I. Introduction

On December 2, 2016, the Chicago Stock Exchange, Inc. (“CHX” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) ^[1] and Rule 19b-4 thereunder,^[2] a proposed rule change in connection with the acquisition (“Transaction”) of CHX Holdings, Inc. (“CHX Holdings”) by North America Casin Holdings, Inc. (“NA Casin Holdings”). The proposed rule change was published for comment in the Federal Register on December 12, 2016.^[3] On January 12, 2017, the Commission instituted proceedings under Section 19(b)(2)(B) of the Exchange Act ^[4] to determine whether to approve or disapprove the proposed rule change.^[5] The Commission received 28 comments on the proposed rule change,^[6] and three responses from the Exchange in response to certain comments.^[7] On June 6, 2017, pursuant ( printed page 38735) to Section 19(b)(2) of the Exchange Act,^[8] the Commission designated a longer period for Commission action on proceedings to determine whether to disapprove the proposed rule change.^[9] On August 7, 2017, the Exchange filed Amendment No. 1 to the proposed rule change.^[10] The Commission is publishing this notice to solicit comments on Amendment No. 1 from interested persons and is approving the proposed rule change, as modified by Amendment No. 1, on an accelerated basis.

II. Summary of the Proposal, As Modified by Amendment No. 1

Currently, the Exchange is a wholly-owned subsidiary of CHX Holdings, and CHX Holdings is beneficially owned by 193 firms or individuals, including certain Participants or affiliates of Participants.^[11] Pursuant to the terms of an Agreement and Plan of Merger, dated February 4, 2016 (“Merger Agreement”), by and among NA Casin Holdings, Exchange Acquisition Corporation, Chongqing Casin Enterprise Group Co., LTD. (“Chongqing Casin”), Richard G. Pane solely in his capacity as the Stockholders Representative thereunder, and CHX Holdings, Exchange Acquisition Corporation would merge into CHX Holdings, which would then become a wholly-owned direct subsidiary of NA Casin Holdings.^[12] Current CHX Holdings stockholders would receive the right to receive cash in exchange for their shares under the terms of the Transaction.^[13] The Exchange would continue to be a wholly-owned subsidiary of CHX Holdings. Consummation of the Transaction is subject to the satisfaction of certain conditions precedent, including approval by the Commission of the proposed rule change.^[14]

The Exchange represents that, after the closing of the Transaction, all of the outstanding and issued shares of NA Casin Holdings would be held by the following firms and individuals (referred to collectively as the “upstream owners”) in the following percentages:

Upstream Owners

• NA Casin Group, Inc. (“NA Casin Group”), a corporation incorporated under the laws of the State of Delaware and wholly-owned by Chongqing Casin, a limited company organized under the laws of the People's Republic of China (“PRC”)—20%
• Chongqing Jintian Industrial Co., Ltd., a corporation incorporated under the laws of the PRC—15%
• Chongqing Longshang Decoration Co., Ltd., a corporation incorporated under the laws of the PRC—14.5%
• Castle YAC Enterprises, LLC (“Castle YAC”), a limited liability company organized under the laws of the State of New York, the sole member of which is Jay Lu,^[15] a U.S. citizen and Vice President of NA Casin Group—19%

• Raptor Holdco LLC (“Raptor”), a limited liability company organized under the laws of the State of Delaware—11.75%
• Saliba Ventures Holdings, LLC (“Saliba”), a limited liability company organized under the laws of the State of Illinois—11.75%
• Xian Tong Enterprises, Inc., a corporation incorporated under the laws of the State of New York—6.94% ( printed page 38736)
• Five members of the CHX Holdings management team, all U.S. citizens—0.88% (as equity incentives)
• Penserra, a limited liability company organized under the laws of the State of New York—0.18% ^[16]

After the closing of the Transaction, CHX would remain a national securities exchange, registered under Section 6 of the Exchange Act,^[17] and a self-regulatory organization (“SRO”), as defined in Section 3(a)(26) of the Exchange Act.^[18] In addition, following the closing, the Exchange's affiliated routing broker, CHXBD, would remain a Delaware limited liability corporation of which CHX Holdings would remain the sole member.

To effect the Transaction, the Exchange proposes to amend its certificate of incorporation and bylaws (“CHX Bylaws”),^[19] the certificate of incorporation (“CHX Holdings Certificate”) and bylaws (“CHX Holdings Bylaws”) of CHX Holdings,^[20] and the Exchange's rules.^[21] The Exchange has also filed the following documents in connection with the Transaction: (1) the certificate of incorporation (“NA Casin Holdings Certificate”) and bylaws (“NA Casin Holdings Bylaws”) of NA Casin Holdings; ^[22] (2) text of a proposed resolution of CHX Holdings' board of directors to waive certain ownership and voting limitations to permit the Transaction; ^[23] (3) the proposed NA Casin Holdings Stockholders' Agreement,^[24] which includes transfer-of-share provisions for the upstream owners that provide a right of first offer, a right to acquire interest upon change of control, and a right to purchase new securities; and (4) put agreements between Saliba, NA Casin Group, and NA Casin Holdings (“Saliba Put Agreement”),^[25] and Raptor, NA Casin Group, and NA Casin Holdings (“Raptor Put Agreement”),^[26] which would grant Saliba and Raptor, respectively, the right to compel NA Casin Holdings to purchase or arrange for an unspecified third-party to purchase a specified amount of Saliba's or Raptor's equity interest in NA Casin Holdings, respectively.

The Exchange proposes several substantive and technical amendments to its corporate governance documents, rules, and the governing documents of CHX Holdings. Among other items, the proposed amendments revise provisions in the CHX Holdings Certificate relating to ownership and voting limitations.^[27] In addition, to govern the upstream owners, the Exchange proposes to establish in the NA Casin Holdings' Certificate ownership and voting limitations that are identical to those contained in the proposed CHX Holdings documents.^[28] In particular, these provisions prohibit any Person,^[29] either alone or with its Related Persons,^[30] from beneficially owning shares of stock of CHX Holdings or NA Casin Holdings representing in the aggregate more than 40% of the then outstanding votes entitled to be cast on any matter unless specific procedures are followed prior to acquiring shares in excess of the ownership limitation.^[31] In addition, no Participant, either alone or with its Related Persons, would be permitted at any time to beneficially own shares of stock of CHX Holdings or NA Casin Holdings representing in the aggregate more than 20% of the then outstanding votes entitled to be cast on any matter.^[32] Further, no Person that is subject to any statutory disqualification as defined in Section 3(a)(39) of the Exchange Act would be permitted at any time to beneficially own, either alone or with its Related Persons, shares of stock of CHX Holdings or NA Casin Holdings representing in the aggregate more than 20% of the then outstanding votes entitled to be cast on any matter.^[33] CHX also proposes cure provisions that would require CHX Holdings or NA Casin Holdings, as applicable, to call shares held in excess of these ownership limits, and to not register any shares transferred in violation of these ( printed page 38737) ownership limits.^[34] These restrictions are described herein as the “ownership limitations.”

In addition, both the CHX Holdings Certificate and NA Casin Holdings Certificate contain voting restrictions that would preclude any stockholder, either alone or with its Related Persons, from voting more than 20% of the then outstanding shares entitled to be cast on any matter unless specific procedures are followed prior to voting in excess of the limitation.^[35] Similarly, no Person, either alone or with its Related Persons, would be permitted to enter into an agreement, plan, or other arrangement that would result in an aggregate of more than 20% of the then outstanding votes entitled to be cast on a matter to not be voted unless specific procedures are followed prior to entering into such an agreement, plan, or arrangement.^[36] The certificates of incorporation would also require that CHX Holdings and NA Casin Holdings disregard any votes cast in excess of the voting limitations.^[37] These restrictions are described herein as the “voting limitations.”

