[Federal Register Volume 83, Number 36 (Thursday, February 22, 2018)]
[Notices]
[Pages 7793-7811]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-03589]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82727; File No. SR-CHX-2016-20]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Setting Aside Action by Delegated Authority and Disapproving a 
Proposed Rule Change, as Modified by Amendments No. 1 and No. 2, 
Regarding the Acquisition of CHX Holdings, Inc. by North America Casin 
Holdings, Inc.

February 15, 2018.

I. Introduction

    On December 2, 2016, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change in connection with the proposed 
acquisition (``Proposed Transaction'') of CHX Holdings, Inc. (``CHX 
Holdings'') by North America Casin Holdings, Inc. (``NA Casin 
Holdings''). The Division of Trading and Markets, for the Commission 
pursuant to delegated authority, approved the proposed rule change as 
modified by CHX in Amendment No. 1. Pursuant to Section 4A of the 
Exchange Act, and Commission Rules of Practice, we have reviewed the 
action by the Division of Trading and Markets pursuant to delegated 
authority. As discussed in more detail below, during the period of our 
review, CHX further modified the proposed rule change in Amendment No. 
2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    In conducting a de novo review of the proposed rule change--through 
which CHX seeks to effect a change in ownership--the Commission is 
mindful of the important role national securities exchanges, such as 
CHX, play in the securities markets.\3\ Not only do they operate 
trading markets, but registered national securities exchanges are also 
self-regulatory organizations (``SROs'') ``charged with a public trust 
to

[[Page 7794]]

implement and enforce the federal securities laws and rules, as well as 
their own rules with respect to their members.'' \4\
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    \3\ Exchange Act Release No. 40760 (December 8, 1998), 63 FR 
70844, 70881 (December 22, 1998) (``the self-regulatory role of 
registered exchanges is fundamental to the enforcement of the 
federal securities laws.''); and Exchange Act Release No. 50699 
(November 18, 2004), 69 FR 71126, 71132 (December 8, 2004) (``As 
operators of trading markets, front-line regulators of securities 
firms, and standard-setters for listed issuers, national securities 
exchanges . . . are critical to the integrity of the U.S. securities 
markets.'').
    \4\ Exchange Act Release No. 50699, 69 FR 71126, 71131. The 
Commission has long recognized the inherent potential for conflicts 
between an exchange's regulatory functions as an SRO and its 
responsibilities to promote the economic interests of its members 
and owners. See, e.g., Exchange Act Release No. 50700 (November 18, 
2004), 69 FR 71256, 71259 (December 8, 2004).
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    To minimize the potential for any person who has an ownership or 
voting interest in a national securities exchange to direct its 
operation so as to cause the exchange to neglect or otherwise fail to 
fulfill its obligations under the Exchange Act, the rules of national 
securities exchanges generally include ownership and voting 
limitations.\5\ The proposed rule change before us contains such 
limitations. But as described more fully below, the Commission's review 
of the information before it--including, but not limited to, the 
staff's experiences in gathering information to assess the proposed 
rule change--leads us to conclude that CHX has not met its burden to 
demonstrate that the proposed rule change is consistent with the 
Exchange Act.
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    \5\ See, e.g., Exchange Act Release Nos. 79585 (December 16, 
2016), 81 FR 93988 (December 22, 2016) (SR-BatsBZX-2016-68); 78119 
(June 21, 2016), 81 FR 41611 (June 27, 2016) (SR-ISE-2016-11, SR-
ISEGemini-2016-05, SR-ISEMercury-2016-10); 74270 (February 13, 
2015), 80 FR 9286 (February 20, 2015) (SR-NSX-2014-017); 71449 
(January 30, 2014), 79 FR 6961 (February 5, 2014) (SR-EDGA-2013-34; 
SR-EDGX-2013-43); 71375 (January 23, 2014), 79 FR 4771 (January 29, 
2014) (SR-BATS-2013-059, SR-BYX-2013-039); 70210 (August 15, 2013), 
78 FR 51758 (August 21, 2013) (SR-NYSE-2013-42, SR-NYSEMKT-2013-50 
and SR-NYSEArca-2013-62); 62716 (August 13, 2010), 75 FR 51295 
(August 19, 2010) (File No. 10-198); 61698 (March 12, 2010), 75 FR 
13151 (March 18, 2010) (File Nos. 10-194 and 10-196) (``EDGX and 
EDGA Registrations''); 58375 (August 18, 2008), 73 FR 49498 (August 
21, 2008) (File No. 10-182); 56955 (December 13, 2007), 72 FR 71979, 
71982-84 (December 19, 2007) (SR-ISE-2007-101); 55293 (February 14, 
2007), 72 FR 8033 (February 22, 2007) (SR-NYSE-2006-120) (``NYSE 
Euronext Approval Order''); 53382 (February 27, 2006), 71 FR 11251 
(March 6, 2006) (SR-NYSE-2005-77); 53963 (June 8, 2006), 71 FR 34660 
(June 15, 2006) (File No. SR-NSX-2006-03); 53128 (January 13, 2006), 
71 FR 3550 (January 23, 2006) (File No. 10-131); 51149 (February 8, 
2005), 70 FR 7531 (February 14, 2005) (SR-CHX-2004-26); and 49098 
(January 16, 2004), 69 FR 3974 (January 27, 2004) (SR-Phlx-2003-73); 
see also Exchange Act Release No. 50699 (November 18, 2004) 69 FR 
71126, 71143 (December 8, 2004) (proposing release explaining the 
purpose of ownership and voting limitations in the rules of national 
securities exchanges).
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    The information before the Commission has highlighted unresolved 
questions about whether the proposed new ownership structure would 
comply with the ownership and voting limitations, as well as whether 
certain aspects of the Proposed Transaction undermine the purpose of 
those ownership and voting limitations. Nor has the Exchange shown that 
it would be able to effectively monitor or enforce compliance with 
these limitations upon consummation of the Proposed Transaction, as it 
would be required to do in its role as an SRO under the federal 
securities laws. And the review process has also raised questions about 
whether the proposed ownership structure will allow the Commission to 
exercise sufficient oversight of the Exchange.
    Because of these concerns, whether viewed independently or in 
combination, we are unable to find that CHX has met its burden of 
demonstrating that the proposed rule change is consistent with the 
Exchange Act and the applicable rules and regulations thereunder. We 
therefore disapprove the proposed rule change.

II. Background

A. Procedural History

    The proposed rule change was published for comment in the Federal 
Register on December 12, 2016.\6\ On January 12, 2017, the Commission 
instituted proceedings under Section 19(b)(2)(B) of the Exchange Act 
\7\ to determine whether to approve or disapprove the proposed rule 
change.\8\ The Commission received 28 comments on the proposed rule 
change,\9\ and three responses from the Exchange to certain 
comments.\10\ On June 6, 2017, pursuant to Section 19(b)(2) of the 
Exchange Act,\11\ the Commission designated a longer period for 
Commission action on proceedings to determine whether to approve or 
disapprove the proposed rule change.\12\ On August 7, 2017, the 
Exchange filed Amendment No. 1 to the proposed rule change.\13\ On 
August 9, 2017, the Division of Trading and Markets, for the Commission 
pursuant to delegated authority,\14\ approved the proposed rule change, 
as modified by Amendment No. 1.\15\
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    \6\ See Exchange Act Release No. 79474 (December 6, 2016), 81 FR 
89543 (``Notice'').
    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ See Exchange Act Release No. 79781, 82 FR 6669 (January 19, 
2017) (``OIP'').
    \9\ See letters from: (1) Representative Robert Pittenger, 
Representative Earl L. ``Buddy'' Carter, Representative Peter 
DeFazio, Representative Collin Peterson, and Representative David 
Joyce, dated December 22, 2016 (``Pittenger Letter 1''); (2) James 
N. Hill, dated December 23, 2016 (``Hill Letter 1''); (3) John 
Ciccarelli, dated January 2, 2017 (``Ciccarelli Letter''); (4) 
Anonymous, dated January 3, 2017 (``Anonymous Letter 1''); (5) David 
E. Kaplan, Executive Director, Global Investigative Journalism 
Network, dated January 4, 2017 (``GIJN Letter''); (6) Reddy Dandolu, 
Founder, Chief Executive Officer, Las Vegas Stock Exchange, dated 
February 4, 2017 (``Dandolu Letter''); (7) David Ferris, Senior 
Research Analyst, The Public Interest Review, dated February 16, 
2017 (``Ferris Letter 1''); (8) Michael Brennan, Independent Market 
Commentator, dated February 17, 2017 (``Brennan Letter''); (9) 
Lawrence Bass, Individual Member, Alliance for American 
Manufacturing, dated February 20, 2017 (``Bass Letter''); (10) 
Steven Mayer, dated February 20, 2017 (``Mayer Letter''); (11) 
William Park, dated February 21, 2017 (``Park Letter''); (12) Jason 
Blake, Commentator, dated February 25, 2017; (13) John Meagher, 
Freelance Journalist, dated March 1, 2017; (14) Yong Xiao, Chief 
Executive Officer, North America Casin Holdings, Inc., dated March 
1, 2017 (``NA Casin Holdings Letter 1''); (15) Steven Caban, dated 
March 1, 2017 (``Caban Letter''); (16) Harley Seyedin, President, 
American Chamber of Commerce in South China, dated March 2, 2017 
(``Seyedin Letter''); (17) Salvatore Nobile, dated March 2, 2017 
(``Nobile Letter''); (18) Olga Gouroudeva, dated March 3, 2017 
(``Gouroudeva Letter 1''); (19) John R. Prufeta, dated March 3, 2017 
(``John R. Prufeta Letter 1''); (20) Anthony J. Saliba, Saliba 
Ventures Holdings, LLC, dated March 3, 2017 (``Saliba Letter 1''); 
(21) Aileen Zhong, dated March 5, 2017 (``Zhong Letter 1''); (22) 
Duncan Karcher, dated March 5, 2017 (``Duncan Karcher Letter 1''); 
(23) Ira Gottlieb, Principal, Healthcare Practice, Mazars USA LLP, 
dated March 5, 2017 (``Gottlieb Letter''); (24) James N. Hill, dated 
March 6, 2017 (``Hill Letter 2''); (25) David Ferris, Senior 
Research Analyst, The Public Interest Review, dated March 6, 2017 
(``Ferris Letter 2''); (26) Sean Casey, dated April 24, 2017; (27) 
Representative Robert Pittenger, Representative Chris Smith, 
Representative Peter DeFazio, Representative Ted Yoho, 
Representative Rosa DeLauro, Representative Steve King, 
Representative Walter Jones, Representative David Joyce, 
Representative Brian Babin, Representative Bill Posey, and 
Representative Tom Marino, dated July 10, 2017 (``Pittenger Letter 
2''); and (28) Senator Joe Manchin, III, dated July 20, 2017 
(``Manchin Letter''). All of the comments are available at: https://www.sec.gov/comments/sr-chx-2016-20/chx201620.shtml.
    \10\ See letters from John K. Kerin, President and Chief 
Executive Officer, CHX, dated January 5, 2017 (``CHX Response Letter 
1''); Albert J. Kim, Vice President and Associate General Counsel, 
CHX, dated January 6, 2017 (``CHX Response Letter 2'') (responding 
specifically to the Ciccarelli Letter); and John K. Kerin, President 
and Chief Executive Officer, CHX, dated March 6, 2017 (``CHX 
Response Letter 3'').
    \11\ 15 U.S.C. 78s(b)(2).
    \12\ See Exchange Act Release No. 80864, 82 FR 26966 (June 12, 
2017).
    \13\ Amendment No. 1 is available at: https://www.sec.gov/comments/sr-chx-2016-20/chx201620.shtml. See also infra note 15.
    \14\ 17 CFR 200.30-3(a)(12).
    \15\ See Exchange Act Release No. 81366, 82 FR 38734 (August 15, 
2017) (``Delegated Order''). In the Delegated Order, the Commission 
also described and noticed the filing of Amendment No. 1 to the 
proposed rule change.
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    Pursuant to Exchange Act Section 4A\16\ and Commission Rule of 
Practice 431,\17\ the Delegated Order has been stayed,\18\ and the 
Commission has reviewed the delegated action. On August 18, 2017, the 
Commission issued a scheduling order (``Scheduling Order''), pursuant 
to Commission Rule

[[Page 7795]]

of Practice 431, allowing the filing of additional statements until 
September 17, 2017.\19\ The Commission received 43 comment letters 
within that period, including two comment letters from the 
Exchange.\20\ On November 6, 2017, the Exchange filed Amendment No. 2 
to the proposed rule change.\21\ Amendment No. 2 was published for 
comment in the Federal Register on November 20, 2017, and a new comment 
period ending on December 5, 2017 was established, with a deadline for 
the submission of rebuttals to comment of December 15, 2017.\22\ After 
the Exchange filed Amendment No. 2, the Commission received an 
additional 21 comment letters on the proposed rule change, as modified 
by Amendments No. 1 and 2,\23\ and three response letters from the 
Exchange.\24\
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    \16\ 15 U.S.C. 78d-1.
    \17\ 17 CFR 201.431.
    \18\ See letter from Secretary of the Commission to Albert 
(A.J.) Kim, Vice President and Associate General Counsel, CHX, dated 
August 9, 2017 (providing notice of Commission review of delegated 
action and stay of order), available at https://www.sec.gov/rules/sro/chx/2017/34-81366-letter-from-secretary.pdf.
    \19\ See Exchange Act Release No. 81435, 82 FR 40187 (August 24, 
2017).
    \20\ See letters from: (1) Frank Milton, dated August 15, 2017 
(``Milton Letter''); (2) Richard R. Taylor, Head Trader, Taylor 
Trading, dated August 15, 2017 (``Richard R. Taylor Letter''); (3) 
Melanie Ayers, dated August 16, 2017 (``Ayers Letter''); (4) Walt H. 
Huskey, dated August 23, 2017 (``Huskey Letter''); (5) Darrell 
Simpson, dated August 23, 2017 (``Simpson Letter''); (6) Anonymous, 
dated August 24, 2017 (``Anonymous Letter 2''); (7) Edward L. Jones, 
dated August 24, 2017 (``Edward Jones Letter''); (8) John K. Kerin, 
President & Chief Executive Officer, CHX, dated August 25, 2017 
(``CHX Response Letter 4''); (9) John Carney, dated August 28, 2017 
(``Carney Letter''); (10) Michael Johnson, dated August 31, 2017 
(``Michael Johnson Letter 1''); (11) Michael Johnson, Director 
Emeritus, Center for East Asian Political Economy, dated September 
2, 2017 (``Michael Johnson Letter 2''); (12) Rick Helmer, dated 
September 4, 2017 (``Helmer Letter''); (13) Ruth Day, dated 
September 4, 2017 (``Day Letter''); (14) Catherine Jones, dated 
September 5, 2017 (``Catherine Jones Letter''); (15) Robert Denholm, 
dated September 6, 2017 (``Denholm Letter''); (16) Arthur Lee, 
Analyst, U.S. Strategic Defense Think Tank, dated September 6, 2017 
(``Lee Letter''); (17) Olga Gouroudeva, dated September 7, 2017 
(``Gouroudeva Letter 2''); (18) Timothy Watson, Investigator, 
DeepDive Background Research, dated September 8, 2017 (``Watson 
Letter''); (19) Vijay Vad, dated September 8, 2017 (``Vad Letter''); 
(20) Lyle Himebaugh, Managing Partner, Granite Group Advisors, dated 
September 8, 2017 (``Himebaugh Letter''); (21) Duncan Karcher, dated 
September 8, 2017 (``Duncan Karcher Letter 2''); (22) John Prufeta, 
Chief Executive Officer and Chairman, Medical Excellence 
International, LLC, dated September 11, 2017 (``John R. Prufeta 
Letter 2''); (23) Aileen Zhong, dated September 11, 2017 (``Zhong 
Letter 2''); (24) Robert Prufeta, Senior Vice President, Executive 
Search, Solomon Page Healthcare & Life Sciences, dated September 12, 
2017 (``Robert Prufeta Letter''); (25) Stella Su, dated September 
12, 2017 (``Su Letter''); (26) Tracy Xu, dated September 12, 2017 
(``Xu Letter''); (27) John L. Prufeta, dated September 13, 2017 
(``John L. Prufeta Letter''); (28) Thomas W. Alfano, Partner, Abrams 
Fensterman, dated September 13, 2017 (``Alfano Letter''); (29) Tara 
Prufeta, dated September 13, 2017 (``Tara Prufeta Letter''); (30) 
Rep. Randy Hultgren, Member of Congress, dated September 14, 2017 
(``Hultgren Letter''); (31) Michael Johnson, Director Emeritus, 
Center for East Asian Political Economy, dated September 14, 2017 
(``Michael Johnson Letter 3''); (32) Cheryl Karcher, dated September 
15, 2017 (``Cheryl Karcher Letter''); (33) Stephen Johnson, 
Investigative Reporter, Money Network Media, dated September 15, 
2017 (``Stephen Johnson Letter''); (34) Yong Xiao, Chief Executive 
Officer, North America Casin Holdings, Inc., dated September 15, 
2017 (``NA Casin Holdings Letter 2''); (35) Manuel Pinho, dated 
September 15, 2017 (``Pinho Letter''); (36) Sandy Sapa, dated 
September 15, 2017 (``Sapa Letter''); (37) Bruce Rauner, Governor of 
the State of Illinois, dated September 15, 2017 (``Rauner Letter''); 
(38) Peter Strotz, Analyst, Center for Government Accountability, 
dated September 16, 2017 (``Strotz Letter''); (39) Susan Williams, 
Risk Analyst, Blue Stone Capital, dated September 17, 2017 
(``Williams Letter''); (40) Representative Robert Pittenger, 
Representative Chris Smith, Representative Mo Brooks, Representative 
Rosa DeLauro, Representative Walter Jones, Representative Julia 
Brownley, Representative Doug LaMalfa, Representative Tom 
O'Halleran, Representative Peter DeFazio, Senator Joe Manchin, 
Senator Amy Klobuchar, Representative Steve King, Representative 
Marcy Kaptur, Representative Austin Scott, Representative David 
Joyce, Representative Glenn Grothman, Representative David Valadao, 
and Representative Mike Gallagher, dated September 26, 2017 
(``Pittenger Letter 3''); (41) James G. Ongena, Executive Vice 
President & General Counsel, CHX, dated October 1, 2017 (``CHX 
Response Letter 5''); (42) Chris Monfort, dated October 5, 2017 
(``Monfort Letter''); and (43) Anonymous, dated October 8, 2017 
(``Anonymous Letter 3'').
    \21\ In Amendment No. 2, the Exchange modified the proposed rule 
change by: (1) Amending the proposed capitalization table for NA 
Casin Holdings due to the withdrawal of three proposed equity 
owners--Chongqing Jintian Industrial Co., Ltd., Chongqing Longshang 
Decoration Co., Ltd., and Xian Tong Enterprises, Inc.--from the 
investor group for the Proposed Transaction, see infra note 30; (2) 
amending the proposed NA Casin Holdings Certificate of Incorporation 
to: (i) require a supermajority vote for certain corporate actions 
related to change of control of NA Casin Holdings; (ii) reflect a 
recent name change of the registered agent from ``National Corporate 
Research'' to ``Cogency Global, Inc.''; and (iii) modify the term 
expiration years of the three classes of directors under Section (6) 
of Article V; (3) amending the put agreements for Raptor Holdco LLC 
(``Raptor'') and Saliba Ventures Holdings, LLC (``Saliba'') to, 
among other changes, reflect the increased ownership levels for 
Raptor and Saliba under the new capital structure; (4) providing a 
new put agreement for Penserra Securities LLC (new Exhibit 5L), 
which the Exchange states is substantively similar to the Raptor and 
Saliba put agreements; and (5) amending the language of the filing 
to update certain sections of the Form 19b-4 in order to conform 
that language with the above changes. Amendment No. 2 is available 
at: https://www.sec.gov/comments/sr-chx-2016-20/chx201620.shtml.
    \22\ See Exchange Act Release No. 82077 (November 14, 2017), 82 
FR 55141 (``Amendment No. 2'').
    \23\ See letters from: (1) Samuel Garland, Regulatory Policy 
Group, dated November 9, 2017 (``Garland Letter''); (2) David 
Mcpherson, Market Transparency Think Tank, dated November 10, 2017 
(``Mcpherson Letter''); (3) Daniel Azsai, dated November 12, 2017 
(``Azsai Letter''); (4) Anonymous, dated November 12, 2017 
(``Anonymous Letter 4''); (5) Richard Taylor, dated November 15, 
2017 (``Richard Taylor Letter''); (6) Karl Montclair, dated November 
20, 2017 (``Montclair Letter''); (7) Jeremy Johnson, Analyst, 
Citizens Alliance for Better Government, dated November 22, 2017 
(``Jeremy Johnson Letter''); (8) Marc Gresack, dated November 21, 
2017 (``Gresack Letter''); (9) Ruben May, dated November 21, 2017 
(``May Letter''); (10) Claire Salters, dated November 22, 2017 
(``Salters Letter''); (11) Gordon Faux, dated November 30, 2017 
(``Faux Letter''); (12) Anthony Saliba, Saliba Ventures Holdings, 
LLC, dated December 1, 2017 (``Saliba Letter 2''); (13) Preston 
Briley, dated December 4, 2017 (``Briley Letter''); (14) G. 
Bleecher, dated December 4, 2017 (``Bleecher Letter''); (15) David 
Marden, dated December 4, 2017 (``Marden Letter''); (16) Yong Xiao, 
Chief Executive Officer, NA Casin Holdings, dated December 13, 2017 
(``NA Casin Holdings Letter 3''); (17) Peter Strauss, Fraud 
Examiner, Fraud Detection Network, dated December 2, 2017 (``Strauss 
Letter''); (18) Steven Hart, Investigator, Center for Market 
Transparency, dated December 15, 2017 (``Hart Letter''); (19) James 
N. Hill, dated December 15, 2017 (``Hill Letter 3''); (20) Jon 
Horwitz, Market Structure Specialist, Compass Research Alert, dated 
December 15, 2017 (``Horwitz Letter''); and (21) Jason Friedman, 
Friedman Regulatory Transparency Group, dated December 15, 2017 
(``Friedman Letter'').
    \24\ See letters from John K. Kerin, President and Chief 
Executive Officer, CHX, dated December 15, 2017 (``CHX Response 
Letter 6''); James G. Ongena, Executive Vice President and General 
Counsel, CHX, dated December 15, 2017 (``CHX Response Letter 7''); 
and James G. Ongena, Executive President and General Counsel, CHX, 
dated January 12, 2018 (``CHX Response Letter 8'').
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    The Commission's Rules of Practice set forth procedures for 
reviewing actions made pursuant to delegated authority.\25\ Pursuant to 
Rule 431(a) of the Rules of Practice, the Commission may affirm, 
reverse, modify, set aside, or remand for further proceedings, in whole 
or in part, the action made pursuant to delegated authority. Here, the 
Commission set aside the Delegated Order and conducted a de novo review 
of, and gave careful consideration to, the record, which includes, 
among other items: (1) CHX's proposal and all amendments thereto; (2) 
supplemental information submitted by CHX, both in the public record 
and pursuant to confidential treatment requests; (3) all comments 
received in connection with the proposed rule change; (4) all comments 
received in connection with the Scheduling Order; and (5) information 
derived from a recent staff examination of the Exchange.
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    \25\ See 17 CFR 201.431.
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B. Summary of the Proposal, as Modified by Amendments No. 1 and No. 2

