
[Federal Register Volume 82, Number 194 (Tuesday, October 10, 2017)]
[Notices]
[Pages 47055-47062]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-21669]



[[Page 47055]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81802; File No. SR-GEMX-2017-37]


Self-Regulatory Organizations; Nasdaq GEMX, LLC; Order Granting 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1 
Thereto, To Adopt New Corporate Governance and Related Processes 
Similar to Those of the Nasdaq Exchanges

October 3, 2017.

I. Introduction

    On August 7, 2017, Nasdaq GEMX, LLC (``GEMX'' or ``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\ proposed rule changes to 
its corporate governance documents and trading rules to align its 
corporate governance framework to the structure of other exchanges 
owned by its ultimate parent company, Nasdaq, Inc. The proposed rule 
change was published for comment in the Federal Register on August 23, 
2017.\3\ The Commission received no comments on the proposal. On 
September 20, 2017, the Exchange filed Amendment No. 1 to the proposed 
rule change.\4\ This order approves the proposed rule change, as 
modified by Amendment No. 1.
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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. 81422 (August 17, 
2017), 82 FR 40026 (``Notice'').
    \4\ In Amendment No. 1, the Exchange made a technical correction 
to a typographical error in proposed By-Law Article III, Section 
5(c). When the Exchange filed Amendment No. 1 with the Commission, 
it also submitted Amendment No. 1 to the public comment file for SR-
GEMX-2017-37 (available at: https://www.sec.gov/comments/sr-gemx-2017-37/gemx201737.htm). Because Amendment No. 1 does not materially 
alter the substance of the proposed rule change or raise unique or 
novel regulatory issues, it is not subject to notice and comment.
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II. Background

    On June 21, 2016, the Commission approved a proposed rule change 
relating to a corporate transaction in which Nasdaq, Inc. would become 
the ultimate parent of GEMX (the ``Nasdaq Acquisition''), Nasdaq ISE, 
LLC (``ISE''), and Nasdaq MRX, LLC (``MRX,'' and together with GEMX and 
ISE, the ``ISE Exchanges'').\5\ On June 30, 2016, pursuant to this 
transaction, Nasdaq, Inc. acquired all of the capital stock of U.S. 
Exchange Holdings, Inc. (``Exchange Holdings''), and thereby became the 
indirect, ultimate parent of the ISE Exchanges.\6\ Nasdaq, Inc. is also 
the ultimate parent of NASDAQ BX, Inc. (``BX''), The NASDAQ Stock 
Market LLC (``Nasdaq''), and NASDAQ PHLX LLC (``Phlx'' and, together 
with Nasdaq and BX, the ``Nasdaq Exchanges'').\7\ The Commission notes 
that the corporate governance documents of GEMX, specifically its 
Second Amended and Restated Limited Liability Company Agreement 
(``Current LLC Agreement'') and its Constitution (``Current 
Constitution'' and, together with the Current LLC Agreement, the 
``Current Governing Documents'') are rules of the Exchange, as are the 
governing documents of GEMX's Upstream Owners,\8\ which include certain 
provisions that are designed to maintain the independence of GEMX's 
self-regulatory functions (as well as the self-regulatory functions of 
the Upstream Owners' other self-regulatory subsidiaries, i.e., the 
Nasdaq Exchanges).\9\
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    \5\ See Securities Exchange Act Release No. 78119 (June 21, 
2016), 81 FR 41611 (June 27, 2016) (SR-ISE-2016-11; SR-ISEGemini-
2016-05; SR-ISEMercury-2016-10) (``Nasdaq Acquisition Order'') 
(order approving Nasdaq, Inc.'s acquisition of ISE (f/k/a 
International Securities Exchange, LLC), GEMX (f/k/a ISE Gemini, 
LLC), and MRX (f/k/a ISE Mercury, LLC)).
    \6\ See Notice, supra note 3, at 40027 n.3. Exchange Holdings is 
the sole owner of ISE Holdings, Inc. (``ISE Holdings,'' and together 
with Exchange Holdings and Nasdaq, Inc., the ``Upstream Owners''), 
which is the sole owner of 100% of the Exchange's limited liability 
company interests. See id. at 40027; see also Nasdaq Acquisition 
Order, supra note 5, at 41611. ISE Holdings is also the sole direct 
owner of ISE and MRX. See Nasdaq Acquisition Order, supra note 5, at 
41611.
    \7\ See Notice, supra note 3, at 40027. See also Nasdaq 
Acquisition Order, supra note 5, at 41611. As a result of this 
transaction, the ISE Exchanges and the Nasdaq Exchanges became 
affiliates. See Nasdaq Acquisition Order, supra note 5, at 41611 
n.8.
    \8\ See Nasdaq Acquisition Order, supra note 5, at 41612.
    \9\ See, e.g., Nasdaq Acquisition Order, supra note 5, at 41612-
13.
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    The Exchange intends to effect a merger with a newly-formed 
Delaware limited liability company (``Merger'') under Nasdaq, Inc. that 
would result in GEMX as the surviving entity with new corporate 
governance documents. In connection with that Merger, the Exchange 
proposes various changes to its corporate governance documents and 
rules (``Rules'').\10\ Specifically, the Exchange proposes to: (1) 
Delete the Exchange's Current LLC Agreement in its entirety and replace 
it with the New LLC Agreement, which is based on the limited liability 
company agreement of Nasdaq; \11\ (2) delete the Exchange's Current 
Constitution in its entirety and replace it with the New By-Laws, which 
are based on the by-laws of Nasdaq; \12\ and (3) amend certain of its 
Rules to reflect the replacement of the Current Governing Documents 
with the New Governing Documents.\13\
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    \10\ The Rules as proposed to be amended pursuant to the 
proposed rule change are referred to herein as the ``New Rules.''
    \11\ See Notice, supra note 3, at 40027 n.5.
    \12\ Id.
    \13\ The Exchange's affiliates, ISE and MRX, have submitted 
nearly identical proposed rule changes. The Commission approved the 
ISE proposal, and the MRX proposal has been published for public 
notice and comment. See Securities Exchange Act Release Nos. 81263 
(July 31, 2017), 82 FR 36497 (August 4, 2017) (SR-ISE-2017-32) 
(``ISE Governance Order'') and 81795 (October 2, 2017) (SR-MRX-2017-
18).
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    The Exchange represents that the proposed changes are designed to 
align the Exchange's corporate governance framework with the existing 
structure of the Nasdaq Exchanges, particularly as it relates to the 
board and committee structure, nomination and election processes, and 
related governance practices.\14\ The Exchange also represents that it 
is not proposing any amendments to its ownership structure. The 
Exchange does not propose any amendments to the governing documents of 
its Upstream Owners.\15\ Thus, the provisions in the governing 
documents of these entities, which were designed to maintain the 
independence of GEMX's self-regulatory functions, would remain 
unchanged. The Exchange also represents that it is not proposing any 
amendments to its Rules at this time, other than minor clarifying 
changes and technical amendments to reflect the changes to its 
governing documents as described in more detail below.\16\ The Exchange 
states that it intends to implement its proposed rule change no later 
than by the end of the fourth quarter of 2017.\17\
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    \14\ See Notice, supra note 3, at 40027.
    \15\ See generally id.
    \16\ See id. at 40027 and 40041-42.
    \17\See id. at 40027. The Exchange also states that it will 
alert its members in the form of a regulatory alert to provide 
notification of the implementation date. Id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\18\ Specifically, as 
discussed in more detail below, the Commission finds that the proposed 
rule change is consistent with Sections 6(b)(1) and 6(b)(3) of the 
Act,\19\ which require, among other things, that a

[[Page 47056]]

national securities exchange be so organized and have the capacity to 
carry out the purposes of the Act, and to comply and enforce compliance 
by its members and persons associated with its members, with the 
provisions of the Act, the rules and regulation thereunder, and the 
rules of the exchange, and assure the fair representation of its 
members and persons associated with its members in the selection of its 
directors and administration of its affairs, and provide that one of 
more directors shall be representative of issuers and investors and not 
be associated with a member of the exchange, broker, or dealer. 
Further, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\20\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices; to 
promote just and equitable principles of trade; to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, and processing information with respect to, and facilitating 
transactions in securities; to remove impediments to and perfect the 
mechanism of a free and open market and a national market system; and, 
in general, to protect investors and the public interest.
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    \18\ In approving these proposed rule changes, the Commission 
has considered the proposed rules' impact on efficiency, competition 
and capital formation. 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78f(b)(1) and (b)(3).
    \20\ 15 U.S.C. 78f(b)(5).
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A. Ownership of the Exchange