In addition, the Exchange has proposed revisions to the corporate governance documents of NA Casin Holdings and CHX Holdings to provide notice requirements with respect to changes in ownership that may affect the ownership and voting limitations. Specifically, the NA Casin Holdings Certificate and CHX Holdings Certificate will provide that: (1) Each Person involved in an acquisition for shares of stock of the corporation shall provide the corporation with written notice 14 days prior to the closing date of any acquisition that would result in a Person having voting rights or beneficial ownership, alone or together with its Related Persons, of record or beneficially, of five percent or more of the then outstanding shares of stock of the corporation entitled to vote on any matter; (2) NA Casin Holdings and CHX Holdings will be required to provide 10-day advance written notice to the Commission of any such changes in ownership; (3) any Person that, either alone or together with its Related Persons, has voting rights or beneficial ownership of, five percent or more of the outstanding voting shares of CHX Holdings or NA Casin Holdings (whether by acquisition or by change in the number of shares outstanding or otherwise), will be required, immediately upon acquiring knowledge of its ownership, to give the board of directors of CHX Holdings or NA Casin Holdings, as applicable, notice of such ownership; (4) any Person that, either alone or together with its Related Persons, of record or beneficially, has voting rights or beneficial ownership of five percent or more of NA Casin Holdings or CHX Holdings must promptly update the corporation if its ownership stake in or voting power regarding NA Casin Holdings or CHX Holdings increases or decreases by one percent or more;^[38] and (5) each Person having voting rights or beneficial ownership of stock of the NA Casin Holdings or CHX Holdings will be required to provide prompt written notice to the corporation regarding any changes to its Related Person status with respect to other Persons that own voting shares of stock of the corporation.^[39]

Furthermore, CHX is amending the CHX Holdings Bylaws,^[40] CHX Bylaws,^[41] and NA Casin Holdings Bylaws,^[42] to adopt provisions in each respective document to require that each of CHX Holdings, CHX, and NA Casin Holdings, as applicable, contemporaneously provide the Commission with any information it provides to any other U.S. governmental entity or U.S. authority pursuant to any agreement.

The proposed rule change also includes changes to CHX Holdings' and the Exchange's certificates of incorporation and bylaws addressing, among other items, board and committee composition and procedures, procedures regarding stockholder meetings, consent to U.S. federal court and Commission jurisdiction, and Commission access to certain corporate books and records.^[43] The proposed rule change also adopts provisions in the new NA Casin Holdings Certificate and NA Casin Holdings Bylaws relating to these matters.^[44]

III. Discussion and Commission Findings

The Commission has carefully considered the proposed rule change, comments on the proposal, and the commitments undertaken by the Exchange in Amendment No. 1, which was filed to respond to comments.^[45] The Commission has also considered additional information provided by the Exchange, some of which was provided on a confidential basis. Based on this consideration, the Commission finds that the proposed rule change is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange.^[46] In particular, the Commission finds that the proposed rule change is consistent with Sections 6(b)(1) and 6(b)(3) of the Exchange Act,^[47] which require, among other things, that: (1) A national securities exchange be organized and have the capacity to be able to carry out the purposes of the Exchange Act and to enforce compliance by its members and persons associated with its members with the provisions of the Exchange Act, the rules and regulations thereunder, and the rules of the exchange; and (2) the rules of a national securities exchange assure the fair representation of its members in the selection of its directors and administration of its affairs, and provide that one or more directors shall be representative of issuers and investors and not be associated with a member of the exchange, broker, or dealer. The Commission also finds that the proposal is consistent with Section 6(b)(5) of the Exchange Act,^[48] which requires that the rules of a national securities exchange be 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.

The Commission notes that, as discussed below, several commenters assert that the proposed rule change is inconsistent with Sections 6(b)(1) and 6(b)(5) of the Exchange Act because they believe that the proposed ownership structure is opaque and therefore it would be difficult for the Exchange to monitor for compliance with the Exchange Act and the rules of the Exchange,^[49] and for the Commission to exercise regulatory oversight, following ( printed page 38738) the closing of the Transaction.^[50] After careful consideration, as discussed further below, the Commission believes that the commenters' concerns are adequately addressed by the following safeguards: The ownership and voting limitations as well as the related monitoring provisions and related remedies; the notice requirements regarding changes in ownership and Related Person relationships; provisions relating to compliance with U.S. law; consents to jurisdiction; requirements to give due regard to the regulatory obligations and functions of the Exchange; and provisions ensuring access to books and records.^[51]

A. Voting and Ownership Limitations; Consent to Jurisdiction; Due Regard; Books and Records

As noted above,^[52] under the terms of the Transaction, CHX will continue to be a wholly-owned subsidiary of CHX Holdings, and CHX Holdings will become a wholly-owned subsidiary of NA Casin Holdings. Furthermore, NA Casin Holdings will be owned by a consortium of both U.S. and non-U.S. entities.^[53]

The rules of each exchange provide for limitations on ownership and voting rights, which are designed to prevent any stockholder from exercising undue control over the operation of an exchange and to assure that the exchange and the Commission are able to carry out their regulatory obligations under the Exchange Act. Here, CHX represents that the CHX Holdings Certificate and the NA Casin Holdings Certificate contain substantially identical ownership and voting limitations (other than the requirement that NA Casin Holdings take reasonable to steps to cause CHX Holdings to be in compliance with the voting and ownership limitations contained in the CHX Holdings Certificate).^[54] Under the proposal, the board of directors of CHX Holdings would waive CHX Holdings' 40% ownership limitation with respect to the proposed acquisition by NA Casin Holdings so that NA Casin Holdings could own 100% of CHX Holdings.^[55] But the relevant ownership and voting limitations will be contained in the NA Casin Holdings Certificate. The Commission notes that these limitations are designed to prevent any stockholder from exercising undue control over the operation of CHX and to assure that CHX and the Commission are able to carry out their regulatory obligations under the Exchange Act. The proposed governing documents of CHX Holdings and NA Casin Holdings contain provisions relating to compliance with U.S. law, consent to jurisdiction, due regard to the regulatory obligations and functions of the Exchange, and books and records that are designed to address CHX's ability to carry out its regulatory obligations and the Commission to exercise its regulatory oversight over CHX after the acquisition.

1. Proposed Ownership and Voting Limitations

With regard to ownership, the NA Casin Holdings Certificate restricts the ability of any Person, either alone or with its Related Persons, to vote or own shares of stock of NA Casin Holdings above certain thresholds. Specifically, the NA Casin Holdings Certificate provides that unless otherwise provided, no Person, either alone or with its Related Persons, shall be permitted at any time to beneficially own shares of stock of NA Casin Holdings representing in the aggregate more than 40% of the then outstanding votes entitled to be cast on any matter.^[56] In addition, the NA Casin Holdings Certificate prohibits any Participant, either alone or with its Related Persons, from beneficially owning shares of stock of NA Casin Holdings representing in the aggregate more than 20% of the then outstanding votes entitled to be cast on any matter.^[57] The NA Casin Holdings Certificate also prohibits a Person that is subject to any statutory disqualification as defined in Section 3(a)(39) of the Exchange Act from at any time beneficially owning, either alone or with its Related Persons, shares of stock of NA Casin Holdings representing in the aggregate more than 20% of the then outstanding votes entitled to be cast on any matter.^[58]

The NA Casin Holdings Certificate provides that if any Person, either alone or with its Related Persons, intends on acquiring ownership in excess of these ownership limitations, such Person must provide the board of directors of NA Casin Holdings with advance notice, the board must adopt a resolution permitting such ownership, and such resolution must be filed with and approved by the Commission under Section 19(b) of the Exchange Act.^[59] In addition, the NA Casin Holdings and CHX Holdings Certificates both provide that the Commission will be given prior notice of any acquisition that would result in a Person, alone or together with its Related Persons, owning or voting five percent or more of the voting stock of the NA Casin Holdings or CHX Holdings, as applicable.^[60]

