In the Matter of the Application of Long Term Stock Exchange, Inc.; for Registration as a National Securities Exchange; Findings, Opinion, and Order of the Commission

I. Introduction and Procedural History

On November 9, 2018, Long-Term Stock Exchange, Inc. (“LTSE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) a Form 1 application under the Securities Exchange Act of 1934 (“Act”), seeking registration as a national securities exchange under Section 6 of the Act. In a letter dated December 4, 2018, LTSE consented to an extension of time for up to an additional 90 days from the date of publication of notice of LTSE's Form 1 application. Notice of the application was published for comment in the Federal Register on December 6, 2018. The Commission has received one comment letter on the application. On February 26, 2019, LTSE submitted Amendment No. 1 to the application. On April 3, 2019, LTSE submitted Amendment No. 2 to the application.

The Commission has reviewed the Exchange's registration application, as amended, together with the comment letter received, in order to make a determination whether to grant such registration. For the reasons set forth below, and based on the representations set forth in LTSE's Form 1, as amended, this order approves LTSE's Form 1 application, as amended, for registration as a national securities exchange.

II. Statutory Standards

Pursuant to Sections 6(b) and 19(a) of the Act, the Commission shall by order grant an application for registration as a national securities exchange if the Commission finds, among other things, that the proposed exchange is so organized and has the capacity to carry out the purposes of the Act and can comply, and can enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of the exchange.

As discussed in greater detail below, the Commission finds that LTSE's application, as amended, for exchange registration meets the requirements of the Act and the rules and regulations thereunder. Further, the Commission finds that the proposed rules of LTSE are consistent with Section 6 of the Act in that, among other things, they are designed to: (1) Assure fair representation of the exchange's members in the selection of its directors and administration of its affairs and provide that, among other things, one or more directors shall be representative of investors and not be associated with the exchange, or with a broker or dealer; (2) prevent fraudulent and manipulative acts and practices, 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, and remove impediments to and perfect the mechanisms of a free and open market and a national market system; (3) not permit unfair discrimination between customers, issuers, or dealers; and (4) protect investors and the public interest. The Commission also finds that the rules of LTSE are consistent with Section 11A of the Act. Finally, the Commission finds that LTSE's proposed rules do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.

III. Discussion

A. Governance of LTSE

LTSE Group, Inc. (“LTSEG”), a Delaware corporation, will own 100% of the equity of LTSE and is the entity through which the individual investors who are ultimate owners of the Exchange will hold their ownership interests in the Exchange. LTSEG will be the primary employer of all LTSE personnel. In addition, the stockholders who directly own LTSEG also will directly own a separate, affiliated Delaware-incorporated entity, LTSE Services, Inc. (“LTSE Services”), a software business currently serving approximately 20,000 users, mostly early stage companies. It is contemplated that the Exchange will maintain a commercial relationship with LTSE Services, seeking to leverage the company's technological expertise to support the Exchange's software needs.

1. LTSE Board of Directors

The board of directors of LTSE (“Exchange Board”) will be its governing body and will possess all of the powers necessary for the management of its business and affairs, including governance of LTSE as a self-regulatory organization (“SRO”). Pursuant to the LTSE Bylaws:

• The Exchange Board initially will be composed of 6 or more directors;

• one director will be the Chief Executive Officer of LTSE;

• the number of Non-Industry Directors, including at least one Independent Director, will equal or exceed the sum of the Industry Directors and Member Representative Directors; and

• at least 20% of the directors on the Exchange Board will be Member Representative Directors.

The initial Directors of the Exchange Board will be appointed by LTSEG and will serve until the first annual meeting of stockholders. The first annual meeting of stockholders will be held prior to LTSE's commencement of operations as an Exchange.

In addition, LTSEG will appoint the initial Nominating Committee and Member Nominating Committee, consistent with each committee's compositional requirements, to nominate candidates for election to the Exchange Board. The Nominating Committee and Member Nominating Committee, after completion of their respective duties for nominating directors for election to the Board for that year, will recommend candidates to serve on the succeeding year's Nominating Committee or Member Nominating Committee, as applicable. LTSE members will have rights to nominate and elect additional candidates for the Member Nominating Committee pursuant to a petition process.

The Nominating Committee will nominate candidates for election to the Board at the annual stockholder meeting and all other vacant or new Director positions on the Board. For Member Representative Director positions, the Member Nominating Committee, composed solely of Member Representative Members, will solicit input from LTSE members and members may submit petition candidates. If no candidates are nominated pursuant to a petition process, then the initial nominees approved and submitted by the Member Nominating Committee will be nominated as Member Representative Directors by the Nominating Committee. If a petition process produces additional candidates, then the candidates nominated pursuant to the petition process, together with those nominated by the Member Nominating Committee, will be presented to LTSE members for election to determine the final designees for any open Member Representative Director positions. In the event of a contested election, the candidates who receive the most votes will be selected as the Member Representative Director designees by the Member Nominating Committee.

The Commission believes that the LTSE governance provisions are consistent with the Act. In particular, the Commission believes that the requirement in the LTSE Bylaws that the number of Member Representative Directors must be at least 20% of the Board and the means by which they will be chosen by LTSE members provide for the fair representation of members in the selection of directors and the administration of LTSE and therefore are consistent with Section 6(b)(3) of the Act. As the Commission has previously noted, this requirement helps to ensure that members have a voice in an exchange's self-regulatory program, and that an exchange is administered in a way that is equitable to all those who trade on its market or through its facilities.