    GEMX is currently structured as a Delaware limited liability 
company (``Delaware LLC'') \21\ and, as discussed above, is a wholly-
owned subsidiary of ISE Holdings. ISE Holdings, in turn is a wholly-
owned subsidiary of Exchange Holdings, which is wholly-owned by Nasdaq, 
Inc. Pursuant to the Current LLC Agreement, ISE Holdings is defined as 
the Sole LLC Member.\22\ As the Sole LLC Member, ISE Holdings may 
assign all (but not less than all) of its interest in the Exchange, 
subject to prior approval by the Commission pursuant to the rule filing 
procedures under Section 19 of the Act.\23\
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    \21\ See Current LLC Agreement.
    \22\ See id. The Current Constitution also defines ISE Holdings 
as the Sole LLC Member of the Exchange and permits assignment of its 
LLC interest as provided in the Current LLC Agreement. See Current 
Constitution, Section 1.1.
    \23\ See Current LLC Agreement, Section 7.1.
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    Pursuant to the proposed rule change, GEMX will be merged with a 
newly formed Delaware LLC, whereby GEMX will be the surviving entity, 
governed by the New Governing Documents. ISE Holdings will continue to 
be the direct owner of GEMX and will be defined as the ``Company 
Member'' or ``Sole LLC Member'' in the New LLC Agreement and New By-
Laws.\24\ Additionally, pursuant to the New LLC Agreement, ISE Holdings 
will not be permitted to assign, in whole or in part, its limited 
liability company interest in the Exchange, unless such transfer or 
assignment is filed with and approved by the Commission pursuant to the 
rule filing procedures under Section 19 of the Act.\25\
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    \24\ See New LLC Agreement, Schedule A; and New By-Laws, Article 
I(f).
    \25\ See New LLC Agreement, Section 20. Pursuant to Section 7.1 
of the Current LLC Agreement, ISE Holdings may only assign all (but 
not less than all) of its ownership interest, and any assignment of 
ISE Holdings' interest in GEMX would similarly be subject to 
approval by the Commission pursuant to the rule filing procedures 
under Section 19 of the Act.
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    The Commission believes that the proposed restrictions on ISE 
Holdings' assignment of its ownership interest in GEMX, taken together 
with restrictions on voting and ownership limitations in the governing 
documents of GEMX's Upstream Owners that were previously approved by 
the Commission,\26\ are designed to minimize the potential that a 
person could improperly interfere with, or restrict the ability of, the 
Commission or GEMX to effectively carry out its regulatory oversight 
responsibilities under the Act. The Commission also notes that the 
restrictions on transfer of ownership interest in the Exchange will be 
similar to those currently in place. In this regard, the Commission 
believes the proposed rule change is consistent with Section 6(b)(1) of 
the Act \27\ in particular, which requires that an exchange be 
organized and have the capacity to be able to carry out the purposes of 
the Act and to comply, 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.
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    \26\ See Nasdaq Acquisition Order, supra note 5, at 41612-17 
(discussing provisions, including voting and ownership limitations, 
in the governing documents of Nasdaq, Inc. and other Upstream Owners 
that are designed to maintain the independence of their self-
regulatory subsidiaries); Securities Exchange Act Release No. 53705 
(April 21, 2006), 71 FR 25260, 25262-63 (April 28, 2006) (``ISE 
HoldCo Order'') (order approving SR-ISE-2006-04) (discussing voting 
and ownership limitations in the governing documents of ISE 
Holdings); Securities Exchange Act Release No. 70050 (July 26, 
2013), 78 FR 46622, 46622-23, 46625, 46627-29 (August 1, 2013) 
(``GEMX Approval Order'') (granting GEMX's application for 
registration as a national securities exchange and discussing the 
provisions in the governing documents of ISE Holdings and other 
Upstream Owners that are designed to preserve the self-regulatory 
function of GEMX); and Securities Exchange Act Release No. 76998 
(January 29, 2016), 81 FR 6066, 6067, 6069, 6071-73 (February 4, 
2016) (``Mercury Exchange Approval'') (approving the registration of 
ISE Mercury, LLC as a national securities exchange and discussing 
the provisions in the governing documents of ISE Holdings and other 
Upstream Owners that are designed to preserve the self-regulatory 
function of the national securities exchanges they control, which 
includes GEMX).
    \27\ 15 U.S.C. 78(b)(1).
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B. Governance of the Exchange

    The Exchange proposes to replace certain provisions pertaining to 
governance of the Exchange with related provisions that are based on 
provisions currently in the Nasdaq LLC Agreement and Nasdaq By-
Laws.\28\ These changes include, among others, provisions governing: 
The composition of the Exchange's board of directors (``Board'' or 
``Board of Directors,'' and each member of the Board of Directors a 
``Director''); the process for nominating, electing, and removing 
Directors; the filling of vacancies on the Exchange's Board; the 
Exchange's board committee structure; and regulatory independence of 
the Exchange.\29\
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    \28\ See Notice, supra note 3, at 40033-36.
    \29\ See id.
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1. Board of Directors: Powers and Composition
    Under the New Governing Documents, and consistent with the Current 
LLC Agreement,\30\ the business and affairs of the Exchange will be 
managed under the discretion of its Board, which will be vested with 
the power to do any and all acts necessary or for the furtherance of 
the purposes described in the New LLC Agreement, including fulfilling 
the Exchange's self-regulatory responsibilities as set forth in the 
Act.\31\ The new Board will also have the power to bind the Exchange 
and delegate powers,\32\ as it does today.\33\
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    \30\ See Current LLC Agreement, Article II, Section 2.2 and 
Article V, Sections 5.1 and 5.7; and Current Constitution, Article 
III, Section 3.1.
    \31\ See New LLC Agreement, Sections 7, 8, and 9(a).
    \32\ See New LLC Agreement, Section 9(b).
    \33\ See Current LLC Agreement, Article II, Section 2.2; and 
Current Constitution, Article V, Section 5.1.
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    ISE Holdings, as the Sole LLC Member, may determine at any time, in 
its sole and absolute discretion, the number of Directors to constitute 
the Board of Directors.\34\ However, at least 20% of the Directors must 
be ``Member Representative Directors'' \35\ and the

[[Page 47057]]