    Currently, the Exchange is a wholly owned subsidiary of CHX 
Holdings, and CHX Holdings is beneficially owned by 193 firms or 
individuals, including certain Participants or affiliates of 
Participants.\26\ Pursuant to the terms of a Merger Agreement dated 
February 4, 2016, as amended on February 3, 2017, and August 29, 2017 
(``Merger Agreement''), by and among NA Casin Holdings, Exchange 
Acquisition Corporation (``Merger Sub''), Chongqing Casin Enterprise 
Group Co., LTD. (``Chongqing Casin''), Richard G. Pane solely in his 
capacity as the

[[Page 7796]]

Stockholders Representative thereunder, and CHX Holdings, Merger Sub 
would merge into CHX Holdings, which would then become a wholly owned 
direct subsidiary of NA Casin Holdings.\27\ Under the Merger Agreement, 
current CHX Holdings stockholders would have the right to receive cash 
in exchange for their shares.\28\ The Exchange would continue to be a 
wholly owned subsidiary of CHX Holdings. Consummation of the Proposed 
Transaction is subject to the satisfaction of certain conditions 
precedent, including approval by the Commission of the proposed rule 
change.\29\ The Exchange represents that, after the closing of the 
Proposed Transaction, all of the outstanding and issued shares of NA 
Casin Holdings would be held by the following firms and individuals 
(referred to collectively as the ``upstream owners'') in the following 
percentages:
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    \26\ See Notice, supra note 6, at 89544. See also CHX Rules 
Article 1, Rule 1(s) (defining ``Participant'').
    \27\ See Notice, supra note 6, at 89544; and Amendment No. 2, 
supra note 22, at 55143.
    \28\ See id.
    \29\ See id.
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    Upstream Owners: \30\
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    \30\ See Amendment No. 2, supra note 22, at 55142.
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     NA Casin Group, Inc. (``NA Casin Group''), a corporation 
incorporated under the laws of the State of Delaware and wholly owned 
by Chongqing Casin, a limited company organized under the laws of the 
People's Republic of China (``PRC'')--29%
     Castle YAC Enterprises, LLC (``Castle YAC''), a limited 
liability company organized under the laws of the State of New York, 
the sole member of which is Jay Lu,\31\ a U.S. citizen and Vice 
President of NA Casin Group--11%
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    \31\ According to the Exchange, Jay Lu is associated with an 
affiliate of Chongqing Casin and is the son of Shengju Lu, the 
Chairman of Chongqing Casin. See Notice, supra note 6, at 89545, 
n.18. The Exchange represents that Castle YAC and NA Casin Group are 
related persons for the purpose of determining the ownership and 
voting concentration limits. See Amendment No. 2, supra note 22, at 
55142.
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     Raptor, a limited liability company organized under the 
laws of the State of Delaware--25%
     Saliba, a limited liability company organized under the 
laws of the State of Illinois--24.5%
     Five members of the CHX Holdings management team, all U.S. 
citizens--collectively, 8.32%, with no one person attributed more than 
5%
     Penserra, a limited liability company organized under the 
laws of the State of New York--2.18% \32\
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    \32\ See Amendment No. 1, supra note 13, at 7 (explaining that 
Cheevers & Co., Inc., one of the original upstream owners, merged 
with Penserra, with Penserra as the surviving entity).
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    After the closing of the Proposed Transaction, CHX would remain a 
national securities exchange, registered under Section 6 of the 
Exchange Act,\33\ and an SRO, as defined in Section 3(a)(26) of the 
Exchange Act.\34\ In addition, following the closing, the Exchange's 
affiliated routing broker, CHXBD, would remain a Delaware limited 
liability company of which CHX Holdings would remain the sole 
member.\35\
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    \33\ 15 U.S.C. 78f.
    \34\ 15 U.S.C. 78c(a)(26).
    \35\ Prior to the change of proposed capital structure noticed 
in Amendment No. 2, the proposed capital structure for NA Casin 
Holdings following the close of the original proposed transaction 
would have been as follows: NA Casin Group, Inc.--20%; Chongqing 
Jintian Industrial Co., Ltd., a corporation incorporated under the 
laws of the PRC (``Chongqing Jintian'')--15%; Chongqing Longshang 
Decoration Co., Ltd., a corporation incorporated under the laws of 
the PRC (``Chongqing Longshang'')--14.5%; Castle YAC--19%; Raptor--
11.75%; Saliba--11.75%; Xian Tong Enterprises, Inc., a corporation 
incorporated under the laws of the State of New York (``Xian 
Tong'')--6.94%; five members of the CHX Holdings management team, 
all U.S. citizens--0.88% (as equity incentives); and Penserra--
0.18%. See Amendment No. 2, supra note 22, at 55142.
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    To effect the Proposed Transaction, the Exchange proposes to amend 
its certificate of incorporation and bylaws (``CHX Bylaws''),\36\ the 
certificate of incorporation (``CHX Holdings Certificate'') and bylaws 
(``CHX Holdings Bylaws'') of CHX Holdings,\37\ and the Exchange's 
rules.\38\ The Exchange has also filed the following documents in 
connection with the Proposed Transaction: (1) The certificate of 
incorporation (``NA Casin Holdings Certificate'') and bylaws (``NA 
Casin Holdings Bylaws'') of NA Casin Holdings; \39\ (2) text of a 
proposed resolution of CHX Holdings' board of directors to waive 
certain ownership and voting limitations to permit the Proposed 
Transaction; \40\ (3) the proposed NA Casin Holdings Stockholders' 
Agreement,\41\ which includes transfer-of-share provisions for the 
upstream owners that provide a right of first offer, a right to acquire 
interest upon change of control, and a right to purchase new 
securities; and (4) put agreements between Saliba, NA Casin Group, and 
NA Casin Holdings (``Saliba Put Agreement''),\42\ Raptor, NA Casin 
Group, and NA Casin Holdings (``Raptor Put Agreement''),\43\ and 
Penserra, NA Casin Group, and NA Casin Holdings (``Penserra Put 
Agreement,'' and collectively with the Saliba and Raptor Put 
Agreements, the ``Put Agreements'').\44\ The Put Agreements would grant 
Saliba, Raptor, and Penserra, respectively, the right to compel NA 
Casin Holdings to purchase or arrange for an unspecified third party to 
purchase all or a portion of Saliba's, Raptor's, or Penserra's equity 
interest in NA Casin Holdings, respectively, during a 30-day window 
commencing two years after the close of the Proposed Transaction.\45\
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    \36\ See Exhibits 5C and 5D. All Exhibits to the proposed rule 
change are available at: https://www.sec.gov/rules/sro/chx/chxarchive/chxarchive2016.shtml.
    \37\ See Exhibits 5A and 5B.
    \38\ See Exhibit 5E. The current CHX Holdings Certificate and 
CHX Holdings Bylaws require that, for so long as CHX Holdings 
controls the Exchange, either directly or indirectly, any changes to 
the CHX Holdings Certificate or CHX Holdings Bylaws must be 
submitted to the board of directors of the Exchange and, if the 
Exchange's board determines that the change must be filed with, or 
filed with and approved by, the Commission under Section 19 of the 
Exchange Act and the rules thereunder, then the changes will not be 
effective until filed with, or filed with and approved by, the 
Commission. See Article THIRTEENTH of the current CHX Holdings 
Certificate; and Article VIII of the current CHX Holdings Bylaws. 
Section 19(b) of the Exchange Act and Rule 19b-4 thereunder require 
an SRO to file proposed rule changes with the Commission. Although 
CHX Holdings is not an SRO, those portions of its certificate of 
incorporation and bylaws that are stated policies, practices, or 
interpretations (as defined in Rule 19b-4 under the Exchange Act) of 
the Exchange are rules of the Exchange and must therefore be filed 
with the Commission pursuant to section 19(b)(4) of the Exchange Act 
and Rule 19b-4 thereunder. Accordingly, the Exchange filed the CHX 
Holdings Certificate and CHX Holdings Bylaws with the Commission.
    \39\ See Exhibits 5F and 5G. The proposed NA Casin Holdings 
Certificate and NA Casin Holdings Bylaws require that, for so long 
as NA Casin Holdings controls the Exchange, either directly or 
indirectly, any change to those documents must be submitted to the 
board of directors of the Exchange and, if the Exchange's board 
determines that the change must be filed with, or filed with and 
approved by, the Commission under Section 19 of the Exchange Act and 
the rules thereunder, then the changes will not be effective until 
filed with, or filed with and approved by, the Commission. See 
proposed NA Casin Holdings Certificate, Article X; proposed NA Casin 
Holdings Bylaws, Article 11. Although NA Casin Holdings is not an 
SRO, those portions of its certificate of incorporation and bylaws 
that are stated policies, practices, or interpretations (as defined 
in Rule 19b-4 under the Exchange Act) of the Exchange are rules of 
the Exchange and must therefore be filed with the Commission 
pursuant to section 19(b)(4) of the Exchange Act and Rule 19b-4 
thereunder. Accordingly, the Exchange filed the NA Casin Holdings 
Certificate and NA Casin Holdings Bylaws with the Commission.
    \40\ See Exhibit 5H.
    \41\ See Exhibit 5I.
    \42\ See Exhibit 5J.
    \43\ See Exhibit 5K.
    \44\ See Exhibit 5L.
    \45\ The Put Agreements state that the price of shares sold 
pursuant to each Put Agreement would be an amount equal to the total 
number of shares that each stockholder determines to sell, 
multiplied by the sum of the average initial price per share, plus 
the amount of the preferred return, which is a certain percentage of 
the average price per share per year compounded annually through the 
date of the exercise of the put right, less any distributions 
previously paid by NA Casin Holdings to the holders of the shares.

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[[Page 7797]]

    The Exchange proposes several substantive and technical amendments 
to its corporate governance documents, rules, and the governing 
documents of CHX Holdings. Among other items, the proposed amendments 
revise provisions in the CHX Holdings Certificate relating to ownership 
and voting limitations. In addition, to govern the upstream owners, the 
Exchange proposes to establish in the NA Casin Holdings Certificate 
ownership and voting limitations that are identical to those contained 
in the proposed CHX Holdings documents. In particular, these provisions 
prohibit any Person,\46\ either alone or with its Related Persons,\47\ 
from beneficially owning shares of stock of CHX Holdings or NA Casin 
Holdings representing in the aggregate more than 40% of the then 
outstanding votes entitled to be cast on any matter unless specific 
procedures are followed prior to acquiring shares in excess of the 
ownership limitation.\48\ In addition, no Participant, either alone or 
with its Related Persons, would be permitted at any time to 
beneficially own shares of stock of CHX Holdings or NA Casin Holdings 
representing in the aggregate more than 20% of the then outstanding 
votes entitled to be cast on any matter.\49\ Further, no Person that is 
subject to any statutory disqualification as defined in Section 
3(a)(39) of the Exchange Act would be permitted at any time to 
beneficially own, either alone or with its Related Persons, shares of 
stock of CHX Holdings or NA Casin Holdings representing in the 
aggregate more than 20% of the then outstanding votes entitled to be 
cast on any matter.\50\ CHX also proposes cure provisions that would 
require CHX Holdings or NA Casin Holdings, as applicable, to call 
shares held in excess of these ownership limits, and to not register 
any shares transferred in violation of these ownership limits.\51\ 
These restrictions are described herein as the ``ownership 
limitations.''
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    \46\ The NA Casin Holdings Certificate and CHX Holdings 
Certificate define ``Person'' to mean ``a natural person, 
partnership (general or limited), corporation, limited liability 
company, trust or unincorporated organization, or a governmental 
entity or political subdivision thereof.'' See proposed CHX Holdings 
Certificate Article FOURTH, Section (b); proposed NA Casin Holdings 
Certificate Article IX, Section (4).
    \47\ CHX proposes to define the term ``Related Persons'' in the 
NA Casin Holdings Certificate and CHX Holdings Certificate to mean: 
(1) With respect to any Person, any executive officer (as such term 
is defined in Rule 3b-7 under the Exchange Act), director, general 
partner, manager or managing member, as applicable, and all 
``affiliates'' and ``associates'' of such Person (as those terms are 
defined in Rule 12b-2 under the Exchange Act), and other Person(s) 
whose beneficial ownership of shares of stock of NA Casin Holdings 
or CHX Holdings, as applicable, with the power to vote on any matter 
would be aggregated with such first Person's beneficial ownership of 
such stock or deemed to be beneficially owned by such first Person 
pursuant to Rules 13d-3 and 13d-5 under the Exchange Act; and (2) in 
the case of any Participant, for so long as CHX remains a registered 
national securities exchange, such Person and any broker or dealer 
with which such Person is associated; and (3) any other Person(s) 
with which such Person has any agreement, an arrangement or 
understanding (whether or not in writing) to act together for the 
purpose of acquiring, voting, holding or disposing of shares of the 
stock of NA Casin Holdings or CHX Holdings, as applicable; and (4) 
in the case of a Person that is a natural person, any relative or 
spouse of such Person, or any relative of such spouse, who has the 
same home as such Person or who is a director or officer of NA Casin 
Holdings or CHX Holdings, as applicable, or any of its parents or 
subsidiaries. See proposed CHX Holdings Certificate Article FOURTH, 
Section (b); and proposed NA Casin Holdings Certificate Article IX, 
Section (4).
    \48\ See proposed CHX Holdings Certificate Article FOURTH, 
Section (c)(i); and proposed NA Casin Holdings Certificate Article 
IX, Section (9).
    \49\ See proposed CHX Holdings Certificate Article FOURTH, 
Section (c)(ii); proposed NA Casin Holdings Certificate Article IX, 
Section (10).
    \50\ See proposed CHX Holdings Certificate Article FOURTH, 
Section (d); and proposed NA Casin Holdings Certificate Article IX, 
Section (13).
    \51\ See proposed CHX Holdings Certificate Article FOURTH, 
Sections (c)(i)(C), (c)(ii)-(iii), and (d); proposed NA Casin 
Holdings Certificate Article IX, Sections (9)(iii), (10), (11), and 
(13).
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    In addition, both the CHX Holdings Certificate and NA Casin 
Holdings Certificate contain voting restrictions that would preclude 
any stockholder, either alone or with its Related Persons, from voting 
more than 20% of the then outstanding shares entitled to be cast on any 
matter unless specific procedures are followed prior to voting in 
excess of the limitation.\52\ Similarly, no Person, either alone or 
with its Related Persons, would be permitted to enter into an 
agreement, plan, or other arrangement that would result in an aggregate 
of more than 20% of the then outstanding votes entitled to be cast on a 
matter to be voted unless specific procedures are followed prior to 
entering into such an agreement, plan, or arrangement.\53\ The 
certificates of incorporation would also require that CHX Holdings and 
NA Casin Holdings disregard any votes cast in excess of the voting 
limitations.\54\ These restrictions are described herein as the 
``voting limitations.''
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    \52\ See proposed CHX Holdings Certificate Article FOURTH 
(b)(i); and proposed NA Casin Holdings Certificate Article IX, 
Section (5).
    \53\ See proposed CHX Holdings Certificate Article FOURTH 
(b)(i); and proposed NA Casin Holdings Certificate Article IX, 
Section (5).
    \54\ See proposed CHX Holdings Certificate Article FOURTH 
(b)(i); and proposed NA Casin Holdings Certificate Article IX, 
Section (5).
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    Relevant to the ownership and voting limitations, the Exchange 
represents that there are two sets of Related Persons among the 
upstream owners: (1) Castle YAC and NA Casin Group and (2) the five 
members of the CHX Holdings management team.\55\ Together, Castle YAC 
and NA Casin Group would hold a 40% ownership interest in NA Casin 
Holdings.\56\ The five members of the CHX Holdings management team 
would collectively hold an 8.32% ownership interest.
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    \55\ See Amendment No. 2, supra note 22, at 55142. The Exchange 
represents that prior to the closing of the Proposed Transaction, 
these five members of the CHX Holdings management will enter into a 
voting agreement, which will require that, among other things, they 
vote as a block; the Exchange asserts that the terms of this voting 
agreement would render the members Related Persons. See id. at n.28.
    \56\ See id. As noted above, NA Casin Group would hold a 29% 
ownership interest and Castle YAC would hold an 11% ownership 
interest. See supra note 30 and accompanying text.
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    The Exchange also has proposed revisions to the corporate 
governance documents of NA Casin Holdings and CHX Holdings to provide 
notice requirements with respect to changes in ownership that may 
affect the ownership and voting limitations. Specifically, the NA Casin 
Holdings Certificate and CHX Holdings Certificate will provide that: 
(1) Each Person involved in an acquisition for shares of stock of the 
corporation shall provide the corporation with written notice 14 days 
prior to the closing date of any acquisition that would result in a 
Person having voting rights or beneficial ownership, alone or together 
with its Related Persons, of record or beneficially, of five percent or 
more of the then outstanding shares of stock of the corporation 
entitled to vote on any matter; (2) NA Casin Holdings and CHX Holdings 
will be required to provide 10-day advance written notice to the 
Commission of any such changes in ownership; (3) any Person that, 
either alone or together with its Related Persons, has voting rights or 
beneficial ownership of, five percent or more of the outstanding voting 
shares of CHX Holdings or NA Casin Holdings (whether by acquisition or 
by change in the number of shares outstanding or otherwise), will be 
required, immediately upon acquiring knowledge of its ownership, to 
give the board of directors of CHX Holdings or NA Casin Holdings, as 
applicable, notice of such ownership; (4) any Person that, either alone 
or together with its Related Persons, of record or beneficially, has 
voting rights or beneficial ownership of five percent or more of NA 
Casin Holdings or CHX Holdings must promptly update the corporation if 
its ownership stake in or voting power regarding NA Casin Holdings or 
CHX Holdings increases or decreases by one

