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From Securities Regulation Daily, August 10, 2017

SEC stays approval of Chicago Stock Exchange acquisition by Chinese investors, pending review

By Jacquelyn Lumb

The Commission will review the action taken by the Division of Trading and Markets in which it approved, by delegated authority, a proposed rule change to permit the acquisition of CHX Holdings, Inc. by North America Casin Holdings, Inc. Under the terms of the transaction, the Chicago Stock Exchange would continue to be a wholly-owned subsidiary of CHX and CHX would become a wholly-owned subsidiary of NA Casin. NA Casin would be owned by a consortium of both U.S. and Chinese entities. The Commission wrote to the exchange advising that the order approving the proposed rule change is stayed until the Commission orders otherwise.

The acquisition, first proposed on December 2, 2016 by the exchange, proved to be controversial. For example, some members of Congress expressed opposition to the acquisition on national securities grounds. On June 6, the Commission designated a longer period on which to act in order to determine whether to approve or disapprove the proposal. On August 7, the exchange filed an amendment to respond to concerns expressed by the commenters. The amendment includes a number of substantive and technical amendments to the exchange’s corporate governance documents and the governing documents of CHX.

Response to concerns. Among the revisions are revised ownership and voting limitations and a requirement to provide notice of any changes that may affect the ownership and voting limitations. In addition, CHX will engage an independent PCAOB-registered auditor to perform within one year of the closing of the transaction and every two years after that an audit of CHX’s compliance with the ownership and voting limitations. The auditor would also audit CHX’s oversight of any regulatory services agreements and its compliance with the policies and procedures relating to access to Consolidated Audit Trail data.

The proposed revisions also address board and committee composition and procedures, procedures for shareholder meetings, consent to U.S. federal court and Commission jurisdiction, and Commission access to corporate books and records.

CFIUS signs off on transaction. In support of its proposal, the exchange noted that it had provided details about the ultimate upstream owners to the Committee for Foreign Investment in the U.S. (CFIUS), which determined that there were no unresolved national securities concerns with respect to the transaction. The CFIUS review included an examination of potential disruptions to the U.S. stock markets or the financial system as a whole, according to the exchange, and included an assessment of the foreign investing entities. Commenters had expressed concern that one of the upstream owners has ties to the Chinese government which could allow the Chinese government to influence or control its upstream owners.

Accelerated approval on delegated basis. The exchange provided additional information on a confidential basis, and the division concluded that the proposed revisions were consistent with the requirements of the Exchange Act and the rules and regulations applicable to a national securities exchange. The division further concluded that the revisions adequately addressed commenters’ concerns that the exchange’s ownership structure was opaque and would make it difficult for the Commission to monitor it for compliance with the Exchange Act and the rules of the exchange.

The division approved the amendment on an accelerated basis after concluding that the provisions would not change the structure or purpose of the rule that was previously published for notice and comment, and that further notice and comment would not be in the public interest.

The division also noted that if CHX violated any provision of the Exchange Act, was unable to comply with its rules and regulations, or failed to enforce compliance with the provisions without reasonable justification or excuse, the Commission could revoke or suspend CHX’s registration or limit it activities, functions and operations.

A final decision now awaits the Commission’s review of the division’s action.

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