Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto Relating to the Certificate of Incorporation of PCX Holdings, Inc., PCX Rules and Bylaws of Archipelago Holdings, Inc., 48611-48621 [E5-4510]
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Federal Register / Vol. 70, No. 159 / Thursday, August 18, 2005 / Notices
C. Self-Regulatory Organization’s
Statement on Comments Regarding the
Proposed Rule Changes Received From
Members, Participants or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Changes and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such other period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission will:
(A) By order approve the proposed
rule change, as amended, or
(B) Institute proceedings to determine
whether the proposed rule change, as
amended, should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, as amended by Amendment No.
3, is consistent with the Act. Comments
may be submitted by any of the
following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CHX–2004–25 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–9303.
All submissions should refer to File
No. SR–CHX–2004–25. This file number
should be included on the subject line
if e-mail 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 (https://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 changes between the
Commission and any person, other than
those that may be withheld from the
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12:20 Aug 17, 2005
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public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of such filing will also be
available for inspection and copying at
the principal office of the CHX. 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 No.
SR–CHX–2004–25 and should be
submitted on or before September 8,
2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.6
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–4509 Filed 8–17–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52249; File No. SR–PCX–
2005–90]
Self-Regulatory Organizations; Pacific
Exchange, Inc.; Notice of Filing of
Proposed Rule Change and
Amendment No. 1 Thereto Relating to
the Certificate of Incorporation of PCX
Holdings, Inc., PCX Rules and Bylaws
of Archipelago Holdings, Inc.
August 12, 2005.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934, as
amended (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on August 1, 2005, the Pacific Exchange,
Inc. (‘‘PCX’’ or the ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’ or ‘‘SEC’’)
the proposed rule change as described
in Items I, II and III below, which Items
have been prepared by the Exchange.3
On August 10, 2005, the Exchange filed
Amendment No. 1 (‘‘Amendment No.
1’’) to the proposed rule change.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 At the request of PCX, the Commission made
clarifications to the description in Item II, as noted
herein. Telephone conversations between Kathryn
Beck, Deputy General Counsel, PCX and Jennifer
Dodd, Special Counsel, Commission, Division of
Market Regulation on August 4, 2005 (‘‘August 4,
2005 Telephone Conversation’’) and August 12,
2005 (‘‘August 12, 2005 Telephone Conversation’’).
4 In Amendment No. 1, the Exchange made
certain corrections to the descriptions in Items I, II
and III and the proposed rule text.
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1 15
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48611
change, as amended, from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
PCX submitted to the Commission (i)
a proposed amendment to the certificate
of incorporation of PCX Holdings, Inc.
(‘‘PCXH’’), the parent company of the
Exchange and its other operating
subsidiaries, (ii) proposed new PCX
Rules 1.1(cc) through (gg), Rule 3.4 and
Rule 13.2(a)(2)(E),5 which are intended
to govern the ownership and voting of
the stock of Archipelago Holdings, Inc.
(‘‘Archipelago’’), a Delaware corporation
that operates the equities trading facility
of PCX and PCX Equities, Inc. (‘‘PCXE’’),
by OTP Holders and OTP Firms,6 and
(iii) a proposed amendment to the
bylaws of Archipelago ((i), (ii) and (iii)
together, the ‘‘Proposed Rule Changes’’).
The text of the Proposed Rule Changes
is available on PCX’s Web site, https://
www.pacificex.com/, at PCX’s Office of
the Secretary, at the Commission’s
Public Reference Room, and on the
Commission’s Web site, https://
www.sec.gov/rules/sro.shtml.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of
and basis for the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of these statements may be examined at
the places specified in Item IV below.
The self-regulatory organization has
prepared summaries, set forth in
sections A, B and C below, of the most
significant aspects of such statements.
5 See
Amendment No. 1.
rules define an ‘‘OTP Holder’’ to mean any
natural person, in good standing, who has been
issued an Options Trading Permit (‘‘OTP’’) by the
Exchange for effecting approved securities
transactions on the Exchange’s trading facilities, or
has been named as a Nominee. PCX Rule 1.1(q). The
term ‘‘Nominee’’ means an individual who is
authorized by an ‘‘OTP Firm’’ (a sole
proprietorship, partnership, corporation, limited
liability company or other organization in good
standing who holds an OTP or upon whom an
individual OTP Holder has conferred trading
privileges on the Exchange’s trading facilities) to
conduct business on the Exchange’s trading
facilities and to represent such OTP Firm in all
matters relating to the Exchange. PCX Rule 1.1(n).
6 PCX
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Federal Register / Vol. 70, No. 159 / Thursday, August 18, 2005 / Notices
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange is submitting to the
Commission the Proposed Rule Changes
in connection with Archipelago’s
proposed acquisition of PCXH. On
January 3, 2005, PCXH, Archipelago and
New Apple Acquisitions Corporation
(the ‘‘Merger Sub’’), a newly formed
wholly-owned subsidiary of
Archipelago, entered into an Agreement
and Plan of Merger (the ‘‘Original
Merger Agreement’’), pursuant to which
Archipelago has agreed to acquire PCXH
and all of its wholly owned subsidiaries,
including PCX and PCXE, by way of a
merger under Delaware law (the
‘‘Merger’’) of the Merger Sub with and
into PCXH, with PCXH as the surviving
corporation. On July 22, 2005, PCXH,
Archipelago and Merger Sub amended
and restated the Original Merger
Agreement to, among other things,
provide that the consideration payable
to PCXH stockholders would be made
wholly in cash, and that, as
contemplated by the Original Merger
Agreement, the measurement dates for
purposes of valuing the Archipelago
stock held by PCXH would now be the
ten consecutive trading days ending on
the last trading day prior to the closing
date of the Merger (as so amended, the
‘‘Amended Merger Agreement’’).
Pursuant to the Amended Merger
Agreement, subject to appraisal rights
under Delaware law and other than with
respect to treasury stock of PCXH and
PCXH common stock beneficially
owned by Archipelago for Archipelago’s
own account, each share of PCXH
common stock issued and outstanding
immediately prior to the effective time
of the Merger (the ‘‘Effective Time’’) will
be converted into, and become
exchangeable for, an amount in cash
equal to the quotient of the aggregate
merger consideration divided by the
sum of the number of outstanding
shares of PCXH common stock and the
number of shares to be issued upon the
exercise of all options at the
consummation of the merger. The
aggregate merger consideration equals
the sum of the value of the shares of
Archipelago common stock owned by
PCX and its subsidiaries and $17
million, subject to market fluctuations
in the Archipelago stock price and
certain other adjustments pursuant to
the Amended Merger Agreement. The
value of Archipelago common stock
shall be determined using the average of
the per share closing prices for
Archipelago common stock for the ten
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consecutive trading days ending on the
last trading day prior to the closing date
of the Merger. At the Effective Time, all
PCXH common stock will be cancelled
or retired and cease to exist.
As a result of the Merger, PCXH, as
the surviving corporation in the Merger,
will become a direct, wholly-owned
subsidiary of Archipelago (the postMerger PCXH will hereinafter be
referred to as the ‘‘New PCXH’’). The
certificate of incorporation of PCXH as
in effect immediately prior to the
Effective Time will, subject to approval
of the Commission, be amended
pursuant to the Amended Merger
Agreement and as so amended, will be
the certificate of incorporation of the
New PCXH. The bylaws of PCXH as in
effect immediately prior to the Effective
Time will be the bylaws of the New
PCXH, until thereafter amended as
provided therein or by applicable law.
The directors of the Merger Sub at the
Effective Time will become directors of
the New PCXH and the officers of PCXH
at the Effective Time will continue to be
officers of the New PCXH.
Except as described in the preceding
paragraph or otherwise approved by the
Commission, the Merger will not affect
the internal corporate structure of PCXH
or the regulatory relationship of PCX
and PCXE to Archipelago Exchange,
L.L.C. (‘‘ArcaEx’’), the exclusive equities
trading facility of PCX and PCXE. PCX
will remain a wholly-owned subsidiary
of the New PCXH, will continue
operating the options business of the
Exchange and will retain the selfregulatory organization function for the
options business as well as for PCX’s
equities business subsidiary, PCXE.
After the Merger, except as otherwise
approved by the Commission, the board
of directors of PCX will continue to
comply with the compositional
requirements set forth in the certificate
of incorporation and bylaws of PCX.
Except as otherwise approved by the
Commission, PCXE’s operations,
governance structure, or rules will not
be affected by the Merger. After the
Merger, except as otherwise approved
by the Commission, the board of
directors of PCXE will continue to
comply with the compositional
requirements set forth in the certificate
of incorporation and bylaws of PCXE.
ArcaEx will remain the exclusive
equities trading facility of PCX and
PCXE and the Amended and Restated
Facility Services Agreement among
Archipelago, PCX and PCXE, dated as of
March 22, 2002, which currently
governs the regulatory relationship of
PCX and PCXE to ArcaEx (the ‘‘Facility
Services Agreement’’), will remain in
full force and effect in its current form.
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a. Certificate of Incorporation of PCXH
(i) Proposed Amendments
In order to safeguard the
independence of the self-regulatory
functions of PCX and protect the
Commission’s oversight responsibilities,
the certificate of incorporation of PCXH,
which was approved by the Commission
on May 17, 2004 in connection with the
demutualization of the Exchange,7
imposes limitations on direct and
indirect changes in control of PCXH
through various ownership and voting
restrictions placed on PCXH’s capital
stock. Specifically, the certificate of
incorporation of PCXH provides that no
person,8 either alone or together with its
related persons,9 may own, directly or
indirectly, shares constituting more than
40% of the outstanding shares of any
class of PCXH capital stock,10 and that
no person, either alone or together with
its related persons who is a trading
permit holder of PCX or an equities
trading permit holder of PCXE, may
own, directly or indirectly, shares
7 Securities Exchange Act Release No. 49718 (May
17, 2005), 69 FR 29611 (May 24, 2005) (order
approving proposed rule change and notice of filing
and order granting accelerated approval of
Amendment No. 1 thereto relating to the
demutualization of PCX).
8 ‘‘Person’’ is defined to mean an individual,
partnership (general or limited), joint stock
company, corporation, limited liability company,
trust or unincorporated organization, or any
governmental entity or agency or political
subdivision thereof. Restated Certificate of
Incorporation of PCXH, Article Nine, Section
1(b)(iv).
9 The term ‘‘related person,’’ as defined in the
Restated Certificate of Incorporation of PCXH,
means (i) with respect to any person, all ‘‘affiliates’’
and ‘‘associates’’ of such person (as such terms are
defined in Rule 12b–2 under the Act); (ii) with
respect to any person constituting a trading permit
holder of PCX or an equities trading permit holder
of PCXE, any broker dealer with which such holder
is associated; and (iii) any two or more persons that
have any agreement, arrangement or understanding
(whether or not in writing) to act together for the
purpose of acquiring, voting, holding or disposing
of shares of the capital stock of PCXH. Restated
Certificate of Incorporation of PCXH, Article Nine,
Section 1(b)(iv).
10 Restated Certificate of Incorporation of PCXH,
Article Nine, Section 1(b)(i). However, such
restriction may be waived by the Board of Directors
of PCXH pursuant to an amendment to the Bylaws
of PCXH adopted by the Board of Directors, if, in
connection with the adoption of such amendment,
the Board of Directors adopts a resolution stating
that it is the determination of such Board that such
amendment will not impair the ability of PCX to
carry out its functions and responsibilities as an
‘‘exchange’’ under the Act and is otherwise in the
best interests of PCXH and its stockholders and
PCX, and will not impair the ability of the
Commission to enforce said Act, and such
amendment shall not be effective until approved by
said Commission; provided that the Board of
Directors of PCXH shall have determined that such
Person and its Related Persons are not subject to
any applicable ‘‘statutory disqualification’’ (within
the meaning of Section 3(a)(39) of the Act). Restated
Certificate of Incorporation of PCXH, Article Nine,
Sections 1(b)(i)(B) and 1(b)(i)(C).
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Federal Register / Vol. 70, No. 159 / Thursday, August 18, 2005 / Notices
constituting more than 20% of any class
of PCXH capital stock.11 Furthermore,
the certificate of incorporation of PCXH
provides that, for so long as PCXH
controls, directly or indirectly, PCX, no
person, either alone or with its related
persons, may directly or indirectly vote
or cause the voting of shares of PCXH
capital stock or give any proxy or
consent with respect to shares
representing more than 20% of the
voting power of the issued and
outstanding PCXH capital stock, and it
also places limitations on the right of
any person, either alone or with its
related persons, to enter into any
agreement with respect to the
withholding of any vote or proxy.12 In
order to permit Archipelago to own
100% of the capital stock of the New
PCXH upon consummation of the
Merger, PCX proposes to amend the
certificate of incorporation of PCXH to
create an exception, with certain
limitations, for Archipelago and certain
related persons of Archipelago from the
voting and ownership restrictions
described above.
Specifically, PCX proposes to add a
new paragraph at the end of Article
Nine of the certificate of incorporation
of PCXH, providing that for so long as
Archipelago directly owns all of the
outstanding capital stock of PCXH, the
provisions of Article Nine, including the
ownership and voting limitations with
respect to shares of PCXH capital stock,
shall not be applicable to the voting and
ownership of shares of PCXH capital
stock by (i) except for prohibited
persons (as defined below),
Archipelago, (ii) except for prohibited
persons, any person which is a related
person (as such term is defined in the
certificate of incorporation of PCXH) of
Archipelago, either alone or together
with its related persons, and (iii) except
for prohibited persons, any other person
to which Archipelago is a related
person, either alone or together with its
related persons.13
‘‘Prohibited persons’’ is defined to
mean any person which is, or which has
a related person which is (A) an OTP
Holder or an OTP Firm (as such terms
are defined in the rules of PCX, as such
rules may be in effect from time to time)
or (B) an ETP Holder,14 except for (1)
11 Id.,
Article Nine, Section 1(b)(ii).
Article Nine, Section 1(c).
13 Amended and Restated Certificate of
Incorporation of PCXH, Article Nine, Section 4.
14 PCXE rules define an ‘‘ETP Holder’’ to mean
any sole proprietorship, partnership, corporation,
limited liability company or other organization in
good standing that has been issued an Equity
Trading Permit, a permit issued by the PCXE for
effecting approved securities transactions on the
trading facilities of PCXE. PCXE Rule 1.1(n).
