
[Federal Register Volume 79, Number 19 (Wednesday, January 29, 2014)]
[Notices]
[Pages 4771-4779]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-01659]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71375; File Nos. SR-BATS-2013-059; SR-BYX-2013-039]


Self-Regulatory Organizations; BATS Exchange, Inc.; BATS-Y 
Exchange, Inc.; Order Granting Approval of Proposed Rule Change in 
Connection With the Proposed Business Combination Involving BATS Global 
Markets, Inc. and Direct Edge Holdings LLC

January 23, 2014.

I. Introduction

    On November 25, 2013, BATS Exchange, Inc. (``BATS'') and BATS-Y 
Exchange, Inc. (``BYX'' and, together with BATS, the ``BATS 
Exchanges'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1)Sec.  \1\ of the 
Securities Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4 
thereunder,\3\ proposed rule changes in connection with the proposed 
business combination (``Combination'') of their parent company, BATS 
Global Markets, Inc., and Direct Edge Holdings LLC (``DE Holdings''), 
the indirect parent company of EDGX Exchange, Inc. (``EDGX'') and EDGA 
Exchange, Inc. (``EDGA'' and, together with EDGX, the ``DE Exchanges'') 
(the BATS Exchanges and the DE Exchanges are the ``Exchanges'').\4\ The 
proposed rule changes were published for comment in the Federal 
Register on December 12, 2013.\5\ The Commission received no comments 
on the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ The DE Exchanges submitted corresponding proposed rule 
changes relating to the Combination. See Securities Exchange Act 
Release Nos. 71046 (December 11, 2013), 78 FR 76416 (December 17, 
2013) (SR-EDGA-2013-34) and 71045 (December 11, 2013) 78 FR 76480 
(December 17, 2013) (SR-EDGX-2013-43).
    \5\ See Securities Exchange Act Release Nos. 71023 (December 6, 
2013), 78 FR 75607 (SR-BATS-2013-059) and 71024 (December 6, 2013), 
78 FR 75585 (SR-BYX-2013-039) (``Notices'').
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    The Commission has reviewed carefully the proposed rule changes and 
finds that the proposed rule changes are consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\6\ In particular, the 
Commission finds that the proposed rule changes are consistent with 
Sections 6(b)(1) and (3) of the Act,\7\ which, among other things, 
requires a national securities exchange to be so organized and have the 
capacity to be able to carry out the purposes of the Act, and to 
enforce compliance by its members and persons associated with its 
members with the provisions of the Act, the rules and regulations 
thereunder, and the rules of the exchange, and assure the fair 
representation of its members in the selection of its directors and 
administration of its affairs, and provide that one or more directors 
shall be representative of issuers and investors and not be associated 
with a member of the exchange, broker, or dealer. The Commission also 
finds that the proposal is consistent with Section 6(b)(5) of the 
Act,\8\ which requires that the rules of the exchange be designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.
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    \6\ In approving the proposed rule changes, the Commission has 
considered their impact on efficiency, competition and capital 
formation. See 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(1) and (b)(3).
    \8\ 15 U.S.C. 78f(b)(5).
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II. Discussion

A. Corporate Structure

1. Current Structure
    BATS Global Markets, Inc., a Delaware corporation, owns 100 percent 
of the equity interests of each BATS Exchange. BATS Global Markets, 
Inc. also owns 100 percent of the equity interest in BATS Trading, 
Inc., a Delaware corporation (``BATS Trading''), that is a broker-
dealer registered with the Commission that provides routing services 
outbound from and, in certain instances inbound to, each of the BATS 
Exchanges. Currently, BATS Global Markets, Inc. is beneficially owned 
primarily by a consortium of several unaffiliated firms, including 
Members \9\ or affiliates of Members of the BATS Exchanges. No firm 
beneficially owns 20 percent or greater of BATS Global Markets, Inc., 
and the only firms beneficially owning ten percent or greater of BATS 
Global Markets, Inc. are: (1) GETCO Investments, LLC, an affiliate of 
KCG Holdings, Inc., (2) BGM Holding, L.P., a holding company itself 
owned by entities affiliated with the Spectrum Equity Investors and TA 
Associates Management private investment funds, and (3) Strategic 
Investments I, Inc., an

[[Page 4772]]

affiliate of Morgan Stanley.\10\ Seven other firms each beneficially 
own five percent or greater, but less than ten percent of BATS Global 
Markets, Inc., while seven other firms as well as various individuals 
each beneficially own less than five percent of BATS Global Markets, 
Inc.
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    \9\ With respect to each of the BATS Exchanges, the term 
``Member'' is defined in Rule 1.5(n) of the BATS Exchanges' Rules as 
``any registered broker or dealer that has been admitted to 
membership in the Exchange.''
    \10\ For purposes of this approval order (``Order''), references 
to the beneficial ownership of a ``firm'' refers to the aggregate 
beneficial ownership of the firm and its affiliated entities. See 
Notices, supra note 5, at 75608, n.6 and 75586, n.6.
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    DE Holdings, a Delaware limited liability company, owns 100 percent 
of the equity interest in Direct Edge, Inc., a Delaware corporation 
(``DEI''). DEI, in turn, owns 100 percent of the equity interest in two 
registered national securities exchanges, EDGX and EDGA, each a 
Delaware corporation. In addition, DE Holdings owns 100 percent of the 
equity interest in Direct Edge ECN LLC d/b/a DE Route, a Delaware 
limited liability company and the routing broker-dealer for the DE 
Exchanges (``DE Route'').
    As a limited liability company, ownership in DE Holdings is 
represented by units held by ``LLC Members.'' Certain of the DE 
Holdings LLC Members are Members \11\ or affiliates of Members of the 
Exchange. The BATS Exchanges noted their understanding that the 
International Securities Exchange Holdings, Inc. (``ISE Holdings'') is 
the only LLC Member of DE Holdings to beneficially own greater than 20 
percent of the equity interest in DE Holdings. Other than ISE Holdings, 
the only firms beneficially owning ten percent or greater of DE 
Holdings (but in each case less than 20 percent) are Citadel Securities 
LLC, The Goldman Sachs Group, Inc., and an affiliate of KCG Holdings, 
Inc. No LLC Member beneficially owns five percent or greater, but less 
than ten percent of DE Holdings. Five other firms as well as various 
individuals each beneficially own less than five percent of DE 
Holdings.
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    \11\ With respect to each of the DE Exchanges, the term 
``Member'' is defined in Rule 1.5(n) of the DE Exchanges' Rules as 
``any registered broker or dealer, or any person associated with a 
registered broker or dealer, that has been admitted to membership in 
the Exchange.''
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2. The Combination
    In connection with the Combination, several new entities were 
formed. BATS Global Markets Holdings, Inc., a Delaware corporation, is 
currently a wholly owned subsidiary of BATS Global Markets, Inc., and 
is currently a shell company with no material assets or operations. 
BATS Global Markets Holdings, Inc., in turn, owns 100 percent of the 
equity interest in each of Blue Merger Sub Inc., a Delaware corporation 
(``Blue Merger Sub''), and Delta Merger Sub LLC, a Delaware limited 
liability company (``Delta Merger Sub''). Each of Blue Merger Sub and 
Delta Merger Sub are currently shell companies with no material assets 
or operations.
    As described in more detail below, at the closing of the 
Combination (``Closing''), BATS Global Markets, Inc. and DE Holdings 
will each become intermediate holding companies, held under a single 
new holding company upon the Closing. The new holding company, 
currently named ``BATS Global Markets Holdings, Inc.,'' will at that 
time change its name to ``BATS Global Markets, Inc.'' In addition, the 
current parent company of the BATS Exchanges, BATS Global Markets, 
Inc., will at that time change its name to ``BATS Global Markets 
Holdings, Inc.'' For ease of reference, this Order will refer to the 
current parent company of each BATS Exchange as ``Current BGM'' when 
referring to the entity prior to the Closing, and as ``BGM Holdings'' 
when referring to that entity after the Closing. The entity that will 
become the new top-level holding company that will, after Closing, own 
BGM Holdings and DE Holdings, will be referred to as ``New BGM.''
    At the Closing, among other things, (1) Blue Merger Sub will merge 
with and into Current BGM, whereupon the separate existence of Blue 
Merger Sub will cease and Current BGM (to be renamed ``BGM Holdings'') 
will be the surviving company (the ``BATS Merger''); (2) Delta Merger 
Sub will merge with and into DE Holdings, whereupon the separate 
existence of Delta Merger Sub will cease and DE Holdings will be the 
surviving company (the ``Direct Edge Merger''); (3) by virtue of the 
BATS Merger and without any action required on the part of Current BGM, 
New BGM, Blue Merger Sub or any holder of Current BGM stock, each 
outstanding share of Current BGM stock issued and outstanding will be 
converted into the right to receive shares of New BGM stock, and each 
outstanding share of Blue Merger Sub issued and outstanding will be 
converted into one share of Current BGM, such that Current BGM will 
become a wholly owned subsidiary of New BGM; and (4) by virtue of the 
Direct Edge Merger and without any action required on the part of DE 
Holdings, New BGM, Delta Merger Sub, or any LLC Member, each LLC 
Member's membership interests in DE Holdings will be converted into the 
right to receive shares of New BGM stock, and each unit of ownership 
interest of Delta Merger Sub issued and outstanding will be converted 
into one unit of ownership of DE Holdings, such that DE Holdings will 
become a wholly owned subsidiary of New BGM.
    As a result of the Combination, New BGM will own: (1) 100 percent 
of the equity interest in BGM Holdings (the entity previously referred 
to as Current BGM), and (2) 100 percent of the LLC membership interests 
in DE Holdings. BGM Holdings will continue to own 100 percent of the 
equity interest in the BATS Exchanges and BATS Trading. DE Holdings 
will continue to own 100 percent of the equity interest in DE Route and 
DEI. DEI will, in turn, continue to own 100 percent of the equity 
interest in the DE Exchanges. Each of the BATS Exchanges and BATS 
Trading, on the one hand, and the DE Exchanges and DE Route, on the 
other hand, will continue to operate separately.
    The ownership of New BGM, as the new top-level holding company for 
the combined businesses, will be divided among the several firms and 
individuals that previously held equity interests in each of Current 
BGM and DE Holdings. Of the firms and individuals that are expected to 
hold equity interests in New BGM after the Closing, none will 
beneficially own 20 percent or greater of New BGM and only an affiliate 
of KCG Holdings, Inc. will beneficially own ten percent or greater. 
Seven firms will beneficially own five percent or greater, but less 
than ten percent, while 12 other firms as well as various individuals 
will each beneficially own less than five percent of New BGM.\12\