number of ``Non-Industry Directors,'' including at least one ``Public 
Director'' and at least one ``issuer representative'' (or if the Board 
consists of ten or more Directors, at least two issuer 
representatives), must equal or exceed the sum of the number of 
Industry Directors and Member Representative Directors.\36\ 
Additionally, up to two Staff Directors may be elected to the 
Board.\37\ A Director may not be subject to a statutory 
disqualification.\38\ A Director will be removed upon a determination 
by the Board, by a majority vote of the remaining Directors, that the 
Director no longer satisfies the classification for which the Director 
was elected and that the Director's continued service on the Board 
would violate the board composition requirements.\39\
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    \34\ See New LLC Agreement, Section 9(a).
    \35\ See id. A ``Member Representative Director'' will be 
defined as a Director who has been elected or appointed after having 
been nominated by the Member Nominating Committee or by an Exchange 
Member pursuant to the New By-Laws and may be, but is not required 
to be, an officer, director, employee, or agent of an Exchange 
Member. See New By-Laws, Article I(r).
    \36\ See New By-Laws, Article III, Section 2(a). A ``Non-
Industry Director'' will be defined as a Director (excluding an 
officer of the Exchange serving as a Director (``Staff Director'')) 
who is (i) a Public Director; (ii) an officer, director, or employee 
of an issuer of securities listed on the Exchange; or (iii) any 
other individual who would not be an Industry Director. See New By-
Laws, Article I(w). A ``Public Director'' will be defined as a 
Director who has no material business relationship with a broker or 
dealer, the Exchange or its affiliates, or FINRA. See New By-Laws, 
Article I(z). An ``Industry Director'' will be defined as a Director 
with direct ties to the securities industry as a result of 
connections to a broker-dealer, the Exchange or its affiliates, 
FINRA, or certain service providers to such entities. See Notice, 
supra note 3, at 40035 n.78. See also New By-Laws, Article I(m).
    \37\ See New By-Laws, Article I(m); see also Notice, supra note 
3, at 40036 n.81 and accompanying text.
    \38\ See New By-Laws, Article III, Section 2(a).
    \39\ See New By-Laws, Article III, Section 2(b). If the 
remaining term of office of a removed Director is not more than six 
months, the Board will not be deemed to be in violation of the 
Article III, Section 2(a) composition requirements during the 
vacancy by virtue of such vacancy. See id.
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    As discussed in more detail below,\40\ the current Board was 
elected at the Exchange's 2017 annual election of its Board (the ``2017 
Annual Election,'' and such Board the ``2017 Board''), which was held 
on June 19, 2017, pursuant to the Current Governing Documents. When the 
New Governing Documents become operative, the 2017 Board will appoint a 
Nominating Committee and a Member Nominating Committee.\41\ The Member 
Nominating Committee will nominate candidates for each Member 
Representative Director position on the Board,\42\ as well as nominate 
candidates for appointment by the Board for each vacant or new position 
on a committee that is to be filled with a ``Member Representative 
member'' \43\ under the New By-Laws.\44\ If an Exchange Member \45\ 
submits a timely and duly executed written nomination to the Secretary 
of the Exchange, additional candidates may be added to the List of 
Candidates \46\ for the Member Representative Director positions.\47\ 
These candidates, together with candidates nominated by the Member 
Nominating Committee, will then be presented to Exchange Members for 
election.\48\ The Nominating Committee will nominate candidates for all 
other vacant or new Director positions on the Board.\49\
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    \40\ See infra notes 61-64, 66-67, and accompanying text.
    \41\ See Notice, supra note 3, at 40037. The Nominating 
Committee will consist of no fewer than six and no more than nine 
members. The number of Non-Industry members on the Nominating 
Committee shall equal or exceed the number of Industry members on 
the Nominating Committee. If the Nominating Committee consists of 
six members, at least two shall be Public members, and if the 
Nominating Committee consists of seven or more members, at least 
three shall be Public members. The Member Nominating Committee shall 
consist of no fewer than three and no more than six members. All 
members of the Member Nominating Committee shall be a current 
associated person of a current Exchange Member, and the Board will 
appoint such individuals after appropriate consultation with 
representatives of Exchange Members. See New By-Laws, Article III, 
Sections 6(b)(i) and (iii). See also Notice, supra note 3, at 40040 
(discussing the compositional requirements for, and responsibilities 
of, the Nominating Committee and Member Nominating Committee).
    An ``Industry member'' will be a member of any committee 
appointed by the Board that is associated with a broker-dealer as 
defined in the New By-Laws, Article I(n). A ``Non-Industry member'' 
will be defined as a member of any committee appointed by the Board 
who is (i) a Public member; (ii) an officer or employee of an issuer 
of securities listed on the Exchange; or (iii) any other individual 
who would not be an Industry member. See New By-Laws, Article I(x). 
A ``Public member'' will be defined as a member of any committee 
appointed by the Board who has no material business relationship 
with a broker or dealer, the Exchange or its affiliates, or FINRA. 
See New By-Laws, Article I(aa).
    \42\ Pursuant to the New By-Laws, Member Representative 
Directors shall be elected to the Board on an annual basis. See New 
By-Laws, Article II, Section 1(a).
    \43\ Pursuant to the New By-Laws, a ``Member Representative 
member'' will be defined as a member of any committee appointed by 
the Board who has been elected or appointed after having been 
nominated by the Member Nominating Committee pursuant to the By-
Laws. See New By-Laws, Article I(s). As discussed further below, the 
required inclusion of such representatives on certain committees, 
and the process by which they are to be selected, is designed to 
comply with the fair representation requirements of Section 6(b)(3) 
of the Act. See infra note 98 and accompanying text. See also 
Notice, supra note 3, at 40034-35, 40042.
    The Exchange states that the new Member Nominating Committee is 
responsible for: (i) The nomination for election of Member 
Representative Directors to the Board and (ii) the nomination for 
appointment of Member Representative members to the committees 
requiring such members. See Notice, supra note 3, at 40040.
    \44\ See New By-Laws, Article III, Section 6(b).
    \45\ ``Exchange Member'' will be defined as any registered 
broker or dealer that has been admitted to membership in the 
national securities exchange operated by GEMX. See New By-Laws, 
Article 1(u).
    \46\ ``List of Candidates'' will be defined as the list of 
candidates for Member Representative Director positions to be 
elected on an Election Date. See New By-Laws, Article 1(p).
    ``Election Date'' will be defined as a date selected by the 
Board on an annual basis, on which Exchange Members may vote with 
respect to Member Representative Directors in the event of a 
Contested Election. See New By-Laws, Article 1(k). See also infra 
note 48 for the definition of ``Contested Election.''
    \47\ See New By-Laws, Article II, Section 1(b). See also Notice, 
supra note 3, at 40033.
    \48\ If there is only one candidate for each Member 
Representative Director position to be elected on the annual 
election date, the Member Representative Directors shall be elected 
by ISE Holdings as the Sole LLC Member. If, as a result of the 
nomination and petition process, there are more Member 
Representative Directors candidates than the number of positions to 
be elected, each Exchange Member shall have the right to cast one 
vote for each Member Representative Director, and the candidates who 
receive the most votes shall be elected to the Member Representative 
Director positions. An Exchange Member, however, either alone or 
together with its affiliates, may not cast votes representing more 
than 20% of the votes cast for a candidate. See New By-Laws, Article 
II, Section 1(c) and Section 2. See also New By-Laws, Article 1(g) 
(defining ``Contested Election'' as an election for one or more 
Member Representative Directors for which the number of candidates 
on the List of Candidates exceeds the number of positions to be 
elected).
    Under the Exchange's Current Governing Documents, at least 30% 
of the directors on the Board are officers, directors, or partners 
of Exchange members (currently, six directors), and are elected by a 
plurality of the holders of Exchange Rights (the ``Industry 
Directors,'' or, as referred to herein, ``Exchange Directors''), of 
which at least one must be elected by holders of PMM Rights, one 
must be elected by holders of CMM Rights, and one must be elected by 
holders of EAM Rights; provided, however, that the number of each 
type of Exchange Director will always be equal to one another. See 
Notice, supra note 3, at 40029. See also Current Constitution, 
Article III, Section 3.2. The Exchange states that this current 
structure was adopted to comply with the fair representation 
requirements of Section 6(b) of the Act. See Notice, supra note 3, 
at 40029. Because they give members a voice in the Exchange's use of 
its self-regulatory authority, the Exchange believes that Exchange 
Directors serve the same function as Member Representative Directors 
on the boards of the Nasdaq Exchanges. See id.
    The Exchange notes that the Commission has previously found the 
Nasdaq LLC Agreement's (1) 20% Member Representative Director 
requirement, and (2) election process, provide fair representation 
of Nasdaq members, consistent with the requirements of Section 6(b) 
of the Act. See Notice, supra note 3, at 40029 n.18 (citing 
Securities Exchange Act Release No. 53128 (January 13, 2006), 71 FR 
3550, 3553 (January 23, 2006) (``Nasdaq Exchange Order'') (granting 
the exchange registration of Nasdaq Stock Market, Inc.). The 
Commission notes that the Board compositional requirements and the 
process for electing Member Representative Directors in the New 
Governing Documents are based on the parallel requirements in the 
Nasdaq LLC Agreement and are identical to those recently approved by 
the Commission for ISE. See ISE Governance Order, supra note 13, at 
36499-501.
    \49\ See New By-Laws, Article III, Section 6(b).
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    The Commission believes that the proposed composition of the 
Exchange's Board satisfies the requirements in

[[Page 47058]]