In addition, with respect to the requirement that the number of Non-Industry Directors, including at least one Independent Director, will equal or exceed the sum of the number of Industry Directors and Member Representative Directors, the Commission believes that the proposed composition of the Exchange Board satisfies the requirements in Section 6(b)(3) of the Act, which require in part that one or more directors be representative of issuers and investors and not be associated with a member of the exchange, or with a broker or dealer. The Commission previously has stated that the inclusion of public, non-industry representatives on exchange oversight bodies is an important mechanism to support an exchange's ability to protect the public interest. Further, the presence of public, non-industry representatives can help to ensure that no single group of market participants has the ability to systematically disadvantage other market participants through the exchange governance process. The Commission believes that public directors can provide unbiased perspectives, which may enhance the ability of the Exchange Board to address issues in a non-discriminatory fashion and foster the integrity of the Exchange.

2. Interim Board

LTSEG, as the sole stockholder of the Exchange, will appoint Interim Directors of the Board (“Interim Board”) at a special meeting of the stockholder, which will include Interim Member Representative Directors. Upon appointment of the Interim Directors by the stockholder, the Interim Board will meet the Board composition requirements set forth in the LTSE Bylaws. The Interim Board members will serve only until the first annual meeting of the stockholders, which will be held prior to the company's commencement of operations as an Exchange. The Exchange represents that it will complete the full nomination, petition, and voting process set forth in the LTSE Bylaws, which will provide persons that are approved as LTSE members after the date that the Commission grants the Exchange's registration as a national securities exchange with the opportunity to participate in the selection of Member Representative Directors as promptly as possible after the effective date of the Bylaws.

3. Exchange Committees

LTSE has proposed to establish several committees of the Exchange Board. Specifically, LTSE has proposed to establish the following committees of the Exchange Board: an Audit Committee, an Appeals Committee, and a Regulatory Oversight Committee, as well as a Compensation Committee. In addition, LTSE has proposed to establish a Nominating Committee and a Member Nominating Committee, as discussed above.

The Appeals Committee will consist of two Independent Directors, and one Member Representative Director. Each member of the Regulatory Oversight Committee must be an Independent Director. Each voting member of the Compensation Committee must be an Independent Director. Each member of the Audit Committee must be an Independent Director.

Because the Executive Committee will have the powers and authority of the Exchange Board in the management of the business and affairs of the Exchange between meetings of the Exchange Board, its composition must reflect that of the Exchange Board. Accordingly, the number of Non-Industry Directors on the Executive Committee must equal or exceed the number of Industry Directors and the percentages of Independent Directors and Member Representative Directors on the Executive Committee must be at least as great as the corresponding percentages of each such class of Directors on the Exchange Board as a whole.

The Commission believes that LTSE's proposed committees, which are similar to the committees maintained by other exchanges, are designed to help enable the Exchange to carry out its responsibilities under the Act and are consistent with the Act, including Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act.

B. LTSE Group and Regulation of the Exchange

When LTSE commences operations as a national securities exchange, it will have all of the attendant regulatory obligations under the Act. In particular, LTSE will be responsible for the operation and regulation of its trading system and the regulation of its members. The Commission believes that certain provisions in the LTSE and LTSEG governing documents are designed to facilitate the ability of LTSE to fulfill its regulatory obligations and to help facilitate Commission oversight of LTSE. The discussion below summarizes some of these key provisions.

1. Ownership Structure; Ownership and Voting Limitations

As stated above, LTSE will be wholly owned by LTSEG. The proposed Amended and Restated Certificate of Incorporation of LTSEG (“LTSEG Certificate”) includes restrictions on the ability to own and vote shares of capital stock of LTSEG. These limitations are designed to prevent any LTSEG shareholder from exercising undue control over the operation of the Exchange and to ensure that the Exchange and the Commission are able to carry out their regulatory obligations under the Act.

In particular, for so long as LTSEG shall control, directly or indirectly, a national securities exchange, no Person, either alone or together with its Related Persons, will be permitted to beneficially own, directly or indirectly, of record or beneficially, shares constituting more than 40% of any class of capital stock of LTSEG. A more restrictive condition will apply to members of the Exchange, who will be prohibited from beneficially owning, directly or indirectly, either alone or together with their Related Persons, more than 20% of shares of any class of capital stock of LTSEG. If any stockholder purports to sell, transfer, assign, pledge, or own any shares of LTSEG in violation of these ownership limits, LTSEG will be required (to the extent funds are legally available) to redeem the shares in excess of the applicable ownership limit at their par value.

In addition, no Person, alone or together with its Related Persons, will be entitled to vote or cause the voting of shares of the capital stock of LTSEG, in person or by proxy or through any voting agreement or other arrangement, to the extent that such shares represent in the aggregate more than 20% of the voting power of the then issued and outstanding capital stock of LTSEG (“Voting Limitation”), and LTSEG will disregard any such votes purported to be cast in excess of the Voting Limitation. Further, if any Person, either alone or together with its Related Persons, is a party to any agreement, plan or other arrangement relating to shares of stock of LTSEG entitled to vote in any matter with any other Person, either alone or together with its Related Persons, under circumstances that would result in the shares of capital stock of LTSEG that are subject to such agreement, plan or other arrangement not being voted on any matter or matters or any proxy relating thereto being withheld, where the effect of such agreement, plan or other arrangement would be to enable any Person, either alone or together with its Related Persons, to vote, possess the right to vote, or cause the voting of shares of the capital stock of LTSEG that would represent more than 20% of said voting power (the “Recalculated Voting Limitation”), then the Person, either alone or together with its Related Persons, will not be entitled to vote or cause the voting of shares of stock of LTSEG, in person or by proxy or through any voting agreement or other arrangement, to the extent that such shares represent in the aggregate more than the Recalculated Voting Limitation, and LTSEG will disregard any such votes purported to be case in excess of the Recalculated Voting Limitation.

The board of directors of LTSEG (“LTSEG Board”) will be permitted to waive the 40% ownership limitation and the 20% voting limitation for non-members of the Exchange, pursuant to a resolution duly adopted by the LTSEG Board, if it makes certain determinations. Any such waiver will not be effective unless and until approved by the Commission. The LTSEG Board is specifically precluded from waiving the 20% voting and ownership limits described above for members of the Exchange and their Related Persons.