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    \12\ ISE Holdings, which will beneficially own greater than five 
percent, but less than ten percent of New BGM, will receive common 
stock of New BGM designated as Class A Non-Voting Common Stock. As 
set forth in the New BGM Charter (as defined below), shares of Class 
A Non-Voting Common Stock are generally non-voting, except with 
respect to certain actions that would adversely affect the 
preferences, rights or powers of the holders of Class A Non-Voting 
Common Stock disproportionately relative to Voting Common Stock or 
the Class B Non-Voting Common Stock. See proposed New BGM Charter, 
Article FOURTH, para. (b)(ii). ISE Holdings' shares of Class A Non-
Voting Common Stock may convert to Voting Common Stock: (1) 
Automatically with respect to any shares transferred to persons 
other than Related Persons of ISE Holdings; (2) upon the termination 
of the Investor Rights Agreement; or (3) automatically with respect 
to any shares of Class A Non-Voting Common Stock sold by ISE 
Holdings in any public offering of the stock of New BGM. See 
proposed New BGM Charter, Article FOURTH, para. (c); and Investor 
Rights Agreement, Section 2.2(j).
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B. Proposed Rule Changes

    Section 19(b) of the Act and Rule 19b-4 thereunder require a self-

[[Page 4773]]

regulatory organization (``SRO'') to file proposed rule changes with 
the Commission. Although New BGM and Current BGM/BGM Holdings are not 
SROs, certain provisions of their proposed certificates of 
incorporation and bylaws, along with other corporate documents, are 
rules of the exchange, if they are stated policies, practices, or 
interpretations, as defined in Rule 19b-4 under the Act, and must be 
filed with the Commission pursuant to Section 19(b)(4) of the Act and 
Rule 19b-4 thereunder. Accordingly, each of the BATS Exchanges filed 
with the Commission the following documents, along with other corporate 
documents, in connection with the Combination: (1) Resolutions of 
Current BGM's board of directors (``Resolutions'') making certain 
determinations regarding New BGM and the impact of the Combination on 
the BATS Exchanges; (2) the proposed Amended and Restated Certificate 
of Incorporation of New BGM (``New BGM Charter''); \13\ (3) the Amended 
and Restated Bylaws of New BGM (the ``New BGM Bylaws''); \14\ (4) the 
proposed amendments to Current BGM's Second Amended and Restated 
Certificate of Incorporation (the ``Current BGM Charter,'' and after 
such amendments, the ``BGM Holdings Charter''); \15\ (5) the proposed 
amendments to the Amended and Restated Bylaws of Current BGM (the 
``Current BGM Bylaws,'' and after such amendments, the ``BGM Holdings 
Bylaws''); \16\ (6) the proposed amendments to the Second Amended and 
Restated By-Laws of the BATS Exchanges (each, and collectively, the 
``BATS Exchanges Bylaws''); (7) the proposed amendments to Rule 2.3 of 
each of the BATS Exchanges to reflect the affiliation between each BATS 
Exchange and two additional registered national securities exchanges; 
and (8) the proposed amendments to Rule 2.12 of each BATS Exchange to 
reflect the affiliation between the BATS Exchanges and the routing 
broker for EDGA and EDGX. Each of the BATS Exchanges also requested 
that the Commission approve the proposed indirect acquisition by an 
affiliate of each BATS Exchange of a Member of the BATS Exchanges and 
the resulting affiliation between the BATS Exchanges and the Member, as 
required under Rule 2.10 of each BATS Exchange.\17\