In addition, the NA Casin Holdings Certificate provides that, if any Person, either alone or with its Related Persons, at any time beneficially owns shares of stock of NA Casin Holdings in excess of the ownership limitations described above and such proposed ownership has not been approved by the board of directors of NA Casin Holdings and the Commission in accordance with the NA Casin Holdings Certificate,^[61] NA Casin Holdings will call from such Person and its Related Persons the number of shares of stock of NA Casin Holdings entitled to vote on any matter that exceeds the ownership limitation at a price equal to the par value of the shares of stock.^[62] In addition, the NA Casin Holdings Certificate provides that NA Casin Holdings will not register the purported transfer of any shares of its stock in violation of the 40% ownership limitation set forth in Article IX, Section (9).^[63]

The NA Casin Holdings Certificate also contains voting restrictions. It provides that no Person, either alone or with its Related Persons, as of any record date for the determination of stockholders entitled to vote on any matter, shall be entitled to vote or cause the voting of shares of stock of NA Casin Holdings, in person or by proxy or through any voting agreement or other arrangement, to the extent such shares represent in the aggregate more than 20% of the then outstanding votes entitled to be cast on such matter.^[64] The NA Casin Holdings Certificate also provides that NA Casin Holdings will disregard any votes cast in excess of the voting limitation.^[65] Further, the NA Casin Holdings Certificate requires NA Casin Holdings to take reasonable steps necessary to cause CHX Holdings to comply with the voting and ownership ( printed page 38739) limitations set forth in the CHX Holdings Certificate.^[66]

Relevant to the ownership and voting limitations, the Exchange represents that the only Related Persons among the upstream owners are Castle YAC and NA Casin Group.^[67] Together, Castle YAC and NA Casin Group would hold a 39% ownership interest in NA Casin Holdings, which is lower than the 40% ownership limitation. In addition, they would not be permitted to exercise their collective voting interest in excess of the 20% voting limitation. In connection with the proposed rule change, the Exchange has submitted to the Commission and to CHX a certification from each of the upstream owners attesting: (1) To the identities of its Related Persons; (2) that such owner does not directly, or indirectly through one or more intermediaries, control, and is not, directly or indirectly through one or more intermediaries, controlled or owned by, or under common control or ownership with, a governmental entity or political subdivision thereof; (3) that no agreement, arrangement, or understanding for the purpose of acquiring, voting, holding, or disposing of stock of NA Casin Holdings exist between the stockholder and any of the upstream owners; and (4) that neither such owner nor any of its Related Persons is subject to any applicable “statutory disqualification” as defined in Section 3(a)(39) of the Exchange Act.^[68]

In addition, by September 1, 2018, and for every year thereafter, each stockholder of NA Casin Holdings and CHX Holdings would be required to submit to the Commission and the corporation an attestation regarding: (1) Its equity ownership level in the corporation and the identity of its Related Persons and (2) the existence of any agreement, arrangement or understanding (whether or not in writing) between the stockholder and any other person to act together for the purpose of acquiring, voting, holding or disposing of shares of stock of the corporation.^[69] The Exchange further represents that the NA Casin Holdings Stockholders' Agreement and the Raptor and Saliba put agreements would not violate the proposed ownership and voting limitations.^[70]

2. Proposed Provisions on Consent to Jurisdiction; Books and Records; Due Regard

Proposed Article IX, Section 2 of the NA Casin Holdings Certificate and proposed Section 3.4 of the CHX Holdings Bylaws provide that each of NA Casin Holdings and CHX Holdings, respectively, and its officers, directors, employees, and agents, by virtue of their acceptance of their positions, shall comply with the federal securities laws and rules and regulations thereunder and shall cooperate, and shall take reasonable steps necessary to cause its agents to cooperate, with respect to such agents' activities related to CHX, with the Commission and the Exchange, pursuant to, and to the extent of, CHX's regulatory authority. In addition, pursuant to proposed Article 10, Section 10.1 of the NA Casin Holdings Bylaws and Article III, Section 3.5 of the CHX Holdings Bylaws, each entity and its officers, directors, employees, and agents, by virtue of their acceptance of their positions, submit to the jurisdiction of the U.S. federal courts, the Commission, and the Exchange, and agree to maintain an agent in the U.S. for service of process of a claim arising out of, or relating to, the activities of the Exchange.

In addition, CHX has filed a statement from each of the upstream owners in which each such owner (1) irrevocably submits to the jurisdiction of the U.S. federal courts, the Commission, and CHX, for the purposes of any suit, action or proceeding relating to the certification it provided to the Commission and CHX arising pursuant to the U.S. federal securities laws, or the rules and regulations thereunder, arising out of, or relating to, the activities of CHX, and waive, and agree not to assert by way of motion, as a defense or otherwise in any such suit, action or proceeding, any claims that it is not personally subject to the jurisdiction of the U.S. federal courts, the Commission or CHX, that the suit, action or proceeding is an inconvenient forum or that the venue of the suit, action or proceeding is improper, or that the subject matter of that suit, action or proceeding may not be enforced in or by such courts or agency; (2) designates, authorizes and identifies to the Commission an agent in the U.S. for the service of process of a claim arising out of, or relating to, the activities of CHX, including the certificates provided to CHX and the Commission regarding, among other things, its ownership level and Related Person status; and (3) agrees to promptly inform the Commission in writing of any change to its designated and authorized agent.^[71]

CHX Holdings also proposes to amend its certificate of incorporation to state that its chief compliance officer shall (1) monitor compliance with the ownership and voting limitations applicable to all upstream beneficial owners and (2) ensure that each beneficial owner of the corporation provides certain annual attestations.^[72] The CHX Holdings Certificate also provides that CHX Holdings shall engage an independent and PCAOB-registered auditor that will perform within one year of the closing date of the Transaction, and every two years thereafter, an audit of CHX Holdings' oversight of compliance with the ownership and voting limitations.^[73]

Proposed Article IX, Section 3 of the NA Casin Holdings Certificate and proposed Article III, Section 3.1 of the CHX Holdings Bylaws require that, for as long as NA Casin Holdings and CHX Holdings control the Exchange, each of NA Casin Holdings and CHX Holdings, respectively, and its board of directors, officers, employees, and agents, shall give due regard to the preservation of the independence of the self-regulatory function of the Exchange and to its obligations to investors and the general public, and shall not take any actions that would interfere with the effectuation of any decisions by the board of directors of the Exchange relating to its regulatory functions (including enforcement and disciplinary matters) or the structure of the market ( printed page 38740) that the Exchange regulates or that would interfere with the ability of the Exchange to carry out its responsibilities under the Exchange Act.