Any person that proposes to own shares of capital stock of LTSEG in excess of the 40% ownership limitation, or vote or cause the voting of shares of capital stock of LTSEG in person or by proxy or through any voting agreement or other arrangement in excess of the Voting Limitation or Recalculated Voting Limitation, as applicable, will be required to deliver written notice to the LTSEG Board of its intention. The notice must be delivered to the LTSEG Board not less than 45 days (or any shorter period to which the Board expressly consents) before the proposed ownership of such shares or the proposal to vote or cause the voting of such shares in person or by proxy through any voting agreement or other arrangement of its intention to do so.

The LTSEG Certificate also contains provisions that are designed to further safeguard the ownership and voting limitations described above, or are otherwise related to direct and indirect changes in control. Specifically, any Person that, either alone or together with its Related Persons beneficially owns, directly or indirectly(whether by acquisition or a change in the number of shares outstanding), of record or beneficially 5% or more of the then outstanding shares of capital stock of LTSEG (excluding shares of any class of stock that does not have the right by its terms to vote generally in the election of members of the LTSEG Board) will be required to immediately notify the LTSEG Board in writing of such ownership. Thereafter, such Persons will be required to update LTSEG of any increase or decrease of 1% or more in their previously reported ownership percentage.

The Exchange's Amended and Restated Certificate of Incorporation (“LTSE Certificate”) does not include change of control provisions that are similar to those in the LTSEG Certificate. However, the LTSE Certificate explicitly provides that LTSEG will be the sole owner of the common stock of the Exchange. Thus, if LTSEG ever proposes to no longer be the sole owner of the Exchange, the LTSE Certificate will be required to be amended. Any amendment to the LTSE Certificate, including any change in the provisions that identify LTSEG as the sole owner of the Exchange, will constitute a proposed rule change under Section 19(b) of the Act and Rule 19b-4 thereunder that will be required to be filed with, or filed with and approved by, the Commission. Moreover, pursuant to the LTSE Certificate itself, any sale, transfer or assignment by LTSEG of common stock of the Exchange will be subject to prior approval by the Commission pursuant to the rule filing procedure under Section 19 of the Act.

Although LTSEG is not directly responsible for regulation, its activities with respect to the operation of LTSE must be consistent with, and must not interfere with, the self-regulatory obligations of LTSE. As described above, the provisions applicable to direct and indirect changes in control of LTSEG and LTSE, as well as the voting limitation imposed on owners of LTSEG who also are LTSE members, are designed to help prevent any owner of LTSEG from exercising undue influence or control over the operation of the Exchange and to help ensure that the Exchange retains a sufficient degree of independence to effectively carry out its regulatory obligations under the Act.

In addition, these limitations are designed to address the conflicts of interests that might result from a member of a national securities exchange owning interests in the exchange. As the Commission has noted in the past, a member's ownership interest in an entity that controls an exchange could become so large as to cast doubt on whether the exchange may fairly and objectively exercise its self-regulatory responsibilities with respect to such member. A member that is a controlling shareholder of an exchange could seek to exercise that controlling influence by directing the exchange to refrain from, or the exchange may hesitate to, diligently monitor and conduct surveillance of the member's conduct or diligently enforce the exchange's rules and the federal securities laws with respect to conduct by the member that violates such provisions. As such, the Commission believes that these requirements are designed to minimize the potential that a person or entity can improperly interfere with or restrict the ability of the Exchange to effectively carry out its regulatory oversight responsibilities under the Act.

The Commission believes that LTSE's and LTSEG's proposed governance provisions are consistent with the Act, including Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act. In particular, these requirements are designed to minimize the potential that a person could improperly interfere with or restrict the ability of the Commission or the Exchange to effectively carry out their regulatory oversight responsibilities under the Act.

2. Regulatory Independence and Oversight

Although LTSEG will not itself carry out regulatory functions, its activities with respect to the operation of LTSE must be consistent with, and must not interfere with, LTSE's self-regulatory obligations. In this regard, LTSE and LTSEG propose to adopt certain provisions in their respective governing documents that are designed to help maintain the independence of the regulatory functions of LTSE. These proposed provisions are substantially similar to those included in the governing documents of other exchanges that recently have been granted registration. Specifically:

• The directors, officers, employees, and agents of LTSEG must give due regard to the preservation of the independence of the self-regulatory function of LTSE and to its obligations to investors and the general public and must not take actions which would interfere with the effectuation of decisions by the Exchange Board relating to its regulatory functions (including disciplinary matters) or which would interfere with LTSE's ability to carry out its responsibilities under the Act.

• LTSEG must comply with the federal securities laws and the rules and regulations promulgated thereunder, and must cooperate with the Commission and LTSE pursuant to, and to the extent of, their respective regulatory authority. In addition, LTSEG's officers, directors, employees, and agents must comply with the federal securities laws and the rules and regulations promulgated thereunder and are deemed to agree to cooperate with the Commission and LTSE in respect of the Commission's oversight responsibilities regarding LTSE and the self-regulatory functions and responsibilities of LTSE, and LTSEG must take reasonable steps necessary to cause its officers, directors, employees and agents to so cooperate.

• LTSEG, and its officers, directors, employees, and agents must submit to the jurisdiction of the U.S. federal courts, the Commission, and LTSE, for purposes of any suit, action or proceeding pursuant to the U.S. federal securities laws, and the rules and regulations thereunder, arising out of, or relating to, LTSE activities.

