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Order Granting Application by EDGX Exchange, Inc. and EDGA Exchange, Inc. for a Conditional Exemption Pursuant to Section 36(a) of the Exchange Act From Certain Requirements of Rules 6a-1 and 6a-2 Under the Exchange Act

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Start Preamble September 11, 2009.

I. Introduction

EDGX Exchange, Inc. (“EDGX”) and EDGA Exchange, Inc. (“EDGA,” and, together with EDGX, the “Applicants”) each submitted to the Securities and Exchange Commission (“Commission”) an application on Form 1 under the Securities Exchange Act of 1934 (“Exchange Act”) to register as a national securities exchange. In addition, the Applicants, pursuant to Rule 0-12 [1] under the Exchange Act, have requested an exemption under Section 36(a)(1) of the Exchange Act [2] from certain requirements of Rules 6a-1(a) and 6a-2 under the Exchange Act.[3] This order grants the Applicants' request for exemptive relief, subject to the satisfaction of certain conditions, which are outlined below.

II. Application for Conditional Exemption From Certain Requirements of Exchange Act Rules 6a-1 and 6a-2

A. Filing Requirements Under Exchange Act Rule 6a-1(a)

Exchange Act Rule 6a-1(a) requires an applicant for registration as a national securities exchange to file an application with the Commission on Form 1. Exhibit C to Form 1 requires the applicant to provide certain information with respect to each of its subsidiaries and affiliates.[4] For purposes of Form 1, Start Printed Page 47829an “affiliate” is “[a]ny person that, directly or indirectly, controls, is under common control with, or is controlled by, the national securities exchange * * * including any employees.” [5] Form 1 defines “control” as “[t]he power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise * * *.” [6] Form 1 provides, further, that any person that directly or indirectly has the right to vote 25% or more of a class of voting securities, or has the power to sell or direct the sale of 25% or more of a class of voting securities, is presumed to control the entity.[7]

Exhibit D to Form 1 requires an applicant for exchange registration to provide unconsolidated financial statements for the latest fiscal year for each subsidiary or affiliate. Exhibit D requires the financial statements to include, at a minimum, a balance sheet and an income statement with such footnotes and other disclosures as are necessary to avoid rendering the financial statements misleading. Exhibit D provides, in addition, that if any affiliate or subsidiary of the applicant is required by another Commission rule to submit annual financial statements, a statement to that effect, with a citation to the other Commission rule, may be provided in lieu of the financial statements required in Exhibit D.

A Form 1 application is not considered filed until all necessary information, including financial statements and other required documents, have been furnished in the proper form.[8]

B. Filing Requirements Under Exchange Act Rule 6a-2

Exchange Act Rule 6a-2(a)(2) requires a national securities exchange to update the information provided in Exhibit C within 10 days of any action that causes the information provided in Exhibit C to become inaccurate or incomplete. In addition, Exchange Act Rule 6a-2(b)(1) requires a national securities exchange to file Exhibit D on or before June 30 of each year, and Exchange Act Rule 6a-2(c) requires a national securities exchange to file Exhibit C every three years.

C. Exemption Request

On July 23, 2009, the Applicants requested that the Commission grant an exemption under Section 36 of the Exchange Act, subject to the conditions set forth below, from the requirement under Exchange Act Rule 6a-1 to file the information requested in Exhibits C and D to Form 1 for the “Foreign Indirect Affiliates,” as defined below, of the Applicants.[9] In addition, the Applicants requested an exemption, subject to certain conditions, with respect to the Foreign Indirect Affiliates from the requirements under: (1) Exchange Act Rule 6a-2(a)(2) to amend Exhibit C within 10 days if the information in Exhibit C becomes inaccurate or incomplete; and (2) Exchange Act Rules 6a-2(b)(1) and (c) to file periodic updates to Exhibits C and D.

