[Federal Register Volume 78, Number 22 (Friday, February 1, 2013)]
[Notices]
[Pages 7470-7472]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-02186]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68740; File No. SR-ISE-2013-07]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change To Amend the 
International Securities Exchange, LLC Amended and Restated 
Constitution

January 28, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on January 18, 2013, the International Securities Exchange, 
LLC (``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its Amended and Restated 
Constitution \3\ (the ``Constitution'') to: (i) Declassify the Non-
Industry Directors (including the Public Directors) of the Board; (ii) 
change the term of the Non-Industry Directors (including the Public 
Directors) and the Former Employee Director to a one (1) year term, 
subject to re-election; and (iii) eliminate the three-term limit for 
the Former Employee Director. Currently, Section 3.2(c) of the 
Constitution requires, in part, that Non-Industry Directors (including 
the Public Directors) \4\ and Exchange Directors \5\ be classified into 
two classes designated as Class I and Class II directors, and that all 
Directors (including the Former Employee Director) \6\ serve two (2) 
year terms, subject to re-election. The text of the proposed rule 
change is available on the Exchange's Web site www.ise.com, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.
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    \3\ Amended and Restated Constitution of International 
Securities Exchange, LLC (last amended December 28, 2007).
    \4\ Section 3.2(b)(iv) of the Constitution requires that the 
Board be composed of eight (8) Non-Industry Directors (at least two 
(2) of which are Public Directors) elected by the Sole LLC Member.
    \5\ Section 3.2(b)(i)-(iii) of the Constitution requires that 
the Board be composed of six (6) Exchange Directors elected by the 
holders of Exchange Rights.
    \6\ Section 3.2(b)(vi) of the Constitution allows the Sole LLC 
Member, in its sole and absolute discretion, [sic] elect one (1) 
additional director who shall meet the requirements of ``Non-
Industry Directors,'' except that such person was employed by the 
Exchange at any time during the three (3) year period prior to his 
or her initial election.
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II. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The self-regulatory organization has prepared summaries, 
set forth in Sections A, B and C below, of the most significant aspects 
of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to amend the 
Constitution: (i) To declassify the Non-Industry Directors (including 
the Public Directors) of the Board; (ii) to change the term of the Non-
Industry Directors (including the Public Directors) and the Former 
Employee Director to a one (1) year term, subject to re-election; and 
(iii) eliminate the three-term limit for the Former Employee Director. 
Currently, Section 3.2(c) of the Constitution requires, in part, that 
Non-Industry Directors (including the Public Directors) \7\ and 
Exchange Directors \8\ be classified into two classes designated as 
Class I and Class II directors, and that all Directors (including the 
Former Employee Director) \9\ serve two (2) year terms, subject to re-
election.
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    \7\ Section 3.2(b)(iv) of the Constitution requires that the 
Board be composed of eight (8) Non-Industry Directors (at least two 
(2) of which are Public Directors) elected by the Sole LLC Member.
    \8\ Section 3.2(b)(i)-(iii) of the Constitution requires that 
the Board be composed of six (6) Exchange Directors elected by the 
holders of Exchange Rights.
    \9\ Section 3.2(b)(vi) of the Constitution allows the Sole LLC 
Member, in its sole and absolute discretion, elect one (1) 
additional director who shall meet the requirements of ``Non- 
Industry Directors,'' except that such person was employed by the 
Exchange at any time during the three (3) year period prior to his 
or her initial election.
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    The Exchange proposes that Section 3.2(c) of the Constitution be 
amended to remove any references to Class I directors or Class II 
directors as such terms relate to Non-Industry Directors (including the 
Public Directors), and state that the Non-Industry Directors (including 
the Public Directors) would hold office for a one (1) year term, 
subject to re-election, as follows:

    ``[t]he Non-Industry Directors and the Public Directors shall 
hold office for a term expiring at the annual meeting of the Sole 
LLC Member and holders of Exchange Rights held in the first year 
following the year of their election, and until their successors are 
elected and qualified.''