[[Page 7798]]

percent or more; \57\ and (5) each Person having voting rights or 
beneficial ownership of stock of NA Casin Holdings or CHX Holdings will 
be required to provide prompt written notice to the corporation 
regarding any changes to its Related Person status with respect to 
other Persons that own voting shares of stock of the corporation.\58\
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    \57\ See proposed NA Casin Holdings Certificate Article IX, 
Section (19)(i); proposed CHX Holdings Certificate Article 
Fourth(g)(i).
    \58\ See proposed NA Casin Holdings Certificate Article IX, 
Section (19)(ii); proposed CHX Holdings Certificate Article 
Fourth(g)(ii).
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    Furthermore, Article VIII of the NA Casin Holdings Certificate sets 
forth a supermajority vote requirement for certain corporate 
actions.\59\ Specifically, Article VIII, Section (2) provides that 
except as otherwise prohibited by applicable law, the affirmative vote 
of the holders of at least 85% of the then outstanding NA Casin 
Holdings voting shares entitled to be cast on such matter is required 
for the following: (1) Any merger or consolidation of NA Casin Holdings 
or any subsidiary with any or any other corporation or other entity; 
(2) any sale, lease, exchange, mortgage, pledge, transfer or other 
disposition (in one transaction or a series of transactions) to or with 
any other corporation or other entity, of all or substantially all of 
the assets of NA Casin Holdings or any subsidiary; (3) the issuance or 
transfer by NA Casin Holdings or any subsidiary (in one transaction or 
a series of transactions) of any securities of NA Casin Holdings or any 
subsidiary that would result in any an individual, corporation, 
partnership, joint venture, limited liability company, governmental or 
regulatory body, unincorporated organization, trust, association or 
other entity: (i) Owning a majority of the shares of the common stock 
of NA Casin Holdings or (ii) owning a majority of the shares of voting 
stock of any subsidiary, unless the owner is NA Casin Holdings or a 
subsidiary; (4) the adoption of any plan or proposal for the 
liquidation or dissolution of NA Casin Holdings that is not the result 
of a transaction contemplated by the prior provisions; (5) any 
reclassification of securities (including any reverse stock split), 
recapitalization of NA Casin Holdings or any merger or consolidation of 
NA Casin Holdings with any of its subsidiaries or any other transaction 
which has the effect, directly or indirectly, of increasing the 
proportionate share of the outstanding shares of any class of equity or 
convertible securities of NA Casin Holdings or any subsidiary with the 
result that the owner or indirect owner of such shares becomes the 
holder of a majority of the shares of common stock of NA Casin 
Holdings; or (6) any agreement, contract, or other arrangement 
providing for any one or more of the previously listed actions.\60\
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    \59\ See Amendment No. 2, supra note 22, at 55144.
    \60\ See id. Moreover, such affirmative vote shall be required 
notwithstanding the fact that no vote may be required, or that a 
lesser percentage may be permitted, by applicable law. See id.
---------------------------------------------------------------------------

    Additionally, CHX is amending the CHX Holdings Bylaws,\61\ CHX 
Bylaws,\62\ and NA Casin Holdings Bylaws,\63\ to adopt provisions in 
each respective document to require that each of CHX Holdings, CHX, and 
NA Casin Holdings, as applicable, contemporaneously provide the 
Commission with any information it provides to any other U.S. 
governmental entity or U.S. authority pursuant to any agreement.
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    \61\ See proposed CHX Holdings Bylaws, Article XIII, Section 
13.1.
    \62\ See proposed CHX Bylaws, Article XIII, Section 13.1.
    \63\ See proposed NA Casin Holdings Bylaws, Article 10, Section 
10.1.3.
---------------------------------------------------------------------------

    The proposed rule change also includes changes to CHX Holdings' and 
the Exchange's certificates of incorporation and bylaws addressing, 
among other items, board and committee composition and procedures, 
procedures regarding stockholder meetings, consent to U.S. federal 
court and Commission jurisdiction, and Commission access to corporate 
books and records related to the activities of the Exchange. The 
proposed rule change also adopts provisions in the new NA Casin 
Holdings Certificate and NA Casin Holdings Bylaws relating to these 
matters.

III. Discussion and Commission Findings

    Under Section 19(b)(2)(C) of the Exchange Act, the Commission must 
approve the proposed rule change of an SRO if the Commission finds that 
the proposed rule change is consistent with the requirements of the 
Exchange Act and the applicable rules and regulations thereunder; if it 
does not make such a finding, the Commission must disapprove the 
proposed rule change.\64\ Additionally, under Rule 700(b)(3) of the 
Commission's Rules of Practice, the ``burden to demonstrate that a 
proposed rule change is consistent with the Exchange Act and the rules 
and regulations issued thereunder . . . is on the self-regulatory 
organization that proposed the rule change.'' \65\ The description of a 
proposed rule change, its purpose and operation, its effect, and a 
legal analysis of its consistency with applicable requirements must all 
be sufficiently detailed and specific to support an affirmative 
Commission finding.\66\ Any failure of a self-regulatory organization 
to provide the information elicited by Form 19b-4 may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Exchange Act and the 
rules and regulations issued thereunder that are applicable to the 
self-regulatory organization.\67\
---------------------------------------------------------------------------

    \64\ See 15 U.S.C. 78s(b)(2)(C)(i).
    \65\ 17 CFR 201.700(b)(3).
    \66\ Id.
    \67\ Id.
---------------------------------------------------------------------------

    Section 6(b)(1) of the Exchange Act requires a national securities 
exchange to be so organized and have the capacity to be able to carry 
out the purposes of the Exchange Act and to comply, and enforce 
compliance by its members, with the provisions of the Exchange Act and 
its own rules.\68\ This encompasses not only a requirement that an 
exchange have the capacity to perform its functions as a self-
regulatory organization, but also that it is so organized as to allow 
for sufficient Commission oversight.\69\ Section 6(b)(5) of the 
Exchange Act requires that the rules of a national securities exchange 
be designed, in general, to protect investors and the public 
interest.\70\
---------------------------------------------------------------------------

    \68\ 15 U.S.C. 78f(b)(1).
    \69\ Id.
    \70\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In reviewing the proposed rule change, the Commission has analyzed 
information provided by the Exchange, both in its public filings and 
subject to confidential treatment requests, as well as information 
derived from a recent staff examination of the Exchange.\71\ Based on 
the information before the Commission, for each of the reasons 
discussed below (whether viewed independently or in combination), we 
are unable to find that the Exchange has met its burden to show that 
the proposed rule change is consistent with the Exchange Act and the 
applicable

[[Page 7799]]

rules and regulations thereunder. Accordingly, we disapprove the 
proposed rule change.\72\
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    \71\ The Commission has also carefully considered the issues 
raised by commenters in its analysis of the information before it, 
and a more detailed description of the comments received, as well as 
the Exchange's responses, is included in the Appendix. As noted in 
the OIP (see OIP, supra note 8, at 6671), questions have been raised 
about the identity and veracity of a commenter. See GIJN Letter, 
supra note 9; see also CHX Response Letter 2 regarding the submitter 
of the Ciccarelli Letter, supra note 10. Additionally, four comment 
letters have been submitted anonymously. See Anonymous Letter 1, 
supra note 9; Anonymous Letters 2 & 3, supra note 20; Anonymous 
Letter 4, supra note 23. Our analysis and conclusions, however, do 
not depend on the identity or affiliation of the author of the 
Ciccarelli Letter or the veracity of the assertions in such letter, 
or the identity of any particular commenter more generally. Rather, 
the Commission has considered the substance of the concerns raised 
by commenters in light of the information before it.
    \72\ In disapproving the proposed rule change, as modified by 
Amendments No. 1 and No. 2, the Commission has considered the 
proposed rule change's impact on efficiency, competition, and 
capital formation, see 15 U.S.C. 78c(f), and the points raised by 
the Exchange with regard to this consideration. The Exchange asserts 
that the Proposed Transaction would: (1) Result in substantial 
capital investment into the Exchange, which will better enable the 
Exchange to compete within the highly competitive U.S. securities 
market and better enable the Exchange to further the objectives of 
the Exchange Act (see Notice, supra note 6, at 89559); (2) enhance 
competition among the equity securities markets and provide new 
trading and capital formation opportunities for market participants 
and the investing public (see Notice, supra note 6, at 89558-59); 
and (3) enhance cooperation between market participants from the two 
largest economies in the world, encourage additional international 
trading and listings in the U.S., and enhance the ability of CHX to 
continue to provide innovative trading functionalities and to offer 
new capital formation opportunities for emerging growth companies 
(see CHX Response Letter 3, supra note 10, at 2-3). The Commission 
has considered the Exchange's assertions and the discussion of these 
issues in the comments. See also Appendix, infra note 142. We note 
that the basis of the Exchange's assertion that approving the 
Proposed Transaction would encourage additional international 
trading and listings is unclear and the Exchange has not provided 
any quantitative analysis to support this assertion. But even if the 
proposed rule change has the potential to promote efficiency, 
competition and/or capital formation, for the reasons discussed 
below, the Commission must disapprove the proposed rule change in 
light of its inability, on the current record, to find that it is 
consistent with the Exchange Act.
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A. Procedural Matters

    Section 19(b)(2)(D) of the Exchange Act requires the Commission to 
``issue an order'' approving or disapproving a proposed rule change 
within 240 days.\73\ The Delegated Order was issued within that time 
period.\74\ We disagree with the Exchange's assertions that: (1) The 
stay of that order pending Commission review ``nullified'' its 
effectiveness, and (2) the approval of the Exchange's original proposed 
rule--since superseded by the Exchange's amended filing--remains in 
effect.
---------------------------------------------------------------------------

    \73\ See 15 U.S.C. 78s(b)(2)(D).
    \74\ See supra note 15.
---------------------------------------------------------------------------

    First, nothing about a stay vitiates the issuance of the underlying 
order. Moreover, at the time Congress enacted the time restrictions in 
Section 19(b)(2)(D) of the Exchange Act, it was known that the 
Commission could delegate authority to approve SRO rule filings 
pursuant to Exchange Act Section 4A, and that such delegated actions 
could be reviewed by the Commission, either at the request of a person 
aggrieved or on the Commission's own initiative.\75\ To construe 
Section 19(b)(2)(D) as requiring Commission review of an order by 
delegated authority to be completed within 240 days would undermine 
both the specific deadlines set forth in the statute and the 
Commission's ability to delegate functions. It would also leave the 
Commission insufficient time to engage in the independent, thoughtful 
analysis required by both the Exchange Act and the Administrative 
Procedure Act in cases in which either the Commission orders, or an 
aggrieved party seeks, review.
---------------------------------------------------------------------------

    \75\ See 15 U.S.C. 78d-1 (enacted in 1987).
---------------------------------------------------------------------------

    Nor is such a construction necessary to fulfill Congress's purpose 
in enacting the statutory timelines. Congress intended to 
``streamline'' the rule filing process \76\ and to encourage the 
Commission ``to employ a more transparent and rapid process for 
consideration of rule changes.'' \77\ This purpose has been achieved. 
With rare exception, rule filings are determined, by delegated 
authority or otherwise, within 240 days.\78\ Only a few delegated 
orders have been subject to Commission review.\79\
---------------------------------------------------------------------------

    \76\ H.R. Rep. No. 111-517, at 727 (2010) (Conf. Rep.).
    \77\ S. Rep. No. 111-176, at 106 (2010).
    \78\ During fiscal year 2017, 302 rule filings were either 
approved or disapproved pursuant to Section 19(b)(2). All of these 
were acted on, by delegated authority or otherwise, within the 
statutory time frame.
    \79\ Of the 302 rule filings that were either approved or 
disapproved in fiscal year 2017, four were brought before the 
Commission for review. Three of those were brought before the 
Commission on its own initiative, while one was subject to petitions 
for review filed by aggrieved persons.
---------------------------------------------------------------------------

    Finally, the proposed rule change now before the Commission differs 
from that addressed in the Delegated Order because the Exchange itself 
filed a material amendment to its original proposal after the 
Commission review of the delegated authority action began. The 
practical implications of the Exchange's assertion that the original 
proposed rule is in effect--either by operation of law due to a failure 
to effectively meet the statutory time restrictions or because the 
delegated order approving the original proposed rules governs--are 
unclear. The transaction contemplated by the Exchange's original 
proposal was never consummated, and the revised proposal currently 
before the Commission contemplates a materially different transaction. 
Indeed, the actions of the Exchange make it clear that there is no 
substance to this argument. The Exchange itself opted to amend 
materially its prior proposal rather than submitting a new proposed 
rule change to alter the proposed rules it now argues had already been 
approved.\80\
---------------------------------------------------------------------------

    \80\ The Exchange also argues that the length of review is 
inconsistent with Rule 103(a) of the Commission's Rules of Practice 
and is inconsistent with Section 3(f) of the Exchange Act. Rule 
103(a) provides that the Rules of Practice ``shall be construed and 
administered to secure the just, speedy, and inexpensive 
determination of every proceeding.'' We do not believe that the 
Commission's review violates this general principle in light of the 
material amendment made by the Exchange to the proposed rule change 
during the pendency of Commission review, the substantial comments 
received on the proposed rule change and amendments thereto, and, as 
discussed below, the fact that questions about the compliance of the 
proposed ownership structure with the Exchange's ownership voting 
limitations and the ability of the Exchange and the Commission to 
exercise sufficient oversight in the future remain outstanding. 
Moreover, the Exchange misconstrues Section 3(f), which does not 
focus on the efficiency of the Commission review process. Instead, 
it focuses on whether the proposed rule promotes efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f) (``Whenever 
pursuant to this title the Commission is engaged in . . . the review 
of a rule of a self-regulatory organization, and is required to 
consider or determine whether an action is necessary or appropriate 
in the public interest, the Commission shall also consider . . . 
whether the action will promote efficiency, competition, and capital 
formation.'') (emphasis added).
---------------------------------------------------------------------------

B. Discussion of Substantive Findings

1. The Proposed Transaction's Compliance With the Ownership and Voting 
Limitations
    As discussed above, in order to minimize the potential for persons 
who have ownership or voting interests in a national securities 
exchange to direct its operation so as to cause the exchange to neglect 
or otherwise fail to fulfill its obligations under the Exchange Act, 
the rules of such exchanges include ownership and voting limitations, 
as well as mechanisms to monitor for compliance with those limits.\81\ 
Here, the Exchange's proposed ownership and voting limitations--which 
would govern the proposed upstream owners--are contained in the NA 
Casin Holdings Certificate.\82\ And proposed changes to the corporate 
governance documents and rules of CHX Holdings provide for ongoing 
information collection and monitoring to ensure future compliance with 
these limitations, pursuant to Section 6(b)(1) of the Exchange Act.
---------------------------------------------------------------------------

    \81\ See supra note 5 and accompanying text.
    \82\ See proposed NA Casin Holdings Certificate Article IX, 
Sections (5) (prohibiting any person, either alone or with its 
Related Persons from voting or causing the voting of shares of stock 
of the NA Casin Holdings representing in the aggregate more than 20% 
of the then outstanding votes entitled to be cast on any matter) and 
(9) (prohibiting any person, either alone or with its Related 
Persons, from beneficially owning shares of stock of NA Casin 
Holdings representing in the aggregate more than 40% of the then 
outstanding votes entitled to be cast on any matter). As explained 
supra note 39, those portions of NA Casin Holdings' certificate of 
incorporation and bylaws that are stated policies, practices, or 
interpretations of the Exchange are rules of the Exchange.
---------------------------------------------------------------------------

    In its original filing, the Exchange represented that the Proposed 
Transaction complied with these

[[Page 7800]]

ownership and voting limitations, stating that the only Related Persons 
among the proposed upstream owners were Castle YAC and NA Casin Group, 
which would collectively hold a 39% interest in NA Casin Holdings. 
Commenters, however, asserted that NA Casin Group had undisclosed 
connections, financial and otherwise, to other proposed upstream owners 
such that it could exercise undue influence over the Exchange.\83\ In 
an effort to clarify the relationships among the proposed investors in 
the consortium and to verify the source of funds used for the Proposed 
Transaction by the various entities involved--including whether NA 
Casin Group or related entities were providing, directly or indirectly, 
undisclosed funding for other proposed upstream owners' participation 
in the Proposed Transaction--Commission staff reviewed information 
derived from an ongoing examination of CHX and, beginning in July of 
2017, requested additional documents and information from CHX.
---------------------------------------------------------------------------

    \83\ See Appendix, infra notes 112-117 and accompanying text.
---------------------------------------------------------------------------

    CHX responded with documents and information, accompanied by a 
request for confidential treatment, that gave rise to additional 
questions. In a series of follow-up requests for information pertaining 
to the proposed upstream owners, Commission staff continued to seek 
additional information from CHX.\84\ While CHX provided documents and 
information in response to the staff's successive requests, the 
information made available to the Commission was insufficient to verify 
the ultimate source of the funds certain of the proposed upstream 
owners were using to fund their part of the transaction. It also raised 
questions about potential undisclosed connections between purportedly 
unrelated members of the investor consortium.
---------------------------------------------------------------------------

    \84\ The staff orally requested information from CHX on July 27, 
2017, and August 4, 2017, and provided CHX with a written document 
request on September 18, 2017.
---------------------------------------------------------------------------

    For example, the information provided, as well as information 
derived from the Commission staff's own due diligence, indicated 
potential connections between Shengju Lu, his son Jay Lu (who controls 
Castle YAC), or Chongqing Casin (the entity Shengju Lu controls) on one 
hand and the funds used by one of the members of the original investor 
consortium, Xian Tong, on the other hand. It appeared from Commission 
staff research and a review of certain bank records and supporting 
documents provided by the Exchange that Xian Tong received funding from 
an individual and entities that may have familial and financial 
connections to Shengju Lu or Jay Lu (neither of whom, according to 
representations submitted by the Exchange, was a Related Person to Xian 
Tong).
    As another example, the funds used by Chongqing Longshang and 
Chongqing Jintian to fund their respective shares of the Proposed 
Transaction were purportedly derived from payments owed to them under 
pre-existing business contracts. But the amount of each of those 
payments (which approximated the amount of their respective levels of 
investment in the Proposed Transaction), and the timing of their 
receipt of those payments, raised questions about whether they were, in 
fact, bona fide payments under those business contracts.
    Shortly after Commission staff requested additional documents and 
information in an attempt to resolve questions about the source of 
funds used by these three entities and whether there were, in fact, 
undisclosed connections between those funds and other proposed 
investors, Chongqing Jintian, Chongqing Longshang, and Xian Tong 
withdrew from the Proposed Transaction.\85\ CHX then stated that it was 
unable to provide certain documents and information the Commission 
staff requested regarding those proposed owners,\86\ leaving various 
questions unanswered.
---------------------------------------------------------------------------

    \85\ Commenters and the Exchange disagreed regarding the reason 
for these investors' withdrawal. Compare, e.g., Appendix, infra 
notes 244-247 and accompanying text with notes 278-282 and 
accompanying text.
    \86\ While NA Casin Holdings and the Exchange contend that these 
investors provided all of the information requested by staff, this 
is not borne out by the confidential record before the Commission. 
See NA Casin Holdings Letter 2, supra note 20, at 2; and CHX 
Response Letter 7, supra note 24, at 2.
---------------------------------------------------------------------------

