[Federal Register Volume 74, Number 121 (Thursday, June 25, 2009)]
[Notices]
[Pages 30334-30337]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-14967]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60152]


Order Granting Application for Extension of a Temporary 
Conditional Exemption Pursuant to Section 36(a) of the Exchange Act by 
the International Securities Exchange, LLC Relating to the Ownership 
Interest of International Securities Exchange Holdings, Inc. in an 
Electronic Communications Network

June 19, 2009.

I. Introduction

    On December 22, 2008, the Securities and Exchange Commission 
(``Commission'') approved a proposal filed by the International 
Securities Exchange, LLC (``ISE'' or ``Exchange'') in connection with 
corporate transactions (the ``Transactions'') in which, among other 
things, the parent company of ISE, International Securities Exchange 
Holdings, Inc. (``ISE Holdings''), purchased a 31.54% ownership 
interest in Direct Edge Holdings LLC (``Direct Edge''), the owner and 
operator of Direct Edge ECN (``DECN''), a registered broker-dealer and 
electronic communications network (``ECN'').\1\ Following the closing 
of the Transactions (the ``Closing''), Direct Edge's wholly-owned 
subsidiary, Maple Merger Sub LLC (``Merger Sub'') began to operate a 
marketplace for the trading of U.S. cash equity securities by Equity 
Electronic Access Members of ISE (the ``Facility''), under ISE's rules 
and as a ``facility,'' as defined in Section 3(a)(2) of the Securities 
Exchange Act of 1934 (``Exchange Act''),\2\ of ISE.\3\
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    \1\ See Securities Exchange Act Release No. 59135 (December 22, 
2008), 73 FR 79954 (December 30, 2008) (order approving File No. SR-
ISE-2008-85).
    \2\ 15 U.S.C. 78c(a)(2).
    \3\ 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.''
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    DECN, which operates as an ECN and submits its limit orders to the 
Facility for display and execution, is an affiliate of ISE through ISE 
Holdings' equity interest in DE Holdings. DECN also is a facility, as 
defined in Section 3(a)(2) of the Exchange Act, of ISE because it is an 
affiliate of ISE used for the purpose of effecting and reporting 
securities transactions. Because DECN is a facility of ISE, ISE, absent 
exemptive relief, would be obligated under Section 19(b) of the 
Exchange Act to file with the Commission proposed rules governing the 
operation of DECN's systems and subscriber fees.
    On December 22, 2008, the Commission exercised its authority under 
Section 36 of the Exchange Act to grant ISE a temporary exemption, 
subject to certain conditions, from the requirements under Section 
19(b) of the Exchange Act with respect to DECN's proposed rules.\4\
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    \4\ See Securities Exchange Act Release No. 59133 (December 22, 
2008), 73 FR 79940 (December 30, 2008) (``Exemption Order'').
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    On June 15, 2009, ISE filed with the Commission, pursuant to Rule 
0-12 \5\ under the Exchange Act, an application under Section 36(a)(1) 
of the Exchange Act \6\ to extend the relief granted in the Exemption 
Order for an additional 180 days, subject to certain conditions.\7\ 
This order grants ISE's request for a temporary extension of the relief 
provided in the Exemption Order, subject to the satisfaction of certain 
conditions, which are outlined below.
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    \5\ 17 CFR 240.0-12.
    \6\ 15 U.S.C. 78mm(a)(1).
    \7\ See letter from Michael J. Simon, General Counsel and 
Secretary, ISE, to Elizabeth M. Murphy, Secretary, Commission, dated 
June 15, 2009 (``Exemption Request'').
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II. Application for an Extension of the Temporary Conditional Exemption 
From the Section 19(b) Rule Filing Requirements

    On June 15, 2009, ISE requested that the Commission exercise its 
authority under Section 36 of the Exchange Act to temporarily extend, 
subject to certain conditions, the temporary conditional exemption 
granted in the Exemption Order from the rule filing procedures of 
Section 19(b) of the Exchange Act in connection with ISE Holdings' 
equity ownership interest in DE Holdings and the continued operation of 
DECN as a facility of ISE.\8\
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    \8\ See Section 3(a)(2) of the Exchange Act, 15 U.S.C. 
78c3(a)(2) (definition of ``facility'').
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    The Exemption Request notes that on May 7, 2009, EDGA Exchange, 
Inc., and EDGX Exchange, Inc. (together, the

[[Page 30335]]