Section 6(b)(3) of the Act,\50\ which requires in part 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.\51\ The Commission previously has stated that the inclusion of 
public, non-industry representatives on exchange oversight bodies is an 
important mechanism to support an exchange's ability to protect the 
public interest,\52\ and that they can help to ensure that no single 
group of market participants has the ability to systematically 
disadvantage others through the exchange governance process.\53\ As it 
has previously stated, the Commission believes that public directors 
can provide unbiased perspectives, which may enhance the ability of the 
Board to address issues in a non-discriminatory fashion and foster the 
integrity of the Exchange.\54\
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    \50\ 15 U.S.C. 78f(b)(3).
    \51\ The Commission also notes that it previously found the 
compositional requirements for the board of directors of Nasdaq, 
upon which GEMX's proposed requirements are based, to be consistent 
with Act. See Nasdaq Exchange Order, supra note 48, at 3553. See 
also ISE Governance Order, supra note 13, at 36500-01 (approving 
identical requirements for ISE).
    \52\ See, e.g., Regulation of Exchanges and Alternative Trading 
Systems, Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844 (December 22, 1998).
    \53\ See, e.g., Securities Exchange Act Release No 68341 
(December 3, 2012), 77 FR 73065, 73067 (December 7, 2012) (``MIAX 
Exchange Order'') (granting the exchange registration of the Miami 
International Securities Exchange LLC).
    \54\ See, e.g., Securities Exchange Act Release No. 53382 
(February 27, 2006), 71 FR 11251, 11261 (March 6, 2006) (order 
approving the New York Stock Exchange, Inc.'s business combination 
with Archipelago Holdings, Inc.); Nasdaq Exchange Order, supra note 
48, at 3553; and Securities Exchange Act Release No. 62716 (August 
13, 2010), 75 FR 51295, 51298 (August 19, 2010) (approving the 
application of BATS Y-Exchange, Inc. for registration as a national 
securities exchange); and ISE Governance Order, supra note 13, at 
36501.
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    Section 6(b)(3) of the Act requires that ``the rules of the 
exchange assure a 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.'' 
\55\ The Commission also believes that the proposed requirement that at 
least 20% of the Directors be Member Representative Directors, and the 
means by which they will be chosen by Exchange Members, is consistent 
with Section 6(b)(3) of the Act.\56\ As the Commission previously has 
noted, this statutory requirement helps to ensure that members have a 
voice in the Exchange's use of its self-regulatory authority, and that 
the Exchange is administered in a way that is equitable to all those 
persons who trade on its markets or through its facilities.\57\ In 
addition, the Commission believes that the requirement that at least 
one director be a Public Director and one an issuer representative 
satisfies the requirements of Section 6(b)(3) of the Act.\58\
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    \55\ Id.
    \56\ 15 U.S.C. 78f(b)(3).
    \57\ See, e.g., Nasdaq Exchange Order, supra note 48; Securities 
Exchange Act Release No. 58375 (August 18, 2008), 73 FR 49498 
(August 21, 2008) (order granting the exchange registration of BATS 
Exchange, Inc.); and ISE Governance Order, supra note 13, at 36501.
    \58\ 15 U.S.C. 78f(b)(3).
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2. Transition From Current Board Election Process to the New Election 
Process
    In its filing, the Exchange states that, when it was acquired by 
Nasdaq, Inc., there were a number of harmonizing changes to its Board 
that resulted in a complete overlap of directors on the Boards of GEMX 
and the Nasdaq Exchanges (the ``Post-Acquisition Board'').\59\ GEMX 
also states its belief that the Post-Acquisition Board satisfied the 
composition requirements contained in both the Current Constitution and 
the New By-Laws.\60\ The Exchange states that the terms of the 
Directors on the Post-Acquisition Board ended at the 2017 Annual 
Election,\61\ and that all of the Directors on the 2017 Board are 
Directors that served on the Post-Acquisition Board. The Exchange 
believes that the 2017 Board satisfies both the board composition 
requirements in the Current Governing Documents, as well as in the New 
Governing Documents,\62\ and that once the New Governing Documents 
become operative, no additional actions with respect to the 2017 Board 
will be required under the Delaware Limited Liability Company Act.\63\ 
Pursuant to the proposal, the 2017 Board will serve until the 
Exchange's first annual election of Directors in 2018 (``2018 Board'') 
in accordance with the processes under the New Governing Documents.\64\
---------------------------------------------------------------------------

    \59\ See Notice, supra note 3, at 40036.
    \60\ See id.
    \61\ The Exchange states that it held its 2017 Annual Election 
on June 19, 2017, in accordance with the nomination, petition, and 
voting processes set forth in the Current Governing Documents. See 
id.
    \62\ The Commission notes that if the Board of Directors in 
place at the time the New Governing Documents become effective does 
not satisfy the requirements in the New Governing Documents, the 
Exchange would need to comply with the procedures for removing 
Directors and filling vacancies pursuant to the New Governing 
Documents. See, e.g., supra notes 39, 42, and 47-49 and accompanying 
text.
    \63\ See Notice, supra note 3, at 40036. As discussed above, the 
Exchange proposes that, if approved, the New Governing Documents 
would be made effective no later than by the end of the fourth 
quarter of 2017. See id. at 40027; see also supra note 16 and 
accompanying text.
    \64\ See Notice, supra note 3, at 40037.
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    The Commission believes the Exchange's proposal to allow the 2017 
Board to continue serving until the 2018 Board would be elected 
pursuant to the process in the New Governing Documents is consistent 
with the Act, and in particular Section 6(b)(3) of the Act.\65\ The 
Exchange states that, although the 2017 Board was not nominated or 
voted upon in accordance with the New Governing Documents, it believes 
that the composition of the 2017 Board is consistent with the Act, as 
it still provides for the fair representation of members and has one or 
more directors that are representative of issuers and investors and not 
associated with a member of the exchange, broker, or dealer. 
Specifically, the Exchange states that six Directors are officers, 
directors, or partners of Exchange members, and were elected by a 
plurality of the holders of ``Exchange Rights,'' as required by Section 
3.2(b) of the Current Constitution.\66\ These Exchange Directors were 
subject to the full petition and voting process by membership in 
accordance with Articles II and III of the Current Constitution, which 
process the Commission previously found to satisfy the requirements of 
the Act.\67\ The Exchange believes that the Exchange Directors serve 
the same function as the Member Representative Directors under the 
proposed board structure, as both directorships give Exchange members a 
voice in the Exchange's use of its self-

[[Page 47059]]