    The significance of these unanswered questions to the Commission's 
review did not disappear with the withdrawal of the former proposed 
upstream owners. Although Xian Tong, Chongqing Longshang, and Chongqing 
Jintian are no longer parties to the Proposed Transaction, as described 
in Amendment No. 2, Shengju Lu and Chongqing Casin remain central to 
the Proposed Transaction. Together with Jay Lu's Castle YAC, they would 
control the largest block (40%) of the outstanding shares in NA Casin 
Holdings following consummation of the Proposed Transaction. If, in 
fact, Shengju Lu or Chongqing Casin had undisclosed relationships with, 
or provided undisclosed funding directly or indirectly to, the 
withdrawn investors, the representations made in connection with the 
initial rule filing and Amendment No. 1 would have been inaccurate. 
That potential (and unresolved) inaccuracy, in turn, would raise 
questions about the accuracy of the representations made regarding the 
current structure of the Proposed Transaction and its compliance with 
the ownership and voting limitations.\87\ Thus, regardless of the 
reasons for the withdrawal of these three members of the original 
investment consortium, their withdrawal and CHX's inability to provide 
the information requested by Commission staff prior to that withdrawal 
leaves the Commission unable to resolve questions that bear on its 
assessment of the current structure of the Proposed Transaction.
---------------------------------------------------------------------------

    \87\ In response to comments raising questions about potential 
undisclosed relationships between the original upstream owners, the 
Exchange pointed to opinions of counsel provided to the Commission 
regarding the proposed upstream owners as well as to the approval of 
the Proposed Transaction by the Committee for Foreign Investment in 
the United States (``CFIUS''). But the opinions of counsel proffered 
by the Exchange expressly relied upon, and assumed the accuracy and 
completeness of, certificates, letters and oral and written 
statements and representations provided by others, including the 
investors themselves. They are therefore insufficient to obviate the 
questions raised by the specific facts before us. Similarly, it is 
not clear from the record available to us that CFIUS's consideration 
of national security concerns included an analysis of the 
relationship between the proposed upstream owners in light of the 
Exchange's ownership and voting limitations.
---------------------------------------------------------------------------

    These concerns about the possibility of, and the risks posed by, 
undisclosed relationships are exacerbated by the terms of the Put 
Agreements, which heighten the potential for circumvention of the 
ownership limitations.\88\ Under those agreements, Raptor, Saliba, and 
Penserra can sell their shares to NA Casin Holdings, or an unspecified 
third-party purchaser, after 24 months for a guaranteed return on their 
investment. These entities--which would collectively receive 51.68% of 
NA Casin Holdings' outstanding shares in the Proposed Transaction--
therefore appear to be taking only minimal economic risk, with the bulk 
of the economic risk appearing to be borne by the remaining investors, 
primarily Chongqing Casin and its related entities. Said another way, 
while their proposed ownership is described as including a substantial 
purchase of equity with a put option, in many ways, from an economic 
perspective, this portion of the Proposed Transaction resembles a loan 
arrangement with an option to convert the loan into equity (which, as 
described below, would be acquired at a discounted price vis-[agrave]-
vis the price

[[Page 7801]]

paid by other investors in the Proposed Transaction). This raises 
concerns, which the Exchange has not allayed, both about the economic 
realities of the Proposed Transaction and about whether the ownership 
group would as a practical matter be dominated by those entities that 
appear to be bearing the bulk of the risk of equity ownership.\89\
---------------------------------------------------------------------------

    \88\ Commenters also raised this concern. See, e.g., Appendix, 
infra notes 223-230, and accompanying text.
    \89\ Questions about the economic realities of the Proposed 
Transaction, as well as the appearance that certain investors may 
have an out-sized influence over the Exchange--in circumvention of 
the purpose of the ownership and voting limitations--are compounded 
by the pricing structure of the Proposed Transaction, which was 
provided to the Commission subject to confidential treatment 
requests. For example, investors are paying significantly different 
amounts for shares that appear to have the same rights. The proposed 
investors who are parties to the Put Agreements are paying 
significantly less, reinforcing the appearance that they are taking 
less risk in the Proposed Transaction. NA Casin Group and Castle 
YAC, in turn, are paying significantly more than the other 
investors, on a per share basis. Therefore, the ownership 
percentages may not accurately reflect the relative investment 
amounts committed or risks undertaken by the various entities. This 
raises concerns that the percentage of ownership does not accurately 
reflect the investors' relative influence over the Exchange.
---------------------------------------------------------------------------

    The Exchange states that concerns about circumvention of the 
ownership and voting limitations are mitigated by the fact that NA 
Casin Holdings cannot compel exercise of the puts. But regardless of 
who initiates any transactions triggered by the Put Agreements, the 
proposed investors who are parties to those agreements are guaranteed a 
return on a discounted investment. In other words, the Exchange's 
arguments regarding the voluntary nature of the Put Agreements do not 
fully take into account or explain the underlying and asymmetric 
economic relationship between the investors who have the benefit of 
puts and those who do not. The Exchange also asserts that the Put 
Agreements are similar to other such agreements that have been approved 
by the Commission.\90\ But the economic substance of the prior 
agreements the Exchange cites as comparable is materially different 
from the substance present here. The Miami International Securities 
Exchange, LLC (``MIAX'') agreements do not provide for a guaranteed 
return on investors' initial purchase price.\91\ Rather, they allow for 
a put option at a fixed percentage of fair market value at the time of 
the sale, which may not lead to the receipt of a premium on 
investment.\92\ And, while there may be--as the Exchange asserts--
reasonable business purposes for the premium guaranteed by the terms of 
the Put Agreements here, neither the Exchange nor the proposed upstream 
owners have sufficiently explained what those purposes are.\93\
---------------------------------------------------------------------------

    \90\ See Appendix, infra notes 303-304 and accompanying text. 
See also Appendix, infra note 288 and accompanying text.
    \91\ See Appendix, infra note 303 and accompanying text.
    \92\ See id.
    \93\ See Appendix, infra note 304 and accompanying text (stating 
only that there are ``legitimate and well-established business 
purposes'' for the Put Agreements); NA Casin Holdings Letter 3, 
supra note 23, at 3 (stating that the Put Agreements serve as a 
``liquidity mechanism'' and ``provide a window of opportunity for 
certain investors to exit their investment during a brief window two 
years after the closing''); and Saliba Letter 2, supra note 23, at 3 
(explaining the Put Agreements but not explaining why they were put 
in place).
---------------------------------------------------------------------------

    Commission staff's inability to obtain sufficient documentation to 
verify the relationships between, and the source of funds used by, the 
original and subsequent proposed upstream owners leaves us unable to 
find that the Exchange has met its burden of showing that--upon 
consummation of the Proposed Transaction--the Exchange would be 
organized in compliance with its own rules and, accordingly, unable to 
find that the Exchange has met its burden of showing that the proposed 
rule change is consistent with Section 6(b)(1) of the Exchange Act.
2. Monitoring for Future Compliance With the Exchange's Own Rules
    The fact that the Commission staff's extensive, iterative requests 
to the Exchange during the review process resulted in an insufficient 
basis for us to find that the Proposed Transaction complies with the 
ownership and voting limitations separately calls into question the 
Exchange's ability to ensure ongoing compliance with those limitations. 
If approved, the proposed rule change would require extensive 
information gathering and monitoring in order to ensure continuing 
compliance with the ownership and voting limitations. For example, the 
Exchange would be required to monitor compliance with:
     Voting limits on a person (individually or with its 
Related Persons) subject to any statutory disqualification;
     a requirement that CHX Holdings or NA Casin Holdings call 
shares held in excess of ownership limits;
     a prohibition on registering shares transferred in 
violation of ownership limits;
     procedural requirements to ensure compliance with the 
voting limitations; and
     a range of notice requirements relating to various changes 
in ownership or Related Person status.\94\
---------------------------------------------------------------------------

    \94\ See supra notes 57-58 and accompanying text.

Similarly, if the Put Agreements are exercised, the Exchange would be 
required to ensure that any new investors satisfy the many restrictions 
on ownership (including on ownership by Related Persons).
    The inability of the Exchange to obtain documents and information 
necessary for it and the Commission to resolve key questions regarding 
the funding of, and relationships between, upstream investors--
notwithstanding its strong incentive to do so in light of the pending 
Commission review of the proposed rule change--raises significant 
doubts about the Exchange's ability to engage in this extensive 
monitoring following approval of the Proposed Transaction.\95\ We 
therefore find that the Exchange has not provided a sufficient basis 
for us to conclude that it would be able to ensure compliance with the 
ownership and voting limitations following consummation of the Proposed 
Transaction.\96\
---------------------------------------------------------------------------

    \95\ Commenters express similar concerns, asserting that it 
would be difficult, if not impossible, for the Exchange and the 
Commission to monitor compliance with these rules after approval and 
consummation of the Proposed Transaction. See, e.g., Appendix, infra 
note 152 and accompanying text.
    \96\ The Exchange asserts that its board, which is subject to 
independence requirements under the Exchange Act, would approve 
future material changes to the Exchange. See Appendix, infra note 
163 and accompanying text. Given the Exchange's inability to obtain 
information necessary to ascertain whether potential investors 
satisfied the proposed ownership limitations, we question whether 
the Exchange or its board would be able to monitor for such changes, 
much less ensure that any such changes are made only following 
approval by the board. The Exchange also notes that the upstream 
owners pledge to maintain relevant books and records in the United 
States, thus allowing it and the Commission to monitor compliance. 
See also CHX Response Letter 6, supra note 24, at 3. In light of the 
Exchange's difficulty obtaining necessary information in connection 
with the Proposed Transaction and for the additional reasons 
described in Subsection 4, below, we are not persuaded that the 
potential availability of books and records in the United States 
adequately addresses the concerns described in this section.
---------------------------------------------------------------------------

    As a result, the Commission is unable to find on the current record 
that the Exchange has met its burden \97\ of showing that the proposed 
rule change is consistent with the requirement under Section 6(b)(1) 
that the Exchange be so organized and have the capacity to comply with 
its own rules.
---------------------------------------------------------------------------

    \97\ See supra notes 65-67 and accompanying text.
---------------------------------------------------------------------------

    We are also not moved by the Exchange's suggestion that we should 
be comfortable with the proposed ownership arrangements, including the 
puts and the discount, and nonetheless approve the proposed rule change 
because we have broad oversight authority, will receive notice of the 
transfer of shares, and can take recourse to mitigate non-compliance 
with the

[[Page 7802]]

ownership and voting limitations in the future through suspending, 
censuring, or deregistering CHX as an SRO pursuant to Section 19(h)(1) 
of the Exchange Act.\98\ In other words, the Exchange is arguing that 
we should not be concerned about the risk of subsequent transfers that 
are inconsistent with the Exchange Act, or an inability on its part to 
monitor for such transactions, because we have the authority to take 
action to prevent any such transfers in the future. But Section 
19(b)(2)(C) of the Exchange Act requires disapproval of a proposed rule 
change in the absence of an affirmative finding by the Commission that 
the rule change is consistent with the Exchange Act and rules and 
regulations thereunder. This includes a finding of consistency with 
Section 6(b)(1) of the Exchange Act. Our ability to seek recourse for 
future violations (assuming they are reported to us or we are otherwise 
able to detect them) is not a sufficient basis on which to make this 
finding if we are unable to find, at the time we consider the proposed 
rule change, that the proposed rules as implemented would meet this 
requirement.\99\ As discussed above, we are unable to conclude that the 
proposed rules meet the requirement.
---------------------------------------------------------------------------

    \98\ See Appendix, infra note 307 and accompanying text.
    \99\ Similarly, the Exchange asserts that its board, which is 
subject to independence requirements under the Exchange Act, would 
approve future material changes to the Exchange. See Appendix, infra 
note 163 and accompanying text. But in light of the particular 
questions raised in our review of the Proposed Transaction, we do 
not believe a general assurance that we can rely on future board 
processes is sufficient to resolve these concerns.
---------------------------------------------------------------------------

3. The Supermajority Approval Requirement
    The Commission is also unable to find that the provision in the NA 
Casin Holdings Certificate requiring supermajority approval for certain 
transactions is consistent with Section 6(b)(1) of the Exchange Act. As 
discussed above, the NA Casin Holdings Certificate would require 
approval by the holders of 85% of the shares of the company's common 
stock to undertake certain corporate transactions related to NA Casin 
Holdings or any of its subsidiaries, including CHX Holdings and the 
Exchange.\100\ In effect, this provision would allow each stockholder 
that holds 15% or more of the voting stock of NA Casin Holdings to veto 
certain transactions, including those designed to raise capital to fund 
the regulatory operations of the Exchange.\101\ Based on its terms, 
such a veto appears contrary to the goal underlying voting limitations: 
Preventing a single stockholder from exercising undue influence over a 
national securities exchange or interfering with its SRO obligations. 
And there is nothing in the record that otherwise explains why this 
provision does not undermine that regulatory goal. Moreover, the 
introduction of the supermajority restriction after the withdrawal of 
three of the original proposed investors, and the revisions to the 
pricing structure of the Proposed Transaction, reinforces the concerns 
discussed above regarding whether certain investors could in effect 
dominate the ownership group.\102\ Therefore, based on the current 
record, the Commission is unable to find that the proposed rule change 
is consistent with Section 6(b)(1) of the Exchange Act.
---------------------------------------------------------------------------

    \100\ See supra notes 59-60 and accompanying text.
    \101\ The Exchange has acknowledged the importance of raising 
additional capital to further capitalize the Exchange so that it may 
continue to meet its regulatory obligations. See Notice, supra note 
6, at 89549.
    \102\ This requirement also limits the extent to which the 
compliance of CHX's board with independence requirements can be seen 
as mitigating concerns about undue influence by certain 
stockholders, as the Exchange contends.
---------------------------------------------------------------------------

4. Ability To Conduct Sufficient Oversight
    Finally, the Exchange's inability to obtain sufficient information 
to ensure compliance with the ownership and voting limitations during 
the rule filing process leaves us unable to find that the proposed 
transaction satisfies Section 6(b)(1)'s requirement that an exchange 
have the capacity to carry out the purposes of the Exchange Act, which 
includes allowing for sufficient Commission oversight.
    Congress has charged the Commission ``with supervising the exercise 
of . . . self-regulatory power in order to [ensure] that it is used 
effectively to fulfill the responsibilities assigned to the self-
regulatory agencies[.]'' \103\ Access to books and records plays an 
integral role in the Commission's exercise of such oversight. To 
facilitate that access, Exchange Act Rule 17a-1(c) requires every 
national securities exchange, ``upon request of any representative of 
the Commission, [to] promptly furnish to the possession of such 
representative copies of any documents required to be kept and 
preserved by it[.]'' \104\
---------------------------------------------------------------------------

    \103\ S. Rep. No. 94-75, at 23 (1975).
    \104\ 17 CFR 240.17a-1; see also 15 U.S.C. 78q(b)(1).
---------------------------------------------------------------------------

    The Exchange asserts that it will be able to ensure that the 
Commission has access to such books and records, notwithstanding the 
significant role played by foreign investors in the Proposed 
Transaction. In particular, the Exchange notes that the remaining 
foreign upstream owner has submitted to United States jurisdiction and 
that this owner pledges to maintain relevant books and records in the 
United States. But we are unable to conclude that these assurances are 
sufficient to support a finding that the proposed rule change is 
consistent with the requirements of the Exchange Act, including the 
provisions of Section 17(b)(1) and Exchange Act Rule 17a-1.
    Because under the terms of the Proposed Transaction the most 
significant stockholder of NA Casin Holdings would be wholly owned by a 
foreign entity, material portions of the relevant records may not be 
under the Exchange's control. As a result, the judgment about which of 
those books and records are sufficiently related to the activities of 
the Exchange that they must be maintained in the United States would 
rest in the first instance with the foreign indirect upstream 
owner.\105\ Indeed, the Exchange was unable to obtain necessary 
information about sources of funds for, and relationships between, 
certain investors in the Proposed Transaction, which further supports 
our conclusion that the Exchange has not demonstrated that it will be 
able to identify or access books and records that may relate to 
ownership of the Exchange or to its activities, much less to ensure 
that such books and records are in fact kept in the United States.
---------------------------------------------------------------------------

    \105\ The Commission periodically encounters difficulties in 
arranging for the on-site review of, or production of, books and 
records held by foreign entities due to a variety of reasons, 
including privacy and blocking statutes and difficulties in 
obtaining assistance from foreign authorities in connection with 
inspections and examinations. Chinese entities, even those seeking 
to be directly regulated by the Commission, have presented 
significant challenges in connection with ensuring compliance with 
these requirements. See, e.g., Matter of Dagong Global Credit Rating 
Co., Ltd., Rel. No. 34-62968 (September 22, 2010).
---------------------------------------------------------------------------

    This concern is particularly significant in our analysis because 
the nature of the reviews that we and the Exchange must conduct--
including monitoring compliance with the ownership and voting 
limitations and compliance with Exchange Act requirements more 
broadly--requires prompt access to documents. Without the assurance of 
such access, neither the Commission nor the Exchange will be able to 
reliably assess compliance with the requirements in the proposed 
corporate documents, to look behind the attestations made by 
stockholders, or to monitor compliance with the ownership and voting 
limitations more broadly.

[[Page 7803]]

    We have approved exchange rules that may, at least theoretically, 
raise similar questions about access to books and records.\106\ We also 
recognize that some exchange rules do not provide for the maintenance 
of such books and records in the United States.\107\ The Proposed 
Transaction, however, raises particular concerns not present in these 
other transactions approved by the Commission. Unlike approved rule 
changes for other exchanges, the proposed rule change here does not 
include specific provisions to facilitate and incentivize non-U.S. 
exchange owners to provide the Commission access to books and 
records.\108\
---------------------------------------------------------------------------

    \106\ See, e.g., Exchange Act Release No. 66871 (April 27, 
2012), 77 FR 26323 (May 3, 2012) (approving the application of BOX 
Options Exchange, which had Canadian upstream ownership, for 
registration as a national securities exchange); NYSE Euronext 
Approval Order, supra note 5 (approving proposed rule changes 
designed to effect the combination of the NYSE Group, Inc. and the 
Dutch company Euronext); 56955 (December 13, 2007), 72 FR 71979, 
71982-84 (December 19, 2007) (SR-ISE-2007-101) (approving a proposed 
rule change designed to effect a transaction in which ISE became a 
wholly owned subsidiary of Eurex Frankfurt AG, which has Swiss and 
German upstream ownership) (``ISE Approval Order''); and EDGX and 
EDGA Registrations, supra note 5 (approving the applications of EDGX 
Exchange, Inc. and EDGA Exchange, Inc., which were partially, 
indirectly owned by ISE, for registration as national securities 
exchanges).
    \107\ See, e.g., Exchange Act Release No. 66871 (April 27, 
2012), 77 FR 26323 (May 3, 2012); NYSE Euronext Approval Order, 
supra note 5; ISE Approval Order, supra note 106; and EDGX and EDGA 
Registrations, supra note 5.
    \108\ See, e.g., ISE Approval Order, supra note 106, at 71983-84 
(describing a procedure developed between the Commission and the 
Swiss Federal Banking Commission to facilitate access to books and 
records and noting that the failure of a non-U.S. upstream owner to 
adhere to its commitment to provide access to books and records 
would trigger a call option that would cause the non-U.S. upstream 
owners to lose control of the exchange); EDGX and EDGA 
Registrations, supra note 5, at 13153 (noting that the safeguards 
described in the ISE Order would apply equally to books and records 
related to EDGX and EDGA).
---------------------------------------------------------------------------

    Because we cannot conclude, on the current record, that such access 
will be assured or that the Exchange will be able to satisfy Rule 17a-
1(c), we are unable to find that the proposed rule change is consistent 
with Section 6(b)(1)'s requirement that the Exchange be so organized 
and have the capacity to comply with the Exchange Act, and to perform 
its functions as a self-regulatory organization, which includes 
allowing for sufficient Commission oversight.
    Separately, we note that Section 6(b)(5) of the Exchange Act 
requires that the rules of a national securities exchange be designed, 
in general, to protect investors and the public interest. Here, the 
proposed rules are designed to effect the Proposed Transaction as 
currently structured and, if approved, the amended rules would be 
implemented through consummation of the Proposed Transaction. In light 
of the concerns discussed above regarding the effect of the Proposed 
Transaction on the ability of the Exchange and the Commission to ensure 
regulatory compliance now and in the future, as well as concerns raised 
by the confidential information, we cannot determine that the rules, as 
proposed, meet this requirement. Congress has stressed the importance 
of Commission oversight to ensure that such self-regulatory authority 
``is not used in a manner inimical to the public interest or unfair to 
private interests.'' \109\ Given the uncertainty about our access to 
sufficient information to fulfill this role, the Commission is 
currently unable to find that the proposed rule change is designed to 
protect investors and the public interest as required by Section 
6(b)(5).
---------------------------------------------------------------------------

    \109\ S. Rep. No. 94-75, at 23 (1975).
---------------------------------------------------------------------------

* * * * *
    A number of other issues have been raised by commenters in arguing 
that the proposed rule change should be disapproved, including 
questions about the involvement of the Chinese government or the impact 
of Chinese foreign investment in an SRO or in U.S. markets more 
generally. On the record before us, for the independently sufficient 
reasons discussed in more detail above, we have concluded that the 
Exchange has not met its burden to show that approval of the proposed 
rule change is appropriate. Accordingly, it is not necessary for us to 
consider either the relevance of such foreign investment concerns to 
our statutory review of this proposed rule change or the merits of the 
concerns themselves.