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    \13\ The BATS Exchanges noted that theNew BGM Charter is modeled 
on, and substantially similar to the Current BGM Charter, except 
with respect to the following: (1) an increase in the number of 
authorized shares that New BGM will have authority to issue, which 
is the result of an increase in the number of stockholders that New 
BGM will have following the Closing; (2) the designation of Class A 
Non-Voting Common Stock and Class B Non-Voting Common Stock (the 
Current BGM Charter has only one class of Non-Voting Common Stock), 
the rights and preferences of which are identical to each other 
except for conversion rights; (3) minor differences in certain 
defined terms; and (4) several non-substantive differences and 
typographical corrections. See Notices, supra note 5, at 75611-75613 
and 75589-90.
    \14\ The New BGM Bylaws are modeled on, and substantially 
similar to the Current BGM Bylaws, except with respect to the 
following: (1) The provision for two separate corporate officer 
positions, one known as the ``Chief Executive Officer'' and another 
known as ``President,'' instead of one position known as ``The 
President and Chief Executive Officer;'' (2) an increase in the size 
of the board of directors from 13 members to 15 members; (3) changes 
in terminology to reflect the new ownership structure; (4) minor 
differences in defined terms; and (5) several non-substantive 
differences and typographical corrections. See Notices, supra note 
5, at 75613 and 75591.
    \15\ The BATS Exchanges note that the BGM Holdings Charter is 
modeled on, and substantially similar to, the current certificate of 
incorporation of DEI, which is similarly situated as an intermediate 
holding company between DE Holdings and the DE Exchanges. See 
Notices, supra note 5, at 75613 and 75591.
    \16\ The BATS Exchanges note that the BGM Holdings Bylaws are 
modeled on, and substantially similar to, the current bylaws of DEI, 
which is similarly situated as an intermediate holding company 
between DE Holdings and the DE Exchanges. See Notices, supra note 5, 
at 75613, 75615 and 75591, 75593.
    \17\ See Notices, supra note 5, at 75617 and 75595.
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1. Voting and Ownership Limitations
    The New BGM Charter includes restrictions on the ability to own and 
vote shares of capital stock of New BGM.\18\ These limitations are 
designed to prevent any stockholder from exercising undue control over 
the operation of any of the BATS Exchanges or the DE Exchanges and to 
assure that the BATS Exchanges, the DE Exchanges, and the Commission 
are able to carry out their regulatory obligations under the Act.
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    \18\ These provisions are generally consistent with ownership 
and voting limits approved by the Commission for other SROs. See 
e.g., Securities Exchange Act Release Nos. 70210 (August 15, 2013), 
78 FR 51758 (August 21, 2013) (SR-NYSE-2013-42, SR-NYSEMKT-2013-50 
and SR-NYSEArca-2013-62) (order approving proposed transaction in 
which NYSE Euronext will become a wholly owned subsidiary of 
IntercontinentalExchange Group, Inc.) (``IntercontinentalExchange 
Group, Inc. Combination Order''); 62716 (August 13, 2010), 75 FR 
51295 (August 19, 2010) (File No. 10-198) (order approving 
registration application of BYX as a national securities exchange) 
(``BYX Approval Order); 61698 (March 12, 2010), 75 FR 13151 (March 
18, 2010) (File Nos. 10-194 and 10-196) (order approving 
registration application of EDGX Exchange, Inc. and EDGA Exchange, 
Inc.) (``EDGX and EDGA Approval Order''); 58375 (August 18, 2008), 
73 FR 49498 (August 21, 2008) (File No. 10-182) (order approving 
registration of BATS as a national securities exchange) (``BATS 
Approval Order''); 55293 (February 14, 2007), 72 FR 8033 (February 
22, 2007) (SR-NYSE-2006-120) (order approving proposed combination 
between NYSE Group, Inc. and Euronext N.V.) (``NYSE-Euronext Merger 
Order''); 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) 
(SR-NYSE-2005-77) (order approving merger of New York Stock 
Exchange, Inc. and Archipelago, and demutualization of New York 
Stock Exchange, Inc.) (``NYSE Inc.-Archipelago Merger Order''); 
53963 (June 8, 2006), 71 FR 34660 (June 15, 2006) (File No. SR-NSX-
2006-03) (``NSX Demutualization Order''); 53128 (January 13, 2006), 
71 FR 3550 (File No. 10-131) (order approving registration 
application of NASDAQ as a national securities exchange) (``NASDAQ 
Approval Order''); 51149 (February 8, 2005), 70 FR 7531 (February 
14, 2005) (SR-CHX-2004-26) (``CHX Demutualization Order''); and 
49098 (January 16, 2004), 69 FR 3974 (January 27, 2004) (SR-Phlx-
2003-73) (``Phlx Demutualization Order'').
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    Specifically, the proposed New BGM Charter includes restrictions on 
the ability to vote and own shares of stock of New BGM. Under the 
proposed New BGM Charter: (1) no person, either alone or together with 
its Related Persons,\19\ at any time may, directly, indirectly or 
pursuant to any voting trust, agreement, plan or other arrangement 
(other than the Investor Rights Agreement), vote or cause the voting of 
shares of the capital stock of New BGM or give any consent or proxy 
with respect to shares representing more than 20 percent of the voting 
power of the then issued and outstanding capital stock of New BGM,\20\ 
and (2) no person, either alone or together with its Related Persons, 
enter into any agreement, plan or other arrangement (other than the 
Investor Rights Agreement) with any other Person,\21\ either alone or 
together with its Related Persons, under circumstances that would 
result in the shares of capital stock of New BGM that are subject to 
such agreement, plan or other arrangement not being voted on any matter 
or matters or any proxy relating thereto being withheld, where the 
effect of such agreement, plan or other arrangement would be to enable 
any Person, either alone or together with its Related Persons, to vote, 
possess the right to vote or cause the voting of shares of the capital 
stock of New BGM that would represent more than 20 percent of said 
voting power (the ``New BGM Voting Restrictions'').\22\
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    \19\ See proposed New BGM Charter, Article FIFTH, para. (a)(ii) 
(defining ``Related Person''). See Notices, supra note 5, at 75611 
and 75589.
    \20\ See proposed New BGM Charter, Article FIFTH, para. 
(b)(i)(C).
    \21\ See id. at Article FIFTH, para. (a)(i) (defining 
``Person'').
    \22\ See id. at Article FIFTH, para. (b)(i)(C).
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    In addition, the New BGM Charter includes ownership restrictions 
that provide that: (1) no Person, either alone or together with its 
Related Persons, may own, directly or indirectly, of record or 
beneficially, shares constituting more than 40 percent of any class of 
capital stock of New BGM, and (2) no Member of any of the BATS 
Exchanges or the DE Exchanges, either alone or together with its 
Related

[[Page 4774]]