• All books and records of LTSE reflecting confidential information pertaining to the self-regulatory function of LTSE (including but not limited to disciplinary matters, trading data, trading practices, and audit information) must be retained in confidence by LTSE and its personnel, directors, officers, employees and agents, and will not be used by LTSE for any non-regulatory purposes and shall not be made available to any person (including, without limitation, any LTSE member) other than to personnel of the Commission, and those personnel of LTSE, members of committees of the Exchange Board, members of the Exchange Board, or hearing officers and other agents of LTSE, to the extent necessary or appropriate to properly discharge the self- regulatory responsibilities of LTSE. Similar provisions apply to LTSEG and its directors, officers, employees and agents.

• The books and records of LTSE and LTSEG must be maintained in the United States and, to the extent they are related to the operation or administration of LTSE, LTSEG's books and records will be subject at all times to inspection and copying by the Commission and LTSE.

• Furthermore, to the extent they are related to the operation or administration of LTSE, the books, records, premises, officers, directors, employees, and agents of LTSEG will be deemed to be the books, records, premises, officers, directors, employees, and agents of LTSE, for purposes of, and subject to oversight pursuant to, the Act.

• LTSEG will take reasonable steps necessary to cause its officers, directors, employees, and agents, prior to accepting a position as an officer, director, employee or agent (as applicable) to consent in writing to the applicability of provisions regarding non-interference, confidentiality, books and records, compliance and cooperation, jurisdiction, and regulatory obligations, with respect to their activities related to LTSE.

• The LTSEG Certificate and Bylaws require that, so long as LTSEG controls LTSE, any changes to those documents must be submitted to the Exchange Board for approval, and, if such change is required to be filed with the Commission pursuant to Section 19(b) of the Act and the rules and regulations thereunder, such change shall not be effective until filed with and effective by operation of law, or filed with, and approved by, the Commission.

The Commission believes that the provisions discussed in this section, which are designed to help ensure the independence of LTSE's regulatory function and facilitate the ability of LTSE to carry out its regulatory responsibilities under, and operate in a manner consistent with, the Act, are appropriate and consistent with the requirements of the Act, particularly with Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act.

Further, Section 19(h)(1) of the Act provides the Commission with the authority “to suspend for a period not exceeding twelve months or revoke the registration of [an SRO], or to censure or impose limitations upon the activities, functions, and operations of [an SRO], if [the Commission] finds, on the record after notice and opportunity for hearing, that [the SRO] has violated or is unable to comply with any provision of the Act, the rules or regulations thereunder, or its own rules or without reasonable justification or excuse has failed to enforce compliance . . . ” with any such provision by its members (including associated persons thereof). If the Commission were to find, or become aware of, through staff review and inspection or otherwise, facts indicating any violations of the Act, including without limitation Sections 6(b)(1) and 19(g)(1), these matters could provide the basis for a disciplinary proceeding under Section 19(h)(1) of the Act.

The Commission also notes that, even in the absence of the governance provisions described above, under Section 20(a) of the Act any person with a controlling interest in LTSE would be jointly and severally liable with and to the same extent that LTSE is liable under any provision of the Act, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action. In addition, Section 20(e) of the Act creates aiding and abetting liability for any person who knowingly provides substantial assistance to another person in violation of any provision of the Act or rule thereunder. Further, Section 21C of the Act authorizes the Commission to enter a cease-and-desist order against any person who has been “a cause of” a violation of any provision of the Act through an act or omission that the person knew or should have known would contribute to the violation. These provisions are applicable to all entities' dealings with LTSE, including LTSEG.

3. Regulatory Oversight Committee

The regulatory operations of LTSE will be monitored by the Regulatory Oversight Committee of the Exchange Board. The Regulatory Oversight Committee will consist of at least three members, all of whom must be Independent Directors. The Regulatory Oversight Committee will be responsible for overseeing the adequacy and effectiveness of LTSE's regulatory and SRO responsibilities, assessing LTSE's regulatory performance, and assisting the Exchange Board (and committees of the Exchange Board) in reviewing LTSE's regulatory plan and the overall effectiveness of LTSE's regulatory functions.

Further, a Chief Regulatory Officer (“CRO”) of LTSE will have general supervision over LTSE's regulatory operations, including responsibility for overseeing LTSE's surveillance, examination, and enforcement functions and for administering any regulatory services agreements with another self-regulatory organization to which LTSE is a party. The Regulatory Oversight Committee, in consultation with the Chief Executive Officer of LTSE, will be responsible for establishing the goals, assessing the performance, fixing the compensation of the CRO and for recommending personnel actions involving the CRO and senior regulatory personnel.

4. Regulatory Funding and Services

As a prerequisite for the Commission's granting of an exchange's application for registration, an exchange must be organized and have the capacity to carry out the purposes of the Act. Specifically, an exchange must be able to enforce compliance by its members, and persons associated with its members, with the federal securities laws and rules thereunder and the rules of the exchange. The discussion below summarizes how LTSE proposes to conduct and structure its regulatory operations.

a. Regulatory Funding

To help ensure that LTSE has and will continue to have adequate funding to be able to meet its responsibilities under the Act, LTSE represents that, if the Commission approves LTSE's application for registration as a national securities exchange, LTSEG will allocate sufficient assets to LTSE to enable the Exchange's operation. Specifically, LTSE represents that LTSEG will make a cash contribution to LTSE of $5,000,000, in addition to any previously-provided in-kind contributions, such as legal, regulatory, and infrastructure-related services.

LTSE also represents that such cash and in-kind contributions from LTSEG will be adequate to operate LTSE, including the regulation of the Exchange, and that LTSEG and LTSE will enter into an agreement that requires LTSEG to provide adequate funding for the Exchange's operations, including the regulation of the Exchange.