IV. Conclusion

    For the reasons set forth above, the Commission does not find, 
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed 
rule change, as modified by Amendments No. 1 and No. 2, is consistent 
with the requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange, and in 
particular, with Sections 6(b)(1) and 6(b)(5) of the Exchange Act.
    It is therefore ordered, pursuant to Rule 431 of the Commission's 
Rules of Practice, that the earlier action taken by delegated 
authority, Exchange Act Release No. 81366, (August 8, 2017), 82 FR 
38734 (August 15, 2017), is set aside and, pursuant to Section 19(b)(2) 
of the Exchange Act, that the proposed rule change (SR-CHX-2016-20), as 
modified by Amendments No. 1 and No. 2, be, and hereby is, disapproved.

    By the Commission.
Brent J. Fields,
Secretary.

Appendix: Summary of Comments and the Exchange's Response

    In total, the Commission received 90 comment letters on the 
proposal and 8 response letters from the Exchange.\110\ Sixty-nine 
of these comments and five of these responses were submitted prior 
to the Exchange filing Amendment No. 2. Twenty-one of these comments 
were submitted in response to the Commission noticing Amendment No. 
2, and the Exchange submitted three rebuttals in response to those 
comments.
---------------------------------------------------------------------------

    \110\ See supra notes 9, 10, 20, 23, and 24.
---------------------------------------------------------------------------

A. Summary of Comments and Exchange's Response Prior to the Filing of 
Amendment No. 2

    As explained above, in Amendment No. 2, the Exchange noticed, 
among other items, a change in the proposed capital structure for 
the upstream owners.\111\ In the comment letters that were received 
prior to the filing of Amendment No. 2, several commenters expressed 
concern about the original proposed capital structure of CHX as it 
related to the ownership and voting limitations. Some of these 
commenters questioned the identities of the proposed upstream owners 
and the validity of the Exchange's representation that there were no 
Related Persons among the proposed upstream owners other than Castle 
YAC and NA Casin Group.\112\ Several commenters also questioned the 
Exchange's representations regarding the backgrounds and identities 
of the upstream owners.\113\ In addition, commenters asserted that, 
contrary to the Exchange's representations, several of those

[[Page 7804]]

proposed upstream owners may be affiliated.\114\ Some of these 
commenters stated that, after the closing of the Proposed 
Transaction, approximately 99% of the voting stock in CHX would be 
controlled by what the commenters believe to be Chinese entities or 
affiliated shell nominees.\115\ Several of these commenters stated 
that they believe that the ownership post consummation of the 
Proposed Transaction would deviate from the 40% ownership 
limitation.\116\
---------------------------------------------------------------------------

    \111\ See supra note 21.
    \112\ See Ciccarelli Letter, supra note 9; Ferris Letter 1, 
supra note 9; Ferris Letter 2, supra note 9; Brennan Letter, supra 
note 9; Mayer Letter, supra note 9; Bass Letter, supra note 9, at 2-
4; and Strotz Letter, supra note 20. Another commenter asserted: 
``[m]urky Chinese ownership laws, poor property ownership rights and 
deficient IP protection rules'' make it ``unclear who would actually 
own CHX under Chinese law.'' See Park Letter, supra note 9, at 4.
    \113\ See Ciccarelli Letter, supra note 9, at 2-9; Mayer Letter, 
supra note 9; Brennan Letter, supra note 9, at 1-2; Ferris Letter 1, 
supra note 9, at 2-3; Ferris Letter 2, supra note 9, at 1-3; Park 
Letter, supra note 9, at 2; Bass Letter, supra note 9, at 2-4; 
Milton Letter, supra note 20; Simpson Letter, supra note 20, at 2-3; 
Carney Letter, supra note 20, at 1-2; Michael Johnson Letter 1, 
supra note 20, at 4-5; Williams Letter, supra note 20; Strotz 
Letter, supra note 20; Watson Letter, supra note 20, at 3; Michael 
Johnson Letter 3, supra note 20, at 1-3; and Stephen Johnson Letter, 
supra note 20. In addition, one commenter stated that the 
Information Statement CHX sent to its stockholders in connection 
with the Proposed Transaction represented that two entities, Beijing 
Guoli Energy Investment Co. Ltd. and Beijing Casin Investment 
Holding Co. Ltd, which were not disclosed in the proposed rule 
change, would be involved in the Proposed Transaction. See Anonymous 
Letter 2, supra note 20, at 1.
    \114\ See Ciccarelli Letter, supra note 9, at 2-3; Ferris Letter 
1, supra note 9, at 2-3; Bass Letter, supra note 9, at 2; Ferris 
Letter 2, supra note 9, at 4; and Carney Letter, supra note 20, at 
1. See also Mayer Letter, supra note 9 (asserting that certain of 
the proposed upstream owners are shell companies put in place by 
Chongqing Casin to avoid ``explicit violation'' of the 40% ownership 
limitation, and should be examined for independence from Chongqing 
Casin).
    \115\ See Ciccarelli Letter, supra note 9, at 1-2. See also 
Ferris Letter 2, supra note 9, at 4; and Bass Letter, supra note 9, 
at 3.
    \116\ See Brennan Letter, supra note 9, at 1; Ciccarelli Letter, 
supra note 9, at 2; Ferris Letter 1, supra note 9, at 1; Bass 
Letter, supra note 9, at 1; Ferris Letter 2, supra note 9, at 4.
---------------------------------------------------------------------------

    Several commenters also opined that the proposed upstream 
ownership of CHX was opaque.\117\ Some of these commenters stated 
their views that approval of the proposal would have promoted the 
improper consolidation of ownership and coordinate voting control 
over CHX, and also materially harm the public trust in the 
independent and objective operation of U.S. capital markets.\118\ 
These commenters expressed a belief that the Proposed Transaction 
would have concentrated ownership and voting power under Chongqing 
Casin and its ``coordinate'' investment entities in China.\119\ And 
commenters expressed concern that the Commission would have been 
unable to monitor the ownership structure of Chongqing Casin after 
approval because they believed that the Commission would have little 
or no insight and transparency into what the commenters stated are 
government-dominated Chinese markets.\120\ The commenters expressed 
a belief that this scenario would leave CHX open to undue, improper, 
and possibly state-driven influence via coordinated voting control 
by its upstream ownership.\121\ Seven commenters also expressed 
concern about the source of funding for the Proposed 
Transaction.\122\
---------------------------------------------------------------------------

    \117\ See Pittenger Letter 2, supra note 9, at 1; Bass Letter, 
supra note 9, at 1-5; Mayer Letter, supra note 9; Ciccarelli Letter, 
supra note 9, at 1-4; Ferris Letter 1, supra note 9, at 1-4; Ferris 
Letter 2, supra note 9, at 1-5; Simpson Letter, supra note 20, at 2; 
Lee Letter, supra note 20; Strotz Letter, supra note 20, at 2; 
Anonymous Letter 3, supra note 20, at 1. See also Hill Letter 2, 
supra note 9 (stating that ``it is easy to become confused about 
exactly who wants to own this exchange'').
    \118\ See Pittenger Letter 2, supra note 9, at 1.
    \119\ See id.
    \120\ See id. See also Anonymous Letter 3, supra note 20, at 1-2 
(stating the voting and ownership limitations are ``meaningless'' 
because there is no ``verifiable mechanism'' to monitor such 
limitations).
    \121\ See Pittenger Letter 2, supra note 9, at 1.
    \122\ See Park Letter, supra note 9, at 2-3 (stating that none 
of the foreign upstream owners are on the published State 
Administration of Foreign Exchange's list of entities that ``have 
applied and received approvals for foreign currencies'' and 
questioning the legitimacy of the funds being used to pay for the 
Proposed Transaction); Ferris Letter 1, supra note 9, at 2; Ferris 
Letter 2, supra note 9, at 3; Bass Letter, supra note 9, at 3; 
Carney Letter, supra note 20, at 1; Williams Letter, supra note 20; 
Strotz Letter, supra note 20, at 2; Watson Letter, supra note 20, at 
2. In response, NA Casin Holdings asserted that the investors have 
available the necessary funds to close the Proposed Transaction, and 
that the Chinese stockholders have obtained necessary approvals from 
the State Administration of Foreign Exchange of China required to 
transfer funds to NA Casin Holdings. See NA Casin Holdings Letter 2, 
supra note 20, at 2.
---------------------------------------------------------------------------

    In addition, one commenter stated that as a result of the 
proposed ownership, there would have been ``reputational risks'' for 
CHX, and that ``compliance frustrations'' related to the Foreign 
Corrupt Practices Act and Anti-Money Laundering rules would have 
been at the ``front and center'' in the Commission's oversight of 
CHX.\123\ Accordingly, the commenters stated that, given these 
actual or potential outcomes, the Proposed Transaction appeared 
inconsistent with Sections 6(b)(l) and 6(b)(5) of the Exchange 
Act.\124\
---------------------------------------------------------------------------

    \123\ See Park Letter, supra note 9, at 3. See also Ferris 
Letter 2, supra note 9, at 2 (stating that concerns over possible 
money laundering are not addressed by NA Casin and therefore are 
conceded).
    \124\ See Park Letter, supra note 9, at 3-4.
---------------------------------------------------------------------------

    Commenters also expressed concern about the ability of the 
Commission to exercise regulatory oversight over the Exchange 
following the closing of the Proposed Transaction.\125\ One 
commenter questioned whether the Commission could effectively 
regulate the Exchange and protect the market from abuses if the 
Commission staff did not know, and could not independently confirm, 
the backgrounds of what the commenter characterized as ``Chinese 
shell companies'' involved in the Proposed Transaction.\126\ Another 
commenter argued that for the sake of the public interest, the 
Commission should take extreme caution in reviewing the proposed 
rule change and reject the Exchange's representations, which the 
commenter believed to be misleading.\127\ Two commenters, in support 
of the proposed rule change, stated their beliefs that compliance 
will be ``strong'' regardless of the upstream owners.\128\
---------------------------------------------------------------------------

    \125\ See Pittenger Letters 1 and 2, supra note 9, at 2; 
Ciccarelli Letter, supra note 9, at 1-2; Bass Letter, supra note 9, 
at 1; and Ferris Letter 1, supra note 9, at 4.
    \126\ See Brennan Letter, supra note 9, at 1.
    \127\ See Ferris Letter 1, supra note 9, at 4.
    \128\ See John L. Prufeta Letter, supra note 20; and Tara 
Prufeta Letter, supra note 20. These commenters also asserted that 
the voting control risk is ``mitigated by [NA Casin Group's] 
decision to have less voting power.'' See id.
---------------------------------------------------------------------------

    In response to these concerns, the Exchange stated that it did 
not misrepresent any facts regarding the Proposed Transaction.\129\ 
The Exchange reaffirmed the representations that it made in the 
Notice that the only Related Persons among the upstream owners were 
Castle YAC and NA Casin Group, that there were no other Related 
Persons among the original proposed upstream owners, and that none 
of the upstream owners directly, or indirectly through one or more 
intermediaries, controlled, or was controlled by, or was under 
common control with, a governmental entity or subdivision 
thereof.\130\ The Exchange asserted that each of these 
representations was supported by an opinion of counsel provided by 
outside counsel for CHX to the Commission, subject to a confidential 
treatment request.\131\ The Exchange, NA Casin Holdings, and one of 
the proposed upstream owners also asserted that some of the comment 
letters contained false accusations regarding the identity, 
ownership, relationships, and business activities of certain 
upstream owners.\132\ In addition, the Exchange, NA Casin Holdings, 
and several other commenters asserted that the proposed upstream 
owners are reputable businesses.\133\ The Exchange also stated that 
the author of the Ciccarelli Letter was employing deception and 
xenophobia, and was attempting to undermine the Commission's rule 
filing process and the integrity of the government. The Exchange 
also requested that the Commission consider the Ciccarelli Letter 
``absolutely unpersuasive.'' \134\
---------------------------------------------------------------------------

    \129\ See CHX Response Letter 2, supra note 10, at 2, 5-6.
    \130\ See id. at 5. NA Casin Holdings also asserted that there 
were no other Related Persons among the investors other than Castle 
YAC and NA Casin Group. See NA Casin Holdings Letter 2, supra note 
20, at 2.
    \131\ See CHX Response Letter 2, supra note 10, at 5.
    \132\ See CHX Response Letter 3, supra note 10, at 3-5; Saliba 
Letter 1, supra note 9, at 2; NA Casin Holdings Letter 1, supra note 
9, at 7; NA Casin Holdings Letter 2, supra note 20, at 2.
    \133\ See CHX Response Letter 3, supra note 10, at 3; NA Casin 
Holdings Letter 1, supra note 9, at 7; NA Casin Holdings Letter 2, 
supra note 20, at 3; Gouroudeva Letter 1, supra note 9; Gouroudeva 
Letter 2, supra note 20; John R. Prufeta Letter 1, supra note 9; and 
Su Letter, supra note 20; and Xu Letter, supra note 20.
    \134\ See CHX Response Letter 2, supra note 10, at 6.
---------------------------------------------------------------------------

    The Exchange further asserted that it provided detailed 
information regarding the upstream owners to CFIUS and that CFIUS 
determined that there are no unresolved national security concerns 
with respect to the Proposed Transaction.\135\ In response to this 
assertion, some of the commenters stated that CFIUS's approval of 
the Proposed Transaction has no relevance to the Commission's 
determination because CFIUS's review focuses solely on national 
security concerns, and does not relate to the ownership and voting 
restrictions applicable to exchanges.\136\ The Exchange responded

[[Page 7805]]

that, with respect to the financial services sector, CFIUS review 
involves an examination of the potential disruptions to U.S. stock 
markets or the U.S. financial system as a whole, cybersecurity 
vulnerabilities, and the vulnerabilities associated with the fact 
that the U.S. business obtains and preserves personal 
information.\137\ The Exchange also stated that CFIUS review 
includes a full and detailed assessment of the foreign investing 
entities, including all of their individual senior executives and 
major stockholders, and the extent of any foreign government control 
over the investors.\138\ The Exchange asserted that CFIUS conducted 
a thorough, deep, and wide-ranging investigation of the Proposed 
Transaction and the proposed upstream owners, and that it concluded 
that there were no unresolved national security concerns.\139\
---------------------------------------------------------------------------

    \135\ See CHX Response Letter 2, supra note 10, at 5; CHX 
Response Letter 3, supra note 10, at 6; and CHX Response Letter 4, 
supra note 20, at 3. Other commenters also pointed to the CFIUS 
approval in support of the Proposed Transaction. See Richard R. 
Taylor Letter, supra note 20; Catherine Jones Letter, supra note 20, 
at 1; John R. Prufeta Letter 2, supra note 20; Hultgren Letter, 
supra note 20, at 2; NA Casin Holdings Letter 2, supra note 20, at 
2-3; and Rauner Letter, supra note 20.
    \136\ See Ferris Letter 1, supra note 9, at 3; Brennan Letter, 
supra note 9, at 2; and Bass Letter, supra note 9, at 4-5. See also 
Strotz Letter, supra note 20, at 2 (stating that the CFIUS approval 
``does not permit Casin and CHX to lie to the SEC''). Another 
commenter expressed concern that CFIUS disregarded the concerns of 
Congress when it closed its review of the Proposed Transaction. See 
Hill Letter 2, supra note 9. In a comment letter submitted after the 
filing of Amendment No. 2, this commenter expressed a view that 
Congress has also ``recognize[d] flaws, deficiencies and 
partisanship of [CFIUS].'' See Hill Letter 3, supra note 23.
    \137\ See CHX Response Letter 3, supra note 10, at 6.
    \138\ See id.
    \139\ See id.
---------------------------------------------------------------------------

    Commenters expressed further concern about whether the Chinese 
government could have influence or control over the Exchange and its 
upstream owners.\140\ Some of these commenters asserted that one of 
the proposed upstream owners has ties to the Chinese 
government.\141\ Several commenters also questioned whether the 
Chinese government could influence Chongqing Casin, stating that 
Chongqing Casin is involved in a number of Chinese market sectors 
that require close ties to the state, such as environmental 
protection.\142\
---------------------------------------------------------------------------

    \140\ See Pittenger Letter 1, supra note 9, at 1-2; Pittenger 
Letter 2, supra note 9, at 1; Bass Letter, supra note 9, at 4; Mayer 
Letter, supra note 9; Hill Letter 2, supra note 9; Jones Letter, 
supra note 20; Lee Letter, supra note 20; Michael Johnson Letter 1, 
supra note 20, at 1; Michael Johnson Letter 2, supra note 20, at 3; 
Michael Johnson Letter 3, supra note 20, at 3; Pittenger Letter 3, 
supra note 20, at 1; and Anonymous Letter 3, supra note 20, at 2-3. 
One commenter also stated that there are ties between Chongqing 
Casin and Chinese government officials. See Simpson Letter, supra 
note 20, at 1-2. NA Casin Holdings denied that there are such ties, 
and asserted that Chongqing Casin is a privately-owned company. See 
NA Casin Holdings Letter 2, supra note 20, at 3.
    \141\ See Pittenger Letter 1, supra note 9, at 1-2; Bass Letter, 
supra note 9, at 4 (asserting that Chongqing Casin could be 40% 
owned and controlled by Chinese government entities and Chinese 
government officials); Mayer Letter, supra note 9; Hill Letter 2, 
supra note 9 (asserting that the Chinese government may be a 
minority stockholder in one of the upstream owners and that the 
Chinese government should not be given protections afforded to 
SROs); and Simpson Letter, supra note 20, at 2 (asserting that 
Chongqing Casin is 40% owned and controlled by Chinese government 
officials). In response, NA Casin Holdings asserted that the 
allegation that Chongqing Casin is 40% owned and controlled by 
Chinese government officials is false, and that 74.36% of Chongqing 
Casin is owned by Shengju Lu and the balance is owned by other 
persons involved in the management of Chongqing Casin. See NA Casin 
Holdings Letter 2, supra note 20, at 4.
    \142\ See Pittenger Letter 1, supra note 9, at 1. See also 
Pittenger Letter 2, supra note 9, at 1 (stating that the Chinese 
government dominates all sectors of society and consistently fails 
to abide by international agreements). Additionally, several 
commenters expressed concerns about the risks posed by CHX's plans 
to list shares of Chinese companies. See, e.g., Pittenger Letter 1, 
supra note 9, at 1; Mayer Letter, supra note 9; Park Letter, supra 
note 9; Milton Letter, supra note 20; Anonymous Letter 3, supra note 
20, at 2. However, one commenter and the Exchange asserted that the 
listing of Chinese companies would be beneficial. See Nobile Letter, 
supra note 9; and CHX Response Letter 5, supra note 20, at 2-3. The 
Commission notes that the Exchange does not currently list shares of 
such companies, and the proposed rule change under consideration 
would not modify the Exchange's listing rules. Any future changes to 
the Exchange's listing rules would be subject to Commission review 
under to Section 19(b)(1) of the Exchange Act and Rule 19b-4 
thereunder. In addition, as a practical matter, to restart its 
primary listing program, the Exchange would likely seek an amendment 
to Rule 146 under the Securities Act of 1933 to obtain ``covered 
securities'' status for the stocks it lists.
---------------------------------------------------------------------------

