[Federal Register Volume 73, Number 250 (Tuesday, December 30, 2008)]
[Notices]
[Pages 79954-79960]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-30862]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59135; File No. SR-ISE-2008-85]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Approving a Proposed Rule Change, as Modified by Amendment 
No. 1, Relating to the Purchase by International Securities Exchange 
Holdings, Inc., of an Ownership Interest in Direct Edge Holdings, Inc.

December 22, 2008.

I. Introduction

    On November 7, 2008, the International Securities Exchange, LLC 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change in connection with corporate 
transactions (the ``Transactions'') in which, among other things: (1) 
The parent company of ISE, International Securities Exchange Holdings, 
Inc. (``ISE Holdings''), will purchase an ownership interest in Direct 
Edge Holdings LLC (``Direct Edge'') by contributing cash and the 
marketplace currently operated by ISE Stock Exchange, LLC (``ISE Stock 
Exchange'') for the trading of U.S. cash equity securities; and (2) 
Direct Edge's wholly-owned subsidiary, Maple Merger Sub LLC (``Merger 
Sub'') will operate the marketplace as a facility of ISE. The proposed 
rule change was published for comment in the Federal Register on 
November 17, 2008.\3\ The Commission received no comments regarding the 
proposal. On December 17, 2008, ISE filed Amendment No. 1 to the 
proposal.\4\ This order approves the proposed rule change, as modified 
by Amendment No. 1.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 58918 (November 7, 
2008), 73 FR 67909 (``Notice'').
    \4\ Amendment No. 1: (1) Corrects minor errors in the text of 
the Merger Sub LLC Agreement and the DE Operating Agreement (as 
defined below); and (2) revises ISE Rule 312(a) to clarify that ISE 
will enter into a plan with a non-affiliated self-regulatory 
organization (``SRO'') pursuant to Rule 17d-2 under the Act to 
relieve ISE of regulatory responsibilities for Direct Edge ECN with 
respect to common rules of ISE and the unaffiliated SRO, and ISE 
will enter into a regulatory services contract with a non-affiliated 
SRO to perform regulatory responsibilities for Direct EDGE ECN for 
unique ISE rules. Because Amendment No. 1 is technical in nature, 
the Commission is not required to publish Amendment No. 1 for 
comment.
---------------------------------------------------------------------------

II. Description of the Proposal

    Currently, ISE Stock Exchange operates, under the ISE's rules and 
as a ``facility,'' as defined in Section 3(a)(2) of the Act,\5\ of ISE, 
a marketplace for the trading of U.S. cash equity securities by Equity 
Electronic Access Members (``Equity EAMs'') of ISE (the 
``Facility'').\6\ Direct Edge wholly owns and operates Direct Edge ECN 
LLC (``DE ECN''), a registered broker-dealer, electronic communications 
network (``ECN''), and Equity EAM that submits limit orders to the 
Facility for display and execution. As part of the Transactions to be 
entered into by ISE, ISE Holdings, Direct Edge, and other parties: (1) 
ISE Holdings will purchase a 31.54% ownership interest in Direct Edge; 
and (2) ISE Stock Exchange will merge with and into Merger Sub, a 
Delaware limited liability company and wholly-owned subsidiary of 
Direct Edge, with Merger Sub as the surviving entity. Following the 
closing of the Transactions, ISE Holdings will own 31.54% of Direct 
Edge, Direct Edge will own all of the equity interests of Merger Sub, 
Merger Sub will operate the Facility as a facility of ISE, and Direct 
Edge will continue to own and operate DE ECN, which intends to continue 
to submit limit orders to the Facility for display and execution.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78c(a)(2). Under Section 3(a)(2) of the Act, the 
term ``facility,'' when used with respect to an exchange, includes 
``its premises, tangible or intangible property whether on the 
premises or not, any right to the use of such premises or property 
or any service thereof for the purpose of effecting or reporting a 
transaction on an exchange (including, among other things, any 
system of communication to or from the exchange, by ticker or 
otherwise, maintained by or with the consent of the exchange), and 
any right of the exchange to the use of any property or service.''
    \6\ See Securities Exchange Act Release No. 54399 (September 1, 
2006), 71 FR 53728 (September 12, 2006) (File No. SR-ISE-2006-45) 
(order approving the Facility). An Equity EAM is an Electronic 
Access Member authorized by ISE to trade on the ISE Stock Exchange. 
See ISE Rule 2100(c)(6).
---------------------------------------------------------------------------

    As limited liability companies, ownership in Direct Edge and in 
Merger Sub is represented by limited liability membership interests. 
The holders of such interests are referred to as ``Members.''\7\ 
Following the closing of the Transactions, Direct Edge will be the sole 
member of Merger Sub. The Members of Direct Edge and their respective 
ownership interests will be: ISE Holdings (31.54%); Citadel Derivatives 
Group LLC (19.9%); The Goldman Sachs Group, Inc. (19.9%); Knight/
Trimark, Inc. (19.9%); and the ISE Stock Exchange Consortium Members 
(collectively 8.76%).\8\
---------------------------------------------------------------------------

    \7\ With respect to Merger Sub, ``Member'' means Direct Edge, 
which initially will be the sole member of Merger Sub, and any 
Additional Members admitted pursuant to Section 4.3 of the Merger 
Sub LLC Agreement. The admission of Additional Members is subject to 
ISE's authority under Section 1.6 of the Merger Sub LLC Agreement, 
and each Additional Member must become a party to the Merger Sub LLC 
Agreement. See Merger Sub LLC Agreement, Sections 4.3(a) and (c). In 
addition, no Person, other than Direct Edge, may acquire an 
ownership interest of more than 20% of Merger Sub without the 
Commission's approval. See Merger Sub LLC Agreement, Sections 7.2(a) 
and (b). With respect to Direct Edge, ``Member'' means any Person 
(i) executing the DE Operating Agreement as a Member of DE on the 
effective date of the Transactions (the ``Effective Date''); (ii) 
admitted as a Member as of the Effective Date upon the effectiveness 
under Delaware law of the merger of ISE Stock Exchange with and into 
Merger Sub; or (iii) subsequently admitted as an additional or 
substitute member of Direct Edge. For as long as Direct Edge 
controls Merger Sub and the Facility is a facility of a national 
securities exchange, no Person may own more than 40% of Direct Edge 
and no ISE member (including Equity EAMs) may own more than 20% of 
Direct Edge without the Commission's approval. See DE Operating 
Agreement, Sections 12.1(a) and (b).
    \8\ The ISE Stock Exchange Consortium Members are: Bear Rex, 
Inc.; DB US Financial Markets Holding Corporation; Canopy 
Acquisition Corporation; IB Exchange Corp.; LabMorgan Corporation; 
Merrill Lynch L.P. Holdings, Inc.; Nomura Securities International, 
Inc.; Sun Partners LLC; and VCM Capital Markets, LLC.
---------------------------------------------------------------------------