Proposed Article IX, Sections 3 and 17 of the NA Casin Holdings Certificate and proposed Sections 3.1 and 3.3 of the CHX Holdings Bylaws provide that each entity's respective books and records related to the activities of the Exchange will be maintained within the U.S. Proposed Article IX, Section 17 of the NA Casin Holdings Certificate and proposed Section 3.3 of the CHX Holdings Bylaws also provide that for so long as NA Casin Holdings and CHX Holdings control, directly or indirectly, the Exchange, the books, records, premises, officers, directors, and employees of the NA Casin Holdings and CHX Holdings, respectively, will be deemed to be the books, records, premises, officers, directors, and employees of the Exchange for the purposes of and subject to oversight pursuant to the Exchange Act, but only to the extent that such books and records are related to, or such officers, directors, and employees are involved in, the activities of the Exchange. These provisions further provide that the NA Casin Holdings and CHX Holdings books and records relating to the activities of Exchange will also be subject at all times to inspection and copying by the Commission and the Exchange. In addition, proposed Article IX, Section 16 of the NA Casin Holdings Certificate and proposed Article III, Section 3.2 of the CHX Holdings Bylaws require each entity to maintain the confidentiality of all confidential information pertaining to the self-regulatory functions of the Exchange (including, but not limited to, confidential information regarding disciplinary matters, trading data, trading practices and audit information) contained in the books and records of the Exchange that come into the possession of each entity and preclude each entity from using such confidential information for any non-regulatory purpose.^[74]

Finally, proposed Article IX, Section 18 of the NA Casin Holdings Certificate and proposed Article III, Section 3.7 of the CHX Holdings Bylaws provide that for so long as a stockholder shall maintain a direct or indirect equity interest in the Exchange: (1) The books, records, officers, directors (or equivalent), and employees of the stockholder shall be deemed to be the books, records, officers, directors, and employees of the Exchange for purposes of and subject to oversight pursuant to the Exchange Act to the extent that such books and records are related to, or such officers, directors (or equivalent) and employees are involved in, the activities of the Exchange; (2) the stockholder's books and records related to the activities of the Exchange shall at all times be made available for inspection and copying by the Commission and the Exchange; and (3) the stockholder's books and records related to the activities of the Exchange shall be maintained within the United States.

CHX also proposes to amend its rules to require the Exchange to confirm that any RSA to which the Exchange is a party must comply with the U.S. federal securities laws, and the rules and regulations thereunder, at the time of the execution of the RSA and on an ongoing basis.^[75] In addition, CHX is amending its rules to require that its chief regulatory officer monitor Exchange compliance with the provisions of each RSA to which the Exchange is a party.^[76] CHX also proposes to amend its rules to require that, before reporting data to CAT or having access to CAT Data, the Exchange will adopt policies and procedures to ensure that only CHX “Authorized Personnel” ^[77] have access to any CAT Data, and that CHX regulatory personnel would not provide access to any CAT Data to the following persons, regardless of citizenship: (1) Any personnel of CHX and CHX Holdings that are not Authorized Personnel; (2) any personnel of NA Casin Holdings; or (3) any upstream beneficial owners of the Exchange that are not Authorized Personnel.^[78] Further, CHX proposes to amend its rules to provide that it will engage an independent and PCAOB-registered auditor that would perform, within one year after the closing of the Transaction and every two years thereafter, an audit of CHX's oversight of: (1) Any RSA; and (2) compliance with the policies and procedures relating to access to CAT Data.^[79]

3. Summary of Comments and the Exchange's Response

The Commission received comments regarding the proposed rule change generally, and the ownership and voting limitations and corporate governance provisions in particular. First, several commenters express concern about the proposed ownership structure of CHX following the close of the Transaction as it relates to the ownership and voting limitations. Some of these commenters question the identities of the proposed upstream owners and the validity of the Exchange's representation that there are no Related Persons among the proposed upstream owners other than Castle YAC and NA Casin Group.^[80] Several commenters also question the Exchange's representations regarding the backgrounds and identities of the upstream owners.^[81] In addition, commenters assert that contrary to the Exchange's representations, several of the proposed upstream owners may be affiliated.^[82] Some of these commenters state that, after the closing of the Transaction, approximately 99% of the voting stock in CHX would be controlled by what the commenters believe to be Chinese entities or affiliated shell nominees.^[83] Several of these commenters state that they believe that the post-Transaction ownership would deviate from the 40% ownership limitation.^[84]

Several commenters also opine that the proposed upstream ownership of ( printed page 38741) CHX is opaque.^[85] Some of these commenters state their views that approval of the proposal would promote the improper consolidation of ownership and coordinate voting control over CHX, and also materially harm the public trust in the independent and objective operation of U.S. capital markets.^[86] These commenters believe that the Transaction would concentrate ownership and voting power under Chongqing Casin and its “coordinate” investment entities in China, and with little or no insight and transparency into what the commenters state are government-dominated Chinese markets, the commenters believe that the Commission will be unable to monitor the ownership structure of Chongqing Casin after approval.^[87] The commenters believe that this scenario would leave CHX open to undue, improper, and possibly state driven influence via coordinated voting control by its upstream ownership.^[88] In addition, one commenter states that as a result of the proposed ownership, there would be “reputational risks” for CHX, and that “compliance frustrations” related to the Foreign Corrupt Practices Act and Anti-Money Laundering rules would be at the “front and center” in the Commission's oversight of CHX.^[89] Accordingly, the commenters state that, given these actual or potential outcomes, the Transaction appears inconsistent with Sections 6(b)(l) and 6(b)(5) of the Exchange Act.^[90]

Commenters also express concern about the ability of the Commission to exercise regulatory oversight over the Exchange following the closing of the Transaction.^[91] One commenter questions whether the Commission can effectively regulate the Exchange and protect the market from abuses if the Commission staff does not know, and cannot independently confirm, the backgrounds of what the commenter characterizes as “Chinese shell companies” involved in the Transaction.^[92] Another commenter argues that for the sake of the public interest, the Commission should take extreme caution in reviewing the proposed rule change and reject the Exchange's representations, which the commenter believes to be misleading.^[93]

In response to these concerns, the Exchange states that it has not misrepresented any facts regarding the Transaction.^[94] It also states that 50.5% of CHX will be indirectly owned by U.S. citizens.^[95] The Exchange reaffirms the representations that it made in the Notice that the only Related Persons among the upstream owners are Castle YAC and NA Casin Group, that there are no other Related Persons among the upstream owners, and that none of the upstream owners directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, a governmental entity or subdivision thereof.^[96] The Exchange asserts that each of these representations is supported by an opinion of counsel provided to the Commission by outside counsel for CHX on a confidential basis.^[97] The Exchange, NA Casin Holdings, and one of the proposed upstream owners also assert that some of the comment letters contain false accusations regarding the identity, ownership, relationships, and business activities of certain upstream owners.^[98] In addition, the Exchange, NA Casin Holdings, and two other commenters assert that the proposed upstream owners are reputable businesses.^[99]

Moreover, the Exchange asserts that it provided detailed information regarding the upstream owners to the Committee for Foreign Investment in the United States (“CFIUS”) and the Exchange asserts that CFIUS determined that there are no unresolved national security concerns with respect to the Transaction.^[100] In response to this assertion, some of the commenters state that CFIUS's approval of the Transaction has no relevance to the Commission's determination because CFIUS's review focuses solely on national security concerns, and does not relate to the ownership and voting restrictions applicable to exchanges.^[101] The Exchange responds that, with respect to the financial services sector, CFIUS review involves an examination of the potential disruptions to U.S. stock markets or the U.S. financial system as a whole, cybersecurity vulnerabilities, and the vulnerabilities associated with the fact that the U.S. business obtains and preserves personal information.^[102] The Exchange also states that CFIUS review includes a full and detailed assessment of the foreign investing entities, including all of their individual senior executives and major stockholders, and the extent of any foreign government control over the investors.^[103] The Exchange again asserts that CFIUS conducted a thorough, deep, and wide-ranging investigation of the Transaction and the proposed upstream owners, and that it concluded that there were no unresolved national security concerns.^[104]