Further, any “Regulatory Funds” received by LTSE will not be used for non-regulatory purposes or distributed to LTSEG, but rather will be applied to fund the regulatory operations of LTSE, or, as applicable, used to pay restitution and disgorgement to customers as part of a regulatory proceeding. Any excess non-regulatory funds, as solely determined by LTSE, will be remitted to LTSEG in accordance with LTSE Bylaws.

b. Regulatory Contract with FINRA

Although LTSE will be an SRO with all of the attendant regulatory obligations under the Act, it has represented to the Commission that it intends to enter into a Regulatory Services Agreement (“RSA”) with FINRA, under which FINRA as a regulatory services provider will perform certain regulatory functions on LTSE's behalf. Specifically, LTSE represents that FINRA will perform certain regulatory surveillance of trading activity on LTSE and conduct various regulatory services on behalf of LTSE, which are expected to include performance of investigation, disciplinary, and hearing services. Notwithstanding the RSA, LTSE will retain legal responsibility for the regulation of its members and its market and the performance of FINRA as its regulatory services provider. Because LTSE anticipates entering into an RSA with FINRA, it has not made provisions to fulfill the regulatory services that would be undertaken by FINRA. Accordingly, the Commission is conditioning the operation of LTSE on a final RSA that specifies the services that will be provided to LTSE.

The Commission believes that it is consistent with the Act for LTSE to contract with FINRA to perform certain examination, enforcement, and disciplinary functions. These functions are fundamental elements of a regulatory program, and constitute core self-regulatory functions. The Commission believes that FINRA has the expertise and experience to perform these functions for LTSE. However, LTSE, unless relieved by the Commission of its responsibility, bears the self-regulatory responsibilities and primary liability for self-regulatory failures, not the SRO retained to perform regulatory functions on LTSE's behalf. In performing these regulatory functions, however, FINRA may nonetheless bear liability for causing or aiding and abetting the failure of LTSE to perform its regulatory functions. Accordingly, although FINRA will not act on its own behalf under its SRO responsibilities in carrying out these regulatory services for LTSE, FINRA may have secondary liability if, for example, the Commission finds that the contracted functions are being performed so inadequately as to cause a violation of the federal securities laws or rules thereunder by LTSE.

c. Rule 17d-2 Agreements

Section 19(g)(1) of the Act, among other things, requires every SRO registered as either a national securities exchange or national securities association to comply with the Act, the rules and regulations thereunder, and the SRO's own rules, and, absent reasonable justification or excuse, enforce compliance by its members and persons associated with its members, unless the SRO is relieved of this responsibility pursuant to Section 17(d) or Section 19(g)(2) of the Act. Rule 17d-2 of the Act permits SROs to propose joint plans to allocate regulatory responsibilities amongst themselves for their common rules with respect to their common members. These agreements, which must be filed with and declared effective by the Commission, generally cover areas where each SRO's rules substantively overlap, including such regulatory functions as personnel registration and sales practices. Without this relief, the statutory obligation of each individual SRO could result in a pattern of multiple examinations of broker-dealers that maintain memberships in more than one SRO. Such regulatory duplication would add unnecessary expenses for common members and their SROs.

A Rule 17d-2 plan that is declared effective by the Commission relieves the specified SRO of those regulatory responsibilities allocated by the plan to another SRO. Many SROs have entered into Rule 17d-2 agreements. LTSE has represented to the Commission that LTSE and FINRA intend to file a Rule 17d-2 agreement with the Commission covering common members of LTSE and FINRA. This agreement will allocate to FINRA regulatory responsibility, with respect to common members, for specified regulatory and enforcement matters arising out of specified common rules and specified provisions of the Act and the rules and regulations thereunder. In addition, LTSE has represented to the Commission that it intends to join all applicable Rule 17d-2 plans, as applicable and in the interest of its members and their “Sponsored Participants”—entities whose access to LTSE is authorized in advance by one or more members in accordance with LTSE rules, including the multi-party Rule 17d-2 plan for the allocation of regulatory responsibilities with respect to certain Regulation NMS Rules and the multi-party Rule 17d-2 plan for the surveillance, investigation, and enforcement of common insider trading rules.

Because LTSE anticipates entering into these Rule 17d-2 agreements, it has not made provision to fulfill the regulatory obligations that would be undertaken by FINRA and other SROs under these agreements with respect to common members. Accordingly, the Commission is conditioning the operation of LTSE on approval by the Commission of a Rule 17d-2 agreement that allocates the above specified matters, and the approval of an amendment to the existing multi-party Rule 17d-2 plans specified above to add LTSE as a party.

C. LTSE Trading System

LTSE will operate a fully automated electronic order book, and will not maintain or operate a physical trading floor. Only broker-dealer members of LTSE and entities that enter into market access arrangements with members (collectively, “Users”) will have access to the LTSE system. Users will be able to electronically submit orders to buy or sell securities listed or traded on the Exchange through a variety of systems. LTSE will allow firms to register as market makers with affirmative and negative market making obligations.

Users may submit orders to the Exchange as Limit Orders or Market Orders, with the following order parameters: Displayed; Reserve; Non-Displayed; Odd Lot; Mixed Lot; LTSE Only; Minimum Quantity; and Inter-market Sweep. Orders may be submitted with the following time-in-force instructions: Immediate-or-Cancel; Day; Good `til Extended Day; System Session; and Good `til Time. Users may submit orders with the display instructions of Displayed, Non-Displayed, or Reserve, but orders submitted without display instructions will be fully displayed. Displayed orders will be displayed on an anonymous basis at a specified price. Orders will be classified as a Round Lot, Odd Lot, or Mixed Lot. Users may also choose to designate orders with an Anti-Internalization Group Identifier modifier for anti-internalization purposes to prevent executions against resting opposite side orders originating from the same market participant identifier. All of these order types and parameters are similar to order types and parameters approved by the Commission and currently available on other national securities exchanges.

