[Federal Register Volume 75, Number 142 (Monday, July 26, 2010)]
[Notices]
[Pages 43584-43587]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-18158]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62515; File No. SR-EDGX-2010-02]


Self-Regulatory Organizations; EDGX Exchange, Inc; Order 
Approving a Proposed Rule Change Relating to Direct Edge, Inc.

July 16, 2010.

I. Introduction

    On June 3, 2010, EDGX Exchange, Inc. (``EDGX'' 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

[[Page 43585]]

thereunder,\2\ a proposed rule change relating to a corporate 
reorganization (``Corporate Reorganization'') in which the Exchange 
will become a wholly-owned subsidiary of Direct Edge, Inc. (``DEI''). 
The proposed rule change was published for comment in the Federal 
Register on June 16, 2010.\3\ The Commission received no comments 
regarding the proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 62256 (June 10, 
2010), 75 FR 34196.
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II. Description of the Proposal

    Currently, the Exchange is a wholly-owned subsidiary of Direct Edge 
Holdings, LLC (``DE Holdings'').\4\ DE Holdings, a Delaware limited 
liability company, is overseen by a Board of Managers, and ownership in 
DE Holdings is represented by limited liability membership interests. 
The Fourth Amended and Restated Limited Liability Company Operating 
Agreement of DE Holdings (``DE Holdings Operating Agreement'') refers 
to the holders of these membership interests as ``Members.'' \5\
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    \4\ The Amended and Restated Bylaws of EDGX (``Exchange 
Bylaws'') identify this ownership structure. See Exchange Bylaws, 
Article I(kk). Any changes to the Exchange Bylaws, including a 
change to the provision that identifies DE Holdings as the sole 
owner of the Exchange, must be filed with the Commission pursuant to 
Section 19 of the Act. See 15 U.S.C. 78s. See also Securities 
Exchange Act Release No. 61698 (March 12, 2010), 75 FR 13151 (March 
18, 2010) (File Nos. 10-194 and 10-196) (order granting the exchange 
registration applications of the Exchange and EDGA Exchange, Inc. 
(``EDGA'')) (``Order''), at note 77 and accompanying text.
    \5\ DE Holdings is described in greater detail in the Order, 
supra note 4.
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    The Exchange proposes a Corporate Reorganization in which DE 
Holdings will transfer all of its equity interest in the Exchange to 
DEI, a Delaware corporation.\6\ As a result, the Exchange will be a 
direct, wholly-owned subsidiary of DEI following the Corporate 
Reorganization. DEI, in turn, will be a direct, wholly-owned subsidiary 
of DE Holdings, and DE Holdings will be the sole stockholder of DEI. 
The self-regulatory functions of the Exchange will remain with the 
Exchange following the Corporate Reorganization. Direct Edge ECN, LLC 
d/b/a DE Route, the Exchange's routing broker/dealer, will continue to 
be a wholly-owned subsidiary of DE Holdings.
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    \6\ The Exchange's affiliate exchange, EDGA, also will become a 
wholly-owned subsidiary of DEI. See Securities Exchange Act Release 
No. 62514 (July 16, 2010) (order approving File No. SR-EDGA-2010-
02).
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    The Exchange has included in its proposal the Certificate of 
Incorporation of DEI (``DEI Certificate''); the Bylaws of DEI (``DEI 
Bylaws''); and changes to the Amended and Restated Bylaws of EDGX 
(``Exchange Bylaws'') to indicate that DEI will be the sole stockholder 
of the Exchange.

III. Discussion and Commission Findings

    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.\7\ In 
particular, the Commission finds that the proposal is consistent with 
Section 6(b) of the Act,\8\ in general, and furthers the objectives of 
Section 6(b)(1) of the Act,\9\ in particular, in that it is designed to 
enable the Exchange to be so organized as to have the capacity to be 
able to carry out the purposes of the Act and to comply, 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. In addition, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act \10\ in that it 
will result in an exchange governance structure designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, 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. In 
particular, the Commission believes that the corporate governing 
documents of DEI, DE Holdings, and the Exchange are designed to protect 
and maintain the integrity of the self-regulatory functions of the 
Exchange and to facilitate the ability of the Exchange and the 
Commission to carry out their regulatory and oversight obligations 
under the Act. Finally, the Commission finds that the proposal is 
consistent with the requirement under Section 6(b)(3) of the Act \11\ 
that the rules of an exchange assure fair representation of the 
exchange's members in the selection of its directors and administration 
of its affairs.
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    \7\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(1).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 15 U.S.C. 78f(b)(3).
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A. DEI