The Applicants are wholly-owned subsidiaries of Direct Edge Holdings LLC (“DE Holdings”). International Securities Exchange Holdings, Inc. (“ISE Holdings”) owns a 31.54% ownership interest in DE Holdings.[10] ISE Holdings is a wholly-owned subsidiary of U.S. Exchange Holdings, Inc., which is wholly-owned by a German stock corporation, Eurex Frankfurt AG (“Eurex Frankfurt”). Eurex Frankfurt is wholly-owned by Eurex Zurich AG (“Eurex Zurich”), a Swiss stock corporation owned by SIX Swiss Exchange AG (“SIX Swiss Exchange”), and Deutsche Borse AG (“Deutsche Borse”).[11] SIX Swiss Exchange is a wholly-owned subsidiary of SIX Group AG (“SIX Group”), a Swiss stock corporation. According to the Applicants, Eurex Frankfurt, Eurex Zurich, SIX Swiss Exchange, Deutsche Borse, and SIX Group (collectively, the “Foreign Direct Affiliates”) hold ownership interests in excess of 25% in a large number of other foreign entities, some of which also own interests in excess of 25% in other entities (such Foreign Direct Affiliate-owned entities are referred to, collectively, as the “Foreign Indirect Affiliates”).[12]

Because of the limited and indirect nature of their connection to the Foreign Indirect Affiliates, the Applicants believe that the corporate and financial information of the Foreign Indirect Affiliates required by Exhibits C and D of Form 1 would have little relevance to the Commission's review of the Applicants' Form 1 applications or to the Commission's ongoing oversight of the Applicants as national securities exchanges if the Commission approves the Applicants' Form 1 applications.[13] In this regard, the Exemption Request states that the Foreign Indirect Affiliates have no ability to influence the management, policies, or finances of the Applicants and no obligation to provide funding to, or ability to materially affect the funding of, the Applicants.[14] The Exemption Request also states that (1) the Foreign Indirect Affiliates have no ownership interest in the Applicants or in any of the controlling shareholders of the Applicants; and (2) there are no commercial dealings between the Applicants and the Foreign Indirect Affiliates.[15] Further, the Exemption Request states that obtaining detailed corporate and financial information with respect to the Foreign Indirect Affiliates (1) is unnecessary for the protection of investors and the public interest and (2) would be unduly burdensome and inefficient because these affiliates are located in foreign jurisdictions and the disclosure of such information could implicate foreign information sharing restrictions in such jurisdictions.[16]

As a condition to the granting of exemptive relief, the Applicants have agreed to provide: (i) A listing of the names of the Foreign Indirect Affiliates; (ii) an organizational chart setting forth the affiliation of the Foreign Indirect Affiliates and the Foreign Direct Affiliates and the Applicants; and (iii) in Exhibit C of the Applicants' respective Form 1 applications, a description of the nature of the Foreign Indirect Affiliates' affiliation with the Foreign Direct Affiliates and the Applicants. In addition, as a condition to the granting of exemptive relief from the requirements of Exchange Act Rule 6a-2(a)(2), 6a-2(b)(1), and 6a-2(c), as Start Printed Page 47830described above, the Applicants have agreed to provide amendments to the information required under conditions (i) through (iii) above on or before June 30th of each year. Further, the Applicants note that they will provide the information required by Exhibits C and D for all of their affiliates other than the Foreign Indirect Affiliates, including the Foreign Direct Affiliates.[17]

III. Order Granting Conditional Section 36 Exemption

Section 6 of the Exchange Act [18] sets forth a procedure for an exchange to register as a national securities exchange.[19] Exchange Act Rule 6a-1(a) [20] requires an application for registration as a national securities exchange to be filed on Form 1 in accordance with the instructions in Form 1. A Form 1 application is not considered filed until all necessary information, including financial statements and other required documents, have been furnished in the proper form.[21] Exchange Act Rule 6a-2 establishes ongoing requirements to file certain amendments to Form 1.

Section 36(a)(1) of the Exchange Act provides that “the Commission, by rule, regulation, or order, may conditionally or unconditionally exempt any person, security, or transaction, or any class or classes of persons, securities, or transactions, from any provision or provisions of [the Exchange Act] or of any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.” [22]

For the reasons discussed below, the Commission believes that it is appropriate in the public interest and consistent with the protection of investors to exempt the Applicants from the requirement under Exchange Act Rule 6a-1 to provide the information required in Exhibits C and D to Form 1 with respect to the Foreign Indirect Affiliates, subject to the following conditions:

(1) The Applicants must provide a list of the names of the Foreign Indirect Affiliates;

(2) The Applicants must provide an organizational chart setting forth the affiliation of the Foreign Indirect Affiliates and the Foreign Direct Affiliates and the Applicants; and

(3) As part of Exhibit C to the Applicants' respective Form 1 Applications, the Applicants must provide a description of the nature of the affiliation between the Foreign Indirect Affiliates and the Foreign Direct Affiliates and the Applicants.