12 Id.,
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12:20 Aug 17, 2005
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any broker or dealer approved by the
Commission after June 20, 2005 to be a
facility (as defined in Section 3(a)(2) of
the Act) of PCX; (2) any person which
has been approved by the Commission
prior to it becoming subject to the
provisions of Article Nine of the
certificate of incorporation of PCXH
with respect to the voting and
ownership of shares of PCXH capital
stock by such person; and (3) any
person which is a related person of
Archipelago solely by reason of
beneficially owning, either alone or
together with its related persons, less
than 20% of the outstanding shares of
Archipelago capital stock (any person
covered by (1) through (3) is referred to
as a ‘‘permitted person’’ in the proposed
amendment).15 The proposed Section 4
to Article Nine of the certificate of
incorporation of PCXH further provides
that any other prohibited person not
covered by the definition of a permitted
person who would be subject to and
exceed the voting and ownership
limitations imposed by Article Nine as
of the date of the closing of the Merger
shall be permitted to exceed the voting
and ownership limitations imposed by
Article Nine only to the extent and for
the time period approved by the
Commission.16
PCX believes that by creating a
limited exemption from the voting and
ownership restrictions in the certificate
of incorporation of PCXH, the proposed
amendment will permit the
consummation of the Merger and the
continued ownership of PCXH by
Archipelago after the Merger while
preserving the general applicability of
such restrictions as they currently exist,
so that these restrictions may continue
safeguarding the independence of PCX’s
self-regulatory function and the
Commission’s oversight responsibilities.
In addition, PCX believes that by
eliminating prohibited persons from the
exemption, other than those approved
by the Commission, it will prevent OTP
Holders, OTP Firms and ETP Holders
(as such terms are defined in the rules
of PCX, as such rules may be amended
from time to time) from acquiring,
directly or indirectly, a substantial
number of outstanding shares of PCXH
and exercising undue influence over the
operation of PCX, including its selfregulatory functions, without proper
oversight by the Commission.
(ii) Archipelago Securities, L.L.C.
In connection with the proposed
amendment to the certificate of
15 Amended and Restated Certificate of
Incorporation and PCXH, Article Nine, Section 4.
16 Id.
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48613
incorporation of PCXH described above,
the Exchange requests that the
Commission approve Archipelago
Securities, L.L.C. (‘‘Archipelago
Securities’’) to be a facility (as defined
in Section 3(a)(2) of the Act) of PCX.
Archipelago Securities, a whollyowned subsidiary of Archipelago, is a
registered broker-dealer, a member of
the National Association of Securities
Dealers, Inc. (‘‘NASD’’) and an ETP
Holder. Archipelago Securities provides
an optional routing service for ArcaEx,
and, as necessary, routes orders to other
securities exchanges, facilities of
securities exchanges, automated trading
systems, electronic communications
networks or other brokers or dealers
(collectively, ‘‘Market Centers’’) from
ArcaEx (such function of Archipelago
Securities is referred to as the
‘‘Outbound Router’’). In its capacity as
an Outbound Router, Archipelago
Securities has operated as a facility (as
defined in Section 3(a)(2) of the Act) of
PCX. It was approved by the
Commission as a facility (as defined in
Section 3(a)(2) of the Act) of PCXE on
October 25, 2001 in connection with the
Commission’s approval of the rules of
PCX establishing ArcaEx as a facility of
PCXE.17
Archipelago intends to continue to
own and operate Archipelago Securities
following the closing of the Merger. The
proposed operation of Archipelago
Securities as an Outbound Router after
the closing of the Merger will not
change from the way it is administered
and operated today.18 As an Outbound
Router, Archipelago Securities will
continue to receive instructions from
ArcaEx, route orders to other Market
Centers in accordance with those
instructions and be responsible for
reporting resulting executions back to
ArcaEx.19 In addition, all orders routed
through Archipelago Securities would
17 See Self Regulatory Organizations; Order
Approving Proposed Rule Change by the Pacific
Exchange, Inc., as Amended, and Notice of Filing
and Order Granting Accelerated Approval of
Amendment Nos. 4 and 5 Concerning the
Establishment of Archipelago Exchange as the
Equities Trading Facility of PCX Equities, Inc.,
Exchange Act Release No. 44983 (October 25, 2001),
66 FR 55225 (November 1, 2001) (SR–PCX–00–25)
(the ‘‘Original Outbound Router Release’’). The
name of the order routing broker-dealer was
originally Wave Securities, L.L.C. as approved by
the Commission in the Original Outbound Router
Release.
18 See, e.g., Original Outbound Router Release, at
55233–55235 (describing the operation of the order
routing broker-dealer approved by the
Commission).
19 See Original Outbound Router Release, at
55234.
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remain subject to the terms and
conditions of PCXE rules.20
PCX and PCXE currently regulate the
Outbound Router function of
Archipelago Securities as a facility (as
defined in Section 3(a)(2) of the Act)
subject to Section 6 of the Act. As such,
the Outbound Router function of
Archipelago Securities is subject to the
Commission’s continuing oversight. In
particular, and without limitation,
under the Act, PCX is responsible for
filing with the Commission rule changes
and fees relating to the Archipelago
Securities Outbound Router function,
and Archipelago Securities is subject to
exchange non-discrimination
requirements.21
Pursuant to Rule 17d–1 under the Act,
where a member of the Securities
Investor Protection Corporation is a
member of more than one self-regulatory
organization (‘‘SRO’’), the Commission
shall designate to one of such
organizations the responsibility for
examining such member for compliance
with the applicable financial
responsibility rules.22 The SRO so
designated by the Commission is
referred to as a ‘‘Designated Examining
Authority.’’ Archipelago Securities is a
member of two SROs, PCX and the
NASD. The NASD is an SRO not
affiliated with Archipelago or any of its
affiliates (including, without limitation,
PCX and PCXE) and it has been
designated by the Commission as the
Designated Examining Authority for
Archipelago Securities pursuant to Rule
17d–1 of the Act with the responsibility
for examining Archipelago Securities for
compliance with the applicable
financial responsibility rules.
Furthermore, under an agreement
between NASD and PCX originally
entered into on May 27, 1977 pursuant
to Rule 17d–2 23 under the Act (the
20 See Archipelago Securities Routing Agreement,
https://www.tradearca.com/exchange/pdfs/
ETPApplication.pdf (last visited July 21, 2005).
21 See, e.g., Section 6(b)(5) of the Act, 15 U.S.C.
78f(b)(5).
22 17 CFR 240.17d–1. Pursuant to Rule 17d–1
under the Act, in making such designation the
Commission shall take into consideration the
regulatory capabilities and procedures of the SROs,
availability of staff, convenience of location,
unnecessary regulatory duplication, and such other
factors as the Commission may consider germane to
the protection of investors, the cooperation and
coordination among self-regulatory organizations,
and the development of a national market system
for the clearance and settlement of securities
transactions.
23 Rule 17d–2 provides that any two or more
SROs may file with the Commission a plan for
allocating among such SROs the responsibility to
receive regulatory reports from persons who are
members or participants of more than one of such
SROs to examine such persons for compliance, or
to enforce compliance by such persons, with
specified provisions of the Act, the rules and
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12:20 Aug 17, 2005
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agreement was amended on February 1,
1980, and as so amended, the ‘‘NASD
PCX Agreement’’), there is currently a
plan in place allocating to the NASD the
responsibility to receive regulatory
reports from Archipelago Securities, to
examine Archipelago Securities for
compliance and to enforce compliance
by Archipelago Securities with the Act,
the rules and regulations thereunder
and the rules of the NASD, and to carry
out other specified regulatory functions
with respect to Archipelago Securities.
ETP Holders’ use of Archipelago
Securities to route orders to another
Market Center is currently optional, and
will remain optional after the closing of
the Merger. Those ETP Holders who
choose to use the Outbound Routing
service of Archipelago Securities must
sign an Archipelago Securities Routing
Agreement. Importantly, among other
things, the Archipelago Securities
Routing Agreement provides that all
orders routed through Archipelago
Securities are subject to the terms and
conditions of PCXE rules.24
PCX and Archipelago recognize that
after the closing of the Merger such
continued ownership and operation by
Archipelago of Archipelago Securities—
by virtue of Archipelago Securities
being an ETP Holder and a related
person of Archipelago 25—would be in
violation of the current and proposed
limitations 26 to be set forth in the
certificate of incorporation of PCXH
described above, unless Archipelago
Securities is approved by the
Commission after June 20, 2005 to be a
facility of PCXE 27 in accordance with
the terms of the proposed amendment to
the certificate of incorporation of PCXH
described above.
PCX and Archipelago further
recognize that the ownership of both
PCX and Archipelago Securities by
Archipelago may pose a conflict of
interest between the regulatory
responsibilities of PCX and PCXE and
the broker or dealer activities of
Archipelago Securities. This is because
the financial interests of Archipelago
may conflict with the responsibilities of
regulations thereunder, and the rules of such SROs,
or to carry out other specified regulatory functions
with respect to such persons. 17 CFR 240.17d–2.
24 See Archipelago Securities Routing Agreement,
https://www.tradearca.com/exchange/pdfs/
ETPApplication.pdf (last visited July 21, 2005).
25 At the request of the Exchange the Commission
deleted the phrase ‘‘as an Outbound Router.’’ See
August 4, 2005 Telephone Conversation.
26 The Exchange clarified that the ownership and
operation by Archipelago of Archipelago Securities
would violate the current, as well as the proposed,
limitations in the certificate of incorporation of
PCXH, unless approved by the Commission after
June 20, 2005 to be a facility of PCXE. See August
12, 2005 Telephone Conversation.
27 See Amendment No. 1.
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Sfmt 4703
PCX and PCXE as an SRO regarding
Archipelago Securities.
PCX and Archipelago believe,
however, that such conflict may be
mitigated with the following proposed
undertakings of Archipelago, PCX and
Archipelago Securities.28
(x) Proposed Undertakings
Each of Archipelago, PCX and
Archipelago Securities undertakes as
follows:
(1) PCX will regulate the Outbound
Router function of Archipelago
Securities as a facility (as defined in
Section 3(a)(2) of the Act), subject to
Section 6 of the Act. In particular, and
without limitation, under the Act, PCX
will be responsible for filing with the
Commission rule changes and fees
relating to the Archipelago Securities
Outbound Router function and
Archipelago Securities will be subject to
exchange non-discrimination
requirements.
(2) Currently, NASD, an SRO
unaffiliated with Archipelago or any of
tis affiliates (including, without
limitation, PCX or PCXE), carries out
oversight and enforcement
responsibilities as the Designated
Examining Authority designated by the
Commission pursuant to Rule 17d–1 of
the Act with the responsibility for
examining Archipelago Securities for
compliance with the applicable
financial responsibility rules.29
(3) The NASD PCX Agreement will
stay in full force and effect and PCX will
continue to abide by the terms of such
agreement.30 Furthermore, PCX
undertakes to amend the agreement to
expand the scope of NASD’s regulatory
functions so as to encompass all of the
regulatory oversight and enforcement
responsibilities with respect to
Archipelago Securities pursuant to
applicable laws, except for real-time
market surveillance.
(4) An ETP Holder’s or OTP Holder’s
use of Archipelago Securities to route
orders to another Market Center will
continue to be optional. Any ETP
Holder or OTP Holder that does not
want to use Archipelago Securities may
use other routers to route orders 31 to
other Market Centers.32
28 The Exchange clarified that the undertakings of
PCX should also be included. See August 12, 2005
Telephone Conversation.
29 See Amendment No. 1.
30 Id.
31 Id.
32 An ETP Holder may chose to route an order to
ArcaEx that, if not executable on ArcaEx, will be
cancelled and returned to the ETP Holder, at which
time the ETP Holder could chose to route the order
to another market. See August 4, 2005 Telephone
Conversation.
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(5) Archipelago Securities will not
engage in any business other than its
Outbound Router function (including,
in that function, the self-clearing
functions that it currently performs for
trades with respect to orders routed to
other Market Centers and the clearing
functions that it may perform for trades
with respect to orders for securities not
trades on any securities exchange) 33
and any other activities it may engage in
as approved by the Commission.
The above undertakings of
Archipelago, PCX and Archipelago
Securities would become effective at the
effective time of the Merger.
(y) Request for Approval
In sum, PCX and Archipelago believe
that the proposed undertakings of
Archipelago, PCX and Archipelago
Securities set forth above would address
the potential conflict of interest with the
regulatory responsibilities of PCX and
PCXE and the continued ownership and
operation of Archipelago Securities by
Archipelago after the closing of the
Merger.34 Consequently, subject to the
proposed undertakings of Archipelago,
PCX and Archipelago Securities set
forth above, PCX and Archipelago
request that the Commission approve
Archipelago Securities to be a facility
(as defined in Section 3(a)(2) of the
Act) 35 of PCX.
b. Proposed PCX Rules
Archipelago is a public company
whose common stock is listed on PCX
for trading on ArcaEx. The certificate of
incorporation of Archipelago, which
was approved by the Commission on
August 9, 2004 prior to the initial public
offering of Archipelago common
stock,36 currently contains certain
provisions intended to ensure that the
ownership of Archipelago by the public
will not unduly interfere with or restrict
the ability of the Commission or PCX to
effectively carry out their regulatory
oversight responsibilities under the Act,
with respect to ArcaEx, and generally to
enable ArcaEx to operate in a manner
that complies with the federal securities
laws, including furthering the objectives
of Section 6(b)(5) of the Act.37 Some of
these provisions impose ownership and
voting limitations on Archipelago’s
33 See
Amendment No. 1.
34 Id.
35 15
U.S.C. 78c(a)(2).
Exchange Act Release No. 50170
(August 9, 2004), 69 FR 50419 (August 16, 2004)
(SR–PCX–2004–56) (order granting approval of
proposed rule change and notice of filing and order
granting accelerated approval to Amendment No. 1
to the proposed rule change by the Pacific
Exchange, Inc. relating to the Certificate of
Incorporation and Bylaws of Archipelago).
