[Federal Register Volume 82, Number 193 (Friday, October 6, 2017)]
[Notices]
[Pages 46848-46865]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-21538]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81795; File No. SR-MRX-2017-18]


Self-Regulatory Organizations; Nasdaq MRX, LLC; Notice of Filing 
of Proposed Rule Change To Adopt New Corporate Governance and Related 
Process Similar to Those of the Nasdaq Exchanges

October 2, 2017.
    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 September 19, 2017, Nasdaq MRX, LLC (``MRX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III 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 Substance 
of the Proposed Rule Change

    The Exchange proposes a rule change (the ``Proposed Rule Change'') 
in connection with the proposed merger (the ``Merger'') with a newly-
formed Delaware limited liability company under the Exchange's ultimate 
parent, Nasdaq, Inc., resulting in the Exchange as the surviving 
entity. Following the Merger, the Exchange's board and committee 
structure, and all related corporate governance processes, will be 
harmonized with that of the three other registered national securities 
exchanges and self-regulatory organizations owned by Nasdaq, Inc., 
namely: The NASDAQ Stock Market LLC (``NSM''), NASDAQ PHLX LLC 
(``Phlx''), and NASDAQ BX, Inc. (``BX'' and together with NSM and Phlx, 
the ``Nasdaq Exchanges'').
    In connection with the Merger and as discussed more fully below, 
the Exchange proposes to adopt new organizational documents that set 
forth a corporate governance framework and related processes that are 
substantially similar in all material respects to those of the Nasdaq 
Exchanges.
    The Exchange intends to implement the Proposed Rule Change no later 
than by the end of Q4 2017. The Exchange will alert its members in the 
form of a Regulatory Alert to provide notification of the 
implementation date.
    The text of the proposed rule change is available on the Exchange's 
Web site at www.ise.com, at the principal office of the Exchange, and 
at the Commission's Public Reference Room.

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 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 Exchange 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 was recently acquired by Nasdaq, Inc. (``HoldCo'').\3\ 
Following the acquisition, the Exchange has continued to operate as a 
separate self-regulatory organization (``SRO'') and continues to have 
separate rules, membership rosters, and listings, distinct from the 
rules, membership rosters, and listings of the Nasdaq Exchanges as well 
as from ISE and GEMX. The Exchange now proposes to harmonize the 
corporate governance framework of the Exchange with that of the Nasdaq 
Exchanges, and submits this Proposed Rule Change to seek the 
Commission's approval of various changes to the Exchange's 
organizational documents and Rules that are necessary in connection 
with the Merger, as described below.
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    \3\ On June 30, 2016, HoldCo acquired all of the capital stock 
of U.S. Exchange Holdings, Inc., the Exchange's indirect parent 
company (the ``Acquisition''). As a result, the Exchange, in 
addition to its affiliates Nasdaq ISE, LLC (``ISE'') and Nasdaq 
GEMX, LLC (``GEMX''), became a wholly-owned subsidiary of HoldCo, 
and also became an affiliate of NSM, Phlx, and BX through common, 
ultimate ownership by HoldCo. HoldCo is the ultimate parent of the 
Exchange. See Securities Exchange Act Release No. 78119 (June 21, 
2016), 81 FR 41611 (June 27, 2016) (SR-ISEMercury-2016-10).
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    The proposed changes consist of: (1) Deleting the Exchange's 
current Limited Liability Company Agreement (the ``Current LLC 
Agreement'') in its entirety and replacing it with a new limited 
liability company agreement (the ``LLC Agreement'') that is based on 
the limited liability company agreement of NSM, (2) deleting the 
Exchange's current Constitution (``Current Constitution'' and together 
with the Current LLC Agreement, the ``Current Governing Documents'') in 
its entirety and replacing it with a new set of by-laws (the ``Bylaws'' 
and together with the LLC Agreement, the ``New Governing Documents'') 
that is based on the by-laws of NSM, and (3) making minor clarifying 
changes to its rules, as discussed below.\4\
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    \4\ The Exchange's affiliates, ISE and GEMX, have submitted 
nearly identical proposed rule changes. See Securities Exchange 
Release No. 81263 (July 31, 2017), 82 FR 36497 (August 4, 2017) (SR-
ISE-2017-32) (ISE Approval Order) and Securities Exchange Release 
No. 81422 (August 17, 2017), 82 FR 40026 (August 23, 2017) (SR-GEMX-
2017-37) (GEMX Notice of Filing).
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    All of the proposed changes are designed to align the Exchange's 
corporate governance framework to the existing structure at the Nasdaq 
Exchanges, particularly as it relates to

[[Page 46849]]

board and committee structure, nomination and election processes, and 
related governance practices.\5\ The Exchange is not proposing any 
amendments to its ownership structure and International Securities 
Exchange Holdings, Inc. (``ISE Holdings'') will remain as the 
Exchange's sole limited liability company member (``Sole LLC Member'') 
and owner of 100% of the Exchange's limited liability company 
interests. Furthermore, the Exchange is not proposing any amendments to 
its trading rules at this time relating to the Merger other than the 
minor clarifying changes and technical amendments as noted below.
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    \5\ The new LLC Agreement and Bylaws are based in form and 
substance on The NASDAQ Stock Market LLC's Second Amended Limited 
Liability Company Agreement (the ``NSM LLC Agreement'') and By-Laws 
(the ``NSM Bylaws''). Additionally, the majority of provisions in 
the organizational documents of Phlx and BX were also based on those 
of NSM with differences that relate mainly to disciplinary processes 
(for Phlx) or to corporate structure (for BX). Notwithstanding, the 
vast majority of the new governance framework and processes proposed 
herein are materially identical to those of all three Nasdaq 
Exchanges.
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A. The Merger
    In order to effectuate the proposed changes above, the Exchange 
proposes to merge with a Delaware limited liability company 
(``NewCo''), newly-formed as a wholly-owned subsidiary of ISE Holdings, 
resulting in the Exchange as the surviving entity. Specifically, 
pursuant to the Delaware Limited Liability Company Act, as amended from 
time to time (the ``LLC Act''), NewCo would be formed under ISE 
Holdings upon filing a certificate of formation with the Secretary of 
State of the State of Delaware (``DE Secretary of State''). 
Subsequently, the Exchange would enter into an agreement and plan of 
merger with NewCo (the ``Merger Agreement''), under which NewCo would 
merge into the Exchange, with the Exchange surviving the Merger. The 
Merger Agreement contemplates that the merged limited liability company 
(i.e. the Exchange) would have a new LLC Agreement and new Bylaws, 
which would be attached to the Merger Agreement. Then, a certificate of 
merger would be filed with the DE Secretary of State, which will 
effectuate the Merger at the time of filing. The new LLC Agreement and 
the new Bylaws would also become effective at the time of filing the 
certificate of merger. Under the LLC Act, the Merger is subject to 
approval by the Exchange Board and by ISE Holdings as the Sole LLC 
Member. The Exchange represents that it has obtained or will obtain the 
necessary approvals prior to filing the certificate of merger with the 
DE Secretary of State.
    Following the Merger, the Exchange proposes to be governed by the 
New Governing Documents in accordance with the LLC Act. The specific 
changes effected by the New Governing Documents to the current 
documents are discussed in the following sections.
B. Limited Liability Company Agreement
    Following the Merger, the Exchange proposes to adopt the LLC 
Agreement,\6\ which would replace the Current LLC Agreement.\7\ The 
proposed LLC Agreement reflects the expectation that the Exchange will 
be operated with a governance structure substantially similar to that 
of the Nasdaq Exchanges, and substantially mirrors the provisions found 
in the NSM LLC Agreement other than as specifically noted herein.\8\ 
Schedule B of the LLC Agreement describes the proposed ownership of the 
Exchange's limited liability company interests, which ownership 
structure is identical to that currently in place. ISE Holdings would 
remain as the Sole LLC Member (and a member of the Exchange within the 
meaning of the LLC Act) and the sole owner of 100% of the limited 
liability company interests of the Exchange. Except as specified below, 
the proposed changes do not affect the manner of the Exchange's 
operations or governance structure.
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    \6\ The proposed LLC Agreement was filed as part of the Proposed 
Rule Change as Exhibit 5B.
    \7\ The Current LLC Agreement was filed as part of the Proposed 
Rule Change as Exhibit 5A.
    \8\ See the Second Amended Limited Liability Company Agreement 
of The NASDAQ Stock Market LLC (the ``NSM LLC Agreement''). The 
Second Amended Limited Liability Company Agreement of NASDAQ PHLX 
LLC (the ``Phlx LLC Agreement'') is also based on and is 
substantially similar to the NSM LLC Agreement. BX is a Delaware 
corporation and is governed by a Certificate of Incorporation, not 
an LLC Agreement. However, the board structure is identical across 
the Nasdaq Exchanges and therefore, BX's Second Restated Certificate 
of Incorporation (the ``BX COI'') contains substantially similar 
governance provisions as the NSM LLC Agreement and Phlx LLC 
Agreement.
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    Section 1 of the LLC Agreement, titled ``Name,'' specifies the name 
of the surviving entity of the Merger as the name of the Exchange. 
Section 2 of the LLC Agreement, titled ``Principal Business Office,'' 
provides for the principal business office of the Exchange and such 
other location as may hereafter be determined by the Board.\9\
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    \9\ In June 2017, the Exchange relocated its office from 60 
Broad Street in New York to One Liberty Plaza in New York. 
Accordingly, Section 2 of the proposed LLC Agreement now reflects 
the new One Liberty Plaza address as the principal business office 
of the Exchange instead of the old 60 Broad address. Similarly, 
Schedule B of the proposed LLC Agreement, which includes the mailing 
address of the Exchange's Sole LLC Member, also reflects the new One 
Liberty Plaza address instead of 60 Broad as the Sole LLC Member's 
mailing address.
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    Sections 3 and 4 of the LLC Agreement, titled ``Registered Office'' 
and ``Registered Agent,'' specifies the place of the Exchange's 
registered office and the entity acting as its registered agent, which 
is the same place and entity used by the Nasdaq Exchanges.\10\ The 
Exchange proposes to replace its current registered office and agent 
set forth in Section 1.5 of the Current LLC Agreement with the 
registered office and agent used by the Nasdaq Exchanges for 
administrative efficiency. This change will not have any material 
substantive effect on the current operations or the governance of the 
Exchange.
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    \10\ See NSM LLC Agreement, Sections 3 and 4; Phlx LLC 
Agreement, Section 3; and BX COI, Article Second.
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    Section 5 of the LLC Agreement, titled ``Sole LLC Member,'' 
provides that the mailing address of the Sole LLC Member is set forth 
on Schedule B of the LLC Agreement. As noted above, ISE Holdings will 
remain as the Sole LLC Member of the Exchange.
    Section 6 of the LLC Agreement, titled ``Certificates,'' refers to 
the filing of the Certificate of Merger with respect to the Merger. 
Such provision acknowledges and confirms that such filings, which were 
necessary for the merger to be effected, were authorized by the 
Exchange. This Section additionally sets forth those person(s) who have 
the authority to file any other certificates with the Delaware 
Secretary of State on behalf of the Exchange pursuant to the LLC Act. 
This provision is purely administrative in nature and therefore will 
have no material substantive effect on the current operations or the 
governance of the Exchange.
    Section 7 of the LLC Agreement, titled ``Purposes,'' discusses the 
Exchange's business purpose, which provides that the Exchange may 
engage in any lawful act or activity for which limited liability 
companies may be formed under the LLC Act and any and all activities 
necessary or incidental to the foregoing. Without limiting these 
general powers, proposed Section 7 also specifically provides that the 
Exchange's business would include actions that support its regulatory 
responsibilities under the Act, including: (i) Supporting the 
operation, regulation, and surveillance of the national securities 
exchange operated by the Exchange, (ii) preventing fraudulent and 
manipulative acts and practices, promoting just and equitable 
principles of trade, fostering cooperation and coordination with

[[Page 46850]]

persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, removing impediments to and perfecting the mechanisms of a 
free and open market and a national market system, and, in general, 
protecting investors and the public interest, (iii) supporting the 
various elements of the national market system pursuant to Section 11A 
of the Act and the rules thereunder, (iv) fulfilling the Exchange's 
self-regulatory responsibilities as set forth in the Act, and (v) 
supporting such other initiatives as the Board may deem appropriate. 
Section 7 mirrors the Section 7 of the NSM LLC Agreement, and is 
similar to the language in Section 1.3 of the Current LLC Agreement of 
the Exchange.
    Section 8 of the LLC Agreement, titled ``Powers,'' discusses the 
general powers of the Exchange, the Board and the officers of the 
Exchange. Specifically, the Exchange, the Board and the officers on 
behalf of the Exchange (i) shall have and exercise all powers 
necessary, convenient or incidental to accomplish its purposes as set 
forth in Section 7 of the LLC Agreement and (ii) shall have and 
exercise all of the powers and rights conferred upon limited liability 
companies formed pursuant to the LLC Act. Section 8 is based on Section 
8 of the NSM LLC Agreement, and is similar to the provisions in the 
Current LLC Agreement and the Current Bylaws.\11\
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    \11\ See Current LLC Agreement, Sections 5.1 and 5.7 and Current 
Constitution, Sections 3.1 and 4.1
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    Section 9 of the LLC Agreement, titled ``Management,'' sets forth 
the proposed management structure of the Exchange. Section 9(a) 
pertains to the Board of the Exchange and provides that the Board will 
manage the Exchange's business and affairs, similar to the provisions 
in Section 5.1 of the Current LLC Agreement.\12\ By adopting new 
Section 9(a), the Exchange proposes to mirror the board structure of 
the Nasdaq Exchanges.\13\ The Exchange proposes to add language to 
indicate that the Sole LLC Member may determine at any time in its sole 
and absolute discretion the number of Directors \14\ to constitute the 
Board.\15\ The authorized number of Directors may be increased or 
decreased by the Sole LLC Member at any time in its sole and absolute 
discretion, upon notice to all Directors, but no decrease in the number 
of Directors shall shorten the term of any incumbent Member 
Representative Director. This language mirrors Section 9(a) of the NSM 
LLC Agreement. In addition, the exact composition of the Board is 
subject to the requirements in the Bylaws relating to independence and 
fair representation of members, which are described in detail below.
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    \12\ See also Current Constitution, Section 3.1.
    \13\ See NSM LLC Agreement, Section 9; Phlx LLC Agreement, 
Section 8; and BX COI, Article Fifth.
    \14\ ``Director'' will be defined as the persons elected or 
appointed to the board of directors from time to time in accordance 
with the LLC Agreement and the Bylaws, in their capacity as managers 
of the Exchange. See proposed Bylaw Article I(j), which is based on 
NSM Bylaw Article I(i).
    \15\ See proposed LLC Agreement, Section 9(a). In contrast, the 
Current Governing Documents have specific limits on the size of the 
Board in that the Exchange is required to have no less than eight 
and no more than sixteen directors. See Current LLC Agreement, 
Section 5.2 and Current Constitution, Section 3.2(a).
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Fair Representation of Members
    The Exchange proposes in Section 9(a), similar to the Nasdaq 
Exchanges, that at least 20% of the Directors would be Member 
Representative Directors.\16\ Member Representative Directors are 
elected or appointed after having been nominated by a Member Nominating 
Committee \17\ composed of representatives of the Exchange members or 
by Exchange members in the manner described in the proposed Bylaws.\18\ 
Currently, there are six directors on the Board who are officers, 
directors or partners of Exchange members, and are elected by a 
plurality of the holders of Exchange Rights \19\ (the ``Exchange 
Directors''),\20\ of which at least: (i) One must be elected by a 
plurality of the holders of Primary Market Maker (``PMM'') Exchange 
Rights, (ii) one must be elected by a plurality of holders of 
Competitive Market Maker (``CMM'') Exchange Rights, and (iii) one must 
be elected by a plurality of holders of Electronic Access Member 
(``EAM'') Exchange Rights; provided, however, that the number of each 
type of Exchange Director will always be equal to one another.\21\ The 
Exchange adopted the current board structure as it relates to Exchange 
Directors to comply with Section 6(b) of the Act, which provides that 
the Exchange must, among other things, assure fair representation of 
its members (here, the PMMs, CMMs, and EAMs) in the selection of its 
directors and administration of its affairs (the ``fair representation 
requirement'').\22\ Therefore, the Exchange believes that the Exchange 
Directors serve the same function on the current Board as ``Member 
Representative Directors'' on the boards of the Nasdaq Exchanges in 
that the Exchange Directors give members a voice in the Exchange's use 
of self-regulatory authority.\23\ The Exchange further believes that 
the new Board structure will still provide for the fair representation 
of its members because the new structure is well-established as meeting 
the fair representation requirement.\24\
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    \16\ See NSM LLC Agreement, Section 9; Phlx LLC Agreement, 
Section 8; BX Bylaws, Section 4.3. ``Member Representative 
Director'' will be defined as a Director who has been elected or 
appointed after having been nominated by the Member Nominating 
Committee or by an Exchange Member. A Member Representative Director 
may, but is not required to be, an officer, director, employee, or 
agent of an Exchange Member. See proposed Bylaw Article I(r), which 
is based on NSM Bylaw Article I(q).
    \17\ See proposed Section 6(b) of Bylaw Article III. ``Member 
Nominating Committee'' will be defined as the Member Nominating 
Committee appointed pursuant to the Bylaws. See proposed Bylaw 
Article I(q), which is based on NSM Bylaw Article I(p).
    \18\ The Commission has previously found that the requirement in 
the NSM LLC Agreement that 20% of the directors shall be ``Member 
Representative Directors'' and the means by which they are elected 
by the members provides for the fair representation of members in 
the selection of directors and administration of NSM consistent with 
the requirement in Section 6(b) of the Act. See Securities Exchange 
Act Release No. 53128 (Jan. 13, 2006), 71 FR 3550 (January 23, 2006) 
(Order Granting Registration as a National Securities Exchange).
    \19\ See Rule 300 Series. ``Exchange Rights'' means the PMM 
Rights, CMM Rights and EAM Rights collectively. See Rule 100(a)(17). 
PMM Rights, CMM Rights and EAM Rights have the meaning set forth in 
Article VI of the Current LLC Agreement. See Rules 100(a)(12), 
100(a)(15) and 100(a)(36). See also Current Constitution, Section 
13.1(o). PMMs, CMMs, and EAMs represent the three classes of 
membership on the Exchange. See Current Constitution, Sections 
13.1(f), 13.1(j) and 13.1(z).
    \20\ These directors are defined as ``Industry Directors'' in 
Section 3.2(b)(i) of the Current Constitution, but will be referred 
to herein as ``Exchange Directors.''
    \21\ See Current Constitution, Section 3.2(b). Section 3.2(b) 
further requires that the Board be composed of at least 30% Exchange 
Directors.
    \22\ See Section 6(b)(3) of the Act, 15 U.S.C. 78f(b)(3). Upon 
granting the Exchange's application for registration as a national 
securities exchange, the Commission found that the board composition 
requirements related to the Exchange Directors satisfied the 
principles of fair representation as required by Section 6(b) of the 
Act. See Securities Exchange Act Release No. 76998 (January 29, 
2016), 81 FR 6066 (February 4, 2016) (Order Granting Registration as 
a National Securities Exchange) (hereinafter, ``MRX Approval 
Order'').
    \23\ Currently, the six Exchange Directors comprise 37.5% of the 
sixteen-member Board.
    \24\ See note 18 above.
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    By adopting the new Board structure set forth in the New Governing 
Documents, the Exchange is proposing to replace the Exchange Director 
positions and all related concepts thereto,\25\ with Member 
Representative Director positions and all related concepts that will be 
further discussed below. In particular, there are a number

[[Page 46851]]

of provisions related to the Exchange Rights set forth in the Current 
Governing Documents that will not carry over into the New Governing 
Documents because they relate to the trading rights and privileges of 
the Exchange members.\26\ It should be noted that on MRX, the Exchange 
Rights do not convey any ownership rights, and only provide for voting 
rights for representation on the Board (i.e., through the Exchange 
Directors) and confers the ability to transact on the Exchange.\27\ 
Because the Exchange Director positions will not be reflected in the 
New Governing Documents for the reasons discussed above, the Exchange 
believes that the remaining provisions in the Current Governing 
Documents that relate to the trading rights of its members are more 
appropriately located in the Rules than in its organizational 
documents. Already, all of the provisions governing the trading 
privileges associated with the Exchange Rights that are located in the 
Current Governing Documents are also substantially set forth in the 
Rules,\28\ and the Exchange is not proposing any changes to those rules 
or to any of its trading rules in connection with the Merger except as 
noted below. As described in more detail below, the Exchange will amend 
its Rules only (i) to clarify any Rules that refer back to the Current 
LLC Agreement or the Current Constitution in the rule text or (ii) to 
relocate in the rulebook any provisions in the Current Governing 
Documents related to the trading privileges of the Exchange Rights 
holders that are not expressly set forth in the Rules. As such, the 
holders of Exchange Rights will continue to have the same trading 
privileges they currently hold as PMMs, CMMs and EAMs under the 
Exchange Rules and the proposed Board structure of the Exchange will 
not change any trading privileges. Virtually all of the proposed 
changes regarding the removal of Exchange Director positions and 
related concepts from the Exchange's organizational documents are 
corporate in nature, and are intended simply to conform the 
organizational documents with those of the Nasdaq Exchanges in order to 
harmonize the Exchange's board structure with its affiliates. The 
proposed changes will primarily affect current board composition 
requirements, the current nomination and election processes of the 
directors and the current committee composition requirements. These 
provisions are outlined in detail in the proposed Bylaws of the 
Exchange, which will be discussed below.
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    \25\ Related concepts include: ``CMM Right,'' ``Competitive 
Market Maker,'' ``EAM Right,'' ``Electronic Access Member,'' 
``Exchange Member Representative,'' ``Exchange Rights,'' ``Industry 
Directors'' (defined herein as ``Exchange Directors''), ``PMM 
Rights,'' ``Primary Market Maker,'' and ``Voting Rights.'' See 
Current Constitution, Section 13 for the definitions.
    \26\ See Current LLC Agreement, Article VI and Current 
Constitution, Article XII. The Exchange also notes that it is not 
carrying over the termination provisions in Section 6.4 of the 
Current LLC Agreement into the New Governing Documents as these 
generally relate to the voting rights associated with the Exchange 
Rights, and therefore will no longer be applicable for the reasons 
discussed above.
    \27\ See Current LLC Agreement, Sections 6.1 and 6.3 and Rules 
300 and 302(c); see also MRX Approval Order.
    \28\ For example, Exchange members holding PMM and CMM Rights 
may seek appointment to become market makers in one or more options 
classes traded on the Exchange, which entitles them to enter 
quotations and orders into the Exchange's trading system. See Rules 
100(a)(34), 100(a)(42) and Rule 800 series; see also Sections 
12.1(a) and 12.2(a) of the Current Constitution. Exchange members 
holding EAM Rights are entitled to enter orders into the Exchange's 
trading system and clear Exchange transactions. See Rules 100(a)(9) 
and 100(a)(34); see also Section 12.3(a) of the Current 
Constitution. The Exchange Rights may not be leased and are not 
transferable except in the event of a change in control of an 
Exchange member or corporate reorganization involving an Exchange 
member. See Rule 302(c); see also Current LLC Agreement, Section 6.4 
and Current Constitution, Sections 12.1(b), 12.2(b), and 12.3(b). 
There is no limit on the number of Exchange Rights issued by MRX. 
See Rule 300; see also Current LLC Agreement, Section 6.1.
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    New Section 9(a) of the LLC Agreement also proposes that all 
Directors other than the Member Representative Directors shall be 
elected by the Sole LLC Member in the manner described in the proposed 
Bylaws. Mirroring Section 9(a) of the NSM LLC Agreement, each Director 
elected, designated or appointed by the Sole LLC Member shall hold 
office until a successor is elected and qualified or until such 
Director's earlier death, resignation, expulsion or removal. As noted 
above, Member Representative Directors shall be elected in accordance 
with the Bylaws. Each Director shall execute and deliver an instrument 
accepting such appointment and agreeing to be bound by all the terms 
and conditions of the LLC Agreement and the Bylaws. A Director need not 
be an Exchange member.
    The Exchange is also proposing to adopt substantially similar 
provisions set forth in Section 9 of the NSM LLC Agreement with respect 
to the Powers of the Board, the By-Laws, the Meeting of the Board of 
Directors, Quorum; LLC Acts of the Board and Electronic 
Communications.\29\ The section discussing the Powers of the Board is 
similar to the current provisions in the Current Constitution in that 
the Board is vested with the power to do any and all acts necessary or 
for the furtherance of the purposes described in the LLC Agreement, 
including all powers, statutory or otherwise.\30\ The Board also has 
the power to bind the Exchange and delegate powers.\31\ As discussed in 
the Bylaws section below, the Bylaws proposed to be adopted by the 
Exchange, the Sole LLC Member and the Board in Section 9(c) of the LLC 
Agreement will replace the Current Constitution of the Exchange.
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    \29\ See proposed Sections 9(b) through (f) of the Exchange's 
LLC Agreement.
    \30\ See Current Constitution, Section 3.1.
    \31\ See Current LLC Agreement, Section 2.2 (providing that the 
Sole LLC Member does not have the power to bind the Exchange, said 
power being vested solely and exclusively in the Board) and Current 
Constitution, Sections 3.1, 4.13 and 5.1.
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    The Meeting of the Board of Directors subsection contains standard 
Delaware limited liability company provisions governing regular and 
special meetings of the board, and related notice provisions. Similar 
language is found in Section 3.6 of the Current Constitution, and the 
Exchange is proposing to streamline these administrative procedures 
across the Nasdaq Exchanges. The Exchange also proposes to add a 
provision in this subsection that all meetings of the Board of 
Directors of the Exchange (and any committees of the Exchange) 
pertaining to the self-regulatory function of the Exchange (including 
disciplinary matters) or relating to the structure of the market which 
the Exchange regulates shall be closed to all persons other than 
members of the Board of Directors and officers, staff, counsel or other 
advisors whose participation is necessary or appropriate to the proper 
discharge of such regulatory functions and any representatives of the 
Commission. The proposed language also prohibits members of the Sole 
LLC Member's board of directors who are not also members of the 
Exchange's board of directors or any officers, staff, counsel or 
advisors of the Sole LLC Member who are not also officers, staff, 
counsel or advisors of the Exchange from participating in such 
meetings.\32\
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    \32\ The proposed language on board and committee meeting 
participation in Section 9(d) is not in the governing documents of 
the Nasdaq Exchanges, but is retained from Section 3.2(d) of the 
Current Constitution and is intended to help maintain the 
independence of the Exchange's self-regulatory functions.
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    The subsections, Quorum; LLC Acts of the Board and Electronic 
Communications, contain standard Delaware limited liability company 
provisions governing quorum rules for Board actions, Board action by 
unanimous written consent, and how Board and committee members may 
participate in Board and committee meetings, as applicable. The 
Exchange notes that these provisions are similar in all material 
respects to those in the Current Governing Documents \33\ and

[[Page 46852]]

relate primarily to the administrative processes of the Board. 
Therefore, the Exchange is proposing to streamline these processes 
across the Nasdaq Exchanges for the sake of efficiency.
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    \33\ See Current Constitution, Sections 3.6 and 3.7.
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    Section 9(g) of the LLC Agreement generally discusses the standing 
committees and provides that the Board may designate one or more 
committees. By adopting new Section 9(g), the Exchange is proposing to 
delete the current committees set forth in Article V of the Current 
Constitution and adopt the standing committees similar to those of the 
Nasdaq Exchanges. Article V of the Current Constitution provides for 
the following committees: An Executive Committee, a Corporate 
Governance Committee, a Finance and Audit Committee, a Compensation 
Committee, and such other additional committees as may be established 
by Board resolution. Article V also provides for a nominating 
committee, which is a committee of the Exchange and not the Board, and 
nominates the Exchange Directors for election to the Board (the 
``Exchange Director Nominating Committee''). The Exchange proposes to 
replace these rules with ``Committees Composed Solely of Directors'' 
and ``Committees Not Composed Solely of Directors'' at newly proposed 
and named Bylaw Article III. The details of those committees will be 
discussed below in the Bylaws section.
    The Exchange proposes to adopt substantially similar provisions set 
forth in Section 9(g) of the NSM LLC Agreement with respect to the 
standing committees.\34\ First, as set forth in proposed subsection 
(g)(i), the Board may designate one or more Directors as alternate 
members of any committee who may replace any absent or disqualified 
member at any meeting of the committee. Second, in proposed subsection 
(g)(ii), the Committee members shall hold office for such period as may 
be fixed by a resolution adopted by the Board. Any member of a 
committee may be removed from such committee only by the Board. 
Vacancies shall be filled by the Board. Third, in proposed subsection 
(g)(iii), each committee may adopt its own rules of procedure and may 
meet at stated times or on such notice as such committee may determine. 
Each committee shall be required to keep regular minutes of its 
meetings and report the same to the Board when required. Fourth, in 
proposed subsection (g)(iv), a majority of the committee shall 
constitute a quorum and the vote of a majority present shall be an act 
of the committee. Finally, in proposed subsection (g)(v), to the extent 
provided in the resolution of the Board, any committee that consists 
solely of one or more Directors shall have and may exercise all the 
powers and authority of the Board in the management of the business and 
affairs of the Exchange. The Exchange also proposes in subsection 
(g)(v) to limit such committee from having the powers of the Board with 
respect to approving any matters pertaining to the self-regulatory 
function of the Exchange or relating to the structure of the market 
which the Exchange regulates.\35\ Such committee or committees shall 
have such name or names as may be determined from time to time by 
resolution adopted by the Board. Further, in the absence or 
disqualification of a member of a committee composed solely of 
Directors, the member or members thereof present at any meeting and not 
disqualified from voting, whether or not such members constitute a 
quorum, may unanimously appoint another member of the Board to act at 
the meeting in the place of any such absent or disqualified member. The 
foregoing provisions are similar to the language found in Section 5.1 
of the Current Constitution.
---------------------------------------------------------------------------

