchanges' 
Member/owners.\83\ With respect to Nasdaq's concern regarding the need 
to scrutinize proposed rule changes of EDGX and EDGA for possible bias 
in favor of the Exchanges' Member/owners, the Commission notes that 
that it will review proposed rule changes by the Exchanges, as it 
reviews the proposed rule changes of all other national securities 
exchanges, to evaluate whether the proposed rules are consistent with 
Act, in general, and, in particular, with the requirements of Section 
6(b)(5) of the Act.\84\
---------------------------------------------------------------------------

    \81\ See notes 65-77, supra, and accompanying text.
    \82\ See note 65, supra.
    \83\ See Exchanges Amended and Restated Bylaws, Article III, 
Section 2(b). The composition of the Exchanges' Boards is discussed 
in greater detail in Section II.D.1., infra.
    \84\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Nasdaq also expresses concern regarding potential unfair advantages 
resulting from exchanges of information between the Exchanges and their 
Member/owners.\85\ In particular, Nasdaq questions how the Exchanges 
will implement the provisions of Exchange Rules 2.10 and 2.11\86\ and 
Exchange Amended and Restated Bylaws Article XI which, among other 
things, restrict the flow of confidential information between the 
Exchanges and other persons, in light of the potential presence of 
representatives of each of the controlling owners on the Exchange 
Boards. The Commission notes that Exchange Rules 2.10 and 2.11 are 
comparable to rules adopted by other national securities exchanges \87\ 
and that Article XI, Section 3 of the Exchange Amended and Restated 
Bylaws is comparable to bylaw provisions adopted by other national 
securities exchanges.\88\ The Commission notes that each Exchange, like 
all national securities exchanges, has the obligation under Section 
6(b)(1) of the Act to comply with its rules and to enforce compliance 
by Exchange Members with, among other things, the rules of the Exchange 
and the federal securities laws. Accordingly, if either Exchange learns 
of a failure to maintain the confidentiality of information pertaining 
to its self-regulatory function, as required by the Exchanges Amended 
and Restated Bylaws and the DE Holdings Operating Agreement, such 
Exchange would be required to take appropriate action to address the 
failure to comply with the applicable requirements of its governing 
documents. In addition, the Commission also monitors national 
securities exchanges with respect to their members' compliance with the 
rules of the exchange.
---------------------------------------------------------------------------

    \85\ See Nasdaq Letter, supra note 4, at 5.
    \86\ Exchange Rule 2.10, ``Affiliation between Exchange and a 
Member,'' generally prohibits an Exchange from acquiring an 
ownership interest in a Member, and a Member from becoming an 
affiliate of the Exchange, without prior Commission approval. 
Exchange Rule 2.10 allows an Exchange Member to be a Director of the 
Exchange or of DE Holdings. In addition, Exchange Rule 2.10 allows 
each Exchange to be an affiliate of DECN. Exchange Rule 2.11, 
``Direct Edge ECN LLC as Outbound Router,'' addresses DECN's 
function as the outbound router for the Exchanges. Exchange Rules 
2.10 and 2.11 are discussed in greater detail in Section III.G, 
infra.
    \87\ See, e.g., BATS Rules 2.10 and 2.11; and NSX Rules 2.10 and 
2.11. Exchange Rules 2.10 and 2.11 are discussed in greater detail 
in Section III.G, infra.
    \88\ See, e.g., Article XI, Section 3 of the Amended and 
Restated Bylaws of BATS Exchange, Inc.
---------------------------------------------------------------------------

2. ISE Holdings and the Upstream Owners
(a) ISE Holdings
    The governing documents of ISE Holdings also include ownership and 
voting limitations that apply for so long as ISE Holdings controls, 
directly or indirectly, a national securities exchange (a ``Controlled 
National Securities Exchange''), or facility thereof, including EDGX or 
EDGA. In particular, the ISE Holdings Certificate provides that, for so 
long as ISE Holdings controls, directly or indirectly, a Controlled 
National Securities exchange, no person, either alone or together with 
its related persons, may own, directly or indirectly, of record or 
beneficially, more than 40% (or 20% if the person is a member of an 
exchange controlled by ISE Holdings) of the capital stock of ISE 
Holdings that has the right by its terms to vote in the election of the 
Board of Directors of ISE Holdings (``ISE Holdings Board'') or on other 
matters (other than matters affecting the rights, preferences, or

[[Page 13158]]

privileges of the capital stock) (``ISE Holdings Ownership 
Limit'').\89\ In addition, for so long as ISE Holdings controls, 
directly or indirectly, a Controlled National Securities Exchange, no 
person, either alone or together with its related persons, may, 
directly or indirectly, vote or cause the voting of more than 20% of 
the ISE Holdings capital stock that has the right by its terms to vote 
in the election of the ISE Holdings Board or on other matters (other 
than matters affecting the rights, preferences, or privileges of the 
capital stock) (``ISE Holdings Voting Limit'').\90\
---------------------------------------------------------------------------

    \89\ See ISE Holdings Certificate, Article FOURTH, Section III.
    \90\ Id. If a person exceeds an ISE Holdings Ownership or ISE 
Holdings Voting Limit, a majority of the capital stock of ISE 
Holdings that has the right by its terms to vote in the election of 
the ISE Holdings Board or on other matters (other than matters 
affecting the rights, preferences or privileges of the capital 
stock) would automatically be transferred to the Trust. See ISE 
Holdings Certificate, Article FOURTH, Section III(c). See also Eurex 
Order, supra note 13, at note 36 and at notes 70-114 and 
accompanying text.
---------------------------------------------------------------------------

    Article XI of the ISE Holdings Bylaws, which originally was adopted 
in connection with the Eurex Transaction, waives the ISE Holdings 
Ownership Limits and the ISE Holdings Voting Limits to allow the 
Upstream Owners to own and vote all of the common stock of ISE 
Holdings.\91\ Article XI, Section 11.1(b) states that, in waiving the 
ISE Holdings Ownership Limits and the ISE Holdings Voting Limits to 
permit the Upstream Owners to own and vote the capital stock of ISE 
Holdings, the ISE Holdings Board has determined, with respect to each 
Upstream Owner, that: (i) Such waiver will not impair the ability of 
ISE Holdings and each Controlled National Securities Exchange to carry 
our their respective functions and responsibilities under the Act; (ii) 
such waiver is in the best interests of ISE Holdings, its stockholders, 
and each Controlled National Securities Exchange; (iii) such waiver 
will not impair the ability of the Commission to enforce the Act; (iv) 
neither the Upstream Owner nor any of its related persons is subject to 
a statutory disqualification (within the meaning of Section 3(a)(39) of 
the Act); and (v) neither the Upstream Owner nor any of its related 
persons is a member of such Controlled National Securities Exchange.
---------------------------------------------------------------------------

    \91\ The ISE Holdings Certificate allows the ISE Holdings Board 
to waive the ISE Holdings Ownership Limit and the ISE Holdings 
Voting Limit pursuant to an amendment to the ISE Holdings Bylaws, 
provided that the ISE Holdings Board makes certain determinations. 
See ISE Holdings Certificate, Article FOURTH, Sections III(a)(i)(A) 
III(a)(i)(B) and III(b)(i). Article XI of the ISE Holdings Bylaws 
was adopted in connection with the Eurex Transaction, when ISE LLC 
was the sole national securities exchange controlled by ISE 
Holdings. See Eurex Order, supra note 13. Article XI, Section 
11.1(b) was subsequently amended to apply to any Controlled National 
Securities Exchange. See DE Holdings Order, supra note 11.
---------------------------------------------------------------------------

    Because Article XI, Section 11.1(b) requires the ISE Holdings 
Board, in waiving the ISE Holdings Ownership Limit and the ISE Holdings 
Voting Limit, to have determined, with respect to each Upstream Owner, 
that, among other things, such waiver will not impair the ability of 
EDGX and EDGA to carry out their functions and responsibilities under 
the Act, or impair the Commission's ability to enforce the Act, the 
Commission believes that the Upstream Owners' exercise of ownership and 
voting control of ISE Holdings will not impair the ability of the 
Commission or of EDGX and EDGA to discharge their respective 
responsibilities under the Act.
(b) Upstream Owners
    To facilitate compliance with the ISE Holdings Ownership Limit and 
the ISE Holdings Voting Limit, the Resolutions of the non-U.S. Upstream 
Owners, as supplemented by the Supplemental Resolutions, provide that 
each such owner will take reasonable steps necessary to cause ISE 
Holdings to be in compliance with the ISE Holdings Ownership Limit and 
the ISE Holdings Voting Limit.\92\ Likewise, the U.S. Exchange Holdings 
Certificate provides that, for so long as U.S. Exchange Holdings 
directly or indirectly controls a national securities exchange, 
including EDGX or EDGA, U.S. Exchange Holdings will take reasonable 
steps necessary to cause ISE Holdings to be in compliance with the ISE 
Holdings Ownership Limit and the ISE Holdings Voting Limit.\93\ The 
Commission believes that these provisions in the Resolutions, as 
supplemented by the Supplemental Resolutions, and in the U.S. Exchange 
Holdings Certificate should minimize the potential that a person could 
improperly interfere with, or restrict the ability of, the Commission 
or EDGX or EDGA to effectively carry out their regulatory 
responsibilities under the Act.
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    \92\ See Resolution 4 and Supplemental Resolution 2(a).
    \93\ See U.S. Exchange Holdings Certificate, Article THIRTEENTH.
---------------------------------------------------------------------------

D. EDGX and EDGA

    EDGX and EDGA each have applied to the Commission to register as a 
national securities exchange. As part of their exchange applications, 
EDGX and EDGA have filed their Certificates of Incorporation (together, 
the ``Exchange Certificates'') and the Exchanges Amended and Restated 
Bylaws.\94\ In these documents, among other things, the Exchanges 
establish the composition of their respective Boards of Directors 
(each, an ``Exchange Board,'' and, together, the ``Exchange Boards'') 
and the committees of the Exchanges.
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    \94\ The enumeration in the EDGX Certificate and the EDGX 
Amended and Restated Bylaws are the same as the enumeration in the 
EDGA Certificate and the EDGA Amended and Restated Bylaws, 
respectively.
---------------------------------------------------------------------------