    As the self-regulatory organization (``SRO'') for the Facility, ISE 
will have regulatory responsibility for the activities of the 
Facility.\9\ In the current proposal, ISE seeks the Commission's 
approval of: (1) The Limited Liability Company Agreement of Merger Sub 
(``Merger Sub LLC Agreement''), which establishes the governance 
structure of

[[Page 79955]]

Merger Sub, the entity that will operate the Facility; (2) the Third 
Amended and Restated Limited Liability Company Operating Agreement of 
Direct Edge (``DE Operating Agreement''), which establishes the 
governance structure of Direct Edge, the sole owner of Merger Sub; (3) 
amendments to the Bylaws and Certificate of Incorporation of ISE 
Holdings (respectively, the ``ISE Holdings Bylaws'' and ``ISE Holdings 
Certificate'') that revise certain provisions in the ISE Holdings 
Bylaws and ISE Holdings Certificate to include other national 
securities exchanges (in addition to ISE) that ISE Holdings may 
control, directly or indirectly, and their facilities; and (4) 
amendments to ISE Rules 312, ``Limitation on Affiliation between the 
Exchange and Members,'' and 2108, ``Order Routing and Route Out 
Facility,'' that are designed to address ISE's and Merger Sub's 
affiliation with DE ECN following the closing of the Transactions.\10\ 
As discussed more fully below, the Merger Sub LLC Agreement, the DE 
Operating Agreement, and the ISE Holdings Certificate and ISE Holdings 
Bylaws, as amended, include, among other things, provisions that are 
designed to maintain the independence of the self-regulatory functions 
of ISE and other national securities exchanges that may be controlled 
by ISE Holdings, and to facilitate the ability of ISE, other national 
securities exchanges that may be controlled by ISE Holdings, and the 
Commission to fulfill their regulatory and oversight obligations under 
the Act.
---------------------------------------------------------------------------

    \9\ ISE represents that it will continue to have adequate funds 
to discharge all regulatory functions related to the Facility. ISE 
represents, further, that Merger Sub, the operator of the Facility, 
will not be entitled to any revenue generated in connection with 
penalties, fines, and regulatory fees that ISE may assess against 
ISE Members in connection with trading on the Facility. Rather, all 
regulatory fines, penalties, and fees assessed against and paid by 
ISE Members to ISE in connection with trading on the Facility will 
remain with ISE. See Notice, supra note 3.
    \10\ Although neither Direct Edge nor ISE Holdings is an SRO, 
certain provisions of the DE Operating Agreement and the ISE 
Holdings Certificate and ISE Holdings Bylaws are rules of an 
exchange if they are stated policies, practices, or interpretations 
(as defined in Rule 19b-4 of the Act) of the exchange, and must be 
filed with the Commission pursuant to Section 19(b)(4) of the Act 
and Rule 19b-4 thereunder. Accordingly, ISE filed the DE Operating 
Agreement and the proposed changes to the ISE Holdings Certificate 
and ISE Holdings Bylaws with the Commission.
---------------------------------------------------------------------------

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.\11\ In particular, the Commission finds that the proposal is 
consistent with Section 6(b)(1) of the Act,\12\ which requires a 
national securities exchange to be so organized and have the capacity 
to carry out the purposes of the Act and to enforce compliance by its 
members and persons associated with its members with the provisions of 
the Act, the rules and regulations thereunder, and the rules of the 
exchange.
---------------------------------------------------------------------------

    \11\ In approving the proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    The Commission also finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\13\ which requires that the 
rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest, and are not designed to 
unfairly discriminate between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

A. Merger Sub's Operation of the Facility

    The Commission believes that the proposal is consistent with 
Section 6(b)(1) of the Act in that upon establishing Merger Sub as the 
operator of the Facility and entering into the relationship with Direct 
Edge described above, ISE should remain so organized and have the 
capacity to be able to carry out the purposes of the Act. The 
Commission notes that it has previously approved a similar structure 
with respect to the operation of an exchange facility.\14\
---------------------------------------------------------------------------

    \14\ See Securities Exchange Act Release No. 44983 (October 25, 
2001), 66 FR 55225 (November 1, 2001) (File No. SR-PCX-00-25) (order 
approving the establishment of Archipelago Exchange (``ArcaEx'') as 
a facility of PCX Equities, Inc., a subsidiary of the Pacific 
Exchange, Inc. (``PCX'')) (``ArcaEx Order''). At the time the 
Commission issued the ArcaEx Order, Archipelago Holdings LLC's 
wholly-owned subsidiary, Archipelago Exchange LLC, operated the 
ArcaEx facility, and PCX held a 10% ownership interest in 
Archipelago Holdings LLC. As noted above, ISE Holdings will purchase 
a 31.54% ownership interest in Direct Edge, which will be the sole 
owner of the Facility operator, Merger Sub.
---------------------------------------------------------------------------

    The Commission believes that Merger Sub can be approved as the 
operator of the Facility because ISE will continue to be the SRO for 
the Facility, and because Merger Sub, a wholly-owned subsidiary of 
Direct Edge, should conduct the Facility's business operations in a 
manner that is consistent with the regulatory and oversight 
responsibilities of ISE.\15\
---------------------------------------------------------------------------

    \15\ As the SRO, ISE will have regulatory responsibility for the 
Facility.
---------------------------------------------------------------------------