Persons, may own, directly or indirectly, of record or beneficially, 
shares constituting more than 20 percent of any class of capital stock 
of New BGM (the ``New BGM Ownership Restrictions'').\23\
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    \23\ See id. at Article FIFTH, paras. (b)(i)(A) and (B). The 
limitations imposed by the New BGM Ownership Restrictions and New 
BGM Voting Restrictions shall not apply in the case of any class of 
stock that does not have the right to vote in the election of 
members of the board of directors of New BGM or on other matters 
that may require the approval of the holders of voting shares of New 
BGM (other than matters affecting the rights, preferences or 
privileges of said class of stock). See id. at Article FIFTH, para. 
(b)(ii)(A).
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    If any stockholder purports to transfer to any person any shares 
that would violate the New BGM Voting Restrictions or New BGM Ownership 
Restrictions (``New BGM Voting and Ownership Restrictions''), then New 
BGM shall record on the books only that number of shares that would not 
violate that restriction and shall treat the remaining shares as owned 
by the purported transferor for all purposes.\24\ If any stockholder of 
New BGM purports to vote, or grant any proxy or enter into any 
agreement, plan or other arrangement relating to the voting of shares 
that would violate the New BGM Voting and Ownership Restrictions, then 
New BGM shall not honor such vote, proxy, agreement, plan or other 
arrangement to the extent that such provisions would be violated, and 
any shares subject to that arrangement shall not be entitled to vote to 
the extent of such violation.\25\
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    \24\ See id. at Article FIFTH, para. (d).
    \25\ Id. If any stockholder purports to sell, transfer, assign, 
convert, pledge, or own any shares in violation of the New BGM 
Voting and Ownership Restrictions, then New BGM shall have the right 
to, and shall promptly after confirming such violation and to the 
extent funds are legally available, redeem the shares transferred in 
violation of the restriction. See id. at Article FIFTH, para. (e).
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    The New BGM Charter would provide that the New BGM Voting and 
Ownership Restrictions would apply only for so long as New BGM directly 
or indirectly controls a national securities exchange registered under 
Section 6 of the Act with the Commission.\26\
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    \26\ See id. at Article FIFTH, para. (b)(i).
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    The New BGM board of directors may waive the New BGM Ownership 
Restrictions applicable to non-Member stockholders and the New BGM 
Voting Restrictions, if, in connection with taking such action, the 
board of directors adopts a resolution stating that the waiver:
     Will not impair the ability of any exchange subsidiary to 
carry out its functions and responsibilities as an ``exchange'' under 
the Act and the rules and regulations promulgated thereunder;
     is otherwise in the best interests of New BGM, its 
stockholders and its exchange subsidiaries; and
     will not impair the Commission's ability to enforce the 
Act or the rules and regulations promulgated thereunder.\27\
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    \27\ See id. at Article FIFTH, para. (b)(ii)(B). In making this 
determination, the BGM board of directors may impose on the Person 
in question and its Related Persons such conditions and restrictions 
that it may in its sole discretion deem necessary, appropriate or 
desirable in furtherance of the objectives of the Act and the 
governance of the applicable exchange subsidiary. Id.
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    Any such waiver would not be effective until approved by the 
Commission pursuant to Section 19 of the Act.\28\ However, the New BGM 
board of directors cannot waive the voting and ownership limits above 
20 percent for a Member of any of the BATS Exchanges or any of the DE 
Exchanges and their Related Persons.\29\ Further, the New BGM board of 
directors also cannot waive the voting and ownership limits above the 
20% threshold if such person or its Related Persons is subject to any 
statutory disqualification (as defined in Section 3(a)(39) of the 
Act).\30\
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    \28\ See id. at Article FIFTH, para. (b)(ii)(B).
    \29\ See id. at Article FIFTH, paras. (b)(i)(B) and (b)(ii)(B).
    \30\ See id. at Article FIFTH, para.(b)(iii).
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    Members that trade on an exchange traditionally have had 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.\31\ A 
member that is a controlling shareholder of an exchange might be 
tempted to exercise that controlling influence by directing the 
exchange to refrain from, or the exchange may hesitate to, diligently 
monitor and surveil the member's conduct or diligently enforce its 
rules and the federal securities laws with respect to conduct by the 
member that violates such provisions.\32\
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    \31\ See, e.g., IntercontinentalExchange Group, Inc. Combination 
Order; BYX Approval Order; EDGX and EDGA Approval Order; BATS 
Approval Order; NYSE--Euronext Merger Order; NYSE Inc.--Archipelago 
Merger Order; NSX Demutualization Order; NASDAQ Approval Order; CHX 
Demutualization Order; Phlx Demutualization Order, supra note 18.
    \32\ See, e.g., id.
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    In addition, as proposed, BGM Holdings will be a wholly-owned 
subsidiary of New BGM and the BGM Holdings Charter identifies this 
ownership structure.\33\ Any changes to the BGM Holdings Charter, 
including any change in the provision that identifies New BGM as the 
sole stockholder of BGM Holdings, must be filed with and approved by 
the Commission pursuant to Section 19 of the Act.\34\ Similarly, as 
proposed, each of the BATS Exchanges will be a wholly-owned subsidiary 
of BGM Holdings and the Bylaws of the BATS Exchanges identify this 
ownership structure.\35\ Any changes to the BGM Holdings Charter, 
including any change in the provision that identifies New BGM as the 
sole stockholder of BGM Holdings, must be filed with and approved by 
the Commission pursuant to Section 19 of the Act.\36\ Similarly, any 
changes to the BATS Exchange Bylaws, including any change in the 
provision that identifies BGM Holdings as the sole stockholder of each 
BATS Exchange, must be filed with and approved by the Commission 
pursuant to Section 19 of the Act.\37\ Further, pursuant to the BATS 
Exchange Bylaws, BGM Holdings may not transfer or assign, in whole or 
in part, its ownership interest in each BATS Exchange.\38\
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    \33\ See proposed BGM Holdings Charter, Article SEVENTH, para. 4 
(``The sole stockholder of the Corporation [BGM Holdings] is BATS 
Global Markets [New BGM].'').
    \34\ See id. at Article SEVENTH, para. 3; 15 U.S.C. 78s(b).
    \35\ See proposed BATS Exchange Bylaws, Article I(cc).
    \36\ See 15 U.S.C. 78s(b).
    \37\ See id.
    \38\ See proposed BATS Exchange Bylaws, Article IV, Section 7.
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    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 Exchange to effectively carry out their regulatory 
oversight responsibilities under the Act.
2. Jurisdiction; Books and Records; Due Regard
    As described above, following the Closing, New BGM will be the sole 
stockholder of BGM Holdings and BGM Holdings will be the sole 
stockholder of the BATS Exchanges. Although New BGM and BGM Holdings 
will not carry out any regulatory functions, their activities with 
respect to the operation of the BATS Exchanges must be consistent with, 
and must not interfere with, the self-regulatory obligations of each 
BATS Exchange. The New BGM Charter, New BGM Bylaws, BGM Holdings 
Charter and BGM Holdings Bylaws therefore include certain provisions 
that are designed to maintain

[[Page 4775]]

the independence of the BATS Exchanges' \39\ self-regulatory functions, 
enable the BATS Exchanges to operate in a manner that complies with the 
federal securities laws, including the objectives of Sections 6(b) \40\ 
and 19(g) \41\ of the Act, and facilitate the ability of the BATS 
Exchanges and the Commission to fulfill their regulatory and oversight 
obligations under the Act.\42\
---------------------------------------------------------------------------

    \39\ The provisions in the BGM Holdings Charter and BGM Holdings 
Bylaws apply to ``Exchange Subsidiaries,'' which is defined as any 
direct or indirect subsidiary of New BGM that is registered with the 
Commission as a national securities exchange as provided in Section 
6 of the Act. The BATS Exchanges, as well as the DE Exchanges, will 
be Exchange Subsidiaries upon the Closing of the Combination.
    \40\ 15 U.S.C. 78f(b).
    \41\ 15 U.S.C. 78s(g).
    \42\ See e.g., proposed New BGM Bylaws Article XIV, Section 
14.01 and proposed BGM Holdings Bylaws, Article VII, Section 7.1.
---------------------------------------------------------------------------

    For example, under the New BGM Bylaws and the BGM Holdings Bylaws, 
for so long as New BGM or BGM Holdings, as the case may be, directly or 
indirectly, controls either or both of the BATS Exchanges, the board of 
directors, officers, employees and agents of each of New BGM and BGM 
Holdings, must give due regard to the preservation of independence of 
the self-regulatory functions of the BATS Exchanges, as well as to its 
obligations to investors and the general public and shall not take any 
actions that would interfere with the effectuation of any decisions by 
either of the boards of directors of the BATS Exchanges relating to its 
regulatory functions (including disciplinary matters), or which would 
interfere with the ability of such exchange to carry out its 
responsibilities under the Act.\43\ The New BGM Bylaws and the BGM 
Holdings Bylaws would further require that New BGM or BGM Holdings, as 
the case may be, comply with the U.S. federal securities laws and rules 
and regulations thereunder and shall cooperate with the Commission and 
each of the BATS Exchanges, pursuant to and to the extent of their 
respective regulatory authority.\44\ In addition, the New BGM Bylaws 
and the BGM Holdings Bylaws, provide that the officers, directors, 
employees and agents of New BGM and BGM Holdings, as the case may be, 
by virtue of the acceptance of their position, shall be deemed to agree 
to: (1) comply with the U.S. federal securities laws and the rules and 
regulations thereunder; and (2) to cooperate with the Commission and 
the BATS Exchanges in respect of the Commission's oversight 
responsibilities regarding the BATS Exchanges and the self-regulatory 
functions and responsibilities of the BATS Exchanges, and New BGM and 
BGM Holdings will take reasonable steps to cause its officers, 
directors, employees and agents to so cooperate.\45\ Furthermore, New 
BGM, BGM Holdings and their respective officers, directors, employees 
and agents will be deemed to irrevocably submit to the jurisdiction of 
the U.S. federal courts, the Commission, and each BATS Exchange, as 
applicable, for purposes of any suit, action, or proceeding pursuant to 
the U.S. federal securities laws or the rules or regulations thereunder 
arising out of, or relating to, the activities of such exchange.\46\
---------------------------------------------------------------------------