regulatory authority.\68\ The Exchange also notes that only its 
corporate governance structure would change under the proposed rule 
change, and that its membership has remained substantially the same 
both before and after the 2017 Annual Election.\69\ Additionally, the 
Commission notes that, under the Current Governing Documents, the 2017 
Board is required to include one Director that is a ``Public 
Director.'' \70\
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    \65\ See supra notes 50-58 and accompanying text (discussing the 
requirements of Section 6(b)(3) and the Commission's belief that the 
compositional requirements for the Board of Directors, and the 
process for electing such Directors under the New Governing 
Documents, are consistent with those requirements).
    \66\ See Notice, supra note 3, at 40029 and 40032-33 (discussing 
the Exchange's current process for the nomination and election of 
Directors, including the Exchange Directors). See also supra note 
48.
    ``Exchange Rights'' currently means, collectively, PMM Rights, 
CMM Rights, and EAM Rights, which are the trading and other rights 
associated with the Exchange's three classes of membership. See Rule 
100(a)(17); Current LLC Agreement, Article VI; and Current 
Constitution, Section 13.1(n). See also Rules 100(a)(12), 
100(a)(15), and 100(a)(36); and Current Constitution, Sections 
13.1(f), 13.1(j), and 13.1(y). Under the New Rules, ``Exchange 
Rights'' will be defined in New Rule 100(a)(20) as the PMM Rights, 
CMM Rights, and EAM Rights, which will be defined in New Rules 
100(a)(41), 100(a)(12), and 100(a)(16), respectively, and as 
discussed further below. See infra Section III.C. (discussing 
amendments to the Exchange's Rules).
    \67\ See Notice, supra note 3, at 40036; GEMX Approval Order, 
supra note 26.
    \68\ See Notice, supra note 3, at 40036.
    \69\ See id.
    \70\ See Current Constitution, Section 3.2(b).
    Pursuant to the Exchange's Current Constitution, a ``Public 
Director'' means a non-industry representative who has no material 
relationship with a broker or dealer or any affiliate of a broker or 
dealer or the Exchange or any affiliate of the Exchange. See Current 
Constitution, Sections 3.2(b) and 13.1(z).
    The term ``non-industry representative'' means any person who 
would not be considered an ``industry representative,'' as well as 
(i) a person affiliated with a broker or dealer that operates solely 
to assist the securities-related activities of the business of non-
member affiliates, or (ii) an employee of an entity that is 
affiliated with a broker or dealer that does not account for a 
material portion of the revenues of the consolidated entity, and who 
is primarily engaged in the business of the non-member entity. See 
Current Constitution, Section 13.1(u).
    The term ``industry representative'' means a person who is an 
officer, director, or employee of a broker or dealer or who has been 
employed in any such capacity at any time within the prior three (3) 
years, as well as a person who has a consulting or employment 
relationship with or has provided professional services to the 
Exchange and a person who had any such relationship or provided any 
such services to the Exchange at any time within the prior three (3) 
years. See Current Constitution, Section 13.1(r).
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3. Committees of the Board
    Pursuant to the New By-Laws, the Exchange may establish committees 
composed solely of Directors. Specifically, the Exchange may establish 
an Executive Committee and a Finance Committee, and shall establish a 
Regulatory Oversight Committee (``ROC'').\71\ The Exchange shall also 
establish certain committees not composed solely of Directors. 
Specifically, the Exchange shall establish a Nominating Committee and a 
Member Nominating Committee, which would be elected on an annual basis 
by ISE Holdings, as the Sole LLC Member,\72\ and a Quality of Markets 
Committee (``QMC'').\73\ The New LLC Agreement will provide that, to 
the extent provided in the resolution of the Board, any committee that 
consists solely of one or more Directors shall have and may exercise 
all the powers and the authority of the Board in the management of the 
business and affairs of the Exchange.\74\ The powers of any such 
committee would, however, be limited with respect to approving any 
matters pertaining to the self-regulatory function of the Exchange or 
relating to the structure of the market the Exchange regulates.\75\
---------------------------------------------------------------------------

    \71\ See New By-Laws, Article III, Section 5.
    The Exchange states that the proposed provisions relating to the 
standing committees are substantially similar to the provisions in 
Section 9(g) of the Nasdaq LLC Agreement with respect to standing 
committees. See Notice, supra note 3, at 40030.
    \72\ See New By-Laws, Article III, Section 6(b). See also supra 
note 41 (describing the compositional requirements of these 
committees).
    The Board may also designate additional committees consisting of 
one or more Directors or other persons. See New LLC Agreement, 
Section 9(g).
    \73\ See New By-Laws, Article III, Section 6(c). See also infra 
note 98 and accompanying text (describing the compositional 
requirements of the QMC).
    \74\ See New LLC Agreement, Section 9(g)(v).
    \75\ See id. See also Notice, supra note 3, at 40031. The 
Exchange notes that the proposed limitation is based on 
substantially similar language in Section 5.2(ii) of MRX's 
Constitution and is intended to assure the fair administration and 
governance of the Exchange. The Exchange does not have this 
limitation in Section 5.2 of its Current Constitution with respect 
to any Board committees set up by Board resolution, and is therefore 
proposing to follow the more current MRX standard. See Notice, supra 
note 3, at 40031 n.35.
---------------------------------------------------------------------------

    The Exchange proposes that the Executive Committee be an optional 
committee, to be appointed only if deemed necessary by the Board.\76\ 
Because the Executive Committee will have the powers and authority of 
the Board in the management of the business and affairs of the Exchange 
between meetings of the Board, its composition must reflect that of the 
Board. Accordingly, if established, the number of Non-Industry 
Directors on the Executive Committee must equal or exceed the number of 
Industry Directors and the percentages of Public Directors and Member 
Representative Directors must be at least as great as the corresponding 
percentages on the Board as a whole.\77\
---------------------------------------------------------------------------

    \76\ See New By-Laws, Article III, Section 5(a).
    \77\ See id.
---------------------------------------------------------------------------

    The Board would retain oversight of the financial operations of the 
Exchange instead of delegating these functions to a standing committee, 
but would have the option to appoint a Finance Committee at the Board's 
discretion.\78\ The Finance Committee would advise the Board with 
respect to the oversight of the financial operations and conditions of 
the Exchange, including recommendations for the Exchange's annual 
operating and capital budgets and proposed changes to the rates and 
fees charged by the Exchange.
---------------------------------------------------------------------------

    \78\ See New By-Laws, Article III, Section 5(b).
---------------------------------------------------------------------------

    The Exchange proposes to eliminate its current Finance and Audit 
Committee and to have the committee's functions performed by Nasdaq, 
Inc.'s Audit Committee (``Nasdaq Audit Committee''), which is composed 
of at least three directors of Nasdaq, Inc., all of whom must satisfy 
the standards for independence set forth in Section 10A(m) of the Act 
\79\ and Nasdaq's rules.\80\ The Exchange notes that the Nasdaq Audit 
Committee has broad authority to review the financial information that 
will be provided to shareholders of Nasdaq, Inc. and others; systems of 
internal controls; and audit, financial reporting, and legal and 
compliance processes.\81\ The Exchange states that, to the extent the 
current Finance and Audit Committee oversees the Exchange's financial 
reporting process, its activities are duplicative of the activities of 
the Nasdaq Audit Committee, which is also charged with providing 
oversight over financial reporting and independent auditor selection 
for Nasdaq, Inc. and all of its subsidiaries.\82\ The Exchange also 
notes that the unconsolidated financial statements of the Exchange will 
still be prepared for each fiscal year.\83\
---------------------------------------------------------------------------

    \79\ See U.S.C. 78j-1(m).
    \80\ See Nasdaq, Inc. By-Laws, Section 4.13(g).
    The current Finance and Audit Committee must be composed of at 
least three (3) and not more than five (5) directors, all of whom 
must be non-industry representatives and must be ``financially 
literate'' as determined by the Board. See Current Constitution, 
Article V, Section 5.5.
    \81\ See Notice, supra note 3, at 40038.
    \82\ See id.
    \83\ See id. The Commission notes that registered national 
securities exchanges have an ongoing requirement to comply with the 
requirements of Form 1, which include filing audited financial 
statements with the Commission on an annual basis. See Form 1, 
General Instructions A.2 and Exhibit I, 17 CFR 249.1; and 17 CFR 
240.6a-2(b)(1) (requiring a national securities exchange to file 
each year, as an amendment to its Form 1, Exhibit I (which requires 
a Form 1 applicant to file audited financial statements), as of the 
latest fiscal year of the exchange).
---------------------------------------------------------------------------

    The Exchange will also have a Regulatory Oversight Committee 
(``ROC'') under the New Governing Documents, which will have broad 
authority to oversee the adequacy and effectiveness of the Exchange's 
regulatory and self-regulatory responsibilities.\84\ The ROC will 
consist of three members, each of whom must

[[Page 47060]]

be a Public Director and an ``independent director,'' as defined in 
Nasdaq Rule 5605.\85\
---------------------------------------------------------------------------

    \84\ See New By-Laws, Article III, Section 5(c). Currently, the 
Exchange's regulatory oversight activities are performed by the 
Exchange's Corporate Governance Committee, which will not exist 
under the new governance structure. See Notice, supra note 3, at 
40039-40.
    The Exchange also states that regulatory oversight functions 
formerly performed by the Finance and Audit Committee may be assumed 
by the ROC, and that like the ROCs of the Nasdaq Exchanges, the GEMX 
ROC, because of its broad authority to oversee the adequacy and 
effectiveness of the Exchange's self-regulatory responsibilities, 
will be able to maintain oversight over controls in tandem with the 
Nasdaq Audit Committee's overall oversight responsibilities. See id. 
at 40038.
    \85\ See New By-Laws, Article III, Section 5(c).
---------------------------------------------------------------------------