    Neither Merger Sub nor Direct Edge will carry out any regulatory 
functions. However, because Merger Sub will operate the Facility--and 
Direct Edge will be the sole owner of Merger Sub--all of the activities 
of Merger Sub and Direct Edge must be consistent with, and not 
interfere with, ISE's self-regulatory obligations. In this regard, 
Section 10.2(d) of the Merger Sub LLC Agreement provides that Merger 
Sub and its Members, and their officers, directors, agents, and 
employees agree to comply with the federal securities laws and the 
rules and regulations thereunder; to cooperate with the Commission and 
with ISE pursuant to its regulatory authority and the provisions of the 
Merger Sub LLC Agreement; and to engage in conduct that fosters and 
does not interfere with Merger Sub, the Facility, and ISE's ability to 
prevent fraudulent and manipulative acts and practices; to promote just 
and equitable principles of trade; to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities; to remove impediments to and perfect the mechanisms of a 
free and open market and a national market system; and, in general, to 
protect investors and the public interest.
    Likewise, Section 14.2 of the DE Operating Agreement provides that 
Direct Edge and its officers, Managers,\16\ employees, and agents shall 
be deemed to agree to comply with the federal securities laws and the 
rules and regulations thereunder and to cooperate with the Commission 
and ISE pursuant to, and to the extent of, their respective regulatory 
authority. In addition, for as long as Direct Edge controls Merger Sub, 
Direct Edge's Managers, officers, employees, and agents will give due 
regard to the preservation of the independence of the self-regulatory 
function of ISE, as well as to its obligations to investors and the 
general public, and will not take any actions that would interfere with 
the effectuation of any decisions by the ISE's Board of Directors 
(``ISE Board'') relating to ISE's regulatory functions, including 
disciplinary matters, or which would interfere with ISE's ability to 
carry out its responsibilities under the Act.\17\
---------------------------------------------------------------------------

    \16\ ``Managers'' are members of Direct Edge's Board of 
Managers.
    \17\ See DE Operating Agreement, Section 14.1.
---------------------------------------------------------------------------

    The Merger Sub LLC Agreement and the DE Operating Agreement include 
additional provisions that make special accommodations for ISE as the 
SRO of the Facility to facilitate ISE's ability to oversee the 
Facility. For example, the

[[Page 79956]]

Merger Sub LLC Agreement sets forth ISE's authority with respect to any 
action, transaction, or aspect of an action or transaction that relates 
to ISE's regulatory functions or responsibilities by requiring ISE's 
affirmative vote before such action or transaction, or aspect thereof, 
can be authorized, undertaken, or effective.\18\ The Merger Sub LLC 
Agreement also provides that, for as long as Merger Sub operates the 
Facility, if ISE determines that an action is necessary or appropriate 
for ISE to fulfill its regulatory functions or responsibilities, ISE 
will have the right to direct that such action be taken by or on behalf 
of Merger Sub without regard to any other party.\19\ The Merger Sub LLC 
Agreement further provides that ISE will receive notice of certain 
planned or proposed changes to Merger Sub and the Facility, which ISE 
must affirmatively approve prior to implementation.\20\ In addition, 
ISE will have access to information through provisions such as Section 
10.3(b) of the Merger Sub LLC Agreement, which allows Merger Sub's 
officers, directors, employees, advisors, and agents to disclose 
confidential information to the Commission and to ISE.
---------------------------------------------------------------------------

    \18\ See Merger Sub LLC Agreement, Section 1.6(a).
    \19\ See Merger Sub LLC Agreement, Section 1.6(a)(ii).
    \20\ See Merger Sub LLC Agreement, Section 1.6(b).
---------------------------------------------------------------------------

    With respect to Direct Edge, under Section 7.1(a)(1) of the DE 
Operating Agreement, ISE Holdings is entitled to designate three of the 
11 Managers of Direct Edge's Board of Managers (``DE Board''). In 
addition, for as long as the Facility is a facility of ISE, one of the 
Managers designated by ISE Holdings to the DE Board must be a member of 
the ISE Board or an officer or employee of ISE nominated by the ISE 
Board.\21\ Further, ISE will have access to information through 
provisions such as Section 11.2(a) of the DE Operating Agreement, which 
allows Direct Edge's Members, Managers, officers, employees, and agents 
to disclose to the Commission and ISE confidential information in 
Direct Edge's possession pertaining to the self-regulatory function of 
ISE with respect to Merger Sub.
---------------------------------------------------------------------------

    \21\ See DE Operating Agreement, Section 7.1(d).
---------------------------------------------------------------------------

    In addition, Section 7.7(i) of the DE Operating Agreement states 
that no provision of Section 7.7, which requires supermajority and 
majority votes of the DE Board or, in certain cases, a vote of the Unit 
holders of Direct Edge,\22\ with respect to certain significant 
actions, will apply where the application of the provision would 
interfere with the effectuation of any decisions by the ISE Board 
relating to ISE's regulatory functions, including disciplinary matters, 
or the structure of the market that ISE regulates, or would interfere 
with the ISE's ability to carry out its responsibilities under the Act 
or to oversee the structure of the market that the ISE regulates, as 
determined by the ISE Board, which functions or responsibilities will 
include the ability of ISE as an SRO to prevent fraudulent and 
manipulative acts and practices; to promote just and equitable 
principles of trade; to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities; to remove impediments to and perfect the mechanisms of a 
free and open market and a national market system; and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \22\ Ownership interests in Direct Edge are represented by 
Units. A Member's Percentage Interest is the ratio of the number of 
Units held by the Member to the total of all of the issued and 
outstanding Units, expressed as a percentage. See DE Operating 
Agreement, Section 1.1.
---------------------------------------------------------------------------

    These provisions of the Merger Sub LLC Agreement and the DE 
Operating Agreement reinforce the notion that the Facility, as a 
facility of an exchange, is not solely a commercial enterprise; it is 
an integral part of an SRO registered pursuant to the Act and, as such, 
is subject to obligations imposed by the Act. In addition, because the 
Facility will be a facility of ISE, ISE's obligations under the Act 
extend to its members' activities on the Facility, as well as to the 
operation and administration of the Facility. Accordingly, the 
Commission believes that the provisions described above are consistent 
with the Act and enhance ISE's ability to carry out its self-regulatory 
responsibilities with respect to the Facility.

B. Changes in Control of Merger Sub and Direct Edge

    The Commission believes that the restrictions in the Merger Sub LLC 
Agreement and the DE Operating Agreement on direct and indirect changes 
in control of Merger Sub, which will operate the Facility, and Direct 
Edge, which will wholly own Merger Sub, respectively, are sufficient so 
that ISE will be able to carry out its regulatory responsibilities and 
the Commission will be able to fulfill its responsibilities under the 
Act.
    In this regard, the Merger Sub LLC Agreement identifies Direct Edge 
as the Sole Member of Merger Sub. A change to the Merger Sub LLC 
Agreement would need to be filed with the Commission if so required 
under Section 19(b) of the Act and Rule 19b-4 thereunder. In addition, 
under Section 7.2 of the Merger Sub LLC Agreement, a proposed transfer 
of ownership interests that would result in any Person (other than 
Direct Edge), alone or together with its Related Persons (as defined in 
the Merger Sub LLC Agreement), owning more than 20% of Merger Sub would 
not become effective until, among other things, the ISE filed a 
proposed rule change with the Commission pursuant to Section 19(b) of 
the Act and the Commission approved the proposal.\23\
---------------------------------------------------------------------------