For the avoidance of doubt, Non-Industry Directors (including the 
Public Directors) would continue to be elected by the Sole LLC Member 
at each annual meeting of the Sole LLC Member and holders of Exchange 
Rights in accordance with Section 3.2 of the Constitution.
    The Exchange further proposes to modify the term of the Former 
Employee Director so that any such director shall hold office for a one 
(1) year term, subject to re-election, and to make such corresponding 
technical changes to the applicable parts of Section 3.2(c). 
Furthermore, the Exchange proposes to eliminate the three-term limit 
for the Former Employee Director.\10\ Upon modification of the two (2) 
year term to a one (1) year term, the Former Employee Director would 
qualify to become a Non-Industry Director after serving on the Board of 
Directors for three (3) years as he/she would no longer have been 
employed by the

[[Page 7471]]

Exchange in the previous three (3) year period prior to his or her 
initial election. As such, there is no need for the three-term limit 
upon modification of the two (2) year term to a one (1) year term.
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    \10\ Section 3.2(e)(iv) of the Constitution provides that a 
Former Employee Director may not serve on the Board of Directors for 
more than three (3) consecutive terms. Any such director may be 
eligible for election as a director following a two-year hiatus from 
service on the Board of Directors, provided, that he or she meets 
the director qualifications pursuant to Section 3.2(b).
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    ISE believes that the declassification of the Non-Industry 
Directors (including the Public Directors), and the institution of a 
one year term for Non-Industry Directors (including the Public 
Directors) and the Former Employee Director, subject to reelection, 
would allow the Exchange to align its Board structure in accordance 
with corporate governance best practices guidelines which advocate the 
repeal of classified/staggered boards and the annual elections of 
directors, including, but not limited to, the Institutional Shareholder 
Services Proxy Voting Guidelines, the CalPERS Core Principles of 
Accountable Corporate Governance, the TIAA-CREF Policy Statement on 
Corporate Governance, and the AFI-CIO Proxy Voting Guidelines. The 
Exchange notes that just because it has one shareholder, the Sole LLC 
Member, as opposed to many shareholders in a public company, the 
Exchange nonetheless believes that the adherence to the aforementioned 
corporate governance best practices guidelines are beneficial to the 
Exchange in that it provides for flexibility, transparency, and 
accountability for the sole shareholder, and ultimately for the members 
of the Exchange and the customers of the Exchange members. 
Specifically, the Exchange believes that the proposed modifications to 
the Constitution would provide it with the most flexibility to 
structure the Board of Directors in a way that is most effective for: 
(i) Attracting and keeping Non-Industry Directors (including Public 
Directors) and the Former Employee Director who provide valuable 
insight and knowledge to the Board; (ii) providing the Sole LLC Member 
with the ability to evaluate and hold Non-Industry Directors (including 
Public Directors) and the Former Employee Director accountable on an 
annual basis; and (iii) removing underperforming, inactive, or 
ineffective Non-Industry Directors (including Public Directors) and the 
Former Employee Director who may be detrimental to the enhancement of 
long-term corporate value.
    Notwithstanding any of the foregoing, the Exchange is not proposing 
any changes to the current requirements in the Constitution which 
specify that Exchange Directors serve two (2) year terms in a 
classified/staggered manner as the Exchange believes that the current 
structure continues to be an effective and practical mechanism for 
ensuring continuity and fair representation of the Exchange's 
membership on the Board. Exchange Directors represent the membership of 
the Exchange on the Board of Directors and because of the direct 
connection between the Exchange's business and each Exchange Director's 
underlying business, Exchange Directors provide a very different 
perspective from the Non-Industry Directors (including Public 
Directors) and the Former Employee Director. Specifically, Exchange 
Directors not only have an interest in seeing certain Exchange 
initiatives through to implementation, but are uniquely positioned to 
offer valuable feedback on such initiatives directly to the Board of 
Directors. Given the regulatory nature of the Exchange's business and 
the extended period of time necessary to see initiatives through to 
implementation, it is the Exchange's belief and experience that a term 
longer than one (1) year is necessary for Exchange Directors to achieve 
the full benefit of participation of the Board. Furthermore, the 
Exchange believes that the classified structure of the Exchange 