    \43\ See proposed New BGM Bylaws, Article XIV, Section 14.01 and 
proposed BGM Holdings Bylaws, Article VII, Section 7.1.
    \44\ See proposed New BGM Bylaws, Article XIV, Section 14.04 and 
BGM Holdings Bylaws, Article VII, Section 7.2.
    \45\ Id.
    \46\ See proposed New BGM Bylaws, Article XIV, Section 14.05 and 
proposed BGM Holdings Bylaws, Article VII, Section 7.3.
---------------------------------------------------------------------------

    The New BGM Bylaws and the BGM Holdings Bylaws provide that New 
BGM, BGM Holdings and their respective officers, directors, employees 
and agents must submit to the Commission's jurisdiction with respect to 
activities relating to any of the BATS Exchanges,\47\ and, for so long 
as New BGM controls, directly or indirectly, such BATS Exchange, New 
BGM agrees to provide the Commission and each BATS Exchange with access 
to its books and records that are related to the operation or 
administration of each BATS Exchange.\48\ In addition, to the extent 
they are related to the operation or administration of the BATS 
Exchanges, the books, records, premises, officers, directors, agents, 
and employees of New BGM and BGM Holdings shall be deemed to be the 
books, records, premises, officers, directors, agents, and employees of 
the respective BATS Exchange for purposes of, and subject to oversight 
pursuant to, the Act.\49\ The New BGM Bylaws and the BGM Holdings 
Bylaws further provide that all books and records of New BGM and BGM 
Holdings shall be maintained at a location within the United 
States.\50\
---------------------------------------------------------------------------

    \47\ See id.
    \48\ See proposed New BGM Bylaws, Article XIV, Section 14.03 and 
proposed BGM Holdings Bylaws, Article V, Section 5.8.
    \49\ Id.
    \50\ See proposed New BGM Bylaws, Article XIV, Section 14.03 and 
proposed BGM Holdings Bylaws, Article V, Section 5.8(b). See also 
proposed BATS Exchange Bylaws, Article XI, Section 3.
---------------------------------------------------------------------------

    The New BGM Bylaws and BGM Holdings Bylaws also provide that all 
books and records of each BATS Exchange reflecting confidential 
information pertaining to the self-regulatory function of the BATS 
Exchanges (including but not limited to disciplinary matters, trading 
data, trading practices and audit information) that shall come into the 
possession of New BGM or BGM Holdings, as the case may be, shall not be 
made available other than to those officers, directors, employees and 
agents of New BGM or BGM Holdings, as the case may be, that have a 
reasonable need to know the contents thereof, and shall be retained in 
confidence by New BGM or BGM Holdings, the members of their respective 
board of directors, its officers, employees and agents, and not used 
for any non-regulatory purposes.\51\ The New BGM Bylaws and BGM 
Holdings Bylaws, however, specify that the New BGM Bylaws and BGM 
Holdings Bylaws (including these confidentiality provisions) shall not 
be interpreted so as to limit or impede the rights of the Commission or 
the BATS Exchanges to access and examine such confidential information 
pursuant to the federal securities laws and the rules and regulations 
thereunder, or to limit or impede the ability of any officers, 
directors, employees or agents of New BGM or BGM Holdings, as the case 
may be, to disclose such confidential information to the Commission or 
the BATS Exchanges.\52\
---------------------------------------------------------------------------

    \51\ See proposed New BGM Bylaws, Article XIV, Section 14.02. 
See also proposed BGM Holdings Bylaws, Article V, Section 5.8(a).
    \52\ See id.
---------------------------------------------------------------------------

    The New BGM Charter and the BGM Holdings Charter provide that, for 
so long as New BGM or BGM Holdings, as the case may be, controls, 
directly or indirectly, a registered national securities exchange, 
before any amendment to or repeal of any provision of the proposed New 
BGM Charter or the BGM Holdings Charter, as the case may be, may be 
effective, those changes must be submitted to the board of directors of 
each of the BATS Exchanges, and if the amendment is required to be 
filed with, or filed with and approved by the Commission pursuant to 
Section 19(b) of the Act,\53\ such change shall not be effective until 
filed with, or filed with and approved by, the Commission.\54\ Each 
BATS Exchange represents that these provisions will assist the Exchange 
in fulfilling its self-regulatory obligations and in administering and 
complying with the requirements of the Act.
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78s(b).
    \54\ See proposed New BGM Charter, Article TWELFTH and proposed 
BGM Holdings Charter, Article SEVENTH, para. 3.
---------------------------------------------------------------------------

    The Commission finds that these provisions are consistent with the 
Act,

[[Page 4776]]

and that they are intended to assist each BATS Exchange in fulfilling 
its self-regulatory obligations and in administering and complying with 
the requirements of the Act. The Commission also notes that, even in 
the absence of these provisions, under Section 20(a) of the Act,\55\ 
any person with a controlling interest in any of the BATS Exchanges 
shall be jointly and severally liable with and to the same extent that 
each BATS Exchange 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 \56\ 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 \57\ 
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.
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 78t(a).
    \56\ 15 U.S.C. 78t(e).
    \57\ 15 U.S.C. 78u-3.
---------------------------------------------------------------------------

3. Change in Control
    Upon the Closing of the Combination, New BGM will become the sole 
owner of Current BGM (which, as noted above, will be referred to as 
``BGM Holdings'' upon the Closing and thereafter). The Current BGM 
Charter includes certain restrictions on the ability to vote and own 
shares of stock of Current BGM. Specifically, the Current BGM Charter 
provides that: (1) no Person,\58\ either alone or together with its 
Related Persons,\59\ may own, directly or indirectly, of record or 
beneficially, shares constituting more than 40 percent of any class of 
its capital stock, and no Member, either alone or together with its 
Related Persons, may own, directly or indirectly, of record or 
beneficially, shares constituting more than 20 percent of any class of 
its capital stock (``Current BGM Ownership Limitation''), and (2) 
subject to certain exceptions, no Person, either alone or together with 
its Related Persons, at any time, may, directly, indirectly or pursuant 
to any of various arrangements, vote or cause the voting of shares or 
give any consent or proxy with respect to shares representing more than 
20 percent of the voting power of its then issued and outstanding 
capital stock (``Current BGM Voting Limitation'').\60\
---------------------------------------------------------------------------

    \58\ See Current BGM Charter, Article FIFTH, para. (a)(i) 
(defining ``Person'').
    \59\ See id. at Article FIFTH, para. (a)(ii) (defining ``Related 
Persons''). See Notices, supra note 5, at 75609 and 75587.
    \60\ See Current BGM Charter, Article FIFTH, para. (b).
---------------------------------------------------------------------------

    The Current BGM Charter also provides that the Current BGM 
Ownership Limitation and the Current BGM Voting Limitation may be 
waived (except with respect to Members and their Related Persons) 
pursuant to a resolution duly adopted by the board of directors of 
Current BGM if, in connection with taking such action, the board of 
directors states in such resolution that it is the determination of the 
board of directors that the waiver: (1) Will not impair the ability of 
each BATS Exchange to carry out its functions and responsibilities as 
an ``exchange'' under the Act and the rules and regulations promulgated 
thereunder; (2) is otherwise in the best interests of Current BGM, its 
stockholders, and the BATS Exchanges; (3) will not impair the ability 
of the Commission to enforce the Act and the rules and regulations 
promulgated thereunder; and (4) shall not be effective until it is 
filed with and approved by the Commission.\61\
---------------------------------------------------------------------------