    \23\ See Merger Sub LLC Agreement, Section 7.2(a)-(c).
---------------------------------------------------------------------------

    Further, Section 7.2(d) of the Merger Sub LLC Agreement requires 
Merger Sub to inform the Commission in writing at least ten days prior 
to the closing of any transaction that would result in a Person's 
percentage ownership interest, either alone or together with its 
Related Persons, in Merger Sub meeting or crossing the threshold level 
of 5% or the successive percentage ownership interest levels of 10% and 
15%. The Commission believes that this approach is consistent with the 
Act in that it is analogous to the ongoing reporting requirements of 
Form 1,\24\ the application for, and amendments to the application for, 
registration as a national securities exchange. Exhibit K of Form 1 
requires any exchange that is a corporation or partnership to list any 
persons that have an ownership interest of 5% or more in that 
exchange;\25\ and Rule 6a-2(a)(2) under the Act \26\ requires an 
exchange to update its Form 1 within ten days after any action that 
renders inaccurate the information previously filed in Exhibit K.
---------------------------------------------------------------------------

    \24\ 17 CFR 249.1.
    \25\ This reporting requirement applies only to exchanges that 
have one or more owners, shareholders, or partners that are not also 
members of the exchange. See Form 1, Exhibit K. Exhibit K applies 
only to the exchange itself, not to entities that operate facilities 
of the exchange.
    \26\ 17 CFR 240.6a-2(a)(2).
---------------------------------------------------------------------------

    Exhibit K imposes no obligation on an exchange to report parties 
whose ownership interest in the exchange is less than 5%. Similarly, 
Section 7.2(d) of the Merger Sub LLC Agreement requires Merger Sub to 
notify the Commission of an interest in Merger Sub only when that 
interest reaches 5% or more. The Commission does not believe that the 
identity of a party that has less than a 5% interest in a facility of a 
national securities exchange is a ``rule of the exchange'' that must be 
filed pursuant to Section 19(b) of the Act and Rule 19b-4(b) 
thereunder.
    With respect to Direct Edge, Exhibit C of the DE Operating 
Agreement lists the Members of Direct Edge and their

[[Page 79957]]

Percentage Interests in Direct Edge. A change to Exhibit C of the DE 
Operating Agreement (as well as a change to any other provision of the 
DE Operating Agreement) would need to be filed with the Commission if 
so required under Section 19(b) of the Act and Rule 19b-4 thereunder.
    In addition, under Section 12.1 of the DE Operating Agreement, no 
Person, other than ISE Holdings, either alone or together with its 
Related Persons (as defined in the DE Operating Agreement), may own, 
directly or indirectly, Units representing more than a 40% Percentage 
Interest \27\ in Direct Edge, or vote Units representing more than a 
20% Percentage Interest in Direct Edge, without an amendment to the DE 
Operating Agreement, which will not be effective unless it is filed 
with and approved by the Commission.\28\ In addition, for as long as 
the Facility is a facility of ISE, no ISE Member, either alone or 
together with its Related Persons, may own, directly or indirectly, 
Units representing more than a 20% Percentage Interest in Direct 
Edge.\29\
---------------------------------------------------------------------------

    \27\ A Member's Percentage Interest is the ratio of the number 
of Units held by the Member to the total of all of the issued and 
outstanding Units, expressed as a percentage. See DE Operating 
Agreement, Section 1.1.
    \28\ See DE Operating Agreement, Section 12.1(a) and (b). The 
ownership and voting limitations in Section 12.1(a) will not apply 
to ISE Holdings for as long as ISE is a wholly-owned subsidiary of 
ISE Holdings and ISE Holdings is subject to ownership and voting 
limitations comparable to those set forth in Section 12.1(a). See DE 
Operating Agreement, Section 12.1(a)(3). The comparable ownership 
and voting limitations for ISE Holdings are included in Article 
FOURTH, Section III of the ISE Holdings Certificate.
    \29\ See DE Operating Agreement, Section 12.1(a)(2).
---------------------------------------------------------------------------

    In conclusion, the Commission believes that Section 7.1 of the 
Merger Sub LLC Agreement and Section 12.1 of the DE Operating 
Agreement, together with the requirements of Section 19(b) of the Act 
and Rule 19b-4 thereunder, provide the Commission with sufficient 
authority over changes in control of Merger Sub and Direct Edge to 
enable the Commission to carry out its regulatory oversight 
responsibilities with respect to ISE and the Facility.

C. Regulatory Jurisdiction Over Merger Sub and Direct Edge

    The Commission believes that the terms of the Merger Sub LLC 
Agreement and the DE Operating Agreement provide the Commission and ISE 
with sufficient regulatory jurisdiction over the controlling parties 
and the Members of Merger Sub to carry out the Commission's and ISE's 
responsibilities under the Act. For example, under Section 10.2(b) of 
the Merger Sub LLC Agreement, each Member of Merger Sub acknowledges 
that, to the extent they are related to the business of Merger Sub or 
the Facility, the books, records, premises, officers, directors, 
agents, and employees of the Member will be deemed to be the books, 
records, premises, officers, directors, agents, and employees of ISE 
for purposes of and subject to oversight pursuant to the Act. In 
addition, the books, records, premises, officers, directors, agents, 
and employees of Merger Sub are deemed to be the books, records, 
premises, officers, directors, agents, and employees of ISE for 
purposes of, and subject to, oversight pursuant to the Act.\30\ 
Furthermore, the Merger Sub LLC Agreement provides that Merger Sub's 
books and records shall be subject at all times to inspection and 
examination by the Commission and ISE.\31\
---------------------------------------------------------------------------

    \30\ See Merger Sub LLC Agreement, Section 10.2(b).
    \31\ See Merger Sub LLC Agreement, Section 10.2(a).
---------------------------------------------------------------------------

    Similarly, Section 11.2(b) of the DE Operating Agreement provides 
that, to the extent they are related to the operation or administration 
of Merger Sub, the books, records, premises, officers, managers, 
agents, and employees of Direct Edge will be deemed to be the books, 
records, premises, officers, managers, directors, agents, and employees 
of ISE for the purpose of, and subject to, oversight pursuant to, the 
Act. In addition, for so long as Direct Edge shall control, directly or 
indirectly, Merger Sub, Direct Edge's books and records shall be 
subject at all times to copying by the Commission or ISE, provided that 
such books and records are related to the operation or administration 
of the Facility.\32\
---------------------------------------------------------------------------

