[Federal Register Volume 74, Number 172 (Tuesday, September 8, 2009)]
[Notices]
[Pages 46280-46281]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-21637]



[[Page 46280]]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60598; File No. SR-ISE-2009-45]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Approving a Proposed Rule Change, as Modified by Amendment 
No. 1, Relating to Changes to Rule 312 in Connection With the Purchase 
by International Securities Exchange Holdings, Inc. of Equity Interests 
in Optifreeze, LLC

September 1, 2009.

I. Introduction

    On July 23, 2009, the International Securities Exchange, LLC 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') a proposed rule change, pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ to amend ISE Rule 312 (Limitation on 
Affiliation between the Exchange and Members) in connection with the 
capital contribution by its parent company, International Securities 
Exchange Holdings, Inc. (``ISE Holdings''), in Optifreeze LLC, a 
Delaware Limited Liability Company (``Optifreeze''). The proposed rule 
change was published for comment in the Federal Register on July 30, 
2009.\3\ The Commission received no comments on the proposal. On August 
28, 2009, ISE filed Amendment No. 1 to the proposed rule change.\4\ 
Because Amendment No. 1 is technical in nature, the Commission is not 
publishing it for comment. 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\ Securities Exchange Act Release No. 60382 (July 24, 2009), 
74 FR 38068 (``Notice'').
    \4\ In Amendment No. 1, the Exchange made technical corrections 
to the filing. Specifically, in Amendment No. 1, ISE removed text 
that is not relevant. As originally proposed, ISE Rule 312(c)(4) 
would require the Exchange and Ballista Securities LLC to 
``establish and maintain procedures and internal control reasonably 
designed to ensure that Ballista Securities LLC and its affiliates 
do not have access to nonpublic information relating to the Exchange 
obtained as a result of ISE Holdings' ownership interest in Ballista 
Securities LLC, until such information is available generally to 
similarly situated members of the Exchange in connection with the 
provision of inbound routing to the Exchange.'' Amendment No. 1 
deletes the clause ``in connection with the provision of inbound 
routing to the Exchange'' from proposed ISE Rule 312(c)(4) and from 
the related discussion in the filing, as Ballista Securities' 
services are not limited to inbound routing to the Exchange.
    In Amendment No. 1, ISE also clarified that the proposal is for 
a one year pilot period.
---------------------------------------------------------------------------

II. Overview

    On June 5, 2009, ISE Holdings entered into a Membership Purchase 
Agreement (``Purchase Agreement'') with Optifreeze. Ballista Securities 
LLC (``Ballista Securities''), a wholly-owned subsidiary of Optifreeze, 
is a member of the Exchange. Pursuant to the Purchase Agreement, ISE 
Holdings contributed cash to the capital of Optifreeze in exchange for 
membership interests representing 8.57% of the aggregate membership 
interests in Optifreeze. As a result of the purchase, ISE Holdings 
became a member of Optifreeze and is entitled to appoint one 
representative to the Optifreeze Board of Directors, but does not have 
any voting or other control arrangements with any other members of 
Optifreeze relating to its investment in Optifreeze.
    In connection with the capital contribution by ISE Holdings in 
Optifreeze, the Exchange proposes to amend ISE Rule 312 (Limitation on 
Affiliation between the Exchange and Members) to allow for ISE 
Holdings' ownership interest in Ballista Securities on a one year pilot 
basis, and to set forth certain limitations and obligations regarding 
that relationship. ISE Rule 312 provides, in part, that, without prior 
Commission approval, the Exchange, or any entity with which the 
Exchange is affiliated shall not, directly or indirectly, acquire or 
maintain an ownership interest in a member or non-member owner. As a 
result of the transaction, an affiliate of the Exchange, ISE Holdings, 
maintains an indirect ownership interest in an ISE member, Ballista 
Securities, which, without Commission approval, would violate ISE Rule 
312.

III. Discussion and Commission Findings

    After careful consideration, 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.\5\ In particular, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act,\6\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices; to promote just and equitable principles of trade; to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, and processing information with respect to, and 
facilitating transactions in securities; to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system; and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \5\ 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).
    \6\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In the past, the Commission has expressed concern that the 
affiliation of an exchange, or an affiliate of the exchange, with one 
of its members raises potential conflicts of interest and the potential 
for unfair competitive advantage.\7\ The proposed relationship raises 
similar concerns. ISE Rule 312 provides, in relevant part, that: 
``Without prior SEC approval, the Exchange, or any facility of the 
Exchange, or any entity with which the Exchange or any facility of the 
Exchange is affiliated shall not, directly or indirectly through one or 
more intermediaries, acquire or maintain an ownership interest in a 
Member or non-member owner.'' As discussed above, the Exchange's 
parent, ISE Holdings, now owns 8.57% of the aggregate membership 
interests in Optifreeze, and thereby maintains an indirect ownership 
interest in Ballista Securities, an Exchange member. Thus, because of 
its affiliation with the Exchange, ISE Holdings' ownership interest in 
Ballista would violate ISE Rule 312, absent Commission approval.
---------------------------------------------------------------------------

