[Federal Register Volume 80, Number 133 (Monday, July 13, 2015)]
[Notices]
[Pages 40100-40107]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-16975]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75374; File No. SR-BOX-2015-22]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing of Proposed Rule Change to Implement the Governance 
Provisions of an Equity Rights Program

July 7, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on June 25, 2015, BOX Options Exchange LLC (the ``Exchange'') 
filed with the Securities and Exchange Commission (the ``Commission'') 
the proposed rule change as described in Items I, II, and III below, 
which Items have been prepared by the self-regulatory organization. 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 implement the governance provisions of an 
equity rights program (the ``VPR Program''). Upon Commission approval 
of the proposed rule change, BOX Holdings Group LLC (``Holdings''), an 
affiliate of the Exchange and direct parent entity of BOX Market LLC, a 
facility of the Exchange (``BOX''), proposes to amend the existing 
Limited Liability Company Agreement of Holdings (the ``Holdings LLC 
Agreement'') by adopting an Amended and Restated Limited Liability 
Company Agreement of Holdings (the ``Restated Holdings LLC 
Agreement''). There are no other proposed changes to any rule text. The 
text of the proposed rule change is available from the principal office 
of the Exchange, at the Commission's Public Reference Room and also on 
the Exchange's Internet Web site at http://boxexchange.com.

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

    In its filing with the Commission, the self-regulatory organization 
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

[[Page 40101]]

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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to implement the governance provisions of the 
VPR Program, in which certain BOX Options Participants (each, a 
``Participant'') elected to participate. The Exchange notified all of 
its Participants of the opportunity to participate in the VPR Program 
by Regulatory Circular published on October 1, 2014. All Participants 
that indicated interest in participating in the VPR Program by October 
31, 2014 and that subscribed to the VPR Program by January 14, 2015 
were permitted to participate in the VPR Program.
    The purpose of this rule filing is, subject to Commission approval, 
to fulfill a condition to providing Subscribers the full benefits 
intended through the VPR Program by permitting Holdings to amend the 
Holdings LLC Agreement by adopting the Restated Holdings LLC Agreement.
Background
    In order to implement the VPR Program, the Exchange has already 
submitted a proposed rule change under Section 19(b)(3)(A)(ii) of the 
Securities Exchange Act of 1934 (the ``Act'') \3\ and Rule 19b-4(f)(2) 
thereunder,\4\ for immediate effectiveness, inasmuch as it establishes 
or changes a due, fee, or other charge imposed by the Exchange.\5\ In 
addition, the Exchange is submitting this proposed rule change under 
Section 19(b)(1) of the Act \6\ and Rule 19b-4 thereunder,\7\ subject 
to Commission approval, to make changes to its company governance 
documents to accommodate aspects of the VPR Program that involve or 
affect the Restated Holdings LLC Agreement of Holdings.
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    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
    \5\ See Securities Exchange Act Release No. 74114 (January 22, 
2015), 80 FR 4611 (January 28, 2015) (Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change to Implement an Equity 
Rights Program). See also Securities Exchange Act Release No. 74576 
(March 25, 2015), 80 FR 17122 (March 31, 2015) (Notice of Filing and 
Immediate Effectiveness of a Proposed Rule Change to Clarify Certain 
Statements Made in SR-BOX- 2015-03).
    \6\ 15 U.S.C. 78s(b)(1).
    \7\ 17 CFR 240.19b-4.
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    Participants that elected to participate in the VPR Program have 
the right to acquire equity in and receive distributions from Holdings, 
in exchange for the achievement of certain order flow volume commitment 
thresholds on the Exchange over a period of five (5) years and a 
nominal initial cash payment. The purpose of the VPR Program is to 
promote the long-term interests of the Exchange by incentivizing 
Participants to contribute to the growth and success of BOX by 
providing enhanced levels of trading volume to BOX.
    Upon initiation of the VPR Program by Holdings, Participants that 
elected to participate in the VPR Program, met the eligibility criteria 
and made the initial cash payment (``Subscribers''), were issued Volume 
Performance Rights (``VPRs'') in tranches of twenty (20) VPRs (each, a 
``Tranche'') with a minimum subscription of two (2)Tranches per 
Subscriber. Twenty-seven (27) Tranches have been issued in connection 
with the VPR Program.
    Each VPR is comprised of the right to receive 8.5 unvested new 
Class C Membership Units of Holdings (``Class C Units''), upon 
effectiveness of this rule filing, and an average daily transaction 
volume commitment (``VPR Volume Commitment'') equal to 0.0055% of 
Industry ADV, as measured in Qualifying Contract Equivalents, for a 
total of five (5) years (twenty (20) consecutive measurement 
quarters).\8\ The VPR Volume Commitment, in terms of total contracts, 
will change based on the movement of the Industry ADV. One VPR per 
Tranche will be eligible to vest each quarter of the five (5) year 
Program period, subject to the Subscriber meeting its volume commitment 
for that quarter. In addition, VPRs may be reallocated among 
Subscribers based upon exceeding or failing to meet Subscribers' volume 
commitments during the VPR Program period.
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    \8\ The measurement of order flow for purposes of the VPR 
Program first began on January 12, 2015, the first trading day after 
the first Subscribers subscribed to the VPR Program. However, BOX 
extended the deadline to accommodate Subscribers; therefore, the 
first measurement date began later for a Subscriber that submitted 
the required documents and payment during the extension period. See 
Securities Exchange Act Release No. 74171 (January 29, 2015), 80 FR 
6153 (February 4, 2015) (Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change To Extend the Deadline for 
the VPR Program to January 14, 2015).
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Ownership Units
    As discussed above, each VPR held by a Subscriber includes the 
right to receive 8.5 Class C Units of Holdings within ten (10) business 
days after effectiveness of this rule filing and the completion or 
waiver of the conditions to closing. Currently, Holdings has issued and 
outstanding Class A and Class B membership units. Class C Units will be 
created by the adoption of the Restated Holdings LLC Agreement and, at 
such time, Holdings will admit the Subscribers as Class C Members. 
Class C Units may be held in fractional numbers equal to one half Unit. 
Units may, but need not be, represented by physical certificates. The 
Restated Holdings LLC Agreement provides for the maintenance of capital 
accounts and other accounting and tax provisions relating to the Class 
C Units.
    The existing limitations on the percentage ownership of Holdings by 
Participants will continue to apply. In the event that a Member, or any 
Related Person \9\ of a Member, is a Participant pursuant to the 
Exchange Rules, and the Member owns more than 20% of the Units, alone 
or together with any