    Commenters also asserted that Chongqing Casin owns an entity 
that has large outstanding debts to a Chinese-government controlled 
bank, and that Chongqing Casin has been using its stock and the 
stock of its subsidiaries to collateralize those loans, which make 
Chongqing Casin subject to Chinese government control.\143\ NA Casin 
Holdings responded that Chongqing Casin has not used the equity of 
CHX or CHX Holdings as collateral for any financing or borrowing in 
connection with the Proposed Transaction.\144\
---------------------------------------------------------------------------

    \143\ See Michael Johnson Letter 1, supra note 20; Michael 
Johnson Letter 2, supra note 20; Watson Letter supra note 20, at 1; 
Michael Johnson Letter 3, supra note 20, at 1-2; and Anonymous 
Letter 3, supra note 20, at 2. These and other commenters also 
expressed general concerns about the financial status of Casin 
Development, an affiliate of Chongqing Casin, and asserted that its 
trading has been halted by Chinese regulators. See Watson Letter, 
supra note 20, at 1; Williams Letter, supra note 20; and Strotz 
Letter, supra note 20, at 1 (asserting that the trading in the stock 
has remained halted). NA Casin Holdings responded that Casin 
Development has a strong asset base and a healthy business, and that 
due to the announcement of a major asset transfer, Casin Development 
applied to the Shenzhen Stock Exchange to suspend its share trading. 
See NA Casin Holdings Letter 2, supra note 20, at 6.
    \144\ See NA Casin Holdings Letter 2, supra note 20, at 2.
---------------------------------------------------------------------------

    Commenters also stated that Chongqing Casin's financial assets 
were originally state-controlled, and that its chairman sits on an 
industry council overseen directly by the mayor of the Chongqing 
Municipality.\145\ These commenters stated that, in particular, 
Chinese ownership or involvement presents risks as Chinese 
government-sponsored cyber-attacks have been conducted to devalue 
foreign businesses and steal intellectual property and proprietary 
data; the commenters asserted that this has cost American companies 
billions of dollars annually.\146\ Commenters stated that the 
Proposed Transaction may therefore present financial security risks 
to investors and the U.S. marketplace.\147\ Some commenters 
expressed a belief that the proposal will materially harm the public 
trust in the independent and objective operation of U.S. capital 
markets.\148\ Another commenter expressed a belief that the proposal 
is a threat to Americans' faith in the U.S.'s national financial 
market infrastructure.\149\ One commenter also raised concerns that 
a bad actor with access to an exchange's data could use information 
available through brokerage records and the Consolidated Audit Trail 
to engage in spear phishing, blackmail attempts, and other similar 
attacks.\150\
---------------------------------------------------------------------------

    \145\ See Pittenger Letter 1, supra note 9, at 1.
    \146\ See id. See also Huskey Letter, supra note 20 (expressing 
concern that the Proposed Transaction could allow China a ``sinister 
entry point'' into the U.S. financial system). Other commenters 
expressed general concern about Chinese involvement in the Proposed 
Transaction. See Day Letter, supra note 20; and Sapa Letter, supra 
note 20.
    \147\ See Pittenger Letters 1 and 2, supra note 9, at 1; Manchin 
Letter, supra note 9, at 1; Anonymous Letter 1, supra note 9; and 
Dandolu Letter, supra note 9. See also Watson Letter, supra note 20, 
at 3 (asserting that the Proposed Transaction is a cyber security 
threat); Monfort Letter, supra note 20 (expressing opposition to the 
Proposed Transaction based on national security concerns); and 
Anonymous Letter 3, supra note 20, at 1.
    \148\ See Pittenger Letter 2, supra note 9, at 1.
    \149\ See Manchin Letter, supra note 9, at 1.
    \150\ See Anonymous Letter 1, supra note 9.
---------------------------------------------------------------------------

    Another commenter expressed concern that the original proposed 
upstream ownership structure would have left CHX and U.S. markets 
open to ``undetectable manipulation'' by Chongqing Casin and the 
Chinese government.\151\ Several commenters expressed a belief that 
it will be impossible for the Commission to fully monitor Chinese 
government involvement or manipulation over CHX.\152\ These 
commenters further asserted that no mitigation steps can fully 
insulate CHX's activities and ensure that the U.S.'s interests are 
protected, not only in line with the intent of the Exchange Act, but 
also with the U.S.'s broader national security interests.\153\ The 
commenters stated that the Chinese government has been unwilling to 
compromise and agree to U.S. transparency standards in their markets 
and that the Chinese entities involved in the Proposed Transaction 
have not yielded themselves to full U.S. jurisdiction or agreed to 
make their records available to the Exchange to ensure compliance 
with ownership and voting limitations, as the commenters state have 
been historically done in international transactions of this 
nature.\154\ In addition, a commenter believes that the ownership of 
a U.S. exchange could provide enormous new opportunities for Chinese 
firms to list on U.S. markets and expose U.S. investors to new and 
unknown risks; these commenters advocated that the Proposed 
Transaction must be evaluated not only for its present impact, but 
its potential impact as well.\155\
---------------------------------------------------------------------------

    \151\ See Mayer Letter, supra note 9.
    \152\ See Pittenger Letter 3, supra note 20, at 1.
    \153\ See id.
    \154\ See id. at 2.
    \155\ See id.
---------------------------------------------------------------------------

    In response, CHX denied the claim that it would be impossible 
for the Commission to fully monitor Chinese government

[[Page 7806]]

involvement or manipulation over the Exchange.\156\ CHX interpreted 
the commenters' statement to be implying that Chinese foreign 
investment should never be allowed in the U.S. because it is 
inherently risky and impossible to fully monitor and disagreed with 
that premise.\157\ CHX reiterated that none of the proposed Chinese 
investors are owned or controlled by the Chinese government,\158\ 
and stated that this fact has been vetted by the Exchange, outside 
counsel, and CFIUS.\159\ CHX also emphasized CFIUS's approval in 
response to concerns about access to the Consolidated Audit 
Trail.\160\ And CHX disagreed with the statement that there are no 
mitigation steps that can fully insulate the Exchange's activities 
and ensure that the U.S.'s interests are protected.\161\ CHX first 
noted that the original capital structure of the Proposed 
Transaction would have resulted in the Exchange being majority owned 
by U.S. citizens; it also asserted that the proposed ownership 
limitation, voting limitation, and cure provisions would ensure that 
no stockholder would exercise undue influence over the 
Exchange.\162\ CHX also pointed to the fact that members of the CHX 
board must meet certain independence requirements and that material 
changes to the Exchange must be approved by both the CHX board 
subject to such independence requirements and the SEC.\163\ CHX 
further stated that, pursuant to the Exchange Act, CHX is subject to 
direct and rigorous oversight by the SEC, which CHX stated entails, 
among other things, frequent examinations of various aspects of CHX 
operations by Commission staff, including security and trading 
protocols, as well as Commission approval of certain regulatory, 
operational and strategic initiatives prior to implementation by 
CHX.\164\
---------------------------------------------------------------------------

    \156\ See CHX Response Letter 5, supra note 20, at 1.
    \157\ See id.
    \158\ CHX Response Letter 1, supra note 10, at 2; CHX Response 
Letter 5, supra note 20, at 1.
    \159\ CHX Response Letter 5, supra note 20, at 1-2. But see 
supra note 87.
    \160\ CHX Response Letter 1, supra note 10, at 5.
    \161\ See id. at 2.
    \162\ See id.
    \163\ See id.
    \164\ See id.
---------------------------------------------------------------------------

    CHX also disagreed with the commenters' claim that the Chinese 
entities involved in the Proposed Transaction had not yielded 
themselves to full U.S. jurisdiction or agreed to make their records 
available to the Exchange to ensure compliance with ownership and 
voting limitations.\165\ CHX noted that the Chinese upstream owners 
had agreed to permanently and irrevocably submit to the jurisdiction 
of the Commission and the U.S. courts, and had appointed registered 
agents in the U.S. for the service of process.\166\ CHX also stated 
that the upstream owners agreed to open books and records, as well 
as agreeing to keep records related to the Exchange here in the 
United States.\167\
---------------------------------------------------------------------------

    \165\ See CHX Response Letter 5, supra note 20, at 3.
    \166\ See id.
    \167\ See id.
---------------------------------------------------------------------------

    CHX next responded to commenters' prediction that Chinese 
ownership of a U.S. exchange could provide enormous new 
opportunities for Chinese firms to list on U.S. markets and expose 
U.S. investors to new and unknown risks.\168\ CHX agreed that the 
Proposed Transaction will provide enormous new opportunities for 
Chinese firms to list on U.S. markets, and stated that this is why 
it viewed the Chinese investors as strategically important to the 
Proposed Transaction.\169\ CHX further stated that many firms in 
China desire a listing on a foreign exchange, and that the U.S. is 
seen as the ``gold standard.'' \170\ CHX stated that it strongly 
believes that listing quality Chinese companies in the U.S., 
according to the U.S. listing rules, using U.S. accounting 
standards, and under the regulatory supervision of the Commission is 
by far the safest way for U.S. investors to get exposure to the 
growing Chinese market.\171\
---------------------------------------------------------------------------

    \168\ See id. at 2-3.
    \169\ See id.
    \170\ See id.
    \171\ See id. See also infra note 175.
---------------------------------------------------------------------------

    The Exchange also stated that the Proposed Transaction will 
enable it to accelerate implementation of its strategic plan, which 
includes implementing a primary listing program focused on capital 
formation for emerging growth companies.\172\ The Exchange further 
asserted that the Proposed Transaction would help empower it to meet 
its strategic goals and enhance its participation in the national 
market system.\173\ The Exchange also expressed a belief that by 
enabling the Exchange to expand its listing program, the Proposed 
Transaction would promote efficiency and capital formation in the 
U.S. market.\174\ Furthermore, a number of other commenters 
expressed a belief that the Proposed Transaction would benefit the 
U.S. capital markets and have positive economic effects.\175\
---------------------------------------------------------------------------

    \172\ See CHX Response Letter 1, supra note 10, at 2; CHX 
Response Letter 3, supra note 10, at 2-3.
    \173\ See CHX Response Letter 4, supra note 20, at 5.
    \174\ See id.
    \175\ See Caban Letter, supra note 9 (stating that having an 
exchange that would help attract additional foreign investment in 
Chicago is an important way to help create well-paying jobs); NA 
Casin Holdings Letter 1, supra note 9, at 8 (stating that the 
Proposed Transaction will help establish links between the capital 
markets of China and the U.S. and explaining how the Proposed 
Transaction will attract Chinese investors to buy stocks listed on 
CHX and companies in Asia to list their stock on CHX); Seyedin 
Letter, supra note 9, at 1 (stating the beliefs that the Proposed 
Transaction will make CHX an important bridge between capital 
markets in the U.S. and China and that connecting U.S. and Chinese 
stock markets would allow the U.S. to benefit further from China's 
growth); Nobile Letter, supra note 9 (stating that the Proposed 
Transaction will result in some very clear benefits to the global 
financial community and that NA Casin Group may seek less well 
known, but legitimate foreign entities that would be listed on a 
U.S. platform strictly regulated under Commission rules and 
regulations); Gouroudeva Letter 1, supra note 9 (stating the belief 
that ownership of CHX by a respected Chinese company will greatly 
increase direct Chinese investment into the U.S. economy.); John R. 
Prufeta Letter 1, supra note 9 (stating the belief that the Proposed 
Transaction will provide a unique and exceedingly valuable window to 
major cross-border investment between the world's largest 
economies); Saliba Letter 1, supra note 9, at 2 (stating that in 
order for the U.S. financial markets to remain at the forefront 
globally, the U.S. must continually innovate and attract business 
from all over the globe, which the Proposed Transaction will 
enable); Zhong Letter 1, supra note 9 (expressing support for the 
Proposed Transaction because, among other reasons, there are 
positive effects of trade and commerce between top Chinese companies 
and U.S.-based companies and that trade is the fundamental basis for 
positive foreign relations); Duncan Karcher Letter 1, supra note 9 
(expressing support for investment by Chinese companies in the U.S. 
because the increased ties through trade will benefit both 
countries); Gottlieb Letter, supra note 9 (stating that the Proposed 
Transaction will provide a needed opportunity and valuable window 
for cross-border investments and world economies); Denholm Letter, 
supra note 20 (stating that the Proposed Transaction will help grow 
the business of a local stock exchange and offer the resources to 
connect its businesses with the global market); Vad Letter, supra 
note 20; Himebaugh Letter, supra note 20 (asserting that the 
Proposed Transaction will have multiple beneficial political and 
economic effects by promoting transparency into Chinese companies by 
causing them to adhere to U.S. accounting standards, protecting U.S. 
investors investing in Chinese securities, causing money to flow 
into the U.S. from China, and fostering better relationships between 
corporate leaders that could ``translate into better political 
relations.''); John R. Prufeta Letter 2, supra note 20 (stating that 
Proposed Transaction would attract new businesses to CHX and spur 
public companies in China to list on U.S. exchanges and to be 
subject to the applicable accounting and transparency rules); Su 
Letter, supra note 20; Zhong Letter 2, supra note 20 (stating that 
the NA Casin Group may influence potential entities to list on U.S. 
exchanges); Robert R. Prufeta Letter, supra note 20 (stating that 
the Proposed Transaction will improve the business climate, spur 
investment, and create investment and partnership opportunities in a 
well-regulation environment); Xu Letter, supra note 20 (asserting 
that the Proposed Transaction would give CHX a major technology 
boost and attract more foreign companies to CHX, which would benefit 
the business community in the greater Chicago area); John L. Prufeta 
Letter, supra note 20; Alfano Letter, supra note 20; Tara Prufeta 
Letter, supra note 20; Pinho Letter, supra note 20 (stating that the 
Proposed Transaction could create jobs in the U.S., permit a 
relatively small U.S. stock exchange to develop a more ambitious 
agenda set benchmarks of higher governance standards for the 
companies from China, and promote investment flows from China to the 
U.S.); and Rauner Letter, supra note 20 (stating that the capital 
raised from the Proposed Transaction and a CHX primary listing 
program could help stimulate the Illinois economy by providing 
companies with access to additional capital they require to fund 
operations, hire staff, and grow their businesses, as well as create 
demand for ancillary services). Other commenters questioned these 
positive effects, stating that the purchase price for the Proposed 
Transaction would be received by CHX's existing stockholders, not 
CHX. See Stephen Johnson Letter, supra note 20; and Strotz Letter, 
supra note 20, at 1.
---------------------------------------------------------------------------

    In addition, some commenters expressed concern that the Saliba 
Put Agreement and the Raptor Put Agreement could create voting 
collusion between Raptor and Saliba, resulting in an aggregate 
voting interest that exceeds the 20% voting limitation.\176\ The

[[Page 7807]]

Exchange responded that under the terms of the put agreements of 
Saliba and Raptor, NA Casin Holdings could not compel Saliba or 
Raptor to exercise its respective put option and that, in the event 
that either put agreement is exercised, CHX rules would require the 
resulting ownership structure to comport with the ownership and 
voting limitations.\177\ Some of the commenters asserted that Raptor 
is Saliba's nominee or business partner.\178\ NA Casin Holdings and 
Saliba responded that Raptor and Saliba have never had any 
relationship, are located in different cities, and are owned by 
different families.\179\ In addition, one commenter asserted that 
these Put Agreements are specifically designed to skirt the 
Commission's exchange ownership restrictions, which would give 
Chongqing Casin virtual control over the Exchange.\180\ In response, 
the Exchange explained that the Put Agreements only grant Saliba and 
Raptor the right to exercise their respective put options and do not 
grant NA Casin Holdings the right to compel the exercise of those 
rights.\181\ The Exchange also noted that any exercise of the put 
rights would be subject to compliance with the ownership and voting 
limitations.\182\
---------------------------------------------------------------------------

    \176\ See Brennan Letter, supra note 9, at 2; Mayer Letter, 
supra note 9; Ferris Letter 1, supra note 9, at 2; Ferris Letter 2, 
supra note 9, at 3-4; Bass Letter, supra note 9, at 2; and Park 
Letter, supra note 9, at 4. Under the original proposed capital 
structure, the aggregate holdings of Saliba and Raptor would have 
been 24%.
    \177\ See CHX Response Letter 2, supra note 10, at 6.
    \178\ See Ferris Letter 1, supra note 9, at 2, n. 5; and Brennan 
Letter, supra note 9, at 2.
    \179\ See NA Casin Holdings Letter 1, supra note 9, at 7; and 
Saliba Letter 1, supra note 9, at 2.
    \180\ See Ciccarelli Letter, supra note 9, at 3.
    \181\ See CHX Response Letter 2, supra note 10, at 6. In 
addition, some commenters asserted that a conflict of interest 
exists because one of the upstream owners, Anthony Saliba, serves on 
the Exchange's and CHX Holdings' boards of directors. See Brennan 
Letter, supra note 9, at 2-3; Ferris Letter 1, supra note 9, at 2; 
Ferris Letter 2, supra note 9, at 5; Bass Letter, supra note 9, at 
2; Park Letter, supra note 9, at 4; Carney Letter, supra note 20, at 
2; Strotz Letter, supra note 20, at 2; and Watson Letter, supra note 
20, at 2. In response to these concerns, the Exchange noted that its 
current rules require a CHX board position to be reserved for 
certain CHX Holdings stockholders and asserts that there is no 
unresolved conflict of interest because Mr. Saliba recused himself 
from all material CHX Holdings and CHX board votes related to the 
Proposed Transaction. See CHX Response Letter 3, supra note 10, at 
5. In addition, NA Casin Holdings stated that Saliba did not join 
the consortium of investors until after the merger agreement between 
NA Casin Holdings and CHX Holdings was executed. See NA Casin 
Holdings Letter 2, supra note 20, at 2.
    \182\ See CHX Response Letter 2, supra note 10, at 6.
---------------------------------------------------------------------------

    Moreover, two commenters expressed concern that CHX and the 
Commission may not be aware of or able to control future transfers 
of ownership or voting in contravention of the ownership and voting 
limitations.\183\ One of these commenters asserted that there are 
little to no controls in place at the upstream corporate ownership 
level that would prevent the upstream owners from transferring their 
voting power in CHX to even more opaque owners or ownership that 
involves the Chinese government.\184\ The other commenter asserted 
that neither the Exchange nor the Commission would know if capital 
stock in China is being consolidated, resold, collateralized, or 
collusively voted in violation of the 20% voting limitation.\185\ 
The commenter expressed concern that collusion or changes in 
ownership that are unknown to the Exchange or the Commission could 
hinder the Exchange's and the Commission's obligations to prevent 
conflicts of interest and improper influence under Section 6(b)(5) 
of the Exchange Act.\186\ In addition, the commenter asserted that 
the upstream owners are not being required to amend their governing 
documents to restrict collusive voting or resale of the 
Exchange.\187\
---------------------------------------------------------------------------

    \183\ See Ciccarelli Letter, supra note 9, at 1; and Mayer 
Letter, supra note 9.
    \184\ See Ciccarelli Letter, supra note 9, at 2.
    \185\ See Mayer Letter, supra note 9. The commenter asserted 
that restricting voting of shares would not remedy ``back-room 
voting collusion, share re-sale or collateralization to an unknown 
party or state entity in China.'' See id.
    \186\ See id.
    \187\ See id.
---------------------------------------------------------------------------