1. Exchange Boards
    Each Exchange Board will be the governing body of its Exchange and 
will possess all of the powers necessary for the management of the 
business and affairs of the Exchange and the execution of the 
Exchange's responsibilities as a self-regulatory organization 
(``SRO''). Under the Exchanges Amended and Restated Bylaws, each 
Exchange Board initially will be composed of 19 Directors, including: 
\95\
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    \95\ See Exchanges Amended and Restated Bylaws, Article III, 
Section 2(a). An Exchange Board may add or remove Director 
positions, provided that, among other things, the number of 
Directors positions will not be fewer than seven nor more than 25. 
See Exchanges Amended and Restated Bylaws, Article III, Section 
2(b).
---------------------------------------------------------------------------

     The Chief Executive Officer (``CEO'') of EDGX or EDGA, as 
applicable; \96\
---------------------------------------------------------------------------

    \96\ See Exchanges Amended and Restated Bylaws, Article III, 
Section 2(a)(i).
---------------------------------------------------------------------------

     Four Owner Directors; \97\
---------------------------------------------------------------------------

    \97\ See Exchanges Amended and Restated Bylaws, Article III, 
Section 2(a)(ii). The Designating Owners of DE Holdings (i.e., 
Members of DE Holdings that hold at least a 15% Percentage Interest 
in DE Holdings) select the Owner Directors. See Exchanges Amended 
and Restated Bylaws, Articles I(k) and III, Section 2(b).
---------------------------------------------------------------------------

     Ten Independent Directors; \98\ and
---------------------------------------------------------------------------

    \98\ See Exchanges Amended and Restated Bylaws, Article III, 
Section 2(a)(iii). An Independent Director is a Director who has no 
material relationship with (i) the Exchange or any Affiliate of the 
Exchange, or (ii) any Exchange Member or Affiliate of any Exchange 
Member; provided, however, that an individual who otherwise 
qualifies as an Independent Director will not be disqualified from 
serving in such capacity solely because such Director is a Director 
of the Exchange, DE Holdings, or, the case of EDGA, a Director of 
EDGX and, in the case of EDGX, a Director of EDGA. See Exchanges 
Amended and Restated Bylaws, Article I(u).
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     Four Exchange Member Directors.\99\
---------------------------------------------------------------------------

    \99\ See Exchanges Amended and Restated Bylaws, Article III, 
Section 2(a)(iv). An Exchange Member Director is an officer, 
director, employee or agent of an Exchange Member who is elected in 
accordance with the procedures set forth in Article III, Section 4 
of the Exchanges Amended and Restated Bylaws. See Exchanges Amended 
and Restated Bylaws, Article I(q).
---------------------------------------------------------------------------

    In addition, at all times, at least 20% of the Directors of each 
Exchange Board will be Exchange Member Directors and the majority of 
the Directors of each Exchange Board will be Independent 
Directors.\100\
---------------------------------------------------------------------------

    \100\ See Exchanges Amended and Restated Bylaws, Article III, 
Section 2(b).

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[[Page 13159]]

    Following approval of the Form 1 Applications, DE Holdings, as the 
sole owner of the common stock of the Exchanges, will elect Directors 
in accordance with the Exchange Certificates and the Exchanges Amended 
and Restated Bylaws.\101\ The first annual meeting of the stockholders 
of each Exchange will be held prior to the Exchanges' commencement of 
operations as national securities exchanges.\102\ At the first annual 
stockholders' meeting, the stockholders will elect Directors of the 
Exchanges pursuant to the Exchange Certificates and the Exchanges 
Amended and Restated Bylaws. Therefore, prior to commencing operations 
as national securities exchanges, the Members of the Exchanges will 
have the opportunity to participate in the selection of Exchange Member 
Directors.\103\
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    \101\ See Form 1 Applications, Exhibit J, Response 2.
    \102\ See Exchanges Amended and Restated Bylaws, Article IV, 
Section 1(b).
    \103\ See Exchanges Amended and Restated Bylaws, Article III, 
Sections 2 and 4.
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    DE Holdings will appoint the initial Nominating Committee \104\ and 
the Exchange Member Nominating Committee \105\ for each Exchange, which 
will serve until the first annual meeting of stockholders.\106\ Each of 
the Nominating Committee and the Exchange Member Nominating Committee, 
after completion of its respective duties for nominating directors for 
election to the Board of EDGX or EDGA, as applicable, for that year, 
will nominate candidates to serve on the succeeding year's Nominating 
Committee or Member Nominating Committee, as applicable.\107\ 
Additional candidates for the Member Nominating Committee may be 
nominated and elected by each Exchange's Members pursuant to a petition 
process.\108\
---------------------------------------------------------------------------

    \104\ The Nominating Committee will consist solely of three 
Independent Directors. See Exchanges Amended and Restated Bylaws, 
Article VI, Section 2. Because the Exchanges Amended and Restated 
Bylaws are substantially the same, the discussion of the Exchanges' 
committees applies to both Exchanges.
    \105\ Each member of the Exchange Member Nominating Committee 
will qualify as an Exchange Member Director, although the committee 
member is not required to be a Director. See Exchanges Amended and 
Restated Bylaws, Article VI, Section 3. An Exchange Member Director 
is an officer, director, employee, or agent of an Exchange Member, 
other than an Exchange Member that maintains an ownership interest 
in DE Holdings, who is elected as a Director in accordance with 
Article III, Section 4 of the Exchanges Amended and Restated Bylaws. 
See Exchanges Amended and Restated Bylaws, Article I(q) and (z).
    \106\ See Exchanges Amended and Restated Bylaws, Article VI, 
Section 1.
    \107\ Id.
    \108\ Id.
---------------------------------------------------------------------------

    Each Exchange's Nominating Committee will nominate candidates for 
each director position (other than Owner Directors, Exchange Member 
Directors, and the director position filled by the CEO), and DE 
Holdings, as the sole shareholder, will elect those directors. Each 
Exchange's Member Nominating Committee will nominate candidates for 
each Exchange Member Director on the Exchange Board.\109\ Members of 
EDGX and EDGA may nominate additional candidates for the Exchange 
Member Director positions pursuant to a petition process.\110\ If no 
candidates are nominated pursuant to a petition process, then each 
Exchange's Nominating Committee will nominate the initial nominees of 
the Member Nominating Committee as Exchange Member Directors.\111\ If a 
petition process produces additional candidates, then the candidates 
nominated pursuant to the petition process, together with those 
nominated by each Exchange's Member Nominating Committee, will be 
presented to Exchange Members for election to determine the final 
nomination of Exchange Member Directors.\112\ Each Exchange's 
Nominating Committee will nominate the candidates who receive the most 
votes as Exchange Member Directors.\113\ DE Holdings, as the sole 
shareholder, will elect those candidates nominated by each Exchange's 
Nominating Committee as Exchange Member Directors.\114\
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    \109\ The Exchange Member Nominating Committee will solicit 
comments from Exchange members for the purpose of approving and 
submitting names of candidates for election to the position of 
Exchange Member Director. See Exchanges Amended and Restated Bylaws, 
Article III, Section 4.
    \110\ See Exchanges Amended and Restated Bylaws, Article III, 
Section 4(c). The petition must be signed by Exchange Member 
Representatives representing 10% or more of the Exchange members. No 
Exchange member, together with its Affiliates, may account for more 
than 50% of the signatures endorsing a particular candidate. Id.
    \111\ See Exchanges Amended and Restated Bylaws, Article III, 
Section 4(e).
    \112\ See Exchanges Amended and Restated Bylaws, Article III, 
Section 4(e) and (f). Each Exchange Member will have the right to 
cast one vote for each available Exchange Member Director 
nomination, provided that any such vote must be cast for a person on 
the List of Candidates, and no Exchange Member, together with its 
Affiliates, may account for more than 20% of the votes cast for a 
candidate. See Exchanges Amended and Restated Bylaws, Article III, 
Section 4(f).
    \113\ See Exchanges Amended and Restated Bylaws, Article III, 
Section 4(f).
    \114\ Id.
---------------------------------------------------------------------------

    The Commission believes that the requirement in the Exchanges 
Amended and Restated By-Laws that 20% of the directors be Exchange 
Member Directors and the means by which they are chosen by Members 
provides for the fair representation of members in the selection of 
directors and the administration of the Exchanges consistent with the 
requirement in Section 6(b)(3) of the Act.\115\ As the Commission has 
previously noted, this requirement helps to ensure that members have a 
voice in the use of self-regulatory authority, and that an exchange is 
administered in a way that is equitable to all those who trade on its 
market or through its facilities.\116\
---------------------------------------------------------------------------

    \115\ 15 U.S.C. 78f(b)(3).
    \116\ See, e.g., Nasdaq Exchange Registration Order and NYSE/
Archipelago Merger Approval Order, supra note 75, and BATS Exchange 
Order, supra note 65.
---------------------------------------------------------------------------

    The Commission has previously stated its belief that the inclusion 
of public, non-industry representatives on exchange oversight bodies is 
critical to an exchange's ability to protect the public interest.\117\ 
Further, public, non-industry representatives help to ensure that no 
single group of market participants has the ability to systematically 
disadvantage other market participants through the exchange governance 
process. The Commission believes that public directors can provide 
unique, unbiased perspectives, which should enhance the ability of the 
Exchange Boards to address issues in a non-discriminatory fashion and 
foster the integrity of the Exchanges.\118\ The Commission believes 
that the composition of the Exchange Boards satisfy the requirements in 
Section 6(b)(3) of the Act,\119\ which requires that one or more 
directors be representative of issuers and investors and not be 
associated with a member of the exchange, or with a broker or 
dealer.\120\
---------------------------------------------------------------------------

    \117\ See, e.g., Regulation of Exchanges and Alternative Trading 
Systems, Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844 (December 22, 1998) (``Regulation ATS Release'').
    \118\ See Nasdaq Exchange Registration Order and NYSE/
Archipelago Merger Approval Order, supra note 75, and BATS Exchange 
Order, supra note 65.
    \119\ 15 U.S.C. 78f(b)(3).
    \120\ See Form 1 Applications, Exhibit J, Response 2 (stating 
that at least one Independent Director will be a public non-industry 
representative not associated with a member of the Exchange or with 
a broker or dealer, as required by Section 6(b)(3) of the Act).
---------------------------------------------------------------------------