[[Page 40102]]

Related Person of the Member (Units owned in excess of 20% being 
referred to as ``Excess Units''), the Member and its designated 
Directors will have no voting rights with respect to the Excess Units 
on any action relating to BOX Holdings nor will the Member or its 
designated Directors, if any, be entitled to give any proxy with 
respect to the Excess Units in relation to a vote of the Members; 
provided, however, that whether or not the Member or its designated 
Directors, if any, otherwise participates in a meeting in person or by 
proxy, the Member's Excess Units will be counted for quorum purposes 
and will be voted by the person presiding over quorum and vote matters 
in the same proportion as the Units held by the other Members are voted 
(including any abstentions from voting).\10\
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    \9\ ``Related Person'' means with respect to any Person: (A) any 
Affiliate of the Person; (B) any other Person with which the first 
Person has any agreement, arrangement or understanding (whether or 
not in writing) to act together for the purpose of acquiring, 
voting, holding or disposing of Units; (C) in the case of a Person 
that is a company, corporation or similar entity, any executive 
officer (as defined under Rule 3b-7 under the Exchange Act) or 
director of the Person and, in the case of a Person that is a 
partnership or limited liability company, any general partner, 
managing member or manager of the Person, as applicable; (D) in the 
case of any BOX Options Participant who is at the same time a 
broker-dealer, any Person that is associated with the BOX Options 
Participant (as determined using the definition of ``person 
associated with a member'' as defined under Section 3(a)(21) of the 
Exchange Act); (E) in the case of a Person that is a natural person 
and a BOX Options Participant, any broker or dealer that is also a 
BOX Options Participant with which the Person is associated; (F) in 
the case of a Person that is a natural person, any relative or 
spouse of the Person, or any relative of the spouse who has the same 
home as the Person or who is a director or officer of the Exchange 
or any of its parents or subsidiaries; (G) in the case of a Person 
that is an executive officer (as defined under Rule 3b-7 under the 
Exchange Act) or a director of a company, corporation or similar 
entity, the company, corporation or entity, as applicable; and (H) 
in the case of a Person that is a general partner, managing member 
or manager of a partnership or limited liability company, the 
partnership or limited liability company, as applicable. 
``Affiliate'' means, with respect to any Person, any other Person 
controlling, controlled by or under common control with, the Person. 
As used in this definition, the term ``control'' means the 
possession, directly or indirectly, of the power to direct or cause 
the direction of the management and policies of a Person, whether 
through the ownership of voting securities, by contract or otherwise 
with respect to the Person. A Person is presumed to control any 
other Person, if that Person: (i) is a director, general partner, or 
officer exercising executive responsibility (or having similar 
status or performing similar functions); (ii) directly or indirectly 
has the right to vote 25 percent or more of a class of voting 
security or has the power to sell or direct the sale of 25 percent 
or more of a class of voting securities of the Person; or (iii) in 
the case of a partnership, has contributed, or has the right to 
receive upon dissolution, 25 percent or more of the capital of the 
partnership. See proposed Restated Holdings LLC Agreement Section 
1.1.
    \10\ See proposed Restated Holdings LLC Agreement Section 
7.4(h).
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    Upon completion of the VPR Program, all outstanding Class C Units 
associated with vested VPRs will be automatically converted into an 
equal number of Class A Units and all outstanding Class C Units 
associated with unvested VPRs will be automatically cancelled and be of 
no further effect. All rights related to Class C Units will terminate 
automatically upon cancellation or conversion and rights related to the 
converted Class A Units will remain, subject to the terms of the 
Restated Holdings LLC Agreement.\11\
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    \11\ See proposed Restated Holdings LLC Agreement Section 
2.5(e).
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Voting
    Each Class C Member will have the right to vote its Class C Units 
that are associated with vested VPRs (``Voting Class C Units'') on 
matters submitted to a vote of all holders of Units. VPRs will vest in 
accordance with the vesting provisions of the VPR Program.\12\ Members 
holding Voting Class C Units will vote with Members holding all other 
classes of Units. Members holding Voting Units \13\ will be entitled to 
vote together, as a single class, each with one vote per Voting Unit so 
held.\14\ Issued and outstanding Class C Units that are not Voting 
Class C Units will not have voting rights. Accordingly, as a Subscriber 
meets or exceeds volume commitments, voting powers as Class C Member of 
Holdings will increase. Similarly, if Subscribers do not meet volume 
commitments, voting powers will decrease.
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    \12\ See supra, note 5.