    In response, the Exchange stated that to the contrary, the 
governing documents of NA Casin Holdings and CHX Holdings do 
restrict the voting and sale of the Exchange's shares.\188\ In 
addition, as noted above, the Exchange affirmed its representation 
that no prospective owner or any of its Related Persons under the 
original capital structure would have maintained an equity interest, 
or exercised voting power, in violation of the ownership and voting 
limitations.\189\ The Exchange also responded that the proposed 
governance documents for NA Casin Holdings and CHX Holdings provide 
robust enforcement mechanisms for the ownership and voting 
limitations, and that the CHX board's composition would be required 
to meet certain independence requirements.\190\ The Exchange also 
noted that the CHX's rules and the Exchange Act contain various 
provisions that would facilitate the ability of U.S. regulators, 
including the Commission, to monitor, compel, and enforce compliance 
by each of the upstream owners.\191\
---------------------------------------------------------------------------

    \188\ See CHX Response Letter 1, supra note 10, at 3-4; and CHX 
Response Letter 2, supra note 10, at 2-3.
    \189\ See CHX Response Letter 1, supra note 10, at 3; and CHX 
Response Letter 2, supra note 10, at 2.
    \190\ See CHX Response Letter 1, supra note 10, at 3. See also 
CHX Response Letter 2, supra note 10, at 3; and CHX Response Letter 
4, supra note 20, at 4.
    \191\ See CHX Response Letter 2, supra note 10, at 2-4 
(specifically noting: (1) The ownership and voting limitations; (2) 
provisions in which the upstream owners consent to U.S. regulatory 
jurisdiction and agree to maintain an agent in the U.S. for service 
of process; and (3) provisions requiring the upstream owners to 
maintain their books and records related to CHX in the U.S. and to 
refrain from interfering with, and to give due consideration to, the 
SRO function of CHX). See also CHX Response Letter 3, supra note 10, 
at 2.
---------------------------------------------------------------------------

    Commenters also expressed concern about the ability of the 
Commission to exercise regulatory oversight over the Exchange 
following the closing of the Proposed Transaction.\192\ 
Characterizing the proposed upstream ownership of CHX as ``opaque,'' 
several commenters stated that approval of the proposal would strip 
the Commission of its ability to carry out its statutorily mandated 
oversight of exchange ownership.\193\ These commenters also stated 
that given ongoing concerns with the severe lack of transparency in 
China, the commenters have substantial concerns related to the 
Commission's ability to monitor and regulate the upstream ownership 
of Chongqing Casin.\194\ These commenters asserted that neither 
Chongqing Casin nor any of its coordinate foreign entities have 
provided U.S. regulators with any power to monitor or regulate their 
activities with respect to CHX.\195\ These commenters further stated 
that, in the past, Chinese entities have limited visibility into 
post-acquisition activities and have attempted to interpose 
arguments--such as sovereign immunity or limits to the 
extraterritorial application of U.S. laws--to avoid compliance with 
U.S. regulatory requirements.\196\ The commenters expressed a belief 
that these actions erode investor trust and adversely affect U.S. 
regulatory interests.\197\
---------------------------------------------------------------------------

    \192\ See Pittenger Letters 1 and 2, supra note 9, at 2; 
Ciccarelli Letter, supra note 9, at 1-2; Bass Letter, supra note 9, 
at 1; and Ferris Letter 1, supra note 9, at 4.
    \193\ See Pittenger Letter 2, supra note 9, at 1.
    \194\ See id.
    \195\ See id. at 2.
    \196\ See id.
    \197\ See id.
---------------------------------------------------------------------------

    Similarly, another commenter opined that what the commenter 
cites as the Chinese government's continued rejection of fundamental 
free-market norms and property rights of private citizens makes the 
commenter strongly doubt whether an Exchange operating under the 
direct control of a Chinese entity can be trusted to self-regulate 
now and in the future.\198\ The commenter stated that while the 
harms caused by NA Casin Group's acquisition of CHX may not become 
apparent immediately, allowing this acquisition to proceed could 
have a devastating effect on the health of U.S. financial 
markets.\199\ The commenter further stated that the commenter 
remains unconvinced of the following: (1) That no prospective 
investor is influenced or controlled by the Chinese government; (2) 
that Exchange rules could stand against the levels of deceit 
employed by the Chinese government; and (3) that the Chinese 
government would not employ influence to affect exchange decisions 
or votes.\200\
---------------------------------------------------------------------------

    \198\ See Manchin Letter, supra note 9, at 1.
    \199\ See id. at 1-2.
    \200\ See id. at 2.
---------------------------------------------------------------------------

    Furthermore, another commenter asserted that, due to 
jurisdiction limitations and transparency concerns, under the 
current proposal, the Commission would not be able to exercise 
proper regulatory oversight.\201\ Some commenters also expressed 
concern about the ability of U.S. regulators to access the books and 
records of the Chinese-owned upstream owners.\202\ Three commenters

[[Page 7808]]

stated that they believe that the proposed foreign upstream owners 
will not submit to U.S. jurisdiction.\203\ Another commenter stated 
its view that foreign ownership of the Exchange may result in lax 
enforcement of its rules.\204\
---------------------------------------------------------------------------

    \201\ See Ciccarelli Letter, supra note 9, at 1-2.
    \202\ See Bass Letter, supra note 9, at 5; and Ferris Letter 1, 
supra note 9, at 4. See also Pittenger Letter 1, supra note 9, at 2 
(asserting that the Public Company Accounting Oversight Board must 
be able to ``penetrate Chinese opacity'' before a Chinese firm is 
allowed to purchase an American stock exchange).
    \203\ See Ciccarelli Letter, supra note 9, at 3-4; Mayer Letter, 
supra note 9; and Anonymous Letter 3, supra note 20, at 2.
    \204\ See Hill Letter 2, supra note 9. This commenter also 
alleged that the Exchange has a record of non-compliance with 
regulations and failure to fully enforce its rules. This commenter 
reiterated this point in a comment letter submitted following the 
filing of Amendment No. 2. See Hill Letter 3, supra note 23.
---------------------------------------------------------------------------

    The Exchange responded that it believes that its rules are 
consistent with the requirements of the Exchange Act, and that its 
rules and the Exchange Act contain various provisions that would 
facilitate the ability of U.S. regulators, including the Commission, 
to monitor, compel, and enforce compliance by each of the upstream 
owners. In particular, upstream owners would be required to adhere 
to the ownership and voting limitations, submit to U.S. regulatory 
jurisdiction and maintain agents in the U.S. for the service of 
process, maintain open books and records related to their ownership 
of CHX and keep such books and records in the U.S., and refrain from 
interfering with, and give due consideration to, the SRO function of 
the Exchange.\205\ Further, the Exchange stated that the CHX rules, 
along with the voting and ownership limitations, are designed to 
prevent undue influence on CHX.\206\ The Exchange also asserted 
that, pursuant to the Exchange Act, the Exchange is subject to 
``direct and rigorous'' oversight by the Commission, which the 
Exchange described as including, among other things, frequent 
examinations of various aspects of its operations by Commission 
staff, including security and trading protocols, as well as the 
requirement for Commission approval of certain regulatory, 
operational, and strategic initiatives prior to implementation by 
the Exchange.\207\
---------------------------------------------------------------------------

    \205\ See CHX Response Letter 1, supra note 10, at 4; and CHX 
Response Letter 2, supra note 10, at 3-4.
    \206\ See CHX Response Letter 4, supra note 20, at 5.
    \207\ See CHX Response Letter 2, supra note 10, at 3-4. In 
addition, the Exchange stated that if CHX or the upstream owners 
fail to meet the requirements of the Exchange Act, or the rules and 
regulations thereunder, the Commission has broad authority and 
recourse to compel compliance or mitigate non-compliance, including 
suspending, censuring, or deregistering CHX as an SRO, pursuant to 
Section 19(h)(1) of the Exchange Act. See CHX Response Letter 4, 
supra note 20, at 5.
---------------------------------------------------------------------------

    In addition, NA Casin Holdings asserted that extensive 
regulatory and governance safeguards would empower the Commission 
and the Exchange to prevent any influence over the Exchange and its 
operations that is improper or a violation of U.S. securities laws 
and regulations.\208\ Other commenters expressed confidence that the 
regulatory controls currently in place are adequate to monitor the 
proposed investors.\209\ In addition, some commenters asserted that 
CHX has shown willingness to submit to oversight.\210\
---------------------------------------------------------------------------

    \208\ See NA Casin Holdings Letter 1, supra note 9, at 1-2. 
Specifically, NA Casin Holdings observed that 50% of the board of 
the Exchange would be required to consist of ``Non-Industry 
Directors'' (which NA Casin Holdings notes is defined in the CHX 
Bylaws), who cannot be employed by any affiliate of CHX.
    \209\ See John R. Prufeta Letter 1, supra note 9 (stating that 
``the continual scrutiny of the U.S. financial system is both 
essential and firmly in place'' and that the commenter believes that 
``all the controls necessary to monitor the investment group exist 
now and will be sufficient''). See also Zhong Letter 1, supra note 9 
(expressing confidence that the current controls of the U.S. 
regulatory system serve as an ``effective check and balance'' on 
both foreign and domestic investors); Duncan Karcher Letter 1, supra 
note 9 (stating that commenter ``trust[s] [the Commission's] process 
much more than relying on the ad hominem attacks [the commenter] 
read[s] within the comments section''); and Zhong Letter 2 
(expressing faith in the U.S. regulatory system), supra note 20. See 
also Catherine Jones Letter, supra note 20, at 1 (asserting that the 
rules of CHX will remain largely unchanged with respect to the 
purposes of promoting just and equitable principles of trade, 
removing impediments to and perfecting the mechanism of the free and 
open market and a national market system, and in general, protecting 
investors and the public interest).
    \210\ See Richard R. Taylor Letter, supra note 20; Duncan 
Karcher Letter 2, supra note 20; and Cheryl Karcher Letter, supra 
note 20.
---------------------------------------------------------------------------

    The Commission also received several comments regarding the 
approval process of the proposed rule change. One commenter 
expressed concern that the staff's approval order was issued so soon 
after CHX submitted Amendment No. 1, which the commenter stated did 
not allow time for the public to comment.\211\ Three commenters 
indicated support for the proposed rule change, and raised concerns 
that the Commission has delayed the Proposed Transaction, or has 
allowed politics to interfere with the approval process.\212\ 
Another commenter asserted that there is no reason for ``further 
unjustified delay'' of the Commission's approval.\213\ The Exchange 
asserted that the upstream owners have complied with applicable laws 
and that therefore, the Commission should approve the proposed rule 
change, in furtherance of fair competition.\214\
---------------------------------------------------------------------------

    \211\ See Milton Letter, supra note 20. See also Watson Letter, 
supra note 20, at 3.
    \212\ See Richard R. Taylor Letter, supra note 20; Ayers Letter, 
supra note 20; Duncan Karcher Letter 2, supra note 20; and Cheryl 
Karcher Letter, supra note 20.
    \213\ See Hultgren Letter supra note 20, at 1 (also asserting 
that the additional review period following the stay of the Division 
of Trading and Markets' approval ``arguably violates the 
Commission's time restrictions under the Exchange Act'').
    \214\ See CHX Response Letter 4, supra note 20, at 6.
---------------------------------------------------------------------------

Summary of Comments and Exchange's Response Following the Filing of 
Amendment No. 2

    On October 2, 2017, during the Commission's review of the 
delegated action, CHX informed the Commission that three of the 
proposed upstream investors were withdrawing from the investor 
group. On November 6, 2017, CHX filed Amendment No. 2 to the 
proposed rule change to update its proposal to reflect this change 
in the investor group and to reflect other changes to the terms of 
the Proposed Transaction and the proposed rule change.\215\
---------------------------------------------------------------------------

    \215\ See supra notes 21, 27, and 30 and accompanying text.
---------------------------------------------------------------------------

    In Amendment No. 2, the Exchange asserts that the new proposed 
capitalization structure complies with the ownership and voting 
limitations set forth in the NA Casin Holdings Certificate because 
the proposed upstream owners and their Related Persons will neither 
exceed the proposed 40% ownership limitation nor be permitted to 
vote in excess of the proposed voting limitation.\216\ The Exchange 
represents that there are now two sets of Related Persons among the 
proposed upstream owners: (1) Castle YAC and NA Casin Group, which 
would hold a combined 40% ownership interest in NA Casin Holdings 
and (2) the five members of the CHX Holdings management team, which 
would hold an aggregate 8.32% ownership interest in NA Casin 
Holdings.\217\ The Exchange further represents that 71% of the 
voting shares of NA Casin Holdings will be owned by U.S. citizens 
and, due to the proposed voting limitation, no less than 80% of the 
voting power of NA Casin Holdings will be held by U.S. 
citizens.\218\ The Exchange also restates its prior representation 
that none of the upstream owners directly, or indirectly through one 
or more intermediaries, controls, or is controlled by, or is under 
common control with a governmental entity or any political 
subdivision thereof.\219\
---------------------------------------------------------------------------

    \216\ See Amendment No. 2, supra note 22, at 55142.
    \217\ See id.
    \218\ See id.
    \219\ See id.
---------------------------------------------------------------------------

    In response to Amendment No. 2, the Commission received 21 
comment letters.\220\ Ten of these commenters raise concerns about 
the proposed ownership structure of NA Casin Holdings, with a 
particular focus on the terms of the Put Agreements.\221\ One 
commenter also states that the Exchange mischaracterizes NA Casin 
Holdings as a ``large private company that is not owned or 
controlled by the Chinese government.'' \222\ Another commenter 
alleges that CHX removed ``fake'' companies from the capitalization 
structure and replaced them with new shell nominees through what the 
commenter calls the ``sham'' Put Agreements.\223\ The commenter 
states that NA Casin Group is an empty shell company controlled by 
Jay Lu, who the commenter states is a college student and whose 
actions

[[Page 7809]]

the commenter states are controlled by his father, Shengju Lu.\224\ 
Arguing that the holdings of Shengju Lu and Jay Lu should be 
aggregated with the holdings of Raptor, Saliba, and Penserra because 
of the Put Agreements, the commenter asserts that the Lus will 
control 91.68% of the shares of NA Casin Holdings.\225\ The 
commenter states that the Put Agreements can compel NA Casin 
Holdings to purchase the shares of Saliba, Raptor, and Penserra or 
arrange for the purchase of those shares by a third-party chosen by 
NA Casin Holdings.\226\ Likewise, another commenter asserts that the 
terms of the Put Agreements would place approximately 91.5% of CHX 
under Chongqing Casin's immediate control.\227\ This commenter 
further asserts that the Put Agreements are designed to circumvent 
Commission scrutiny.\228\
---------------------------------------------------------------------------

    \220\ See supra note 23.
    \221\ See Garland Letter, supra note 23; Jeremy Johnson Letter, 
supra note 23, Azsai Letter, supra note 23; Anonymous Letter 4, 
supra note 23; Montclair Letter, supra note 23; Mcpherson Letter 4, 
supra note 23; Strauss Letter, supra note 23; Horwitz Letter, supra 
note 23; Hart Letter, supra note 23, at 3; and Friedman Letter supra 
note 23, at 2.
    \222\ See Friedman Letter, supra note 23, at 1.
    \223\ See Garland Letter, supra note 23.
    \224\ See id. See also Hart Letter, supra note 23, at 2; and 
Friedman Letter, supra note 23, at 2.
    \225\ See Garland Letter, supra note 23.
    \226\ See id.
    \227\ See Mcpherson Letter, supra note 23.
    \228\ See id.
---------------------------------------------------------------------------

    Several commenters also raise the possibility that, under the 
Put Agreements, NA Casin Holdings may be able to force the transfer 
of Saliba's, Raptor's, and Penserra's shares to someone from a 
Chinese government agency, unknown foreign third-party entities, or 
a ``non-descript affiliated company.'' \229\ These commenters assert 
that the proposed Chinese upstream owners are trying to determine 
who controls CHX through the terms of the Put Agreements.\230\
---------------------------------------------------------------------------

    \229\ See Garland Letter, supra note 23; Anonymous Letter 4, 
supra note 23; Mcpherson Letter, supra note 23; and Horwitz Letter, 
supra note 23 (expressing concern that, because NA Casin Holdings 
has the authority to identify a third-party purchaser to purchase 
shares sold under the put options and Jay Lu is the current 
signatory for NA Casin Holdings, such arrangement could result in 
conflicts of interest and collusion).
    \230\ See id.
---------------------------------------------------------------------------

    Similarly, and citing one of the commenters above, another 
commenter asserts that the Put Agreements make the entities that are 
parties to them ``fake'' investors, and that those investors are 
entering into risk-free transactions that involve the Chinese 
upstream owners ``pulling all the strings'' and ``dictating terms on 
both the timing and pricing of the put.'' \231\ Another commenter 
asserts that the Put Agreements would obligate the Chinese owners to 
repurchase 50% ownership in CHX at any time, and represent ``risk-
free transactions.'' \232\ This commenter concludes that Saliba and 
Raptor therefore do not appear to be ``bona fide investors.'' \233\ 
Two commenters also claim that Anthony Saliba has a conflict of 
interest by both investing in CHX through Saliba and approving the 
Proposed Transaction as a member of CHX's board.\234\ One of these 
commenters further asserts that what the commenter calls the ``so-
called `American Investors' '' would hold 60% of CHX on behalf of 
the Chinese upstream owners due to the terms of the Put 
Agreements.\235\
---------------------------------------------------------------------------

    \231\ See Jeremy Johnson Letter, supra note 23 at 2 (citing 
Garland Letter, supra note 23).
    \232\ See Strauss Letter, supra note 23 at 2.
    \233\ See id. See also Hart Letter, supra note 23, at 3 
(claiming that Saliba and Raptor are ``guaranteed handsome profits 
which would allow them to `put' their CHX holdings to the Chinese at 
any price they would demand'').
    \234\ See Jeremy Johnson Letter, supra note 23 at 2; and Strauss 
Letter, supra note 23 at 2. See also Hart Letter, supra note 23, at 
3; and Friedman Letter, supra note 23, at 3.
    \235\ See id. at 3. See also Gresack Letter, supra note 23, at 
2.
---------------------------------------------------------------------------

    Likewise, another commenter asserts that the parties subject to 
the Put Agreements are ``merely placeholders for un-disclosed third 
parties.'' \236\ This commenter asserts that the Put Agreements 
ensure that the purchasers subject to them will have zero risk 
associated with their purchase because NA Casin Holdings will cover 
any losses to the investor and that the Chinese upstream owners 
would be ``pulling the strings on the `Puts.' '' \237\ Due to this 
lack of risk on behalf of the upstream owners subject to the Put 
Agreements, the commenter states that those investors are not bona 
fide investors, but merely placeholders so that CHX can obtain 
Commission approval of the proposed rule change.\238\
---------------------------------------------------------------------------

    \236\ See Montclair Letter, supra note 23.
    \237\ See id.
    \238\ See id.
---------------------------------------------------------------------------

    Two commenters question why CHX management would obtain an 
aggregate 8.32% ownership interest in NA Casin Holdings, which the 
commenters speculate would be granted to management at no cost.\239\ 
One of these commenters asserts that CHX management are ``place 
holders'' for the Chinese owners, and that as a result, Jay Lu would 
``control'' 95% of CHX's ownership.\240\ In addition, another 
commenter questions the increase in ownership of CHX management, 
noting that it went from 0.88% to 8.32%, and questions whether the 
CHX management is contributing cash for their respective 
shares.\241\ Another commenter claims that the terms providing this 
equity to CHX management amount to ``bribes and hush money to abet a 
fraud'' on the Commission.\242\ In addition, one commenter asserts 
that the funds paid in the Proposed Transaction would not be 
invested in CHX and that no jobs would be created in Chicago as a 
result of the Proposed Transaction.\243\
---------------------------------------------------------------------------

    \239\ See Strauss Letter, supra note 23, at 2-3; and Garland 
Letter, supra note 23 at 1. One of these commenters also questions 
whether the full terms of the Proposed Transaction, including any 
grant of stock to management, were disclosed to CHX stockholders. 
See Strauss Letter, supra note 23, at 3.
    \240\ See id. at 1.
    \241\ See Gresack Letter, supra note 23, at 2.
    \242\ See Hart Letter, supra note 23, at 3. See also Friedman 
Letter, at 2 supra note 23, at 2 (suggesting that the grant of stock 
to CHX management should be reviewed for violations of the Foreign 
Corrupt Practices Act); and Strauss Letter, supra note 23, at 1.
    \243\ See Strauss Letter, supra note 23, at 1.
---------------------------------------------------------------------------