37 Id.
36 Securities
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12:20 Aug 17, 2005
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stockholders and their related
persons,38 including persons who are
ETP Holders and the broker-dealers
with whom such ETP Holders are
associated.39 In order to ensure that
upon consummation of the Merger, the
public company nature of Archipelago
will not unduly interfere with or restrict
the regulatory oversight responsibilities
of the Commission or PCX with respect
to the options business and the general
compliance of the operations of the
options business with federal securities
laws, PCX proposes to impose on any
OTP Holder or OTP Firm, that is not an
ETP Holder, voting and ownership
limitations that are analogous to those
imposed on ETP Holders by the
certificate of incorporation of
Archipelago. In addition, PCX proposes
to require such OTP Holder and OTP
Firm, as well as ‘‘associated persons’’
(as such term is defined in Section
3(a)(18) of the Act) 40 of such OTP
Holder or OTP Firm, to enter into an
agreement with PCX and Archipelago
within certain specific time periods set
forth in the proposed PCX rules,
pursuant to which such OTP Holder,
OTP Firm and any person who is
deemed an ‘‘associated person’’ (as such
term is defined in Section 3(a)(18) of the
38 The term ‘‘related persons,’’ as defined in the
Certificate of Incorporation of Archipelago, means
with respect to any person: (a) Any other person(s)
whose beneficial ownership of shares of stock of
Archipelago with the power to vote on any matter
would be aggregated with such first person’s
beneficial ownership of such stock or deemed to be
beneficially owned by such first person pursuant to
Rules 13d–3 and 13d–5 under the Act; (b) in the
case of a person that is a natural person, for so long
as ArcaEx remains a facility of PCX and PCXE and
the Facility Services Agreement is in full force and
effect, any broker or dealer that is an ETP Holder
with which such natural person is associated; (c) in
the case of a person that is an ETP Holder, for so
long as ArcaEx remains a facility of PCX and PCXE
and the Facility Services Agreement is in full force
and effect, any broker or dealer with which such
ETP Holder is associated; (d) any other person(s)
with which such person has any agreement,
arrangement or understanding (whether or not in
writing) to act together for the purpose of acquiring,
voting, holding or disposing of shares of the stock
of Archipelago; and (e) in the case of a person that
is a natural person, any relative or spouse of such
person, or any relative of such spouse, who has the
same home as such person or who is a director or
officer of Archipelago or any of its parents or
subsidiaries. Certificate of Incorporation of
Archipelago, Article FOURTH, paragraph H(3).
39 Certificate of Incorporation of Archipelago,
Article FOURTH, paragraphs (C) and (D).
40 Pursuant to Section 3(a)(18) of the Act, the term
‘‘associated person of a broker or dealer’’ means any
partner, officer, director, or branch manager of such
broker or dealer (or any person occupying a similar
status or performing similar functions), any person
directly or indirectly controlling, controlled by or
under common control with such broker or dealer,
or any employee of such broker or dealer, except
that such term does not include any person
associated with a broker or dealer whose functions
are solely clerical or ministerial. 15 U.S.C.
78c(a)(18).
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48615
Act) of such OTP Holder or OTP Firm
(such persons are referred to in this
filing as ‘‘OTP Associates’’) would agree
to comply with the ownership and
voting limitations imposed by the
proposed PCX rules, to authorize
Archipelago to vote their shares of
Archipelago stock in favor of
amendments to the certificate of
incorporation of Archipelago that
incorporate such ownership and voting
limitations, and to be subject to the
disciplinary action in the proposed PCX
rules if they violate any of the
ownership or voting limitations or fail
to enter into such ownership and voting
agreement (such agreement, the
‘‘Ownership and Voting Agreement’’).
Under the proposed PCX rules, failure
to comply with the ownership and
voting limitations or failure to enter into
the Ownership and Voting Agreement
will subject the responsible OTP Holder
or OTP Firm to the possible suspension
of all trading rights and privileges. The
proposed PCX Rules 1.1(cc) through
(gg), Rule 3.4 and Rule 13.2(a)(2)(E) are
summarized below.
(i) Ownership and Voting Limitations
The proposed PCX rules provide that
for as long as Archipelago shall control,
directly or indirectly, PCX, no OTP
Holder or OTP Firm, either alone or
with its related persons, shall own
beneficially shares of Archipelago stock
representing in the aggregate more than
20% of the then outstanding votes
entitled to be cast on any matter (the
‘‘Ownership Limitation’’).41 ‘‘Related
persons’’ is defined to mean, with
respect to any OTP Holder or OTP Firm:
(a) Any broker or dealer with which
such OTP Holder or OTP Firm is
associated; (b) any natural person who
is an associated person of such OTP
Firm; (c) any other person(s) 42 whose
beneficial ownership of shares of stock
of Archipelago with the power to vote
on any matter would be aggregated with
the OTP Holder’s or OTP Firm’s
beneficial ownership of such stock or
deemed to be beneficially owned by
such OTP Holder or OTP Firm pursuant
to Rules 13d–3 and 13d–5 under the
Act; 43 (d) any other person(s) with
41 Proposed
PCX Rule 3.4(a).
Rule 1.1(v) defines ‘‘Person’’ to mean a
natural person, corporation, partnership, limited
liability company, association, joint stock company,
trustee of a trust fund, or any organized group of
persons whether incorporated or not. PCX Rule
1.1(v).
43 PCX believes that this definition, by
incorporating a ‘‘beneficial ownership’’ concept,
will help PCX to monitor ownership of the common
stock of Archipelago by monitoring filings on
Schedules 13D and 13G by stockholders of
Archipelago. PCX further believes that the
42 PCX
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which such OTP Holder or OTP Firm
has any agreement, arrangement or
understanding (whether or not in
writing) to act together for the purpose
of acquiring, voting, holding or
disposing of shares of the stock of
Archipelago; and (e) with respect to any
OTP Holder and any person described
in (a) to (d) above who is a natural
person, any relative or spouse of such
person, or any relative of such spouse,
who has the same home as such person
or who is a director or officer of
Archipelago or any of its parents or
subsidiaries.44 PCX and Archipelago
believe that stockholders of
Archipelago, including OTP Holders,
OTP Firms and their related persons
who own Archipelago stock, will be
able to effectively monitor their
shareholdings in Archipelago using
systems they already have in place.
For purposes of the Ownership
Limitation, no OTP Holder or OTP Firm
shall be deemed to have any agreement,
arrangement or understanding to act
together with respect to voting shares of
stock of Archipelago solely because
such OTP Holder, OTP Firm or any of
their related persons, has or shares the
power to vote or direct the voting of
such shares of stock pursuant to a
revocable proxy given in response to a
public proxy or consent solicitation
conducted pursuant to, and in
accordance with, Regulation 14A
promulgated pursuant to the Act, except
if such power (or the arrangements
relating thereto) is then reportable under
Item 6 of Schedule 13D under the Act
(or any similar provision of a
comparable or successor report).45
In addition to the Ownership
Limitation, the proposed PCX rules
provide that for as long as Archipelago
shall control, directly or indirectly,
PCX, no OTP Holder or OTP Firm,
definition of ‘‘beneficial ownership’’ used will
cover persons which control, are controlled by or
are under common control with an OTP Holder or
an OTP firm.
44 Proposed PCX Rule 1.1(gg). The proposed Rule
1.1(gg) further provides that ‘‘related persons’’
includes, with respect to any OTP Holder or OTP
Firm: (1) any other person beneficially owning
pursuant to Rules 13d–3 and 13d–5 under the Act
shares of Archipelago stock with the power to vote
on any matter that also are deemed to be
beneficially owned by such OTP Holder or OTP
Firm pursuant to Rules 13d–3 and 13d–5 under the
Act; (2) any other person that would be deemed to
own beneficially pursuant to Rules 13d–3 and 13d–
5 under the Act shares of Archipelago stock with
the power to vote on any matter that are beneficially
owned directly or indirectly by such OTP Holder
or OTP Firm pursuant to Rules 13d–3 and 13d–5
under the Act; and (3) any additional person
through which such other person would be deemed
to directly or indirectly own beneficially pursuant
to Rules 13d–3 and 13d–5 under the Act shares of
Archipelago stock with the power to vote on any
matter.
45 Proposed PCX Rule 3.4(a).
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12:20 Aug 17, 2005
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either alone or together with its related
persons, shall (1) have the right to vote,
vote or cause the voting of shares of
stock of Archipelago to the extent such
shares represent in the aggregate more
than 20% of the then outstanding votes
entitled to be cast on any matter (the
‘‘Voting Limitation’’) or (2) enter into
any agreement, plan or arrangement not
to vote shares, the effect of which
agreement, plan or arrangement would
be to enable any person, either alone or
with its related persons, to vote or cause
the voting of shares that would
represent in the aggregate more than
20% of the then outstanding votes
entitled to be cast on any matter (the
‘‘Nonvoting Agreement Prohibition’’).46
The Voting Limitation and Nonvoting
Agreement Prohibition shall not apply
to (1) any solicitation of any revocable
proxy from any stockholder of
Archipelago by or on behalf of
Archipelago or by an officer or director
of Archipelago acting on behalf of
Archipelago or (2) any solicitation of
any revocable proxy from any
stockholder of Archipelago by any other
stockholder that is conducted pursuant
to, and in accordance with, Regulation
14A promulgated pursuant to the Act.47
(ii) Ownership and Voting Agreement
The proposed PCX Rule 3.4 also
requires certain OTP Holders and OTP
Firms that are not ETP Holders, and
certain OTP Associates,48 to enter into
an Ownership and Voting Agreement
with PCX and Archipelago, which
Ownership and Voting Agreement shall
provide that for as long as Archipelago
shall control, directly or indirectly,
PCX: (i) No OTP Holder or OTP Firm,
either alone or with its related persons,
shall, at any time, own beneficially
shares of Archipelago stock in excess of
the Ownership Limitation; (ii) no OTP
Holder or OTP Firm, either alone or
together with its related persons, shall
have the right to vote, vote or cause the
voting of shares of Archipelago stock, in
person or by proxy or through any
voting agreement or other arrangement,
in excess of the Voting Limitation; and
(iii) no OTP Holder or OTP Firm, either
alone or together with its related
persons, shall enter into any agreement,
plan or other arrangement relating to
shares of Archipelago stock entitled to
46 Proposed
PCX Rule 3.4(b).
47 Id.
48 PCX clarified that only certain OTP Holders,
OTP Firms and OTP Associates would be required
to enter into the Ownership and Voting Agreement.
See August 4, 2005 Telephone Conversation and
text accompanying note 51, infra, for a discussion
of which OTP Holders, OTP Firms, and OTP
Associates would be required to enter into an
Ownership and Voting Agreement.
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Fmt 4703
Sfmt 4703
vote on any matter with any other
person, either alone or with its related
persons, in contravention of the
Nonvoting Agreement Prohibition.49 In
addition, the Ownership and Voting
Agreement provides that each OTP
Holder, OTP Firm and OTP Associate
who is party to such agreement shall
agree to be subject to the
implementation provisions imposed by
the proposed PCX Rule 3.4(d), which
are also going to be set forth in the
Ownership and Voting Agreement; 50
these provisions are described in more
detail below.
Finally, the Ownership and Voting
Agreement provides that each OTP
Holder, OTP Firm and OTP Associate
who is party to such agreement shall
vote, or authorize Archipelago to vote
on their behalf, shares of Archipelago
stock owned by such OTP Holder, OTP
Firm or OTP Associate, as appropriate,
in favor of amendments to the certificate
of incorporation of Archipelago that
incorporate ownership and voting
limitations that are substantially similar
to the Ownership Limitation, Voting
Limitation and Nonvoting Agreement
Prohibition set forth in the proposed
Rules 3.4(a) and 3.4(b), as well as
implementation provisions imposed by
the proposed PCX Rule 3.4(d).51 The
Ownership and Voting Agreement shall
be governed by Delaware law.52
Under the proposed PCX rules, the
OTP Holders, OTP Firms and OTP
Associates who are required to enter
into the Ownership and Voting
Agreement have to do so within certain
specified time periods set forth in the
proposed rules. Specifically, in the case
of an OTP Holder, OTP Firm or OTP
Associate which is not an ETP Holder
and which (x) owns beneficially any
shares of Archipelago stock or (y) has
entered into any agreement, plan or
other arrangement relating to the voting
or ownership of any shares of
Archipelago stock, at the time of the
closing of the Merger, such person will
be required to enter into the Ownership
and Voting Agreement no later than 30
calendar days following the date of
closing of the Merger; in the case of any
OTP Holder, OTP Firm or OTP
Associate which is not required to enter
into an Ownership and Voting
Agreement pursuant to the above clause,
the Ownership and Voting Agreement
has to be entered into no later than the
fifth calendar day following the date on
which: (x) such OTP Holder, OTP Firm
or OTP Associate ceases being an ETP
49 Proposed
PCX Rule 3.4(c).
50 Id.
51 Proposed
52 Proposed
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PCX Rule 3.4(c)(3).
PCX Rule 3.4(c)(5).
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Holder and (A) owns or acquires
beneficial ownership of any shares of
Archipelago stock or (B) is a party to or
enters into any agreement, plan or other
arrangement relating to the voting or
ownership of any shares of Archipelago
stock; or (y) such OTP Holder, OTP
Firm or OTP Associate which is not an
ETP Holder (A) acquires beneficial
ownership of any shares of Archipelago
stock or (B) enters into any agreement,
plan or other arrangement relating to the
voting or ownership of any shares of
Archipelago stock.53
The ownership and voting limitations
contained in the proposed PCX Rule 3.4
and the Ownership and Voting
Agreement required by the proposed
PCX Rule 3.4 are designed to impose on
OTP Holders, OTP Firms and their
related persons restrictions that are
similar to those that are currently
contained in the certificate of
incorporation of Archipelago with
respect to ETP Holders and their related
persons. The corresponding provisions
in the certificate of incorporation of
Archipelago are designed to prevent any
ETP Holder or any ETP Holders acting
together, from exercising undue control
over the operation of Archipelago and,
therefore, ArcaEx. PCX believes that by
extending the same restrictions to OTP
Holders and OTP Firms as well as their
related persons, the proposed rule
would accomplish the same objectives
with respect to the options business of
PCX. Specifically, PCX believes that the
proposed rules would deter any OTP
Holder or OTP Firm, either alone or
together with its related persons, from
accumulating a substantial number of
outstanding votes entitled to be cast on
any matter without Commission review.
PCX believes that the imposition of such
20% ownership and voting limitations
would help ensure that Archipelago,
and therefore PCX, would not be subject
to undue influence from an OTP Holder
or OTP Firm, or a group of OTP Holders
or OTP Firms that control a substantial
number of outstanding votes entitled to
be cast on any matter that may be
adverse to PCX’s or the Commission’s
regulatory oversight responsibilities.
The proposed voting limitations, along
with the related ownership limitation,
would serve to protect the integrity of
PCX’s and the Commission’s regulatory
oversight responsibilities and would
allow PCX to review the acquisition of
substantial voting power of Archipelago,
and therefore PCX and PCXE, by any
OTP Holder, OTP Firm and their related
persons.
