
[Federal Register Volume 78, Number 56 (Friday, March 22, 2013)]
[Notices]
[Pages 17727-17729]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-06609]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69164; File No. SR-ISE-2013-07]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Approving Proposed Rule Change To Amend International 
Securities Exchange, LLC Amended and Restated Constitution

March 18, 2013.

I. Introduction

    On January 13, 2013, the International Securities Exchange, LLC 
(``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend its Amended and Restated 
Constitution \3\ (the ``ISE Constitution'') to declassify the Non-
Industry Directors of the board of directors, change the term of the 
Non-Industry Directors and the Former Employee Director to a one-year 
term, and eliminate the three-term limit for the Former Employee 
Director. The proposed rule change was published for comment in the 
Federal Register on February 1, 2013.\4\ The Commission received no 
comments on the proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amended and Restated Constitution of International 
Securities Exchange, LLC (last amended December 28, 2007).
    \4\ See Securities Exchange Act Release No. 68740 (January 28, 
2013), 78 FR 7470 (``Notice'').
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II. Description of the Proposal

    As described more fully in the Notice, the Exchange's proposal 
would amend the ISE Constitution to: (i) Declassify the Non-Industry 
Directors (including the Public Directors) of the Board; (ii) change 
the term of the Non-Industry Directors (including the Public Directors) 
and the Former Employee Director to a one-year term, subject to re-
election; and (iii) eliminate the three-term limit for the Former 
Employee Director.
    Currently, Section 3.2(c) of the ISE Constitution requires, in 
part, that both Non-Industry Directors (including the Public Directors) 
\5\ and Exchange Directors \6\ be classified into two classes 
designated as Class I and Class II directors, and that all Directors 
(including the Former Employee Director) \7\ serve two-year terms, 
subject to re-election.
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    \5\ Section 3.2(b)(iv) of the ISE Constitution requires that the 
Board be composed of eight Non-Industry Directors (at least two of 
which are Public Directors) elected by the Sole LLC Member.
    \6\ Section 3.2(b)(i)-(iii) of the ISE Constitution requires 
that the Board be composed of six Exchange Directors elected by the 
holders of Exchange Rights.
    \7\ Section 3.2(b)(vi) of the ISE Constitution allows the Sole 
LLC Member, in its sole and absolute discretion, elect one 
additional director who shall meet the requirements of ``Non- 
Industry Directors,'' except that such person was employed by the 
Exchange at any time during the three-year period prior to his or 
her initial election.
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    ISE has proposed to amend Section 3.2(c) of the ISE Constitution 
to: (i) Remove any reference to Class I directors or Class II directors 
for Non-Industry Directors (including Public Directors); and (ii) state 
that the Non-Industry Directors (including the Public Directors) would 
hold office for a one-

[[Page 17728]]