    \13\ ``Voting Unit'' means any Class A Unit, Class B Unit, or 
Voting Class C Unit.
    \14\ See proposed Restated Holdings LLC Agreement Section 
4.13(a).
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    The Holdings LLC Agreement currently provides, and the Restated 
Holdings LLC Agreement will continue to provide, that any Director 
designated by either MX US 2, Inc. or IB Exchange Corp may effectively 
block certain actions of Holdings (the ``Major Action Veto''). The 
Restated Holdings LLC Agreement provides that, upon vesting of VPRs 
associated with Class C Units equal to at least 25% of the total 
outstanding Units, the Major Action Veto will automatically expire and 
be of no further effect. Also, when the 25% threshold is met, the 
Restated Holdings LLC Agreement also provides that Holdings and its 
Members will take all necessary action to amend the Limited Liability 
Company Agreement of BOX to eliminate the major action veto provisions 
therein that are applicable to BOX and inure to the benefit of MX US 2, 
Inc. and IB Exchange Corp and to provide that the executive committee 
of BOX will be constituted in the same manner as the Executive 
Committee of Holdings.\15\
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    \15\ See proposed Restated Holdings LLC Agreement Section 16.4.
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    The Restated Holdings LLC Agreement includes a new supermajority 
voting requirement that Members holding at least 67% of all outstanding 
Voting Units must vote to approve certain actions (the ``Supermajority 
Actions'') by Holdings.\16\ The new supermajority voting requirement 
will be in addition to all other existing voting requirements 
applicable to Holdings and any actions Holdings may take, including the 
Major Action Veto. This new requirement provides additional protections 
to Subscribers and Members that Supermajority Actions will not be 
undertaken without broad support among holders of Voting Units.
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    \16\ See proposed Restated Holdings LLC Agreement Section 
4.13(b).
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    Supermajority Actions include the following: (i) Merger or 
consolidation of Holdings or BOX with any other entity, a sale of 
Holdings or BOX, or the sale, lease or transfer, by Holdings or BOX, of 
any material portion of its assets; (ii) entry by Holdings or BOX into 
any line of business other than the business described in Article 3 of 
the Restated Holdings LLC Agreement or in Article 3 of the Limited 
Liability Company Agreement of BOX; (iii) conversion of Holdings or BOX 
from a Delaware limited liability company into any other type of 
entity; (iv) except as expressly contemplated by a members agreement 
among the Members (the ``Members Agreement''), Holdings or BOX entering 
into any agreement, commitment, or transaction with any Member or any 
of its Affiliates other than transactions or agreements upon 
commercially reasonable terms that are no less favorable to Holdings or 
BOX, respectively, than Holdings or BOX would obtain in a comparable 
arms-length transaction or agreement with a third party; (v) to the 
fullest extent permitted by law, taking any action to effect the 
voluntary, or which would precipitate an involuntary, dissolution or 
winding-up of Holdings or BOX; (vi) except as otherwise provided in the 
facility agreement between the Exchange and BOX (the ``Facility 
Agreement'') or to the extent otherwise required by the Exchange to 
fulfill its regulatory functions or responsibilities or to oversee the 
BOX Market as determined by the board of the Exchange, the issuance, by 
Holdings, of any additional equity interests in, or any securities 
exchangeable for or convertible into equity securities of, Holdings 
other than the following, as approved by the Holdings Board and in the 
aggregate not to exceed ten percent (10%) of the outstanding equity 
interests of Holdings: (A) Equity interests, options or convertible 
securities issued as a dividend, Unit split or distribution on existing 
Units, (B) equity interests issued to employees or Directors of, or 
consultants or advisors to, Holdings or one or more subsidiaries 
thereof pursuant to a plan, agreement or arrangement, (C) equity 
interests issued upon the exercise of options or convertible securities 
issued by Holdings, provided each such exercise or conversion is in 
accordance with the terms of each such option or security, and (D) 
equity interests issued by Holdings in the acquisition of any business; 
(vii) the issuance, by BOX, of any additional equity interests in, or 
any securities exchangeable for or convertible into equity securities 
of, BOX, except as otherwise provided in the Facility Agreement or to 
the extent otherwise required by the Exchange to fulfill its regulatory 
functions or responsibilities or to oversee the BOX Market as 
determined by the board of the Exchange; (viii) permitting BOX to 
operate the BOX Market utilizing any other regulatory services provider 
other than the Exchange, except as otherwise provided in the Facility 
Agreement or to the extent otherwise required by the Exchange to 
fulfill its regulatory functions or responsibilities or to oversee the 
BOX Market as determined by the Exchange Board; (ix) except as 
otherwise provided in the Facility Agreement, entering into, or 
permitting any subsidiary of Holdings to enter into,