    Following the Corporate Reorganization, DEI will be the sole 
stockholder of the Exchange.\12\ Although DEI will not carry out any 
regulatory functions, its activities with respect to the operation of 
the Exchange must be consistent with, and must not interfere with, the 
self-regulatory obligations of the Exchange. The DEI Certificate and 
DEI Bylaws include certain provisions that are designed to maintain the 
independence of the Exchange's self-regulatory function from DEI, 
enable the Exchange to operate in a manner that complies with the 
Federal securities laws, including the objectives of Sections 6(b) and 
19(g) of the Act,\13\ and facilitate the ability of the Exchange and 
the Commission to fulfill their regulatory and oversight obligations 
under the Act.
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    \12\ See Exchange Bylaws, Article I(kk).
    \13\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g).
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    For example, DEI submits to the jurisdiction of the Commission and 
the Exchange with respect to activities relating to the Exchange,\14\ 
and agrees to provide the Commission and the Exchange with access to 
its books and records that are related to the operation or 
administration of the Exchange.\15\ In addition, to the extent they are 
related to the operation or administration of the Exchange, the books, 
records, premises, officers, directors, agents, and employees of DEI 
will be deemed to be the books, records, premises, officers, directors, 
agents, and employees of the Exchange for the purpose of, and subject 
to oversight pursuant to, the Act.\16\ DEI also agrees to keep 
confidential non-public information relating to the self-regulatory 
function \17\ of the Exchange and not to use such information for any 
non-regulatory purpose.\18\ In addition, the Board of Directors of DEI, 
and DEI's officers, employees, and agents, are required to give due 
regard to the preservation of the independence of the self-regulatory 
function of the Exchange.\19\
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    \14\ See DEI Bylaws, Article VII, Section 7.3.
    \15\ See DEI Bylaws, Article V, Section 5.8(b).
    \16\ Id.
    \17\ This requirement to keep confidential non-public 
information relating to the self-regulatory function of the Exchange 
will not limit the Commission's or the Exchange's ability to access 
and examine such information or limit the ability of any officers, 
directors, agents, or employees of DEI to disclose such information 
to the Commission or to the Exchange. See DEI Bylaws, Article V, 
Section 5.8(a).
    \18\ See DEI Bylaws, Article VII, Section 7.1.
    \19\ See DEI Bylaws, Article V, Section 5.8(b).
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    Article VII, Section 7.7 of the DE Holdings Operating Agreement 
requires the approval of the DE Holdings Board of Managers and/or 
Members of DE Holdings in connection with certain actions taken by DE 
Holdings or a subsidiary of DE Holdings. Article

[[Page 43586]]

SIXTH of the DEI Certificate states that any action that specifically 
requires the approval of the DE Holdings Board of Managers and/or 
Members of DE Holdings pursuant to Article VII, Section 7.7 of the DE 
Holdings Operating Agreement will require the approval of the 
stockholders of DEI.\20\ Article SIXTH of the DEI Certificate further 
provides, however, that nothing contained in Article VII, Section 7.7 
of the DE Holdings Operating Agreement will be applicable where the 
application of that provision would interfere with the effectuation of 
any decisions of the DEI Board of Directors (``DEI Board'') relating to 
regulatory functions of the Exchange (including disciplinary matters) 
or the structure of the market the Exchange regulates, or would 
interfere with the ability of the Exchange to carry out its 
responsibilities under the Act or to oversee the structure of the 
market the Exchange regulates.\21\ For as long as DEI directly or 
indirectly controls the Exchange, any change to the DEI Certificate 
must be submitted to the Exchange's Board of Directors (``Exchange 
Board'') and, if the amendment is required to be filed with the 
Commission pursuant to Section 19(b) of the Act, the change will not be 
effective until filed with, or filed with and approved by, the 
Commission.\22\
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    \20\ See DEI Certificate, Article SIXTH(1).
    \21\ See DEI Certificate, Article SIXTH(2).
    \22\ See DEI Certificate, Article EIGHTH(3).
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    The Commission finds that these provisions in the DEI Bylaws and 
DEI Certificate are consistent with the Act, and that they will assist 
the Exchange in fulfilling its self-regulatory obligations and in 
administering and complying with the requirements of the Act.