The LTSE system will continuously and automatically match orders pursuant to price/display/time priority, with displayed orders and displayed portions of orders having precedence over non-displayed orders and non-displayed portions of orders at the same price without regard to time. LTSE will also utilize certain collars and constraints in an effort to reduce the occurrence of erroneous trades. With respect to the price of executions that would occur on LTSE, the LTSE system is designed to comply with the order protection requirements of Rule 611 of Regulation NMS by requiring that, for any execution to occur on LTSE during regular trading hours, the price must be equal to, or better than, the “protected quotation,” unless an exception to Rule 611 applies. Orders may be executed on the Exchange during the Regular Market Session or during Pre- and Post-Market Sessions; however, some order types and functionality are available only during the Regular Market Session.

In addition, LTSE's rules are designed to address locked and crossed markets, as required by Rule 610(d) of Regulation NMS, in that they are designed not to disseminate interest that would lock or cross a protected quote, require Users to reasonably avoid displaying interest that locks or crosses any protected quotation, and are reasonably designed to assure the reconciliation of locked or crossed interest.

LTSE will conduct an opening process for non-LTSE-listed securities at the start of its regular market session, and Users who wish to participate in the opening process may enter appropriately designated orders for queuing in the system. LTSE's rules also contemplate auction processes for any securities that may be listed on LTSE, which include Opening Auctions, Closing Auctions, IPO and Halt Auctions, and Volatility Auctions.

Initially, LTSE will not offer any outbound routing functionality; thus, all orders submitted to LTSE will be treated as LTSE Only, though limit orders may also include the execution instructions of Inter-Market Sweep Order, if appropriate.

The Commission finds that LTSE's trading rules are consistent with the Act and, in particular, the Section 6(b)(5) requirement that an exchange's rules be designed to promote just and equitable principles of trade, remove impediments to and perfect the mechanisms of a free and open market and a national market system, and protect investors and the public interest.

As a national securities exchange, LTSE will be a trading center whose quotations can be “automated quotations” under Rule 600(b)(3). In turn, LTSE is designed to be an “automated trading center” under Rule 600(b)(4) whose best-priced, displayed quotation would be a “protected quotation” under Rules 600(b)(57) and 600(b)(58), and for purposes of Rule 611.

At the same time, to meet their regulatory responsibilities under Rule 611(a) of Regulation NMS, such other trading centers will be required to have sufficient notice of new protected quotations, as well as all necessary information (such as final technical specifications). The Commission believes that it would be a reasonable policy and procedure under Rule 611(a) to require that industry participants begin treating LTSE's best bid and best offer as a protected quotation as soon as possible but no later than 90 days after the date of this order, or such later date as LTSE begins operation as a national securities exchange. The Commission notes that it has taken the same position with other new equities exchanges.

D. Discipline and Oversight of Members

As noted above, one prerequisite for the Commission's grant of an exchange's application for registration is that a proposed exchange must be so organized and have the capacity to be able to carry out the purposes of the Act. Specifically, an exchange must be able to enforce compliance by its members and persons associated with its members with the federal securities laws and rules thereunder and the rules of the exchange. As also noted above, pursuant to the proposed RSA with FINRA, FINRA will perform many of the initial disciplinary processes on behalf of LTSE. For example, FINRA will investigate potential securities laws violations, issue complaints, and conduct hearings pursuant to LTSE rules. Appeals from disciplinary decisions will be heard by the LTSE Appeals Committee and the LTSE Appeals Committee's decision shall be final. In addition, the Exchange Board on its own initiative may order review of a disciplinary decision.

The LTSE Bylaws and LTSE rules provide that the Exchange has disciplinary jurisdiction over its members so that it can enforce its members' compliance with its rules and the federal securities laws and rules. The Exchange's rules also permit LTSE to sanction members for violations of its rules and violations of the federal securities laws and rules by, among other things, expelling or suspending members, limiting members' activities, functions, or operations, fining or censuring members, or suspending or barring a person from being associated with a member, or any other fitting sanction. LTSE's rules also provide for the imposition of fines for certain minor rule violations in lieu of commencing disciplinary proceedings. Accordingly, as a condition to the operation of LTSE, a Minor Rule Violation Plan (“MRVP”) filed by LTSE under Act Rule 19d-1(c)(2) must be declared effective by the Commission.

The Commission finds that the LTSE Bylaws and rules concerning its disciplinary and oversight programs are consistent with the requirements of Sections 6(b)(6) and 6(b)(7) of the Act in that they provide fair procedures for the disciplining of members and persons associated with members. The Commission further finds that the rules of LTSE provide it with the ability to comply, and with the ability to enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of LTSE.

E. Listing and Trading on LTSE

1. Registration Under Section 12(b) of the Act

Once LTSE begins operations as a national securities exchange, a security will be considered for listing on LTSE only if such security is registered pursuant to Section 12(b) of the Act or such security is subject to an exemption. An issuer may register a security pursuant to Section 12(b) by submitting to LTSE a listing application that provides certain required information. LTSE will review the listing application and, if the listing application is approved, will certify to the Commission that it has approved the security for listing and registration. Registration of the security will become effective thirty days after the receipt of such certification by the Commission or within a shorter period of time as the Commission may determine. Once registration is effective, the security is eligible for listing on LTSE.

2. Initial and Continuing Listing Standards

The Commission finds that LTSE's proposed initial and continuing listing standards are consistent with the requirements of the Act. With respect to the standards relating to the listing and delisting of companies, including procedures and prerequisites for initial and continued listing on LTSE, the obligations of issuers with securities listed on LTSE, as well as rules describing the application and qualification process, LTSE's proposed listing rules for securities are virtually identical to those of IEX. With respect to LTSE Rule 14.201, which is substantially similar to the analogous rule of IEX, LTSE requires a company seeking the initial listing of one or more classes of securities on LTSE to participate in a free confidential pre-application eligibility review to determine whether the company meets LTSE's listing criteria and, if, upon completion of this review, LTSE determines that a company is eligible for listing, LTSE will notify that company in writing that it has been cleared to submit an original listing application. The Commission notes that, if, upon completion of this review, the Exchange determines that a company is ineligible for listing, the company may request a review of LTSE's determination pursuant to the process set forth in LTSE Rule 9.555.