Directors allows for a more consistent representation of the Exchange's 
membership on the Board of Directors. By never having a whole slate of 
new Exchange Directors join the Board at the same time, the Exchange 
believes that the classified structure allows incumbent Exchange 
Directors to provide leadership and continuity to new Exchange 
Directors and the Board of Directors, as a whole.
    The Exchange proposes that the declassification changes to the 
Board of Directors be implemented through a gradual process in which 
each current Non-Industry Director (including the Public Directors) 
will serve out the remainder of his or her two (2) year term and at the 
end of such term, the election or re-election of such Non-Industry 
Director (including the Public Directors) vacancy will be for a one (1) 
year term. This gradual process would result in a fully declassified 
Board of Directors at the conclusion of the Exchange's 2014 annual 
meeting of the Sole LLC Member and holders of Exchange Rights.
2. Statutory Basis
    The basis under the Exchange Act for this proposed rule change is 
the requirement under Section 6(b)(1) that an exchange be so organized 
so as to have the capacity to be able to carry out the purposes of the 
Exchange Act and to comply, and (subject to any rule or order of the 
Commission pursuant to Section 17(d) or 19(g)(2) of the Exchange Act) 
to enforce compliance by its members and persons associated with its 
members, with the provisions of the Exchange Act, the rules and 
regulations thereunder and the rules of the Exchange. The Exchange also 
believes this proposed rule change furthers the objective of Section 
6(b)(5) that an exchange have rules that, among other things, are 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
with persons engaged in 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.
    Specifically, the Exchange believes that because the proposed rule 
change does not modify the structure of the Exchange Directors, the 
Exchange continues to be organized so as to have the capacity to be 
able to carry out the purposes of the Exchange Act and to comply, and 
(subject to any rule or order of the Commission pursuant to Section 
17(d) or 19(g)(2) of the Exchange Act) to enforce compliance by its 
members and persons associated with its members, with the provisions of 
the Exchange Act, the rules and regulations thereunder and the rules of 
the Exchange. Furthermore, aligning the structure of the Non-Industry 
Directors (including the Public Directors) and the Former Employee 
Director in accordance with corporate governance best practices 
guidelines would ensure that the Exchange continues to have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to foster 
cooperation with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system. In addition, the 
Exchange believes that the proposed rule change protects investors and 
the public interest by providing the most flexibility to structure the 
Non-Industry Directors (including the Public Directors) and the Former 
Employee Director in a way that is most effective for: (i) Attracting 
and keeping Non-Industry Directors (including Public Directors) and the 
Former Employee Director who provide valuable insight and knowledge to 
the Board; (ii) providing the Sole LLC Member with the ability to 
evaluate and hold Non-Industry Directors (including Public Directors) 
and the Former Employee Director accountable on an annual basis; and 
(iii) removing underperforming, inactive, or ineffective Non-Industry 
Directors (including Public Directors)

[[Page 7472]]

and the Former Employee Director who may be detrimental to the 
enhancement of long-term corporate value.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition. Specifically, the proposed rule 
change only seeks to implement corporate governance best practices 
guidelines with respect to the structure of its Board of Directors and 
does not directly impact the Exchange's trading rules, its membership, 
or marketplace, and therefore does not implicate the competition 
analysis.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the publication date of this notice or within 
such longer period (1) as the Commission may designate up to 45 days of 
such date if it finds such longer period to be appropriate and 
publishes its reasons for so finding or (2) as to which the self-
regulatory organization consents, the Commission will:
    (a) By order approve or disapprove such proposed rule change; or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Exchange Act. Comments may be submitted 
by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-ISE-2013-07 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2013-07. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room on official business 
days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal offices of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-ISE-2013-07, and should be submitted on or before 
February 22, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-02186 Filed 1-31-13; 8:45 am]
BILLING CODE 8011-01-P