Furthermore, commenters express concern about whether the Chinese government could have influence or control over the Exchange and its upstream owners.^[105] Some of these commenters assert that one of the proposed upstream owners has ties to the Chinese government.^[106] Several commenters question whether the Chinese government could influence ( printed page 38742) Chongqing Casin, stating that Chongqing Casin is involved in a number of Chinese market sectors that require close ties to the state, such as environmental protection.^[107] The commenters assert that Chinese markets are non-transparent and “heavily dominated” by the Chinese State Council and that companies in China often receive significant illegal subsidies from the government and are used as conduits for the Chinese Communist Party to “disrupt and distort foreign markets, businesses, and governments.” ^[108] Some commenters also state that Chongqing Casin's financial assets were originally state-controlled, and that its chairman sits on an industry council overseen directly by the mayor of the Chongqing Municipality.^[109] These commenters state that, in particular, Chinese ownership or involvement presents risks as Chinese government-sponsored cyber-attacks have been conducted to devalue foreign businesses and steal intellectual property and proprietary data; the commenters assert that this has cost American companies billions of dollars annually.^[110] Commenters also state that the Transaction may present financial security risks to investors and the U.S. marketplace.^[111] Some commenters believe that the proposal will materially harm the public trust in the independent and objective operation of U.S. capital markets.^[112] Similarly, another commenter believes that the proposal is a threat to Americans' faith in the U.S.'s national financial market infrastructure.^[113] One commenter also raises concerns that a bad actor with access to an exchange's data could use information available through brokerage records and the Consolidated Audit Trail to engage in spear phishing, blackmail attempts, and other similar attacks.^[114] In response, the Exchange states that CFIUS investigated the Transaction and “determined that there were no unresolved national security concerns with respect to the [p]roposed Transaction.” ^[115] Furthermore, some commenters believe that the Transaction would benefit the U.S. capital markets and have positive economic effects.^[116] The Exchange also states that the Transaction will enable it to accelerate implementation of its strategic plan, which includes implementing a primary listing program focused on capital formation for emerging growth companies.^[117]

Another commenter expresses concern that the proposed upstream ownership leaves CHX and U.S. markets open to “undetectable manipulation” by Chongqing Casin and the Chinese government.^[118] In response, the Exchange affirms that no prospective investor controls, is controlled by, or is under common control with, a governmental entity or any political subdivision thereof, including the Chinese government.^[119]

In addition, some commenters express concern that the Saliba Put Agreement and the Raptor Put Agreement could create voting collusion between Raptor and Saliba, resulting in a combined 24% voting interest that exceeds the 20% voting limitation.^[120] The Exchange responds that under the terms of the put agreements, NA Casin Holdings could not compel Saliba or Raptor to exercise its respective put option and that, in the event that either put agreement is exercised, CHX rules would require the resulting ownership structure to comport with the ownership and voting limitations.^[121] Some of the commenters assert that Raptor is Saliba's nominee or business partner.^[122] NA Casin Holdings and Saliba respond that Raptor and Saliba have never had any relationship, are located in different cities, and are owned by different families.^[123] In addition, one commenter asserts that these put agreements are specifically designed to skirt the Commission's exchange ownership restrictions, which would give Chongqing Casin virtual control over the Exchange.^[124] In response, the Exchange explains that the put agreements only grant Saliba and Raptor the right to exercise their respective put options and do not grant NA Casin Holdings the right to compel the exercise of those rights.^[125] The ( printed page 38743) Exchange also notes that any exercise of the put rights would be subject to compliance with the ownership and voting limitations.^[126]

Moreover, two commenters express concern that CHX and the Commission may not be aware of or able to control future transfers of ownership or voting in contravention of the ownership and voting limitations.^[127] One of these commenters asserts that there are little to no controls in place at the upstream corporate ownership level that would prevent the upstream owners from transferring their voting power in CHX to even more opaque owners or ownership that involves the Chinese government.^[128] The other commenter asserts that neither the Exchange nor the Commission would know if capital stock in China is being consolidated, resold, collateralized, or collusively voted in violation of the 20% voting limitation.^[129] The commenter expresses concern that collusion or changes in ownership that are unknown to the Exchange or the Commission could hinder the Exchange's and the Commission's obligations to prevent conflicts of interest and improper influence under Section 6(b)(5) of the Exchange Act.^[130] In addition, the commenter asserts that the upstream owners are not being required to amend their governing documents to restrict collusive voting or resale of the Exchange.^[131]

In response, the Exchange states that to the contrary, the governing documents of NA Casin Holdings and CHX Holdings do indeed restrict the voting and sale of the Exchange.^[132] In addition, as noted above, the Exchange affirms its representation that no prospective owner or any of its Related Persons would maintain an equity interest, or exercise voting power, in violation of the ownership and voting limitations.^[133] The Exchange also responds that the proposed governance documents for NA Casin Holdings and CHX Holdings provide robust enforcement mechanisms for the ownership and voting limitations, and that the CHX board's composition would be required to meet certain independence requirements.^[134] The Exchange also notes that the CHX rules and Exchange Act contain various provisions that would facilitate the ability of U.S. regulators, including the Commission, to monitor, compel, and enforce compliance by each of the upstream owners.^[135]

Commenters also express concern about the ability of the Commission to exercise regulatory oversight over the Exchange following the closing of the Transaction.^[136] Characterizing the proposed upstream ownership of CHX as “opaque,” several commenters state that approval of the proposal would strip the Commission of its ability to carry out its statutorily mandated oversight of exchange ownership.^[137] These commenters also state that given ongoing concerns with the severe lack of transparency in China, the commenters have substantial concerns related to the Commission's ability to monitor and regulate the upstream ownership of Chongqing Casin.^[138] These commenters note that neither Chongqing Casin nor any of its coordinate foreign entities have provided U.S. regulators with any power to monitor or regulate their activities with respect to CHX.^[139] These commenters further state that, in the past, Chinese entities have limited visibility into post-acquisition activities and have attempted to interpose arguments—such as sovereign immunity or limits to the extraterritorial application of U.S. laws—to avoid compliance with U.S. regulatory requirements.^[140] The commenters believe that these actions erode investor trust and adversely affect U.S. regulatory interests.^[141]

Similarly, another commenter opines that what the commenter cites as the Chinese government's continued rejection of fundamental free-market norms and property rights of private citizens makes the commenter strongly doubt whether an Exchange operating under the direct control of a Chinese entity can be trusted to self-regulate now and in the future.^[142] The commenter states that while the harms caused by NA Casin Group's acquisition of the CHX may not become apparent immediately, allowing this acquisition to proceed could have a devastating effect on the health of U.S. financial markets, which the commenter states are “the envy of the world.” ^[143] The commenter further states that the commenter remains unconvinced of the following: (1) That no prospective investor is influenced or controlled by the Chinese government; (2) that Exchange rules could stand against the levels of deceit employed by the Chinese government; and (3) that the Chinese government would not employ influence to affect exchange decisions or votes.^[144]

Furthermore, another commenter asserts that, due to jurisdiction limitations and transparency concerns, under the current proposal, the Commission would not be able to exercise proper regulatory oversight.^[145] Some commenters also express concern about the ability of U.S. regulators to access the books and records of the Chinese-owned upstream owners.^[146] Two commenters state that they believe that the proposed foreign upstream owners will not submit to U.S. jurisdiction.^[147] Another commenter states its view that foreign ownership of the Exchange may result in lax enforcement of its rules.^[148]

The Exchange responds that it believes that its rules are consistent with the requirements of the Exchange Act, and that its rules and the Exchange Act contain various provisions that would facilitate the ability of U.S. regulators, including the Commission, ( printed page 38744) to monitor, compel, and enforce compliance by each of the upstream owners. In particular, upstream owners would be required to adhere to the ownership and voting limitations, submit to U.S. regulatory jurisdiction and maintain agents in the U.S. for the service of process, maintain open books and records related to their ownership of CHX and keep such books and records in the U.S., and refrain from interfering with, and give due consideration to, the SRO function of the Exchange.^[149] The Exchange also asserts that, pursuant to the Exchange Act, the Exchange is subject to “direct and rigorous” oversight by the Commission, which, the Exchange describes as including among other things, frequent examinations of various aspects of its operations by Commission staff, including security and trading protocols, as well as the requirement for Commission approval of certain regulatory, operational, and strategic initiatives prior to implementation by the Exchange.^[150]