    \61\ See Current BGM Charter, Article FIFTH, para. (b)(ii)(B). 
In granting such a waiver, the Current BGM board of directors has 
the discretion to impose on the person and its Related Persons, such 
conditions and restrictions that it deems necessary, appropriate or 
desirable in furtherance of the objectives of the Act and the rules 
and regulations promulgated thereunder, and the governance of each 
BATS Exchange. Id.
---------------------------------------------------------------------------

    In connection with the Combination, the Current BGM Charter will be 
amended and restated to: (1) remove the Current BGM Ownership 
Limitation and the Current BGM Voting Limitation and (2) specify that 
the sole stockholder of Current BGM (which will be renamed BGM 
Holdings) will be New BGM. In addition, as noted below, the New BGM 
Charter, which will become effective contemporaneously with the 
Closing, will contain ownership and voting limitation provisions that 
are substantively the same as the Current BGM Ownership Limitation and 
the Current BGM Voting Limitation.
    Because the Current BGM Charter will be amended to eliminate the 
Current BGM Ownership Limitation and the Current BGM Voting Limitation 
contemporaneously with the Combination, New BGM's acquisition of 
ownership and voting rights in BGM Holdings upon Closing would not 
cause New BGM to contravene the Current BGM Ownership Limitation or the 
Current BGM Voting Limitation. Therefore, in this instance, although 
New BGM will possess ownership and voting rights in excess of the 
Current BGM Ownership Limitation and the Current BGM Voting Limitation, 
no waiver of these provisions is necessary.
    Nevertheless, because the Combination will result in a change of 
ownership of Current BGM (in that New BGM will become the sole 
stockholder of Current BGM, which will be renamed BGM Holdings), the 
BATS Exchanges and the board of directors of Current BGM represented 
that it was appropriate for the board of directors of Current BGM to 
adopt the Resolutions, which set forth certain determinations with 
respect to New BGM and the Combination similar to those that would have 
been necessary to waive the Current BGM Ownership Limitation and 
Current BGM Voting Limitation.
    Specifically, the board of directors of Current BGM made the 
following determinations: (1) The acquisition of the proposed ownership 
by New BGM in Current BGM will not impair the ability of each BATS 
Exchange to carry out its functions and responsibilities as an 
``exchange'' under the Act and the rules and regulations promulgated 
thereunder, is otherwise in the best interests of Current BGM, its 
stockholders and the BATS Exchanges, and will not impair the ability of 
the Commission to enforce the Act and the rules and regulations 
promulgated thereunder; (2) the acquisition or exercise of the proposed 
voting rights by New BGM in Current BGM will not impair the ability of 
each BATS Exchange to carry out its functions and responsibilities as 
an ``exchange'' under the Act and the rules and regulations promulgated 
thereunder, that it is otherwise in the best interests of the Current 
BGM, its stockholders and the BATS Exchanges, and that it will not 
impair the ability of the Commission to enforce the Act and the rules 
and regulations promulgated thereunder; (3) neither New BGM, nor any of 
its Related Persons, is subject to ``statutory disqualification'' 
within the meaning of Section 3(a)(39) of the Act; \62\ and (4) neither 
New BGM, nor any of its Related Persons (excluding BATS Trading, a 
Member whose affiliation with the BATS Exchanges has been approved/
permitted by the Commission pursuant

[[Page 4777]]

to Rule 2.11 and Rule 2.12 of each Exchange),\63\ is a Member.\64\
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 78c(a)(39).
    \63\ As noted below, BATS Trading is a routing broker-dealer and 
a Member that is affiliated with each BATS Exchange, pursuant to 
Rules 2.11 and 2.12 of each BATS Exchange, and a direct subsidiary 
of Current BGM. The same structure will continue to be in place 
following the Closing and BATS Trading will remain a direct 
subsidiary of BGM Holdings.
    \64\ The Resolutions also contain a determination that the 
execution and delivery of the Merger Agreement by New BGM 
constituted notice of New BGM's intention to acquire ownership and 
voting rights in excess of the BGM Ownership Limitation and BGM 
Voting Limitation, respectively, in writing and not less than 45 
days before the Closing. See Current BGM Charter, Article FIFTH, 
para. (b)(iv).
---------------------------------------------------------------------------

    The Commission believes that it is consistent with the Act to allow 
New BGM to wholly-own and vote all of the outstanding common stock of 
Current BGM (to be renamed BGM Holdings). The Commission notes that, as 
the new top-level holding company for the combined businesses, New BGM 
will have ownership divided among the several firms and individuals 
that previously held equity interests in each of Current BGM and DE 
Holdings.\65\ According to the BATS Exchanges, of the firms and 
individuals that are expected to hold equity interests in New BGM after 
the Closing, none will beneficially own 20 percent or greater of New 
BGM and only an affiliate of KCG Holdings, Inc. will beneficially own 
10 percent or greater.\66\ The Commission also notes that, while the 
Current BGM Ownership Limitation and Current BGM Voting Limitation will 
no longer be in the Current BGM Charter, the BGM Holdings Charter will 
specify that BGM Holdings' sole stockholder will be New BGM, and the 
New BGM Charter will contain substantively identical ownership and 
voting limitation provisions.\67\ Further, as discussed above, New BGM 
has included in its corporate documents certain provisions designed to 
maintain the independence of each BATS Exchange's regulatory functions 
from New BGM and BGM Holdings.\68\ Accordingly, the Commission does not 
believe that the Combination will impair the ability of either BATS 
Exchange to carry out its functions and responsibilities as an 
``exchange'' under the Act and the rules and regulations promulgated 
thereunder, or the ability of the Commission to enforce the Act and the 
rules and regulations promulgated thereunder.
---------------------------------------------------------------------------

    \65\ See Notices, supra note 5, at 75609 and 75587.
    \66\ See id.
    \67\ See proposed BGM Holdings Charter, Article SEVENTH, para. 
4; proposed New BGM Charter, Article FIFTH.
    \68\ See proposed New BGM Bylaws, Article XIV and proposed BGM 
Holdings Bylaws, Article VII.
---------------------------------------------------------------------------

4. Board Composition; Committees
a. Board Composition
    The board of directors of each BATS Exchange will continue to be 
the governing body of their respective BATS Exchange and possess all of 
the powers necessary for the management of the business and affairs of 
their respective BATS Exchanges and the execution of their respective 
responsibilities as SROs. In connection with the Combination, each BATS 
Exchange proposed several changes to their respective BATS Exchange 
Bylaws.
    First, each BATS Exchange proposes to amend Section 2(b) of Article 
III of their respective BATS Exchange Bylaws to explicitly state that 
the Chief Executive Officer of the BATS Exchange will be considered an 
Industry Director.\69\ The BATS Exchange Bylaws require that the Board 
of Directors be composed of one Director who is the Chief Executive 
Officer of the BATS Exchange, and a sufficient number of Non-Industry 
Directors (including Independent Directors), Industry Directors and 
Member Representative Directors such that: (1) the number of Non-
Industry Directors, including at least one Independent Director, equals 
or exceeds the sum of the number of Industry Directors and Member 
Representative Directors,\70\ and (2) the number of Member 
Representative Directors equals at least 20 percent of the board of 
directors (the ``Exchange Board Composition Requirements'').\71\ The 
definition of ``Industry Director'' includes a Director that has an 
employment relationship with the Exchange.\72\ Consequently, the Chief 
Executive Officer of each BATS Exchange will always meet the definition 
of ``Industry Director.'' Consistent with this definition, and in order 
to effectuate the Exchange Board Composition Requirements, each BATS 
Exchange considers the Chief Executive Officer to be an Industry 
Director.\73\ Consistent with this interpretation, each BATS Exchange 
proposes to amend Section 2(b) of Article III of their respective BATS 
Exchange Bylaws to explicitly clarify that the Chief Executive Officer 
shall be considered an Industry Director.
---------------------------------------------------------------------------