[[Page 40103]]

any partnership, joint venture or other similar joint business 
undertaking; (x) making a fundamental change to the business model of 
BOX to be other than a for-profit business, except to the extent 
otherwise required by the Exchange to fulfill its regulatory functions 
or responsibilities or to oversee the BOX Market as determined by the 
Exchange Board; (xi) subject to the transfer provisions of the Restated 
Holdings LLC Agreement, the acquisition of any Units by any person that 
results in the person, alone or together with any Affiliate of the 
person, newly holding an aggregate percentage interest equal to or 
greater than twenty percent (20%); (xii) altering the provisions 
relating to the designation of Directors set forth in Section 4.1(a), 
except to the extent otherwise required by the Exchange to fulfill its 
regulatory functions or responsibilities or to oversee the BOX Market 
as determined by the Exchange Board; and (xiii) altering or amending 
any of the Supermajority Actions provisions, except to the extent 
otherwise required by the Exchange to fulfill its regulatory functions 
or responsibilities or to oversee the BOX Market as determined by the 
Exchange Board.
    Amendments to the Restated Holdings LLC Agreement that alter the 
terms of one or more classes of Units in a manner that would 
materially, adversely and disproportionately (as compared with other 
classes of Units) affect the rights associated with the Class C Units 
as a class will require the written consent of holders of Class C Units 
(``Class C Members'') holding at least seventy-five percent (75%) of 
the then outstanding Class C Units and any amendment to the Restated 
Holdings LLC Agreement that would have a disproportionate (with respect 
to the same class), material and adverse effect on the rights 
associated with any Units, or impose any additional, disproportionate 
(with respect to the same Class) and material liability or obligation 
upon the holder of any Units, will not be effective without the consent 
of the holders of those Units.\17\
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    \17\ See proposed Restated Holdings LLC Agreement Section 
18.1(b)(ii).
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Directors
    The Restated Holdings LLC Agreement will amend the provisions 
governing composition of the Holdings Board. Currently, MX US 2, Inc. 
has the right to designate up to five (5) Directors, IB Exchange Corp 
has the right to designate up to two (2) Directors and each other 
Member has the right to designate one (1) Director to the Holdings 
Board and the Holdings Board has the power to increase the size of the 
Holdings Board and to authorize new Members to designate Directors.
    Under the Restated Holdings LLC Agreement, no Member may designate 
more than three (3) Directors and each Member may designate the maximum 
number of Directors permitted under any one (1) (but not more than one) 
of the following criteria: (i) Each Member, so long as it (together 
with its respective Affiliates) holds a combined total of Class A Units 
and Class B Units greater than two and one-half percent (2.5%) of all 
outstanding Voting Units, will be entitled to designate one (1) 
Director, (ii) each Member, so long as it (together with its respective 
Affiliates) holds a combined total of Voting Class C Units greater than 
four percent (4%) of all outstanding Voting Units, will be entitled to 
designate one (1) Director, (iii) each Member, so long as it (together 
with its respective Affiliates) holds a combined total of Voting Units 
greater than fourteen percent (14%) of all outstanding Voting Units, 
will be entitled to designate two (2) Directors, (iv) each Member, so 
long as it (together with its respective Affiliates) holds a combined 
total of Voting Units greater than twenty-eight percent (28%) of all 
outstanding Voting Units, will be entitled to designate three (3) 
Directors, and (v) each other existing Member may designate one (1) 
Director.\18\ Directors serving on the Holdings Board may also serve on 
the board of directors of any subsidiary of Holdings. If a Member 
ceases to qualify for the right to designate a Director then serving, 
that Director will then automatically be removed from the Holdings 
Board.
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    \18\ See proposed Restated Holdings LLC Agreement Section 4.1.
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    The Restated Holdings LLC Agreement will also amend the provisions 
governing the right of Members to designate members of the Executive 
Committee of Holdings (the ``Executive Committee''), if any. Currently, 
MX US 2, Inc. has the right to designate up to two (2) members of the 
Executive Committee (``EC Members'') and IB Exchange Corp has the right 
to designate one (1) EC Member. Under the Restated Holdings LLC 
Agreement, any Member with the right to designate three (3) Directors 
to the Holdings Board will have the right to designate up to two (2) EC 
Members and any Member with the right to designate two (2) Directors to 
the Holdings Board will have the right to designate one (1) EC Member. 
Other provisions relating to the composition of the Executive Committee 
will be unchanged.\19\
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    \19\ See proposed Restated Holdings LLC Agreement Section 
4.2(c).
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    Subscribers will also have the right to designate one individual to 
a new Advisory Committee organized by Holdings, the purpose of which 
will be to advise and make recommendations to Holdings with respect to 
the Exchange's competitiveness in the marketplace. Only Subscribers 
will have the right to designate individuals to serve on the Advisory 
Committee.\20\ The Advisory Committee will be advisory only and will 
not have any powers, votes or fiduciary duties to Holdings.
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    \20\ See Securities Exchange Act Release No. 74114 (January 22, 
2015), 80 FR 4611 at 4613 (January 28, 2015) (Notice of Filing and 
Immediate Effectiveness of a Proposed Rule Change to Implement an 
Equity Rights Program).
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Distributions
    Once per year, Holdings will make a distribution (an ``Annual 
Distribution'') to its Members to the extent funds are available for 
distribution.\21\ In determining the amount of each Annual 
Distribution, the Holdings Board will first provide for any regulatory 
needs of BOX and the Exchange, as determined by the Exchange Board, and 
any Annual Distribution amounts will be calculated after taking into 
account all financial and regulatory needs of the Exchange, as 
determined by the Exchange.\22\ The Annual Distribution will be equal 
to 80% of Free Cash Flow,\23\ except as limited by applicable law, 
including for regulatory and compliance purposes. In addition, another 
15% of Free Cash Flow will be included in the distribution, except to 
the extent the Holdings Board determines that any portion thereof is 
(i) required for the operations of Holdings and its subsidiaries, which 
will be reflected on the annual budget for the next year, (ii) required 
for payment of liabilities or