    Pursuant to the New By-Laws, the Exchange will also have a Chief 
Regulatory Officer (``CRO''), as it does currently.\86\ The new CRO 
will have general responsibility for the supervision of the regulatory 
operations of the Exchange and will meet with the ROC in executive 
session at regularly scheduled meetings of the ROC, and at any time 
upon request of the CRO or any member of the ROC.\87\
---------------------------------------------------------------------------

    \86\ See Notice, supra note 3, at 40041 (noting that, although 
not expressly in its Current Governing Documents, the position of 
Chief Regulatory Officer has long existed at the Exchange). See also 
New By-Laws, Article IV, Section 7.
    In addition to the CRO, pursuant to the New LLC Agreement, the 
Exchange's officers will include: A Chief Executive Officer, a 
President, Vice Presidents, a Chief Regulatory Officer, a Secretary, 
an Assistant Secretary, a Treasurer, and an Assistant Treasurer. See 
New By-Laws, Article IV, Sections 4-11.
    \87\ See New By-Laws, Article IV, Section 7. The CRO may also 
serve as the General Counsel of the Exchange. Id.
---------------------------------------------------------------------------

    The ROC will assess the Exchange's regulatory performance, assist 
the Board in reviewing the regulatory plan and the overall 
effectiveness of the Exchange's regulatory functions, review the 
Exchange's regulatory budget and inquire into the adequacy of resources 
available in the budget for regulatory activities, and be informed 
about the compensation and promotion or termination of the CRO.\88\
---------------------------------------------------------------------------

    \88\ See New By-Laws, Article III, Section 5(c).
---------------------------------------------------------------------------

    The Exchange also proposes that the Internal Audit Department of 
Nasdaq, Inc. (``Nasdaq Internal Audit Department'') would report to the 
Board on all Exchange-related internal audit matters and direct such 
reports to the new ROC.\89\ In addition, to ensure that the Board 
retains authority to direct the Nasdaq Internal Audit Department's 
activities with respect to the Exchange, the Nasdaq Internal Audit 
Department's written procedures will stipulate that the ROC may, at any 
time, direct the Nasdaq Internal Audit Department to conduct an audit 
of a matter of concern and report the results of the audit both to the 
ROC and the Nasdaq Audit Committee.\90\
---------------------------------------------------------------------------

    \89\ See Notice, supra note 3, at 40039 & n.104 (citing the 
Regulatory Oversight Committee Charter of Nasdaq, Phlx, and BX, 
available at http://ir.nasdaq.com/corporate-governance-document.cfm?DocumentID=1097).
    \90\ See id. at 40039.
---------------------------------------------------------------------------

    The Exchange also proposes to eliminate its current Compensation 
Committee and its Corporate Governance Committee.\91\ The Compensation 
Committee is primarily charged with reviewing and approving 
compensation policies and plans for the Chief Executive Officer and 
other senior executive officers of the Exchange.\92\ Under the new 
governance structure, the functions of the Compensation Committee will 
be performed by Nasdaq, Inc.'s management compensation committee or, to 
the extent that policies, programs, and practices must be established 
for any Exchange officers or employees who are not also officers or 
employees of Nasdaq, Inc., the full Board.\93\ The Corporate Governance 
Committee is primarily charged with: (i) Nominating candidates for all 
vacant or new non-industry representative positions on the Board, (ii) 
overseeing the Exchange's regulatory activities and program, and (iii) 
overseeing and evaluating the governance of the Exchange.\94\ Under the 
new governance structure, the functions of the Corporate Governance 
Committee will be performed by the new Nominating Committee, the new 
ROC, or, if required, the full Board.\95\
---------------------------------------------------------------------------

    \91\ See id. at 40039-40.
    \92\ See id. at 40039. See also Current Constitution, Section 
5.6.
    \93\ See Notice, supra note 3, at 40039.
    \94\ See id. See also Current Constitution, Section 5.4.
    \95\ See Notice, supra note 3, at 40039-40.
---------------------------------------------------------------------------

    As discussed above, the Nominating Committee and Member Nominating 
Committee will have responsibility for, among other things, nominating 
candidates for election to the Board. On an annual basis, the members 
of these committees will nominate candidates for the succeeding year's 
respective committees to be elected by ISE Holdings.\96\
---------------------------------------------------------------------------

    \96\ See New By-Laws, Article III, Section 6(b). See also supra 
notes 42-49 and accompanying text. Additional candidates for the 
Member Nominating Committee may be nominated and elected by Exchange 
Members pursuant to a petition process. See supra notes 45-48 and 
accompanying text.
    The Commission notes that under the New By-Laws, the Member 
Nominating Committee shall nominate candidates for each Member 
Representative Director position to be elected by Exchange Members 
or the Sole LLC Member, and for appointment by the Board for each 
vacant or new position on any committee that is to be filled with a 
Member Representative member. See New By-Laws, Article III, Section 
6.
---------------------------------------------------------------------------

    Finally, the Quality of Markets Committee (``QMC'') will have the 
following functions: (i) To provide advice and guidance to the Board on 
issues relating to the fairness, integrity, efficiency, and 
competitiveness of the information, order handling, and execution 
mechanisms of the Exchange from the perspective of investors, both 
individual and institutional, retail firms, market making firms, and 
other market participants; and (ii) to advise the Board with respect to 
national market system plans and linkages between the facilities of the 
Exchange and other markets.\97\ At least 20% of the QMC must be 
composed of Member Representative members, and the Non-Industry members 
on the QMC must equal or exceed the sum of Industry members and Member 
Representative members.\98\
---------------------------------------------------------------------------

    \97\ See New By-Laws, Article III, Section 6(c)(i).
    \98\ See New By-Laws, Article III, Section 6(c)(ii). See also 
Notice, supra note 3, at 40040.
    The Exchange also states that the function of Member 
Representative members on committees is to provide members a voice 
in the administration of the Exchange's affairs on certain 
committees that are responsible for providing advice on any matters 
pertaining to the Exchange's self-regulatory function or relating to 
its market structure. See Notice, supra note 3, at 40034. In order 
to ensure that its members have the opportunity to formally provide 
input on matters that are important to them, the Exchange states 
that at least 20% of the persons serving on any such committees will 
be individuals who will have been appointed by the Member Nominating 
Committee and will be representative of the Exchange's membership. 
See id.
---------------------------------------------------------------------------

    The Commission believes that the Exchange's proposed committees, 
which are similar to the committees maintained by other exchanges,\99\ 
are consistent with the Act, including Section 6(b)(1), which requires, 
in part, an exchange to be so organized and have the capacity to carry 
out the purposes of the Act.\100\ The Commission further believes that 
the Exchange's proposed committees, including their composition and the 
means by which committee members will be chosen, are consistent with 
Section 6(b)(3) of the Act because relevant committees provide for the 
fair representation of members in the administration of the Exchange's 
affairs.\101\
---------------------------------------------------------------------------

    \99\ See, e.g., Nasdaq By-Laws Article III, Sections 5-6; BX By-
Laws, Article IV, Sections 4.13-14; Phlx By-Laws, Article V, 
Sections 5-2 to -3; ISE By-Laws Article III, Sections 5-6.
    \100\ 15 U.S.C. 78f(b)(1).
    \101\ See 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------

4. Regulatory Independence
    Certain provisions in GEMX's Current Governing Documents, and those 
of its Upstream Owners, are designed to help maintain the independence 
of the regulatory functions of the Exchange.\102\ The New Governing 
Documents similarly include provisions designed to help maintain the 
independence of the regulatory functions of GEMX,\103\ which

[[Page 47061]]

provisions are substantially similar to those included in the governing 
documents of other exchanges.\104\ Specifically:
---------------------------------------------------------------------------

    \102\ See, e.g., GEMX Approval Order, supra note 26, at 46627-
29, Nasdaq Acquisition Order, supra note 5, at 41613-16; Securities 
Exchange Act Release No. 56955 (December 13, 2007), 72 FR 71979 
(December 19, 2007) (SR-ISE-2007-101) (order approving acquisition 
of ISE Holdings by Eurex Frankfurt); and ISE HoldCo Order, supra 
note 26, at 25263-64.
    \103\ See Notice, supra note 3, at 40042. The Commission notes 
that the Exchange did not propose any amendments to the governing 
documents of its Upstream Owners.
    \104\ See, e.g., Nasdaq Exchange Order, supra note 48; MIAX 
Exchange Order, supra note 53; Mercury Exchange Approval, supra note 
26; ISE Governance Order, supra note 13.
---------------------------------------------------------------------------