    \69\ See proposed BATS Exchanges' Bylaws, Article III, Section 
2(b).
    \70\ See id. at Article I, paras. (i) and (s) (defining 
``Director'' and ``Member Representative Director.'').
    \71\ See id.
    \72\ See id. at Article I, para. (o)(vi).
    \73\ According to the BATS Exchanges, any other treatment might 
result in the total number of persons affiliated with the securities 
industry exceeding the number of Non-Industry Directors--a result 
that would contravene the Board Composition Requirements. See 
Notices, supra note 5, at 75615 and 75593.
---------------------------------------------------------------------------

    Second, each of the BATS Exchange Bylaws provide that each of the 
Non-Industry Directors and Industry Directors are divided into one of 
three classes to serve staggered three-year terms.\74\ Unlike other 
Industry Directors, rather than serving a three-year term, the Chief 
Executive Officer of each BATS Exchange serves on the board of 
directors of such BATS Exchange until he or she ceases to be Chief 
Executive Officer.\75\ Each BATS Exchange is therefore proposing to 
amend Section 3(b) of Article III of their respective BATS Exchange 
Bylaws to explicitly clarify that the reference to each Industry 
Director serving a staggered three-year term excludes the Chief 
Executive Officer.
---------------------------------------------------------------------------

    \74\ See proposed BATS Exchange Bylaws, Article III, Section 
3(b).
    \75\ See id. at Article III, Section 3(a).
---------------------------------------------------------------------------

    Finally, each of the BATS Exchanges is proposing to amend Sections 
4(a), 4(c), and 4(e) of Article III of the BATS Exchange Bylaws to 
permit the Director nomination and election process (including the 
Member Representative Director nomination and election process 
conducted by the Member Nominating Committee) to be conducted through 
either an annual or special meeting of the stockholders, rather than 
exclusively through an annual meeting of the stockholders. According to 
each of the BATS Exchanges, this change is designed to allow the BATS 
Exchange additional flexibility to fill vacancies that arise more 
quickly throughout the year, rather than have to wait until the BATS 
Exchanges' annual director election process.\76\
---------------------------------------------------------------------------

    \76\ See Notices, supra note 5, at 75616 and 75594.
---------------------------------------------------------------------------

    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.\77\ 
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 
BATS Exchanges boards of directors to address issues in a non-

[[Page 4778]]

discriminatory fashion and foster the integrity of BATS Exchanges.\78\ 
The Commission believes that the proposed modifications relating to the 
Board of each of the BATS Exchanges satisfies the requirements in 
Section 6(b)(3) of the Act,\79\ 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.\80\
---------------------------------------------------------------------------

    \77\ See, e.g., Securities Exchange Act Release No. 58375 
(August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10-182) 
(citing Regulation of Exchanges and Alternative Trading Systems, 
Securities Exchange Act Release No. 40760 (December 8, 1998), 63 FR 
70844 (December 22, 1998)).
    \78\ See Securities Exchange Act Release Nos. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006) (File No. 10-131) and 53382 
(February 27, 2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77).
    \79\ 15 U.S.C. 78f(b)(3).
    \80\ The Exchange Bylaws will continue to require that the 
number of Non-Industry Directors on the Exchange Board must equal or 
exceed the sum of the Industry and Member Representative Directors, 
and the Exchange Board must include at least one Independent 
Director. See proposed BATS Exchange Bylaws, Article III, Section 
2(b)(i).
---------------------------------------------------------------------------

b. BATS Exchange Committees
    The BATS Exchanges are proposing two changes that relate to the 
BATS Exchanges committees. The BATS Exchanges are proposing to amend 
Section 2(a) of Article V of the BATS Exchange Bylaws to clarify that 
the Chairman, with the approval of the board of directors, not only 
appoints the members of all board committees, but also appoints the 
chair of each committee.
    Second, the BATS Exchanges are proposing to amend Section 6(c) of 
Article V of the BATS Exchange Bylaws to delineate the Regulatory 
Oversight Committee's (``ROC's'') responsibilities. The ROC's 
responsibilities include the following: (1) Those with regard to each 
of the BATS Exchanges' facilities, as defined in Section 3(a)(2) of the 
Act; \81\ (2) assessing the BATS Exchanges' regulatory performance; (3) 
assisting the Board and committees of the Board in reviewing the 
regulatory plan and the overall effectiveness of the BATS Exchanges' 
regulatory functions; and (4) in consultation with the Chief Executive 
Officer of the BATS Exchanges, establishing the goals, assessing the 
performance, and fixing the compensation of the Chief Regulatory 
Officer of the BATS Exchanges.
---------------------------------------------------------------------------

    \81\ 15 U.S.C. 78c(a)(2).
---------------------------------------------------------------------------

    The Commission believes that the proposed changes are designed to 
make more transparent how the committee chairs are appointed and what 
responsibilities are assigned to the ROC.
5. Affiliation Between BATS Exchanges and DE Exchanges
    Rule 2.3 of each of the BATS Exchanges generally provides that in 
order to be eligible for membership in BATS or BYX, a registered broker 
or dealer is required to be a member of at least one other national 
securities association or national securities exchange. Membership in 
the BATS Exchanges affiliated national securities exchange (either BATS 
or BYX as the case may be) is not sufficient for purposes of membership 
eligibility.\82\ As discussed above, as a result of the Combination, 
the BATS Exchanges will become affiliated with the DE Exchanges. The 
BATS Exchange continue to believe that it is appropriate to limit 
membership to registered broker-dealers that are members of at least 
one national securities association or national securities exchange 
that is not affiliated with the BATS Exchanges. Therefore, the BATS 
Exchanges proposed to amend Rule 2.3 to specify that a registered 
broker-dealer will be eligible for membership only if it is a member of 
a national securities association or national securities exchange other 
than BATS, BYX, EDGA, or EDGX.
---------------------------------------------------------------------------

    \82\ See Rule 2.3 of each of the BATS Exchanges.
---------------------------------------------------------------------------

    The Commission notes that the proposed changes to Rule 2.3 of each 
of the BATS Exchanges extends the membership eligibility criteria in a 
way that is consistent with the current rule, taking into account the 
BATS Exchanges new affiliation with the DE Exchanges after the Closing.
6. Affiliation With DE Route
    As discussed above, as a result of the Combination, New BGM will, 
indirectly, wholly own the BATS Exchanges, the DE Exchanges, BATS 
Trading and DE Route. DE Route is a registered broker-dealer and a 
member of Financial Industry Regulation Authority. DE Route is also a 
member of each of the BATS Exchanges and the DE Exchanges.\83\
---------------------------------------------------------------------------

    \83\ See Notices, supra note 5, at 75609 and 75586-87.
---------------------------------------------------------------------------

    Rule 2.10 of each BATS Exchange generally provides that, without 
the prior approval of the Commission, (i) each BATS Exchange or any 
entity with which each BATS Exchange is affiliated (as defined in Rule 
12b-2 under the Act \84\), may not directly or indirectly acquire or 
maintain an ownership interest in a Member of each BATS Exchange, and 
(ii) a Member of each BATS Exchange may not be or become an affiliate 
of the BATS Exchange, or an affiliate of any affiliate of the BATS 
Exchanges. The BATS Exchanges note that the purpose of Rule 2.10 is to 
prevent or manage potential conflicts of interest that could arise from 
the BATS Exchanges or their affiliates having an ownership interest in 
a Member, particularly with respect to the Exchanges' obligation under 
Section 19(g) of the Act \85\ to enforce its Members' compliance with 
the Act, the Commission's rules thereunder, and BATS Exchanges' 
Rules.\86\
---------------------------------------------------------------------------