    \34\ See proposed LLC Agreement, Section 9(g)(i)-(v).
    \35\ This limitation is based on substantially similar language 
in Section 5.2(ii) of the Current Constitution, and is intended to 
assure the fair administration and governance of the Exchange.
---------------------------------------------------------------------------

    Similar to Section 3.9 of the Current Constitution, proposed 
Section 9(h) provides that the compensation of Directors shall be fixed 
by the Board. This language mirrors the provisions in Section 9(h) of 
the NSM LLC Agreement. The Removal and Resignation of Directors 
language in proposed Section 9(i) also mirrors Section 9(i) of the NSM 
LLC Agreement, and is similar to the resignation and removal language 
in Section 5.4 of the Current LLC Agreement and Sections 3.4 and 3.5 of 
the Current Constitution. The Directors as Agents language in proposed 
Section 9(j) provides that the Directors are agents of the Exchange and 
mirrors Section 9(j) of the NSM LLC Agreement.
    Section 10, titled ``Officers,'' the Exchange proposes to adopt 
identical language regarding officer appointments found in Section 10 
of the NSM LLC Agreement, which provisions are similar in nature to the 
existing provisions in Article IV of the Current Constitution.
    Section 11, titled ``Limited Liability,'' contains standard 
Delaware limited liability company language on the limitation of 
liability of the Sole LLC Member and the Directors in the manner 
permitted under the LLC Act. The proposed language is similar to the 
limitation of liability language found in the Current LLC Agreement 
\36\ and mirrors Section 11 of the NSM LLC Agreement.
---------------------------------------------------------------------------

    \36\ See Current LLC Agreement, Sections 2.3 and 5.8.
---------------------------------------------------------------------------

    Sections 12 through 14 of the LLC Agreement, which are virtually 
identical to Sections 12 through 14 of the NSM LLC Agreement, are 
equity-related provisions that encompass the topics of capital 
contributions, additional capital contributions, and allocations of 
profits and losses. These provisions set forth the basic economic 
arrangement of the Sole LLC Member and remain consistent with the 
economic arrangement under the Current Governing Documents.\37\ 
Proposed Section 15, which relates to distributions, provides that ISE 
Holdings, as the Sole LLC Member, is generally entitled to all 
distributions made by the Exchange. Similar to Section 3.3 of the 
Current LLC Agreement,\38\ however, proposed Section 15 also contains a 
stipulation that (i) the Exchange shall not be required to make a 
distribution to the Sole LLC Member on account of its interest in the 
Exchange if such distribution would violate the LLC Act or any other 
applicable law or is otherwise required to fulfill the regulatory 
functions or responsibilities of the Exchange, and (ii) Regulatory 
Funds shall not be used for non-regulatory purposes, but rather shall 
be used to fund the legal, regulatory and surveillance operations of 
the Exchange and the Exchange shall not make a distribution to the Sole 
LLC Member using Regulatory Funds.\39\ ``Regulatory Funds'' means fees, 
fines, or penalties derived from the regulatory operations of the 
Exchange. ``Regulatory Funds'' shall not be construed to include 
revenues derived from listing fees, market data revenues, transaction 
revenues, or any other aspect of the commercial operations of the 
Exchange, even if a portion of such revenues are used to pay costs 
associated with the

[[Page 46853]]

regulatory operations of the Exchange.\40\ This provision is designed 
to preclude the Exchange from using its authority to raise Regulatory 
Funds for the purpose of benefitting its Sole LLC Member.
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    \37\ See Current LLC Agreement, Sections 3.1 and 3.2.
    \38\ The Exchange notes that Section 3.3 of the Current LLC 
Agreement also sets forth two exceptions where the Sole LLC Member 
is entitled to distributions made by the Exchange: (i) For U.S. 
federal and state income tax purposes pursuant to Section 3.4 of the 
Current LLC Agreement and (ii) upon liquidation of the Exchange.
    \39\ The Nasdaq Exchanges will each separately file proposed 
rule changes to harmonize the distribution provisions in their 
respective governing documents with the language the Exchange 
proposes for Section 15, specifically to add the language imported 
from Section 3.3 of the Exchange's Current LLC Agreement.
    \40\ See proposed LLC Agreement, Schedule A.
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    Similar to Section 4.1 of the Current LLC Agreement, Section 16 of 
the LLC Agreement, titled ``Books and Records,'' sets forth certain 
information relating to general administrative matters with respect to 
the books and records of the Exchange. Specifically, the Board shall 
keep or cause to be kept complete and accurate books of account and 
records with respect to the Exchange's business. The books of the 
Exchange shall at all times be maintained by the Board. The Exchange's 
books of account shall be kept using the method of accounting 
determined by the Sole LLC Member. Further, the Exchange's independent 
auditor shall be an independent public accounting firm selected by the 
Board.\41\ Finally, the Exchange proposes to retain some of the 
existing concepts on books and records from Section 4.1(b) of the 
Current LLC Agreement in the new Section 16.\42\ First, the books of 
account and records with respect to the Exchange's business must be 
kept within the United States. Second, other than as provided in 
Section 16 with respect to the Commission, all confidential information 
pertaining to the self-regulatory function of the Exchange (including 
but not limited to disciplinary matters, trading data, trading 
practices and audit information) contained in the books and records of 
the Exchange shall: (i) Not be made available to any persons other than 
to those officers, directors, employees and agents of the Exchange that 
have a reasonable need to know the contents thereof; (ii) be retained 
in confidence by the Exchange and the officers, directors, employees 
and agents of the Exchange; and (iii) not be used for any non-
regulatory purposes. Nothing in the LLC Agreement shall be interpreted 
as to limit or impede the rights of the Commission to access and 
examine such confidential information pursuant to the federal 
securities laws and the rules and regulations thereunder, or to limit 
and impede the ability of any officers, directors, employees or agents 
of the Exchange to disclose such confidential information to the 
Commission.
---------------------------------------------------------------------------

    \41\ See Section 16 of the NSM LLC Agreement for substantially 
similar provisions.
    \42\ These concepts are generally not in the governing documents 
of the Nasdaq Exchanges, and relate to where the Exchange's books 
and records must be maintained and who may access such books and 
records, in particular those that contain confidential information 
pertaining to the self-regulatory function of the Exchange. While 
Phlx has a requirement under Section 15 of the Phlx LLC Agreement to 
keep its books and records in the United States, neither BX nor NSM 
has this requirement under their respective governing documents. 
Furthermore, none of the Nasdaq Exchanges have in their governing 
documents a provision that explicitly sets forth the Commission's 
right to access their books and records. The Nasdaq Exchanges will 
each separately file proposed rule changes to harmonize the books 
and records provisions in their respective governing documents with 
the language the Exchange proposes for Section 16.
---------------------------------------------------------------------------

    Section 17, titled ``Reports,'' is being added to mirror the 
language of the NSM LLC Agreement, and requires the Board, after the 
end of each fiscal year, to use reasonable efforts to cause the 
Exchange's independent accountants, if any, to prepare and transmit to 
the Sole LLC Member any tax information that the Sole LLC Member may 
reasonably need to prepare its federal, state and local income tax 
returns for such fiscal year.\43\ Section 18, titled ``Other 
Business,'' is standard language in the Delaware limited liability 
company context and merely states that the Sole LLC Member and any 
Director, officer, employee or agent of the Exchange may engage in 
other business and that the Exchange has no rights to such other 
business or the proceeds derived therefrom. The Exchange is proposing 
to mirror the language found in Section 18 of the NSM LLC Agreement.
---------------------------------------------------------------------------

    \43\ See Section 17 of the NSM LLC Agreement for identical 
provisions.
---------------------------------------------------------------------------

    Section 19, titled ``Exculpation and Indemnification,'' is based on 
Section 19 of the NSM LLC Agreement. Similar to the provisions in 
Article VI of the Current Constitution, the language provides for the 
exculpation and indemnification of ISE Holdings and any officer, 
Director, employee or agent of the Exchange or of the affiliate of ISE 
Holdings. Section 20, titled Assignments, is based on Section 20 of the 
NSM LLC Agreement, but retains similar transfer restrictions from 
Section 7.1 of the Current LLC Agreement on any assignments by the Sole 
LLC Member and prohibits the Sole LLC Member from transferring or 
assigning its limited liability company interest in the Exchange, 
unless the Commission approves such transfer or assignment pursuant to 
a rule filing under Section 19 of the Act.\44\ Section 21, titled 
``Dissolution,'' sets forth the events which will cause the dissolution 
of the Exchange, as prescribed by mandatory provisions of the LLC Act 
or as otherwise agreed among the parties, and is based on Section 21 of 
the NSM LLC Agreement. The proposed language is similar to the language 
currently in Section 7.2 of the Current LLC Agreement.
---------------------------------------------------------------------------

    \44\ BX has a similar provision in Section 9.4(c) of the BX 
Bylaws, which restricts HoldCo, as BX's sole shareholder, from 
transferring any shares of stock to any entity unless such transfer 
is filed and approved by the Commission pursuant to a rule filing. 
In contrast, Section 20 of the NSM LLC Agreement allows HoldCo, as 
NSM's sole LLC member, to assign NSM's limited liability company 
interest solely to an affiliate of HoldCo, but does not require 
approval by the Commission for such assignments. Phlx follows the 
NSM model. As such, Phlx and NSM will each separately file a 
proposed rule change to harmonize their assignment provisions with 
the Exchange's proposal hereunder.
---------------------------------------------------------------------------

    Sections 22 through 28 of the proposed LLC Agreement contain 
general provisions which are relatively standard in Delaware limited 
liability company agreements.\45\ These provisions include: A benefits 
of agreement clause, a severability clause, an entire agreement clause, 
a binding agreement clause, a governing law clause, an amendment 
provision and a notice provision. The Exchange notes that its members 
are acknowledged in proposed Section 22 as holding rights under the LLC 
Agreement and included as third-party beneficiaries to the LLC 
Agreement as is similarly provided in Section 22 of the NSM LLC 
Agreement.
---------------------------------------------------------------------------

    \45\ For example, see Sections 22 through 28 of the NSM LLC 
Agreement and Sections 22 through 28 of the Phlx LLC Agreement.
---------------------------------------------------------------------------

    Section 27, titled ``Amendments,'' provides that the LLC Agreement 
may be amended by a resolution adopted by the Board and a written 
agreement executed and delivered by the Sole LLC Member, and further 
provides that all such amendments to the LLC Agreement will not become 
effective until filed with, or filed with and approved by, the 
Commission, as required under Section 19 of the Exchange Act and the 
rules promulgated thereunder.\46\
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    \46\ This provision is based in concept on Section 6-9 of the 
Phlx Bylaws, which requires Phlx to file any amendments to the Phlx 
Bylaws with the Commission. The Phlx LLC Agreement, however, does 
not have a similar requirement for amendments to the Phlx LLC 
Agreement. As well, neither BX nor NSM has filing requirements for 
amendments in their respective governing documents. Therefore, the 
Nasdaq Exchanges will each separately file proposed rule changes 
with the Commission to add this requirement in (as applicable): The 
Phlx LLC Agreement, the BX COI, the BX Bylaws, the NSM LLC Agreement 
and the NSM Bylaws.
---------------------------------------------------------------------------

    The Exchange proposes to add a new Schedule A to the LLC Agreement, 
which contains key definitions used in the LLC Agreement. The Exchange 
also proposes a section on rules of construction further explaining the 
definitions in proposed Schedule A.
C. Bylaws
    The Exchange proposes to adopt the Bylaws,\47\ which would replace 
the

[[Page 46854]]

Exchange's Current Constitution.\48\ The Bylaws reflect the expectation 
that the Exchange will be operated with governance structures similar 
to those of the Nasdaq Exchanges. Accordingly, the Exchange proposes to 
adopt Bylaws that set forth the same corporate governance framework and 
related processes as those contained in the Bylaws of the Nasdaq 
Exchanges. Article I of the Bylaws, titled ``Definitions,'' contains 
key definitions used in the Bylaws, and are based on the defined terms 
used in NSM Bylaw Article I.
---------------------------------------------------------------------------

    \47\ The proposed Bylaws were filed as part of the Proposed Rule 
Change as Exhibit 5D.
    \48\ The Current Constitution was filed as part of the Proposed 
Rule Change as Exhibit 5C.
---------------------------------------------------------------------------

Nomination and Election Process
    Article II of the Bylaws, titled ``Annual Election of Member 
Representative Directors and Other Actions by Exchange Members,'' 
mirrors the language in NSM Bylaw Article II,\49\ and contains key 
provisions regarding the processes for the nomination and election of 
Member Representative Directors. As discussed in the LLC Agreement 
section above, the Exchange is proposing to replace the Exchange 
Directors with Member Representative Directors to harmonize its board 
structure with the Nasdaq Exchanges. The proposed nomination and 
election process for Member Representative Directors described in new 
Article II would replace the current processes for the Exchange 
Directors set forth in the Current Governing Documents.
---------------------------------------------------------------------------

    \49\ Phlx and BX also have the identical nomination and election 
processes for their Member Representative Directors. See Phlx Bylaw 
Article II and Section 4.4 of the BX Bylaws.
---------------------------------------------------------------------------

Current Nomination and Election Process
    Under the current nomination and election process, nominees for 
election of the Exchange Directors are selected each year by the 
Exchange Director Nominating Committee (which is not a Board committee 
but composed of three Exchange member representatives).\50\ A petition 
process will also allow holders of the Exchange Rights to nominate 
alternate candidates for consideration as Exchange Directors.\51\ At an 
annual meeting of the holders of Exchange Rights, the Exchange 
Directors are elected by a plurality of the votes cast at the meeting 
by the holders of Exchange Rights entitled to vote thereon.\52\ 
Following the full nomination, petition, and voting process, each 
Exchange Director holds office for a term of two years.\53\
---------------------------------------------------------------------------

    \50\ See Current Constitution, Section 3.10(a). With respect to 
the Exchange Director Nominating Committee process, the Secretary of 
the Exchange, on behalf of the Exchange Director Nominating 
Committee, will circulate a memorandum to all holders of Exchange 
Rights soliciting interest in presenting Exchange Director 
candidates to the Exchange Director Nominating Committee. Shortly 
after the receipt of candidate submissions, the Exchange Director 
Nominating Committee will conduct a short interview with each 
candidate. Following all interviews, the Exchange Director 
Nominating Committee, by majority vote, will select its Exchange 
Director candidates and the Secretary of the Exchange will inform 
the holders of Exchange Rights of the Exchange Director Nominating 
Committee's selections.
    \51\ See Current Constitution, Section 3.10(a). Specifically, in 
addition to the Exchange Director nominees named by the Nominating 
Committee, persons eligible to serve as such may be nominated for 
election to the Board by a petition, signed by the holders of not 
less than 5% of the outstanding Exchange Rights of the series 
entitled to elect such person if there are more than eighty (80) 
Exchange Rights in the series entitled to vote, ten percent (10%) of 
the outstanding rights of such series entitled to elect such person 
if there are between eighty (80) and forty (40) Exchange Rights in 
the series entitled to vote, and twenty-five percent (25%) of the 
outstanding Exchange Rights of such series entitled to elect such 
person if there are less than forty (40) Exchange Rights in the 
series entitled to vote. For purposes of determining whether a 
person has been nominated for election by petition by the requisite 
percentage, no Exchange member, alone or together with its 
affiliates, may account for more than fifty percent (50%) of the 
signatures of the holders of outstanding Exchange Rights of the 
series entitled to elect such person, and any such signatures by 
such Exchange members, alone or together with its affiliates, in 
excess of such fifty percent (50%) limitation shall be disregarded. 
Id.
    \52\ See Current Constitution, Sections 2.1 and 2.5. A holder of 
Exchange Rights, together with any affiliate, may not exercise the 
voting rights (i.e., voting to elect the Exchange Directors) 
associated with more than twenty percent (20%) of the outstanding 
Exchange Rights. See Current LLC Agreement, Section 6.3(b).
    \53\ See Current Constitution, Section 3.2(c).
---------------------------------------------------------------------------

