UPDATED: The Latest on the SEC’s Consideration of the Proposed Acquisition of Chicago Stock Exchange

Legal Sidebari

UPDATED: The Latest on the SEC’s
Consideration of the Proposed Acquisition of
Chicago Stock Exchange
March 7, 2018
UPDATE: On February 15, 2018, the SEC disapproved CHX’s proposed rule change. The SEC based its
decision on CHX’s inability to provide sufficient documentation verifying the relationships between and
the sources of funds used by certain proposed upstream owners. Because of these deficiencies, the SEC
explained that it was unable to find that the proposed rule change was consistent with the Exchange Act’s
requirements that (1) CHX enforce compliance with ownership and voting limitations in its proposed
rules, and (2) the SEC be capable of exercising sufficient oversight over national securities exchanges.
On March 5, CHX announced that it will no longer pursue a deal with NA Casin Holdings in light of the
SEC’s decision.
The original post from August 29, 2017, follows below.
In the latest development in a transaction originating last year, on August 9, the Securities and Exchange
Commission (SEC or Commission) stayed an order (i.e., temporarily prevented the order from going into
effect) issued by its Division of Trading and Markets (Division) approving a proposed rule concerning the
acquisition of the Chicago Stock Exchange (CHX). CHX is one of 21 national securities exchanges
registered with the SEC, and a group of investors that includes a number of Chinese entities with possible
ties to the Chinese government is attempting to acquire the exchange. The proposed rule would approve
changes to the certificates of incorporation and bylaws of CHX and its parent company to effectuate the
proposed acquisition. The Division approved the acquisition subject to an amendment that purported to
address concerns raised in comments that were provided to the SEC over the past several months. Perhaps
most notably, the comments included those filed by a number of federal lawmakers who voiced concerns
over the possibility of Chinese-government influence over the prospective acquirers of CHX.
As background, the Securities and Exchange Act of 1934 (the “Exchange Act”) controls what types of
entities can operate as securities exchanges. The Exchange Act provides that an entity may operate as a
securities exchange only if it is registered with the SEC as a national securities exchange under Section
6 of the Exchange Act or exempted from such registration by the SEC due to the limited volume of
transactions it processes. When an exchange registers with the SEC as a national securities exchange, it
becomes a self-regulatory organization charged with “certain quasi-governmental functions and
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responsibilities” that are “fundamental to the enforcement of the federal securities laws.” Specifically, a
national securities exchange must (1) enforce compliance of its members with federal securities laws and
regulations and with its own internal rules; (2) discipline its members when it finds such violations; and
(3) promulgate rules related to fair representation in governance, burdens on competition, the prevention
of fraudulent or manipulative practices, the promotion of trade, and the prevention of unfair
discrimination. Moreover, the Exchange Act requires that national securities exchanges obtain
Commission approval for proposed rule changes, and that rule changes proposed by national securities
exchanges be published in the Federal Register for notice and comment. The Commission may approve a
proposed rule change only if it finds that the change would be consistent with Section 6’s general
requirements for registration as a national securities exchange.
With these requirements in mind, CHX filed a proposed rule change with the Commission on December
6, 2016, concerning the acquisition of CHX by North America Casin Holdings, Inc. (“NA Casin
Holdings”), an entity in which a Chinese firm, Chongqing Casin Enterprise Group Co., LTD (“Chongqing
Casin”), owns the largest stake. As discussed, the proposed rule would approve changes to the certificates
of incorporation and bylaws of CHX and its parent company to effectuate the proposed acquisition.
After the Commission published the proposed rule, it received numerous comments opposing the
transaction, including a December 22, 2016 letter from five Members of the House of Representatives
“urg[ing the Commission] to consider the negative impacts Chinese state-affiliated ownership of [CHX]
will have on national security and the financial security of the American marketplace.” Specifically, the
Members argued that “Chinese markets maintain zero transparency and are heavily dominated by the
Chinese State Council.” Because of this lack of transparency and Chongqing Casin’s involvement “in a
number of market sectors that would require close ties to the state,” the Members asserted that “there is
no way to refute concerns related to government influence over [Chongqing Casin].” The Members
further claimed that because “the Chinese government remains the number one state-sponsor of cyber-
espionage and corporate theft,” Chinese-government influence over the prospective acquirers of CHX
poses dangers to U.S. national security and the intellectual property of American companies.
In January 2017, the Commission instituted proceedings to determine whether to approve the proposed
rule. After receiving 21 additional comments and a response letter from CHX, the Commission opted,
pursuant to its authority under the Exchange Act, to extend the 180-day period for considering the
proposed rule by 60 days, making the new deadline August 9, 2017. During the extended comment
period, 11 Members of the House (including 3 who had signed the first letter) wrote to the Commission
on July 10, 2017 and “strongly urge[d]” it to deny the proposed transaction. The letter expressed concern
about the “opaque upstream ownership” of the prospective acquirers. The Members further maintained
that other Chinese entities operating in the U.S. have attempted to evade regulation by invoking sovereign
immunity and limitations on the extraterritorial application of U.S. laws. Thus, the lawmakers argued, the
proposed transaction appeared to be inconsistent with Section 6 of the Exchange Act, which, as discussed,
requires that national securities exchanges be able to comply with and enforce rules concerning fraudulent
and manipulative practices and investor protection. Senator Joe Manchin also wrote to the Commission
during the extended comment period to express concern about Chinese-government influence over the
prospective acquisition of CHX and about the national-security implications of the proposed
transaction.
In an apparent response to these concerns, on August 7 CHX filed an amendment to its proposed rule
change. The amendment altered the proposed certificates of incorporation of CHX’s parent company and
NA Casin Holdings (and other CHX documents) to require, among other things:
 notice be provided to the Commission of any changes in the ownership of NA Casin
Holdings;