    \84\ 17 CFR 240.12b-2.
    \85\ 15 U.S.C. 78s(g).
    \86\ See Notices, supra note 5, at 75617 and 75595.
---------------------------------------------------------------------------

    DE Route is currently a Member of each BATS Exchange. The BATS 
Exchanges proposed to become affiliated with DE Route, and that DE 
Route provide certain routing services to the BATS Exchanges. 
Specifically, the BATS Exchanges proposed to receive through DE Route 
orders routed inbound to the BATS Exchanges from each of the DE 
Exchanges, both of which will also be affiliates of the BATS Exchanges 
as a result of the Combination. Accordingly, the BATS Exchanges have 
asked the Commission to approve an exception to Rule 2.10 that will 
permit the affiliation between each of the BATS Exchange and their 
Member, DE Route.
    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,\87\ each BATS Exchange 
previously implemented limitations and conditions to the affiliation 
between each BATS Exchange and BATS Trading, also an affiliated member, 
to permit each BATS Exchange to accept inbound orders that BATS Trading 
routes in its capacity as a facility of an affiliated exchange 
(BYX).\88\ Again recognizing the Commission's concerns, the BATS 
Exchanges have now proposed that DE Route operate as an affiliated 
inbound

[[Page 4779]]

router subject to substantially similar limitations and conditions.\89\
---------------------------------------------------------------------------

    \87\ See e.g., Securities Exchange Act Release No. 53382 
(February 27, 2006), 71 FR 11251 (March 6, 2006). See also 
Securities Exchange Act Release No. 57648 (April 11, 2008), (April 
17, 2008).
    \88\ See Rule 2.12 of each of the BATS Exchanges. See also 
Securities Exchange Act Release No. 62901, (September 13, 2010), 75 
FR 57097 (September 17, 2010). Such limitations and conditions were 
originally implemented on a pilot basis. The Commission later 
approved a proposal to make them permanent. See Securities Exchange 
Act Release No. 66808 (April 13, 2012), 77 FR 23294 (April 18, 
2012). BYX implemented similar limitations and conditions first on a 
pilot basis, but which were later approved on a permanent basis. See 
Securities Exchange Act Release Nos. 62716 (August 13, 2010), 75 FR 
51295 (August 19, 2010) (File No. 10-198) (approving registration 
application of BYX and approving conditions and limitations which 
allowed BYX to receive inbound routes of orders by BATS Trading in 
its capacity as an order routing facility of BATS on a twelve month 
pilot) and 66807 (April 13, 2012) 77 FR 23300 (April 18, 2012) (SR-
BYX-2012-006) (approving conditions and limitations on a permanent 
basis).
    \89\ See Notices, supra note 5, at 75616-17 and 75595.
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    Specifically, the BATS Exchanges proposed that DE Route, operating 
as a facility of the DE Exchanges, provide routing services from each 
of the DE Exchanges to each BATS Exchange, subject to the following 
conditions and limitations set forth in the proposed Rule 2.12 of each 
BATS Exchange: \90\
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    \90\ See Rule 2.12 of each of the BATS Exchanges; see also supra 
note 5, at 75616-17 and 75595. Additionally, Rule 2.12(b) will 
require that DE Route operates as an outbound router on behalf of 
each of the DE Exchanges in accordance with the rules of each DE 
Exchange.
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     Each BATS Exchange would enter into (1) a plan pursuant to 
Rule 17d-2 under the Exchange Act with a non-affiliated SRO to relieve 
each BATS Exchange of regulatory responsibilities for DE Route with 
respect to rules that are common rules between each BATS Exchange and 
the non-affiliated SRO, and (2) a regulatory services contract with a 
non-affiliated SRO to perform regulatory responsibilities for DE Route 
for unique rule of each BATS Exchange.
     The regulatory services contract would require the BATS 
Exchanges 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 (collectively ``Exceptions'') in which DE Route is 
identified as a participant that has potentially violated the rules of 
the BATS Exchanges or Commission rules, and would require that the non-
affiliated SRO provide a report, at least quarterly, to the BATS 
Exchanges quantifying all Exceptions in which DE Route is identified as 
a participant that has potentially violated the rules of the BATS 
Exchanges or the Commission.
     Each BATS Exchange, on behalf of the holding company 
indirectly owning the BATS Exchanges and DE Route, would establish and 
maintain procedures and internal controls reasonably designed to ensure 
that DE Route does not develop or implement changes to its system on 
the basis of non-public information regarding planned changes to each 
BATS Exchange's systems, obtained as a result of its affiliation with 
the BATS Exchanges, until such information is available generally to 
similarly situated users of the BATS Exchanges in connection with the 
provision of inbound order routing to the BATS Exchanges.
     Each BATS Exchange may furnish to DE Route the same 
information on the same terms that the BATS Exchanges make available in 
the normal course of business to any other user.
    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 DE Route to be affiliated with the BATS Exchanges and to 
provide inbound routing to the BATS Exchanges, subject to the 
conditions described above.
    The BATS Exchanges have proposed four conditions applicable to DE 
Route'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 a non-affiliated SRO oversight 
of DE Route,\91\ combined with the non-affiliated SRO's monitoring of 
DE Route's compliance with the equity trading rules and quarterly 
reporting to each BATS Exchange, will help to protect the independence 
of each BATS Exchange's regulatory responsibilities with respect to DE 
Route. The Commission also believes that the requirement that each BATS 
Exchange establish and maintain procedures and internal controls 
reasonably designed to ensure that DE Route does not develop or 
implement changes to its system based on non-public information 
obtained as a result of its affiliation with the BATS Exchanges, until 
such information is available generally to similarly situated members 
of the BATS Exchanges, is reasonably designed to ensure that DE Route 
cannot misuse any information advantage it may have because of its 
affiliation with the BATS Exchanges.
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    \91\ The oversight will be accomplished through the Rule 17d-2 
agreement and the regulatory contract.
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    Further, the Commission notes that the proposed conditions for the 
operation of DE Route as an affiliated inbound router on behalf of each 
BATS Exchange are consistent with conditions the Commission has 
approved for other exchanges.\92\ The Commission therefore finds the 
proposed operation of DE Route as an affiliated inbound router of the 
BATS Exchanges is consistent with the Act.
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    \92\ See, e.g., Securities Exchange Act Release Nos. 62716 
(August 13, 2010), 75 FR 51295 (August 19, 2010) (order approving 
the exchange registration of BATS Y-Exchange, Inc.); 61698 (March 
12, 2010), 75 FR 13151 (March 18, 2010) (order approving the 
exchange registration of the DE Exchanges); and 65456 (September 30, 
2011), 76 FR 62118 (October 6, 2011) (order approving a proposal by 
NYSE Arca, Inc. (``NYSE Arca'') to make permanent the pilot program 
that permits NYSE Arca to accept inbound orders routed by its 
affiliated broker-dealer).
     They are also consistent with the conditions and limitations on 
inbound routing to the Exchange by its affiliate BATS Trading. See 
supra note 88 and accompanying text.
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III. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule changes are consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\93\ that the proposed rule changes (SR-BATS-2013-059 and SR-BYX-2013-
039) are approved.
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    \93\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\94\
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    \94\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2014-01659 Filed 1-28-14; 8:45 am]
BILLING CODE 8011-01-P