``Exchange Subsidiaries''), two wholly-owned subsidiaries of DE 
Holdings, filed with the Commission Form 1 applications (the ``Form 1 
Applications'') to register as national securities exchanges under 
Section 6 of the Exchange Act.\9\ According to the Exemption Request, 
DECN intends to file a ``Cessation of Operations Report'' with the 
Commission and to cease operations as an ECN shortly following any 
Commission approval of the Form 1 Applications and the Exchange 
Subsidiaries commencing operations as national securities 
exchanges.\10\
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    \9\ See Exemption Request at 2.
    \10\ Id.
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    Because DECN will cease operations as an ECN if the Commission 
approves the Form 1 Applications, ISE expects that DECN will continue 
to operate as a facility of ISE for a relatively brief period.\11\ In 
addition, ISE believes that it would be unduly burdensome and 
inefficient to require DECN's operating rules to be separately subject 
to the Section 19(b) rule filing process because DECN is only operating 
temporarily as a facility of ISE while the Commission considers the 
Form 1 Applications.\12\ ISE notes, further, that the Commission is 
reviewing the rules governing the operation of the Exchange 
Subsidiaries as part of its review of the Form 1 Applications.\13\
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    \11\ Id.
    \12\ Id.
    \13\ Id.
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    ISE has asked the Commission to exercise its authority under 
Section 36 of the Exchange Act to grant ISE a 180-day extension of the 
Exemption Order's relief, subject to certain conditions, from the 
Section 19(b) rule filing requirements that otherwise would apply to 
DECN as a facility of ISE.\14\ The extended temporary conditional 
exemption would commence immediately and would permit the continued 
operation of DECN while the Commission considers the Form 1 
Applications that, if approved, would allow the Exchange Subsidiaries 
to operate in place of DECN.\15\ ISE believes that the extended 
temporary conditional exemption will help to ensure an orderly 
transition from DECN to the proposed Exchange Subsidiaries.\16\
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    \14\ Id.
    \15\ According to ISE, it would be impracticable for DECN to 
display its limit orders other than on the Facility. See Exemption 
Request at 3.
    \16\ See Exemption Request at 2.
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    ISE states, in addition, that the extended exemption will not 
diminish the Commission's ability to monitor ISE and DECN.\17\ In this 
regard, ISE notes that to the extent that ISE makes changes to its 
systems, including the Facility, during the extended temporary 
exemption period, or thereafter, it remains subject to Section 19(b) 
and thus obligated to file proposed rule changes with the 
Commission.\18\ Further, in the Exemption Request, ISE commits to 
satisfying certain conditions, as outlined below, which are identical 
to the conditions in the Exemption Order.\19\ For example, as a 
condition to the extended temporary exemption, ISE will be required to 
submit proposed rule changes with respect to any material changes to 
DECN's functions during the exemption period.\20\ ISE notes, however, 
that neither ISE nor DECN anticipates any material changes to DECN's 
functionality during the extended temporary exemption period.\21\
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    \17\ Id.
    \18\ See Exemption Request at 2-3.
    \19\ The ISE also represents that it has complied with the 
conditions in the Exemption Order and that it will continue to 
comply with these conditions during any extension of the relief 
granted in the Exemption Order. See Exemption Request at 3.
    \20\ See Exemption Request at note 5.
    \21\ See Exemption Request at note 4.
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III. Order Granting Extension of Temporary Conditional Section 36 
Exemption

    In 1996, Congress gave the Commission greater flexibility to 
regulate trading systems, such as DECN, by granting the Commission 
broad authority to exempt any person from any of the provisions of the 
Exchange Act and to impose appropriate conditions on their 
operation.\22\ Specifically, NSMIA added Section 36(a)(1) to the 
Exchange Act, which provides that ``the Commission, by rule, 
regulation, or order, may conditionally or unconditionally exempt any 
person, security, or transaction, or any class or classes of persons, 
securities, or transactions, from any provision or provisions of [the 
Exchange Act] or of any rule or regulation thereunder, to the extent 
that such exemption is necessary or appropriate in the public interest, 
and is consistent with the protection of investors.'' \23\ In enacting 
Section 36, Congress indicated that it expected that ``the Commission 
will use this authority to promote efficiency, competition and capital 
formation.'' \24\ It particularly intended to give the Commission 
sufficient flexibility to respond to changing market and competitive 
conditions:
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    \22\ 15 U.S.C. 78mm(a). Section 36 of the Exchange Act was 
enacted as part of the National Securities Markets Improvements Act 
1996, Pub. L. No. 104-290 (``NSMIA'').
    \23\ 15 U.S.C. 78mm(a)(1).
    \24\ H.R. Rep. No. 104-622, 104th Cong., 2d Sess. 38 (1996).