53 Proposed
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(iii) Certain Matters Related to the
Implementation of the Ownership and
Voting Limitations
The proposed PCX Rule 3.4(d)
provides that in the event that any OTP
Holder or OTP Firm, either alone or
with its related persons (including any
related persons who are OTP Associates
of such OTP Holder or OTP Firm), at
any time owns beneficially shares of
Archipelago stock in excess of the
Ownership Limitation, Archipelago
shall promptly call from such OTP
Holder or OTP Firm, or an OTP
Associate of such OTP Holder or OTP
Firm, at a price per share equal to the
par value thereof, shares of Archipelago
stock owned by such OTP Holder, OTP
Firm or OTP Associate that are
necessary to decrease the beneficial
ownership of such OTP Holder or OTP
Firm, either alone or with its related
persons, to 20% of the then outstanding
votes entitled to be cast on any matter
after giving effect to the redemption of
the shares of Archipelago stock.54
54 Proposed PCX Rule 3.4(d)(1). For purposes of
illustration, if there are 1,000,000 votes entitled to
be cast in total and an OTP Holder acquires
beneficial ownership of shares of Archipelago stock
representing in the aggregate 300,000 votes, then
Archipelago has to call such number of shares from
such OTP Holder so that the number of votes that
the OTP Holder beneficially owns after giving effect
to the reduction in such OTP Holder’s stake and the
consequent reduction in the total number of votes
entitled to be cast, is not more than 20% of the new
total number of votes entitled to be cast. Thus,
using the number provided in this example,
Archipelago would have to call shares of
Archipelago stock representing in the aggregate
125,000 votes, leaving the OTP Holder with shares
of Archipelago stock representing in the aggregate
175,000 votes, or 20% of the new 875,000 votes
entitled to be cast in total.
In addition, assuming there is a second OTP
Holder who beneficially owns shares of
Archipelago stock representing 190,000 votes, the
calling of the shares of the first OTP Holder
described above would result in an increase of the
second OTP Holder’s ownership from 19% to
21.7%. In this scenario, Archipelago would have to
call shares of Archipelago stock representing 20,000
votes from the second OTP Holder and additional
shares representing 5,000 votes from the first OTP
Holder (for a total of 130,000 shares called from the
first OTP Holder) such that upon completion of
these calls, each of these two OTP Holders owns
shares of Archipelago stock representing 170,000
votes, or 20% of the new 850,000 votes entitled to
be cast in total.
The proposed PCX Rule 3.4(d)(1) further provides
that in the event Archipelago shall call shares of
Archipelago stock pursuant to the proposed PCX
Rule 3.4(d)(1), notice of such call shall be given
promptly by first-class mail, postage prepaid to the
holders of the shares of Archipelago stock to be so
called (such holders shall include holders whose
ownership of Archipelago stock exceeded the 20%
ownership limitation solely as a result of the
reduction in the total number of outstanding votes
due to calls of shares of Archipelago stock from
other stockholders), at such holders’ addresses as
the same appears on the stock register of
Archipelago. Each such notice shall state: (a) The
call date; (b) the number of shares to be called; (c)
the aggregate call price; and (d) the place or places
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48617
In addition, if any OTP Holder or OTP
Firm, either alone or with its related
persons (including any related persons
who are OTP Associates of such OTP
Holder or OTP Firm), acquires the right
to vote more than 20% of the then
outstanding votes entitled to be cast by
stockholders of Archipelago on any
matter, Archipelago shall have the right
to vote and shall vote such shares of
Archipelago stock owned by such OTP
Holder, OTP Firm, or an OTP Associate
of such OTP Holder or OTP Firm, in
excess of the 20% voting limitation in
proportion with the results of voting
(excluding such excess shares) for such
matter at a meeting of Archipelago
stockholders.55
Furthermore, the proposed PCX rules
provide that in the event of any
violation by any OTP Holder or OTP
Firm of the Ownership Limitation,
Voting Limitation or Nonvoting
Agreement Prohibition (including,
without limitation, any failure of an
OTP Holder, OTP Firm or OTP
Associate to enter into the Ownership
and Voting Agreement as required by
the proposed Rule 3.4(c) within the
applicable time periods specified
therein or any breach of the Ownership
and Voting Agreement by an OTP
Holder, OTP Firm or OTP Associate
which is a party thereto), the Exchange
shall suspend all trading rights and
privileges of such OTP Holder or OTP
Firm in accordance with proposed PCX
Rule 13.2(a)(2)(E), subject to the
procedures provided therein.56
The proposed PCX Rule 13.2(a)(2)(E)
provides that in the event of any such
failure to comply with Rule 3.4, the
Exchange shall: (1) Provide notice to the
where shares are to be surrendered for payment of
the call price. Failure to give notice as aforesaid, or
any defect therein, shall not affect the validity of
the call of the shares. From and after the call date
(unless default shall be made by Archipelago in
providing funds for the payment of the call price),
shares which have been called as aforesaid shall be
cancelled, shall no longer be deemed to be
outstanding, and all rights of the holder of such
shares as a stockholder of Archipelago (except the
right to receive from Archipelago the call price
against delivery to Archipelago of evidence of
ownership of such shares) shall cease. Upon
surrender in accordance with said notice of
evidence of ownership of the shares of Archipelago
stock so called (properly assigned for transfer, if the
board of directors of Archipelago shall so require
and the notice shall so state), such shares shall be
called by Archipelago at par value.
55 Proposed PCX Rule 3.4(d)(2). For example, if,
with respect to a particular proposal submitted to
stockholder vote, 60% of the vote cast by
Archipelago stockholders (excluding the excess
shares) was in favor of the proposal and 40% of the
vote cast by Archipelago stockholders (excluding
the excess shares) was against the proposal,
Archipelago would vote 60% of the excess shares
in favor of the proposal and 40% of the excess
shares against the proposal. See Amendment No. 1.
56 Proposed PCX Rule 3.4(d)(3).
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applicable OTP Holder or OTP Firm
within five business days of learning of
the failure to comply; (2) allow the
applicable OTP Holder, OTP Firm or
OTP Associate of such OTP Holder or
OTP Firm fifteen calendar days to cure
any such failure to comply; (3) in the
event that the applicable OTP Holder,
OTP Firm or OTP Associate of such
OTP Holder or OTP Firm does not cure
such failure to comply within such
fifteen calendar day cure period,
schedule a hearing to occur within
thirty calendar days following the
expiration of such fifteen calendar day
cure period; and (4) render its decision
as to the suspension of all trading rights
and privileges of the applicable OTP
Holder or OTP Firm no later than ten
calendar days following the date of such
hearing.57
Finally, the proposed PCX rules
provide that in the event any OTP
Holder or OTP Firm, either alone or
with its related persons (including any
related person that is an OTP Associate
of such OTP Holder or OTP Firm), has
cast votes, in person or by proxy or
through any voting agreement or other
arrangement, in excess of the Voting
Limitation, Archipelago may bring suit
in a court of competent jurisdiction
against such OTP Holder, OTP Firm or
OTP Associates seeking enforcement of
the Voting Limitation.58
c. Bylaws of Archipelago
(i) Duration of Certain Bylaw Provisions
With respect to the ownership and
voting limitations in the certificate of
incorporation of Archipelago that apply
specifically to ETP Holders and their
related persons (as opposed to
stockholders of Archipelago in general)
and certain other provisions of the
certificate of incorporation of
Archipelago (such provisions,
collectively, the ‘‘ArcaEx
Limitations’’),59 the certificate of
incorporation of Archipelago provides
that such provisions shall remain
applicable for so long as ArcaEx remains
a facility (as defined in Section 3(a)(2)
of the Act) 60 of PCX and PCXE and the
57 57
Proposed PCX Rule 13.2(a)(2)(E).
PCX Rule 3.4(d)(4).
59 Certificate of Incorporation of Archipelago,
paragraphs (C)(3)(y), (D)(2), (D)(2)(a) and (H)(3) of
Article FOURTH, the third paragraph of Article
EIGHTH, the penultimate paragraph of Article
TENTH, Article THIRTEENTH, Article
FOURTEENTH, Article FIFTEENTH, Article
SIXTEENTH, Article SEVENTEENTH and Article
NINETEENTH.
60 Section 3(a)(2) defines the term ‘‘facility,’’
when used with respect to an exchange, to include
its premises, tangible or intangible property
whether on the premises or not, any right to the use
of such premises or property or any service thereof
for the purpose of effecting or reporting a
58 Proposed
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Facility Services Agreement remains in
full force and effect.61 As described
previously in Item II.A.1, following
completion of the Merger, ArcaEx will
remain the exclusive equities trading
facility of PCX and PCXE, and the
Facility Services Agreement will remain
in full force and effect in its current
form. In order to ensure the continued
force and effect of the ArcaEx
Limitations in the event of any change
in the relationship of PCX and PCXE to
ArcaEx or the effectiveness of the
Facility Services Agreement, PCX
proposes to amend the bylaws of
Archipelago to provide that Archipelago
will not take any action, and will not
permit any of its subsidiaries, which
will include PCXH, PCX, PCXE and
ArcaEx, to take any action, that will
cause (i) ArcaEx to cease to be a facility
of PCX and PCXE, or (ii) the Facility
Services Agreement to cease to be in full
force and effect, unless each of the
provisions in the certificate of
incorporation of Archipelago relating to
the ArcaEx Limitations is amended
pursuant to the terms thereof, the
bylaws and applicable law, to provide
that such provisions shall remain in full
force and effect whether or not ArcaEx
remains a facility of PCX and PCXE or
the Facility Services Agreement is in
full force and effect.62 The foregoing
bylaw provisions may not be amended,
modified or repealed unless such
amendment, modification or repeal is (i)
filed with and approved by the
Commission 63 or (ii) approved by
Archipelago stockholders voting not less
than 80% of the then outstanding votes
entitled to be cast in favor of any such
amendment, modification or repeal.64
transaction on an exchange (including, among other
things, any system of communication to or from the
exchange, by ticker or otherwise, maintained by or
with the consent of the exchange), and any right of
the exchange to the use of any property or service.
15 U.S.C. 78c(a)(2).
61 The Exchange clarified that the provisions
discussed in this section, the ArcaEx Limitations,
include both the ownership and voting limitations
and other provisions. See August 12, 2005
Telephone Conversation.
62 Amended Bylaws of Archipelago, Section
6.8(c).
63 The current Bylaws of Archipelago provide that
before any amendment to the bylaws shall be
effective, such amendment shall be submitted to the
Board of Directors of PCX and if such Board shall
determine that the same is required, under Section
19 of the Act and the rules promulgated thereunder,
to be filed with, or filed with and approved by, the
Commission before such amendment may be
effective under Section 19 of the Act and the rules
promulgated thereunder, then such amendment
shall not be effective until filed with, or filed with
and approved by, the Commission, as the case may
be. Amended Bylaws of Archipelago, Section 6.8(b).
64 Amended Bylaws of Archipelago Section
6.8(g). Under Section 216 of the Delaware General
Corporation Law, a bylaw amendment by
shareholders generally requires the affirmative vote
PO 00000
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Fmt 4703
Sfmt 4703
PCX believes that, because Archipelago
will own 100% of the ownership
interest in PCX, these proposed
Archipelago bylaw provisions, in
conjunction with voting and ownership
limitations currently in place, and the
ownership and voting limitations that
will be imposed by the Proposed Rule
Changes on OTP Holders, OTP Firms
and their related persons, will ensure
that, regardless of whether ArcaEx
remains a facility of PCX and PCXE or
whether the Facility Services Agreement
remains in full force and effect, the
regulatory oversight responsibilities of
PCX and PCXE will not be subject to
any undue influences from a PCX
member or a group of PCX members that
control a substantial number of
outstanding votes.
(ii) No Waiver by the Board of Directors
of Archipelago
The certificate of incorporation of
Archipelago currently contains
provisions that allow the board of
directors of Archipelago to, subject to
certain conditions,65 waive the voting
and ownership limitations with respect
to a specific Archipelago stockholder
and its related persons, provided that
neither the stockholder subject to such
waiver nor any of its related persons is
an ETP Holder.66 These provisions
reflect the heightened scrutiny with
respect to ETP Holders and their related
persons relative to other Archipelago
stockholders due to the fact that ETP
Holders are members of the Exchange
of a majority of the shares present in person or
represented by proxy at a stockholders’ meeting and
entitled to vote on such bylaw amendment, unless
specified otherwise in the corporation’s certificate
of incorporation or bylaws. Del. Code Ann. tit. 8
sec. 216(2) (1998).
65 Before adopting any waiver with respect to (i)
the exercise of any voting rights in excess of the
voting limitation set forth in the certificate of
incorporation of Archipelago, (ii) the entering into
of any agreement, plan or other arrangement in
violation of the non-voting agreement prohibition
set forth in the certificate of incorporation of
Archipelago, or (iii) the ownership of Archipelago
stock in excess of the concentration limitation set
forth in the certificate of incorporation of
Archipelago, the board of directors of Archipelago
has to determine that: (x) the undertaking of any of
the actions described in (i), (ii) or (iii) above by any
person, either alone or with its related persons, will
not impair any of Archipelago’s, PCX or PCXE’s
ability to discharge its responsibilities under the
Act and the rules and regulations thereunder and
is otherwise in the best interests of Archipelago and
its stockholders; (y) the undertaking of any of the
actions described in (i), (ii) or (iii) above by any
person, either alone or with its related persons, will
not impair the Commission’s ability to enforce the
Act; and (z) neither such person nor any of its
related persons is subject to any statutory
disqualification (as defined in Section 3(a)(39) of
the Act). Certificate of Incorporation of Archipelago,
Article FOURTH, paragraphs C(3) and D(1)(b).
66 Certificate of Incorporation of Archipelago,
Article FOURTH, paragraph C(3).
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and present more of a concern for undue
influence than other stockholders of
Archipelago. In connection with the
Merger and the expansion of the voting
and ownership limitations to OTP
Holders, OTP Firms and their related
persons through the new proposed PCX
rules described in Item 3.1(b), PCX
proposes to amend the bylaws of
Archipelago to provide that the board of
directors of Archipelago will not adopt
any resolution waiving the Voting
Limitation, the Nonvoting Agreement
Prohibition and the ‘‘Concentration
Limitation’’ (as such term is defined in
the certificate of incorporation of
Archipelago) 67 with respect to any OTP
Holder, OTP Firm or any of their related
persons.68 The foregoing bylaw
provisions may not be amended,
modified or repealed unless such
amendment, modification or repeal is
filed and approved by the Commission
or approved by Archipelago
stockholders voting not less than 80% of
the then outstanding votes entitled to be
cast in favor of any such amendment,
modification, or repeal.69 These
proposed bylaw provisions, in
conjunction with the ownership and
voting limitations that would be
imposed by the Proposed Rule Changes
on OTP Holders, OTP Firms and their
related persons, are designed to apply a
comparable level of scrutiny that has
been in place for ETP Holders and their
related persons to OTP Holders, OTP
Firms and their related persons after
completion of the Merger. By
proscribing any discretion by the board
of directors of Archipelago with respect
to granting waivers of the ownership
and voting limitations to the OTP
Holders and OTP Firms 70 and their
related persons, the proposed bylaw
provisions further ensure that these
limitations will be strictly enforced to
fulfill their intended purpose of
protecting the integrity of the regulatory
oversight of PCX and the Commission.