    \32\ See DE Operating Agreement, Section 11.2(b).
---------------------------------------------------------------------------

    These provisions would enable the Commission to exercise its 
authority under Section 19(h)(4) of the Act \33\ with respect to the 
officers and directors of Merger Sub and Direct Edge, as well as the 
officers and directors of Members of Merger Sub, because all such 
officers and directors--to the extent that they are acting in matters 
related to Merger Sub's activities--would be deemed to be the officers 
and directors of ISE itself. Further, the records of any Member of 
Merger Sub--to the extent they are related to Merger Sub's activities--
are subject to the Commission's examination authority under Section 
17(b)(1) of the Act,\34\ as these records would be deemed to be the 
records of ISE itself.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78s(h)(4). Section 19(h)(4) authorizes the 
Commission, by order, to remove from office or censure any officer 
or director of a national securities exchange if its finds, after 
notice and an opportunity for hearing, that such officer or director 
has: (1) Willfully violated any provision of the Act or the rules 
and regulations thereunder, or the rules of a national securities 
exchange; (2) willfully abused his or her authority; or (3) without 
reasonable justification or excuse, has failed to enforce compliance 
with any such provision by a member or person associated with a 
member of the national securities exchange.
    \34\ 15 U.S.C. 78q(b)(1).
---------------------------------------------------------------------------

    In addition, under the terms of Section 14.3 of the DE Operating 
Agreement, Direct Edge--and its officers, Managers, agents, and 
employees--will be deemed to irrevocably submit to the jurisdiction of 
the U.S. federal courts, the Commission, and ISE for purposes of any 
suit, action, or proceeding pursuant to the U.S. federal securities 
laws or the rules or regulations thereunder arising out of, or relating 
to, the activities of Merger Sub. In addition, Direct Edge--and its 
officers, Managers, agents, and employees--will be deemed to waive, and 
agree not to assert by way of motion, as a defense or otherwise in any 
suit, action, or proceeding, any claim that it or they are not 
personally subject to the jurisdiction of the U.S. federal courts, the 
Commission, or ISE; that the suit, action, or proceeding is in an 
inconvenient forum, or that the venue of the suit, action, or 
proceeding is improper; or that the subject matter of the suit, action, 
or proceeding may not be enforced in or by such courts or agency.\35\ 
Section 10.2(c) of the Merger Sub LLC Agreement contains comparable 
provisions under which Merger Sub and its Members and their officers, 
directors, agents, and employees submit to the jurisdiction of the U.S. 
federal courts, the Commission, and ISE.
---------------------------------------------------------------------------

    \35\ See DE Operating Agreement, Section 14.3.
---------------------------------------------------------------------------

    Moreover, under Section 14.2 of the DE Operating Agreement, Direct 
Edge agrees to cooperate with the Commission and with ISE pursuant to 
their respective regulatory authority. Similarly, under Section 10.2(d) 
of the Merger Sub LLC Agreement, Merger Sub and its Members agree to 
cooperate with the Commission and with ISE pursuant to its regulatory 
authority and the provisions of the Merger Sub LLC Agreement.
    Finally, pursuant to Section 14.4 of the DE Operating Agreement, 
Direct Edge is required to take reasonable steps necessary to cause its 
current and prospective officers, Managers, employees, and agents to 
consent in writing to the application of the requirements of Section 
11.2 of the DE Operating Agreement (relating to the disclosure of 
confidential information to

[[Page 79958]]

the Commission and ISE) and Article XIV of the DE Operating Agreement 
(relating to the SRO function of ISE, including provisions relating to 
regulatory compliance, cooperation, and consent to jurisdiction) with 
respect to their activities relating to Merger Sub. Section 10.2(e) of 
the Merger Sub LLC Agreement applies a comparable requirement to Merger 
Sub and its Members.
    The Commission also notes that, even in the absence of these 
provisions of the Merger Sub LLC Agreement and the DE Operating 
Agreement, Section 20(a) of the Act \36\ provides that any person with 
a controlling interest in Merger Sub would be jointly and severally 
liable with and to the same extent that Merger Sub is liable under any 
provision of the Act, unless the controlling person acted in good faith 
and did not directly or indirectly induce the act or acts constituting 
the violation or cause of action.
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78t(a).
---------------------------------------------------------------------------

    The Commission believes that, together, these provisions of the 
Merger Sub LLC Agreement and the DE Operating Agreement grant the 
Commission sufficient jurisdictional authority over Merger Sub, its 
Members, and Direct Edge. Moreover, ISE is required to enforce 
compliance with these provisions because they are ``rules of the 
exchange'' within the meaning of Section 3(a)(27) of the Act.\37\ A 
failure on the part of ISE to enforce its rules could result in 
suspension or revocation of registration under Section 19(h)(1) of the 
Act.\38\
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78c(a)(27).
    \38\ 15 U.S.C. 78s(h)(1).
---------------------------------------------------------------------------

D. Ownership and Voting Restrictions on Members of Merger Sub and 
Direct Edge

    Section 7.2(a) of the Merger Sub LLC Agreement prohibits any Person 
(other than Direct Edge), either alone or together with its Related 
Persons, from directly or indirectly owning more than a 20% Percentage 
Interest in Merger Sub.\39\ Although Section 7.2(b) permits Direct Edge 
and ISE to waive this limitation, so long as such waiver has been filed 
with and approved by the Commission, Section 7.2(c) precludes such a 
waiver if the Person or its Related Persons is an ISE Member. Further, 
Section 4.4(a) of the Merger Sub LLC Agreement prohibits any Person 
(other than Direct Edge) from voting more than 20% of the Common 
Interests of Merger Sub. Although Section 4.4(b) allows Direct Edge and 
ISE to waive this limitation so long as the waiver has been filed with 
and approved by the Commission, Section 4.4(c) precludes such a waiver 
if the Person or its Related Persons is an ISE Member.
---------------------------------------------------------------------------

    \39\ Ownership in Merger Sub is represented by Common Interests. 
See Merger Sub LLC Agreement, Section 5.1. A Percentage Interest is 
the ratio of Common Interests held by a Member of Merger Sub to the 
total of all issued and outstanding Common Interests, expressed as a 
percentage. See Merger Sub LLC Agreement, Section 2.1.
---------------------------------------------------------------------------