B. DE Holdings

    In the Corporate Reorganization, DE Holdings, which currently is 
the sole stockholder of the Exchange, will transfer its stock in the 
Exchange to DE Holdings' wholly-owned subsidiary, DEI, which will 
become the sole stockholder of the Exchange. Accordingly, DE Holdings 
will be an indirect owner of the Exchange following the Corporate 
Reorganization. Although DE Holdings will not carry out any regulatory 
functions, its activities with respect to the operation of the Exchange 
must be consistent with, and not interfere with, the self-regulatory 
obligations of the Exchange.
    The DE Holdings Operating Agreement, which the Commission reviewed 
in connection with the Exchange's application for registration as a 
national securities exchange,\23\ includes certain provisions that are 
designed to maintain the independence of the Exchange's self-regulatory 
function from DE Holdings, enable the Exchange to operate in a manner 
that complies with the Federal securities laws, including the 
objectives of Sections 6(b) and 19(g) of the Act, and facilitate the 
ability of the Exchange and the Commission to fulfill their regulatory 
and oversight obligations under the Act. For example, the DE Holdings 
Operating Agreement provides that, for so long as DE Holdings directly 
or indirectly controls the Exchange, the Managers, officers, employees, 
and agents of DE Holdings shall give due regard to the preservation of 
the independence of the self-regulatory function of the Exchange and 
shall not take any actions that would interfere with the effectuation 
of any decisions by the Exchange Board relating to the Exchange's 
regulatory functions (including disciplinary matters) or which would 
interfere with the ability of the Exchange to carry out its 
responsibilities under the Act.\24\
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    \23\ See Order, supra note 4.
    \24\ See DE Holdings Operating Agreement Article XIV, Section 
14.1. In addition, the DE Holdings Operating Agreement further 
specifies, among other things, that: (1) DE Holdings and its 
officers, Managers, employees, and agents submit to the Commission's 
and the Exchange's jurisdiction with respect to activities relating 
to the Exchange; (2) DE Holdings agrees to retain in confidence 
information in the books and records of the Exchange reflecting 
confidential information pertaining to the self-regulatory function 
of the Exchange (including disciplinary matters, trading data, 
trading practices, and audit information) that comes into DE 
Holdings' possession; (3) the books, records, premises, officers, 
Managers, agents, and employees of DE Holdings are deemed to be the 
books, records, premises, officers, Managers, agents, and employees 
of the Exchange for purposes of, and subject to oversight pursuant 
to, the Act, to the extent that they are related to the operation or 
administration of the Exchange; and (4) DE Holdings agrees to 
provide the Commission and the Exchange with access to DE Holdings' 
books and records that are related to the operation or 
administration of the Exchange for so long as DE Holdings directly 
or indirectly controls the Exchange. See DE Holdings Operating 
Agreement, Article XI, Section 14.3; and Article XI, Section 11.2. 
For a more complete discussion of the DE Holdings Operating 
Agreement, see Order, supra note 4, at notes 40--47 and accompanying 
text.
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    The Commission notes that the Exchange is not proposing to amend 
the DE Holdings Operating Agreement.\25\ Accordingly, the DE Holdings 
Operating Agreement that the Commission reviewed in connection with the 
Exchange's application for registration as a national securities 
exchange, including the provisions in the DE Holdings Operating 
Agreement relating to the self-regulatory function of the Exchange, 
will remain in place following the Corporate Reorganization.
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    \25\ For as long as DE Holdings directly or indirectly controls 
the Exchange, any changes to the DE Holdings Operating Agreement 
must be submitted to the Exchange Board and, if the Exchange Board 
determines that such amendment is required to be filed with the 
Commission pursuant to Section 19(b) of the Act, such change will 
not be effective until filed with, or filed with and approved by, 
the Commission. See DE Holdings Operating Agreement, Article XV, 
Section 15.2(b). See also Order, supra note 4, at note 47 and 
accompanying text.
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C. Ownership and Control of the Exchange, DEI, and DE Holdings