year term, subject to annual re-election for additional terms. In the 
Notice, ISE noted that the rule change would not affect the manner of 
election of Non-Industry Directors (including the Public Directors), 
who would continue to be elected by the Sole LLC Member at each annual 
meeting of the Sole LLC Member and the holders of Exchange Rights in 
accordance with Section 3.2 of the ISE Constitution.
    Similarly, ISE has proposed to modify the term of the Former 
Employee Director so that any such director shall hold office for a 
one-year term, subject to re-election, and to make conforming technical 
changes to the applicable parts of Section 3.2(c).
    Finally, the proposal would eliminate the three-term limit for the 
Former Employee Director.\8\ In the Notice, ISE observed that, with 
these modifications, the Former Employee Director would qualify to 
become a Non-Industry Director after serving on the Board of Directors 
for three years as he or she would no longer have been employed by the 
Exchange in the previous three-year period after his or her initial 
election. As such, according to ISE, there would no longer be a need 
for the three-term limit.
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    \8\ Section 3.2(e)(iv) of the Constitution provides that a 
Former Employee Director may not serve on the Board of Directors for 
more than three consecutive terms. Any such director may be eligible 
for election as a director following a two-year hiatus from service 
on the Board of Directors, provided, that he or she meets the 
director qualifications pursuant to Section 3.2(b).
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    According to ISE, the declassification of the Non-Industry 
Directors, and the institution of a one-year term for Non-Industry 
Directors and the Former Employee Director, subject to re-election, 
would allow the Exchange to align its Board structure in accordance 
with corporate governance best practices guidelines that advocate the 
repeal of classified or staggered boards and the institution of annual 
elections of directors. The best practices cited by ISE include, but 
are not limited to, the Institutional Shareholder Services Proxy Voting 
Guidelines, the CalPERS Core Principles of Accountable Corporate 
Governance, the TIAA-CREF Policy Statement on Corporate Governance, and 
the AFI-CIO Proxy Voting Guidelines. Although ISE has only one 
shareholder, as opposed to many shareholders in a public company, the 
Exchange nonetheless stated its belief that adherence to the 
aforementioned corporate governance best practices guidelines would be 
beneficial to the Exchange in that they would provide for flexibility, 
transparency, and accountability for the sole shareholder and, 
ultimately, for the members of the Exchange and the customers of the 
Exchange members. According to ISE, the proposed modifications to the 
ISE Constitution would provide ISE with the most flexibility to 
structure the board of directors in a way that is most effective for: 
(i) Attracting and keeping Non-Industry Directors and the Former 
Employee Director who provide valuable insight and knowledge to the 
Board; (ii) providing the Sole LLC Member with the ability to evaluate 
and hold accountable Non-Industry Directors and the Former Employee 
Director on an annual basis; and (iii) removing an underperforming, 
inactive, or ineffective Non-Industry Director or Former Employee 
Director who may be detrimental to the enhancement of long-term 
corporate value.
    In the Notice, ISE noted, however, that it was not proposing any 
changes to the current requirements in the ISE Constitution that 
specify that Exchange Directors serve two-year terms in a classified 
manner. The Exchange stated its belief that the current structure 
continues to be an effective and practical mechanism for ensuring 
continuity and fair representation of the Exchange's membership on the 
Board. ISE further noted that Exchange Directors represent the 
membership of the Exchange on the Board of Directors. Due to the 
connection between the Exchange's business and each Exchange Director's 
underlying business, ISE also stated that it believes that Exchange 
Directors provide a very different perspective from the Non-Industry 
Directors and the Former Employee Director. Specifically, according to 
ISE, Exchange Directors not only have an interest in seeing certain 
Exchange initiatives through to implementation, but are uniquely 
positioned to offer valuable feedback on such initiatives directly to 
the Board of Directors. Given the regulatory nature of the Exchange's 
business and the extended period of time necessary to see initiatives 
through to implementation, the Exchange stated that a term longer than 
one year is necessary for Exchange Directors to achieve the full 
benefit of participation of the Board. The Exchange also noted that the 
classified structure of the Exchange Directors allows for a more 
consistent representation of the Exchange's membership on the Board of 
Directors. By never having a whole slate of new Exchange Directors join 
the Board at the same time, the Exchange stated its belief that the 
classified structure allows incumbent Exchange Directors to provide 
leadership and continuity to new Exchange Directors and the Board of 
Directors, as a whole.
    As to implementation, under the Exchange's proposal, the 
declassification changes to the Board of Directors would be implemented 
through a process in which each current Non-Industry Director 
(including the Public Directors) will serve out the remainder of his or 
her two-year term, and any subsequent election or re-election of a Non-
Industry Director (including any Public Director) vacancy will be for a 
one-year term. ISE noted that this process would result in all Non-
Industry directors being declassified at the conclusion of the 
Exchange's 2014 annual meeting.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\9\ 
In particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(1) of the Act,\10\ which requires, among 
other things, that an exchange be so organized and have the capacity to 
be able to carry out the purposes of the Act and (subject to any rule 
or order of the Commission pursuant to Section 17(d) or 19(g)(2) of the 
Exchange Act) to enforce compliance by its members and persons 
associated with its members with the provisions of the Exchange Act, 
the rules and regulations thereunder, and the rules of the Exchange and 
consistent with Section 6(b)(5) of the Act,\11\ which requires that the 
rules of an exchange be designed, among other things, to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts, to remove impediments to and to perfect the 
mechanism for a free and open market and a national market system, and, 
in general, to protect investors and the public interest.
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    \9\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(1).
    \11\ 15 U.S.C. 78f(b)(5).
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    ISE has proposed, in part, to declassify the Non-Industry Directors 
(including the Public Directors) of the ISE board. The Commission finds 
the declassification of the Non-Industry Director members (including 
the Public Directors) of the ISE board in the manner proposed to be 
consistent with other self-regulatory organization

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governance structures that were approved by the Commission.\12\
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    \12\ See Securities Exchange Act Nos. 56955 (December 13, 2007); 
72 FR 71979, 71981 fn. 33 (December 19, 2007) (File No. SR-ISE-2007-
101) (approving declassification the board for ISE's parent, 
International Securities Exchange Holdings, Inc.); 51741 (May 25, 
2005); 70 FR 31558 (June 1, 2005) (File No. SR-NASD-2005-054) 
(approving declassification of the board for NASD).
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    Moreover, ISE has proposed, in part, to change the term of the Non-
Industry Directors (including the Public Directors) and the Former 
Employee Director to a one-year term, subject to re-election. The 
Commission finds the one-year term for Non-Industry Directors 
(including the Public Directors) and for the Former Employee Director 
to be consistent with the Act.
    The Commission notes that the elimination of the term limit for the 
Former Employee Director will have no practical effect on board 
composition at ISE. As proposed, an ISE director who serves as the 
Former Employee Director for three years will have been, by definition, 
a former employee of ISE for those three years, and could thereby meet 
the requirements to serve as a Non-Industry Director. The Commission 
finds the elimination of this term limit to be consistent with the Act.
    Finally, the Commission notes that ISE will not be making any other 
changes to its governance structure other than those specifically 
described in this filing. Under the proposed rule change, the ISE 
Constitution would continue to provide that eight of the members of the 
Exchange's board of directors--out of a maximum total of 16 members--
must be non-industry representatives. This proposed balance with 
respect to the composition of the Exchange's Board is consistent with 
other self-regulatory organization governance structures that were 
approved by the Commission,\13\ and the Commission continues to believe 
that this board composition is consistent with the Act.
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    \13\ See, e.g., Securities Exchange Act Release No. 54494 
(September 25, 2006), 71 FR 58023 (October 2, 2006) (File No. SR-
CHX-2006-23). See also Securities Exchange Act Release No. 56211 
(August 6, 2007); 72 FR 45287 (August 13, 2007) (File No. SR-ISE-
2007-34).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-ISE-2013-07) be, and it 
hereby is, approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-06609 Filed 3-21-13; 8:45 am]
BILLING CODE 8011-01-P