In addition, NA Casin Holdings asserts that extensive regulatory and governance safeguards would empower the Commission and the Exchange to prevent any influence over the Exchange and its operations that is improper or a violation of U.S. securities laws and regulations.^[151] Other commenters express confidence that the regulatory controls currently in place are adequate to monitor the proposed investors.^[152]

4. Commission Findings

The Commission believes that, in light of the proposed restrictions on the ownership and voting of stockholders, the above-discussed corporate governance provisions relating to compliance with U.S. law, consent to jurisdiction, due regard to the regulatory obligations and functions of the Exchange, and books and records, and the statements from the upstream owners committing to submit to jurisdiction and designating an agent for service of process, the proposed rule change is consistent with the requirements of Section 6(b) of the Exchange Act. The Commission believes that the proposed ownership and voting limitations are reasonably designed to prevent any stockholder from exercising undue control over the operation of NA Casin Holdings, and in turn, over the operation of the Exchange. The Commission also notes that these ownership and voting limitations are consistent with those approved by the Commission for other SROs ^[153] (including for other SROs with foreign ownership),^[154] and believes that they are reasonably designed to assure that the Exchange and the Commission are able to carry out their regulatory obligations under the Exchange Act and in administering and complying with the requirements of the Exchange Act. Moreover, the Commission believes that the proposed ownership and voting limits are reasonably designed to eliminate the potential that the control of the Exchange by one or few stockholders would improperly interfere with or impair the ability of the Commission or the Exchange to effectively carry out their regulatory oversight responsibilities under the Exchange Act.

In addition to being designed to eliminate the potential of any stockholder from exercising undue control over the Exchange, the Commission also notes that other proposed ownership and voting limitations applicable to members of the Exchange are designed to address the conflicts of interests that might result from a member of a national securities exchange owning interests in the exchange.^[155] As the Commission has noted in the past, a member's interest in an exchange could become so large as to cast doubts on whether the exchange may fairly and objectively exercise its self-regulatory responsibilities with respect to such member.^[156] A member that is a controlling stockholder 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, these restrictions ( printed page 38745) on Exchange members' ownership and voting of NA Casin Holdings stock are expected to minimize the potential that a person or entity can improperly interfere with or restrict the ability of CHX to effectively carry out its regulatory oversight responsibilities under the Exchange Act.

The Commission also believes that the proposed rule change, as modified by Amendment No. 1, is reasonably designed to: (1) Safeguard against violations of the ownership and voting limitations and (2) facilitate the ability of the Exchange to comply with its responsibilities under the Exchange Act. In particular, the Commission notes the requirements that: (1) Certain stockholders of CHX Holdings and NA Casin Holdings must notify the corporation of changes to the stockholder's voting power or ownership; ^[157] (2) the chief compliance officer of CHX Holdings monitor for compliance with the limits on ownership and voting applicable to the upstream beneficial owners; ^[158] and (3) CHX Holdings hire an independent and PCAOB-registered auditor to regularly monitor CHX Holdings' oversight of those limits.^[159] The Commission believes this will assist CHX Holdings in exercising its oversight obligations of the ownership and voting limits after the closing of the Transaction.

With regards to commenters' concerns that the upstream owners in fact may be Related Persons,^[160] or that the upstream owners may vote or act collusively,^[161] or may be under the control of a foreign government,^[162] CHX has responded to these concerns by providing certifications from each of the upstream owners, each of which: Identifies its Related Persons; states that it does not directly, or indirectly through one or more intermediaries, control, and is not, directly or indirectly through one or more intermediaries, controlled or owned by, or under common control or ownership with, a governmental entity or political subdivision thereof; and attests that no agreement, arrangement, or understanding exists between the stockholder and any other person for the purpose of acquiring, voting, holding or disposing of shares of stock of NA Casin Holdings.^[163] In response to these concerns, as well as commenters' concerns regarding the ability of the Exchange to exercise its self-regulatory obligations and monitor for compliance with its ownership and voting limitations after the closing of the Transaction,^[164] the Commission notes that: (1) By September 1, 2018, and every year thereafter, each stockholder of NA Casin Holdings as well as CHX Holdings will be required to submit directly to the Commission and the corporation an attestation as to (a) its equity ownership level in the corporation and the identity of its Related Persons and (b) the existence of any agreement, arrangement or understanding (whether or not in writing) to act together exists between the stockholder, on the one hand, and any other person, on the other hand, for the purpose of acquiring, voting, holding or disposing of shares of stock of the corporation; ^[165] (2) the chief compliance officer of CHX Holdings will monitor for compliance with the corporation's voting and ownership limitations and ensure that each of the upstream owners provides to the Commission and CHX on a yearly basis relevant attestations; ^[166] (3) within one year of the closing of the Transaction and every two years thereafter, an independent auditor will audit CHX Holdings' oversight of compliance with such voting and ownership limitations; ^[167] and (4) each of the upstream owners has irrevocably submitted to the jurisdiction of U.S. federal courts, the Commission and CHX, designated and authorized an agent in the United States for service of process, and committed to promptly inform the Commission in writing of any change of its designated and authorized agent.^[168] The Commission believes that these requirements are reasonably designed to assist the Exchange in monitoring for and enforcing compliance with the voting and ownership limitations.

The Commission also notes that although neither NA Casin Holdings nor CHX Holdings would directly perform any regulatory function, their activities with respect to the operation of the Exchange must be consistent with, and must not interfere with, the self-regulatory obligations of the Exchange and the Commission's oversight of the Exchange. The Commission believes that the above-discussed corporate governance provisions of the NA Casin Holdings Certificate, the NA Casin Holdings Bylaws, and the CHX Holdings Bylaws relating to compliance with U.S. law, consent to jurisdiction, due regard to the regulatory obligations and functions of the Exchange, and books and records are reasonably designed to allow: (1) CHX to independently perform its self-regulatory function; (2) CHX to operate in a manner that complies with federal securities laws, including Sections 6(b) and 19(g) of the Exchange Act; ^[169] and (3) the Commission to fulfill its regulatory and oversight obligations under the Exchange Act with respect to the Exchange.^[170] The Commission believes that these provisions should assist CHX in fulfilling its self-regulatory obligations in administering and complying with the requirements of the Exchange Act.

In response to commenters' concerns regarding the ability of CHX and the Commission to exercise jurisdiction over the upstream owners,^[171] the Commission notes that each upstream owner has irrevocably submitted to the jurisdiction of the U.S. federal courts, the Commission, and CHX for the purposes of any action relating to the certification to the Commission and CHX regarding its ownership levels and Related Persons, among other things, or the activities of CHX, and designated an agent for the service of process of such claims.^[172] The Commission believes that this will enhance the ability of the Commission to fulfill its regulatory and oversight obligations and of CHX to fulfill its self-regulatory obligations under the Exchange Act.