    Under Section 12.1(a)(1) and (3) of the DE Operating Agreement, no 
Person (other than ISE Holdings, for so long as ISE Holdings is subject 
to ownership and voting limitations comparable to those set forth in 
Section 12.1(a) and ISE is a wholly owned subsidiary of ISE 
Holdings),\40\ either alone or together with its Related Persons, may 
own, directly or indirectly, Units representing more than a 40% 
Percentage Interest in Direct Edge. In addition, for as long as the 
Facility is a facility of ISE, no ISE Member, either alone or together 
with its Related Persons, may own, directly or indirectly, Units 
representing more than a 20% Percentage Interest in Direct Edge.\41\ 
Further, under Section 12.1(a)(3), no Person (other than ISE Holdings, 
for so long as ISE Holdings is subject to limitations comparable to 
those set forth in Section 12.1(a) and ISE is a wholly owned subsidiary 
of ISE Holdings), either alone or together with its Related Persons, 
may vote Units representing more than a 20% Percentage Interest in 
Direct Edge. Under Section 12.1(b), the DE Board may waive the 
limitations in Sections 12.1(a)(1) and (3) by adopting an amendment to 
the DE Operating Agreement, which must be filed with and approved by 
the Commission.
---------------------------------------------------------------------------

    \40\ The ownership and voting limitations applicable to ISE 
Holdings are set forth in Article FOURTH, Section III of the ISE 
Holdings Certificate.
    \41\ See DE Operating Agreement, Section 12.1(a)(2).
---------------------------------------------------------------------------

    The Commission believes that the ownership concentration and voting 
limitations contained in the Merger Sub LLC Agreement and the DE 
Operating Agreement are reasonable and consistent with the Act. It is 
common for members who trade on an exchange to have ownership interests 
in the exchange. However, a member's interest could become so large as 
to cast doubt on whether the exchange can fairly and objectively 
exercise its self-regulatory responsibilities with respect to that 
member. A member that is also a controlling shareholder of an exchange 
might be tempted to exercise that controlling influence by directing 
the exchange to refrain from diligently surveilling the member's 
conduct or from punishing any conduct that violates the rules of the 
exchange or the federal securities laws. An exchange might also be 
reluctant to surveil and enforce its rules zealously against a member 
that the exchange relies on as its largest source of capital. 
Accordingly, the Commission believes that the ownership concentration 
and voting limitations in the Merger Sub LLC Agreement and the DE 
Operating Agreement are designed to preserve the independence of ISE's 
self-regulatory functions and ISE's ability to fulfill its regulatory 
and oversight obligations.

E. Amendments to the ISE Holdings Certificate and ISE Holdings Bylaws

    The ISE proposes to amend certain provisions of the ISE Holdings 
Certificate and ISE Holdings Bylaws in anticipation of Direct Edge's 
contemplated ownership and operation of two national securities 
exchanges. Because ISE Holdings will purchase a 31.54% equity interest 
in Direct Edge and possess certain contractual rights and obligations 
with respect to Direct Edge, ISE Holdings may, in the future, 
indirectly control these two national securities exchanges. 
Accordingly, ISE is revising certain provisions of the ISE Holdings 
Certificate and ISE Holdings Bylaws that relate solely to ISE, the sole 
registered national securities exchange currently controlled by ISE 
Holdings, to relate to any national securities exchange that is 
controlled, directly or indirectly, by ISE Holdings (a ``Controlled 
National Securities Exchange''), or facility thereof.
    These provisions, which apply for as long as ISE Holdings controls, 
directly or indirectly, a Controlled National Securities Exchange, or a 
facility thereof, include, among others: (1) Ownership and voting 
limitations that prohibit any Person (as defined in the ISE Holdings 
Certificate), alone or together with its Related Persons (as defined in 
the ISE Holdings Certificate), from owning, directly or indirectly, 
more than 40% of ISE Holdings or voting shares representing more than 
20% of the voting shares of ISE Holdings, and prohibit members of a 
Controlled National Securities Exchange from owning more than 20% of 
ISE Holdings; \42\ (2) requirements that directors, officers, and 
employees of ISE Holdings give due regard to the preservation of the 
independence of the self-regulatory function of each Controlled 
National Securities Exchange,\43\ submit to the jurisdiction of the 
U.S. federal courts, the Commission,

[[Page 79959]]

and each Controlled National Securities Exchange,\44\ and cooperate 
with each such Controlled National Securities Exchange and the 
Commission pursuant to their respective regulatory authority; \45\ (3) 
a provision that deems the books, records, premises, officers, 
directors, and employees of ISE Holdings to be the books, records, 
premises, officers, directors, and employees of each Controlled 
National Securities Exchange to the extent that they are related to, or 
involved in, the activities of the Controlled National Securities 
Exchange or facility thereof; \46\ (4) a requirement that ISE Holdings 
and its officers, directors, employees, and agents maintain the 
confidentiality of confidential information pertaining to the self-
regulatory function of each Controlled National Securities Exchange, 
although such information may be accessed by, and disclosed to, the 
Commission and the Controlled National Securities Exchange; \47\ and 
(5) requirements that proposed changes to the ISE Holdings Certificate 
or ISE Holdings Bylaws be submitted to the board of each Controlled 
National Securities Exchange and, if necessary, filed with the 
Commission.\48\
---------------------------------------------------------------------------

    \42\ See ISE Holdings Certificate, Article FOURTH, Section III.
    \43\ See ISE Holdings Bylaws, Section 1.5.
    \44\ See ISE Holdings Bylaws, Section 1.4.
    \45\ See ISE Holdings Certificate, Article TENTH.
    \46\ See ISE Holdings Certificate, Article TWELFTH.
    \47\ See ISE Holdings Certificate, Article ELEVENTH.
    \48\ See ISE Holdings Certificate, Article FOURTEENTH and ISE 
Holdings Bylaws, Section 10.1.
---------------------------------------------------------------------------

    These requirements in the ISE Holdings Certificate and ISE Holdings 
Bylaws currently apply with respect to, and so long as, ISE Holdings 
controls, directly or indirectly, ISE. The Commission believes that the 
proposed changes are consistent with the Act because they extend these 
existing requirements in the ISE Holdings Certificate and ISE Holdings 
Bylaws to apply with respect to, and so long as, ISE Holdings controls, 
directly or indirectly, any Controlled National Securities Exchange, or 
facility thereof. Accordingly, if, in the future, the Commission 
approves any proposal or Form 1 application that results in ISE's 
controlling, directly or indirectly, a Controlled National Securities 
Exchange, the extension of these provisions to a Controlled National 
Securities Exchange, or facility thereof, should help the Controlled 
National Securities Exchange and the Commission to carry out their 
regulatory responsibilities with respect to the Controlled National 
Securities Exchange.\49\
---------------------------------------------------------------------------