(iii) Extension of Certain Provisions
Related to ArcaEx
Among other things, the certificate of
incorporation of Archipelago provides
for the inspection and copying by PCX
67 The ‘‘Concentration Limitation,’’ as defined in
the certificate of incorporation of Archipelago,
provides that no person, either alone or with its
related persons, shall be permitted at any time to
own beneficially shares of Archipelago stock
representing in the aggregate more than 40% of the
then outstanding votes entitled to be cast on any
matter. Certificate of Incorporation of Archipelago,
Article FOURTH, Paragraph D(1).
68 Amended Bylaws of Archipelago, Section
6.8(d.). See Amendment No. 1.
69 Amended Bylaws of Archipelago, Section
6.8(g).
70 See Amendment No. 1.
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and PCXE of Archipelago’s books and
records, requires that Archipelago take
reasonable steps necessary to cause its
agents to cooperate with PCX and PCXE
in connection with certain of such
agents’ activities and requires that
Archipelago cause its officers, directors
and employees to consent to the
applicability to them of certain
provisions of Archipelago’s certificate of
incorporation in connection with
certain of such persons’ activities.71
These provisions, however, apply only
to the extent that such books and
records or activities, as the case may be,
relate to ArcaEx. As described
previously in Item II.A.1, following
completion of the Merger, PCX and
PCXE will become wholly-owned
subsidiaries of Archipelago. In order to
ensure that these provisions apply also
to the operations of PCX and PCXE, PCX
proposes to amend the bylaws of
Archipelago to provide that, in addition
to the current requirements of the
certificate of incorporation of
Archipelago, (i) Archipelago’s books
and records shall be subject at all times
to inspection and copying by PCX and
PCXE to the extent such books and
records are related to the operation and
administration of PCX or PCXE, (ii)
Archipelago shall take reasonable steps
necessary to cause its agents to
cooperate with PCX and PCXE pursuant
to their regulatory authority with
respect to such agents’ activities related
to PCX or PCXE, (iii) Archipelago shall
take reasonable steps necessary to cause
its officers, directors and employees
prior to accepting a position as an
officer, director or employee, as
applicable, of the Corporation to
consent in writing to the applicability to
them of certain specified provisions of
the certificate of incorporation of
Archipelago with respect to their
activities related to PCX or PCXE, and
(iv) Archipelago, its directors and
officers, and those of its employees
whose principal place of business and
residence is outside the United States
shall be deemed to irrevocably submit to
the exclusive jurisdiction of the United
States federal courts, the Commission
and PCX for the purposes of any suit,
action or proceeding pursuant to the
United States federal securities laws,
and the rules and regulations
thereunder, arising out of, or relating to,
the activities of PCX or PCXE, and
Archipelago and each such director,
of Incorporation of Archipelago,
Article THIRTEENTH, Article FOURTEENTH,
Article SEVENTEENTH and Article EIGHTEENTH.
The Exchange clarified that Article THIRTEENTH
of the Certificate of Archipelago should be included
in the preceding list. See August 12, 2005
Telephone Conversation.
PO 00000
71 Certificate
Frm 00105
Fmt 4703
Sfmt 4703
48619
officer or employee, in the case of any
such director, officer or employee by
virtue of his acceptance of any such
position, shall be deemed to waive, and
agree not to assert by way of motion, as
a defense or otherwise in any suit,
action or proceeding, any claims that it
or they are not personally subject to the
jurisdiction of the Commission, 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
thereof may not be enforced in or by
such courts or agency.72 The foregoing
proposed bylaw provisions may not be
amended, modified or repealed unless
such amendment, modification or repeal
is (i) filed with and approved by the
Commission or (ii) approved by
Archipelago stockholders voting not less
than 80% of the then outstanding votes
entitled to be cast in favor of any such
amendment, modification or repeal.73
PCX believes that, because Archipelago
will own 100% of the ownership
interest in PCX (and, through PCX, in
PCXE as well), these proposed
Archipelago bylaw provisions will
ensure that the regulatory oversight
responsibilities of PCX and PCXE will
also extend to such books and records,
agents, officers, directors and employees
of Archipelago as may relate to, or be
involved in, the operations of PCX and
PCXE (as well as ArcaEx).
(iv) Calling of Shares by Archipelago
The certificate of incorporation of
Archipelago also contains provisions
that govern the process that Archipelago
will follow in order to call shares from
certain of its stockholders in the event
of breaches of certain ownership
limitations.74 The proposed Archipelago
bylaw amendment clarifies that, in
order to effect the purposes of these
provisions of Archipelago’s certificate of
incorporation, Archipelago recognizes
that the call must be undertaken and
completed promptly. To that end, under
the proposed bylaw amendment, the
Board of Directors of Archipelago will
cause Archipelago to call promptly
shares of stock of Archipelago and also
to give notice of such call promptly.75
The foregoing proposed bylaw
provisions may not be amended,
modified or repealed unless such
amendment, modification or repeal is (i)
filed with and approved by the
72 Amended Bylaws of Archipelago, Section
6.8(e).
73 Amended Bylaws of Archipelago, Section
6.8(g).
74 Certificate of Incorporation of Archipelago,
Article FOURTH, paragraph F.
75 Amended Bylaws of Archipelago, Section
6.8(f).
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Commission or (ii) approved by
Archipelago stockholders voting not less
than 80% of the then outstanding votes
entitled to be cast in favor of any such
amendment, modification or repeal.76
d. Undertakings by Archipelago
In connection with the submission of
the Proposed Rule Changes, Archipelago
undertakes that, prior to the earlier of
(1) the 2006 annual general meeting of
Archipelago stockholders and (2) the
first meeting of Archipelago
stockholders to occur after the closing of
the Merger (other than any meeting or
meetings of Archipelago stockholders
convened for the purpose of considering
and approving the merger of
Archipelago and New York Stock
Exchange, Inc.), the board of directors of
Archipelago shall: (a) Propose
amendments to the certificate of
incorporation of Archipelago to (x)
extend the application of voting and
ownership limitations imposed on ETP
Holders currently contained in the
certificate of incorporation of
Archipelago to OTP Holders and OTP
Firms, (y) delete the phrase ‘‘[f]or so
long as ArcaEx remains a Facility of
PCX and PCX Equities and the FSA
remains in full force and effect’’ from
each paragraph that contains such
language, which paragraphs shall
include paragraphs (C)(3)(y), (D)(2),
(D)(2)(a) and (H)(3) of Article FOURTH,
the third paragraph of Article EIGHTH,
the penultimate paragraph of Article
TENTH, Article THIRTEENTH, Article
FOURTEENTH, Article FIFTEENTH,
Article SIXTEENTH, Article
SEVENTEENTH and Article
NINETEENTH, and (z) incorporate into
Articles THIRTEENTH, FOURTEENTH,
SEVENTEENTH AND EIGHTEENTH, as
appropriate, the requirements set forth
in Section 6.8(e) of the proposed
Archipelago bylaw amendment; (b)
declare the advisability of such
amendments; and (c) direct such
amendments be submitted for
stockholder approval at the earlier of (1)
the 2006 annual meeting of Archipelago
stockholders and (2) the first meeting of
Archipelago stockholders to occur after
the closing of the Merger (other than any
meeting or meetings of Archipelago
stockholders convened for the purpose
of considering and approving the merger
of Archipelago and New York Stock
Exchange, Inc.). The Ownership and
Voting Agreement will provide that any
OTP Holder, OTP Firm or OTP
Associate that is subject to the
Ownership and Voting Agreement shall
vote, or authorize Archipelago to vote
76 Amended
Bylaws of Archipelago, Section
6.8(g).
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on its behalf, shares of Archipelago
stock owned by such OTP Holder, OTP
Firm or OTP Associate in favor of the
amendments to the certificate of
incorporation of Archipelago described
in (x) above.77
In addition, Archipelago undertakes
to take reasonable steps necessary to
cause Archipelago’s directors and
officers and those Archipelago
employees whose principal place of
business and residence is outside the
United States prior to accepting a
position as an officer, director or
employee, as applicable, of Archipelago
to consent in writing to the applicability
to them of the proposed Section
6.8(e)(iv) of the proposed Archipelago
bylaw amendment. Furthermore,
Archipelago undertakes that it will take
reasonable steps necessary to cause
Archipelago’s current directors and
officers and those current Archipelago
employees whose principal place of
business and residence is outside the
United States to consent in writing prior
to the consummation of the Merger to
the applicability to them of Section
6.8(e)(iv) of the proposed Archipelago
bylaw amendment.
e. Certain Additional Matters 78
(i) The Exchange is also requesting the
Commission’s approval for the
following temporary exceptions for the
following persons, each of whom would
be subject to and exceed the voting and
ownership limitations imposed by
Article Nine of the certificate of
incorporation of PCXH (as proposed to
be amended as described in this filing)
as of the date of the closing of the
Merger, so that such persons be
permitted to exceed such limitations
imposed by Article Nine to the
following extent and for the following
time periods:
(x) Archipelago may, until December
31, 2005, continue to own all of its
ownership interest in Wave Securities,
L.L.C., a broker-dealer and whollyowned subsidiary of Archipelago,
following the closing of its acquisition
of PCXH notwithstanding the terms of
the certificate of incorporation of PCXH,
as proposed to be amended as described
in this filing.
(y) Gerald D. Putnam, Chairman and
Chief Executive Officer of Archipelago,
may, until December 31, 2005, continue
to own in excess of 5% of Terra Nova
Trading, L.L.C. and continue to serve as
PCX Rule 3.4(c)(3).
PCX clarified that the Ownership and Voting
Agreement also would apply to OTP Associates,
and that such agreement would only require a vote
in favor of the amendments described in (x) above.
See August 4, 2005 Telephone Conversation.
78 See Amendment No. 1.
PO 00000
77 Proposed
Frm 00106
Fmt 4703
Sfmt 4703
a director of TAL Financial Services,
LLC following the closing of the
Archipelago’s acquisition of PCXH
notwithstanding the terms of the
certificate of incorporation of PCXH, as
proposed to be amended as described in
this filing.
(ii) In order to abide by the terms of
the certificate of incorporation of PCXH,
as proposed to be amended as described
in this filing, each of Kevin J.P. O’Hara,
Chief Administrative Officer and
General Counsel of Archipelago, and
Paul Adcock, Managing Director,
Trading, of Archipelago, shall resign
from the board of directors of White Cap
Trading LLC prior to the effective time
of the Merger.
2. Basis
The Exchange believes that this filing
is consistent with Section 6(b) 79 of the
Act, in general, and furthers the
objectives of Section 6(b)(1),80 in
particular, in that it enables the
Exchange to be so organized so as to
have the capacity to be able to carry out
the purposes of the Act and to comply,
and (subject to any rule or order of the
Commission pursuant to Section 17(d)
or 19(g)(2) of the Act) to enforce
compliance by its exchange members
and persons associated with its
exchange members, with the provisions
of the Act, the rules and regulations
thereunder, and the rules of the
Exchange. The Exchange also believes
that this filing furthers the objectives of
Section 6(b)(5),81 in particular, because
the rules summarized herein would
create a governance and regulatory
structure with respect to the operation
of the options business of PCX that is
designed to help prevent fraudulent and
manipulative acts and practices; to
promote just and equitable principals of
trade; to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities;
and 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.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
79 15
U.S.C. 78f(b).
U.S.C. 78f(b)(1).
81 15 U.S.C. 78f(b)(5).
80 15
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments on the proposed
rule change were neither solicited nor
received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period
(1) as the Commission may designate up
to 90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(2) as to which the Exchange consents,
the Commission will:
(A) By order approve such proposed
rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
The board of directors of PCXH and
the board of directors of PCX approved
the proposed amendment to the
certificate of incorporation of PCXH at
their respective meetings on June 1,
2005. The board of directors of PCX
approved this filing, including the
Proposed Rule Changes contained
therein, at its meeting on August 2,
2005. The board of directors of
Archipelago approved the proposed
amendment to the bylaws of
Archipelago at its meeting on July 18,
2005. In addition, PCXH will be
submitting the Amended Merger
Agreement to its stockholders for
approval. This vote is expected to occur
at a special meeting of PCXH
stockholders in September 2005. To the
extent necessary, the Exchange hereby
consents to an extension of the time
period specified in Section 19(b)(2) of
the Act until at least 35 days after the
Exchange has filed an appropriate
amendment to this filing setting forth
the completion of all such necessary
corporate actions.82
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, as amended, is consistent with
the Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
82 See
Amendment No. 1.
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12:20 Aug 17, 2005
Jkt 205001
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–PCX–2005–90 on the
subject line.
48621
94404, a Federal Licensee under the
Small Business Investment Act of 1958,
as amended (‘‘the Act’’), in connection
with the financing of a small concern,
has sought an exemption under Section
Paper Comments
312 of the Act and Section 107.730,
• Send paper comments in triplicate
Financings which Constitute Conflicts
to Jonathan G. Katz, Secretary,
of Interest of the Small Business
Securities and Exchange Commission,
Administration (‘‘SBA’’) Rules and
Station Place, 100 F Street, NE.,
Regulations (13 CFR 107.730). Telesoft
Washington, DC 20549–9303.
Partners II SBIC, L.P. proposes to
All submissions should refer to File
provide equity/debt security financing
Number SR–PCX–2005–90. This file
to CreekPath Systems, Inc. The
number should be included on the
financing is contemplated for working
subject line if e-mail is used. To help the capital and general corporate purposes.