    Specifically pursuant to Section 3.2(c) of the Current 
Constitution, the Exchange Directors are divided into two classes, 
designated as Class I and Class II directors. Each of Class I and Class 
II is comprised of half of the Exchange Directors. The Exchange 
Directors of each class holds office until their successors are duly 
elected and qualified. At each annual meeting of the holders of 
Exchange Rights, the successors of the class of Exchange Directors 
whose term expires at that meeting will be elected by the Exchange 
Rights holders to hold office for a term expiring at the annual meeting 
held in the second year following the year of their election, and until 
their successors are elected and qualified.\54\ No Exchange Director 
may serve more than three consecutive terms, and after a two-year 
hiatus, may be eligible to serve as an Exchange Director again.\55\
---------------------------------------------------------------------------

    \54\ Id.
    \55\ See Current Constitution, Sections 3.2(e). The Exchange 
does not impose term limits on Non-Industry Directors.
---------------------------------------------------------------------------

Proposed Nomination and Election Process
    The Exchange is proposing to adopt identical nomination and 
election processes as the Nasdaq Exchanges as set forth in proposed 
Bylaw Article II, Section 1 so that Member Representative Directors 
would be elected to the Board on an annual basis.\56\ For each annual 
election, the Board would select a Record Date \57\ and an Election 
Date.\58\ The Record Date would be at least 10 days but not more than 
60 days prior to the Election Date. The Member Nominating Committee, 
consisting of representatives of the Exchange members, would create a 
list of one or more candidates for each Member Representative Director 
position (the ``List of Candidates'') on the Board to be elected on the 
Election Date. Promptly after selection of the Election Date, in a 
notice transmitted to the Exchange members and in a prominent location 
on a publicly accessible Web site, the Exchange (i) shall announce the 
Election Date and the List of Candidates, and (ii) shall describe the 
procedures for Exchange members to nominate candidates for election at 
the next annual meeting. In the event of a Contested Election, the 
Exchange shall also send its members the List of Candidates and a 
formal notice of the Election Date, which notice shall be sent by the 
Exchange at least 10 days but no more than 60 days prior to the 
Election Date to the Exchange members that were Exchange members on the 
Record Date, by any means, including electronic transmission, as 
determined by the Board or committee thereof.
---------------------------------------------------------------------------

    \56\ See Section 1 of NSM Bylaw Article II, Section 2-1 of the 
Phlx Bylaws and Section 4.4 of the BX Bylaws. Currently, the 
Exchange Directors are elected for two-year terms.
    \57\ ``Record Date'' will be defined as a date selected by the 
Board for the purpose of determining the Exchange members entitled 
to vote for the election of Member Representative Directors on an 
Election Date in the event of a Contested Election. See proposed 
Bylaw Article I(bb), which is based on NSM Bylaw Article I(aa).
     ``Contested Election'' will be defined as an election for one 
or more Member Representative Directors for which the number of 
candidates on the List of Candidates exceeds the number of positions 
to be elected. See proposed Bylaw Article I(g), which is based on 
NSM Bylaw Article I(ee).
    \58\ ``Election Date'' will be defined as a date selected by the 
Board on an annual basis, on which the Exchange members may vote 
with respect to Member Representative Directors in the event of a 
contested election. See proposed Bylaw Article I(k), which is based 
on NSM Bylaw Article I(j).
---------------------------------------------------------------------------

    An additional candidate may be added to the List of Candidates by 
any Exchange member that submits a timely and duly executed written 
nomination to the Secretary of the Exchange. To be

[[Page 46855]]

timely, an Exchange member's notice would have to be delivered to the 
Secretary at the principal executive offices of the Exchange not later 
than the close of business on the 90th day nor earlier than the close 
of business on the 120th day prior to the first anniversary of the 
preceding year's Election Date, provided however that in the event that 
the Election Date is more than 30 days before or more than 70 days 
after such anniversary date, notice by the Exchange member must be so 
delivered not earlier than the close of business on the 120th day prior 
to such Election Date and not later than the close of business on the 
later of the 90th day prior to such Voting Election or the tenth day 
following the day on which public announcement of such Election Date is 
first made by the Exchange. Such Exchange member's notice shall set 
forth: (i) As to the person whom the Exchange member proposes to 
nominate for election as a Member Representative Director, all 
information relating to that person that is required to be disclosed in 
solicitations of proxies for election of directors in an election 
contest, or is otherwise required, in each case pursuant to Regulation 
14A under the Act and the rules thereunder (and such person's written 
consent to be named in the List of Candidates as a nominee and to 
serving as a Director if elected); (ii) a petition in support of the 
nomination duly executed by the Executive Representatives \59\ of 10% 
or more of all Exchange members; and (iii) the name and address of the 
Exchange members making the nomination. The Exchange may require any 
proposed nominee to furnish such other information as it may reasonably 
require to determine the eligibility of such proposed nominee to serve 
as a Member Representative Director.
---------------------------------------------------------------------------

    \59\ ``Executive Representative'' will be defined as an 
individual appointed by an Exchange member to represent, vote, and 
act for the Exchange member in all the affairs of the Exchange; 
provided, however, that other representatives of an Exchange member 
may also serve on the Board or committees of the Exchange or 
otherwise take part in the affairs of the Exchange. If an Exchange 
member is also a member of FINRA, the Exchange executive 
representative shall be the same person appointed to serve as the 
FINRA executive representative. An Exchange member may change its 
executive representative or appoint a substitute for its executive 
representative upon giving notice thereof to the Exchange Secretary 
via electronic process or such other process as the Exchange may 
prescribe. An executive representative of an Exchange member or a 
substitute shall be a member of senior management and registered 
principal of the Exchange member. Each executive representative 
shall maintain an Internet electronic mail account for communication 
with the Exchange and shall update firm contact information as 
prescribed by the Exchange. Each member shall review and, if 
necessary, update its executive representative designation and 
contact information in the manner prescribed by the Exchange. See 
proposed Bylaw Article I(l), which is based on NSM Bylaw Article 
I(k) and NSM Rule 1150.
---------------------------------------------------------------------------

    For purposes of determining whether a person has been nominated for 
election by petition by the requisite percentage, no Exchange member, 
alone or together with its affiliates, may account for more than 50% of 
the signatures endorsing a particular candidate, and any such 
signatures by such Exchange member, alone or together with its 
affiliates, in excess of such 50% limitation shall be disregarded.\60\
---------------------------------------------------------------------------

    \60\ This 50% limitation is not in the governing documents of 
the Nasdaq Exchanges but is based on the existing 50% limitation 
found in Section 3.10(a)(ii) of the Current Constitution. The 
existing 50% limitation caps the signature count by member class 
(i.e., 50% of the signatures of the holders of Exchange Rights of 
the series entitled to elect such person). Because the fair 
representation directors will no longer be elected separately by 
each member class but by the Exchange members as a whole, it is also 
no longer necessary to apply a separate 50% limitation on each class 
of members.
---------------------------------------------------------------------------

    If by the date on which an Exchange member may no longer submit a 
timely nomination, there is only one candidate for each Member 
Representative Director position to be elected on the Election Date, 
the Member Representative Directors will be elected by ISE Holdings as 
the Sole LLC Member from the List of Candidates. In the event of a 
Contested Election, the Exchange would conduct a vote to determine the 
candidates on the List of Candidates in accordance with proposed 
Section 2 of Bylaw Article II, which mirrors the language found in 
Section 2 of the NSM Bylaw Article II.
    If there is a Contested Election, each Exchange member would have 
the right to cast one vote for each Member Representative Director 
position to be filled; provided, however, that any such vote must be 
cast for a person on the List of Candidates. However, an Exchange 
member, either alone or together with its affiliates, may not cast 
votes representing more than 20% of the votes cast for a candidate, and 
any votes cast by the Exchange member, either alone or together with 
its affiliates, in excess of such 20% limitation would be 
disregarded.\61\ The votes would be cast by written ballot, electronic 
transmission or any other means as set forth in a notice to the 
Exchange members sent by the Exchange prior to the Election Date. Only 
votes received prior to 11:59 p.m. Eastern Time on the Election Date 
would count for the election of a Member Representative Director. The 
persons on the List of Candidates who receive the most votes would be 
elected to the Member Representative Director positions.
---------------------------------------------------------------------------

    \61\ This is the same as the 20% voting limitation included in 
Section 6.3(b) of the Exchange's Current LLC Agreement. See note 52 
above.
---------------------------------------------------------------------------

    New Section 3 of Bylaw Article II proposes that if a Member 
Representative Director position becomes vacant prior to the expiration 
of such person's term, or it an increase in the size of the Board 
results in the creation of a new Member Representative Director 
position, the Sole LLC Member will elect a person from a list of 
candidates prepared by the Member Nominating Committee to fill such 
vacancy, except that if the remaining term of office for the vacant 
Director position is less than six months, no replacement will be 
required. The proposal would replace the current process for filling 
Exchange Director vacancies on the Board,\62\ and mirrors Section 3 of 
NSM Bylaw Article II. Finally, new Section 4 of Bylaw Article II, 
copied from Section 4 of NSM Bylaw Article II, proposes that the 
Exchange will not be required to hold meetings of the Exchange 
members.\63\
---------------------------------------------------------------------------

    \62\ See Current Constitution, Section 3.3.
    \63\ In contrast, the Current Constitution requires that an 
annual meeting of the holders of Exchange Rights be held for the 
purpose of electing Exchange Directors to fill expiring terms. See 
Current Constitution, Section 2.1. As noted above for the proposed 
process, the Exchange members may vote in the event of a Contested 
Election, through a balloting process without a formal meeting.
---------------------------------------------------------------------------

    Related to the proposed changes to the Exchange's nomination and 
election process described above, the Exchange also proposes to create 
a Member Nominating Committee, which would replace the current Exchange 
Director Nominating Committee in nominating candidates for director 
positions that meet the fair representation requirement (i.e., the 
proposed Member Representative Directors). In addition, the new Member 
Nominating Committee would nominate candidates for committee positions 
that meet the fair representation requirement (i.e., the ``Member 
Representative members'').\64\ Similar to the Member Representative 
Directors on the Board, the function of Member Representative members 
is to provide members a voice in the administration of the Exchange's 
affairs, specifically on certain committees that are responsible for 
providing advice on any matters pertaining to the Exchange's self-
regulatory function or relating to the market structure which the 
Exchange regulates. The Exchange will therefore require that at least 
20% of the persons

[[Page 46856]]

serving on any such committees be individuals who will have been 
appointed by the Member Nominating Committee and be representative of 
the Exchange's membership in order to ensure that its members have the 
opportunity to formally provide input on matters that are important to 
them.\65\ New Section 6(b) of Bylaw Article III, which is copied from 
Section 6(b) of NSM Bylaw Article III, proposes that the Member 
Nominating Committee would nominate candidates for each Member 
Representative Director position on the Board, and would also nominate 
candidates for appointment by the Board for positions on any committees 
with positions reserved for Member Representative members. The Member 
Nominating Committee would consist of no fewer than three and no more 
than six members. All members of the Member Nominating Committee would 
be a current associated person of a current Exchange member. The Board 
would appoint such individuals after appropriate consultation with the 
Exchange members. Member Nominating Committee members would be 
appointed annually by the Board and may be removed by a majority vote 
of the Board.
---------------------------------------------------------------------------

    \64\ ``Member Representative member'' will be defined as a 
member of any committee appointed by the Board who has been elected 
or appointed after having been nominated by the Member Nominating 
Committee pursuant to the Bylaws. See proposed Bylaw Article I(s), 
which is based on NSM Bylaw Article I(r).
    \65\ Under the Proposed Rule Change, the new Quality of Markets 
Committee, whose primary function is to provide advice on industry-
wide market issues, will be required to be composed of at least 20% 
Member representative members. The Quality of Markets Committee is 
discussed in detail below.
---------------------------------------------------------------------------

    The Exchange believes that the proposed process for selecting 
Member Representative Directors, together with the requirement in the 
proposed LLC Agreement that the Board be comprised of at least 20% 
Member Representative Directors as discussed in the LLC Agreement 
section above, will continue to provide for a fair representation of 
its members on the Board. Similar to the nomination and election 
process currently in place, proposed Bylaw Article II includes a 
process by which members can directly petition and vote for 
representation on the Board. The Exchange also believes that proposed 
process for selecting Member Representative members, together with 
requirements in the proposed Bylaws that certain committees such as the 
Quality of Markets Committee be composed of at least 20% Member 
Representative members, will continue to provide for fair 
representation of its members in the administration of the Exchange's 
affairs. In addition, the proposed Member Nominating Committee would be 
composed solely of persons associated with Exchange members, similar to 
the current Exchange Director Nominating Committee, and is selected 
after consultation with representatives of Exchange members. The 
Commission has previously approved rule changes for substantially 
similar board nomination and election processes for the Nasdaq 
Exchanges.\66\
---------------------------------------------------------------------------