As discussed above, various commenters express concern about the identity and motives of the upstream owners and, in light of these issues, the Commission's ability to effectively regulate the Exchange.^[173] Based on the information in the record,^[174] the ( printed page 38746) Commission believes that the proposed requirements applicable to the Exchange, CHX Holdings, and NA Casin Holdings are reasonably designed to allow the Commission to oversee the Exchange and for CHX to independently discharge its SRO responsibilities.^[175] In particular, the Commission notes that, under the NA Casin Holdings Certificate, for as long as a stockholder maintains a direct or indirect equity interest in the Exchange, (1) the books, records, officers, directors (or equivalent) and employees of the stockholder will be deemed to be the books, records, officers, directors, and employees of the Exchange for purposes of and subject to oversight pursuant to the Exchange Act to the extent that such books and records are related to, or such officers, directors (or equivalent) and employees are involved in, the activities of the Exchange; (2) the stockholder's books and records related to the activities of the Exchange must be made available for inspection and copying by the Commission and the Exchange at all times; and (3) the stockholder's books and records related to the activities of the Exchange must be maintained within the United States. The Commission also notes that the upstream owners have irrevocably submitted to the jurisdiction of U.S. federal courts, the Commission, and CHX.^[176]

Commenters also express concern regarding the potential for malfeasance whether by individuals or on behalf of government actor.^[177] We note that the Exchange stated that CFIUS investigated the Transaction and the upstream owners, and concluded that there are no unresolved national security concerns. Furthermore, in response to commenters' concerns regarding potential financial security risks of the proposed ownership structure,^[178] the Commission notes that CHX will limit access to CAT Data to only CHX regulatory personnel.^[179] In addition, the requirement that CHX engage an independent auditor to monitor for CHX's oversight of compliance with the policies and procedures relating to access to CAT Data will assist CHX in meeting its self-regulatory obligations.^[180]

In addition, if NA Casin Holdings, CHX Holdings, or CHX provides information of any kind to a U.S. governmental entity or U.S. authority pursuant to any agreement, then the company will contemporaneously provide such information to the Commission as well.^[181] The Commission believes that receiving such information will further assist the Commission in fulfilling its mission to oversee and regulate the Exchange by helping to ensure that the Commission is aware of activities—by CHX, CHX Holdings, NA Casin Holdings, and perhaps the upstream beneficial owners—that may be relevant under the Exchange Act.

The Commission believes that CHX's rule changes requiring it to confirm that any RSA it may enter into will comply with U.S. federal securities laws and the rules and regulations thereunder,^[182] that its chief regulatory officer will monitor provisions of the RSA on an on-going basis,^[183] and that it will engage an independent and PCAOB-registered auditor that would perform oversight of the RSA within one year after the closing of the Transaction and every two years thereafter,^[184] respond to concerns and will assist the Exchange in complying with federal securities laws and monitoring for compliance with federal securities laws on an on-going basis.

Furthermore, the Commission notes that the attestations submitted by the stockholders of NA Casin Holdings, and the annual attestations that will be submitted by the shareholders of NA Casin Holdings and CHX Holdings starting September 1, 2018, will be made directly to the Commission, and therefore potential liability for misrepresentations would attach.^[185] Additionally, to the extent that CHX (a) violated any provision of the Exchange Act, including Section 19(b), any rule or regulation under the Exchange Act, or any Exchange rule, (b) is unable to comply with any provision of the Exchange Act, any rule or regulation under the Exchange Act, or any Exchange rule, or (c) without reasonable justification or excuse failed to enforce compliance with any such provision by any Participant or person associated with a Participant, the Commission may take action to either revoke or suspend for up to 12 months its registration as a national securities exchange or limit CHX's activities, functions, and operations.^[186] Further, to the extent that any officer or director of the Exchange either willfully violated any provision of the Exchange Act, including Section 19(b), any rule or regulation under the Exchange Act, or any Exchange rule, or without reasonable justification or excuse failed to enforce compliance with any such provision by any Participant or person associated with a Participant, the Commission may take action to remove such person from office.^[187]

Finally, the Commission notes that: (1) Under Section 20(a) of the Exchange Act, any person with a controlling interest in CHX shall be jointly and severally liable with and to the same extent that the CHX is liable under any provision of the Exchange 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; (2) Section 20(e) of the Exchange 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; and (3) Section 21C of the Exchange 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 Exchange Act through an act or omission that the person knew or should have known would contribute to the violation.

For these reasons, the Commission believes that the proposed rule change—including restrictions on the ownership and voting of stockholders and the above-discussed corporate governance provisions relating to compliance with U.S. law, consent to jurisdiction, due regard to the regulatory obligations and functions of the Exchange, and books and records, and statements from the upstream owners committing to submit to jurisdiction—is consistent with the Exchange Act, including Section 6(b)(1). ( printed page 38747)

B. Board Composition and Procedures; Committees; Special Meetings of the Stockholders

The Exchange proposes to amend the composition of the CHX and CHX Holdings boards of directors, and to make other changes to the governance of these entities. For example, CHX proposes that the CHX board of directors consist of at least 10 and not more than 25 directors.^[188] The CHX board of directors would be comprised as follows: (1) The Chief Executive Officer of CHX; (2) at least 50% Non-Industry Directors ^[189] (at least one of whom must be an Independent Director ^[190] ); (3) such number of Participant Directors ^[191] as necessary to comprise at least 20% of the board; and (4) such number of CHX Holdings Directors ^[192] as necessary to comprise at least 20% of the board.^[193] The directors (other than the Chief Executive Officer) shall serve one-year terms, and any director may be removed from office by a majority vote of the stockholders at any time with or without cause, provided that any Participant Director or CHX Holdings Director may only be removed for cause.^[194]

In addition, CHX proposes to amend its bylaws to require that the board's Regulatory Oversight Committee be composed entirely of Non-Industry Directors.^[195] The proposed CHX Bylaws also require that the Nominating and Governance Committee will have four members and be comprised of at least two Non-Industry Directors, and set forth the process that the Nominating and Governance Committee will follow in submitting nominees for board positions.^[196] Among other things, the proposed CHX Bylaws also provide that a majority of the directors would constitute a quorum,^[197] action by the board requires a majority of directors,^[198] and that vacancies on the board may be filled by a majority of directors then in office, or by a sole remaining director, except that vacancies in the Participant Director or CHX Holding director position must be recommended by the Participant Director Nominating Committee, or the CHX Holdings board, as applicable.^[199] In addition, CHX proposes that special meetings of its stockholders may be called at any time by the board of directors or the chief executive officer, or upon written notice to CHX by the stockholders holding one-third of the votes entitled to be cast.^[200]

With respect to CHX Holdings, CHX proposes that the number of directors on the board be established by resolution, eliminating the requirement that the board have no less than 10 and no more than 16 directors.^[201] CHX also proposes to eliminate the three classes of CHX Holdings directors and their associated three-year staggered terms and to instead provide that each CHX Holdings Director shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal.^[202] In addition, CHX proposes to amend the CHX Holdings Bylaws to change the required number of directors on the Nominating and Governance Committee from six to one or more directors.^[203] CHX also proposes that special meetings of the CHX Holdings stockholders may be called at any time by the board of directors or the Chief Executive Officer, or upon written notice to CHX Holdings by the stockholders holding one-third of the votes entitled to be cast.^[204] In addition, CHX proposes that any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote.^[205]

With respect to NA Casin Holdings, its proposed certificate of incorporation contains provisions that, according to the Exchange, are designed to ensure that a new NA Casin Holdings board is elected by the upstream owners as soon as practicable after closing of the Transaction, as well as provisions to facilitate the ability of NA Casin Holdings to maintain board members that are experienced with the operation of the Exchange.^[206] Specifically, within 30 days after the consummation of the Transaction, NA Casin Holdings must convene a special meeting of its stockholders for the purpose of electing a new board of directors.^[207] The NA Casin Holdings board will be divided into three classes from and after that initial special meeting, with the term of each Class I director expiring in 2017, the term of each Class II director expiring in 2018, and the term of each Class III director expiring in 2019.^[208] Other than those initial terms, each director will serve for a term ending on the date of the third annual meeting following the meeting at which such director was elected.^[209] The number of directors on the NA Casin Holdings board will be determined by the board of directors.^[210] The Exchange asserts that the proposed class board structure of NA Casin Holdings would ensure overlap of board member terms, which would provide continuity and stability in the board's composition and, thereby, facilitate the ability of the NA Casin Holdings board to meet its obligations with regard to CHX as set forth in Article IX of the NA Casin Holdings Certificate.^[211]