Commission process and review your
The financing is brought within the
comments more efficiently, please use
purview of § 107.730(a)(1) of the
only one method. The Commission will Regulations because Telesoft Partners II
post all comments on the Commission’s QP, L.P., Telesoft Partners II, L.P. and
Internet Web site (https://www.sec.gov/
Telesoft NP Employee Fund, LLC, all
rules/sro.shtml). Copies of the
Associates of Telesoft Partners II SBIC,
submission, all subsequent
L.P., own more than ten percent of
amendments, all written statements
CreekPath Systems, Inc.
with respect to the proposed rule
Notice is hereby given that any
change that are filed with the
interested person may submit written
Commission, and all written
comments on the transaction to the
communications relating to the
Associate Administrator for Investment,
proposed rule change between the
U.S. Small Business Administration,
Commission and any person, other than 409 Third Street, SW., Washington, DC
those that may be withheld from the
20416.
public in accordance with the
Jaime Guzman-Fournier,
provisions of 5 U.S.C. 552, will be
Associate Administrator for Investment.
available for inspection and copying in
the Commission’s Public Reference
[FR Doc. 05–16350 Filed 8–17–05; 8:45 am]
Room. Copies of such filing also will be BILLING CODE 8025–01–P
available for inspection and copying at
the principal office of PCX. All
SMALL BUSINESS ADMINISTRATION
comments received will be posted
without change; the Commission does
[Disaster Declaration # 10142]
not edit personal identifying
information from submissions. You
Mississippi Disaster Number MS–
should submit only information that
00002
you wish to make available publicly. All
AGENCY: Small Business Administration.
submissions should refer to File
ACTION: Amendment 1.
Number SR–PCX–2005–90 and should
be submitted on or before September 8,
SUMMARY: This is an amendment of the
2005.
Presidential declaration of a major
For the Commission, by the Division of
disaster for Public Assistance Only for
Market Regulation, pursuant to delegated
the State of Mississippi (FEMA–1594–
83
authority.
DR), dated 07/10/2005.
Margaret H. McFarland,
Incident: Hurricane Dennis.
Deputy Secretary.
Incident Period: 07/10/2005 through
[FR Doc. E5–4510 Filed 8–17–05; 8:45 am]
07/15/2005.
Effective Date: 07/15/2005.
BILLING CODE 8010–01–P
Physical Loan Application Deadline
Date: 09/08/2005.
ADDRESSES: Submit completed loan
SMALL BUSINESS ADMINISTRATION
applications to: Small Business
Telesoft Partners II SBIC, L.P., License Administration, Disaster Area Office 3,
No. 09/79–0432; Notice Seeking
14925 Kingsport Road, Fort Worth, TX
Exemption Under Section 312 of the
76155.
Small Business Investment Act,
FOR FURTHER INFORMATION CONTACT: A.
Conflicts of Interest
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
Notice is hereby given that Telesoft
409 3rd Street, Suite 6050, Washington,
Partners II SBIC, L.P., 1450 Fashion
DC 20416.
Island Blvd., Suite 610, San Mateo, CA
SUPPLEMENTARY INFORMATION: The notice
83 17 CFR 200.30–3(a)(12).
of the President’s major disaster
PO 00000
Frm 00107
Fmt 4703
Sfmt 4703
E:\FR\FM\18AUN1.SGM
18AUN1
]]>Agencies
[Federal Register Volume 70, Number 159 (Thursday, August 18, 2005)]
[Notices]
[Pages 48611-48621]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-4510]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52249; File No. SR-PCX-2005-90]
Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of
Filing of Proposed Rule Change and Amendment No. 1 Thereto Relating to
the Certificate of Incorporation of PCX Holdings, Inc., PCX Rules and
Bylaws of Archipelago Holdings, Inc.
August 12, 2005.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934, as amended (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is
hereby given that on August 1, 2005, the Pacific Exchange, Inc.
(``PCX'' or the ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') the proposed rule change as
described in Items I, II and III below, which Items have been prepared
by the Exchange.\3\ On August 10, 2005, the Exchange filed Amendment
No. 1 (``Amendment No. 1'') to the proposed rule change.\4\ The
Commission is publishing this notice to solicit comments on the
proposed rule change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ At the request of PCX, the Commission made clarifications to
the description in Item II, as noted herein. Telephone conversations
between Kathryn Beck, Deputy General Counsel, PCX and Jennifer Dodd,
Special Counsel, Commission, Division of Market Regulation on August
4, 2005 (``August 4, 2005 Telephone Conversation'') and August 12,
2005 (``August 12, 2005 Telephone Conversation'').
\4\ In Amendment No. 1, the Exchange made certain corrections to
the descriptions in Items I, II and III and the proposed rule text.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
PCX submitted to the Commission (i) a proposed amendment to the
certificate of incorporation of PCX Holdings, Inc. (``PCXH''), the
parent company of the Exchange and its other operating subsidiaries,
(ii) proposed new PCX Rules 1.1(cc) through (gg), Rule 3.4 and Rule
13.2(a)(2)(E),\5\ which are intended to govern the ownership and voting
of the stock of Archipelago Holdings, Inc. (``Archipelago''), a
Delaware corporation that operates the equities trading facility of PCX
and PCX Equities, Inc. (``PCXE''), by OTP Holders and OTP Firms,\6\ and
(iii) a proposed amendment to the bylaws of Archipelago ((i), (ii) and
(iii) together, the ``Proposed Rule Changes''). The text of the
Proposed Rule Changes is available on PCX's Web site, https://
www.pacificex.com/, at PCX's Office of the Secretary, at the
Commission's Public Reference Room, and on the Commission's Web site,
https://www.sec.gov/rules/sro.shtml.
---------------------------------------------------------------------------
\5\ See Amendment No. 1.
\6\ PCX rules define an ``OTP Holder'' to mean any natural
person, in good standing, who has been issued an Options Trading
Permit (``OTP'') by the Exchange for effecting approved securities
transactions on the Exchange's trading facilities, or has been named
as a Nominee. PCX Rule 1.1(q). The term ``Nominee'' means an
individual who is authorized by an ``OTP Firm'' (a sole
proprietorship, partnership, corporation, limited liability company
or other organization in good standing who holds an OTP or upon whom
an individual OTP Holder has conferred trading privileges on the
Exchange's trading facilities) to conduct business on the Exchange's
trading facilities and to represent such OTP Firm in all matters
relating to the Exchange. PCX Rule 1.1(n).
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in sections A, B and C below, of the
most significant aspects of such statements.
[[Page 48612]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is submitting to the Commission the Proposed Rule
Changes in connection with Archipelago's proposed acquisition of PCXH.
On January 3, 2005, PCXH, Archipelago and New Apple Acquisitions
Corporation (the ``Merger Sub''), a newly formed wholly-owned
subsidiary of Archipelago, entered into an Agreement and Plan of Merger
(the ``Original Merger Agreement''), pursuant to which Archipelago has
agreed to acquire PCXH and all of its wholly owned subsidiaries,
including PCX and PCXE, by way of a merger under Delaware law (the
``Merger'') of the Merger Sub with and into PCXH, with PCXH as the
surviving corporation. On July 22, 2005, PCXH, Archipelago and Merger
Sub amended and restated the Original Merger Agreement to, among other
things, provide that the consideration payable to PCXH stockholders
would be made wholly in cash, and that, as contemplated by the Original
Merger Agreement, the measurement dates for purposes of valuing the
Archipelago stock held by PCXH would now be the ten consecutive trading
days ending on the last trading day prior to the closing date of the
Merger (as so amended, the ``Amended Merger Agreement'').
Pursuant to the Amended Merger Agreement, subject to appraisal
rights under Delaware law and other than with respect to treasury stock
of PCXH and PCXH common stock beneficially owned by Archipelago for
Archipelago's own account, each share of PCXH common stock issued and
outstanding immediately prior to the effective time of the Merger (the
``Effective Time'') will be converted into, and become exchangeable
for, an amount in cash equal to the quotient of the aggregate merger
consideration divided by the sum of the number of outstanding shares of
PCXH common stock and the number of shares to be issued upon the
exercise of all options at the consummation of the merger. The
aggregate merger consideration equals the sum of the value of the
shares of Archipelago common stock owned by PCX and its subsidiaries
and $17 million, subject to market fluctuations in the Archipelago
stock price and certain other adjustments pursuant to the Amended
Merger Agreement. The value of Archipelago common stock shall be
determined using the average of the per share closing prices for
Archipelago common stock for the ten consecutive trading days ending on
the last trading day prior to the closing date of the Merger. At the
Effective Time, all PCXH common stock will be cancelled or retired and
cease to exist.
As a result of the Merger, PCXH, as the surviving corporation in
the Merger, will become a direct, wholly-owned subsidiary of
Archipelago (the post-Merger PCXH will hereinafter be referred to as
the ``New PCXH''). The certificate of incorporation of PCXH as in
effect immediately prior to the Effective Time will, subject to
approval of the Commission, be amended pursuant to the Amended Merger
Agreement and as so amended, will be the certificate of incorporation
of the New PCXH. The bylaws of PCXH as in effect immediately prior to
the Effective Time will be the bylaws of the New PCXH, until thereafter
amended as provided therein or by applicable law. The directors of the
Merger Sub at the Effective Time will become directors of the New PCXH
and the officers of PCXH at the Effective Time will continue to be
officers of the New PCXH.
Except as described in the preceding paragraph or otherwise
approved by the Commission, the Merger will not affect the internal
corporate structure of PCXH or the regulatory relationship of PCX and
PCXE to Archipelago Exchange, L.L.C. (``ArcaEx''), the exclusive
equities trading facility of PCX and PCXE. PCX will remain a wholly-
owned subsidiary of the New PCXH, will continue operating the options
business of the Exchange and will retain the self-regulatory
organization function for the options business as well as for PCX's
equities business subsidiary, PCXE. After the Merger, except as
otherwise approved by the Commission, the board of directors of PCX
will continue to comply with the compositional requirements set forth
in the certificate of incorporation and bylaws of PCX. Except as
otherwise approved by the Commission, PCXE's operations, governance
structure, or rules will not be affected by the Merger. After the
Merger, except as otherwise approved by the Commission, the board of
directors of PCXE will continue to comply with the compositional
requirements set forth in the certificate of incorporation and bylaws
of PCXE. ArcaEx will remain the exclusive equities trading facility of
PCX and PCXE and the Amended and Restated Facility Services Agreement
among Archipelago, PCX and PCXE, dated as of March 22, 2002, which
currently governs the regulatory relationship of PCX and PCXE to ArcaEx
(the ``Facility Services Agreement''), will remain in full force and
effect in its current form.
a. Certificate of Incorporation of PCXH
(i) Proposed Amendments
In order to safeguard the independence of the self-regulatory
functions of PCX and protect the Commission's oversight
responsibilities, the certificate of incorporation of PCXH, which was
approved by the Commission on May 17, 2004 in connection with the
demutualization of the Exchange,\7\ imposes limitations on direct and
indirect changes in control of PCXH through various ownership and
voting restrictions placed on PCXH's capital stock. Specifically, the
certificate of incorporation of PCXH provides that no person,\8\ either
alone or together with its related persons,\9\ may own, directly or
indirectly, shares constituting more than 40% of the outstanding shares
of any class of PCXH capital stock,\10\ and that no person, either
alone or together with its related persons who is a trading permit
holder of PCX or an equities trading permit holder of PCXE, may own,
directly or indirectly, shares
[[Page 48613]]
constituting more than 20% of any class of PCXH capital stock.\11\
Furthermore, the certificate of incorporation of PCXH provides that,
for so long as PCXH controls, directly or indirectly, PCX, no person,
either alone or with its related persons, may directly or indirectly
vote or cause the voting of shares of PCXH capital stock or give any
proxy or consent with respect to shares representing more than 20% of
the voting power of the issued and outstanding PCXH capital stock, and
it also places limitations on the right of any person, either alone or
with its related persons, to enter into any agreement with respect to
the withholding of any vote or proxy.\12\ In order to permit
Archipelago to own 100% of the capital stock of the New PCXH upon
consummation of the Merger, PCX proposes to amend the certificate of
incorporation of PCXH to create an exception, with certain limitations,
for Archipelago and certain related persons of Archipelago from the
voting and ownership restrictions described above.
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\7\ Securities Exchange Act Release No. 49718 (May 17, 2005), 69
FR 29611 (May 24, 2005) (order approving proposed rule change and
notice of filing and order granting accelerated approval of
Amendment No. 1 thereto relating to the demutualization of PCX).
\8\ ``Person'' is defined to mean an individual, partnership
(general or limited), joint stock company, corporation, limited
liability company, trust or unincorporated organization, or any
governmental entity or agency or political subdivision thereof.
Restated Certificate of Incorporation of PCXH, Article Nine, Section
1(b)(iv).
\9\ The term ``related person,'' as defined in the Restated
Certificate of Incorporation of PCXH, means (i) with respect to any
person, all ``affiliates'' and ``associates'' of such person (as
such terms are defined in Rule 12b-2 under the Act); (ii) with
respect to any person constituting a trading permit holder of PCX or
an equities trading permit holder of PCXE, any broker dealer with
which such holder is associated; and (iii) any two or more persons
that have any agreement, arrangement or understanding (whether or
not in writing) to act together for the purpose of acquiring,
voting, holding or disposing of shares of the capital stock of PCXH.
Restated Certificate of Incorporation of PCXH, Article Nine, Section
1(b)(iv).
\10\ Restated Certificate of Incorporation of PCXH, Article
Nine, Section 1(b)(i). However, such restriction may be waived by
the Board of Directors of PCXH pursuant to an amendment to the
Bylaws of PCXH adopted by the Board of Directors, if, in connection
with the adoption of such amendment, the Board of Directors adopts a
resolution stating that it is the determination of such Board that
such amendment will not impair the ability of PCX to carry out its
functions and responsibilities as an ``exchange'' under the Act and
is otherwise in the best interests of PCXH and its stockholders and
PCX, and will not impair the ability of the Commission to enforce
said Act, and such amendment shall not be effective until approved
by said Commission; provided that the Board of Directors of PCXH
shall have determined that such Person and its Related Persons are
not subject to any applicable ``statutory disqualification'' (within
the meaning of Section 3(a)(39) of the Act). Restated Certificate of
Incorporation of PCXH, Article Nine, Sections 1(b)(i)(B) and
1(b)(i)(C).
\11\ Id., Article Nine, Section 1(b)(ii).
\12\ Id., Article Nine, Section 1(c).
---------------------------------------------------------------------------
Specifically, PCX proposes to add a new paragraph at the end of
Article Nine of the certificate of incorporation of PCXH, providing
that for so long as Archipelago directly owns all of the outstanding
capital stock of PCXH, the provisions of Article Nine, including the
ownership and voting limitations with respect to shares of PCXH capital
stock, shall not be applicable to the voting and ownership of shares of
PCXH capital stock by (i) except for prohibited persons (as defined
below), Archipelago, (ii) except for prohibited persons, any person
which is a related person (as such term is defined in the certificate
of incorporation of PCXH) of Archipelago, either alone or together with
its related persons, and (iii) except for prohibited persons, any other
person to which Archipelago is a related person, either alone or
together with its related persons.\13\
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\13\ Amended and Restated Certificate of Incorporation of PCXH,
Article Nine, Section 4.
