
[Federal Register Volume 80, Number 170 (Wednesday, September 2, 2015)]
[Notices]
[Pages 53213-53216]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-21672]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75766; File No. SR-BOX-2015-22]


Self-Regulatory Organizations; BOX Options Exchange LLC; Order 
Granting Approval of a Proposed Rule Change To Implement the Governance 
Provisions of an Equity Rights Program

August 27, 2015.

I. Introduction

    On June 25, 2015, BOX Options Exchange LLC (the ``Exchange'') 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 
implement the governance provisions of a volume performance rights 
program (the ``VPR Program''). The proposed rule change was published 
for comment in the Federal Register on July 13, 2015.\3\ 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\ See Securities Exchange Act Release No. 75374 (July 7, 
2015), 80 FR 40100 (SR-BOX-2015-22) (``Notice'').
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II. Description

    Under the VPR Program, BOX \4\ Options Participants \5\ 
(``Participants'') that take part in the Program will have the right to 
acquire equity in, and receive distributions from, BOX Holdings Group 
LLC (``Holdings''), an affiliate of the Exchange and direct parent 
entity of BOX, in exchange for a nominal cash payment and the 
achievement of certain order flow volume commitments over a period of 
five years.\6\ Pursuant to the VPR Program, Volume Performance Rights 
(``VPRs'') were issued to Participants that elected to participate, met 
the eligibility criteria and made the initial cash payment 
(``Subscribers'').\7\
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    \4\ ``BOX'' means BOX Market LLC, an options trading facility of 
the Exchange. See BOX Rule 100(a)(7).
    \5\ ``Options Participant'' or ``Participant'' means a firm, or 
organization that is registered with the Exchange pursuant to the 
Rule 2000 Series for purposes of participating in options trading on 
BOX as an ``Order Flow Provider'' or ``Market Maker.'' See BOX Rule 
100(a)(40).
    \6\ See Securities Exchange Act Release No. 74114 (January 22, 
2015), 80 FR 4611 (January 28, 2015) (SR-BOX-2015-03) (the ``VPR 
Filing''). See also Securities Exchange Act Release No. 74171 
(January 29, 2015), 80 FR 6153 (February 4, 2015) (SR-BOX-2015-05) 
(extending the deadline to participate in the VPR program until 
January 14, 2015) (the ``Second VPR Filing'').
    \7\ See Notice, supra note 3, at 40101. The VPRs were issued in 
tranches of twenty (20) VPRs (each, a ``Tranche'') with a minimum 
subscription of two (2) Tranches per Subscriber. According to the 
Exchange, twenty-seven (27) Tranches have been issued in connection 
with the VPR Program. See id.
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    Each VPR is comprised of the right to receive 8.5 unvested new 
Class C Membership Units of Holdings (``Class C Units''), upon 
effectiveness of this proposed rule change. One VPR per Tranche will be 
eligible to vest each quarter of the five (5) year Program period, 
subject to the Subscriber meeting its volume commitment for that 
quarter. In addition, VPRs may be reallocated among Subscribers based 
upon exceeding or failing to meet Subscribers' volume commitments 
during the VPR Program period.\8\
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    \8\ See Notice, supra note 3, at 40101.
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A. Ownership Units

    As described in more detail in the Notice,\9\ in order to implement 
certain aspects of the VPR Program, Holdings would amend its existing 
Limited Liability Company Agreement (the ``Holdings LLC Agreement'') by 
adopting an Amended and Restated Limited Liability Company Agreement of 
Holdings (the ``Restated Holdings LLC Agreement''), to create Class C

[[Page 53214]]