2. Exchange Committees
    In the Exchanges Amended and Restated Bylaws, the Exchanges have 
proposed to establish several committees. Specifically, each Exchange 
has proposed to establish the following committees whose members the 
Exchange Boards, after consultation with the Chairman, may designate: a 
Compensation Committee; \121\ an Audit

[[Page 13160]]

Committee; \122\ an Executive Committee; \123\ a Regulatory Oversight 
Committee; and an Appeals Committee.\124\ In addition, each Exchange 
has proposed to establish a Nominating Committee \125\ and a Member 
Nominating Committee, which will be elected on an annual basis by a 
vote of the stockholders.\126\ For the reasons discussed above, the 
Commission believes that the Exchanges' proposed committees should 
enable the Exchanges to carry out their responsibilities under the Act 
and are consistent with the Act.
---------------------------------------------------------------------------

    \121\ The Compensation Committee will consist of three 
Independent Directors. See Exchanges Amended and Restated Bylaws, 
Article V, Section 5(a).
    \122\ The Audit Committee, which will have at least three 
members, will consist solely of Directors, including a majority of 
Independent Directors, and an Independent Director will serve as 
Chairman of the Audit Committee. See Exchanges Amended and Restated 
Bylaws, Article V, Sections 2(a) and 5(b).
    \123\ The Regulatory Oversight Committee will have at least 
three members and will consist solely of Independent Directors. See 
Exchanges Amended and Restated Bylaws, Article V, Sections 2(a) and 
5(c).
    \124\ The Appeals Committee will consist of two Independent 
Directors and one Exchange Member Director. See Exchanges Amended 
and Restated Bylaws, Article V, Section 5(d).
    \125\ See Exchanges Amended and Restated Bylaws, Article VI, 
Sections 1 and 2, and Section II.D.1., supra.
    \126\ See Exchanges Amended and Restated Bylaws, Article VI, 
Sections 1 and 3, and Section II.D.1., supra.
---------------------------------------------------------------------------

E. Regulation of EDGX and EDGA

    As a prerequisite for the Commission's approval of an exchange's 
application for registration, an exchange must be organized and have 
the capacity to carry out the purposes of the Act.\127\ Among other 
requirements, an exchange must be able to enforce compliance by its 
members, and persons associated with its members, with the federal 
securities laws and the rules of the exchange.\128\
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    \127\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
    \128\ Id. See also Section 19(g) of the Act, 15 U.S.C. 78s(g).
---------------------------------------------------------------------------

1. Membership
    Membership on the Exchanges will be open to any registered broker 
or dealer that is a member of another registered national securities 
exchange or association, or any natural person associated with such a 
registered broker or dealer.\129\ To be eligible for membership in the 
Exchanges, a person must be, and remain, a member of another registered 
national securities exchange or association.\130\
---------------------------------------------------------------------------

    \129\ See Exchange Rules 2.3(a) and 2.5(a)(4).
    \130\ Id.
---------------------------------------------------------------------------

    For a temporary 90-day period after approval of the Exchanges' Form 
1 Applications, an applicant that is an active member of another 
registered national securities exchange or the Financial Industry 
Regulatory Authority, Inc. (``FINRA'') and is a current or former 
subscriber to DECN will be able to apply through an expedited process 
to become a member of one or both Exchanges, and to register with the 
Exchange(s) all of its associated persons whose registrations are 
active at the time the Exchanges are approved as national securities 
exchanges, by submitting waive-in application forms, including 
membership agreements.\131\ EDGX or EDGA may request additional 
documentation in addition to the waive-in application form in order to 
determine whether a waive-in applicant meets the Exchange's 
qualification standards.\132\ All of the firm's associated persons who 
are registered in categories recognized by Exchange rules would become 
registered persons of an Exchange member firm.\133\
---------------------------------------------------------------------------

    \131\ See Exchange Rule 2.4. The BATS Exchange also provided a 
waive-in application process. See BATS Rule 2.4.
    \132\ Id.
    \133\ Id.
---------------------------------------------------------------------------

    All other applicants (and after the 90-day period has ended, those 
that could have waived in through the expedited process) may apply for 
membership in one or both Exchanges by submitting a full membership 
application to the Exchange(s).\134\ Applications for association with 
an Exchange Member shall be submitted to the Exchange(s) on Form U-4 
and such other forms as the Exchanges may prescribe.\135\
---------------------------------------------------------------------------

    \134\ See Exchange Rule 2.6.
    \135\ See Exchange Rule 2.6(b).
---------------------------------------------------------------------------

    Each Exchange will receive and review all applications for 
membership in the Exchange. If an Exchange is satisfied that the 
applicant is qualified for membership, the Exchange will promptly 
notify the applicant, in writing, of such determination, and the 
applicant will be a member of the Exchange.\136\ If an Exchange is not 
satisfied that the applicant is qualified for membership, the Exchange 
shall promptly notify the applicant of the grounds for denial.\137\ 
Once an applicant is a member of an Exchange, it must continue to 
possess all the qualifications set forth in the Exchange's rules. When 
an Exchange has reason to believe that an Exchange member or associated 
person of a member fails to meet such qualifications, the Exchange may 
suspend or revoke such person's membership or association.\138\
---------------------------------------------------------------------------

    \136\ See Exchange Rule 2.6(c).
    \137\ See Exchange Rule 2.6(d).
    \138\ See Exchange Rule 2.7; see also Exchange Rules Chapters 
VII and VIII.
---------------------------------------------------------------------------

    Appeal of a staff denial, suspension, or termination of membership 
will be heard by the Appeals Committee of EDGX or EDGA, as 
applicable.\139\ Decisions of the Appeals Committee will be made in 
writing and will be sent to the parties to the proceeding.\140\ The 
decisions of the Appeals Committee will be subject to review by the 
applicable Exchange Board, on its own motion, or upon written request 
by the aggrieved party or by the Chief Regulatory Officer 
(``CRO'').\141\ The Exchange Board will have sole discretion to grant 
or deny the request.\142\ The Exchange Board will conduct the review of 
the Appeals Committee's decision and may affirm, reverse, or modify the 
Appeals Committee's decision.\143\ An Exchange Board's decision is 
final.\144\
---------------------------------------------------------------------------

    \139\ See Exchange Rule 10.3; see also Exchanges Amended and 
Restated Bylaws Article V, Section 5(d).
    \140\ See Exchange Rule 10.4(d).
    \141\ See Exchange Rule 10.5(a).
    \142\ Id.
    \143\ See Exchange Rule 10.5(b).
    \144\ Id. Membership decisions are subject to review by the 
Commission. See Exchange Rule 10.7 and Section 19(d) of the Act, 15 
U.S.C. 78s(d).
---------------------------------------------------------------------------

    The Commission finds that the membership rules of EDGX and EDGA 
\145\ are consistent with section 6 of the Act,\146\ specifically 
section 6(b)(2) of the Act,\147\ which requires that a national 
securities exchange have rules that provide that any registered broker 
or dealer or natural person associated with such broker or dealer may 
become a member and any person may become associated with an exchange 
member. The Commission notes that pursuant to section 6(c) of the Act, 
an exchange must deny membership to any person, other than a natural 
person, that is not a registered broker or dealer, any natural person 
that is not, or is not associated with, a registered broker or dealer, 
and registered broker-dealers that do not satisfy certain standards, 
such as financial responsibility or operational capacity. As registered 
exchanges, the Exchanges must independently determine if an applicant 
satisfies the standards set forth in the Act, regardless of whether an 
applicant is a member of another SRO.\148\
---------------------------------------------------------------------------

    \145\ In its comment letter, Nasdaq states that EDGX and EDGA 
should be required to amend their rules governing the registration 
of associated persons of members to address certain deficiencies. 
See Nasdaq Letter, supra note 4, at 7. EDGX and EDGA have revised 
their member registration rules accordingly. See Exchange Rule 2.3 
and Amendment No. 2.
    \146\ 15 U.S.C. 78f.
    \147\ 15 U.S.C. 78f(b)(2).
    \148\ See Nasdaq Exchange Registration Order, supra note 75.

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[[Page 13161]]

2. Regulatory Independence
    Each Exchange has proposed several measures to help ensure the 
independence of its regulatory function from its market operations and 
other commercial interests. The regulatory operations of each Exchange 
will be supervised by the Exchange's CRO and monitored by its 
Regulatory Oversight Committee.\149\ The Regulatory Oversight 
Committees of each Exchange will consist of three members, each of whom 
must be an Independent Director.\150\ Each Exchange's Regulatory 
Oversight Committee will be responsible for monitoring the adequacy and 
effectiveness of the Exchange's regulatory program, assessing the 
Exchange's regulatory performance, and assisting the Exchange Board in 
reviewing the Exchange's regulatory plan and the overall effectiveness 
of the Exchange's regulatory functions.\151\ Each Exchange's Regulatory 
Oversight Committee also will meet with the Exchange's CRO in executive 
session at regularly scheduled meetings and at any time upon request of 
the CRO or any member of the Regulatory Oversight Committee.\152\
---------------------------------------------------------------------------

    \149\ See Exchanges Amended and Restated Bylaws, Article V, 
Section 5(c).
    \150\ See Exchanges Amended and Restated By-Laws Articles I(u) 
and V, Sections 2(a) and 5(c).
    \151\ See Exchanges Amended and Restated By-Laws Article V, 
Section 5(c).
    \152\ See Exchanges Amended and Restated By-Laws Article VII, 
Section 9.
---------------------------------------------------------------------------

    Each Exchange proposes that its CRO have general supervision of the 
regulatory operations of the Exchange, including overseeing 
surveillance, examination, and enforcement functions.\153\ The CRO also 
will administer any regulatory services agreement with another SRO to 
which the Exchange is a party.\154\ The CRO of each Exchange will be an 
Executive Vice President or Senior Vice President of the Exchange, and 
also may serve as the Exchange's General Counsel.\155\
---------------------------------------------------------------------------