---------------------------------------------------------------------------
``Prohibited persons'' is defined to mean any person which is, or
which has a related person which is (A) an OTP Holder or an OTP Firm
(as such terms are defined in the rules of PCX, as such rules may be in
effect from time to time) or (B) an ETP Holder,\14\ except for (1) any
broker or dealer approved by the Commission after June 20, 2005 to be a
facility (as defined in Section 3(a)(2) of the Act) of PCX; (2) any
person which has been approved by the Commission prior to it becoming
subject to the provisions of Article Nine of the certificate of
incorporation of PCXH with respect to the voting and ownership of
shares of PCXH capital stock by such person; and (3) any person which
is a related person of Archipelago solely by reason of beneficially
owning, either alone or together with its related persons, less than
20% of the outstanding shares of Archipelago capital stock (any person
covered by (1) through (3) is referred to as a ``permitted person'' in
the proposed amendment).\15\ The proposed Section 4 to Article Nine of
the certificate of incorporation of PCXH further provides that any
other prohibited person not covered by the definition of a permitted
person who would be subject to and exceed the voting and ownership
limitations imposed by Article Nine as of the date of the closing of
the Merger shall be permitted to exceed the voting and ownership
limitations imposed by Article Nine only to the extent and for the time
period approved by the Commission.\16\
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\14\ PCXE rules define an ``ETP Holder'' to mean any sole
proprietorship, partnership, corporation, limited liability company
or other organization in good standing that has been issued an
Equity Trading Permit, a permit issued by the PCXE for effecting
approved securities transactions on the trading facilities of PCXE.
PCXE Rule 1.1(n).
\15\ Amended and Restated Certificate of Incorporation and PCXH,
Article Nine, Section 4.
\16\ Id.
---------------------------------------------------------------------------
PCX believes that by creating a limited exemption from the voting
and ownership restrictions in the certificate of incorporation of PCXH,
the proposed amendment will permit the consummation of the Merger and
the continued ownership of PCXH by Archipelago after the Merger while
preserving the general applicability of such restrictions as they
currently exist, so that these restrictions may continue safeguarding
the independence of PCX's self-regulatory function and the Commission's
oversight responsibilities. In addition, PCX believes that by
eliminating prohibited persons from the exemption, other than those
approved by the Commission, it will prevent OTP Holders, OTP Firms and
ETP Holders (as such terms are defined in the rules of PCX, as such
rules may be amended from time to time) from acquiring, directly or
indirectly, a substantial number of outstanding shares of PCXH and
exercising undue influence over the operation of PCX, including its
self-regulatory functions, without proper oversight by the Commission.
(ii) Archipelago Securities, L.L.C.
In connection with the proposed amendment to the certificate of
incorporation of PCXH described above, the Exchange requests that the
Commission approve Archipelago Securities, L.L.C. (``Archipelago
Securities'') to be a facility (as defined in Section 3(a)(2) of the
Act) of PCX.
Archipelago Securities, a wholly-owned subsidiary of Archipelago,
is a registered broker-dealer, a member of the National Association of
Securities Dealers, Inc. (``NASD'') and an ETP Holder. Archipelago
Securities provides an optional routing service for ArcaEx, and, as
necessary, routes orders to other securities exchanges, facilities of
securities exchanges, automated trading systems, electronic
communications networks or other brokers or dealers (collectively,
``Market Centers'') from ArcaEx (such function of Archipelago
Securities is referred to as the ``Outbound Router''). In its capacity
as an Outbound Router, Archipelago Securities has operated as a
facility (as defined in Section 3(a)(2) of the Act) of PCX. It was
approved by the Commission as a facility (as defined in Section 3(a)(2)
of the Act) of PCXE on October 25, 2001 in connection with the
Commission's approval of the rules of PCX establishing ArcaEx as a
facility of PCXE.\17\
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\17\ See Self Regulatory Organizations; Order Approving Proposed
Rule Change by the Pacific Exchange, Inc., as Amended, and Notice of
Filing and Order Granting Accelerated Approval of Amendment Nos. 4
and 5 Concerning the Establishment of Archipelago Exchange as the
Equities Trading Facility of PCX Equities, Inc., Exchange Act
Release No. 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001)
(SR-PCX-00-25) (the ``Original Outbound Router Release''). The name
of the order routing broker-dealer was originally Wave Securities,
L.L.C. as approved by the Commission in the Original Outbound Router
Release.
---------------------------------------------------------------------------
Archipelago intends to continue to own and operate Archipelago
Securities following the closing of the Merger. The proposed operation
of Archipelago Securities as an Outbound Router after the closing of
the Merger will not change from the way it is administered and operated
today.\18\ As an Outbound Router, Archipelago Securities will continue
to receive instructions from ArcaEx, route orders to other Market
Centers in accordance with those instructions and be responsible for
reporting resulting executions back to ArcaEx.\19\ In addition, all
orders routed through Archipelago Securities would
[[Page 48614]]
remain subject to the terms and conditions of PCXE rules.\20\
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\18\ See, e.g., Original Outbound Router Release, at 55233-55235
(describing the operation of the order routing broker-dealer
approved by the Commission).
\19\ See Original Outbound Router Release, at 55234.
\20\ See Archipelago Securities Routing Agreement, https://
www.tradearca.com/exchange/pdfs/ETPApplication.pdf (last visited
July 21, 2005).
---------------------------------------------------------------------------
PCX and PCXE currently regulate the Outbound Router function of
Archipelago Securities as a facility (as defined in Section 3(a)(2) of
the Act) subject to Section 6 of the Act. As such, the Outbound Router
function of Archipelago Securities is subject to the Commission's
continuing oversight. In particular, and without limitation, under the
Act, PCX is responsible for filing with the Commission rule changes and
fees relating to the Archipelago Securities Outbound Router function,
and Archipelago Securities is subject to exchange non-discrimination
requirements.\21\
---------------------------------------------------------------------------
\21\ See, e.g., Section 6(b)(5) of the Act, 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Pursuant to Rule 17d-1 under the Act, where a member of the
Securities Investor Protection Corporation is a member of more than one
self-regulatory organization (``SRO''), the Commission shall designate
to one of such organizations the responsibility for examining such
member for compliance with the applicable financial responsibility
rules.\22\ The SRO so designated by the Commission is referred to as a
``Designated Examining Authority.'' Archipelago Securities is a member
of two SROs, PCX and the NASD. The NASD is an SRO not affiliated with
Archipelago or any of its affiliates (including, without limitation,
PCX and PCXE) and it has been designated by the Commission as the
Designated Examining Authority for Archipelago Securities pursuant to
Rule 17d-1 of the Act with the responsibility for examining Archipelago
Securities for compliance with the applicable financial responsibility
rules. Furthermore, under an agreement between NASD and PCX originally
entered into on May 27, 1977 pursuant to Rule 17d-2 \23\ under the Act
(the agreement was amended on February 1, 1980, and as so amended, the
``NASD PCX Agreement''), there is currently a plan in place allocating
to the NASD the responsibility to receive regulatory reports from
Archipelago Securities, to examine Archipelago Securities for
compliance and to enforce compliance by Archipelago Securities with the
Act, the rules and regulations thereunder and the rules of the NASD,
and to carry out other specified regulatory functions with respect to
Archipelago Securities.
---------------------------------------------------------------------------
\22\ 17 CFR 240.17d-1. Pursuant to Rule 17d-1 under the Act, in
making such designation the Commission shall take into consideration
the regulatory capabilities and procedures of the SROs, availability
of staff, convenience of location, unnecessary regulatory
duplication, and such other factors as the Commission may consider
germane to the protection of investors, the cooperation and
coordination among self-regulatory organizations, and the
development of a national market system for the clearance and
settlement of securities transactions.
\23\ Rule 17d-2 provides that any two or more SROs may file with
the Commission a plan for allocating among such SROs the
responsibility to receive regulatory reports from persons who are
members or participants of more than one of such SROs to examine
such persons for compliance, or to enforce compliance by such
persons, with specified provisions of the Act, the rules and
regulations thereunder, and the rules of such SROs, or to carry out
other specified regulatory functions with respect to such persons.
17 CFR 240.17d-2.
---------------------------------------------------------------------------
ETP Holders' use of Archipelago Securities to route orders to
another Market Center is currently optional, and will remain optional
after the closing of the Merger. Those ETP Holders who choose to use
the Outbound Routing service of Archipelago Securities must sign an
Archipelago Securities Routing Agreement. Importantly, among other
things, the Archipelago Securities Routing Agreement provides that all
orders routed through Archipelago Securities are subject to the terms
and conditions of PCXE rules.\24\
---------------------------------------------------------------------------
\24\ See Archipelago Securities Routing Agreement, https://
www.tradearca.com/exchange/pdfs/ETPApplication.pdf (last visited
July 21, 2005).
---------------------------------------------------------------------------
PCX and Archipelago recognize that after the closing of the Merger
such continued ownership and operation by Archipelago of Archipelago
Securities--by virtue of Archipelago Securities being an ETP Holder and
a related person of Archipelago \25\--would be in violation of the
current and proposed limitations \26\ to be set forth in the
certificate of incorporation of PCXH described above, unless
Archipelago Securities is approved by the Commission after June 20,
2005 to be a facility of PCXE \27\ in accordance with the terms of the
proposed amendment to the certificate of incorporation of PCXH
described above.
---------------------------------------------------------------------------
\25\ At the request of the Exchange the Commission deleted the
phrase ``as an Outbound Router.'' See August 4, 2005 Telephone
Conversation.
\26\ The Exchange clarified that the ownership and operation by
Archipelago of Archipelago Securities would violate the current, as
well as the proposed, limitations in the certificate of
incorporation of PCXH, unless approved by the Commission after June
20, 2005 to be a facility of PCXE. See August 12, 2005 Telephone
Conversation.
\27\ See Amendment No. 1.
---------------------------------------------------------------------------
PCX and Archipelago further recognize that the ownership of both
PCX and Archipelago Securities by Archipelago may pose a conflict of
interest between the regulatory responsibilities of PCX and PCXE and
the broker or dealer activities of Archipelago Securities. This is
because the financial interests of Archipelago may conflict with the
responsibilities of PCX and PCXE as an SRO regarding Archipelago
Securities.
PCX and Archipelago believe, however, that such conflict may be
mitigated with the following proposed undertakings of Archipelago, PCX
and Archipelago Securities.\28\
---------------------------------------------------------------------------
\28\ The Exchange clarified that the undertakings of PCX should
also be included. See August 12, 2005 Telephone Conversation.
---------------------------------------------------------------------------
(x) Proposed Undertakings
Each of Archipelago, PCX and Archipelago Securities undertakes as
follows:
(1) PCX will regulate the Outbound Router function of Archipelago
Securities as a facility (as defined in Section 3(a)(2) of the Act),
subject to Section 6 of the Act. In particular, and without limitation,
under the Act, PCX will be responsible for filing with the Commission
rule changes and fees relating to the Archipelago Securities Outbound
Router function and Archipelago Securities will be subject to exchange
non-discrimination requirements.
(2) Currently, NASD, an SRO unaffiliated with Archipelago or any of
tis affiliates (including, without limitation, PCX or PCXE), carries
out oversight and enforcement responsibilities as the Designated
Examining Authority designated by the Commission pursuant to Rule 17d-1
of the Act with the responsibility for examining Archipelago Securities
for compliance with the applicable financial responsibility rules.\29\
---------------------------------------------------------------------------
\29\ See Amendment No. 1.
---------------------------------------------------------------------------
(3) The NASD PCX Agreement will stay in full force and effect and
PCX will continue to abide by the terms of such agreement.\30\
Furthermore, PCX undertakes to amend the agreement to expand the scope
of NASD's regulatory functions so as to encompass all of the regulatory
oversight and enforcement responsibilities with respect to Archipelago
Securities pursuant to applicable laws, except for real-time market
surveillance.
---------------------------------------------------------------------------
\30\ Id.
---------------------------------------------------------------------------
(4) An ETP Holder's or OTP Holder's use of Archipelago Securities
to route orders to another Market Center will continue to be optional.
Any ETP Holder or OTP Holder that does not want to use Archipelago
Securities may use other routers to route orders \31\ to other Market
Centers.\32\
---------------------------------------------------------------------------
\31\ Id.
\32\ An ETP Holder may chose to route an order to ArcaEx that,
if not executable on ArcaEx, will be cancelled and returned to the
ETP Holder, at which time the ETP Holder could chose to route the
order to another market. See August 4, 2005 Telephone Conversation.
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[[Page 48615]]
(5) Archipelago Securities will not engage in any business other
than its Outbound Router function (including, in that function, the
self-clearing functions that it currently performs for trades with
respect to orders routed to other Market Centers and the clearing
functions that it may perform for trades with respect to orders for
securities not trades on any securities exchange) \33\ and any other
activities it may engage in as approved by the Commission.
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\33\ See Amendment No. 1.
---------------------------------------------------------------------------
The above undertakings of Archipelago, PCX and Archipelago
Securities would become effective at the effective time of the Merger.
(y) Request for Approval
In sum, PCX and Archipelago believe that the proposed undertakings
of Archipelago, PCX and Archipelago Securities set forth above would
address the potential conflict of interest with the regulatory
responsibilities of PCX and PCXE and the continued ownership and
operation of Archipelago Securities by Archipelago after the closing of
the Merger.\34\ Consequently, subject to the proposed undertakings of
Archipelago, PCX and Archipelago Securities set forth above, PCX and
Archipelago request that the Commission approve Archipelago Securities
to be a facility (as defined in Section 3(a)(2) of the Act) \35\ of
PCX.
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\34\ Id.
\35\ 15 U.S.C. 78c(a)(2).