    Several commenters also assert that Chongqing Jintian, Chongqing 
Longshang, and Xian Tong exited the Proposed Transaction only when 
faced with due diligence by the Commission regarding their ownership 
structure.\244\ One commenter suggests that the Commission should 
review the bank statements and sources of funds for the three 
proposed upstream owners who withdrew from the Proposed 
Transaction,\245\ stating that continued review is necessary as no 
new investors have been added to the Proposed Transaction.\246\ 
Another commenter asserts that the three investors' source of funds 
for the Proposed Transaction was Shengju Lu, an owner of Chongqing 
Casin.\247\
---------------------------------------------------------------------------

    \244\ See Garland Letter, supra note 23, at 1; Montclair Letter, 
supra note 23; Jeremy Johnson Letter, supra note 23, at 1; Azsai 
Letter, supra note 23; Mcpherson Letter, supra note 23; Azsai 
Letter, supra note 23; Gresack Letter, supra note 23, at 2; Strauss 
Letter, supra note 23, at 1; and Horwitz Letter, supra note 23, at 
1.
    \245\ See supra note 21 and accompanying text.
    \246\ See Gresack Letter, supra note 23, at 2.
    \247\ See Strauss Letter, supra note 23, at 1.
---------------------------------------------------------------------------

    In addition, one commenter does not express support or 
opposition to the proposed rule change, but encourages the 
Commission to carefully examine the bank statements and other 
sources of funding for both the current proposed upstream owners and 
the previous upstream owners who left the group.\248\ This commenter 
states that a ``huge red flag was raised'' when some upstream owners 
left the ownership group after the Commission began to investigate 
their backgrounds.\249\ This commenter also states that the terms of 
the Put Agreements suggest that Saliba, Raptor, and Penserra do not 
intend to be long-term investors in CHX.\250\ This commenter opines 
that the Commission must investigate the origins of the Put 
Agreements, and whether they were demanded by the U.S. upstream 
owners, another party to the Proposed Transaction, or 
otherwise.\251\ The commenter believes that the Commission's review 
of bank statements and the origin of funds for the upstream owners 
will disclose whether the upstream owners subject to the Put 
Agreements are using their own funds to finance their share of the 
Proposed Transaction.\252\
---------------------------------------------------------------------------

    \248\ See Gresack Letter, supra note 23, at 2.
    \249\ See id.
    \250\ See id.
    \251\ See id.
    \252\ See id.
---------------------------------------------------------------------------

    One commenter states his belief that Chongqing Casin's source of 
funding is at issue, asserting that Shengju Lu leveraged stock of 
his company in return for loans from Chinese-government controlled 
banks.\253\ This commenter suggests that the Chinese government is 
playing a role in the Proposed Transaction.\254\ In addition, this 
commenter questions whether the Commission can carry out its duty to 
properly regulate the Exchange given the limits of the Commission's 
authority in China.\255\ Another commenter states that investors 
from China have taken U.S. shell corporations and, through reverse 
mergers, acquired listed U.S. corporations that were ``defunct'' for 
the purpose of executing ``pump and dump'' schemes.\256\ This 
commenter implies that such past actions might be cause for concern 
with regard to the Proposed Transaction.\257\
---------------------------------------------------------------------------

    \253\ See Horwitz Letter, supra note 23, at 1.
    \254\ See id.
    \255\ See id. at 2.
    \256\ See Hill Letter 3, supra note 23.
    \257\ See id.

---------------------------------------------------------------------------

[[Page 7810]]

    The Commission also received nine comment letters advocating 
that the Commission approve the proposed rule change.\258\ One 
commenter states that the Proposed Transaction was approved by CFIUS 
and Commission staff, and agreed to by all the parties 
involved.\259\ The commenter states that the Proposed Transaction 
poses no risk and urges the Commission to approve the proposed rule 
change as soon as possible.\260\ In addition, another commenter 
states that CFIUS concluded that there were no unresolved national 
security concerns with respect to the Proposed Transaction.\261\ 
Another commenter opines that CHX has a very good business model and 
that it is in an advantageous position that will drive its 
growth.\262\ This commenter believes that the U.S. regulatory regime 
has proven over the years that the U.S. has a robust and successful 
market, and that the U.S. must continue to try to build a stronger 
connection for financial services between the U.S. and the 
world.\263\
---------------------------------------------------------------------------

    \258\ See Salters Letter, supra note 23; May Letter, supra note 
23; and Richard Taylor Letter, supra note 23; Faux Letter, supra 
note 23; Saliba Letter 2, supra note 23, at 2; Briley Letter, supra 
note 23; Bleecher Letter, supra note 23; Marden Letter, supra note 
23; and NA Casin Holdings Letter 3, supra note 23.
    \259\ See Richard Taylor Letter, supra note 23. See also Faux 
Letter, supra note 23 (stating that CFIUS cleared the sale of the 
exchange); and Marden Letter, supra note 23 (asserting that the 
presence of national security issues is non-existent as evident by 
the approval from CFIUS).
    \260\ See Richard Taylor Letter, supra note 23.
    \261\ See Saliba Letter 2, supra note 23, at 2.
    \262\ See Salters Letter, supra note 23.
    \263\ See id.
---------------------------------------------------------------------------

    In addition, one commenter asserts that nothing will change with 
the acquisition of the Exchange, and that the operational processes 
of the Exchange, which it states conform to guidelines set by the 
Commission and observed by the Financial Industry Regulatory 
Authority (``FINRA''), must remain the same.\264\ Another commenter 
states that China has given global financial companies what the 
commenter calls unprecedented access to its economy and that the 
U.S. should remain open-minded when embracing a diversity of market 
participants in the financial sector.\265\ This commenter states 
that both countries can benefit from increased access to each 
other's respective markets.\266\ The fourth commenter believes that 
the upstream owners' investment in CHX could ``create the bridge for 
China-based companies to list their IPOs on the Chicago Stock 
Exchange thereby also providing Americans a more direct opportunity 
to potentially participate in Asia's major engine of growth.'' \267\ 
This commenter further opines that if these companies do not list on 
the Chicago Stock Exchange, they will list on competing exchanges in 
other countries, which the commenter believes would further erode 
``[CHX's] global market share and prominence.'' \268\ Another 
commenter states that the Proposed Transaction ``stands to create 
many jobs'' in Chicago and to ``increase the popularity of CHX 
internationally.'' \269\ Another commenter, however, counters the 
point that job creation should be an important consideration for 
this proposed rule change.\270\
---------------------------------------------------------------------------

    \264\ See Briley Letter, supra note 23.
    \265\ See May Letter, supra note 23.
    \266\ See id.
    \267\ See Faux Letter, supra note 23.
    \268\ See id.
    \269\ See Marden Letter, supra note 23.
    \270\ See Hill Letter 3, supra note 23.
---------------------------------------------------------------------------

    In addition, one commenter asserts that the NA Casin Group is a 
privately-owned company and that it is not the Chinese government 
and should not be treated as such.\271\ Another commenter states 
that the international company involved with the Proposed 
Transaction would have 29% ownership and 20% voting rights, and 
therefore asserts that its influence would be ``minimal.'' \272\
---------------------------------------------------------------------------

    \271\ See Saliba Letter 2, supra note 23, at 2.
    \272\ See Marden Letter, supra note 23.
---------------------------------------------------------------------------

    NA Casin Holdings states that no new investors were added to the 
investor consortium under the revised ownership structure in 
Amendment No. 2, and asserts that the arrangements among the 
investors were the result of arm's-length negotiations among the 
parties.\273\ NA Casin Holdings further asserts that the identities, 
management, and sources of funds for the stockholders have been 
thoroughly disclosed in CHX's filings with the Commission.\274\ NA 
Casin Holdings also responds to commenters' assertions about the 
ownership of NA Casin Group, stating that Jay Lu does not 
independently control either NA Casin Group or Chongqing Casin.\275\ 
In addition, NA Casin Holdings asserts that the U.S. upstream owners 
are independent and unaffiliated with any investor, and that 
statements made in other comment letters that Jay Lu or Casin Group 
would control 90% of the shares of NA Casin Holdings are false.\276\ 
NA Casin Holdings further asserts that following the closing of the 
Proposed Transaction, the majority of its voting power would be in 
the hands of the U.S. upstream owners.\277\
---------------------------------------------------------------------------

    \273\ See NA Casin Holdings Letter 3, supra note 23, at 1-2.
    \274\ See id. at 2.
    \275\ See id. at 2.
    \276\ See id. at 3.
    \277\ See id. at 3.
---------------------------------------------------------------------------

    Two commenters respond to questions about why Chongqing Jintian, 
Chongqing Longshang, and Xian Tong withdrew from the Proposed 
Transaction.\278\ NA Casin Holdings states that withdrawal of these 
investors from the investor consortium was the result of each such 
entity's ``independent decision,'' and that these entities cited a 
number of factors as responsible for their withdrawal, including 
delays in the Proposed Transaction and that funds necessary for the 
investment were ``tied up and unavailable for use in alternative 
investment opportunities.'' \279\ Further, NA Casin Holdings asserts 
that prior to their withdrawal, these entities provided all 
information requested by the Commission, the Commission's staff, 
CFIUS, and FINRA.\280\ Another commenter also denies claims that 
some of the Chinese companies withdrew from the Proposed Transaction 
because they have something to hide, stating that instead, these 
companies withdrew from the Proposed Transaction due to the length 
of the regulatory process.\281\ In response, three commenters that 
oppose the Proposed Transaction assert that NA Casin Holdings' 
statement that the three investors did not have available funds 
necessary to complete the Proposed Transaction raises questions 
about who was funding the entities' purchase.\282\
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    \278\ See Saliba Letter 2, supra note 23, at 2; and NA Casin 
Holdings Letter 3, supra note 23, at 2.
    \279\ See NA Casin Holdings Letter 3, supra note 23, at 2.
    \280\ See id.; but see supra note 86.
    \281\ See Saliba Letter 2, supra note 23, at 2.
    \282\ See Horwitz Letter, supra note 23, at 1; Hart Letter, 
supra note 23, at 1; and Friedman Letter supra note 23, at 3.
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    Two commenters deny other commenters' assertions regarding the 
Put Agreements.\283\ Specifically, NA Casin Holdings states that 
contrary to the assertions of other commenters, the Put Agreements 
would not permit NA Casin Group to force the sale of the U.S. 
upstream owners' shares to unknown third parties; instead, the Put 
Agreement would permit NA Casin Holdings to find a third party 
purchaser only after a holder of a put option determines to exercise 
such option.\284\ In addition, NA Casin Holdings asserts that the NA 
Casin Holdings Certificate, which imposes the voting and ownership 
limitations, is ``virtually indistinguishable'' from exchange 
applications previously approved by the Commission, and that any 
sale of the proposed U.S. upstream owners' shares, including 
transactions pursuant to the Put Agreements, would be subject to the 
ownership and voting limitations.\285\ In addition, NA Casin 
Holdings states that the Put Agreements would only provide certain 
investors an opportunity to exit from their investments for a 
``brief window'' two years after closing.\286\ According to NA Casin 
Holdings, it would not assume all risks or liabilities of the 
investment of the holders of the Put Agreements, and suggestions 
that the proposed U.S. upstream owners would not be long-term owners 
are without merit.\287\ NA Casin Holdings further asserts that 
agreements similar to the Put Agreements are common for investors in 
private companies, and other privately-held exchanges also provide 
put rights to their equity holders.\288\ In addition, another 
commenter asserts that the NA Casin Group would not control the Put 
Agreements, and notes that the put right cannot be exercised for two 
years.\289\
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    \283\ See Saliba Letter 2, supra note 23, at 2; and NA Casin 
Holdings Letter 3, supra note 23, at 2-3.
    \284\ See NA Casin Holdings Letter 3, supra note 23, at 3. One 
commenter questions the authenticity of this third comment letter 
submitted by NA Casin Holdings. See Hart Letter, supra note 23, at 
1.
    \285\ See NA Casin Holdings Letter 3, supra note 23, at 3.
    \286\ See id.
    \287\ See id.
    \288\ See id.
    \289\ See Saliba Letter 2, supra note 23, at 3.

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[[Page 7811]]

    The Exchange submitted three response letters following its 
filing of Amendment No. 2.\290\ First, the Exchange asserts that the 
Proposed Transaction would create access to capital, attract new 
businesses and jobs to the U.S., and grow the U.S. economy.\291\ In 
addition, the Exchange asserts that the Proposed Transaction is 
``safe,'' stating that NA Casin Holdings would be majority-owned by 
U.S. owners, NA Casin Group is not owned or controlled by the 
Chinese government, and CFIUS concluded that there were no 
unresolved national security concerns with the Proposed 
Transaction.\292\ Further, CHX asserts that the Commission would be 
able to verify compliance by NA Casin Holdings stockholders with the 
Exchange's rules, noting that CHX rules would require NA Casin 
Holdings stockholders to make annual attestations to the Commission 
and the Exchange related to their ownership levels and the existence 
of any voting agreements, and that the Exchange's oversight of the 
ownership and voting limitations would be subject to regular 
independent audits by a PCAOB registered auditor.\293\ The Exchange 
states that the Commission has broad authority to compel compliance 
or mitigate non-compliance, including suspending, censuring or 
deregistering the Exchange pursuant to Section 19(h)(1) of the 
Exchange Act.\294\ In addition, the Exchange states that NA Casin 
Group has agreed to permanently and irrevocably submit to the 
jurisdiction of the Commission and the U.S. courts, has appointed a 
registered agent in the U.S. for the service of process, has agreed 
to open books and records, and is required to keep such records in 
the U.S.\295\
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    \290\ See supra note 24.
    \291\ See CHX Response Letter 6, supra note 24, at 1-2.
    \292\ See id. at 2-3.
    \293\ See id. at 3.
    \294\ See id.
    \295\ See id.
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    The Exchange asserts that the three investors that withdrew from 
the Proposed Transaction did so due to the length of the approval 
process.\296\ The Exchange asserts its view that: (1) The 
Commission's review violates Section 19(b) of the Exchange Act \297\ 
because more than 240 days have elapsed since the date of 
publication of the proposed rule change; (2) the length of the 
Commission's review violates Rule 103 of the Commission's Rules of 
Practice \298\ (which provides that the Rules of Practice ``shall be 
construed and administered to secure the just, speedy, and 
inexpensive determination of every proceeding'') and that where such 
rules conflict with statute, the statute will control; and (3) the 
length of the Commission's review violates Section 3(f) of the 
Exchange Act \299\ (which requires the Commission to consider 
efficiency, competition, and capital formation within the national 
market system) by delaying (and potentially jeopardizing) the 
consummation of the Proposed Transaction.\300\
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    \296\ See id.
    \297\ See 15 U.S.C. 78s(b).
    \298\ See 17 CFR 201.103(a).
    \299\ See 15 U.S.C. 78c(f) (requiring that the Commission 
consider whether a proposed rule change will promote efficiency, 
competition, and capital formation).
    \300\ See CHX Response Letter 8, supra note 24, at 1-5. The 
Exchange also asserts that the merger agreement could be terminated 
by ``regulatory inaction'' due to the end of the exclusivity period 
and ``drop dead'' termination date under the merger agreement, and 
expresses concern regarding the perception of such result by the 
international business community. See id. at 6.
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    The Exchange asserts that, in response to Commission requests, 
it provided the Commission staff with various financial statements 
and other evidence of financial wherewithal and sources of funds 
from all of the prospective investors, including the three 
prospective investors that withdrew from the investor group.\301\ 
Further, the Exchange asserts that there are no outstanding 
Commission requests for information related to the Proposed 
Transaction.\302\
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    \301\ See CHX Response Letter 7, supra note 24, at 2.
    \302\ Id.; but see supra note 86. The Exchange also states that 
on July 11, 2017, CHXBD filed a Form CMA (a continuing membership 
application that the Exchange's broker-dealer affiliate is required 
to file with FINRA under NASD Rule 1017 prior to consummation of the 
Proposed Transaction) with FINRA, which was deemed ``substantially 
complete'' on July 28, 2017. According to CHX, CHXBD provided FINRA 
with several large document productions in response to seven 
separate information requests from FINRA staff, which included, 
among other things, financial statements, evidence of funds 
transfers, corporate governance documents and descriptions of 
business activities, as applicable, for all current prospective 
investors, as well as the three former prospective investors. The 
Exchange states that there are no outstanding FINRA requests related 
to the Proposed Transaction. See id. at 2-3. Nevertheless, the 
Commission notes that, to date, the Exchange has not notified the 
Commission that FINRA has approved CHXBD's continuing membership 
application.
---------------------------------------------------------------------------

    Regarding the Put Agreements, the Exchange notes that the MIAX 
has offered similar put options as an incentive to its prospective 
stockholders through an equity rights program through which MIAX 
offered shares and warrants for shares in MIAX International 
Holdings, Inc. (``MIH'') to MIAX members that met certain financial 
order flow requirements, and included a provision whereby all MIAX 
members that received equity through the program retained a put 
option to require MIH to buy back shares at a fixed percentage of 
fair market value.\303\ The Exchange submits that given the 
similarities between the MIAX put options and the proposed CHX put 
options, as well as what it characterizes as the legitimate and 
``well-established'' business purposes of the Put Agreements, the 
Put Agreements are appropriate and consistent with Commission 
precedent.\304\
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    \303\ See id. at 3.
    \304\ See id.
---------------------------------------------------------------------------

    The Exchange also describes provisions in the CHX Holdings and 
NA Casin Holdings corporate documents that it believes would 
facilitate the ability of the Commission and the Exchange to ensure 
that the put options are exercised in a manner consistent with CHX 
rules and the Exchange Act.\305\ The Exchange asserts that such 
provisions, the Rule 19b-4 rule filing requirement for any proposed 
change of control, and the Commission's broad authority to compel 
compliance or mitigate non-compliance with CHX rules, including 
suspending, censuring, or deregistering the Exchange pursuant to 
Section 19(h)(1) of the Exchange Act, the Commission would be able 
to effectively monitor and review any changes to CHX ownership.\306\ 
The Exchange notes that, pursuant to provisions of the proposed 
corporate governance documents of CHX Holdings and NA Casin 
Holdings: (1) Each person involved in an acquisition of shares of 
stock of NA Casin Holdings or CHX Holdings would be required to 
provide NA Casin Holdings or CHX Holdings, as applicable, with 
written notice 14 days prior to, and such corporation would be 
required to provide the Commission with written notice 10 days prior 
to, the closing date of any acquisition that would result in any 
person, alone or together with its Related Persons, having voting 
rights or beneficial ownership of 5% or more of the outstanding 
stock of the corporation; (2) each stockholder of NA Casin Holdings 
and CHX Holdings would be required to make annual attestations to 
the Commission and NA Casin Holdings regarding its equity ownership 
level in the corporation and the identity of its Related Persons, 
and the existence of any agreement, arrangement, or understanding 
between the stockholder and any person for the purpose of acquiring, 
voting, holding, or disposing of shares of stock of the corporation; 
and (3) each person having voting rights or beneficial ownership of 
stock of NA Casin Holdings or CHX Holdings would be required to 
promptly provide the corporation with written notice of any change 
in its status as a Related Person of another person that owns voting 
stock of the corporation.\307\
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    \305\ See id. at 4.
    \306\ See id. at 5.
    \307\ See id. at 4-5.
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    In addition, in response to comments that question the details 
of the NA Casin Holdings shares that would be held by CHX 
management,\308\ the Exchange states that more than half of such 
shares would be purchased on terms similar to other proposed 
upstream owners,\309\ and the remaining shares would be granted by 
NA Casin Holdings as restricted stock subject to a customary vesting 
period.\310\
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    \308\ See supra notes 239-242.
    \309\ But see supra note 89.
    \310\ See CHX Response Letter 7, supra note 24, at 4-5.

[FR Doc. 2018-03589 Filed 2-21-18; 8:45 am]
 BILLING CODE 8011-01-P