3. Corporate Governance Standards

LTSE has proposed corporate governance standards in connection with securities to be listed and traded on LTSE that are substantially similar to the corporate governance listing standards of other exchanges. Included in these standards are rules requiring a majority of directors on a listed issuer's board to be independent; rules and independence requirements relating to audit and compensation committees and the oversight of nominations; and rules requiring listed issuers to adopt codes of conduct applicable to all their directors, officers and employees. The Commission finds that LTSE's proposed corporate governance standards for listed issuers contained in LTSE's proposed rules are consistent with the Act. The Commission further finds that LTSE's rules satisfy the requirements of Section 10A(m) of the Act and Rule 10A-3 thereunder and Section 10C of the Act and Rule 10C-1 thereunder, relating to audit and compensation committees, respectively. The Commission believes that LTSE's corporate governance standards for listed issuers that require a fully independent audit committee are designed to promote independent and objective review and oversight of the accounting and auditing practices of listed issuers and to enhance audit committee independence, authority, and responsibility by implementing the standards set forth in Rule 10A-3. In addition, the Commission believes that LTSE's proposed requirements relating to independent compensation committees for listed issuers would benefit investors by implementing the standards set forth in Rule 10C-1, which requires that the independent directors of a listed issuer oversee executive compensation matters, consider independence criteria before retaining compensation advisers and have responsibility for the appointment, compensation and oversight of these advisers. The corporate governance standards embodied in the listing rules of national securities exchanges, in particular, play an important role in assuring that companies listed for trading on the exchanges' markets observe good governance practices, including a reasoned, fair, and impartial approach for determining the compensation of corporate executives. The Commission believes that the Exchange's rules will foster greater transparency, accountability, and objectivity in the oversight of compensation practices of listed issuers and in the decision-making processes of their compensation committees.

As noted above, the Commission received one comment letter on LTSE's Form 1 application. In its comment letter, the Council of Institutional Investors (“CII”) advised that it could not support LTSE's Form 1 application for two reasons. First, CII stated that the corporate governance requirements in LTSE's Form 1 application (specifically, its “Voting Rights Policy” ) would “permit newly public companies to have multi-class structures with unequal voting rights in conflict with [CII's] membership approved policies supporting a one share, one vote structure” with “no sunsets on such structures.” Second, CII stated that LTSE's Form 1 application “does not include any information about LTSE's reported plans to update its application to include time-phased voting rights as a core element of its proposed corporate governance listing standards.” In addition, CII set forth its concerns about time-phased voting rights, including disproportionate empowerment of long-term stakeholders and challenges in tracking ownership of those with super-voting rights.

The issues raised in the CII Letter do not provide a basis for the Commission to reject LTSE's Form 1 application. Commission rules do not mandate that the rules of a national securities exchange must provide for a “one share, one vote” requirement for listed issuers. In approving the current rules governing the voting rights of shareholders of common stock listed on the NYSE, American Stock Exchange (“Amex”), or included on Nasdaq, the Commission stated that the new rules would protect investors from disparate voting rights plans that resulted in disenfranchisement. At the same time, however, the Commission stated that the new voting rights rules would provide flexibility to listed companies to devise their corporate capital structure by permitting disparate voting rights plans that do not disenfranchise existing shareholders and that a company could, for example, have a permissible dual class structure resulting from an initial public offering or the issuance of lower voting stock. The Commission notes that the Voting Rights Policy, as set forth in LTSE's proposed listing standards, is consistent with the current voting rights provisions of NYSE and Nasdaq, as acknowledged by CII in its letter. Other national securities exchanges that provide for the listing of equity securities also maintain shareholder voting rights provisions consistent with the NYSE and Nasdaq rules. As noted above, Commission rules do not mandate a “one share, one vote” requirement for listed issuers.

For the forgoing reasons, the Commission believes that it is appropriate to approve LTSE's Form 1 application with the inclusion of the Voting Rights Policy. With respect to the CII's concerns about time-phased voting rights, no such rights are proposed by LTSE in its Form 1 application. Once LTSE is registered as a national securities exchange, LTSE is required to file any changes to its rules as a proposed rule change under Section 19(b) of the Act and Rule 19b-4, and the public will be provided notice and given the opportunity to provide comments on any such proposed rule change.

4. Trading Pursuant to Unlisted Trading Privileges

As an exchange, LTSE will be permitted by Section 12(f) of the Act to extend unlisted trading privileges to securities listed and registered on other national securities exchanges, subject to Commission rules. In particular, Rule 12f-5 under the Act requires an exchange that extends unlisted trading privileges to securities to have in effect a rule or rules providing for transactions in the class or type of security to which the exchange extends unlisted trading privileges. The Commission notes that Chapter 14 of LTSE's rules provides for transactions in securities that meet specified criteria. Accordingly, pursuant to Section 12(f) of the Act and Rule 12f-5 thereunder, the Exchange will be permitted to extend unlisted trading privileges to securities of the same class, subject to the trading rules of the Exchange.

F. Section 11(a) of the Act

Section 11(a)(1) of the Act prohibits a member of a national securities exchange from effecting transactions on that exchange for its own account, the account of an associated person, or an account over which it or its associated person exercises investment discretion (collectively, “covered accounts”) unless an exception applies. Rule 11a2-2(T) under the Act, known as the “effect versus execute” rule, provides exchange members with an exemption from the Section 11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, subject to certain conditions, to effect transactions for covered accounts by arranging for an unaffiliated member to execute transactions on the exchange. To comply with Rule 11a2-2(T)'s conditions, a member: (i) Must transmit the order from off the exchange floor; (ii) may not participate in the execution of the transaction once it has been transmitted to the member performing the execution; (iii) may not be affiliated with the executing member; and (iv) with respect to an account over which the member or an associated person has investment discretion, neither the member nor its associated person may retain any compensation in connection with effecting the transaction except as provided in the Rule.