Units.\10\ Once Class C Units are created, Holdings will admit the 
Subscribers as Class C Members.\11\
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    \9\ See id.
    \10\ See Notice, supra note 3 at, 40100. Currently, Holdings 
only has issued and outstanding Class A and Class B membership 
Units. See id. at 40101.
    \11\ See id.
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    The existing limitations on the percentage ownership of Holdings by 
Participants will continue to apply. Specifically, in the event that a 
Member, or any Related Person \12\ of a Member, is a Participant, and 
the Member owns more than 20% of the Units,\13\ alone or together with 
any Related Person of the Member (Units owned in excess of 20% being 
referred to as ``Excess Units''), the Member and its designated 
Directors \14\ will have no voting rights with respect to the Excess 
Units on any action relating to Holdings nor will the Member or its 
designated Directors, if any, be entitled to give any proxy with 
respect to the Excess Units in relation to a vote of the Members; 
provided, however, that whether or not the Member or its designated 
Directors, if any, otherwise participates in a meeting in person or by 
proxy, the Member's Excess Units will be counted for quorum purposes 
and will be voted by the person presiding over quorum and vote matters 
in the same proportion as the Units held by the other Members are voted 
(including any abstentions from voting).\15\
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    \12\ The Exchange is not proposing to change the definition of 
``Related Person.'' See Notice, supra note 3, at 40101, n.9.
    \13\ ``Units'' means Class A Membership Units, Class B 
Membership Units and Class C Units of Holdings. See proposed 
Restated Holdings LLC Agreement Section 1.1 (defining ``Units'').
    \14\ See proposed Restated Holdings LLC Agreement Section 4.1(a) 
(defining ``Directors'').
    \15\ See proposed Restated Holdings LLC Agreement Section 
7.4(h).
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    Upon completion of the VPR Program, all outstanding Class C Units 
associated with vested VPRs will be automatically converted into an 
equal number of Class A Units and all outstanding Class C Units 
associated with unvested VPRs will be automatically cancelled and be of 
no further effect. All rights related to Class C Units will terminate 
automatically upon cancellation or conversion and rights related to the 
converted Class A Units will remain, subject to the terms of the 
Restated Holdings LLC Agreement.\16\
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    \16\ See proposed Restated Holdings LLC Agreement Section 
2.5(e).
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B. Voting

    Each Class C Member will have the right to vote its Class C Units 
that are associated with vested VPRs (``Voting Class C Units'') on 
matters submitted to a vote of all holders of Units. VPRs will vest in 
accordance with the vesting provisions of the VPR Program.\17\ Members 
holding Voting Class C Units will vote with Members holding all other 
classes of Units. Members holding Voting Units \18\ will be entitled to 
vote together, as a single class, each with one vote per Voting Unit so 
held.\19\ Issued and outstanding Class C Units that are not Voting 
Class C Units will not have voting rights. According to the Exchange, 
as a Subscriber meets or exceeds its volume commitments, its voting 
powers as a Class C Member of Holdings will increase.\20\ Similarly, if 
a Subscriber does not meet its volume commitment, its voting powers 
will decrease.\21\
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    \17\ See Notice, supra note 3. See also VPR Filing, supra note 
6.
    \18\ ``Voting Unit'' means any Class A Unit, Class B Unit, or 
Voting Class C Unit. See proposed Restated Holdings LLC Agreement, 
Section 1.1.
    \19\ See proposed Restated Holdings LLC Agreement Section 
4.13(a).
    \20\ See Notice, supra note 3, at 40102.
    \21\ See id.
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    The Holdings LLC Agreement currently provides, and the Restated 
Holdings LLC Agreement will continue to provide, that any Director 
designated by either MX US 2, Inc. or IB Exchange Corp may effectively 
block certain actions of Holdings (the ``Major Action Veto''). Under 
the Restated Holdings LLC Agreement, upon vesting of VPRs associated 
with Class C Units equal to at least 25% of the total outstanding 
Units, the Major Action Veto will automatically expire and be of no 
further effect. In addition, when the 25% threshold is met, the 
Restated Holdings LLC Agreement provides that Holdings and its Members 
will take all necessary action to amend the Limited Liability Company 
Agreement of BOX to eliminate the Major Action Veto provisions therein 
that are applicable to BOX and inure to the benefit of MX US 2, Inc. 
and IB Exchange Corp and to provide that the executive committee of BOX 
will be constituted in the same manner as the Executive Committee of 
Holdings.\22\
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    \22\ See proposed Restated Holdings LLC Agreement Section 16.4.
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    The Restated Holdings LLC Agreement includes a new supermajority 
voting requirement that Members holding at least 67% of all outstanding 
Voting Units must vote to approve certain actions (the ``Supermajority 
Actions'') by Holdings.\23\ The supermajority voting requirement, 
however, would not apply to certain of these Supermajority Actions,\24\ 
to the extent otherwise required by the Exchange to fulfill its 
regulatory functions or responsibilities or to oversee the BOX Market 
as determined by the board of the Exchange.
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    \23\ See proposed Restated Holdings LLC Agreement Section 
4.13(b). For further details on these actions, see Notice, supra 
note 3, at 40102-03.
    \24\ See, e.g., proposed Restated Holdings LLC Agreement Section 
4.13(b)(vi)-(viii), (x), (xii), and (xiii). These provisions are: 
(1) The issuance, by Holdings, of any additional equity interests 
in, or any securities exchangeable for or convertible into equity 
securities of, Holdings, subject to specified exceptions; (2) the 
issuance, by BOX, of any additional equity interests in, or any 
securities exchangeable for or convertible into equity securities 
of, BOX, except as otherwise provided in the Facility Agreement; (3) 
permitting BOX to operate the BOX Market utilizing any other 
regulatory services provider other than the Exchange; (4) making a 
fundamental change to the business model of BOX to be other than a 
for-profit business; (5) altering the provisions relating to the 
designation of Directors set forth in Restated Holdings LLC 
Agreement; and (6) altering or amending any of the Supermajority 
Actions provisions as set forth in the Restated Holdings LLC 
Agreement. Id.
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C. Directors