    The Committee recognizes that the rapidly changing marketplace 
dictates that effective regulation requires a certain amount of 
flexibility. Accordingly, the bill grants the SEC general exemptive 
authority under both the Securities Act and the Securities Exchange 
Act. This exemptive authority will allow the Commission the 
flexibility to explore and adopt new approaches to registration and 
disclosure. It will also enable the Commission to address issues 
relating to the securities markets more generally. For example, the 
SEC could deal with the regulatory concerns raised by the recent 
proliferation of electronic trading systems, which do not fit neatly 
into the existing regulatory framework.\25\
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    \25\ S. Rep. No. 104-293, 104th Cong., 2d Sess. 15 (1996).

    As noted above, in December 2008 the Commission exercised its 
Section 36 exemptive authority to grant ISE a temporary exemption, 
subject to certain conditions, from the 19(b) rule filing requirements 
in connection with the Transaction.\26\ In 2004, the Commission granted 
similar exemptive relief in connection with the acquisition by The 
Nasdaq Stock Market, Inc. (``Nasdaq'') of Brut, LLC, the operator of 
the Brut ECN.\27\
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    \26\ See Exemption Order, supra note 4.
    \27\ See Securities Exchange Act Release No. 50311 (September 3, 
2004), 69 FR 54818 (September 10, 2004).
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    Section 19(b)(1) of the Exchange Act requires a self-regulatory 
organization (``self-regulatory organization'' or ``SRO''), including 
ISE, to file with the Commission its proposed rule changes accompanied 
by a concise general statement of the basis and purpose of the proposed 
rule change. Once a proposed rule change has been filed with the 
Commission, the Commission is required to publish notice of it and 
provide an opportunity for public comment. The proposed rule change may 
not take effect unless approved by the Commission by order, unless the 
rule change is within the class of rule changes that are effective upon 
filing pursuant to Section 19(b)(3)(A) of the Act.\28\
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    \28\ 15 U.S.C. 78s(b)(3)(A).
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    Section 19(b)(1) of the Exchange Act defines the term ``proposed 
rule change'' to mean ``any proposed rule or rule change in, addition 
to, or deletion from the rules of [a] self-regulatory organization.'' 
Pursuant to Section 3(a)(27) and 3(a)(28) of the Exchange Act, the term 
``rules of a self-regulatory organization'' means (1) the constitution, 
articles of incorporation, bylaws and rules, or instruments 
corresponding to the foregoing, of an SRO, and (2) such stated 
policies,

[[Page 30336]]