    \153\ Id.
    \154\ Id.
    \155\ Id. See Nasdaq Exchange Registration Order, supra note 75.
---------------------------------------------------------------------------

    In addition, each Exchange has taken steps designed to provide 
sufficient funding for the Exchange to carry out its responsibilities 
under the Act. Specifically, each Exchange has represented that: (1) DE 
Holdings will allocate sufficient operational assets and make a capital 
contribution to the Exchange's capital account prior to the launch of 
the Exchange; (2) such an allocation and contribution will be adequate 
to operate the Exchange, including the regulation of the Exchange; and 
(3) there will be an explicit agreement between the Exchange and DE 
Holdings that requires DE Holdings to provide adequate funding for each 
Exchange's operations, including the regulation of the Exchange.\156\ 
In addition, the Amended and Restated Bylaws of each Exchange provides 
that revenues received by the Exchange from fees derived from its 
regulatory function or regulatory penalties will not be used for non-
regulatory purposes or distributed to the stockholders, but rather, 
will be applied to fund the legal and regulatory operations of the 
Exchange (including surveillance and enforcement activities), or will 
be used to pay restitution and disgorgement of funds intended for 
customers.\157\
---------------------------------------------------------------------------

    \156\ See Amendment No. 2, supra note 5.
    \157\ See Exchanges Amended and Restated Bylaws Article X, 
Section 4.
---------------------------------------------------------------------------

3. Regulatory Contracts
    Although the Exchanges will be SROs with all of the attendant 
regulatory obligations under the Act, EDGX and EDGA each have stated 
that they entered into a regulatory contract with FINRA and a 
regulatory contract with ISE LLC (each, a ``Regulatory Contract,'' and, 
together, the ``Regulatory Contracts''), under which FINRA and ISE will 
perform certain regulatory functions on behalf of EDGX and EDGA.\158\ 
Specifically, each Exchange states that FINRA will assist Exchange 
staff on registration issues on an as-needed basis, investigate 
potential violations of each Exchange's rules or federal securities 
laws related to activity on the Exchange, conduct examinations related 
to market conduct on the Exchange by Members, assist the Exchanges with 
disciplinary proceedings pursuant to each Exchange's rules, including 
issuing charges and conducting hearings, and provide dispute resolution 
services to Exchange Members on behalf of the Exchanges, including 
operation of each Exchange's arbitration program. Each Exchange also 
represents that FINRA will provide the Exchange with access to FINRA's 
WebCRD system, and will assist with programming Exchange-specific 
functionality relating to such system.\159\ With respect to the 
Regulatory Contracts with ISE, each Exchange states that ISE will 
perform surveillance including, but not limited to, reviews respecting 
trading through protected quotes, locked and crossed markets, 
manipulation, wash trades, marking the close, customer complaints, 
frontrunning, trading ahead of customer orders, and anti-spoofing.\160\ 
Notwithstanding the Regulatory Contracts, each Exchange acknowledges it 
will retain ultimate legal responsibility for the regulation of its 
members and its market.\161\
---------------------------------------------------------------------------

    \158\ See Exchange Rule 13.7; see also Amendment No. 2. Pursuant 
to the applicable provisions of the Freedom of Information Act, 5 
U.S.C. 552, and Commission regulations thereunder, 17 CFR 200.83, 
the Exchanges have requested confidential treatment for the 
Regulatory Contracts.
    \159\ See Amendment No. 2, supra note 5.
    \160\ Each Exchange also states that ISE surveillance will work 
closely with the market operations and legal/compliance groups of 
the Exchange, when needed, to perform error trade reviews. See 
Amendment No. 2, supra note 5.
    \161\ See Exchange Rule 13.7 and Amendment No. 2, supra note 5.
---------------------------------------------------------------------------

    The Commission believes that it is consistent with the Act to allow 
the Exchanges to contract with FINRA and ISE to perform examination, 
enforcement, and disciplinary functions.\162\ These functions are 
fundamental elements to a regulatory program, and constitute core self-
regulatory functions. The Commission believes that FINRA and ISE have 
the expertise and experience to perform these functions on behalf of 
the Exchanges.\163\
---------------------------------------------------------------------------

    \162\ See, e.g., Regulation ATS Release, supra note 117. See 
also Securities Exchange Act Release Nos. 50122 (July 29, 2004), 69 
FR 47962 (August 6, 2004) (SR-Amex-2004-32) (order approving rule 
that allowed Amex to contract with another SRO for regulatory 
services) (``Amex Regulatory Services Approval Order''); 57478 
(March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004) 
(``NOM Approval Order''); Nasdaq Exchange Registration Order, supra 
note 75; and BATS Exchange Order, supra note 65.
    \163\ See, e.g., Amex Regulatory Services Approval Order, supra 
note 162; NOM Approval Order, supra note 162; and Nasdaq Exchange 
Registration Order, supra note 75. The Commission notes that the 
Regulatory Contracts are not before the Commission and, therefore, 
the Commission is not acting on them.
---------------------------------------------------------------------------

    At the same time, each Exchange, unless relieved by the Commission 
of its responsibility,\164\ bears the ultimate responsibility for self-
regulatory responsibilities and primary liability for self-regulatory 
failures, not the SRO retained to perform regulatory functions on the 
Exchange's behalf. In performing these regulatory functions, however, 
the SROs retained to perform regulatory functions may nonetheless bear 
liability for causing or aiding and abetting the failure of EDGX or 
EDGA to perform its

[[Page 13162]]

regulatory functions.\165\ Accordingly, although FINRA and ISE will not 
act on their own behalf under their SRO responsibilities in carrying 
out these regulatory services for the Exchanges, as SROs retain to 
perform regulatory functions, they may have secondary liability if, for 
example, the Commission finds that the contracted functions are being 
performed so inadequately as to cause a violation of the federal 
securities laws by EDGX or EDGA.\166\
---------------------------------------------------------------------------

    \164\ See Section 17(d)(1) of the Act and Rule 17d-2 thereunder, 
15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2. Section 17(d)(1) of the 
Act allows the Commission to relieve an SRO of certain 
responsibilities with respect to members of the SRO who are also 
members of another SRO. Specifically, Section 17(d)(1) allows the 
Commission to relieve an SRO of its responsibilities to (i) receive 
regulatory reports from such members; (ii) examine such members for 
compliance with the Act and the rules and regulations thereunder, 
and the rules of the SRO; or (iii) carry out other specified 
regulatory responsibilities with respect to such members. See also 
Section III.E.4, infra.
    \165\ For example, if failings by the SRO retained to perform 
regulatory functions have the effect of leaving an Exchange in 
violation of any aspect of the Exchange's self-regulatory 
obligations, the Exchange would bear direct liability for the 
violation, while the SRO retained to perform regulatory functions 
may bear liability for causing or aiding and abetting the violation. 
See, e.g., Nasdaq Exchange Registration Order, supra note 75; BATS 
Exchange Order, supra note 65; and Securities Exchange Act Release 
No. 42455 (February 24, 2000), 65 FR 11388 (March 2, 2000) (File No. 
10-127) (order approving the International Securities Exchange LLC's 
application for registration as a national securities exchange).
    \166\ Id.
---------------------------------------------------------------------------

    Because the exhibits to the Regulatory Contacts, including the 
Exchange and Commission rules covered by the Regulatory Contracts, have 
not yet been finalized, the Commission is conditioning the operation of 
EDGX and EDGA as exchanges on the finalization of the provisions in the 
Regulatory Contracts that will specify the Exchange and Commission 
rules for which FINRA and ISE will provide regulatory functions.\167\
---------------------------------------------------------------------------

    \167\ Alternatively, the Exchanges could demonstrate that they 
have the ability to fulfill their regulatory obligations.
---------------------------------------------------------------------------

4. 17d-2 Agreement
    Section 19(g)(1) of the Act \168\ requires every SRO to examine its 
members and persons associated with its members and to enforce 
compliance with the federal securities laws and the SRO's own rules, 
unless the SRO is relieved of this responsibility pursuant to section 
17(d) of the Act.\169\ Section 17(d) was intended, in part, to 
eliminate unnecessary multiple examinations and regulatory duplication 
with respect to members of more than one SRO (``common members'').\170\ 
Rule 17d-2 of the Act permits SROs to propose joint plans allocating 
regulatory responsibilities concerning common members.\171\ These 
agreements, which must be filed with and approved by the Commission, 
generally cover such regulatory functions as personnel registration, 
branch office examinations, and sales practices. Commission approval of 
a Rule 17d-2 plan relieves the specified SRO of those regulatory 
responsibilities allocated by the plan to another SRO.\172\ Many 
existing SROs have entered into such agreements.\173\
---------------------------------------------------------------------------