    The Exchange proposes to amend the Holdings LLC Agreement with 
respect to the composition of the Holdings Board. Currently, MX US 2, 
Inc. has the right to designate up to five (5) Directors, IB Exchange 
Corp has the right to designate up to two (2) Directors and each other 
Member has the right to designate one (1) Director to the Holdings 
Board and the Holdings Board has the power to increase the size of the 
Holdings Board and to authorize new Members to designate Directors.\25\
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    \25\ See Notice, supra 3, at 40103.
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    Under the Restated Holdings LLC Agreement, no Member may designate 
more than three (3) Directors and each Member may designate the maximum 
number of Directors permitted under any one (1) (but not more than one) 
of the following criteria: (i) Each Member, so long as it (together 
with its respective Affiliates) holds a combined total of Class A Units 
and Class B Units greater than two and one-half percent (2.5%) of all 
outstanding Voting Units, will be entitled to designate one (1) 
Director, (ii) each Member, so long as it (together with its respective 
Affiliates) holds a combined total of Voting Class C Units greater than 
four percent (4%) of all outstanding Voting Units, will be entitled to 
designate one (1) Director, (iii) each Member, so long as it (together 
with its respective Affiliates) holds a combined total of Voting Units 
greater than fourteen percent (14%) of all outstanding Voting Units, 
will be entitled to designate two (2) Directors, (iv) each Member, so 
long as it (together with its respective Affiliates) holds a combined 
total of Voting Units greater than twenty-eight percent (28%) of all

[[Page 53215]]

