[Federal Register Volume 71, Number 33 (Friday, February 17, 2006)]
[Notices]
[Pages 8625-8626]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-2300]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53271; File No. SR-ISE-2005-46]


Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Order Approving a Proposed Rule Change Relating to the Operation 
of Primary Market Maker Memberships

February 10, 2006.

I. Introduction

    On September 27, 2005, the International Securities Exchange, Inc. 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend its rules to increase 
the maximum number of Primary Market Maker (``PMM'') memberships that 
an ISE member may operate from two PMM memberships to three PMM 
memberships. The proposed rule change was published for comment in the 
Federal Register on December 6, 2005.\3\ The Commission received no 
comment letters regarding the proposal. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 52856 (November 30, 
2005), 70 FR 72684 (December 6, 2005) (``Notice'').
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II. Description of Proposed Rule

    The Exchange proposes to amend ISE Rule 303(b) to increase from two 
to three the maximum number of PMM memberships that an ISE member may 
operate. According to ISE's Certificate of Incorporation 
(``Certificate'') \4\ and ISE's Amended and Restated Constitution 
(``Constitution''),\5\ each PMM membership is represented by a single 
share of ISE Class B Common Stock, Series B-1, of which there are 10 
shares authorized and outstanding.\6\ ISE represents that it currently 
has seven PMMs operating the ten PMM memberships; three PMMs each 
operate two PMM memberships, and the remaining four PMMs each operate 
one PMM membership. ISE's Certificate prohibits an ISE member from 
owning or voting the shares representing more than 20% of any class or 
series of ISE capital stock.\7\ Current ISE Rule 303(b) prohibits an 
ISE member from exercising the trading privileges associated with 
(i.e., operating) more than one PMM membership, but permits the ISE 
Board of Directors (``ISE Board'') to waive this restriction and allow 
an ISE member (together with its affiliates) to exercise the trading 
privileges associated with 20% of the outstanding PMM memberships. To 
waive this restriction, the ISE Board must make a finding of ``good 
cause.'' \8\ Taken together, ISE's Certificate and ISE Rule 303(b) 
currently prohibit an ISE member from owning, voting, or operating more 
than 20% of the outstanding PMM memberships.\9\
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    \4\ See Article Fourth, Section II(b)(ii)(A) of the Certificate.
    \5\ See Article XIII, Section 13.1 of the Constitution.
    \6\ See Article Fourth, Section II(b)(i) of the Certificate.
    \7\ See Article Fourth, Sections III(a)(ii) and (b)(i) of the 
Certificate.
    \8\ Supplementary Material .01 to ISE Rule 303 provides that the 
ISE Board, when making its determination of whether good cause has 
been shown, the ISE Board must consider whether an operational, 
business or regulatory need to operate more than one PMM membership 
has been demonstrated. It further provides that the ISE Board is 
only allowed to approve the operation of additional PMM memberships 
when, in its judgment, such action is in the best interest of the 
Exchange.
    \9\ The Commission notes that ISE recently filed a proposed rule 
change that would restructure the Exchange but would retain its 
existing 20% ownership and voting limitations applicable to ISE 
members as part of the proposed reorganization. See File No. SR-ISE-
2006-04.
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    The proposed rule change would amend ISE Rule 303(b) to increase 
the maximum number of PMM memberships an ISE member may operate, upon 
the ISE Board's approval, from 20% of the outstanding PMM memberships 
(two PMM memberships) to 30% of the outstanding PMM memberships (three 
PMM memberships). The proposed rule change also would add proposed 
Supplementary Material .02 to ISE Rule 303, which would prohibit the 
ISE Board from approving any such arrangement in which a PMM would gain 
ownership or voting rights in excess of those permitted under ISE's 
Certificate or Constitution. Because the proposal would not alter the 
20% ownership and voting limits currently set forth in ISE's 
Certificate that apply to ISE members, the proposal would allow a 
member to operate up to 30% of the outstanding PMM memberships, upon 
receiving Board approval, but only in the event that such member did 
not own or vote more than 20% of such PMM memberships.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\10\ In particular, the Commission believes that the proposal 
is consistent with the requirements of Section 6(b)(5) of the Act,\11\ 
which requires, among other things, that the rules of a national 
securities exchange be designed to promote just and equitable 
principles of trade and to remove impediments to and perfect the 
mechanisms of a free and open market and a national market system.
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    \10\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the proposed change to ISE Rule 303(b) 
would increase the maximum number of PMM memberships that an ISE member 
could operate from two to three PMM memberships. The provisions of 
ISE's Certificate that currently prohibit an ISE member from owning, 
directly or indirectly, or voting more than 20% of the outstanding 
shares of any class or series of ISE capital stock would not be altered 
by this proposal. Rather, in proposed Supplementary Material .02 to ISE 
Rule 303, the ISE Board would be prohibited from allowing a member to 
operate a third PMM membership if such an arrangement would violate any 
ownership and voting limits contained in ISE's Certificate or 
Constitution. In essence, the proposal would permit the Board to 
approve an ISE member to acquire the trading privileges to operate a 
third PMM membership through a leasing arrangement with an unaffiliated 
person or entity, where the lessor retains all of the ownership and 
voting rights associated with that PMM membership.
    As the Commission has stated previously, a regulatory concern can 
arise if a member's interest in an exchange becomes so large as to cast 
doubt on whether the exchange can fairly and objectively exercise its 
self-regulatory responsibilities with respect to that member.\12\ For 
example, a

[[Page 8626]]

member that directly or indirectly controls an exchange might be 
tempted to exercise that controlling influence by directing the 
exchange to refrain from diligently monitoring and surveiling the 
member's conduct or diligently enforcing its rules and the federal 
securities laws with respect to conduct by the member that violates 
such provisions.
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    \12\ See Securities Exchange Act Release Nos. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006); 51149 (February 8, 2005), 70 
FR 7531 (February 14, 2005) (SR-CHX-2004-26); 49718 (May 17, 2004), 
69 FR 29611 (May 24, 2004) (SR-PCX-2004-08); 49098 (January 16, 
2004), 69 FR 3974 (January 27, 2004) (SR-Phlx-2003-73); and 49067 
(January 13, 2004), 69 FR 2761 (January 20, 2004) (SR-BSE-2003-19).
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    The Commission believes that the proposal would not give rise to 
concerns about the Exchange's ability to effectively carry out its 
regulatory responsibilities under the Act because the proposed rule 
change preserves existing ownership and voting limitations.
    In light of the foregoing, the Commission believes that the 
Exchange's proposed rule change is consistent with the requirements of 
the Act and the rules and regulations thereunder.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-ISE-2005-46) is 
approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-2300 Filed 2-16-06; 8:45 am]
BILLING CODE 8010-01-P