    \49\ In approving these proposed changes to the ISE Holdings 
Certificate and ISE Holdings Bylaws, the Commission makes no 
findings with respect to any Form 1 applications that Direct Edge 
may file.
---------------------------------------------------------------------------

    ISE also proposes to apply to each Controlled National Securities 
Exchange and facility thereof Section 11.1(b) of the ISE Holdings 
Bylaws, relating to findings made by the Board of Directors of ISE 
Holdings (the ``ISE Holdings Board'') with respect to each Upstream 
Owner (as defined in Section 11.1(a) of the ISE Holdings Bylaws) in 
determining to waive the Ownership Limits and Voting Limits in Article 
FOURTH, Section III of the ISE Holdings Certificate. Specifically, ISE 
proposes to amend Section 11.1(b) to indicate that, in waiving the 
applicable Ownership Limits and Voting Limits to allow the ownership 
and voting of the capital stock of ISE Holdings by the Upstream Owners, 
the ISE Holdings Board has determined, with respect to each Upstream 
Owner, that: (i) Such waiver will not impair the ability of ISE 
Holdings and each Controlled National Securities Exchange, or facility 
thereof, to carry out its respective functions and responsibilities 
under the Act and the rules thereunder; (ii) such waiver is in the 
interests of ISE Holdings, its stockholders, and each Controlled 
National Securities Exchange, or facility thereof; (iii) such waiver 
will not impair the ability of the Commission to enforce the Act; (iv) 
neither the Upstream Owner nor any of its Related Persons are subject 
to any applicable ``statutory disqualification'' within the meaning of 
Section 3(a)(39) of the Act; \50\ and (v) neither the Upstream Owner 
nor any of its Related Persons is a member of such Controlled National 
Securities Exchange.
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 78c(a)(39).
---------------------------------------------------------------------------

    The Commission believes that the ISE Holdings Board determinations 
required under Section 11.1(b) provide some assurance that the waiver 
of the applicable Ownership Limits and Voting Limits will not impair 
the ability of the Commission and the Controlled National Securities 
Exchange to discharge their respective responsibilities under the Act 
following ISE Holdings' acquisition of control of a Controlled National 
Securities Exchange. In connection with this requirement, at the time 
that ISE Holdings proposes to acquire control of a Controlled National 
Securities Exchange, the Commission expects ISE to include in a rule 
filing a representation that the ISE Holdings Board has made the 
determinations required in Section 11.1(b) with respect to that 
Controlled National Securities Exchange.

F. Amendments to ISE Rules 312 and 2108

    As discussed above, ISE Holdings will own 31.54% of Direct Edge, 
which will continue to own and operate DE ECN, a registered broker-
dealer and Equity EAM of ISE that will continue to submit limit orders 
to the Facility for display and execution. As a result, ISE and Merger 
Sub will be affiliated with a member of ISE, DE ECN. Further, DE ECN 
will be a facility of ISE because (1) DE ECN will display limit orders 
on the Facility; and (2) DE ECN will become an affiliate of ISE through 
ISE's ownership interest in DE Holdings.
    In the past, the Commission has expressed concern that the 
affiliation of an exchange with one of its members raises potential 
conflicts of interest, and the potential for unfair competitive 
advantage.\51\ Recognizing this concern, the ISE adopted ISE Rule 312, 
which places limitations on the affiliation between the ISE and an ISE 
member.\52\ Because the affiliation between ISE and Merger Sub would be 
prohibited by current ISE Rule 312, ISE has requested that the 
Commission approve the relationships between DE ECN and ISE described 
above on a temporary basis for a period of one year, subject to

[[Page 79960]]

several limitations and conditions to be incorporated in new paragraph 
(b) of ISE Rule 312.
---------------------------------------------------------------------------

    \51\ See, e.g., Securities Exchange Act Release No. 54170 (July 
18, 2006), 71 FR 42149 (July 25, 2006) (File No. SR-NASDAQ-2006-006) 
(order approving Nasdaq Rule 2140, restricting affiliations between 
Nasdaq and its members). See also Securities Exchange Act Release 
Nos. 59010 (November 24, 2008), 73 FR 73373 (December 2, 2008) (File 
No. SR-NYSEArca-2008-130) (order approving NYSE Arca proposal to 
allow Archipelago Securities LLC, an NYSE Arca affiliated member, to 
route orders to NYSE Arca in its capacity as an order routing 
facility of NYSE Alternext U.S., LLC); 58681 (September 29, 2008), 
73 FR 58285 (File No. SR-NYSEArca-2008-90) (order approving, among 
other things, conditions relating to the affiliation between NYSE 
Arca and Archipelago Securities, LLC); 59009 (November 24, 2008), 73 
FR 73363 (December 2, 2008) (File No. SR-NYSEALTR-2008-07) (order 
approving proposal by NYSEALTR to use its broker-dealer affiliate, 
Archipelago Securities LLC, as its routing broker to route orders to 
an away market center when the market center is displaying the 
national best bid or offer); and ArcaEx Order, supra note 14.
    \52\ See Securities Exchange Act Release No. 53705 (April 21, 
2006), 71 FR 25260 (April 28, 2006) (order approving File No. SR-
ISE-2006-04). Because ISE Rule 312(a) currently would prohibit 
Direct Edge's ownership of Merger Sub, ISE proposes to update ISE 
Rule 312(a) to provide that the ownership restrictions in ISE Rule 
312(a) will not prohibit an ISE Member or non-member owner from 
acquiring or holding any equity interest permitted by the Merger Sub 
LLC Agreement. The Commission believes that this change is 
consistent with the Act because of the provisions in the Merger Sub 
LLC Agreement, as discussed above, that are designed to allow the 
Commission and the ISE to fulfill their regulatory and oversight 
obligations.
---------------------------------------------------------------------------

    Specifically, ISE Rule 312(b) provides that, for so long as ISE is 
affiliated with DE ECN or DE ECN is a facility of ISE:
     The Financial Industry Regulatory Authority, Inc. 
(``FINRA''), an SRO unaffiliated with ISE or any of its affiliates (a 
``non-affiliated SRO''), will carry out oversight and enforcement 
responsibilities as the designated examining authority designated by 
the Commission pursuant to Rule 17d-1 under the Act \53\ with the 
responsibility for examining DE ECN for compliance with applicable 
financial responsibility rules;
---------------------------------------------------------------------------