outstanding Voting Units, will be entitled to designate three (3) 
Directors, and (v) each other existing Member may designate one (1) 
Director.\26\ Directors serving on the Holdings Board may also serve on 
the board of directors of any subsidiary of Holdings. If a Member 
ceases to qualify for the right to designate a Director then serving, 
then that Director will then automatically be removed from the Holdings 
Board.\27\
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    \26\ See proposed Restated Holdings LLC Agreement Section 
4.1(a)(i)-(vi).
    \27\ See proposed Restated Holdings LLC Agreement section 
4.1(b).
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    The Restated Holdings LLC Agreement also will amend the provisions 
governing the right of Members to designate members of the Executive 
Committee of Holdings (the ``Executive Committee''), if any.\28\ 
Currently, MX US 2, Inc. has the right to designate up to two (2) 
members of the Executive Committee (``EC Members'') and IB Exchange 
Corp has the right to designate one (1) EC Member. Under the Restated 
Holdings LLC Agreement, any Member with the right to designate three 
(3) Directors to the Holdings Board will have the right to designate up 
to two (2) EC Members and any Member with the right to designate two 
(2) Directors to the Holdings Board will have the right to designate 
one (1) EC Member.\29\
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    \28\ See Notice, supra note 3, at 40103.
    \29\ See proposed Restated Holdings LLC Agreement section 
4.2(c). Other provisions relating to the composition of the 
Executive Committee will be unchanged.
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    Subscribers will also have the right to designate one individual to 
a new Advisory Committee organized by Holdings, the purpose of which 
will be to advise and make recommendations to Holdings with respect to 
the Exchange's competitiveness in the marketplace.\30\ Only Subscribers 
will have the right to designate individuals to serve on the Advisory 
Committee.\31\ The Advisory Committee will be advisory only and will 
not have any powers, votes or fiduciary duties to Holdings.\32\
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    \30\ See Notice, supra note 3, at 40103.
    \31\ See VPR Filing, supra note 6, at 4613.
    \32\ See Notice, supra note 3, at 40103.
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D. Distributions

    The Restated Holdings LLC Agreement provides that, once per year, 
Holdings will make a distribution (an ``Annual Distribution'') to its 
Members to the extent funds are available for distribution.\33\ In 
determining the amount of each Annual Distribution, the Holdings Board 
will first provide for any regulatory needs of BOX and the Exchange, as 
determined by the Exchange Board, and any Annual Distribution amounts 
will be calculated after taking into account all financial and 
regulatory needs of the Exchange, as determined by the Exchange.\34\ 
The Annual Distribution will be equal to 80% of Free Cash Flow,\35\ 
except as limited by applicable law, including for regulatory and 
compliance purposes. In addition, another 15% of Free Cash Flow will be 
included in the distribution, except to the extent the Holdings Board 
determines that any portion thereof is (i) required for the operations 
of Holdings and its subsidiaries, which will be reflected on the annual 
budget for the next year, (ii) required for payment of liabilities or 
expenses of Holdings, or (iii) required as a reserve to make reasonable 
provision to pay other claims and obligations then known to, or 
reasonably anticipated by, BOX or Holdings. When, as and if declared by 
the Holdings Board, Holdings will make the cash distribution to each 
Member pro rata in accordance with the number of Units held by each 
Member, which will be determined by multiplying the aggregate Annual 
Distribution amount by each Member's Percentage Interest \36\ on the 
record date. Distributions to Class C Members may be adjusted as 
provided in the Members Agreement.\37\
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    \33\ See proposed Restated Holdings LLC Agreement section 8.1. 
Distributions on Class C Units will not be paid until this proposed 
rule change is effective. Distributions payable on Class C Units 
that accrue before such effectiveness will be held in a segregated 
account until such effectiveness. If this rule filing does not 
become effective by July 1, 2016, a Subscriber may terminate its 
involvement in the VPR Program and any and all distributions with 
respect to Class C Units payable to that Subscriber held in the 
segregated account will be released back to Holdings and distributed 
to existing Members in accordance with the terms of the Holdings LLC 
Agreement. See Notice, supra note 3, at 40104, n.21. See also VPR 
Filing, supra note 6, at 4612, n.15.
    \34\ See proposed Restated Holdings LLC Agreement Section 8.1.
    \35\ ``Free Cash Flow'' means consolidated net income, plus 
depreciation, less capital expenditures (in each case calculated in 
accordance with generally accepted accounting principles in the 
United States, as in effect from time to time) of Holdings and BOX, 
for the calendar year. See proposed Restated Holdings LLC Agreement 
Section 1.1.
    \36\ ``Percentage Interest'' with respect to a Member means the 
ratio of the number of Units held by the Member to the total of all 
of the issued Units, expressed as a percentage and determined with 
respect to each class of Units, whenever applicable.
    \37\ See proposed Restated Holdings LLC Agreement Section 8.1 
and see VPR Filing supra, note 6.
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III. Discussion