     The Exchange Board will be required, when evaluating any 
proposal, to take into account all factors that the Board deems 
relevant, including, without limitation, (1) the potential impact on: 
The integrity, continuity, and stability of the national securities 
exchange operated by the Exchange and the other operations of the 
Exchange; the ability to prevent fraudulent and manipulative acts and 
practices; and investors and the public, and (2) whether such proposal 
would promote just and equitable principles of trade, foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, or assist in the removal of 
impediments to or the perfection of the mechanisms for a free and open 
market and a national market system.\105\
---------------------------------------------------------------------------

    \105\ See New By-Laws, Article III, Section 3. See also Notice, 
supra note 3, at 40037. Article III, Section 3 of the New By-Laws 
sets forth the factors to be considered by the Board when evaluating 
any proposal. See New By-Laws, Article III, Section 3. Further, the 
Exchange states that Article III, Section 3 of the New By-Laws 
recognizes the Exchange's status as a self-regulatory organization, 
and the provisions of Section 3, taken together, are designed to 
reinforce the notion that the Exchange is not solely a commercial 
enterprise, but rather a self-regulatory organization registered 
pursuant to, and subject to the obligations imposed by, the Act. See 
Notice, supra note 3, at 40037.
---------------------------------------------------------------------------

     All books and records of GEMX reflecting confidential 
information pertaining to the self-regulatory function of the Exchange 
(including but not limited to disciplinary matters, trading data, 
trading practices, and audit information) shall be retained in 
confidence by GEMX and its officers, directors, employees and agents; 
shall not be made available to persons other than to those officers, 
directors, employees, and agents of GEMX that have a reasonable need to 
know; and will not be used for any non-regulatory purpose.\106\
---------------------------------------------------------------------------

    \106\ The corresponding provision in GEMX's Current LLC 
Agreement prohibits the use of confidential information for any 
commercial purpose. See Current LLC Agreement, Article IV, Section 
4.1(b). The Exchange proposes to modify the standard to prohibit the 
use of such information for any non-regulatory purpose. See Notice, 
supra note 3, at 40031 n.42; New LLC Agreement, Section 16. The 
Exchange states that this change is intended to replicate Section 
4.1(b)(iii) of MRX's LLC Agreement, to emphasize the independence of 
the Exchange's regulatory function from its commercial interests. 
See Notice, supra note 3, at 40031 n. 42.
    The Exchange is not proposing that GEMX, and the Board on behalf 
of GEMX, shall not have the right to keep confidential from ISE 
Holdings, as the Sole LLC Member, any information that the Board 
would otherwise be permitted to keep confidential from the Sole LLC 
Member pursuant to Section 18-305(c) of the Delaware Limited 
Liability Company Act, 6 Del. C. Sec.  18-101. Additionally, the 
Exchange is not proposing that ISE Holdings, as the Sole LLC Member 
and the Exchange's authorized representative, shall have an explicit 
right to examine the Exchange's books, records, and documents during 
normal business hours. See Notice, supra note 3, at 40031. Although 
such provisions are in the Nasdaq LLC Agreement (see Nasdaq LLC 
Agreement, Section 16), they are not in the Current Governing 
Documents of GEMX.
    The Commission believes that the proposed provisions relating to 
the books and records of the Exchange are designed to maintain the 
independence of GEMX's self-regulatory function, and are consistent 
with the Act. The Commission notes that these provisions are 
substantially similar to those the Commission has previously found 
to be consistent with the Act in the context of the corporate 
governance structures of other exchanges. See, e.g., MIAX Exchange 
Order, supra note 53; Mercury Exchange Approval, supra note 26; ISE 
Governance Order, supra note 13.
    The Commission also notes that the governing documents of GEMX's 
Upstream Owners provide that all books and records of GEMX 
reflecting confidential information pertaining to the self-
regulatory function of the Exchange will be subject to 
confidentiality restrictions. See Certificate of Incorporation of 
ISE Holdings, Article Eleventh; Certificate of Incorporation of U.S. 
Exchange Holdings, Article Fourteenth; By-Laws of Nasdaq, Inc., 
Article XII, Section 12.1(b).
---------------------------------------------------------------------------

     The Exchange proposes that, as is currently the case, the 
books and records of GEMX must be maintained in the United States \107\ 
and are subject at all times to examination by the Commission pursuant 
to the federal securities laws and the rules and regulations 
thereunder.\108\
---------------------------------------------------------------------------

    \107\ See New LLC Agreement, Section 16; see also Current LLC 
Agreement, Article IV, Section 4.1.
    \108\ See New LLC Agreement, Section 16. The Commission notes 
that, as is currently the case, the requirement to keep such 
information confidential shall not limit the Commission's ability to 
access and examine such information or limit the ability of 
officers, directors, employees, or agents of GEMX to disclose such 
information to the Commission. See id. See also Current LLC 
Agreement, Article IV, Section 4.1(b).
    The Exchange states that certain provisions in Section 16 of the 
New LLC Agreement are substantially similar to provisions in Section 
16 of the Nasdaq LLC Agreement. See Notice, supra note 3, at 40031 
n.40. The Exchange also states that it is retaining in the New LLC 
Agreement certain provisions from its Current LLC Agreement that are 
not in the governing documents of the Nasdaq Exchanges, such as 
those relating to where the Exchange's books and records must be 
maintained and who may access the books and records, in particular 
those books and records that contain confidential information 
pertaining to the self-regulatory function of the Exchange. See 
Notice, supra note 3, at 40031 & n. 41.
    GEMX also states that the Nasdaq Exchanges will separately file 
proposed rule changes to harmonize the books and records provisions 
in their respective governing documents with the language in Section 
16 of the New LLC Agreement. See Notice, supra note 3, at 40031 
n.41.
---------------------------------------------------------------------------

     Under the New LLC Agreement and New By-Laws, any 
amendments to those documents will not become effective until filed 
with, or filed with and approved by, the Commission, as required under 
Section 19 of the Act and the rules promulgated thereunder.\109\
---------------------------------------------------------------------------

    \109\ See New LLC Agreement, Section 27; New By-Laws, Article 
VIII, Section 1.
    The Commission notes that, although the Current Constitution and 
Current LLC Agreement do not include a similar, explicit requirement 
regarding the filing of amendments pursuant to Section 19 of the 
Act, the Current Constitution and Current LLC Agreement, as rules of 
the Exchange, are nonetheless subject to the requirements of Section 
19 of the Act and the rules and regulations thereunder.
    Additionally, pursuant to the New By-Laws, either the Sole LLC 
Member or the vote of a majority of the whole Board may enact 
amendments to the By-Laws, and the Board may adopt emergency by-
laws.
---------------------------------------------------------------------------

     Additionally, as is currently the case pursuant to the 
Current LLC Agreement,\110\ Section 15 of the New LLC Agreement would 
prohibit the Exchange from using Regulatory Funds to pay 
dividends.\111\
---------------------------------------------------------------------------

    \110\ See Current LLC Agreement, Article III, Section 3.3.
    \111\ Specifically, pursuant to Section 15 of the New LLC 
Agreement, Regulatory Funds shall not be used non-regulatory 
purposes, but rather shall be used to fund the legal, regulatory, 
and surveillance operations of the Exchange, and the Exchange shall 
not make a distribution to the Sole LLC Member using Regulatory 
Funds. See New LLC Agreement, Section 15.
    Consistent with Section 3.3 of the Current LLC Agreement, 
Schedule A of the New LLC Agreement defines ``Regulatory Funds'' as 
fees, fines, or penalties derived from the regulatory operations of 
the Exchange. However, Regulatory Funds do not include revenues 
derived from listing fees, market data revenues, transaction 
revenues, or any other aspect of the commercial operations of the 
Exchange even if a portion of such revenues are used to pay costs 
associated with the regulatory operations of the Exchange. See New 
LLC Agreement, Schedule A.
    GEMX states that the Nasdaq Exchanges will separately file 
proposed rule changes to harmonize the distribution provisions in 
their respective governing documents with the language in Section 15 
of the New LLC Agreement. See Notice, supra note 3, at 40031 n. 38.
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    The Commission believes that the provisions discussed in this 
section, which are designed to help ensure the independence of the 
Exchange's regulatory function and facilitate the ability of the 
Exchange to carry out its responsibility and operate in a manner 
consistent with the Act, are appropriate and consistent with the 
requirements of the Act, particularly with Section 6(b)(1), which 
requires, in part, an exchange to be so organized and have the capacity 
to carry out the purposes of the Act.\112\
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    \112\ 15 U.S.C. 78f(b)(1).
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    The Commission finds that proposed process regarding amendments to 
the New Governing Documents is consistent with Section 6(b)(1) of the 
Act, because it reflects the obligation of the Board to