    \7\ See, e.g., Securities Exchange Act Release Nos. 54170 (July 
18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order 
approving Nasdaq's proposal to adopt Nasdaq Rule 2140, restricting 
affiliations between Nasdaq and its members); 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order 
approving combination of NYSE and Archipelago Holdings, Inc.); 58673 
(September 29, 2008), 73 FR 57707 (October 3, 2008) (SR-Amex-2008-
62) (order approving acquisition of the American Stock Exchange by 
NYSE Euronext); 59135 (December 22, 2008), 73 FR 79954 (December 30, 
2008) (SR-ISE-2009-85) (order approving the purchase by ISE Holdings 
of an ownership interest in DirectEdge Holdings LLC); and 59281 
(January 22, 2009), 74 FR 5014 (January 28, 2009) (SR-NYSE-2008-120) 
(order approving a joint venture between NYSE and BIDS Holdings 
L.P.).
---------------------------------------------------------------------------

    ISE has requested that the Commission approve the proposed 
relationship described above on a temporary basis for a period of one 
year, subject to certain limitations and conditions set forth in 
proposed ISE Rule 312(c). Specifically, proposed ISE Rule 312(c) 
provides that (1) so long as ISE Holdings, or another affiliate of the 
Exchange, maintains an ownership interest in Ballista Securities; and 
(2) Ballista Securities remains a member of ISE:
     FINRA, a self-regulatory organization unaffiliated with 
the Exchange or any of its affiliates (a ``non-

[[Page 46281]]

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 \8\ with the 
responsibility for examining Ballista Securities for compliance with 
applicable financial responsibility rules;
---------------------------------------------------------------------------

    \8\ 17 CFR 240.17d-1.
---------------------------------------------------------------------------

     The Exchange shall enter into a plan pursuant to Rule 17d-
2 under the Act \9\ with a non-affiliated SRO to relieve the Exchange 
of regulatory responsibilities for Ballista Securities with respect to 
rules that are common rules between the Exchange and the SRO; \10\
---------------------------------------------------------------------------

    \9\ 17 CFR 240.17d-2.
    \10\ Common rules are ISE rules that are substantially similar 
to the rules of the non-affiliated SRO.
---------------------------------------------------------------------------

     With respect to unique ISE rules, ISE shall enter into a 
regulatory services contract with a non-affiliated SRO to perform 
certain regulatory responsibilities for Ballista Securities;
     The regulatory services contract with the non-affiliated 
SRO shall require the Exchange 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 Ballista Securities 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 shall establish and maintain procedures and internal 
controls reasonably designed to ensure that Ballista Securities and its 
affiliates do not develop or implement changes to its systems on the 
basis of nonpublic information obtained as a result of ISE Holdings' 
ownership interest in Ballista Securities, until such information is 
available generally to similarly situated members of the Exchange; and
     The ownership interest of ISE Holdings in Ballista 
Securities is subject to the foregoing conditions and is approved on a 
temporary basis, for a period not to exceed one year.
    Additionally, ISE Holdings currently owns less than a 9% equity 
interest in Optifreeze and does not own a controlling interest in 
Optifreeze or otherwise have any veto or other special voting rights 
with respect to the management or operation of Optifreeze. The Exchange 
has acknowledged that neither it, nor any of its affiliates, may 
directly or indirectly increase its equity ownership in Optifreeze 
without prior Commission approval.\11\
---------------------------------------------------------------------------

    \11\ See Notice, 74 FR at 38069.
---------------------------------------------------------------------------

    The Commission finds the proposed limitations and conditions of 
Rule 312(c) to be consistent with the Act, particularly Section 6(b)(5) 
thereunder.\12\ 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, or one of its affiliates, holds an ownership interest in 
a member, the proposed conditions appear reasonably designed to 
mitigate concerns about potential conflicts of interest and unfair 
competitive advantage. The Commission believes that the oversight of 
Ballista Securities by a non-affiliated SRO,\13\ combined with the 
requirement that ISE provide the non-affiliated SRO with information 
regarding exceptions relating to Ballista Securities on not less than a 
quarterly basis, promote robust and independent regulation of Ballista 
Securities. ISE and Ballista Securities must also establish and 
maintain procedures and internal controls that are reasonably designed 
to prevent Ballista Securities and its affiliates from deriving any 
unfair informational advantage resulting from its relationship with 
ISE. Finally, the Commission believes that ISE's proposal on a pilot 
basis will provide ISE and the Commission an opportunity to assess 
whether there might be any adverse consequences of the exception and 
whether a permanent exception is warranted. The Commission believes 
that, taken together, these limitations and conditions are reasonably 
designed to mitigate potential conflicts between the commercial 
interests of the Exchange or its parent company in Ballista Securities 
and the Exchange's regulatory responsibilities with respect to Ballista 
Securities.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b)(5).
    \13\ This oversight will be accomplished through a 17d-2 
agreement and a regulatory services contract between ISE and a non-
affiliated SRO. The Commission notes that ISE has not yet entered 
into such agreements.
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (File No. SR-ISE-2009-45) is 
hereby approved on a pilot basis through September 1, 2010.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78s(b)(2).
    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-21637 Filed 9-4-09; 8:45 am]
BILLING CODE 8010-01-P