practices and interpretations of an SRO (other than the Municipal 
Securities Rulemaking Board) as the Commission, by rule, may determine 
to be necessary or appropriate in the public interest or for the 
protection of investors to be deemed to be rules. Rule 19b-4(b) under 
the Exchange Act,\29\ defines the term ``stated policy, practice, or 
interpretation'' to mean generally ``any material aspect of the 
operation of the facilities of the self-regulatory organization or any 
statement made available to the membership, participants, or specified 
persons thereof that establishes or changes any standard, limit, or 
guideline with respect to rights and obligations of specified persons 
or the meaning, administration, or enforcement of an existing rule.''
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    \29\ 17 CFR 240.19b-4(b).
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    The term ``facility'' is defined in Section 3(a)(2) of the Exchange 
Act, with respect to an exchange, to include ``its premises, tangible 
or intangible property whether on the premises or not, any right to use 
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.''
    In its Exemption Request, ISE acknowledges that since the Closing, 
Merger Sub has operated the Facility as a facility of ISE.\30\ Absent 
an exemption, Section 19(b) of the Exchange Act and Rule 19b-4 
thereunder would require ISE to file proposed rules with the Commission 
to allow ISE to operate DECN as a facility of ISE.
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    \30\ See Exemption Request at 1. As discussed above, ISE owns a 
31.54% ownership interest in DE Holdings, the sole owner of Merger 
Sub.
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    In its Exemption Request, ISE notes that the Exchange Subsidiaries 
have filed Form 1 Applications and that DECN intends to cease 
operations as an ECN shortly after any Commission approval of the Form 
1 Applications and the Exchange Subsidiaries' commencement of 
operations as national securities exchanges.\31\ Accordingly, ISE 
expects that DECN will continue to operate as a facility of ISE for a 
relatively brief period of time.\32\ ISE notes, in addition, that the 
Commission is reviewing the rules governing the operation of the 
Exchange Subsidiaries as part of its review of the Form 1 
Applications.\33\ ISE represents that it has complied with the 
conditions in the Exemption Order and that it will continue to comply 
with these conditions during an extension of the relief granted in the 
Exemption Order.\34\
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    \31\ See Exemption Request at 2.
    \32\ Id.
    \33\ Id.
    \34\ See Exemption Request at 2.
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    The Commission believes that it is appropriate to grant a temporary 
extension of the relief provided in the Exemption Order, subject to the 
conditions described below, to allow DECN to continue to operate as a 
facility of ISE without being subject to the rule filing requirements 
of Section 19(b) of the Exchange Act for a temporary period.\35\ 
Accordingly, the Commission has determined to grant ISE's request for 
an extension of the relief provided in the Exemption Order, subject to 
certain conditions, for a period not to exceed 180 days. The Commission 
finds that the temporary extended conditional exemption from the 
provisions of Section 19(b) of the Exchange Act is appropriate in the 
public interest and is consistent with the protection of investors. In 
particular, the Commission believes that the temporary extended 
exemption should help promote efficiency and competition in the market 
by allowing DECN to continue to operate as an ECN for a limited period 
of time while the Commission considers the Form 1 Applications. In this 
regard, the Commission notes ISE's belief that it would be unduly 
burdensome and inefficient to require DECN's operating rules to be 
separately subjected to the Section 19(b) rule filing and approval 
process because DECN will operate only temporarily as a facility of ISE 
while the Commission considers the Form 1 Applications.\36\ To provide 
the Commission with the opportunity to review and act upon any proposal 
to change DECN's fees or to make material changes to DECN's operations 
as an ECN during the period covered by the extended temporary 
exemption, as well as to ensure that the Commission's ability to 
monitor ISE and DECN is not diminished by the extended temporary 
exemption, the Commission is imposing the following conditions while 
the extended temporary exemption is in effect.\37\ The Commission 
believes such conditions are necessary and appropriate in the public 
interest for the protection of investors. Therefore, the Commission is 
granting to ISE an extended temporary exemption, pursuant to Section 36 
of the Exchange Act, from the rule filing requirements imposed by 
Section 19(b) of the Exchange Act as set forth above, provided that ISE 
and DECN comply with the following conditions:
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    \35\ In granting this relief, the Commission makes no finding 
regarding whether ISE's operation of DECN as a facility would be 
consistent with the Exchange Act.
    \36\ In addition, the Commission notes that the rules governing 
the operation of the Exchange Subsidiaries will be subjected to 
public comment and Commission review and approval as part of the 
exchange registration process.
    \37\ See Exemption Request at note 5.
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    (1) DECN remains a registered broker-dealer under Section 15 of the 
Exchange Act \38\ and continues to operate as an ECN;
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    \38\ 15 U.S.C. 78o.
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    (2) DECN operates in compliance with the obligations set forth 
under Regulation ATS;
    (3) DECN and ISE continue to operate as separate legal entities;
    (4) ISE files a proposed rule change under Section 19 of the 
Exchange Act \39\ if any material changes are sought to be made to 
DECN's operations. A material change would include any changes to a 
stated policy, practice, or interpretation regarding the operation of 
DECN or any other event or action relating to DECN that would require 
the filing of a proposed rule change by an SRO or an SRO facility; \40\
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    \39\ 15 U.S.C. 78s.
    \40\ See Section 19(b) of the Exchange Act and Rule 19b-4 
thereunder. The Commission notes that a material change would 
include, among other things, changes to DECN's operating platform; 
the types of securities traded on DECN; DECN's types of subscribers; 
or the reporting venue for trading that takes place on DECN. The 
Commission also notes that any rule filings must set forth the 
operation of the DECN facility sufficiently so that the Commission 
and the public are able to evaluate the proposed changes.
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    (5) ISE files a proposed rule change under Section 19 of the 
Exchange Act if DECN's fee schedule is sought to be modified; and
    (6) ISE treats DECN the same as other ECNs that participate in the 
Facility, and, in particular, ISE does not accord DECN preferential 
treatment in how DECN submits orders to the Facility or in the way its 
orders are displayed or executed.\41\
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    \41\ See Exemption Request at note 5.
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    In addition, the Commission notes that the Financial Industry 
Regulatory Authority is currently the Designated Examining Authority 
for DECN.
    For the reasons discussed above, the Commission finds that the 
extended temporary conditional exemptive relief requested by ISE is 
appropriate in the public interest and is consistent with the 
protection of investors.
    It is ordered, pursuant to Section 36 of the Exchange Act,\42\ that 
the application for an extended temporary conditional exemption is 
granted for a

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period of 180 days, effective immediately.
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    \42\ 15 U.S.C. 78mm.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-14967 Filed 6-24-09; 8:45 am]
BILLING CODE 8010-01-P