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 periodic independent audits to ensure that CHX is complying with ownership limitations
imposed elsewhere in the proposed rule;
 that CHX adopt rules to ensure that only CHX regulatory personnel have access to
Consolidated Audit Trail data (“CAT data”), and that CHX regulatory personnel do not
provide CAT data to any other personnel of CHX’s parent or NA Casin Holdings, or to
any upstream beneficial owners of those corporations. (CAT data generally consist of
records of orders, cancellations, and completed trades related to certain securities that
national securities exchanges must submit to a central repository overseen by the SEC.).
The amendment also supplemented certain representations made by each owner of NA Casin Holdings
attesting that it is not controlled or owned by any governmental entity. Finally, the amendment provided
signed “Investor Statements” from each owner of NA Casin Holdings irrevocably submitting to the
jurisdiction of U.S. federal courts.
When the consideration period closed on August 9, the Division issued an order approving the proposed
rule as amended, but the Commission stayed the order that same day. In the order, the
Division concluded that the proposed rule change was consistent with Section 6 of the Exchange Act in
light of the amendment’s proposed ownership and voting limitations, provisions relating to compliance
with U.S. law, consent to U.S. jurisdiction by prospective upstream owners, books and records provisions,
and notice and audit requirements. The order also noted that the Department of the Treasury’s Committee
on Foreign Investment in the United States, which is responsible for reviewing certain transactions
involving foreign investors for national security concerns, had approved the proposed transaction.
It is unclear when the stay will be lifted, as the Commission’s notice of the stay indicates that the order is
stayed “until the Commission orders otherwise.” If the Commission lifts the stay and acts on the order, its
decision would be subject to judicial review if a party injured by the SEC’s order pursues litigation. As
discussed, Section 6 of the Exchange Act requires that national securities exchanges be capable of
enforcing federal securities laws and regulations, and of adopting and enforcing rules of their own related
to fair representation in governance, burdens on competition, and the prevention of fraudulent or
manipulative practices, among other things. A litigant seeking to challenge the Commission’s final
decision to approve or disapprove the proposed rule change pursuant to Section 6 would need to
demonstrate that the decision is “arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law.” (For more information on the types of agency actions that violate this standard, see
this CRS report).
Given the interest several Members of Congress have voiced in the proposed rule change,
and recent increases in Chinese investment in the U.S. more generally, the Commission’s
ultimate decision on the CHX acquisition is likely to generate additional consideration from the
legislative branch and beyond. More broadly, the SEC’s treatment of the CHX deal may have, at
least in the view of some commentators, far-reaching effects for how regulatory agencies will
generally approach Chinese investments in the U.S. financial sector going forward, making the
CHX acquisition noteworthy.

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Author Information

Jay B. Sykes

Legislative Attorney




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