The Commission believes that the proposed changes to the CHX Bylaws related to the structure, composition, and committee composition of CHX's board of directors are consistent with Section 6(b)(3) of the Exchange Act in that they assure the fair representation of CHX members on the CHX board and ( printed page 38748) in the administration of exchange affairs, and provide that one or more directors shall be representative of issuers and investors and not be associated with a member of the exchange, broker, or dealer. In particular, the Commission finds that the requirement that at least 20% of the board be comprised of Participant Directors is consistent with the fair representation requirements under Section 6(b)(3) In addition, the Commission finds that the proposed provisions of the CHX, CHX Holdings, and NA Casin Holdings governing documents relating to the proposed structure, composition, and governance of their boards of directors,^[212] are consistent with Section 6(b)(1) of the Exchange Act in that they are designed to assist the Exchange in fulfilling its self-regulatory obligations and in administering and complying with the requirements of the Exchange Act. For example, the Commission believes that the requirement that the CHX board of directors be comprised of at least 50% Non-Industry Directors, and that the CHX Regulatory Oversight Committee be comprised entirely of Non-Industry Directors, is consistent with Section 6(b)(1) because it reduces the likelihood of conflicts of interest and therefore, enables the independence of the Exchange in administering and complying with the requirements of the Exchange Act. The Commission emphasizes that following the Transaction, the board of directors of the Exchange—not its parent companies or the upstream owners ^[213] —will continue to be the governing body of the Exchange and possess all the authority necessary for the management of the business and affairs of the Exchange and the execution of the responsibilities of the Exchange as an SRO.

C. Future Amendments to the Governing Documents of CHX Holdings and NA Casin Holdings

The Exchange also has proposed to harmonize provisions under the CHX Holdings Bylaws, the CHX Holdings Certificate, the NA Casin Holdings Certificate, and the NA Casin Holdings Bylaws regarding the effectuation of amendments to those documents. The proposed CHX Holdings Bylaws, proposed CHX Holdings Certificate, NA Casin Holdings Bylaws, and NA Casin Holdings Certificate provide that, for so long as CHX Holdings and NA Casin Holdings control CHX, they must submit any changes to their bylaws or certificates of incorporation to the board of directors of CHX.^[214] If the board of directors of CHX determines that the changes must be filed with or filed with and approved by the Commission under Section 19 of the Exchange Act and the rules thereunder, then the proposed changes would not be effective until filed with or filed with and approved by the Commission, as the case may be.^[215]

The Commission believes that these provisions are consistent with the Exchange Act because they enable continued oversight of CHX Holdings and NA Holdings by the Exchange and the Commission, which should help assure that the Exchange remains organized in a manner that will allow it to fulfill its self-regulatory obligations and to comply with the requirements of the Exchange Act.

D. Waiver of CHX Holdings' Ownership and Voting Limitations

With respect to the Transaction, pursuant to the CHX Holdings Certificate, CHX has filed for approval of a waiver of certain restrictions on ownership and voting contained in the CHX Holdings Certificate. Specifically, the current certificate prohibits, among other things: (1) Any Person, either alone or together with its Related Persons, from owning, directly or indirectly, of record or beneficially, shares of stock of the CHX Holdings representing in the aggregate more than 40% of the then outstanding votes entitled to be cast on any matter; and (2) any Person, either alone or together with its Related Persons, from directly, indirectly or pursuant to any voting trust, agreement, plan or other arrangement, voting or causing the voting of shares of the capital stock (whether such shares be common stock or preferred stock) of CHX Holdings or giving any consent or proxy with respect to shares representing more than 20% of the voting power of the then issued and outstanding capital stock of CHX Holdings.^[216] A waiver of these ownership and voting limitations is required to effect the Transaction because, after the closing of the Transaction, CHX Holdings would become a wholly-owned subsidiary of NA Casin Holdings. CHX states that the board of directors of CHX Holdings adopted resolutions necessary to waive the ownership and voting limitations, and that Commission approval of the proposed rule change will effectuate a waiver of these requirements under the CHX Holdings Bylaws.^[217]

The Commission believes that it is consistent with the Exchange Act to allow NA Casin Holdings to own and vote all of the outstanding common stock of CHX Holdings. In particular, NA Casin Holdings will be subject to the ownership and voting limitations described above, which are consistent with CHX Holdings' current ownership and voting limitations.^[218] In addition, and as discussed above, CHX Holdings and NA Casin Holdings have also included in their corporate documents certain provisions designed to maintain the independence of the Exchange's regulatory functions.^[219] Accordingly, the Commission believes that the revised rules of the Exchange, including the corporate documents of NA Casin Holdings, CHX Holdings, and the Exchange, are reasonably designed to support the ability of the Exchange to carry out its responsibilities under the Exchange Act and the rules and regulations promulgated thereunder and the Commission to enforce the Exchange Act and the rules and regulations promulgated thereunder.

Going forward, the proposed CHX Holdings Certificate provides that, for any Person to acquire ownership or exercise voting rights in excess of the ownership and voting limitations: ^[220] (1) Such Person must deliver, not less than 45 days prior to such acquisition of ownership or exercise of voting rights, a notice in writing to the board of directors expressing its intention to ( printed page 38749) acquire such ownership or exercise such voting rights; (2) the CHX Holdings board must resolve to expressly permit such ownership or exercise of voting rights; ^[221] and (3) such resolution must be filed with and approved by the Commission under Section 19(b) of the Exchange Act.^[222] The proposed NA Casin Holdings Certificate contains substantially identical provisions.^[223] The Commission believes that these provisions are reasonably designed to assist the Exchange in fulfilling its self-regulatory obligations, and in administering and complying with the requirements of the Exchange Act, by ensuring that the Commission will review and approve, if appropriate, any future change in ownership or voting power that gives rise to its concerns about a stockholder exercising undue control over the operation of the Exchange.^[224] Similarly, the Commission believes that this protection against such future changes in ownership or voting concentration without careful Commission review and approval is reasonably designed to promote just and equitable principles of trade and to protect investors and the public interest under the standards set forth in Section 6(b)(5) of the Exchange Act. The Commission also notes that these requirements for acquiring ownership or exercising voting rights in excess of the ownership and voting limitations are consistent with other such provisions previously approved by the Commission.^[225]

IV. Solicitation of Comments on Amendment No. 1

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 1 to the proposed rule change is consistent with the Exchange Act. Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form (http://www.sec.gov/​rules/​sro.shtml); or
• Send an email torule-comments@sec.gov. Please include File Number SR-CHX-2016-20 on the subject line.

Paper Comments

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

V. Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1

The Commission finds good cause to approve the proposed rule change, as modified by Amendment No. 1, prior to the 30th day after the date of publication of notice of Amendment No. 1 in the Federal Register . As noted above, Amendment No. 1 does not change the structure or purpose of the proposed rule change as it was previously published for notice and comment.^[226] Rather, the Exchange modified its proposed rule change to address certain concerns raised by commenters. The Commission believes that an additional notice and comment period for Amendment No. 1 before approval of the proposed rule change would not be in furtherance of the public interest or the protection of investors. Accordingly, the Commission finds good cause, pursuant to Section 19(b)(2) of the Exchange Act,^[227] to approve the proposed rule change, as modified by Amendment No. 1, on an accelerated basis.

VI. Conclusion

For the foregoing reasons, the Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange.

It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act ^[228] that the proposed rule change (SR-CHX-2016-20), as modified by Amendment No. 1, be, and hereby is, approved on an accelerated basis.

All submissions should refer to File Number SR-CHX-2016-20. 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 this filing will also 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-CHX-2016-20 and should be submitted on or before September 5, 2017.