    The Commission has reviewed carefully the proposed rule change and 
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.\38\ In particular, the Commission finds 
that the proposed rule change is consistent with sections 6(b)(1) of 
the Act,\39\ 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. 
The Commission also finds that the proposal is consistent with section 
6(b)(5) of the Act,\40\ 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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    \38\ 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).
    \39\ 15 U.S.C. 78f(b)(1).
    \40\ 15 U.S.C. 78f(b)(5).
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    Although Holdings does not carry out any regulatory functions, all 
of its activities must be consistent with the Act. Holdings is the sole 
owner of BOX, which owns and operates the BOX options trading platform 
as a facility of the Exchange. As a facility of a national securities 
exchange, the options trading platform is not solely a commercial 
enterprise, but is an integral part of an SRO that is registered 
pursuant to the Act and therefore subject to obligations imposed by the 
Act. The Commission believes that the Restated Holdings LLC Agreement 
is reasonably designed to enable Holdings to operate in a manner that 
is consistent with this principle. In this regard, the Commission 
believes that the proposed changes related to the VPR Program will not 
impact provisions of Holding's corporate governance documents that were 
designed to enable the Exchange and BOX to operate in a manner that 
complies with the federal securities laws, and were intended to assist 
the Exchange in fulfilling its self-regulatory obligations and 
administering and complying with the requirements of the Act.\41\ The 
Commission also believes

[[Page 53216]]

that the proposed rule change will allow the Commission to continue to 
exercise its plenary regulatory authority over the Exchange and 
continue to provide the Commission and the Exchange with access to 
necessary information that will allow the Exchange to comply, and 
enforce compliance, with the Act.
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    \41\ See Securities Exchange Act Release No. 66871 (April 27, 
2012), 77 FR 26323, 26329-30 (May 3, 2012) (describing provisions in 
governing documents designed to help maintain the independence of 
the regulatory functions of the Exchange, including, but not limited 
to, section 4.12(a) of the proposed Restated Holdings LLC Agreement, 
which provides that each of the Members, Directors, Officers, 
employees and agents of Holdings shall give due regard to the 
preservation of the independence of the self-regulatory function of 
the Exchange and to its obligations to investors and the general 
public and shall not take actions which would interfere with the 
effectuation of decisions by the board of directors of the Exchange 
relating to its regulatory functions (including disciplinary 
matters) or which would interfere with the Exchange's ability to 
carry out its responsibilities under the Exchange Act, and section 
4.12(b), which provides that Holdings and its Members shall comply 
with the federal securities laws and the rules and regulations 
thereunder and shall cooperate with the Commission and the Exchange 
pursuant to and to the extent of their respective regulatory 
authority).
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    With respect to the Annual Distributions, the Commission notes the 
Exchange represents that before making any distribution to its Members, 
the Holdings Board will first provide for any regulatory needs of BOX 
and the Exchange (as determined by the Exchange Board).\42\ The 
Commission believes that the requirement to first provide for the 
regulatory needs of BOX and the Exchange is designed to facilitate the 
ability of the Exchange to fulfill its regulatory obligations under the 
Act and help to ensure that the proposed provisions regarding 
distributions maintain the independence of the Exchange's regulatory 
function and would not be made in violation of the Exchange's legal and 
regulatory responsibilities. The Commission therefore believes that the 
proposed provisions in the Restated Holdings LLC Agreement related to 
distributions are consistent with the Act.
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    \42\ See Notice, supra note 3, at 40103 (``In determining the 
amount of each Annual Distribution, the Holdings Board will first 
provide for any regulatory needs of BOX and the Exchange, as 
determined by the Exchange Board, and any Annual Distribution 
amounts will be calculated after taking into account all financial 
and regulatory needs of the Exchange, as determined by the 
Exchange.'').
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is 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 
\43\ that the proposed rule change (SR--BOX-2015-22) is approved.
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    \43\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
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    \44\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-21672 Filed 9-1-15; 8:45 am]
 BILLING CODE 8011-01-P