The Commission believes, further, that it is appropriate in the public interest and consistent with the protection of investors to exempt the Applicants, with respect to the Foreign Indirect Affiliates, from the requirements under: (a) Exchange Act Rule 6a-2(a)(2) to amend Exhibit C within 10 days of any action that renders the information in Exhibit C inaccurate or incomplete; (b) Exchange Act Rules 6a-2(c) to provide periodic updates of Exhibit C; and (c) Exchange Act Rules 6a-2(b)(1) to provide periodic updates of Exhibits D, subject to the condition that the Applicants provide amendments to the information required under conditions (1) through (3) above on or before June 30th of each year.

As part of an application for exchange registration, the information included in Exhibits C and D is designed to help the Commission make the determinations required under Sections 6(b) and 19(a) of the Exchange Act with respect to the application. The updated Exhibit C and D information required under Exchange Act Rule 6a-2 is designed to help the Commission exercise its oversight responsibilities with respect to registered national securities exchanges. Specifically, Exhibit D is designed to provide the Commission with information concerning the financial status of an exchange and its affiliates and subsidiaries,[23] and Exhibit C provides the Commission with the names and organizational documents of these affiliates and subsidiaries.[24] Such information is designed to help the Commission determine whether an applicant for exchange registration would have the ability to carry out its obligations under the Exchange Act, and whether a registered national securities exchange continues to have the ability to carry out its obligations under the Exchange Act.

Since the most recent amendments to Form 1 in 1998,[25] many registered national securities exchanges that previously were member-owned organizations with few affiliated entities have demutualized. Some of these demutualized exchanges have been consolidated under holding companies with numerous affiliates that, in some cases, have only a limited and indirect connection to the registered national securities exchange, with no ability to influence the management or policies of the registered exchange and no obligation to fund, or to materially affect the funding of, the registered exchange. The Commission believes that, for these affiliated entities, the information required under Exhibits C and D would have limited relevance to the Commission's review of an application for exchange registration or to its oversight of a registered exchange.

Based on the Applicants' representations, the indirect nature of the relationship between the Applicants and the Foreign Indirect Affiliates, and the information that the Applicants will provide with respect to the Foreign Direct Affiliates and the Foreign Indirect Affiliates, the Commission believes that it will have sufficient information to review the Applicants' Form 1 applications and to make the determinations required under Sections 6(b) and 19(a) of the Exchange Act with respect to their applications for registration as national securities exchanges.[26] The Commission believes, further, that it would have the information necessary to oversee the Applicants' activities as national securities exchanges if the Commission approves the Applicants' Form 1 applications. In particular, the Commission notes that the Applicants have represented that they have no direct connection to the Foreign Indirect Affiliates, that the Foreign Indirect Affiliates have no ability to influence the management or policies of the Applicants, and that the Foreign Indirect Affiliates have no obligation to fund, or ability to materially affect the funding of, the Applicants. In addition, the Commission notes that the Applicants represented that: (1) The Foreign Indirect Affiliates have no ownership interest in the Applicants or Start Printed Page 47831in any of the controlling shareholders of the Applicants; and (2) there are no commercial dealings between the Applicants and the Foreign Indirect Affiliates.[27] The Commission also believes that, based on the Applicants' representations, it could be burdensome for the Applicants to obtain detailed corporate and financial information with respect to the Foreign Indirect Affiliates because these affiliates are located in foreign jurisdictions and the disclosure of such information could implicate foreign information sharing restrictions in such jurisdictions.[28] Given the limited and indirect relationship between the Applicants and the Foreign Indirect Affiliates and the location of the Foreign Indirect Affiliates in foreign jurisdictions, as described above, the Commission believes that the detailed corporate and financial information required in Exhibits C and D with respect to the Foreign Indirect Affiliates is unnecessary for the Commission's review of the Applicants' Form 1 applications and would be unnecessary for the Commission's oversight of the Applicants as registered national securities exchanges following any Commission approval of their Form 1 applications.

For the reasons discussed above, the Commission finds that the conditional exemptive relief requested by the Applicants is appropriate in the public interest and is consistent with the protection of investors.