[[Page 40104]]

expenses of Holdings, or (iii) required as a reserve to make reasonable 
provision to pay other claims and obligations then known to, or 
reasonably anticipated by, BOX or Holdings. When, as and if declared by 
the Holdings Board, Holdings will make the cash distribution to each 
Member pro rata in accordance with the number of Units held by each 
Member, which will be determined by multiplying the aggregate Annual 
Distribution amount by each Member's Percentage Interest \24\ on the 
record date. Distributions to Class C Members may be adjusted as 
provided in the Members Agreement.\25\
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    \21\ Distributions on Class C Units will not be paid until this 
rule change is effective. Distributions payable on Class C Units 
that accrue before such effectiveness will be held in a segregated 
account until such effectiveness. If this rule filing does not 
become effective by July 1, 2016, a Subscriber may terminate its 
involvement in the VPR Program and any and all distributions with 
respect to Class C Units payable to that Subscriber held in the 
segregated account will be released back to Holdings and distributed 
to existing Members in accordance with the terms of the Holdings LLC 
Agreement. Id at 4612.
    \22\ See proposed Restated Holdings LLC Agreement Section 8.1.
    \23\ ``Free Cash Flow'' means consolidated net income, plus 
depreciation, less capital expenditures (in each case calculated in 
accordance with generally accepted accounting principles in the 
United States, as in effect from time to time) of Holdings and BOX, 
for the calendar year. See proposed Restated Holdings LLC Agreement 
Section 1.1.
    \24\ ``Percentage Interest'' with respect to a Member means the 
ratio of the number of Units held by the Member to the total of all 
of the issued Units, expressed as a percentage and determined with 
respect to each class of Units, whenever applicable. ``Units'' means 
Class A Membership Units, Class B Membership Units and Class C 
Membership Units of Holdings, whether or not associated with vested 
VPRs. See proposed Restated Holdings LLC Agreement Section 1.1.
    \25\ See proposed Restated Holdings LLC Agreement Section 8.1 
and see supra, note 5.
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Transfers
    Class C Units are not expected to be registered for resale by 
Holdings and may not be transferred without complying with, or 
qualifying for an exemption from, the registration requirements of the 
Securities Act. Any Transferee of Class C Units must become a party to 
the Members Agreement and the Restated Holdings LLC Agreement as a 
condition to the transfer.
    Transfers of Class C Units will be subject to certain rights of 
first refusal. Before a Class C Member may transfer Class C Units to a 
transferee that is not an Affiliate, the Class C Member must first 
offer to sell the Class C Units to Holdings on the same terms\26\ and, 
to the extent Holdings does not exercise its primary right of first 
refusal, the Class C Units must then be offered to the other Class C 
Members on the same terms.\27\
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    \26\ See proposed Restated Holdings LLC Agreement Section 7.2.
    \27\ See proposed Restated Holdings LLC Agreement Section 
7.3(b).
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    Class C Units will include pre-emptive rights. In the event 
Holdings proposes to issue and sell new equity securities of Holdings, 
other than for certain customary exceptions, a Class C Member will have 
the right to maintain its percentage ownership in Holdings represented 
by the Class C Units it holds, by electing to purchase from Holdings, 
on the same terms, a percentage of the new securities equal to the 
percentage of all outstanding securities of Holdings represented by the 
outstanding Class C Units held by the Class C Member.\28\
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    \28\ See proposed Restated Holdings LLC Agreement Section 
7.3(c).
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    Class C Units will be subject to co-sale rights. In the event a 