In a letter to the Commission, LTSE requested that the Commission concur with LTSE's conclusion that LTSE members that enter orders into the LTSE trading system satisfy the requirements of Rule 11a2-2(T). For the reasons set forth below, the Commission believes that LTSE members entering orders into the LTSE trading system will satisfy the requirements of Rule 11a2-2(T).

The Rule's first requirement is that orders for covered accounts be transmitted from off the exchange floor. In the context of automated trading systems, the Commission has found that the off-floor transmission requirement is met if a covered account order is transmitted from a remote location directly to an exchange's floor by electronic means. LTSE has represented that LTSE does not have a physical trading floor, and the LTSE trading system will receive orders from members electronically through remote terminals or computer-to-computer interfaces. The Commission believes that the LTSE trading system satisfies this off-floor transmission requirement.

Second, the Rule requires that the member and any associated person not participate in the execution of its order after the order has been transmitted. LTSE represented that at no time following the submission of an order is a member or an associated person of the member able to acquire control or influence over the result or timing of the order's execution. According to LTSE, the execution of a member's order is determined solely by what quotes and orders are present in the system at the time the member submits the order, and the order priority based on the LTSE rules. Accordingly, the Commission believes that an LTSE member and its associated persons do not participate in the execution of an order submitted to the LTSE trading system.

Third, Rule 11a2-2(T) requires that the order be executed by an exchange member who is unaffiliated with the member initiating the order. The Commission has stated that this requirement is satisfied when automated exchange facilities, such as the LTSE trading system, are used, as long as the design of these systems ensures that members do not possess any special or unique trading advantages in handling their orders after transmitting them to the exchange. LTSE has represented that the design of the LTSE trading system ensures that no member has any special or unique trading advantage in the handling of its orders after transmitting its orders to LTSE. Based on LTSE's representation, the Commission believes that the LTSE trading system satisfies this requirement.

Fourth, in the case of a transaction effected for an account with respect to which the initiating member or an associated person thereof exercises investment discretion, neither the initiating member nor any associated person thereof may retain any compensation in connection with effecting the transaction, unless the person authorized to transact business for the account has expressly provided otherwise by written contract referring to Section 11(a) of the Act and Rule 11a2-2(T) thereunder. LTSE members trading for covered accounts over which they exercise investment discretion must comply with this condition in order to rely on the rule's exemption.

G. Exemption From Section 19(b) of the Act With Regard to FINRA and NYSE Rules Incorporated by Reference

LTSE proposes to incorporate by reference certain FINRA and NYSE rules as LTSE rules. Thus, for certain LTSE rules, Exchange members will comply with an LTSE rule by complying with the FINRA or NYSE rule referenced therein. In connection with its proposal to incorporate FINRA and NYSE rules by reference, LTSE requested, pursuant to Rule 240.0-12, an exemption under Section 36 of the Act from the rule filing requirements of Section 19(b) of the Act for changes to those LTSE rules that are effected solely by virtue of a change to a cross-referenced FINRA or NYSE rule. LTSE proposes to incorporate by reference categories of rules (rather than individual rules within a category) that are not trading rules. LTSE agrees to provide written notice to its members whenever a proposed rule change to a FINRA or NYSE rule that is incorporated by reference is proposed and whenever any such proposed change is approved by the Commission or otherwise becomes effective.

Using its authority under Section 36 of the Act, the Commission is hereby granting LTSE's request for an exemption, pursuant to Section 36 of the Act, from the rule filing requirements of Section 19(b) of the Act with respect to the rules that LTSE proposes to incorporate by reference. This exemption is conditioned upon LTSE providing written notice to its members whenever FINRA or the NYSE proposes to change a rule that LTSE has incorporated by reference. The Commission believes that this exemption is appropriate in the public interest and consistent with the protection of investors because it will promote more efficient use of Commission and SRO resources by avoiding duplicative rule filings based on simultaneous changes to identical rules of more than one SRO.

H. Conclusion

It is ordered that the application of LTSE for registration as a national securities exchange be, and it hereby is, granted.

It is furthered ordered that operation of LTSE is conditioned on the satisfaction of the requirements below:

A. Participation in National Market System Plans. LTSE must join the Consolidated Tape Association Plan, the Consolidated Quotation Plan, the Nasdaq UTP Plan, the National Market System Plan Establishing Procedures Under Rule 605 of Regulation NMS, the Regulation NMS Plan to Address Extraordinary Market Volatility, the Plan for the Selection and Reservation of Securities Symbols, and the National Market System Plan Governing the Consolidated Audit Trail.

B. Intermarket Surveillance Group. LTSE must join the Intermarket Surveillance Group.

C. Minor Rule Violation Plan. A MRVP filed by LTSE under Rule 19d-1(c)(2) must be declared effective by the Commission.

D. Rule 17d-2 Agreement. An agreement pursuant to Rule 17d-2 that allocates regulatory responsibility for those matters specified above must be approved by the Commission, or LTSE must demonstrate that it independently has the ability to fulfill all of its regulatory obligations.

E. Participation in Multi-Party Rule 17d-2 Plans. LTSE must become a party to the multi-party Rule 17d-2 agreements concerning the surveillance, investigation, and enforcement of common insider trading rules.

F. RSA. LTSE must finalize the provisions of the RSA with its regulatory services provider, as described above, that will specify the LTSE and Commission rules for which the regulatory services provider will provide certain regulatory functions, or LTSE must demonstrate that it independently has the ability to fulfill all of its regulatory obligations.

It is further ordered, pursuant to Section 36 of the Act, that LTSE shall be exempted from the rule filing requirements of Section 19(b) of the Act with respect to the FINRA and NYSE rules that LTSE proposes to incorporate by reference into LTSE's rules, subject to the conditions specified in this Order.