    \168\ 15 U.S.C. 78s(g)(1).
    \169\ 15 U.S.C. 78q(d).
    \170\ See Securities Exchange Act Release No. 12935 (October 28, 
1976), 41 FR 49091 (November 8, 1976) (``Rule 17d-2 Adopting 
Release'').
    \171\ 17 CFR 240.17d-2.
    \172\ See Rule 17d-2 Adopting Release, supra note 170.
    \173\ See, e.g., Securities Exchange Act Release Nos. 13326 
(March 3, 1977), 42 FR 13878 (March 14, 1977) (NYSE/Amex); 13536 
(May 12, 1977), 42 FR 26264 (May 23, 1977) (NYSE/BSE); 14152 
(November 9, 1977), 42 FR 59339 (November 16, 1977) (NYSE/CSE); 
13535 (May 12, 1977), 42 FR 26269 (May 23, 1977) (NYSE/CHX); 13531 
(May 12, 1977), 42 FR 26273 (May 23, 1977) (NYSE/PSE); 14093 
(October 25, 1977), 42 FR 57199 (November 1, 1977) (NYSE/Phlx); 
15191 (September 26, 1978), 43 FR 46093 (October 5, 1978) (NASD/BSE, 
CSE, CHX and PSE); 16858 (May 30, 1980), 45 FR 37927 (June 5, 1980) 
(NASD/BSE, CSE, CHX and PSE); 42815 (May 23, 2000), 65 FR 34762 (May 
31, 2000) (NASD/ISE); and 54136 (July 12, 2006), 71 FR 40759 (July 
18, 2006) (NASD/Nasdaq).
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    EDGX and EDGA each have represented to the Commission that each 
Exchange and FINRA intend to file Rule 17d-2 agreements with the 
Commission covering common members of EDGX or EDGA, as applicable, and 
FINRA. These agreements would allocate to FINRA regulatory 
responsibility, with respect to common members, for the following:
     FINRA will examine common members of EDGX or EDGA, as 
applicable, and FINRA for compliance with federal securities laws, 
rules and regulations, and rules of the Exchange that the Exchange has 
certified as identical or substantially similar to FINRA rules.
     FINRA will investigate common members of EDGX or EDGA, as 
applicable, and FINRA for violations of federal securities laws, rules 
or regulations, or Exchange rules that the Exchange has certified as 
identical or substantially identical to a FINRA rule.
     FINRA will enforce compliance by common members with the 
federal securities laws, rules and regulations, and the rules of EDGX 
or EDGA, as applicable, that the Exchange has certified as identical or 
substantially similar to FINRA rules.
    Because EDGX and EDGA anticipate entering into this Rule 17d-2 
agreement, they have not made provision to fulfill the regulatory 
obligations that would be undertaken by FINRA under these agreements 
with respect to common members of EDGX or EDGA, as applicable, and 
FINRA.\174\ Accordingly, the Commission is conditioning the operation 
of the Exchanges on approval by the Commission of the Rule 17d-2 
agreements between each Exchange and FINRA that allocate the above 
specified matters to FINRA.\175\
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    \174\ The Commission notes that regulation that is to be covered 
by the Rule 17d-2 agreements for common members will be carried out 
by FINRA under the Regulatory Contracts for EDGX or EDGA members 
that are not also members of FINRA.
    \175\ Alternatively, EDGX and EDGA could demonstrate that they 
have the ability to fulfill their regulatory obligations.
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5. Discipline and Oversight of Members
    As noted above, as a prerequisite for Commission approval of an 
exchange's application for registration, an exchange must be organized 
and have the capacity to carry out the purposes of the Act. Among other 
requirements, an exchange must be able to enforce compliance by its 
members and persons associated with its members with federal securities 
laws and the rules of the exchange.\176\ As noted above, pursuant to 
the Regulatory Contracts, FINRA will perform many of the initial 
disciplinary processes on behalf of the Exchanges.\177\ For example, 
FINRA will investigate potential securities laws violations, issue 
complaints, and conduct hearings pursuant to the rules of the 
Exchanges. Appeals from disciplinary decisions will be heard by each 
Exchange's Appeals Committee,\178\ and the Appeals Committee's decision 
shall be final. In addition, each Exchange Board may on its own 
initiative order review of a disciplinary decision.\179\
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    \176\ See 15 U.S.C. 78f(b)(1).
    \177\ See Section III.E.5, supra.
    \178\ See Exchange Rule 8.10(b).
    \179\ See Exchange Rule 8.10(c).
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    The Exchanges Amended and Restated Bylaws and the Exchanges' rules 
provide that each Exchange has disciplinary jurisdiction over its 
members so that it can enforce its members' compliance with its rules 
and the federal securities laws.\180\ Each Exchange's rules also permit 
it to sanction members for violations of its rules and violations of 
the federal securities laws and rules by, among other things, expelling 
or suspending members, limiting members' activities, functions, or 
operations, fining or censuring members, or suspending or barring a 
person from being associated with a member, or any other fitting 
sanction.\181\ Each Exchange's rules also provide for the imposition of 
fines for certain minor rule violations in lieu of commencing 
disciplinary proceedings.\182\ Accordingly, as a condition to the 
operation of the Exchanges, a Minor Rule Violation Plan (``MRVP'') 
filed by each Exchange under

[[Page 13163]]

Act Rule 19d-1(c)(2) must be declared effective by the Commission.\183\
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    \180\ See generally Exchanges Amended and Restated Bylaws 
Article X and Exchange Rules Chapters II and VIII.
    \181\ See Exchange Rules 2.2 and 8.1(a).
    \182\ See Exchange Rule 8.15.
    \183\ 17 CFR 240.19d-1(c)(2).
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    The Commission finds that the Exchanges Amended and Restated By-
Laws and the rules of each Exchange concerning the Exchange's 
disciplinary and oversight programs are consistent with the 
requirements of sections 6(b)(6) and 6(b)(7) \184\ of the Act in that 
they provide fair procedures for the disciplining of members and 
persons associated with members. The Commission further finds that the 
rules of EDGX and EDGA are designed to provide the Exchanges with the 
ability to comply, and with the authority to enforce compliance by 
their members and persons associated with their members, with the 
provisions of the Act, the rules and regulations thereunder, and the 
rules of the Exchanges.\185\
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    \184\ 15 U.S.C. 78f(b)(6) and (b)(7).
    \185\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
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F. Trading Systems of EDGX and EDGA

1. Trading Rules
    Each Exchange will operate a fully automated electronic order book. 
Members of EDGX and EDGA and entities that enter into sponsorship 
arrangements with such members (collectively, ``Users'') will have 
access to the systems of EDGX and EDGA (each, an ``EDGX System,'' an 
``EDGA System,'' or an ``Exchange System,'' and, together, the 
``Exchange Systems'').\186\ Users will be able to electronically submit 
market and various types of limit orders to EDGX or EDGA from remote 
locations.\187\ All orders submitted to the Exchanges will be displayed 
unless designated otherwise by the Exchange member submitting the 
order. Displayed orders will be displayed on an anonymous basis at a 
specified price. Non-displayed orders will not be displayed but will be 
ranked in an Exchange System at a specified price.\188\ The Exchanges' 
Systems will continuously and automatically match orders pursuant to 
price/time priority, except that displayed orders will have priority 
over non-displayed orders at the same price.\189\
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    \186\ To obtain authorized access to the Exchange Systems, each 
User must enter into a User Agreement with the Exchange(s). See 
Exchange Rule 11.3(a).
    \187\ One proposed order type is the Step-up Order, which is a 
market or limit order with the instruction that the Exchange System 
display the order to Users at or within the National Best Bid or 
Offer (``NBBO'') price pursuant to Exchange Rule 11.9(b)(1)(C). See 
Exchange Rule 11.5(c)(11). Prior to routing to away markets, or 
cancellation per the order's instructions, Step-up Orders will be 
displayed to Users, in a manner that is separately identifiable from 
other Exchange orders, at or within the NBBO price for a period of 
time not to exceed 500 milliseconds, as determined by the Exchange. 
See Exchange Rule 11.9(a)(1)(C). In its comment letter, Nasdaq notes 
that the Commission recently has proposed a rule amendment to 
prohibit the use of this type of order, known as a flash order, and 
questions whether the Commission should approve the Form 1 
Applications with an order type that ``would become illegal if the 
Commission's flash order ban is adopted.'' See Nasdaq Letter, supra 
note 4, at 6. The Commission notes that it has not acted on its 
proposal to prohibit the use of flash orders. The Commission also 
notes that the Exchanges will be required to comply with any 
Commission rules regarding flash orders and that the Exchanges have 
represented that they will do so. See letter from William O'Brien, 
Chief Executive Officer, DE Holdings, DECN, EDGX, and EDGA, to James 
Brigagliano, Co-Acting Director, Division of Trading and Markets, 
Commission, dated August 10, 2009.
    \188\ The rules of EDGX and EDGA do not provide for specialists 
or market makers.
    \189\ See Exchange Rule 11.8.
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    Each Exchange System is designed to comply with Rule 611 of 
Regulation NMS \190\ by requiring that, for any execution to occur on 
the Exchange during regular trading hours, the price must be equal to, 
or better than, any ``protected quotation'' within the meaning of 
Regulation NMS (``Protected Quotation''), unless an exception to Rule 
611 of Regulation NMS applies.\191\ Each Exchange will direct any 
orders or portion of orders that cannot be executed in their entirety 
to away markets for execution, unless the terms of the orders direct 
the Exchange not to route such orders away.\192\
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    \190\ 17 CFR 242.611.
    \191\ See Exchange Rule 11.9(a).
    \192\ See Exchange Rule 11.9(b)(2).
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    Each Exchange intends to operate as an automated trading center in 
compliance with Rule 600(b)(4) of Regulation NMS.\193\ Each Exchange 
will display automated quotations at all times except in the event that 
a systems malfunction renders the Exchange's System incapable of 
displaying automated quotations.\194\ Each Exchange has designed its 
rules relating to orders, modifiers, and order execution to comply with 
the requirements of Regulation NMS, including an immediate-or-cancel 
functionality.\195\ These rules include accepting orders marked as 
intermarket sweep orders, which will allow orders so designated to be 
automatically matched and executed without reference to Protected 
Quotations at other trading centers,\196\ and routing orders marked as 
intermarket sweep orders by a User to a specific trading center for 
execution.\197\ In addition, each Exchange's rules address locked and 
crossed markets,\198\ as required by Rule 610(d) of Regulation 
NMS.\199\ The Commission believes that the Exchanges' rules are 
consistent with the Act, in particular with the requirements of Rule 
610(d) and Rule 611 of Regulation NMS.
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    \193\ 17 CFR 242.600(b)(4).
    \194\ See Exchange Rule 11.9(d); see also 17 CFR 242.600(b)(3).
    \195\ See Exchange Rules 11.5 and 11.9; see also 17 CFR 
242.600(b)(3).
    \196\ See Exchange Rule 11.5(d)(1).
    \197\ See Exchange Rule 11.5(d)(2).
    \198\ See Exchange Rule 11.16.
    \199\ 17 CFR 242.610(d).
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    As stated above, each Exchange intends to operate as an automated 
trading center and have its best bid and best offer be a Protected 
Quotation.\200\ To meet their regulatory responsibilities under Rule 
611(a) of Regulation NMS, market participants must have sufficient 
notice of new Protected Quotations, as well as all necessary 
information (such as final technical specifications).\201\ Therefore, 
the Commission believes that it would be a reasonable policy and 
procedure under Rule 611(a) for industry participants to begin treating 
each Exchange's best bid and best offer as a Protected Quotation within 
90 days after the date of this order, or such later date as the 
Exchange begins operations as national securities exchange.
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    \200\ 17 CFR 242.600(b)(58).
    \201\ See Securities Exchange Act Release No. 53829 (May 18, 
2006), 71 FR 30038, 30041 (May 24, 2006).
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2. Section 11 of the Act
    Section 11(a)(1) of the Act \202\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises discretion 
(collectively, ``covered accounts''), unless an exception applies. Rule 
11a2-2(T) under the Act,\203\ known as the ``effect versus execute'' 
rule, provides exchange members with an exemption from the Section 
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute the 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) Must transmit the order from off the exchange 
floor; (ii) may not participate in the execution of the transaction 
once it has been transmitted to the member performing the 
execution;\204\ (iii) may not be affiliated with the executing