Class C Member proposes to Transfer Voting Class C Units (a 
``Transferring Member'') to a transferee that is not an Affiliate, each 
other Class C Member will have the right to sell a portion of its 
Voting Class C Units to the transferee on the same terms. All Class C 
Members that elect to exercise this right of co-sale may, collectively, 
sell a number of Voting Class C Units equal to one-half (1/2) of the 
total number of Voting Class C Units proposed to be sold by the 
Transferring Member. If more than one Class C Member elects to exercise 
this co-sale right, the number of Voting Class C Units each may sell 
will be divided pro rata among them based upon their relative ownership 
of Voting Class C Units.\29\
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    \29\ See proposed Restated Holdings LLC Agreement Section 
7.6(c).
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    Class C Units will be subject to drag-along rights. In the event 
that holders of at least seventy-five percent (75%) of the then 
outstanding Voting Units, including at least seventy-five percent (75%) 
of the then outstanding Voting Class C Units (collectively, the 
``Selling Members'') approve a sale of Holdings in writing, specifying 
that the drag-along rights will apply to the transaction, then each 
Class C Member will be required to approve, cooperate and participate 
as a seller of Class C Units in the transaction, subject to certain 
customary exceptions.\30\
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    \30\ See proposed Restated Holdings LLC Agreement Section 7.7.
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Miscellaneous
    The Holdings LLC Agreement currently requires, and the Restated 
Holdings LLC Agreement will continue to require, that, so long as MX US 
2, Inc. and its Affiliates own 4% or more of Holdings, it shall not 
invest in more than 5%, or participate in the creation and/or operation 
of, a competing business (the ``Non-compete Covenant''). The proposed 
Restated Holdings LLC Agreement provides that, upon vesting of VPRs 
associated with Class C Units equal to at least 10% of the total 
outstanding Units, the Non-compete Covenant will automatically expire 
and be of no further effect.
    Additional structural, technical and non-substantive changes to the 
Holdings LLC Agreement are proposed to accommodate the substantive 
changes described above.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\31\ Specifically, the Exchange believes that its proposed rule 
change is consistent with Section 6(b)(5) of the Act\32\ in that it is 
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 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. Additionally, the Exchange 
believes the proposed rule change is consistent with the requirement in 
Section 6(b)(5) of the Act\33\ that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. The Exchange also believes the proposed rule 
change is consistent with Section 6(b)(1) of the Act,\34\ which 
requires that the Exchange be so organized and 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.
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    \31\ 15 U.S.C. 78f(b).
    \32\ 15 U.S.C. 78f(b)(5).
    \33\ Id.
    \34\ 15 U.S.C. 78f(b)(1).
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Ownership
    The Exchange believes that continuing to apply the existing 
limitations on the percentage ownership of Holdings by Participants is 
just and equitable and not unfairly discriminatory because it will 
protect all Members, including Participants, by ensuring that no 
Participant will be permitted to vote more than a 20% ownership 
interest in Holdings. Therefore, no Participant will be able to assert 
excessive influence over Holdings. The diverse ownership of Holdings 
will enhance the Exchange's ability to enforce compliance by Holdings 
with the provisions of the Act, the rules and regulations thereunder, 
and the rules of the Exchange. Further, the diverse ownership of 
Holdings will promote just and equitable principles of trade, foster 
cooperation and coordination with persons engaged in

[[Page 40105]]