    \66\ See e.g. Securities Exchange Act Release No. 53128 (Jan. 
13, 2006), see note 18 above; Securities Exchange Act Release No. 
58324 (August 7, 2008), 73 FR 46936 (August 12, 2008) (SR-BSE-2008-
02, -23, -25, SR-BSECC-2001-01) (Order Approving a Proposal by BX to 
Amend and Restate its COI and its Constitution to Reflect its 
Acquisition by the NASDAQ OMX Group); and Securities Exchange Act 
Release No. 59794 (April 20, 2009), 74 FR 18761 (April 24, 2009) 
(SR-Phlx-2009-17) (Order Approving Proposed Rule Change Relating to 
the Nomination and Election of Candidates for Governor and 
Independent Governor).
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Board Composition
    The Exchange is proposing to adopt Article III of the Bylaws, 
titled ``Board of Directors,'' which is based on NSM Bylaw Article III. 
Section 1 of Bylaw Article III proposes that if any Director position 
other than a Member Representative Director position becomes vacant, 
whether because of death, disability, disqualification, removal, or 
resignation, the Nominating Committee (discussed below) shall nominate, 
and the Sole LLC Member shall select, a person satisfying the 
classification (Industry, Non-Industry, or Public Director), if 
applicable, for the directorship to fill such vacancy.
    Section 2(a) of Bylaw Article III sets forth the proposed Board 
composition requirements and provides that a Director may not be 
subject to a statutory disqualification. The Exchange is proposing to 
replace the current Board qualification requirements with the ones set 
forth in the new Section 2(a), which mirrors the qualifications 
language in Section 2(a) of NSM Bylaw Article III. This proposed change 
to the current Board composition is in addition to the proposal 
discussed in the LLC Agreement section above to give the Sole LLC 
Member discretion to determine the size of the Board from time to 
time.\67\
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    \67\ See proposed Section 9(a) of the LLC Agreement.
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    Currently, the number of directors on the Board must be no less 
than eight and no more than sixteen \68\ and in no event shall the 
number of Exchange Directors constitute less than 30% of the members of 
Board and in no event shall the number of directors who meet the 
qualifications of ``non-industry representatives'' as set forth in the 
Current Constitution \69\ constitute less than the number of Exchange 
Directors.\70\ Furthermore, the Board must be composed as follows: (i) 
At least 50% directors who meet the qualifications of ``non-industry 
representatives'' \71\ and elected by ISE Holdings as the Sole LLC 
Member, at least one (1) of whom must meet the qualifications of 
``Public Director,'' \72\ (ii) one (1) director, who is the President 
and Chief Executive Officer of the Exchange (the ``CEO Director''),\73\ 
and (iii) at least 30% Exchange Directors, as described above.\74\
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    \68\ See Current Constitution, Section 3.2(a). Currently, the 
Board is comprised of sixteen directors.
    \69\ The term ``non-industry representative'' means any person 
who would not be considered an ``industry representative,'' as well 
as (i) a person affiliated with a broker or dealer that operates 
solely to assist the securities-related activities of the business 
of non-member affiliates, or (ii) an employee of an entity that is 
affiliated with a broker or dealer that does not account for a 
material portion of the revenues of the consolidated entity, and who 
is primarily engaged in the business of the non-member entity. See 
Current Constitution, Section 13.1(v).
    The term ``industry representative'' means a person who is an 
officer, director or employee of a broker or dealer or who has been 
employed in any such capacity at any time within the prior three (3) 
years, as well as a person who has a consulting or employment 
relationship with or has provided professional services to the 
Exchange and a person who had any such relationship or provided any 
such services to the Exchange at any time within the prior three (3) 
years. See Current Constitution, Section 13.1(s).
    \70\ See Current Constitution, Section 3.2(a). Section 3.2(a), 
similar to proposed Section 2(a) of Bylaw Article III, also provides 
that a director may not be subject to a statutory disqualification 
(as defined in Section 3(a)(39) of the Exchange Act).
    \71\ See Current Constitution, Section 3.2(b).
    \72\ A ``Public Director'' is a non-industry representative who 
has no material relationship with a broker or dealer or any 
affiliate of a broker or dealer or the Exchange or any affiliate of 
the Exchange. See Current Constitution, Section 3.2(b) and Sections 
13.1(aa) and (bb).
    \73\ See Current Constitution, Section 3.2(b). The President and 
Chief Executive Officer of the Exchange is elected by the Board and 
will be nominated by the Board for a directorship by virtue of his 
or her office. See Current Constitution, Section 4.6(a). The 
President and Chief Executive Officer will only serve on the Board 
for so long as such person remains the President and Chief Executive 
Officer. See Current Constitution, Section 3.2(e).
    \74\ See Current Constitution, Section 3.2(b).
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    The Exchange is proposing to replace the aforementioned Board 
composition with the board structure in place at the Nasdaq Exchanges. 
As is the case with the Nasdaq Exchanges, the proposed Board 
composition would be required to reflect a balance among ``Industry 
Directors,'' ``Member Representative Directors,'' and ``Non-Industry 
Directors,'' including ``Public Directors.'' \75\ The new Board 
structure would be as follows:
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    \75\ See Section 2(a) of NSM Bylaw Article III, Section 3-2(a) 
of Phlx Bylaws and Section 4.3 of BX Bylaws.

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[[Page 46857]]

     At least twenty percent (20%) of the directors on the 
Board would be ``Member Representative Directors;'' \76\
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    \76\ See proposed LLC Agreement, Section 9(a). ``Member 
Representative Director'' will be defined as a Director who has been 
elected or appointed after having been nominated by the Member 
Nominating Committee or by an Exchange Member. A Member 
Representative Director may, but is not required to be, an officer, 
director, employee, or agent of an Exchange member. See proposed 
Bylaws, Article I(r), which is based on NSM Bylaw Article I(q).
---------------------------------------------------------------------------

     The number of ``Non-Industry Directors'' \77\ would equal 
or exceed the sum of the number of ``Industry Directors'' \78\ and 
``Member Representative Directors'' \79\
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    \77\ ``Non-Industry Director'' will be defined as a Director 
(excluding Staff Directors) who is (i) a Public Director; (ii) an 
officer, director, or employee of an issuer of securities listed on 
the Exchange; or (iii) any other individual who would not be an 
Industry Director. See proposed Bylaws, Article I(w), which is based 
on NSM Bylaw Article I(v).
    \78\ An ``Industry Director'' will be a person with direct ties 
to the securities industry as a result of connections to a broker-
dealer, the Exchange or its affiliates, FINRA, or certain service 
providers to such entities. Specifically, an ``Industry Director'' 
will be defined as a Director (excluding Staff Directors), who (i) 
is or has served in the prior three years as an officer, director, 
or employee of a broker or dealer, excluding an outside director or 
a director not engaged in the day-to-day management of a broker or 
dealer; (ii) is an officer, director (excluding an outside 
director), or employee of an entity that owns more than ten percent 
of the equity of a broker or dealer, and the broker or dealer 
accounts for more than five percent of the gross revenues received 
by the consolidated entity; (iii) owns more than five percent of the 
equity securities of any broker or dealer, whose investments in 
brokers or dealers exceed ten percent of his or her net worth, or 
whose ownership interest otherwise permits him or her to be engaged 
in the day-to-day management of a broker or dealer; (iv) provides 
professional services to brokers or dealers, and such services 
constitute 20 percent or more of the professional revenues received 
by the Director or 20 percent or more of the gross revenues received 
by the Director's firm or partnership; (v) provides professional 
services to a director, officer, or employee of a broker, dealer, or 
corporation that owns 50 percent or more of the voting stock of a 
broker or dealer, and such services relate to the director's, 
officer's, or employee's professional capacity and constitute 20 
percent or more of the professional revenues received by the 
Director or member or 20 percent or more of the gross revenues 
received by the Director's or member's firm or partnership; or (vi) 
has a consulting or employment relationship with or provides 
professional services to the Exchange or any affiliate thereof or to 
FINRA (or any predecessor) or has had any such relationship or 
provided any such services at any time within the prior three years. 
See proposed Bylaws Article I(m), which is based on NSM Bylaw 
Article I(l).
    \79\ See proposed Section 2(a) of Bylaw Article III.
---------------------------------------------------------------------------

     The Board would include at least one ``Public Director'' 
\80\ and at least one issuer representative (or if the Board consists 
of ten or more Directors, at least two issuer representatives);
---------------------------------------------------------------------------

    \80\ Id. ``Public Director'' will be defined as a Director who 
has no material business relationship with a broker or dealer, the 
Exchange or its affiliates, or FINRA. See proposed Bylaw Article 
I(z), which is based on NSM Bylaw Article I(y).
---------------------------------------------------------------------------

     Up to two officers of the Exchange (``Staff Directors'') 
may be elected to the Board.\81\
---------------------------------------------------------------------------

    \81\ See proposed Bylaw Article I(m). Staff Directors will not 
be considered as either Industry or Non-Industry Directors.
---------------------------------------------------------------------------

    Under Section 2(b) of proposed Bylaw Article III, which mirrors 
Section 2(b) of NSM Bylaw Article III, a Director would be disqualified 
and removed immediately upon a determination by the Board, by a 
majority vote of the remaining Directors, (a) that the Director no 
longer satisfies the classification for which the Director was elected; 
and (b) that the Director's continued service as such would violate the 
compositional requirements of the Board set forth in proposed Section 
2(a). Thus, for example, if a Public Director became employed by a 
broker-dealer and the Board thereby had an inadequate number of Public 
Directors, the Director would be disqualified and removed. If a 
Director is disqualified and removed, and the remaining term of office 
of such Director at the time of termination is not more than 6 months, 
a replacement for the Director is not required until the next annual 
meeting. Analogous disqualification provisions exist for committee 
members.\82\
---------------------------------------------------------------------------

    \82\ See proposed Section 4(b) of Bylaw Article III, which 
mirrors the language in Section 4(b) of NSM Bylaw Article III.
---------------------------------------------------------------------------

    Upon the Acquisition, there were a number of harmonizing changes to 
the Board,\83\ which resulted in a complete overlap of directors on the 
boards of the Exchange, NSM, Phlx and BX. Specifically, there were 
eight (8) directors meeting the qualifications of ``non-industry 
representatives'' under the Current Constitution and ``Non-Industry 
Directors'' under each of the Nasdaq Exchanges' Bylaws.\84\ 
Furthermore, two of these directors also met the compositional 
requirements of ``Public Directors'' under the Current Constitution and 
under the Bylaws of each Nasdaq Exchange.\85\ The Chief Executive 
Officer appointed upon the Acquisition by the Sole LLC Member became a 
Board member by virtue of his office under the current Constitution, 
and also met the qualifications of ``Staff Director'' under each of the 
Nasdaq Exchange Bylaws. Five of the six Exchange Directors serving on 
the Board immediately prior to the Acquisition remained on the Board 
post-Acquisition. One Exchange Director was appointed by the Exchange 
Director Nominating Committee and elected to the Board upon the 
Acquisition due to his predecessor being term limited out under the 
Current Constitution. The Board therefore satisfied the composition 
requirements in the Current Constitution that at least 50% of directors 
be ``non-industry representatives,'' and at least 30% be Exchange 
Directors. The six Exchange Directors also served as ``Member 
Representative Directors'' on the Nasdaq Exchange boards, therefore 
satisfying the 20% Member Representative Director requirement under 
their Bylaws. As such, the post-Acquisition Board satisfied the 
composition requirements contained both in the Current Constitution and 
in the proposed Bylaws.
---------------------------------------------------------------------------

    \83\ These changes consisted of the resignations of all 
directors, other than the Exchange Directors, sitting on the Board 
immediately prior to the consummation of the Acquisition, and the 
appointments of Nasdaq designees to fill these vacancies on the 
Board. The changes were effected through a series of unanimous 
written consents by the Board, as well as unanimous written consents 
by the Exchange Director Nominating Committee and the Corporate 
Governance Committee. The Exchange represents that these changes 
were effected in accordance with the Current Governing Documents.
    \84\ These eight directors also sat on the three Nasdaq Exchange 
boards immediately prior to the Acquisition.
    \85\ In addition, the current Board also satisfies the 
requirement under the Nasdaq Exchange Bylaws that the board be 
composed of at least one Public Director and at least one (or two, 
if the board consists of ten or more directors) issuer 
representatives.
---------------------------------------------------------------------------

    The terms of the directors on the post-Acquisition Board ended at 
the 2017 annual meeting of the Exchange Members and Sole LLC Member 
(``2017 Annual Election''), which was held on June 19, 2017 to elect 
the current Board and coincided with the 2017 annual elections of the 
Nasdaq Exchange boards. The Exchange held the 2017 Annual Election to 
elect the current Board in accordance with the nomination, petition and 
voting processes set forth in the Current Governing Documents. Once the 
New Governing Documents become operative, no additional actions will be 
required under the LLC Act with respect to the current Board. All of 
the directors on the current Board are existing directors who served on 
the post-Acquisition Board and, similar to the post-Acquisition Board 
as described above, the current Board satisfies the board composition 
requirements both in the Current Governing Documents and in the New 
Governing Documents.\86\ Even though the current Board was not 
nominated or voted upon in accordance with New Governing Documents, the 
Exchange believes that the current Board is consistent with the Act in 
that it still provides for the fair representation of members and has 
one

[[Page 46858]]

or more directors that are representative of issuers and investors and 
not associated with a member of the exchange, broker, or dealer. First, 
six Exchange Directors, who are officers, directors or partners of 
Exchange members as required by Section 3.2(b) of the Current 
Constitution, were nominated by the Exchange Director Nominating 
Committee and elected to the current Board by a plurality of the 
holders of the Exchange Rights. These Exchange Directors were subject 
to the full petition and voting process by membership in accordance 
with Articles II and III of the Current Constitution, which process the 
Commission has already found as satisfying the principles of fair 
representation as required by Section 6(b) of the Act.\87\ Furthermore 
as noted above, the Exchange believes that the Exchange Directors serve 
the same function as the Member Representative Directors under the 
proposed board structure in that both directorships give Exchange 
members a voice in the Exchange's use of self-regulatory authority. The 
Exchange notes that only the corporate governance structure is changing 
under the Proposed Rule Change, and that the Exchange's membership has 
remained substantially the same both before and after the 2017 Annual 
Election.
---------------------------------------------------------------------------

    \86\ See Current Constitution, Section 3.2; proposed LLC 
Agreement, Section 9(a); and proposed Bylaw Article III, Section 
2(a).
    \87\ See MRX Approval Order.
---------------------------------------------------------------------------

    Second, eight directors who meet the requirements of non-industry 
representatives under the Current Constitution as well as Non-Industry 
Directors under the proposed Bylaws were nominated by the existing 
Corporate Governance Committee and elected by the Sole LLC Member to 
the current Board. Further, at least three of these directors are 
Public Directors or issuer representatives, consistent with the 
composition requirements under the Current Constitution and proposed 
Bylaws. The current Board therefore reflects a balance among the six 
Exchange Directors (i.e., Member Representative Directors) and the 
eight non-industry representative directors (i.e., Non-Industry 
Directors, including Public Directors or issuer representatives). The 
Exchange's Chief Executive Officer was also elected to the current 
Board by the Sole LLC Member, thereby satisfying the composition 
requirements of CEO Director and Staff Director under the Current 
Constitution and proposed Bylaws.
    For the annual elections starting in 2018 and subject to approval 
by the Commission, the Exchange will hold its annual elections in 
accordance with the processes contemplated in the New Governing 
Documents and as such, the 2017 Board will serve until the 2018 annual 
election. Specifically upon the Merger, the 2017 Board will appoint a 
Nominating Committee (as discussed in detail below) and a Member 
Nominating Committee, and such committees would nominate candidates for 
the 2018 annual election pursuant to the procedures set forth in 
proposed Bylaw Article I (for Member Representative Directors) and in 
proposed Section 9(a) of the LLC Agreement and proposed Bylaw Article 
III (for all other Directors).
    Section 3 of Bylaw Article III, which is copied from Section 3 of 
NSM Bylaw Article III, contains standard provisions for a Delaware 
limited liability company governing the appropriateness of reliance by 
Directors upon the records of the Exchange. Section 3 also recognizes 
the Exchange's status as an SRO by providing that the Board, when 
evaluating any proposal, shall, to the fullest extent permitted by 
applicable law, take into account all factors that the Board deems 
relevant, including, without limitation, (i) the potential impact 
thereof on the integrity, continuity and stability of the national 
securities exchange operated by the Exchange and the other operations 
of the Exchange, on the ability to prevent fraudulent and manipulative 
acts and practices and on investors and the public, and (ii) whether 
such would promote just and equitable principles of trade, foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to and 
facilitating transactions in securities or assist in the removal of 
impediments to or perfection of the mechanisms for a free and open 
market and a national market system. Taken together, these provisions 
are designed to reinforce the notion that the Exchange is not solely a 
commercial enterprise but rather an SRO registered pursuant to the Act 
and subject to the obligations imposed by the Act.
Standing Committees
    The proposed new Sections 4, 5 and 6 of Bylaw Article III, which 
are based on Sections 4, 5 and 6 of the NSM Bylaw Article III, would 
include provisions governing the composition and authority of various 
standing committees established by the Board. Proposed new Section 4 of 
Bylaw Article III would require prospective committee members, who are 
not Directors, to provide the Secretary of the Exchange with certain 
information to classify a committee member as an Industry member,\88\ a 
Member Representative member,\89\ a Non-Industry member,\90\ or a 
Public member.\91\ Analogous new provisions are also proposed for 
prospective Directors.\92\
---------------------------------------------------------------------------