[[Page 13164]]

member; and (iv) with respect to an account over which the member has 
investment discretion, neither the member nor its associated person may 
retain any compensation in connection with effecting the transaction 
except as provided in the Rule.
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    \202\ 15 U.S.C. 78k(a)(1).
    \203\ 17 CFR 240.11a2-2(T).
    \204\ The member may, however, participate in clearing and 
settling the transaction. See 1978 Release, infra note 206.
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    In letters to the Commission,\205\ each Exchange requested that the 
Commission concur with its conclusion that Exchange members entering 
orders into each respective Exchange System satisfy the requirements of 
Rule 11a2-2(T). For the reasons set forth below, the Commission 
believes that EDGA members entering orders into the EDGA System and 
EDGX members entering orders into the EDGX System would satisfy the 
conditions of the Rule.
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    \205\ See letter from Eric W. Hess, General Counsel and 
Secretary, EDGA Exchange, to Elizabeth Murphy, Secretary, 
Commission, dated February 11, 2010; and letter from Eric W. Hess, 
General Counsel and Secretary, EDGX Exchange, to Elizabeth Murphy, 
Secretary, Commission, dated February 11, 2010 (collectively, 
``Exchange 11(a) Request Letters'').
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    The rule's first condition is that orders for covered accounts be 
transmitted from off the exchange floor. Each Exchange System receives 
orders electronically through remote terminals or computer-to-computer 
interfaces. In the context of other automated trading systems, the 
Commission has found that the off-floor transmission requirement is met 
if a covered account order is transmitted from a remote location 
directly to an exchange's floor by electronic means.\206\ Because each 
Exchange System receives orders electronically through remote terminals 
or computer-to-computer interfaces, the Commission believes that each 
System satisfies the off-floor transmission requirement.
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    \206\ See, e.g., Securities Exchange Act Release Nos. 59154 
(December 23, 2008) 73 FR 80468 (December 31, 2008) (SR-BSE-2008-48) 
(order approving proposed rules of NASDAQ OMX BX); 49068 (January 
13, 2004), 69 FR 2775 (January 20, 2004) (order approving the Boston 
Options Exchange as an options trading facility of the Boston Stock 
Exchange); 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001) 
(order approving Archipelago Exchange as electronic trading facility 
of the Pacific Exchange (``PCX'')); 29237 (May 24, 1991), 56 FR 
24853 (May 31, 1991) (regarding NYSE's Off-Hours Trading Facility); 
15533 (January 29, 1979), 44 FR 6084 (January 31, 1979) (regarding 
the American Stock Exchange (``Amex'') Post Execution Reporting 
System, the Amex Switching System, the Intermarket Trading System, 
the Multiple Dealer Trading Facility of the Cincinnati Stock 
Exchange, the PCX Communications and Execution System, and the 
Philadelphia Stock Exchange (``Phlx'') Automated Communications and 
Execution System (``1979 Release'')); and 14563 (March 14, 1978), 43 
FR 11542 (March 17, 1978) (regarding the NYSE's Designated Order 
Turnaround System (``1978 Release'')).
---------------------------------------------------------------------------

    Second, the rule requires that the member not participate in the 
execution of its order. Each Exchange represents that at no time 
following the submission of an order is a member able to acquire 
control or influence over the result or timing of an order's 
execution.\207\ According to each Exchange, the execution of a member's 
order is determined solely by what orders, bids, or offers are present 
in each system at the time the member submits the order and on the 
priority of those orders, bids and offers.\208\ Accordingly, the 
Commission believes that Exchange members do not participate in the 
execution of orders submitted into the Exchange Systems.
---------------------------------------------------------------------------

    \207\ See Exchange 11(a) Request Letters, supra note 205. The 
member may only cancel or modify the order, or modify the 
instructions for executing the order, but only from off the Exchange 
floor. The Commission has stated that the non-participation 
requirement is satisfied under such circumstances so long as such 
modifications or cancellations are also transmitted from off the 
floor. See 1978 Release, supra note 206 (stating that the ``non-
participation requirement does not prevent initiating members from 
canceling or modifying orders (or the instructions pursuant to which 
the initiating member wishes orders to be executed) after the orders 
have been transmitted to the executing member, provided that any 
such instructions are also transmitted from off the floor'').
    \208\ Id.
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    Third, Rule 11a2-2(T) requires that the order be executed by an 
exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that this requirement is satisfied 
when automated exchange facilities, such as the Exchange Systems, are 
used, as long as the design of these systems ensures that members do 
not possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange.\209\ Each Exchange 
represents that the design of its Exchange System ensures that no 
member has any special or unique trading advantage in the handling of 
its orders after transmitting its orders to the Exchange.\210\ Based on 
the Exchanges' representations, the Commission believes that the 
Exchange Systems satisfy this requirement.
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    \209\ In considering the operation of automated execution 
systems operated by an exchange, the Commission noted that while 
there is no independent executing exchange member, the execution of 
an order is automatic once it has been transmitted into each system. 
Because the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See 1979 
Release, supra note 206.
    \210\ See Exchange 11(a) Request Letters, supra note 205.
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    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T).\211\ Each Exchange represents that Exchange members trading for 
covered accounts over which they exercise investment discretion must 
comply with this condition in order to rely on the rule's 
exemption.\212\
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    \211\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for covered accounts over which such member or 
associated person thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member in connection with effecting 
transactions for the account during the period covered by the 
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra 
note 206(stating ``[t]he contractual and disclosure requirements are 
designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such 
arrangements are suitable to their interests'').
    \212\ See Exchange 11(a) Request Letters, supra note 205
---------------------------------------------------------------------------

G. Section 11A of the Act

    Section 11A of the Act and the rules thereunder form the basis of 
our national market system and impose requirements on exchanges to 
implement its objectives. Specifically, national securities exchanges 
are required, under Rule 601 of Regulation NMS,\213\ to file 
transaction reporting plans regarding transactions in listed equity and 
Nasdaq securities that are executed on their facilities. Currently 
registered exchanges satisfy this requirement by participating in the 
Consolidated Transaction Association Plan (``CTA Plan'') for listed 
equities and the Joint Self-Regulatory Organization Plan Governing the 
Collection, Consolidation and Dissemination of Quotation and 
Transaction Information for Nasdaq-Listed Securities Traded on 
Exchanges on an Unlisted Trading Privileges Basis (``Nasdaq UTP Plan'') 
for Nasdaq securities.\214\ Before the Exchanges can begin operating as 
exchanges, each must join these plans as a participant.
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    \213\ 17 CFR 242.601.
    \214\ These plans also satisfy the requirement in Rule 603 that 
national securities exchanges and national securities associations 
act jointly pursuant to an effective national market system plan to 
disseminate consolidated information, including a national best bid 
and offer, and quotations for and transactions in NMS stocks. See 17 
CFR 242.603. See also Nasdaq Exchange Registration Order, supra note 
75.
---------------------------------------------------------------------------

    National securities exchanges are required, under Rule 602 of 
Regulation

[[Page 13165]]

NMS,\215\ to collect bids, offers, quotation sizes and aggregate 
quotation sizes from those members who are responsible broker or 
dealers. National securities exchanges must then make this information 
available to vendors at all times when the exchange is open for 
trading. The current exchanges satisfy this requirement by 
participating in the Consolidated Quotation System Plan (``CQ Plan'') 
for listed equity securities and the Nasdaq UTP Plan for Nasdaq 
securities. Before EDGX and EDGA can begin operating as exchanges, each 
must join the CQ Plan as a participant, in addition to the CTA Plan and 
the Nasdaq UTP Plan.
---------------------------------------------------------------------------

    \215\ 17 CFR 242.602.
---------------------------------------------------------------------------

    Finally, national securities exchanges must make available certain 
order execution information pursuant to Rule 605 of Regulation 
NMS.\216\ Current exchanges have standardized the required disclosure 
mechanisms by participating in the Order Execution Quality Disclosure 
Plan.\217\ Each Exchange must join this plan before it begins 
operations as an exchange.
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    \216\ 17 CFR 242.605.
    \217\ See Securities Exchange Act Release No. 44177 (April 12, 
2001), 66 FR 19814 (April 17, 2001).
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H. Order Routing