facilitating transactions in securities, remove impediments to and 
perfect the mechanisms of a free and open market and a national market 
system and, in general, protect investors and the public interest. The 
Exchange believes that the limit is reasonable and not unfairly 
discriminatory because each Participant Member may vote up to 20% so 
there is no risk that the limit will prevent a Participant with 
substantial ownership from being adequately represented.
    The Exchange believes that the conversion of Class C Units 
associated with vested VPRs into Class A Units at the end of the VPR 
Program is just and equitable and not unfairly discriminatory. Class A 
Units are the primary ownership unit of Holdings. The conversion is 
just and equitable and not unfairly discriminatory because, at the end 
of the VPR Program, each Subscriber will be rewarded with Class A Units 
to the extent it has met its obligations under the VPR Program.
Voting
    Limiting voting on matters submitted to a vote of all holders of 
Units to Class C Units that are associated with vested VPRs is just and 
equitable and not unfairly discriminatory because the Exchange does not 
believe it would be fair to treat Class C Units associated with 
unvested VPRs in the same manner as Class C Units associated with 
vested VPRs when it comes to matters of voting since vested VPRs in the 
VPR Program have satisfied certain requirements that provide value to 
Holdings in return for establishing a voting interest in Holdings. 
Additionally, the Exchange believes it is reasonable to exclude Class C 
Units associated with unvested VPRs from voting because Subscribers 
holding unvested VPRs are still able to provide input and make 
recommendations to Holdings through the VPR Program.\35\
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    \35\ See supra, note 20.
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    The Exchange believes that allowing the expiration of the Major 
Action Veto upon vesting of VPRs associated with Class C Units equal to 
at least 25% of the total outstanding Units is reasonable and not 
unfairly discriminatory because it will allow all Members to exert 
influence over the affairs and direction of Holdings in percentages 
more closely aligned with their respective ownership percentages. 
Eliminating the Major Action Veto from both the Restated Holdings LLC 
Agreement and the Limited Liability Company Agreement of BOX is just 
and equitable and not unfairly discriminatory because it will allow 
Holdings and BOX to undertake a broader range of actions without 
allowing a single Member to block such actions.
    The new supermajority voting requirement that Members holding at 
least 67% of all outstanding Voting Units must vote to approve 
Supermajority Actions is fair and reasonable because it will ensure 
sufficient oversight of the commercial affairs of Holdings and that any 
Supermajority Action undertaken is necessary, appropriate and in the 
best interest of Holdings and the Members. Additionally, supermajority 
voting will provide adequate safeguards and affirmative approval of 
significant changes to Holdings and will serve to protect the interest 
of the Members. The Exchange further believes that the supermajority 
voting provision is important given the new, more diverse ownership 
structure of Holdings. Specifically, requiring supermajority voting 
will ensure any substantial change in BOX will have to be approved by 
more than a simple majority.
    The proposed rule change will foster key changes to the governance 
of Holdings. Equity issued pursuant to the proposed rule change and in 
connection with the VPR Program is intended to reduce the ownership 
percentage of the existing majority owner of Holdings, MX US 2, Inc., 
below fifty percent (50%). If Subscribers meet expected order flow 
commitments pursuant to the VPR Program, the ownership of Holdings by 
current Members, including MX US 2, Inc., will be diluted such that no 
single Member will have a majority ownership.
    The elimination of the Major Action Veto, the addition of 
supermajority voting provisions, and the dilution of MX US 2, Inc.'s 
ownership below fifty percent (50%) will give Members other than MX US 
2, Inc. increased voting power and enhance the Exchange's ability to 
enforce compliance by Holdings with the Act and the rules of the 
Exchange. Further, such voting provisions will promote just and 
equitable principles of trade, foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, remove 
impediments to and perfect the mechanisms of a free and open market and 
a national market system and, in general, protect investors and the 
public interest.
    Requiring the written consent of Class C Members holding at least 
seventy-five percent (75%) of then outstanding Class C Units for any 
amendment to the Restated Holdings LLC Agreement that alters the terms 
of one or more classes of Units in a manner that would materially, 
adversely and disproportionately (as compared with other classes of 
Units) affect the rights associated with the Class C Units as a class 
is fair, reasonable and not unfairly discriminatory because it will 
protect Class C Units from being unfairly disadvantaged relative to the 
other classes of Units and will prevent the other classes of Units from 
unfairly discriminating against the Class C Units.
Directors
    The Exchange believes that setting the number of Directors that a 
Member can designate is fair, reasonable and not unfairly 
discriminatory because it will ensure that the Holdings Board has broad 
representation and that no single Member will be able to exert undue 
control and influence over the Holdings Board. The diverse makeup of 
the Holdings Board will enhance the Exchange's ability to enforce 
compliance by Holdings with the provisions of the Act, the rules and 
regulations thereunder, and the rules of the Exchange. Further, the 
Exchange believes that broad representation will be beneficial because 
it will foster cooperation and coordination, will contribute to the 
identification of opportunities for innovation and will enhance 
competition. The Exchange further believes that the various percentage 
thresholds for determining the number of Directors a Member can 
designate fosters cooperation and coordination with persons engaged in 
facilitating transactions in securities, removes impediments to and 
perfect the mechanisms of a free and open market and a national market 
system, protects investors and the public interest, and are just and 
equitable and not unfairly discriminatory because such thresholds 
generally align Members' economic interests with their respective 
representation on the Holdings Board. Further, the purpose of the VPR 
Program is to reward Subscribers that execute orders on the Exchange; 
the percentage thresholds for determining the number of Directors a 
Member is permitted to designate will reward those Members that 
contribute to the success of the Exchange by allowing them to designate 
additional Directors to the Holdings Board. The limitations on 
designated members of the Executive Committee of Holdings is fair, 
reasonable and not unfairly discriminatory because the Executive 
Committee has oversight responsibility over the affairs of Holdings and 
the Exchange believes it is reasonable to limit the membership of the 
Executive Committee to those Members that have a greater economic 
interest in Holdings.