    \88\ ``Industry member'' will be defined as a member of any 
committee appointed by the Board who (i) is or has served in the 
prior three years as an officer, director, or employee of a broker 
or dealer, excluding an outside director or a director not engaged 
in the day-to-day management of a broker or dealer; (ii) is an 
officer, director (excluding an outside director), or employee of an 
entity that owns more than ten percent of the equity of a broker or 
dealer, and the broker or dealer accounts for more than five percent 
of the gross revenues received by the consolidated entity; (iii) 
owns more than five percent of the equity securities of any broker 
or dealer, whose investments in brokers or dealers exceed ten 
percent of his or her net worth, or whose ownership interest 
otherwise permits him or her to be engaged in the day-to-day 
management of a broker or dealer; (iv) provides professional 
services to brokers or dealers, and such services constitute 20 
percent or more of the professional revenues received by the 
committee member or 20 percent or more of the gross revenues 
received by the committee member's firm or partnership; (v) provides 
professional services to a director, officer, or employee of a 
broker, dealer, or corporation that owns 50 percent or more of the 
voting stock of a broker or dealer, and such services relate to the 
director's, officer's, or employee's professional capacity and 
constitute 20 percent or more of the professional revenues received 
by the committee member or 20 percent or more of the gross revenues 
received by the committee member's firm or partnership; or (vi) has 
a consulting or employment relationship with or provides 
professional services to the Exchange or any affiliate thereof or to 
FINRA (or any predecessor) or has had any such relationship or 
provided any such services at any time within the prior three years. 
See proposed Bylaw Article I(n), which is based on NSM Bylaw Article 
I(m).
    \89\ ``Member Representative member'' will be defined as a 
member of any committee appointed by the Board who has been elected 
or appointed after having been nominated by the Member Nominating 
Committee pursuant to the Bylaws. See proposed Bylaw Article I(s), 
which is based on NSM Bylaw Article I(r).
    \90\ ``Non-Industry member'' will be defined as a member of any 
committee appointed by the Board who is (i) a Public member; (ii) an 
officer or employee of an issuer of securities listed on the 
national securities exchange operated by the Exchange; or (iii) any 
other individual who would not be an Industry member. See proposed 
Bylaw Article I(x), which is based on NSM Bylaw Article I(w).
    \91\ ``Public member'' will be defined as a member of any 
committee appointed by the Board who has no material business 
relationship with a broker or dealer, the Exchange or its 
affiliates, or FINRA. See proposed Bylaw Article I(aa), which is 
based on NSM Bylaw Article I(z).
    \92\ See proposed Section 6(b)(v) of Bylaw Article III, which is 
based on Section 6(b)(v) of NSM Bylaw Article III.
---------------------------------------------------------------------------

    Sections 5 and 6 of proposed Bylaw Article III, titled ``Committees 
Composed Solely of Directors'' and ``Committees Not Composed Solely of 
Directors,'' establishes several standing committees and delineates 
their general duties and responsibilities. The proposed committee 
structure is modeled substantially on the committee

[[Page 46859]]

structures of the Nasdaq Exchanges, and are copied to the extent such 
committees are relevant to the Exchange.\93\
---------------------------------------------------------------------------

    \93\ For example, the Exchange does not propose to establish an 
Exchange Listing and Hearing Review Council because the Exchange 
does not offer any original listings. Similarly, the Exchange does 
not propose to establish an Arbitration and Mediation Committee as 
the Exchange's arbitration and mediation program is operated by the 
Financial Industry Regulatory Authority (``FINRA'') in accordance 
with the FINRA rules pursuant to a regulatory services agreement 
dated June 10, 2013, as amended (``RSA''). Under the RSA, FINRA 
provides a comprehensive dispute resolution program for Exchange 
members.
---------------------------------------------------------------------------

    Currently, the standing Board committees of the Exchange are: An 
Executive Committee, a Corporate Governance Committee, a Finance and 
Audit Committee, a Compensation Committee, and such other additional 
committees as may be established by Board resolution.\94\ As discussed 
above, the Exchange also has an Exchange Director Nominating Committee, 
which is a committee of the Exchange and not the Board. All committee 
appointments are made by the Board, and each appointee serves for one 
year or until his or her successor is duly appointed.
---------------------------------------------------------------------------

    \94\ See Current Constitution, Article V.
---------------------------------------------------------------------------

Proposed Committees Composed Solely of Directors
    New Section 5 of Bylaw Article III, which copies the language in 
Section 5 of NSM Bylaw Article III, provides for an Executive 
Committee, a Finance Committee, and a Regulatory Oversight Committee.
Creation of an Executive Committee
    The Exchange proposes to adopt new Section 5(a), which provides 
that the Board may appoint an Executive Committee and delineates its 
composition and functions. In particular, the proposed Executive 
Committee may exercise all the powers and authority of the Board in the 
management of the business and affairs of the Exchange between meetings 
of the Board. The number of Non-Industry Directors on the Executive 
Committee must equal or exceed the number of Industry Directors on the 
Executive Committee. The percentage of Public Directors on the 
Executive Committee must be at least as great as the percentage of 
Public Directors on the whole Board, and the percentage of Member 
Representative Directors on the Executive Committee must be at least as 
great as the percentage of Member Representative Directors on the whole 
Board. Currently, the Executive Committee is a permanent standing 
committee of the Board.\95\ Under the new Section 5(a), the Executive 
Committee would be an optional committee, to be appointed only if 
deemed necessary by the Board. The Exchange's proposal is similar to 
all three Nasdaq Exchanges where the Exchange Committee is optional, at 
the discretion of the Board.\96\
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    \95\ The Executive Committee (consisting of six directors, and 
with the number of non-industry representatives equaling or 
exceeding the number of Exchange Directors) on behalf of the Board 
and subject to its control, has all of the powers of the Board 
except the power to approve (i) any merger, consolidation, sale or 
dissolution of the Exchange or (ii) any matters pertaining to the 
self-regulatory function of the Exchange or relating to the 
structure of the market which the Exchange regulates. See Current 
Constitution, Section 5.2.
    \96\ See Section 5(a) of NSM Bylaw Article III, Section 4.13(a) 
of the BX Bylaws and Section 5-2(a) of the Phlx Bylaws.
---------------------------------------------------------------------------

Elimination of the Current Finance and Audit Committee
    The Exchange also proposes to adopt new Section 5(b), which 
provides that the Board may appoint a Finance Committee and delineates 
its composition and functions. In particular, the Finance Committee 
will advise the Board with respect to the oversight of the financial 
operations and conditions of the Exchange, including recommendations 
for the Exchange's annual operating and capital budgets and proposed 
changes to the rates and fees charged by the Exchange. By adopting new 
Section 5, the Exchange is proposing to eliminate the current Finance 
and Audit Committee, and have all of its duties and functions performed 
at the Board level, assigned to other proposed Board committees or to 
the HoldCo audit committee (the ``HoldCo Audit Committee'').\97\
---------------------------------------------------------------------------

    \97\ See Article IV, Section 4.13(g) of the HoldCo By-Laws. See 
also the HoldCo Audit Committee Charter (available at http://ir.nasdaq.com/corporate-governance-document.cfm?DocumentID=195).
---------------------------------------------------------------------------

    Pursuant to its current charter, the Finance and Audit Committee 
\98\ is primarily charged with: (i) Oversight of financial operations 
of the Exchange; (ii) oversight of the Exchange's financial reporting 
process; (iii) oversight of the systems of internal controls 
established by management and the Board, and for monitoring compliance 
with laws and regulations; (iv) evaluation of independent external 
auditors; and (v) direction and oversight of the internal audit 
function. Under the new Section 5(b), the Board would retain oversight 
of the financial operations of the Exchange instead of delegating these 
functions to standing committee, and would have to option to appoint a 
Finance Committee at the Board's discretion. The Exchange's proposal is 
similar to all three Nasdaq Exchanges where the Finance Committee is 
optional, at the discretion of the Board.\99\
---------------------------------------------------------------------------

    \98\ The current Finance and Audit Committee must be composed of 
at least three (3) and not more than five (5) directors, all of whom 
must be non-industry representatives. See Current Constitution, 
Section 5.5. In addition, committee members must be ``financially 
literate'' as determined by the Board.
    \99\ See Section 5(b) of NSM Bylaw Article III, Section 4.13(b) 
of the BX Bylaws and Section 5-2(b) of the Phlx Bylaws.
---------------------------------------------------------------------------

    Furthermore, the HoldCo Audit Committee also covers the functions 
of the current Finance and Audit Committee. The HoldCo Audit Committee 
is composed of at least three directors, all of whom must satisfy the 
standards for independence set forth in Section 10A(m) of the Act \100\ 
and Rule 5605 of NSM's listing rules. All committee members must be 
able to read and understand financial statements, and at least one 
member must have past employment experience in finance or accounting, 
requisite professional certification in accounting or any other 
comparable experience or background that results in the individual's 
financial sophistication.
---------------------------------------------------------------------------

    \100\ See U.S.C. 78j-1(m).
---------------------------------------------------------------------------

    The HoldCo Audit Committee has broad authority to review the 
financial information that will be provided to shareholders of HoldCo 
and others, systems of internal controls, and audit, financial 
reporting and legal and compliance processes. Because HoldCo's 
financial statements are prepared on a consolidated basis that includes 
the financial results of HoldCo's subsidiaries, including the Exchange 
and the other Nasdaq Exchange subsidiaries, HoldCo's audit committee 
purview necessarily includes these subsidiaries. The Exchange notes 
that unconsolidated financial statements of the Exchange will still be 
prepared for each fiscal year in accordance with the requirements set 
forth in its application for registration as a national securities 
exchange.\101\ To the extent the current Finance and Audit Committee 
oversees the Exchange's financial reporting process, its activities are 
duplicative of the activities of the HoldCo Audit Committee, which is 
also charged with providing oversight over financial reporting and 
independent auditor selection for HoldCo and all of its subsidiaries, 
including the Exchange and the other Nasdaq Exchange subsidiaries. 
Similarly, the HoldCo Audit Committee has general responsibility for 
oversight over internal controls, and direction and oversight over the 
internal audit function for

[[Page 46860]]

HoldCo and all of its subsidiaries. Thus, the responsibilities of the 
Exchange's Finance and Audit Committee as it relates to the functions 
set forth in clauses (ii)-(v) above are fully duplicated by the 
responsibilities of the HoldCo Audit Committee. Accordingly, the 
Exchange is proposing to allow the elimination of its Finance and Audit 
Committee. The Commission has previously approved similar proposals by 
the Nasdaq Exchanges to eliminate their respective audit 
committees.\102\
---------------------------------------------------------------------------

    \101\ See MRX Approval Order.
    \102\ See Securities Exchange Act Release No. 60276 (July 9, 
2009), 74 FR 34840 (July 17, 2009) (SR-NASDAQ-2009-042); Securities 
Exchange Act Release No. 60247 (July 6, 2009), 74 FR 33495 (July 13, 
2009) (SR-BX-2009-021); and Securities Exchange Act Release No. 
60687 (September 18, 2009), 74 FR 49060 (September 25, 2009) (SR-
Phlx-2009-59).
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Creation of a Regulatory Oversight Committee
    The Exchange believes, however, that even in light of the HoldCo 
Audit Committee's overall responsibilities for internal controls and 
the internal audit function, it is nevertheless important for the Board 
to maintain its own independent oversight over the Exchange's controls 
and internal audit matters relating to the Exchange's operations. 
Therefore, the Exchange is proposing to create a Regulatory Oversight 
Committee (``ROC'') so that regulatory oversight functions formerly 
performed by the Finance and Audit Committee may be assumed by the new 
committee.\103\ Like the ROCs of the Nasdaq Exchanges, the new 
committee will have broad authority to oversee the adequacy and 
effectiveness of the Exchange's regulatory and self-regulatory 
organization responsibilities, and will therefore be able to maintain 
oversight over controls in tandem with the HoldCo Audit Committee's 
overall oversight responsibilities.
---------------------------------------------------------------------------

    \103\ See proposed Section 5(c) of Bylaw Article III. The Nasdaq 
Exchanges also have Regulatory Oversight Committees, which have the 
same authority in all material respects to the proposed ROC. See 
Section 5(c) of NSM Bylaw Article III, Section 4.13(c) of the BX 
Bylaws and Section 5-2(c) of the Phlx Bylaws.
---------------------------------------------------------------------------

    Similarly, it is already a formal practice of HoldCo's Internal 
Audit Department, which performs internal audit functions for all 
HoldCo subsidiaries, to report to the Nasdaq Exchange boards on all 
Nasdaq Exchange-related internal audit matters and to direct such 
reports to the ROCs of the Nasdaq Exchanges.\104\ The Exchange proposes 
that the HoldCo Internal Audit Department would also similarly report 
to the Exchange Board and direct such reports to the new ROC. In 
addition, to ensure that the Exchange Board retains authority to direct 
the Department's activities with respect to the Exchange, the 
Department's written procedures will to stipulate that the Exchange's 
ROC may, at any time, direct the Department to conduct an audit of a 
matter of concern to it and report the results of the audit both to the 
Exchange ROC and the HoldCo Audit Committee. The Internal Audit 
Department is currently required to conduct such audits upon the 
request of the Nasdaq Exchange ROCs.
---------------------------------------------------------------------------

    \104\ See the Regulatory Oversight Committee Charter of NSM, 
Phlx and BX (available at http://ir.nasdaq.com/corporate-governance-document.cfm?DocumentID=1097).
---------------------------------------------------------------------------