    As discussed above, DE Holdings wholly owns EDGA, EDGX, and 
DECN.\218\ As such, each Exchange is affiliated with DECN,\219\ which 
is a registered broker-dealer and member of FINRA. The Exchanges also 
anticipate that DECN will be a member of each Exchange.
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    \218\ See Section III.A, supra.
    \219\ The Exchanges state that DECN will do business under the 
name of ``DE Route.''
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    Each Exchange's Rule 2.10 provides generally that, without prior 
Commission approval, the Exchange may not, directly or indirectly, 
acquire or maintain an ownership interest in a member organization of 
such Exchange. In addition, each Exchange's Rule 2.10 provides that, 
without prior Commission approval, none of the Exchange's members may 
be or become an affiliate of the Exchange or an affiliate of an 
affiliate of the Exchange. However, each Exchange proposes that its 
affiliate, DECN, become a member of the Exchange to provide certain 
routing services on behalf of the Exchange. Specifically, each Exchange 
proposes to (1) operate DECN as a facility of such Exchange to provide 
outbound routing services to other securities exchanges,\220\ automated 
trading systems, electronic communications networks, or other broker-
dealers (collectively, ``Trading Centers''), and (2) receive through 
DECN orders routed inbound to such Exchange from its affiliated 
exchange (i.e., EDGX in the case of EDGA, and EDGA in the case of 
EDGX).\221\ Accordingly, each Exchange seeks Commission approval of an 
exception in the Exchange's Rule 2.10 that will permit the affiliation 
between the Exchange and its member, DECN.
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    \220\ Securities exchanges to which each Exchange proposes to 
route orders include its affiliated exchange (i.e., EDGX in the case 
of EDGA, and EDGA in the case of EDGX).
    \221\ See Notice, supra note 3.
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    Recognizing that the Commission has previously expressed concern 
regarding the potential for conflicts of interest in instances where a 
member firm is affiliated with an exchange, particularly where a member 
is routing orders to such affiliated exchange,\222\ each Exchange has 
proposed limitations and conditions on DECN's affiliation with the 
Exchange. Specifically, each Exchange proposes that DECN operate as an 
affiliated outbound router on behalf of the Exchange, subject to 
certain conditions set forth in the Exchange's Rule 2.11; and that DECN 
operate as an affiliated inbound router on behalf of the Exchange 
subject to certain conditions set forth in the Exchange's Rule 
2.12.\223\
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    \222\ See e.g., Securities Exchange Act Release No. 53382 
(February 27, 2006), 71 FR 11251 FR (March 6, 2006).
    \223\ See Exchange Rules 2.11 and 2.12.
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1. DECN as Outbound Router
    Each Exchange proposes that DECN would operate as a facility of the 
Exchange providing outbound routing services from the Exchange to other 
Trading Centers.\224\ DECN's operation as a facility providing outbound 
routing services for each Exchange is subject to the conditions that:
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    \224\ See Exchange Rule 2.11. See also Notice, supra note 3.
---------------------------------------------------------------------------

     The Exchange regulates DECN as a facility of the Exchange;
     FINRA, a self-regulatory organization unaffiliated with 
the Exchange, is DECN's designated examining authority;
     DECN only provides routing services unless otherwise 
approved by the Commission;
     The use of DECN for outbound routing by Exchange members 
is optional; and
     The Exchange will establish and maintain procedures and 
internal controls reasonably designed to adequately restrict the flow 
of confidential and proprietary information between the Exchange and 
its facilities (including DECN) and any other entity.\225\
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    \225\ Id.
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    As a facility of each Exchange, DECN will be subject to each 
Exchange's and the Commission's regulatory oversight; and each Exchange 
will be responsible for ensuring that DECN's outbound routing function 
is operated consistent with section 6 of the Act and the Exchange's 
rules. In addition, each Exchange will be required to file with the 
Commission rule changes and fees relating to DECN's outbound routing 
function. Any such fees relating to DECN's outbound router function 
will be subject to exchange non-discrimination requirements. Further, 
the Commission believes that the proposed conditions on which DECN will 
operate as a facility providing outbound routing services for each 
Exchange should minimize the potential for conflicts of interest and 
informational advantages involved where a member firm is affiliated 
with an exchange to which it is routing orders. The Commission notes 
that the proposed conditions for the operation of DECN as affiliated 
outbound router on behalf of each Exchange are consistent with 
conditions the Commission has approved for other exchanges.\226\ The 
Commission therefore finds the proposed operation of DECN as an 
affiliated outbound router of each Exchange to be consistent with the 
Act.
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    \226\ See, e.g., Securities Exchange Act Release No. 59153 
(December 23, 2008), 73 FR 80485 (December 31, 2008) (order 
approving outbound routing by broker-dealer affiliate of Nasdaq 
Stock Exchange); and BATS Exchange Order, supra note 65.
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2. DECN as Inbound Router
    Each Exchange also proposes that DECN, operating as a facility of 
the Exchange, provide routing services from EDGX to EDGA, in the case 
of EDGA, and from EDGA to EDGX, in the case of EDGX (i.e, ``inbound'' 
routing), subject to the following conditions and limitations:
     The Exchange enters into (1) a 17d-2 agreement with FINRA, 
a non-affiliated SRO,\227\ to relieve the Exchange of regulatory 
responsibilities for DECN with respect to rules that are common rules 
between the Exchange and the non-affiliated SRO, and (2) a regulatory 
services agreement with FINRA, a non-affiliated SRO, to perform 
regulatory responsibilities for DECN for unique Exchange rules.
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    \227\ The Rule 17d-2 agreement is discussed at Section III.E.4, 
supra.
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     The regulatory service agreement requires the Exchange to 
provide the non-affiliated SRO with information, in an easily 
accessible manner, regarding all exception reports, alerts, complaints, 
trading errors, cancellations, investigations, and enforcement matters

[[Page 13166]]

(collectively ``Exceptions'') in which DECN is identified as a 
participant that has potentially violated Exchange or Commission Rules, 
and requires that FINRA provide a report, at least quarterly, to the 
Exchange quantifying all Exceptions in which DECN is identified as a 
participant that has potentially violated Exchange or Commission rules.
     The Exchange has in place a rule that requires DE Holdings 
to establish and maintain procedures and internal controls reasonably 
designed to ensure that DECN does not develop or implement changes to 
its system based on non-public information obtained as a result of its 
affiliation with the Exchange, until such information is available 
generally to similarly situated members of the Exchange.
     Routing of orders from DECN to the Exchange, in DECN's 
capacity as a facility of the affiliated exchange (i.e., EDGX, in the 
case of EDGA, and EDGA, in the case of EDGX), be authorized for a pilot 
period of 12 months.\228\
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    \228\ See Exchange Rule 2.12.
---------------------------------------------------------------------------

    Although the Commission continues to be concerned about potential 
unfair competition and conflicts of interest between an exchange's 
self-regulatory obligations and its commercial interest when the 
exchange is affiliated with one of its members, for the reasons 
discussed below, the Commission believes that it is consistent with the 
Act to permit DECN to be affiliated with each Exchange and to provide 
inbound routing to each Exchange on a pilot basis, subject to the 
conditions described above.
    Each Exchange has proposed five conditions applicable to DECN's 
inbound routing activities, which are enumerated above. The Commission 
believes that these conditions mitigate its concerns about potential 
conflicts of interest and unfair competitive advantage. In particular, 
the Commission believes that FINRA's oversight of DECN,\229\ combined 
with FINRA's monitoring of DECN's compliance with the equity trading 
rules and quarterly reporting to each Exchange, will help to protect 
the independence of each Exchange's regulatory responsibilities with 
respect to DECN. The Commission also believes that the requirement that 
each Exchange establish and maintain procedures and internal controls 
reasonably designed to ensure that DECN does not develop or implement 
changes to its system based on non-public information obtained as a 
result of its affiliation with the Exchange, until such information is 
available generally to similarly situated members of the Exchange is 
reasonably designed to ensure that DECN cannot use any information 
advantage it may have because of its affiliation with the Exchange. 
Furthermore, the Commission believes that each Exchange's proposal to 
allow DECN to route orders inbound to its affiliated exchange (i.e., 
from EDGX, in the case of EDGA, and from EDGA, in the case of EDGX), on 
a pilot basis, will provide each Exchange and the Commission an 
opportunity to assess the impact of any conflicts of interest of 
allowing an affiliated member of an Exchange to route orders inbound to 
the Exchange and whether such affiliation provides an unfair 
competitive advantage.
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    \229\ This oversight will be accomplished through the Rule 17d-2 
agreement and the RSA.
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    Further, the Commission notes that the proposed conditions for the 
operation of DECN as affiliated inbound router on behalf of each 
Exchange are similar to conditions the Commission has approved for 
other exchanges.\230\ The Commission therefore finds the proposed 
operation of DECN as an affiliated inbound router of each Exchange is 
consistent with the Act.
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    \230\ See e.g., Securities Exchange Release Nos. 60598 
(September 1, 2009), 74 FR 46280 (September 8, 2009) (SR-ISE-2009-
45); 59154 (December 23, 2008) 73 FR 80468 (December 31, 2008) (SR-
BSE-2008-48) (order approving proposed rulebook of NASDAQ OMX BX); 
and 59009 (November 24, 2008), 73 FR 73363 (December 2, 2008) (order 
granting accelerated approval to File No. SR-NYSEALTR-2008-07).
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I. Listing Requirements/Unlisted Trading Privileges

    The Exchanges initially do not intend to list any securities. 
Accordingly, the Exchanges have not proposed rules that would allow 
them to list any securities at this time.\231\ Instead, the Exchanges 
have proposed to trade securities pursuant to unlisted trading 
privileges, consistent with section 12(f) of the Act and Rule 12f-5 
thereunder. Rule 12f-5 requires an exchange that extends unlisted 
trading privileges to securities to have in effect a rule or rules 
providing for transactions in the class or type of security to which 
the exchange extends unlisted trading privileges.\232\ Each Exchange's 
rules allow it to extend unlisted trading privileges to any security 
listed on another national securities exchange or with respect to which 
unlisted trading privileges may otherwise be extended in accordance 
with section 12(f) of the Act.\233\ Each Exchange's rules provide for 
transactions in the class or type of security to which the exchange 
intends to extend unlisted trading privileges.\234\ In addition, 
pursuant to its rules, each Exchange will cease trading any equity 
security admitted to unlisted trading privileges that is no longer 
listed on another national securities exchange or to which unlisted 
trading privileges may no longer be extended, consistent with Section 
12(f). The Commission finds that these rules are consistent with the 
Act.\235\
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    \231\ The Exchanges have incorporated listing standards for 
certain derivative securities products in their rules. However, each 
Exchange's rules will prohibit the Exchange from listing any 
derivative security product pursuant to these listing standards 
until the Exchange submits a proposed rule change to the Commission 
to amend its listing standards to comply with Rule 10A-3 under the 
Act and incorporate qualitative listing criteria. See Exchange Rule 
14.1(a).
    \232\ 17 CFR 240.12f-5. See also Securities Exchange Act Release 
No. 35737 (April 21, 1995), 60 FR 20891 (April 28, 1995) (adopting 
Rule 12f-5).
    \233\ See Exchange Rule 14.1(a).
    \234\ Id. The Exchanges' rules currently do not provide for the 
trading of options, security futures, or other similar instruments.
    \235\ Each Exchange has represented to the Commission that it 
intends to phase-in the trading of securities currently trading on 
the DECN to each Exchange, and that it will provide appropriate 
advance notice to its members of the phase-in schedule. The 
Commission believes that this approach is appropriate and should 
help maintain an orderly transition to the Exchanges. See Amendment 
No. 2, supra note 5.
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J. Exchange Fees