    \53\ 17 CFR 240.17d-1.
---------------------------------------------------------------------------

     ISE will enter into a plan pursuant to Rule 17d-2 under 
the Act \54\ with a non-affiliated SRO to relieve ISE of regulatory 
responsibilities for DE ECN with respect to rules that are common rules 
between ISE and the SRO; \55\
---------------------------------------------------------------------------

    \54\ 17 CFR 240.17d-2.
    \55\ Common rules are ISE rules that are substantially similar 
to the rules of the non-affiliated SRO.
---------------------------------------------------------------------------

     With respect to unique ISE rules,\56\ ISE will enter into 
a regulatory services contract with a non-affiliated SRO to perform 
regulatory responsibilities for DE ECN;
---------------------------------------------------------------------------

    \56\ Unique ISE rules are ISE rules that are not common rules.
---------------------------------------------------------------------------

     The regulatory services contract with the non-affiliated 
SRO will require ISE to provide the non-affiliated SRO with 
information, in an easily accessible manner, regarding all exception 
reports, alerts, complaints, trading errors, cancellations, 
investigations, and enforcement matters (collectively, ``Exceptions'') 
in which DE ECN is identified as a participant that has potentially 
violated ISE or Commission rules, and shall require that the non-
affiliated SRO provide a report to the Exchange quantifying Exceptions 
on not less than a quarterly basis;
     ISE, on behalf of Direct Edge, will establish and maintain 
procedures and internal controls reasonably designed to ensure that DE 
ECN does not develop or implement changes to its systems on the basis 
of nonpublic information obtained as a result of its affiliation with 
ISE until such information is available generally to similarly situated 
members of ISE in connection with the provision of inbound order 
routing to ISE;
     In the event that DE ECN acts as an introducing broker for 
subscribers of DE ECN who are not members of ISE, then DE ECN's role as 
introducing broker is limited to its role as introducing broker to DE 
ECN; \57\
---------------------------------------------------------------------------

    \57\ Under Section 6 of the Act, as a facility of an SRO, access 
to ISE facilities like DE ECN is limited to ISE members, or those 
sponsored by such members. DE ECN intends to temporarily provide 
access to its system for DE ECN subscribers that are not members of 
ISE. Accordingly, ISE proposes to allow DE ECN subscribers who are 
not ISE members, or sponsored by ISE members, to continue to 
participate in DE ECN by allowing DE ECN to act as an introducing 
broker to DE ECN with respect to such subscribers.
---------------------------------------------------------------------------

     DE ECN will not engage in any business other than 
operating as an ECN and other than acting as an introducing broker as 
described above; and
     The affiliation of DE ECN is subject to the foregoing 
conditions and is approved on a temporary basis, for a period not to 
exceed one year.
    In addition, ISE proposes to modify ISE Rule 2108 to make clear 
that the books and records of DE ECN, as a facility of ISE, shall be 
subject to copying and inspection by ISE and the Commission, and, 
further, that the books, records, premises, officers, directors, 
agents, and employees of DE ECN shall be considered the books, records, 
premises, officers, directors, agents, and employees of ISE.
    Although the Commission continues to be concerned about potential 
unfair competition and conflicts of interest between an exchange's 
self-regulatory obligations and its commercial interest when the 
exchange is affiliated with one of its members, for the reasons 
discussed below, the Commission believes that it is consistent with the 
Act to permit DE ECN to display its limit orders on the Facility as an 
order delivery ECN,\58\ subject to the conditions in ISE Rule 312(b), 
described above.\59\ The Commission believes that these conditions 
mitigate its concerns about potential conflicts of interest and unfair 
competitive advantage. In particular, the Commission believes that the 
oversight of DE ECN by a non-affiliated SRO,\60\ combined with the 
requirement that ISE provide the non-affiliated SRO with information 
regarding Exceptions relating to DE ECN and the requirement that the 
non-affiliated SRO provide a report quantifying the Exceptions on not 
less than a quarterly basis, will help to protect the independence of 
ISE's regulatory responsibilities with respect to DE ECN. The 
Commission also believes that ISE Rule 312(b) is designed to ensure 
that DE ECN cannot use any information advantage it may have because of 
its affiliation with ISE. Furthermore, the Commission believes that 
ISE's proposal to allow DE ECN to display its limit orders on the 
Facility as an order delivery ECN on a temporary basis will provide ISE 
and the Commission an opportunity to assess the impact of any conflicts 
of interest of allowing an affiliated member of ISE to display its 
limit orders on the Facility as an order delivery ECN and whether such 
affiliation provides an unfair competitive advantage.
---------------------------------------------------------------------------

    \58\ See ISE Rule 2107. An order delivery ECN submits quotations 
that are displayed on ISE, while simultaneously executing buy and 
sell orders for its customers.
    \59\ Several of the conditions ISE has proposed are similar to 
those the Commission recently approved in connection with exchange 
proposals to permit inbound order routing by an affiliated exchange 
member. See e.g., Securities Exchange Act Release Nos. 58673 
(September 29, 2008), 73 FR 57707 (October 3, 2008) (order approving 
File Nos. SR-Amex-2008-62 and NYSE-2008-60); 58681 (September 29, 
2008), 73 FR 58285 (October 6, 2008) (order approving File No. SR-
NYSEArca-2008-90); 58680 (September 29, 2008), 73 FR 58283 (October 
6, 2008) (order approving File No. SR-NYSE-2008-76). The additional 
conditions proposed by ISE with regard to DE ECN clarify that DE 
ECN's role on ISE is limited to operating as an ECN and as an 
introducing broker to DE ECN for DE ECN subscribers that are not ISE 
members.
    \60\ This oversight will be accomplished through a regulatory 
services contract between ISE and a non-affiliated SRO, and through 
a 17d-2 agreement between ISE and FINRA, as the non-affiliated SRO, 
as required by ISE Rule 312(b). See Securities Exchange Act Release 
No. 59134 (December 22, 2008) (File No. 4-574) (order declaring 
effective the 17d-2 agreement between ISE and FINRA with respect to 
DE ECN).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\61\ that the proposed rule change (File No. SR-ISE-2008-85), as 
modified by Amendment No. 1, is approved, and ISE Rule 312(b) is 
approved for a one-year period to expire on December 21, 2009.
---------------------------------------------------------------------------

    \61\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\62\
---------------------------------------------------------------------------

    \62\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

 Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-30862 Filed 12-29-08; 8:45 am]
BILLING CODE 8011-01-P