[[Page 47062]]

ensure compliance with the rule filing requirements under the Act. 
Additionally, the Commission finds these changes to be consistent with 
Section 19(b)(1) of the Act and Rule 19b-4 thereunder,\113\ which 
require that a self-regulatory organization file with the Commission 
all proposed rules, as well as all proposed changes in, additions to, 
and deletions of its existing rules. These provisions clarify that 
amendments to the New Governing Documents constitute proposed rule 
changes within the meaning of Section 19(b)(2) of the Act and Rule 19b-
4 thereunder, and are subject to the filing requirements of Section 19 
of the Act and the rules and regulations thereunder.
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    \113\ Id.; 17 CFR 240.19b-4.
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    The Commission also finds that the prohibition on the use of 
regulatory fines, fees, or penalties to fund dividends is consistent 
with Section 6(b)(1) of the Act, because it will further the Exchange's 
ability to effectively comply with its statutory obligations and is 
designed to ensure that the regulatory authority of the Exchange is not 
improperly used.\114\ This restriction on the use of regulatory funds 
is intended to preclude the Exchange from using its authority to raise 
Regulatory Funds for the purpose of benefiting its shareholders.\115\
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    \114\ See, e.g., Securities Exchange Act Release No. 51029 
(January 12, 2005), 70 FR 3233, 3241 (January 21, 2005) (SR-ISE-
2004-29) (approving an ISE rule interpretation that requires that 
revenues received from regulatory fees or regulatory penalties be 
segregated and applied to fund the legal, regulatory, and 
surveillance operations of the Exchange and not used to pay 
dividends to the holders of Class A Common Stock).
    \115\ See Notice, supra note 3, at 40031.
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C. Related Rule Amendments

    The Exchange proposes to amend its Rules to reflect the changes to 
its constituent documents through the adoption of the New Governing 
Documents to replace the Current Governing Documents. The Exchange 
states that it is amending its Rules to: (i) Clarify any Rules that 
cross-reference the Current Governing Documents in the rule text, since 
those documents are being replaced by the New Governing Documents; 
\116\ or (ii) relocate in the Rules the definitions for a number of 
defined terms used in the Rules that currently refer back to the 
Current LLC Agreement or the Current Constitution for their 
meanings.\117\
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    \116\ The Exchange states that all such changes are non-
substantive, primarily changing terminology, such as changing the 
term ``Constitution'' to ``By-Laws'' and removing references to the 
``Current LLC Agreement.'' See id. at 40041.
    \117\ See id. at 40029. The Exchange provides that all the 
provisions governing the trading privileges associated with the 
Exchange Rights in the Current Governing Documents are substantially 
set forth in the Rules. See id. The Commission notes that, currently 
on GEMX, the Exchange Rights do not convey any ownership rights and 
only provide for voting rights for representation, through Exchange 
Directors, on the Board and the ability to transact on the Exchange. 
The Exchange represents that, under its Rules, the holders of 
Exchange Rights will continue to have the same trading privileges 
they currently hold as PMMs, CMMs, and EAMs, and the new Board 
structure of the Exchange will not change any trading privileges. 
Further, under the New Governing Documents, the holders of Exchange 
Rights will continue to have voting rights for representation on the 
Board through the election of Member Representative Directors. See 
id. at 40029-30.
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    Specifically, the Exchange proposed changes to its Rules to, among 
other things:
     Relocate the concept of CMM Rights from the Current LLC 
Agreement \118\ to New Rule 100(a)(12), which will state that the term 
``CMM Rights'' means the non-transferable rights held by a Competitive 
Market Maker.\119\
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    \118\ See Current LLC Agreement, Article VI, Section 6.2(b).
    \119\ CMM Rights are non-transferable rights. The holders of CMM 
Rights may not lease or sell these rights. As discussed above, all 
Exchange Rights (i.e., PMM, CMM, and EAM Rights) convey only voting 
rights and trading privileges on the Exchange. See Notice, supra 
note 3, at 40041 n.120.
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     Relocate to New Rule 100(a)(13) the definition of 
``Competitive Market Maker,'' \120\ which is currently only defined in 
Section 13.1(f) of the Current Constitution.
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    \120\ The term ``Competitive Market Maker'' (referred to herein 
as ``CMM'') will be defined to mean a Member that is approved to 
exercise trading privileges associated with CMM Rights. See New Rule 
100(a)(13).
    The term ``Member'' means an organization that has been approved 
to exercise trading rights associated with Exchange Rights. See 
current Rule 100(a)(23); New Rule 100(a)(28).
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     Relocate the concept of EAM Rights to New Rule 100(a)(16), 
which will state that the term ``EAM Rights'' means the non-
transferable rights held by an Electronic Access Member.\121\
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    \121\ See supra note 119.
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     Relocate to New Rule 100(a)(17) the definition of 
``Electronic Access Member,'' \122\ which is currently only defined in 
Section 13.1(j) of the Current Constitution.
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    \122\ The term ``Electronic Access Member'' (referred to herein 
as ``EAM'') will be defined to mean a Member that is approved to 
exercise trading privileges associated with EAM Rights. See New Rule 
100(a)(17).
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     Relocate the definitions for ``Exchange Transaction,'' 
``good standing,'' and ``System'' from the Current Constitution to the 
Rules,\123\ and delete Rule 100(a)(22A), defining ``LLC Agreement,'' as 
that term would no longer be used in the Rules, as amended by the 
proposed rule change.
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    \123\ ``Exchange Transaction'' would be relocated from Section 
13.1(o) of the Current Constitution to New Rule 100(a)(21), ``good 
standing'' from Section 13.1(p) of the Current Constitution to New 
Rule 100(a)(24), and ``System'' from Section 13.1(dd) of the Current 
Constitution to New Rule 100(a)(55).
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     Relocate the concept of PMM Rights from Article VI of the 
Current LLC Agreement to New Rule 100(a)(41), which will state that the 
term ``PMM Rights'' means the non-transferable rights held by a Primary 
Market Maker.
     Relocate to New Rule 100(a)(42) the definition for 
``Primary Market Maker'' \124\ from Section 13.1(y) of the Current 
Constitution.
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    \124\ The term ``Primary Market Maker'' (referred to herein as 
``PMM'') will be defined to mean a Member that is approved to 
exercise trading privileges associated with PMM Rights. See New Rule 
100(a)(42).
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    The Commission believes that the proposed changes to GEMX's Rules 
are consistent with the Act and, in particular Section 6(b)(1) of the 
Act,\125\ which requires among other things that a national securities 
exchange be so organized and have the capacity to carry out the 
purposes of the Act. The Commission notes that many of the proposed 
changes to GEMX's Rules are technical in nature, such as renumbering of 
Rules or conforming terminology to reflect the replacement of the 
Current Governing Documents with the New Governing Documents. The 
Commission also notes that, as described above, the Exchange proposes 
to relocate definitions for a number of defined terms used in the Rules 
from the Current Governing Documents into the Rules.
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    \125\ 15 U.S.C. 78f(b)(1).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\126\ that the proposed rule change (SR-GEMX-2017-37), as modified 
by Amendment No. 1, be, and hereby is, approved.
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    \126\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\127\
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    \127\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-21669 Filed 10-6-17; 8:45 am]
BILLING CODE 8011-01-P