    In the Form 1 Applications, the Exchanges generally describes their 
proposed fees and note that they, may, in the future, prescribe such 
reasonable dues, fees, and assessments or other charges as they may 
deem appropriate.\236\ Nasdaq, however, argues that the Form 1 
Applications are deficient because the Exchanges have not included 
their fee schedules in the Form 1 Applications.\237\ The Commission 
notes that it previously approved Form 1 applications that did not 
include fee schedules. For example, the Commission approved the Form 1 
application of BATS Exchange, Inc. (``BATS'') on August 18, 2008,\238\ 
and BATS subsequently filed its fee schedule on October 21, 2008, 
pursuant to Exchange Act Section 19(b).\239\ The

[[Page 13167]]

Commission also notes that any fees to be charged by the Exchanges 
would need to be filed with the Commission pursuant to section 19(b) of 
the Act and would not be effective until filed with, or filed with and 
approved by, the Commission.
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    \236\ See Form 1 Applications, Exhibit E, Response F.
    \237\ See Nasdaq Letter, supra note 4, at 7-8. Nasdaq also 
raises questions concerning fees that Nasdaq proposed in File No. 
SR-NASDAQ-2009-054. See Nasdaq Letter, supra note 4, at 8. The 
Commission believes that Nasdaq's proposed fees should be addressed 
in the context of Nasdaq's proposal, rather than in connection with 
the Form 1 Applications.
    \238\ See BATS Exchange Order, supra note 65.
    \239\ See Securities Exchange Act Release No. 58871 (October 28, 
2008), 73 FR 65428 (November 3, 2008) (notice of filing and 
immediate effectiveness of File No. SR-BATS-2008-009) (implementing 
the fee schedule that would be in effect on the date BATS commenced 
operations as a national securities exchange). Similarly, DE 
Holdings notes that Nasdaq filed fee schedules for two of its 
facilities, Nasdaq BX and the Nasdaq Options Market, after the 
Commission approved rules establishing the facilities. See DE 
Holdings Response, supra note 4, at 5.
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IV. Exemption From Section 19(b) of the Act With Regard to FINRA Rules 
Incorporated by Reference

    Each Exchange proposes to incorporate by reference certain rules of 
FINRA.\240\ Thus, for certain EDGA rules, EDGA members will comply with 
an EDGA rule by complying with the referenced FINRA rule. Similarly, 
for certain EDGX rules, EDGX members will comply with an EDGX rule by 
complying with the referenced FINRA rule.
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    \240\ Specifically, each Exchange proposes to incorporate by 
reference the following FINRA rules: FINRA's 1010 Series (Membership 
Proceedings) (referenced in each Exchange's Rule 2.4); FINRA's 
12,000 Series (Code of Arbitration for Customer Disputes) and 
FINRA's 13,000 Series (Code of Arbitration Procedure for Industry 
Disputes) (referenced in each Exchange's Rules 9.1 and 9.4).
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    In connection with its proposal to incorporate FINRA rules by 
reference, each Exchange requested, pursuant to Rule 240.0-12,\241\ an 
exemption under Section 36 of the Act from the rule filing requirements 
of Section 19(b) of the Act for changes to those Exchange rules that 
are effected solely by virtue of a change to a cross-referenced FINRA 
rule.\242\ Each Exchange proposes to incorporate by reference 
categories of rules (rather than individual rules within a category) 
that are not trading rules. Each Exchange agrees to provide written 
notice to its members whenever FINRA proposes a change to a cross-
referenced rule \243\ and whenever any such proposed changes are 
approved by the Commission.\244\
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    \241\ 17 CFR 240.0-12.
    \242\ See letter from Eric W. Hess, General Counsel and 
Secretary, EDGA, to Elizabeth M. Murphy, Secretary, Commission, 
dated February 11, 2010; and letter from Eric W. Hess, General 
Counsel and Secretary, EDGX, to Elizabeth M. Murphy, Secretary, 
Commission, dated February 11, 2010 (together, the ``Exchange 19(b) 
Exemption Request Letters'').
    \243\ See Exchange 19(b) Exemption Request Letters, supra note 
242.
    \244\ Each Exchange will provide such notice through a posting 
on the same Web site location where each Exchange will post its own 
rule filings pursuant to Rule 19b-4 under Act, within the time frame 
required by that Rule. The Web site posting will include a link to 
the location on the FINRA Web site where FINRA's proposed rule 
change is posted. Id.
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    Using its authority under Section 36 of the Act, the Commission 
previously exempted certain SROs from the requirement to file proposed 
rule changes under Section 19(b) of the Act.\245\ Each such exempt SRO 
agreed to be governed by the incorporated rules, as amended from time 
to time, but is not required to file a separate proposed rule change 
with the Commission each time the SRO whose rules are incorporated by 
reference seeks to modify its rules. In addition, each SRO incorporated 
by reference only regulatory rules (e.g., margin, suitability, 
arbitration), not trading rules, and incorporated by reference whole 
categories of rules (i.e., did not ``cherry-pick'' certain individual 
rules within a category). Each exempt SRO had reasonable procedures in 
place to provide written notice to its members each time a change is 
proposed to the incorporated rules of another SRO in order to provide 
its members with notice of a proposed rule change that affects their 
interests, so that they would have an opportunity to comment on it.
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    \245\ See, e.g., Securities Exchange Act Release No. 57478 
(March 12, 2008) 73 FR 14521, (March 18, 2008) (order approving 
rules governing the trading of options on the NASDAQ Options 
Market); Nasdaq Exchange Registration Order, supra note 75; and BATS 
Exchange Registration Order, supra note 65.
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    The Commission is granting each Exchange's request for exemption, 
pursuant to Section 36 of the Act, from the rule filing requirements of 
Section 19(b) of the Act with respect to the rules that each Exchange 
proposes to incorporate by reference into their respective rules. This 
exemption is conditioned upon each Exchange providing written notice to 
its members whenever FINRA proposes to change a rule that each Exchange 
has incorporated by reference. The Commission believes that this 
exemption is appropriate in the public interest and consistent with the 
protection of investors because it will promote more efficient use of 
Commission and SRO resources by avoiding duplicative rule filings based 
on simultaneous changes to identical rule text sought by more than one 
SRO. Consequently, the Commission grants each Exchange's exemption 
request.

V. Conclusion

    It is ordered that the applications of each of EDGX and EDGA for 
registration as a national securities exchange be, and hereby is, 
granted.
    It is further ordered that operation of each of EDGX and EDGA is 
conditioned on the satisfaction of the requirements below:
    A. Participation in National Market System Plans. Each Exchange 
must join the CTA Plan, the CQ Plan, the Nasdaq UTP Plan, and the Order 
Execution Quality Disclosure Plan.
    B. Intermarket Surveillance Group. Each Exchange must join the 
Intermarket Surveillance Group.
    C. Minor Rule Violation Plan. A MRVP filed by each Exchange under 
Rule 19d-1(c)(2) must be declared effective by the Commission.\246\
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    \246\ 17 CFR 240.19d-1(c)(2).
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    D. 17d-2 Agreement. An agreement pursuant to Rule 17d-2 \247\ 
between FINRA and each Exchange that allocates to FINRA regulatory 
responsibility for those matters specified above \248\ must be approved 
by the Commission, or each Exchange must demonstrate that it 
independently has the ability to fulfill all of its regulatory 
obligations.
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    \247\ 17 CFR 240.17d-2.
    \248\ See Sections III.E.4 and III.H.2, supra.
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    E. Regulatory Contracts. Each Exchange and FINRA, and each Exchange 
and ISE LLC, must finalize the provisions in the Regulatory Contracts, 
as described above,\249\ that will specify the Exchange and Commission 
rules for which FINRA and ISE will provide certain regulatory 
functions, or each Exchange must demonstrate that it independently has 
the ability to fulfill all of its regulatory obligations.
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    \249\ See Sections III.E.3 and III.H.2, supra.
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    F. Examination by the Commission. Each Exchange must have, and 
represent in a letter to the staff in the Commission's Office of 
Compliance Inspections and Examinations that it has, adequate 
procedures and programs in place to effectively regulate the Exchange.
    G. Trade Processing and Exchange Systems. Each Exchange must have, 
and represent in letters to the staff in the Commission's Division of 
Trading and Markets that it has, adequate procedures and programs in 
place, as noted in Commission Automation Policy Review guidelines,\250\ 
to effectively process trades and maintain the confidentiality, 
integrity, and availability of the Exchange's systems.
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    \250\ On November 16, 1989, the Commission published its first 
Automation Review Policy (``ARP I''), in which it created a 
voluntary framework for self-regulatory organizations to establish 
comprehensive planning and assessment programs to determine systems 
capacity and vulnerability. On May 9, 1991, the Commission published 
its second Automation Review Policy (``ARP II'') to clarify the 
types of review and reports that were expected from SROs. See 
Securities Exchange Act Release Nos. 27445 (November 16, 1989), 54 
FR 48703 (November 24, 1989); and 29185 (May 9, 1991), 56 FR 22490 
(May 15, 1991).
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    It is further ordered, pursuant to section 36 of the Act,\251\ that 
each Exchange shall be exempt from the rule filing requirements of 
section 19(b) of

[[Page 13168]]

the Act \252\ with respect to the FINRA rules the Exchange proposes to 
incorporate by reference into the Exchange's rules, subject to the 
conditions specified in this Order.
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    \251\ 15 U.S.C 78mm.
    \252\ 15 U.S.C 78s(b).

    By the Commission.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-5868 Filed 3-17-10; 8:45 am]
BILLING CODE 8011-01-P