    To effectuate this change, the Exchange proposes to adopt the new 
Section 5(c) providing for a ROC and delineating its composition and 
functions. In particular, the proposed ROC's responsibilities will be 
to: (i) Oversee the adequacy and effectiveness of the Exchange's 
regulatory and self-regulatory organization responsibilities; (ii) 
assess the Exchange's regulatory performance; and (iii) assist the 
Board and other committees of the Board in reviewing the regulatory 
plan and the overall effectiveness of the Exchange's regulatory 
functions. In furtherance of its functions, the ROC shall: (A) Review 
the Exchange's regulatory budget and specifically inquire into the 
adequacy of resources available in the budget for regulatory 
activities; (B) meet regularly with the Exchange's Chief Regulatory 
Officer in executive session; and (C) be informed about the 
compensation and promotion or termination of the Chief Regulatory 
Officer and the reasons therefor. The Exchange proposes that the ROC 
shall consist of three members, each of whom shall be a Public Director 
and an ``independent director'' as defined in Rule 5605 of the Rules of 
The NASDAQ Stock Market, LLC.
    Given the expansive regulatory and internal oversight of the 
proposed ROC and HoldCo Audit Committee, coupled with the oversight and 
responsibilities of the full Board and HoldCo's Internal Audit 
Department, the Exchange believes that all of the duties and functions 
of the eliminated Finance and Audit Committee would continue to be 
performed in the new governance structure as proposed herein.
Elimination of the Current Compensation Committee
    By adopting the new Board committees in Section 5, the Exchange 
also proposes to eliminate its current Compensation Committee, and to 
prescribe that its duties be performed by the HoldCo management 
compensation committee or the full Board when required. The 
Compensation Committee \105\ is primarily charged with reviewing and 
approving compensation policies and plans for the Chief Executive 
Officer and other senior executive officers of the Exchange. Under the 
Nasdaq governance structure, this function is performed by the HoldCo 
management compensation committee or the full boards of the Nasdaq 
Exchanges. The HoldCo By-Laws provide that its management compensation 
committee (a committee consisting of at least two HoldCo board members 
meeting the independence and other eligibility standards in the listing 
rules of NSM) considers and recommends compensation policies, programs, 
and practices for employees of HoldCo. Because many employees 
performing work for the Exchange are also employees of HoldCo, its 
compensation committee already performs these functions for such 
employees. Moreover, certain of its senior officers are also officers 
of HoldCo and other HoldCo subsidiaries because their responsibilities 
relate to multiple entities within the HoldCo corporate structure. 
Accordingly, HoldCo pays these individuals and establishes compensation 
policy for them. Most notably, the current Chief Executive Officer of 
the Exchange is also an ``executive officer'' of HoldCo within the 
meaning of NSM Rule 5605. Under that rule, the compensation of 
executive officers of an issuer of securities, such as the common stock 
of HoldCo, that is listed on NSM, must be determined by, or recommended 
to the board of directors for determination by, a majority of 
independent directors or a compensation committee comprised solely of 
independent directors. Accordingly, the HoldCo board of directors and/
or its compensation committee is legally required to establish the 
compensation for this individual.
---------------------------------------------------------------------------

    \105\ The committee must be composed of at least three and not 
more than five directors who must all meet the ``Non-Industry 
Director'' qualifications under the Current Constitution. See 
Current Constitution, Section 5.6.
---------------------------------------------------------------------------

    To the extent that policies, programs, and practices must also be 
established for any Exchange officers or employees who are not also 
HoldCo officers or employees, the Board would perform such actions 
without the use of a compensation committee (but subject to the recusal 
of the Staff Directors).\106\

[[Page 46861]]

Finally, it should be noted that under the new Section 5(c) of Bylaw 
Article III, the ROC of the Board would be informed about the 
compensation and promotion or termination of the Exchange's Chief 
Regulatory Officer and the reasons therefor, to allow the ROC to 
provide oversight over decisions affecting this key officer. Therefore, 
the Exchange believes that the duties and functions of the eliminated 
Compensation Committee would continue to be performed and covered in 
the new corporate governance structure proposed by the New Governing 
Documents. The Commission has previously approved proposals by the 
Nasdaq Exchanges to eliminate their respective compensation 
committees.\107\
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    \106\ As discussed in the proposed Board composition section 
above, ``Staff Directors'' would be Exchange directors that are also 
serving as officers. Since the Board would not be responsible for 
setting the compensation of any Staff Directors who are also 
officers of HoldCo, they would be permitted to participate in 
discussions concerning compensation of Exchange employees, but would 
recuse themselves from a vote on the subject to allow the 
determination to be made by directors that are not officers or 
employees of the Exchange. If a Staff Director was an officer or 
employee of the Exchange but not of HoldCo, that Staff Director 
would also absent himself or herself from any deliberations 
regarding his or her compensation.
    \107\ See note 102 above.
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Elimination of the Current Corporate Governance Committee
    Finally, the Exchange also proposes to eliminate the current 
Corporate Governance Committee, and to prescribe that its duties be 
performed by the new Nominating Committee (as discussed below), the new 
ROC or by the full Board when required. The Corporate Governance 
Committee \108\ is primarily charged with: (i) Nominating candidates 
for all vacant or new non-industry representative positions on the 
Board, (ii) overseeing the Exchange's regulatory activities and 
program, and (iii) overseeing and evaluating the governance of the 
Exchange. As discussed below, the Exchange is proposing to establish a 
new Nominating Committee that would nominate candidates for all vacant 
or new non-Member Representative Director positions on the Board, and 
therefore would perform the Non-Industry Director nominating functions 
of the current Corporate Governance Committee.\109\ Furthermore, the 
new ROC would have to carry out the regulatory oversight tasks 
currently within purview of the Corporate Governance Committee. In 
particular, the new ROC would (i) oversee the adequacy and 
effectiveness of the Exchange's regulatory and self-regulatory 
organization responsibilities; (ii) assess the Exchange's regulatory 
performance; and (iii) assist the Board and other committees of the 
Board in reviewing the regulatory plan and the overall effectiveness of 
the Exchange's regulatory functions. Its duties would include reviewing 
the Exchange's regulatory budget and inquiring into the adequacy of 
resources available in the budget for regulatory activities; meeting 
regularly with the Exchange's Chief Regulatory Officer in executive 
session; and having oversight over compensation, hiring and termination 
decisions affecting this key officer as discussed above.
---------------------------------------------------------------------------

    \108\ The committee must consist of at least three directors, 
all of whom are required to meet the ``Non-Industry Director'' 
standards under the Current Constitution. See Current Constitution, 
Section 5.4.
    \109\ See proposed Section 6(b) of Bylaw Article III.
---------------------------------------------------------------------------

    As it relates to the general supervision over the corporate 
governance of the Exchange, the full Board would perform such functions 
without the use of a corporate governance committee, similar to the 
boards of the Nasdaq Exchanges.\110\ In particular, the full Board, led 
by the Chair of the Board,\111\ would perform annual self-assessments, 
oversee annual formal director and Chair evaluations, and periodically 
review the allocations of powers between management and the Board. 
Therefore, the Exchange believes that the duties and functions of the 
eliminated Corporate Governance Committee would continue to be 
performed and covered in the new corporate governance structure 
proposed by the New Governing Documents.
---------------------------------------------------------------------------

    \110\ See the Corporate Governance Guidelines of NSM, Phlx and 
BX (available at http://ir.nasdaq.com/corporate-governance-document.cfm?DocumentID=6027).
    \111\ The Board Chair will be an ``independent director'' (i.e. 
person other than an officer or employee of HoldCo or its 
subsidiaries, including the Exchange) as provided under the listing 
rules of NSM and SEC requirements.
---------------------------------------------------------------------------

Proposed Committees Not Composed Solely of Directors
    In addition to the proposed Board committees discussed above, new 
Section 6 of Bylaw Article III provides for the appointment by the 
Board of certain standing committees, not composed solely of Directors, 
to administer various provisions of the rules that the Exchange expects 
to propose with respect to governance, options trading and member 
discipline. By adopting Section 6, the Exchange proposes to eliminate 
certain standing committees and have their relevant functions performed 
by the new committees, each as described below.
Creation of a Member Nominating Committee
    The new Member Nominating Committee, responsible for: (i) The 
nomination for election of Member Representative Directors to the Board 
or (ii) the nomination for appointment of Member Representative members 
to the committees requiring such members, would replace the Exchange 
Director Nominating Committee. The composition requirements of the 
Member Nominating Committee are discussed in the Nomination and 
Election Process section above.
Creation of a Nominating Committee
    The new Nominating Committee will nominate candidates for all other 
vacant or new Director positions on the Board, and therefore, would 
perform the non-industry representative nomination function currently 
assigned to the Corporate Governance Committee. The Nominating 
Committee will consist of no fewer than six and no more than nine 
members, and the number of Non-Industry members (i.e. committee members 
not associated with broker-dealers) shall equal or exceed the number of 
Industry members on the Nominating Committee. If the Nominating 
Committee consists of six members, at least two shall be Public 
members. If the Nominating Committee consists of seven or more members, 
at least three shall be Public members. No officer or employee of the 
Exchange shall serve as a member of the Nominating Committee in any 
voting or non-voting capacity. No more than three of the Nominating 
Committee members and no more than two of the Industry members shall be 
current Directors. A Nominating Committee member may not simultaneously 
serve on the Nominating Committee and the Board, unless such member is 
in his or her final year of service on the Board, and following that 
year, that member may not stand for election to the Board until such 
time as he or she is no longer a member of the Nominating Committee. 
Nominating Committee members will be appointed annually by the Board 
and may be removed by a majority vote of the Board.\112\
---------------------------------------------------------------------------

    \112\ See Section 6(b) of NSM Bylaw Article III, Section 4.14(b) 
of the BX Bylaws and Section 5-3(a) of the Phlx Bylaws for similar 
provisions related to the Nominating Committee.
---------------------------------------------------------------------------

Creation of a Quality of Markets Committee
    The new Quality of Markets Committee (the ``QMC''), which is 
modeled off of the QMCs of the Nasdaq Exchanges,\113\ will have the 
following functions: (i) To provide advice and guidance to the Board on 
issues relating to the fairness, integrity, efficiency, and

[[Page 46862]]

competitiveness of the information, order handling, and execution 
mechanisms of the Exchange from the perspective of investors, both 
individual and institutional, retail firms, market making firms and 
other market participants; and (ii) to advise the Board with respect to 
national market system plans and linkages between the facilities of the 
Exchange and other markets. The QMC shall include broad representation 
of participants in the Exchange, including investors, market makers, 
retail firms, and order entry firms. The QMC shall include a number of 
Member Representative members that is equal to at least 20% of the 
total number of members of the QMC. The number of Non-Industry members 
on the proposed QMC shall equal or exceed the sum of the number of 
Industry members and Member Representative members. A quorum of the QMC 
will consist of a majority of its members, including not less than 50% 
of its Non-Industry members, unless this requirement is waived pursuant 
to proposed Section 6(c)(iii) of Bylaw Article III.
---------------------------------------------------------------------------

    \113\ See Section 6(c) of NSM Bylaw Article III, Section 4.14(c) 
of the BX Bylaws and Section 5-3(c) of the Phlx Bylaws.
---------------------------------------------------------------------------

Other Proposed Bylaw Provisions
    Proposed Section 7 of Bylaw Article III contains standard 
provisions for a Delaware limited liability company requiring recusal 
by Directors or committee members subject to a conflict of interest, 
and providing for the enforceability of contracts in which a Director 
has an interest if appropriately approved or ratified by disinterested 
Directors. This language is based on Section 7 of NSM Bylaw Article 
III. Proposed Section 8 of Bylaw Article III allows for reasonable 
compensation of the Board and committee members, and mirrors Section 8 
of NSM Bylaw Article III.
    Bylaw Article IV, titled ``Officers, Agents, and Employees,'' 
contains provisions governing the Exchange's officers, agents and 
employees, and is based on Article IV of the NSM Bylaws. Proposed 
Section 1 of Bylaw Article IV provides that the Board may delegate the 
duties and powers of any officer of the Exchange to any other officer 
or to any Director for a specified period of time and for any reason 
that the Board may deem sufficient. Proposed Section 2 discusses how an 
officer of the Exchange may resign or may be removed. Proposed Sections 
3 through 11 each specifically provides for the appointment of a Chair 
of the Board,\114\ a Chief Executive Officer, a President, Vice 
Presidents, a Chief Regulatory Officer, a Secretary, an Assistant 
Secretary, a Treasurer, and an Assistant Treasurer.\115\ The Exchange 
notes that proposed Section 7 of Bylaw Article IV specifically provides 
for a Chief Regulatory Officer,\116\ who would have general supervision 
of the regulatory operations of the Exchange, including responsibility 
for overseeing the Exchange's surveillance, examination, and 
enforcement functions and for administering any regulatory services 
agreements with another SRO to which the Exchange is a party. The Chief 
Regulatory Officer shall meet with the Regulatory Oversight Committee 
of the Exchange in executive session at regularly scheduled meetings of 
such committee, and at any time upon request of the Chief Regulatory 
Officer or any member of the Regulatory Oversight Committee. The Chief 
Regulatory Officer may also serve as the General Counsel of the 
Exchange.
---------------------------------------------------------------------------

    \114\ The Chair of the Board would be an independent Director as 
defined in Rule 5605 of the listing rules of The NASDAQ Stock 
Market, LLC.
    \115\ See NSM Bylaw Article IV for substantially similar 
provisions.
    \116\ Sections 4.1 and 4.7 of the Current Constitution also 
specifically provide for a Chief Regulatory Officer.
---------------------------------------------------------------------------

    Bylaw Article VII, titled ``Miscellaneous Provisions,'' contains 
standard limited liability company provisions relating to waiver of 
notice of meetings and the Exchange's contracting ability. Article 
VIII, titled ``Amendments; Emergency By-Laws,'' authorizes amendments 
to the By-Laws by either the Sole LLC Member or the vote of a majority 
of the whole Board,\117\ as well as the adoption of emergency by-laws 
by the Board. Other than as noted above, Articles VII and VIII mirror 
the language in Articles VII and VIII of the NSM Bylaws.
---------------------------------------------------------------------------

    \117\ As proposed, all such changes must be filed with the 
Commission under Section 19(b) of the Act, 15 U.S.C. 78s(b), and 
become effective thereunder before being implemented. See proposed 
Bylaw Article VIII, Section 1. The BX Bylaws and the NSM Bylaws do 
not have a similar requirement, but Phlx has a similar requirement 
in Section 6-9 of the Phlx Bylaws. BX and NSM will each separately 
file proposed rule changes with the Commission to add this 
requirement in their respective governing documents. See note 46 
above.
---------------------------------------------------------------------------

    Article IX, titled ``Exchange Authorities,'' which mirrors NSM 
Bylaw Article IX, contains specific authorization for the Board to 
adopt rules needed to effect the Exchange's obligations as an SRO, to 
establish disciplinary procedures and impose sanctions on its members, 
to establish standards for membership, to impose dues, fees, 
assessments, and other charges and to take action under emergency or 
extraordinary market conditions.
D. Rules
    The Exchange proposes to amend its current Rules to reflect the 
changes to its constituent documents through the adoption of the New 
Governing Documents to replace the Current Governing Documents.\118\ 
All of the proposed changes are non-substantive, and primarily reflect 
the changing terminology from ``Constitution'' to ``By-Laws,'' \119\ or 
to remove references to the Current LLC Agreement \120\ as these will 
become obsolete under the Proposed Rule Change. Furthermore, a number 
of defined terms used in the Rules refer back to the Current LLC 
Agreement or the Current Constitution for their meanings. As discussed 
below, the Exchange proposes to add these defined terms originally 
contained in the Current Governing Documents as new Rules. In addition, 
a number of existing Rules contain references to the Current Governing 
Documents, and the Exchange proposes to amend these provisions either 
by (i) replacing those references with references to the New Governing 
Documents or (ii) importing language originally found in the Current 
Governing Documents, as further described below. Finally, the Exchange 
proposes to make a number of technical amendments to renumber the 
Rules, which is a result of adding the new definitions as further 
discussed below.
---------------------------------------------------------------------------