[[Page 40106]]

Distributions
    The Exchange believes that the proposed distribution provisions are 
consistent with the Act and protects investors and the public interest 
because all financial and regulatory needs of the Exchange and BOX will 
be provided for in determining the amount each distribution. This rule 
change ensures that no funds necessary for the regulation of the 
Exchange or BOX will be distributed to the Members of Holdings and will 
provide the Exchange with the financial ability to carry out the 
purposes of the Act, to comply and to enforce compliance with the 
provisions of the Act and the rules and regulations thereunder, 
including the rules of the Exchange, to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade and to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transaction in 
securities.
Transfers
    The Exchange believes that the limitations on transferring Class C 
Units are fair, reasonable and not unfairly discriminatory. 
Specifically, requiring any such Transferee to become a party to the 
Members Agreement and the Restated Holdings LLC Agreement as a 
condition of a transfer fosters cooperation and coordination with 
persons engaged in facilitating transactions in securities, removes 
impediments to and perfect the mechanisms of a free and open market and 
a national market system, protects investors and the public interest, 
is just and equitable and not unfairly discriminatory because all 
Members are required to be parties to the Members Agreement and the 
Restated Holdings LLC Agreement, which ensures that the rule change 
will apply to all Members. The limitation on transferring Class C Units 
to a transferee that is not an Affiliate is just and equitable and not 
unfairly discriminatory because it preserves the rights of the other 
Members by protecting their ownership stake in Holdings. Further, the 
proposed rights of first refusal, pre-emptive rights, co-sale rights 
and drag-along rights are reasonable and not unfairly discriminatory as 
these rights provide stability among the ownership group, allow Members 
to participate in opportunities for third party transactions and 
protect the nature of the investment made by each Member. All of the 
proposed limitations on equity transfers enhance the Exchange's 
capacity and ability 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.
Miscellaneous
    The Exchange believes that the proposed rule change to permit the 
potential future expiration of the non-compete obligation of MX US 2, 
Inc. fosters cooperation and coordination with persons engaged in 
facilitating transactions in securities, removes impediments to and 
perfect the mechanisms of a free and open market and a national market 
system, protects investors and the public interest, and is just and 
equitable and not unfairly discriminatory. Currently, this restriction 
applies only to MX US 2, Inc. and not to other Members of Holdings. The 
expiration of this non-compete obligation was approved by the existing 
Members and will only take effect if MX US 2, Inc. becomes a minority 
Member of Holdings by reducing its ownership to less than fifty percent 
(50%) of the outstanding equity of Holdings. The expiration of this 
existing restriction will place all Members of Holdings on equal 
footing with respect to other investments they wish to make.

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes that 
the proposed rule change will improve competition by providing market 
participants with an incentive to consider and utilize another market, 
BOX, when determining where to execute options contracts and post 
liquidity.
    The Exchange believes that the proposed rule change will help the 
Exchange achieve the goals of the VPR Program to increase both 
intermarket and intramarket competition by incenting Subscribers to 
direct their orders to the Exchange, which will enhance the quality of 
quoting and increase the volume of contracts traded there. 
Notwithstanding these incentives, Subscribers will still be free to 
send orders to other markets, even if they have not met their volume 
commitment for that measurement period; thus the proposed change will 
not impose a burden on competition among exchanges. To the extent an 
additional competitive burden on non-Subscribers is imposed by the 
proposed rule change, the Exchange believes that this is appropriate 
because the VPR Program should incent Participants to direct additional 
order flow to the Exchange and thus provide additional liquidity, which 
enhances the quality of BOX and increases the volume of options traded 
on BOX. To the extent that this purpose is achieved, all of the 
Exchange's Participants, even non-Subscribers, should benefit from the 
improved market liquidity. Enhanced market quality and increased 
transaction volume that results from the anticipated increase in order 
flow directed to the Exchange will benefit all market participants and 
improve competition on the Exchange.
    Given the robust competition for volume among options markets, many 
of which offer the same products, implementing rule changes to help 
achieve the goals of a program to attract order flow like the VPR 
Program is consistent with the above-mentioned goals of the Act. This 
is especially true for a smaller options exchange, such as BOX, which 
is competing for volume with much larger exchanges that dominate the 
options trading industry. BOX captures a relatively modest percentage 
of the average daily trading volume in options, so it is unlikely that 
the rule change could cause any competitive harm to the options market 
generally or to market participants. Rather, the proposed rule change, 
which will allow BOX to fully implement the governance provisions of 
the VPR Program, is an attempt by a small options market to attract 
order volume away from larger competitors by adopting an innovative 
pricing strategy.
    Finally, the proposed rule change will permit an increase in the 
diversity of ownership of Holdings such that no one entity will have a 
majority ownership of Holdings. Upon the issuance of Class C Units to 
Subscribers, the ownership of Holdings will be distributed among more 
holders and distributed more evenly among existing holders. If there is 
full participation in the VPR Program, then the ownership of Holdings 
by its majority owner will be diluted and no single Member will have a 
majority ownership of Holdings.

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

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

[[Page 40107]]

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove the 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 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-BOX-2015-22 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-BOX-2015-22. 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, 100 F Street, NE., 
Washington, DC 20549, 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 office 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-BOX-2015-22, and should be 
submitted on or before August 3, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-16975 Filed 7-10-15; 8:45 am]
 BILLING CODE 8011-01-P