    Following the Corporate Reorganization, DEI will be the sole 
stockholder of the Exchange. The Exchange Bylaws identify this 
ownership structure.\26\ Any changes to the Exchange Bylaws, including 
any change in the provision that identifies DEI as the sole stockholder 
of the Exchange, must be filed with and approved by the Commission 
pursuant to Section 19 of the Act.\27\ Similarly, the DEI Certificate 
identifies DE Holdings as the sole stockholder of DEI.\28\ For as long 
as DEI directly or indirectly controls the Exchange, any amendment to 
the DEI Certificate, including an amendment to the provision that 
identifies DE Holdings as the sole stockholder of DEI, must be 
submitted to the Exchange Board and, if the Exchange Board determines 
that the amendment must be filed with, or filed with and approved by 
the Commission, before the amendment may be effective under Section 19 
of the Act, then the proposed amendment will not be effective until it 
is filed with, or filed with and approved by, the Commission.\29\
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    \26\ See Exchange Bylaws, Article I(kk).
    \27\ See 15 U.S.C. 78s.
    \28\ See DEI Certificate, Article EIGHTH(4).
    \29\ See DEI Certificate, Article EIGHTH(3).
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    In addition, as discussed in greater detail in the Order,\30\ the 
DE Holdings Operating Agreement includes restrictions on the ability to 
own and vote the capital stock of DE Holdings.\31\ These limitations 
apply for so long as DE Holdings directly or indirectly controls the 
Exchange.\32\ The limitations, which are designed to prevent any Member 
of DE Holdings from exercising undue control over the operation of the 
Exchange and to assure that the Exchange and the Commission are able to 
effectively carry out their regulatory and oversight obligations under 
the Act, generally prohibit any person, other than International 
Securities Exchange Holdings, Inc., from owning interests representing 
more than

[[Page 43587]]

40% of DE Holdings or from voting interests representing more than 20% 
of DE Holdings. In addition, the limitations prohibit any member of the 
Exchange from owning interests representing more than 20% of DE 
Holdings.
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    \30\ See Order, supra note 4, at notes 65-88 and accompanying 
text.
    \31\ See DE Holdings Operating Agreement, Article XII.
    \32\ See DE Holdings Operating Agreement, Article XII, Section 
12.1(a).
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    The Commission believes that these provisions in the governing 
documents of the Exchange, DEI, and DE Holdings should minimize the 
potential that a person could improperly interfere with or restrict the 
ability of the Commission or the Exchange to effectively carry out 
their regulatory and oversight responsibilities under the Act.

D. Electing Directors and Certain Committee Members of the Exchange

    Currently, the DE Holdings Operating Agreement requires DE 
Holdings, in its capacity as the sole stockholder of the Exchange, to 
vote all of the outstanding equity of the Exchange owned by DE Holdings 
and entitled to vote in an election to be voted in favor of the 
election of (1) those directors nominated by the Nominating Committee 
of the Exchange (``Exchange Nominating Committee''); and (2) those 
nominees for the Exchange Nominating Committee and the Exchange Member 
Nominating Committee nominated in accordance with the governance 
documents of the Exchange.\33\ Because DE Holdings will no longer be a 
stockholder of the Exchange following the Corporate Reorganization, the 
Exchange notes that these requirements will no longer apply to DE 
Holdings.
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    \33\ See DE Holdings Operating Agreement, Article VII, Section 
7.3(b).
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    However, the DEI Bylaws require DEI, in its capacity as the sole 
stockholder of the Exchange, to cause all outstanding equity of the 
Exchange owned by DEI and entitled to vote in an election to be voted 
in favor of the election of (1) those directors nominated by the 
Exchange Nominating Committee; and (2) those nominees for the Exchange 
Nominating Committee and the Exchange Member Nominating Committee 
nominated in accordance with the governance documents of the 
Exchange.\34\ Through these requirements in the DEI Bylaws, the 
Commission believes that the same procedures governing the election of 
Exchange directors and Exchange member directors that the Commission 
approved in the Order will continue to apply following the Corporate 
Reorganization.\35\ Accordingly, the Commission finds that the proposal 
is consistent with the requirement in Section 6(b)(3) of the Act that 
the rules of the Exchange provide for the fair representation of its 
members in the selection of directors and the administration of the 
Exchange.
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    \34\ See DEI Bylaws, Article II, Section 2.15(b).
    \35\ See Order, supra note 4, at notes 94-120 and accompanying 
text, for a discussion of the Exchange's procedures for nominating 
directors and Exchange member directors.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\36\ that the proposed rule change (File No. SR-EDGX-2010-02) is 
approved.
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    \36\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-18158 Filed 7-23-10; 8:45 am]
BILLING CODE 8010-01-P