    \118\ The amended Rules were filed as part of the Proposed Rule 
Change as Exhibit 5E.
    \119\ In particular, the proposed changes are in Rules 200, 202, 
203, 305(a), 307(c), 307(d), and 711(a), as well as in 
.01(b)(2)(iii) of Supplementary Material to Rule 706.
    \120\ In particular, the proposed changes are in Rules 
100(a)(22A), 302(c), and 302(e).
---------------------------------------------------------------------------

    In Rule 100, titled ``Definitions,'' the Exchange proposes to make 
the following changes:
     Rule 100(a) currently refers to Article XIII of the 
Current Constitution as containing certain defined terms that are also 
used in the Exchange's rulebook. The proposed change would replace the 
reference to Article XIII of the Current Constitution with references 
to the proposed LLC Agreement and By-Laws.
     Rule 100(a)(5) ``board of directors'' or ``Board'' 
currently refers to Article I of the LLC Agreement. The proposed change 
reflects that this definition will be set forth in Article I of the new 
Bylaws.
     Rule 100(a)(12) ``CMM Rights'' currently refers to Article 
VI of the Current LLC Agreement. The proposed change would relocate the 
concept of CMM Rights from the Current LLC Agreement to this Rule, and 
would state that the term CMM Rights means the

[[Page 46863]]

non-transferable rights held by a Competitive Market Maker.\121\
---------------------------------------------------------------------------

    \121\ CMM Rights are non-transferable rights in that the holders 
of CMM Rights may not lease or sell these rights. As discussed in 
the LLC Agreement section above, all Exchange Rights (i.e., PMM, CMM 
and EAM Rights) convey voting rights and trading privileges on the 
Exchange. From MRX's inception, the voting rights and trading 
privileges associated with the PMM, CMM, and EAM Rights have never 
been transferable. See MRX Approval Order.
---------------------------------------------------------------------------

     New Rule 100(a)(13) ``Competitive Market Maker'' would be 
relocated from Section 13.1(f) of the Current Constitution. Currently, 
this term is used throughout the Exchange's rulebook, but the 
definition is only found in the Current Constitution.
     Rules 100(a)(13)-(14) ``covered short position'' and 
``discretion,'' respectively, would be renumbered as Rules 100(a)(14)-
(15).
     Rule 100(a)(15) ``EAM Rights'' currently refers to Article 
VI of the Current LLC Agreement. The proposed change would relocate the 
concept of EAM Rights from the Current LLC Agreement to this Rule, and 
would state that EAM Rights means the non-transferable rights held by 
an Electronic Access Member.\122\ The Rule would also be renumbered as 
Rule 100(a)(16).
---------------------------------------------------------------------------

    \122\ See note 121 above.
---------------------------------------------------------------------------

     New Rule 100(a)(17) ``Electronic Access Member'' would be 
relocated from Section 13.1(j) of the Current Constitution. Currently, 
this term is used throughout the Exchange's rulebook, but the 
definition is only found in the Current Constitution.
     Rules 100(a)(16) and (17) ``European-style option,'' 
``Exchange Act'' and ``Exchange Rights,'' respectively, would be 
renumbered as Rules 100(a)(18)-(20).\123\
---------------------------------------------------------------------------

    \123\ ``European-style option'' and ``Exchange Act'' are both 
inadvertently numbered as Rule 100(a)(16) in the current Rules, so 
the proposed changes will renumber these Rules as Rules 100(a)(18) 
and (19), respectively.
---------------------------------------------------------------------------

     New Rule 100(a)(21) ``Exchange Transaction'' would be 
relocated from Section 13.1(p) of the Current Constitution. Currently, 
this term is used throughout the Exchange's rulebook, but the 
definition is only found in the Current Constitution.
     Rules 100(a)(18) and (19) ``exercise price'' and ``Federal 
Reserve Board,'' respectively, would be renumbered as Rules 100(a)(22) 
and (23).
     New Rule 100(a)(24) ``good standing'' would be relocated 
from Section 13.1(q) of the Current Constitution. Currently, this term 
is used throughout the Exchange's rulebook, but the definition is only 
found in the Current Constitution.
     Rules 100(a)(20)-(22) ``he,'' ``him'' or ``his,'' ``ISE,'' 
``Nasdaq GEMX,'' and ``long position,'' respectively, would be 
renumbered as Rules 100(a)(25)-(27).
     Rule 100(a)(22A) ``LLC Agreement'' would be deleted as 
that term would no longer be used in the Rules, as amended by this rule 
change.
     Rules 100(a)(23)-(35) ``Member,'' ``Membership,'' ``market 
makers,'' ``Market Maker Rights,'' ``Non-Customer,'' ``Non-Customer 
Order,'' ``offer,'' ``opening purchase transaction,'' ``opening writing 
transaction,'' ``Voluntary Professional,'' ``options contract,'' 
``OPRA,'' ``order'' and ``outstanding,'' respectively, would be 
renumbered as Rules 100(a)(28)-(40).
     Rule 100(a)(36) ``PMM Rights'' currently refers to Article 
VI of the Current LLC Agreement. The proposed change would relocate the 
concept of PMM Rights from the Current LLC Agreement to this Rule, and 
would state that PMM Rights means the non-transferable rights held by a 
Primary Market Maker.\124\ The Rule would also be renumbered as Rule 
100(a)(41).
---------------------------------------------------------------------------

    \124\ See note 121 above.
---------------------------------------------------------------------------

     New Rule 100(a)(42) ``Primary Market Maker'' would be 
relocated from Section 13.1(z) of the Current Constitution. Currently, 
this term is used throughout the Exchange's rulebook, but the 
definition is only found in the Current Constitution.
     Rules 100(a)(37), (37A), (37B), (37C), (38)-(48) ``primary 
market,'' ``Priority Customer,'' ``Priority Customer Order,'' 
``Professional Order,'' ``Public Customer,'' ``Public Customer Order,'' 
``put,'' ``Quarterly Options Series,'' ``quote'' or ``quotation,'' 
``Rules of the Clearing Corporation,'' ``SEC,'' ``series of options,'' 
``short position,'' ``Short Term Option Series'' and ``SRO,'' 
respectively, would be renumbered as Rules 100(a)(43), (43A), (43B), 
(43C), (44)-(54).
     New Rule 100(a)(55) ``System'' would be relocated from 
Section 13.1(ee) of the Current Constitution. Currently, this term is 
used throughout the Exchange's rulebook, but the definition is only 
found in the Current Constitution.
     Rules 100(a)(49)-(51) ``type of option,'' ``uncovered'' 
and ``underlying security,'' respectively, would be renumbered as Rules 
100(a)(56)-(58).
    In Rule 304(b), the Exchange is proposing to replace the references 
to the Current Governing Documents with the proposed Bylaws to state 
that no Exchange member shall exercise voting rights in excess of those 
permitted under the Bylaws.\125\
---------------------------------------------------------------------------

    \125\ See proposed Bylaw Article II, Section 2. An Exchange 
Member, either alone or together with its affiliates, may not cast 
votes representing more than 20% of the votes cast for a candidate. 
A similar 20% voting limitation is also in Section 6.3(b) of the 
Current LLC Agreement.
---------------------------------------------------------------------------

    In Rule 309 ``Limitation on Affiliation between the Exchange and 
Members,'' the Exchange proposes to replace references to ``Exchange 
Director'' and ``Constitution'' with ``Member Representative Director'' 
and ``By-Laws,'' respectively, for the reasons discussed above. Lastly, 
the proposed changes in Rule 713(a) and Rule 720(a)(1) reflect the 
renumbering of the defined terms ``offer,'' ``quotations,'' ``Priority 
Customer Orders,'' ``Professional Orders,'' and ``Priority Customer.''
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \126\ in general, and furthers the objectives of 
Section 6(b)(1) of the Act \127\ in particular, in that it enables 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 exchange members and persons associated with its exchange members, 
with the provisions of the Act, the rules and regulations thereunder, 
and the rules of the Exchange. The Exchange also believes that this 
proposal furthers the objectives of Section 6(b)(3) and (b)(5) of the 
Act \128\ in particular, in that it is designed to assure a fair 
representation of Exchange members in the selection of its directors 
and administration of its affairs and provide that one or more 
directors would be representative of issuers and investors and not be 
associated with a member of the exchange, broker, or dealer; and is 
designed 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.
---------------------------------------------------------------------------

    \126\ 15 U.S.C. 78f(b).
    \127\ 15 U.S.C. 78f(b)(1).
    \128\ 15 U.S.C. 78f(b)(3) and (b)(5).
---------------------------------------------------------------------------

    The Exchange believes that its proposal to adopt the Board and 
committee structure and related nomination and election processes set 
forth in New Governing Documents are consistent with the Act, including 
Section 6(b)(1) of the Act, which requires, among other things, that a 
national securities exchange be organized to carry out the purposes of 
the Act and comply with the requirements of the Act. In general, the 
proposed changes would make the Exchange's Board and committee 
composition requirements, and related

[[Page 46864]]

nomination and election processes, more consistent with those of its 
affiliates, BX, NSM and Phlx. The Exchange therefore believes that the 
proposed changes would contribute to the orderly operation of the 
Exchange and would enable the Exchange to be so organized as to have 
the capacity to carry out the purposes of the Act and comply with the 
provisions of the Act by its members and persons associated with 
members.
    Additionally, the Exchange believes that the New Governing 
Documents support a corporate governance framework that is designed to 
insulate the Exchange's regulatory functions from its market and other 
commercial interests so that the Exchange can carry out its regulatory 
obligations in furtherance of Section 6(b)(1) of the Act. Specifically, 
the Exchange believes that creation of a ROC, modeled on the approved 
ROCs of other Nasdaq Exchanges, and the inclusion of the Chief 
Regulatory Officer in the proposed Bylaws, would underscore the 
importance of the Exchange's regulatory function and specifically 
empower an independent committee of the Board to oversee regulation and 
meet regularly with the Chief Regulatory Officer. Furthermore, proposed 
language in the New Governing Documents specifically providing that the 
Exchange's business and the Board's evaluations would include actions 
and evaluations that support and take into account its regulatory 
responsibilities under the Act, reinforce the notion that the Exchange 
is not solely a commercial enterprise, but an SRO subject to the 
obligations imposed by the Act. The restriction on using Regulatory 
Funds to pay dividends to the Sole LLC Member further underscores the 
independence of the Exchange's regulatory function. Finally, the 
Exchange believes that the proposed requirements to include Public 
Directors on the Board (at least two Directors) and that on the ROC 
(all three Directors) would help to ensure that no single group of 
market participants will have the ability to systematically 
disadvantage other market participants through the exchange governance 
process, and would foster the integrity of the Exchange by providing 
unique, unbiased perspectives. Accordingly, the Exchange believes that 
the new board and committee structure contemplated by the proposed New 
Governing Documents is designed to insulate the Exchange's regulatory 
functions from its market and other commercial interests so that the 
Exchange can carry out its regulatory obligations in furtherance of 
Section 6(b)(1) of the Act.
    The Exchange also believes that the proposed 20% requirement for 
Member Representative Directors and the proposed method for selecting 
Member Representative Directors would ensure fair representation of 
Exchange members on the Board and allow members to have a voice in the 
Exchange's use of its self-regulatory authority. In particular, the 
Exchange notes that the Member Nominating Committee would be composed 
solely of persons associated with Exchange members and is selected 
after consultation with representatives of Exchange members. In 
addition, the new Bylaws include a process by which Exchange members 
can directly petition and vote for representation on the Board. For the 
foregoing reasons, the Exchange believes that the proposed change to 
remove the Exchange Director positions and related concepts from its 
organizational documents is consistent with fair representation 
requirement under the Act. Specifically, Exchange members will continue 
to be represented on the Board and on key standing committees, and will 
have a voice in the selection of Member Representative Directors 
through the Member Nominating Committee and through their ability to 
petition and vote on alternate candidates. As noted above, the trading 
privileges associated with the Exchange Rights, which are currently 
located in the Exchange's organizational documents, are already 
substantively in the Exchange's rulebook, and the Rules would be 
clarified to the extent such Rules refer back to the Current Governing 
Documents.
    The Exchange also believes that the proposed Board and composition 
requirements set forth in the New Governing Documents is consistent 
with the requirements of Section 6(b)(3) of the Act, because the Public 
Director positions on the Board and on the ROC would include the 
representatives of issuers and investors with no material business 
relationship with a broker dealer or the Exchange. Further, the 
Exchange believes that the proposed compositional balance of the 
proposed committees continues to provide for the fair representation of 
members in the administration of the affairs of the Exchange. In 
particular, all members of the new Member Nominating Committee must be 
associated persons of an Exchange member. In addition, at least 20% of 
the new QMC must be composed of Member Representative members. 
Moreover, the proposed compositional requirements provide that the 
Nominating Committee and the QMC must be compositionally balanced 
between Industry members and Non-Industry members. The proposed 
compositional requirements are designed to ensure that members are 
protected from unfair, unfettered actions by an exchange pursuant to 
its rules, and that, in general, an exchange is administered in a way 
that is equitable to all those who trade on its market or through its 
facilities.
    Moreover, the Exchange believes that the new corporate governance 
framework and related processes proposed by the New Governing Documents 
are consistent with Section 6(b)(5) of the Act because they are 
identical to the framework and processes used by the Nasdaq Exchanges, 
which have been well-established as fair and designed to protect 
investors and the public interest. The Exchange believes that adopting 
the New Governing Documents based on the NSM model would streamline the 
Nasdaq Exchanges' governance process, create equivalent governing 
standards among HoldCo's SROs and also provide clarity to its members, 
which is beneficial to both investors and the public interest.
    Finally, the proposed amendments to the Rules as discussed above 
are non-substantive changes to clarify the rule text where the Rule 
referred only to the Current LLC Agreement or to the Current 
Constitution, and also the technical amendments to renumber certain 
Rules.

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

    Because the Proposed Rule Change relates to the corporate 
governance of the Exchange and not to the operations of the Exchange, 
the Exchange does not believe that the proposed rule change will impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act.

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

    No written comments were either solicited or received.

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

[[Page 46865]]

(ii) as to which the Exchange consents, the Commission shall: (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 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-MRX-2017-18 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-MRX-2017-18. 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 the 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-MRX-2017-18 and should be 
submitted on or before October 27, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\129\
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    \129\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-21538 Filed 10-5-17; 8:45 am]
 BILLING CODE 8011-01-P