It is ordered, pursuant to Section 36 of the Exchange Act,[29] and subject to the conditions described above, that the Applicants are exempt from the requirements to: (1) Include in their Form 1 applications the information required in Exhibits C and D to Form 1 with respect to the Foreign Indirect Affiliates; and (2) with respect to the Foreign Indirect Affiliates, update the information in Exhibits C and D to Form 1 as required by Exchange Act Rules 6a-2(a)(2), 6a-2(b)(1), and 6a-2(c).

Start Signature

By the Commission.

Elizabeth M. Murphy,

Secretary.

End Signature End Preamble

Footnotes

3.  17 CFR 240.6a-1(a) and 6a-2. See letter from Eric W. Hess, General Counsel and Secretary, EDGA and EDGX, to Elizabeth Murphy, Secretary, Commission, dated July 30, 2009 (“Exemption Request”).

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4.  Specifically, Exhibit C requires the applicant to provide, for each subsidiary or affiliate, and for any entity that operates an electronic trading system used to effect transactions on the exchange: (1) The name and address of the organization; (2) the form of organization; (3) the name of the State and statute citation under which it is organized, and the date of its incorporation in its present form; (4) a brief description of the nature and extent of the affiliation; (5) a brief description of the organization's business or function; (6) a copy of the organization's constitution; (7) a copy of the organization's articles of incorporation or association, including all amendments; (8) a copy of the organization's by-laws or corresponding rules or instruments; (9) the name and title of the organization's present officers, governors, members of all standing committees, or persons performing similar functions; and (10) an indication of whether the business or organization ceased to be associated with the applicant during the previous year, and a brief statement of the reasons for termination of the association.

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5.  Form 1 Instructions, Explanation of Terms, 17 CFR 249.1.

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8.  17 CFR 202.3(b)(2). Defective Form 1 applications may be returned with a request for correction or held until corrected before being accepted as a filing. See 17 CFR 202.3(b)(2). See also Securities Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844 (December 22, 1998) (“Regulation ATS Adopting Release”) at note 329 and accompanying text.

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9.  See Exemption Request, supra note 3.

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10.  See Exemption Request, supra note 3, at 2-3. See also Securities Exchange Act Release No. 59135 (December 22, 2008), 73 FR 79954 (December 30, 2008) (File No. SR-ISE-2008-85) (order approving ISE Holdings' purchase of an ownership interest in DE Holdings).

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11.  SIX Swiss Exchange, a Swiss stock corporation, and Deutsche Borse, a German stock corporation, each own approximately 50% of Eurex Zurich. See Exemption Request, supra note 3, at 2-3.

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12.  See Exemption Request, supra note 3, at 3.

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16.  Id. The Applicants also believe that providing the information required by Exhibits C and D with respect to the Foreign Indirect Affiliates could raise confidentiality concerns because many of the Foreign Indirect Affiliates are not public companies. Id.

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17.  See Exemption Request, supra note 3, at 4.

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19.  Specifically, Section 6(a) of the Exchange Act states that “[a]n exchange may be registered as a national securities exchange * * * by filing with the Commission an application for registration in such form as the Commission, by rule, may prescribe containing the rules of the exchange and such other information and documents as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors.” Section 6 of the Exchange Act also sets forth various requirements to which a national securities exchange is subject.

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21.  17 CFR 202.3(b)(2). See also note 8, supra.

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23.  See Securities Exchange Act Release No. 18843 (June 25, 1982), 47 FR 29259 (July 6, 1982) (proposing amendments to Form 1); see also Form 1, 17 CFR 249.1, and Section II.A., supra.

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24.  Form 1, 17 CFR 249.1. See also note 4, supra.

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25.  See Regulation ATS Adopting Release, note 8, supra.

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26.  15 U.S.C. 78f(b) and 78s(a). Section 6(b) of the Exchange Act enumerates certain determinations that the Commission must make with respect to an exchange before registering the exchange as a national securities exchange. The Commission will not register an exchange as a national securities exchange unless it is satisfied that the exchange meets these requirements. See Regulation ATS Adopting Release, supra note 8, at IV.B.

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27.  See Exemption Request, supra note 3, at 3.

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28.  See id.

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[FR Doc. E9-22346 Filed 9-16-09; 8:45 am]

BILLING CODE 8010-01-P