---------------------------------------------------------------------------
b. Proposed PCX Rules
Archipelago is a public company whose common stock is listed on PCX
for trading on ArcaEx. The certificate of incorporation of Archipelago,
which was approved by the Commission on August 9, 2004 prior to the
initial public offering of Archipelago common stock,\36\ currently
contains certain provisions intended to ensure that the ownership of
Archipelago by the public will not unduly interfere with or restrict
the ability of the Commission or PCX to effectively carry out their
regulatory oversight responsibilities under the Act, with respect to
ArcaEx, and generally to enable ArcaEx to operate in a manner that
complies with the federal securities laws, including furthering the
objectives of Section 6(b)(5) of the Act.\37\ Some of these provisions
impose ownership and voting limitations on Archipelago's stockholders
and their related persons,\38\ including persons who are ETP Holders
and the broker-dealers with whom such ETP Holders are associated.\39\
In order to ensure that upon consummation of the Merger, the public
company nature of Archipelago will not unduly interfere with or
restrict the regulatory oversight responsibilities of the Commission or
PCX with respect to the options business and the general compliance of
the operations of the options business with federal securities laws,
PCX proposes to impose on any OTP Holder or OTP Firm, that is not an
ETP Holder, voting and ownership limitations that are analogous to
those imposed on ETP Holders by the certificate of incorporation of
Archipelago. In addition, PCX proposes to require such OTP Holder and
OTP Firm, as well as ``associated persons'' (as such term is defined in
Section 3(a)(18) of the Act) \40\ of such OTP Holder or OTP Firm, to
enter into an agreement with PCX and Archipelago within certain
specific time periods set forth in the proposed PCX rules, pursuant to
which such OTP Holder, OTP Firm and any person who is deemed an
``associated person'' (as such term is defined in Section 3(a)(18) of
the Act) of such OTP Holder or OTP Firm (such persons are referred to
in this filing as ``OTP Associates'') would agree to comply with the
ownership and voting limitations imposed by the proposed PCX rules, to
authorize Archipelago to vote their shares of Archipelago stock in
favor of amendments to the certificate of incorporation of Archipelago
that incorporate such ownership and voting limitations, and to be
subject to the disciplinary action in the proposed PCX rules if they
violate any of the ownership or voting limitations or fail to enter
into such ownership and voting agreement (such agreement, the
``Ownership and Voting Agreement''). Under the proposed PCX rules,
failure to comply with the ownership and voting limitations or failure
to enter into the Ownership and Voting Agreement will subject the
responsible OTP Holder or OTP Firm to the possible suspension of all
trading rights and privileges. The proposed PCX Rules 1.1(cc) through
(gg), Rule 3.4 and Rule 13.2(a)(2)(E) are summarized below.
---------------------------------------------------------------------------
\36\ Securities Exchange Act Release No. 50170 (August 9, 2004),
69 FR 50419 (August 16, 2004) (SR-PCX-2004-56) (order granting
approval of proposed rule change and notice of filing and order
granting accelerated approval to Amendment No. 1 to the proposed
rule change by the Pacific Exchange, Inc. relating to the
Certificate of Incorporation and Bylaws of Archipelago).
\37\ Id.
\38\ The term ``related persons,'' as defined in the Certificate
of Incorporation of Archipelago, means with respect to any person:
(a) Any other person(s) whose beneficial ownership of shares of
stock of Archipelago with the power to vote on any matter would be
aggregated with such first person's beneficial ownership of such
stock or deemed to be beneficially owned by such first person
pursuant to Rules 13d-3 and 13d-5 under the Act; (b) in the case of
a person that is a natural person, for so long as ArcaEx remains a
facility of PCX and PCXE and the Facility Services Agreement is in
full force and effect, any broker or dealer that is an ETP Holder
with which such natural person is associated; (c) in the case of a
person that is an ETP Holder, for so long as ArcaEx remains a
facility of PCX and PCXE and the Facility Services Agreement is in
full force and effect, any broker or dealer with which such ETP
Holder is associated; (d) any other person(s) with which such person
has any agreement, arrangement or understanding (whether or not in
writing) to act together for the purpose of acquiring, voting,
holding or disposing of shares of the stock of Archipelago; and (e)
in the case of a person that is a natural person, any relative or
spouse of such person, or any relative of such spouse, who has the
same home as such person or who is a director or officer of
Archipelago or any of its parents or subsidiaries. Certificate of
Incorporation of Archipelago, Article FOURTH, paragraph H(3).
\39\ Certificate of Incorporation of Archipelago, Article
FOURTH, paragraphs (C) and (D).
\40\ Pursuant to Section 3(a)(18) of the Act, the term
``associated person of a broker or dealer'' means any partner,
officer, director, or branch manager of such broker or dealer (or
any person occupying a similar status or performing similar
functions), any person directly or indirectly controlling,
controlled by or under common control with such broker or dealer, or
any employee of such broker or dealer, except that such term does
not include any person associated with a broker or dealer whose
functions are solely clerical or ministerial. 15 U.S.C. 78c(a)(18).
---------------------------------------------------------------------------
(i) Ownership and Voting Limitations
The proposed PCX rules provide that for as long as Archipelago
shall control, directly or indirectly, PCX, no OTP Holder or OTP Firm,
either alone or with its related persons, shall own beneficially shares
of Archipelago stock representing in the aggregate more than 20% of the
then outstanding votes entitled to be cast on any matter (the
``Ownership Limitation'').\41\ ``Related persons'' is defined to mean,
with respect to any OTP Holder or OTP Firm: (a) Any broker or dealer
with which such OTP Holder or OTP Firm is associated; (b) any natural
person who is an associated person of such OTP Firm; (c) any other
person(s) \42\ whose beneficial ownership of shares of stock of
Archipelago with the power to vote on any matter would be aggregated
with the OTP Holder's or OTP Firm's beneficial ownership of such stock
or deemed to be beneficially owned by such OTP Holder or OTP Firm
pursuant to Rules 13d-3 and 13d-5 under the Act; \43\ (d) any other
person(s) with
[[Page 48616]]
which such OTP Holder or OTP Firm has any agreement, arrangement or
understanding (whether or not in writing) to act together for the
purpose of acquiring, voting, holding or disposing of shares of the
stock of Archipelago; and (e) with respect to any OTP Holder and any
person described in (a) to (d) above who is a natural person, any
relative or spouse of such person, or any relative of such spouse, who
has the same home as such person or who is a director or officer of
Archipelago or any of its parents or subsidiaries.\44\ PCX and
Archipelago believe that stockholders of Archipelago, including OTP
Holders, OTP Firms and their related persons who own Archipelago stock,
will be able to effectively monitor their shareholdings in Archipelago
using systems they already have in place.
---------------------------------------------------------------------------
\41\ Proposed PCX Rule 3.4(a).
\42\ PCX Rule 1.1(v) defines ``Person'' to mean a natural
person, corporation, partnership, limited liability company,
association, joint stock company, trustee of a trust fund, or any
organized group of persons whether incorporated or not. PCX Rule
1.1(v).
\43\ PCX believes that this definition, by incorporating a
``beneficial ownership'' concept, will help PCX to monitor ownership
of the common stock of Archipelago by monitoring filings on
Schedules 13D and 13G by stockholders of Archipelago. PCX further
believes that the definition of ``beneficial ownership'' used will
cover persons which control, are controlled by or are under common
control with an OTP Holder or an OTP firm.
\44\ Proposed PCX Rule 1.1(gg). The proposed Rule 1.1(gg)
further provides that ``related persons'' includes, with respect to
any OTP Holder or OTP Firm: (1) any other person beneficially owning
pursuant to Rules 13d-3 and 13d-5 under the Act shares of
Archipelago stock with the power to vote on any matter that also are
deemed to be beneficially owned by such OTP Holder or OTP Firm
pursuant to Rules 13d-3 and 13d-5 under the Act; (2) any other
person that would be deemed to own beneficially pursuant to Rules
13d-3 and 13d-5 under the Act shares of Archipelago stock with the
power to vote on any matter that are beneficially owned directly or
indirectly by such OTP Holder or OTP Firm pursuant to Rules 13d-3
and 13d-5 under the Act; and (3) any additional person through which
such other person would be deemed to directly or indirectly own
beneficially pursuant to Rules 13d-3 and 13d-5 under the Act shares
of Archipelago stock with the power to vote on any matter.
---------------------------------------------------------------------------
For purposes of the Ownership Limitation, no OTP Holder or OTP Firm
shall be deemed to have any agreement, arrangement or understanding to
act together with respect to voting shares of stock of Archipelago
solely because such OTP Holder, OTP Firm or any of their related
persons, has or shares the power to vote or direct the voting of such
shares of stock pursuant to a revocable proxy given in response to a
public proxy or consent solicitation conducted pursuant to, and in
accordance with, Regulation 14A promulgated pursuant to the Act, except
if such power (or the arrangements relating thereto) is then reportable
under Item 6 of Schedule 13D under the Act (or any similar provision of
a comparable or successor report).\45\
---------------------------------------------------------------------------
\45\ Proposed PCX Rule 3.4(a).
---------------------------------------------------------------------------
In addition to the Ownership Limitation, the proposed PCX rules
provide that for as long as Archipelago shall control, directly or
indirectly, PCX, no OTP Holder or OTP Firm, either alone or together
with its related persons, shall (1) have the right to vote, vote or
cause the voting of shares of stock of Archipelago to the extent such
shares represent in the aggregate more than 20% of the then outstanding
votes entitled to be cast on any matter (the ``Voting Limitation'') or
(2) enter into any agreement, plan or arrangement not to vote shares,
the effect of which agreement, plan or arrangement would be to enable
any person, either alone or with its related persons, to vote or cause
the voting of shares that would represent in the aggregate more than
20% of the then outstanding votes entitled to be cast on any matter
(the ``Nonvoting Agreement Prohibition'').\46\
---------------------------------------------------------------------------
\46\ Proposed PCX Rule 3.4(b).
---------------------------------------------------------------------------
The Voting Limitation and Nonvoting Agreement Prohibition shall not
apply to (1) any solicitation of any revocable proxy from any
stockholder of Archipelago by or on behalf of Archipelago or by an
officer or director of Archipelago acting on behalf of Archipelago or
(2) any solicitation of any revocable proxy from any stockholder of
Archipelago by any other stockholder that is conducted pursuant to, and
in accordance with, Regulation 14A promulgated pursuant to the Act.\47\
---------------------------------------------------------------------------
\47\ Id.
---------------------------------------------------------------------------
(ii) Ownership and Voting Agreement
The proposed PCX Rule 3.4 also requires certain OTP Holders and OTP
Firms that are not ETP Holders, and certain OTP Associates,\48\ to
enter into an Ownership and Voting Agreement with PCX and Archipelago,
which Ownership and Voting Agreement shall provide that for as long as
Archipelago shall control, directly or indirectly, PCX: (i) No OTP
Holder or OTP Firm, either alone or with its related persons, shall, at
any time, own beneficially shares of Archipelago stock in excess of the
Ownership Limitation; (ii) no OTP Holder or OTP Firm, either alone or
together with its related persons, shall have the right to vote, vote
or cause the voting of shares of Archipelago stock, in person or by
proxy or through any voting agreement or other arrangement, in excess
of the Voting Limitation; and (iii) no OTP Holder or OTP Firm, either
alone or together with its related persons, shall enter into any
agreement, plan or other arrangement relating to shares of Archipelago
stock entitled to vote on any matter with any other person, either
alone or with its related persons, in contravention of the Nonvoting
Agreement Prohibition.\49\ In addition, the Ownership and Voting
Agreement provides that each OTP Holder, OTP Firm and OTP Associate who
is party to such agreement shall agree to be subject to the
implementation provisions imposed by the proposed PCX Rule 3.4(d),
which are also going to be set forth in the Ownership and Voting
Agreement; \50\ these provisions are described in more detail below.
---------------------------------------------------------------------------
\48\ PCX clarified that only certain OTP Holders, OTP Firms and
OTP Associates would be required to enter into the Ownership and
Voting Agreement. See August 4, 2005 Telephone Conversation and text
accompanying note 51, infra, for a discussion of which OTP Holders,
OTP Firms, and OTP Associates would be required to enter into an
Ownership and Voting Agreement.
\49\ Proposed PCX Rule 3.4(c).
\50\ Id.
---------------------------------------------------------------------------
Finally, the Ownership and Voting Agreement provides that each OTP
Holder, OTP Firm and OTP Associate who is party to such agreement shall
vote, or authorize Archipelago to vote on their behalf, shares of
Archipelago stock owned by such OTP Holder, OTP Firm or OTP Associate,
as appropriate, in favor of amendments to the certificate of
incorporation of Archipelago that incorporate ownership and voting
limitations that are substantially similar to the Ownership Limitation,
Voting Limitation and Nonvoting Agreement Prohibition set forth in the
proposed Rules 3.4(a) and 3.4(b), as well as implementation provisions
imposed by the proposed PCX Rule 3.4(d).\51\ The Ownership and Voting
Agreement shall be governed by Delaware law.\52\
---------------------------------------------------------------------------
\51\ Proposed PCX Rule 3.4(c)(3).
\52\ Proposed PCX Rule 3.4(c)(5).
---------------------------------------------------------------------------
Under the proposed PCX rules, the OTP Holders, OTP Firms and OTP
Associates who are required to enter into the Ownership and Voting
Agreement have to do so within certain specified time periods set forth
in the proposed rules. Specifically, in the case of an OTP Holder, OTP
Firm or OTP Associate which is not an ETP Holder and which (x) owns
beneficially any shares of Archipelago stock or (y) has entered into
any agreement, plan or other arrangement relating to the voting or
ownership of any shares of Archipelago stock, at the time of the
closing of the Merger, such person will be required to enter into the
Ownership and Voting Agreement no later than 30 calendar days following
the date of closing of the Merger; in the case of any OTP Holder, OTP
Firm or OTP Associate which is not required to enter into an Ownership
and Voting Agreement pursuant to the above clause, the Ownership and
Voting Agreement has to be entered into no later than the fifth
calendar day following the date on which: (x) such OTP Holder, OTP Firm
or OTP Associate ceases being an ETP
[[Page 48617]]
Holder and (A) owns or acquires beneficial ownership of any shares of
Archipelago stock or (B) is a party to or enters into any agreement,
plan or other arrangement relating to the voting or ownership of any
shares of Archipelago stock; or (y) such OTP Holder, OTP Firm or OTP
Associate which is not an ETP Holder (A) acquires beneficial ownership
of any shares of Archipelago stock or (B) enters into any agreement,
plan or other arrangement relating to the voting or ownership of any
shares of Archipelago stock.\53\
---------------------------------------------------------------------------
\53\ Proposed PCX Rule 3.4(c).
---------------------------------------------------------------------------
The ownership and voting limitations contained in the proposed PCX
Rule 3.4 and the Ownership and Voting Agreement required by the
proposed PCX Rule 3.4 are designed to impose on OTP Holders, OTP Firms
and their related persons restrictions that are similar to those that
are currently contained in the certificate of incorporation of
Archipelago with respect to ETP Holders and their related persons. The
corresponding provisions in the certificate of incorporation of
Archipelago are designed to prevent any ETP Holder or any ETP Holders
acting together, from exercising undue control over the operation of
Archipelago and, therefore, ArcaEx. PCX believes that by extending the
same restrictions to OTP Holders and OTP Firms as well as their related
persons, the proposed rule would accomplish the same objectives with
respect to the options business of PCX. Specifically, PCX believes that
the proposed rules would deter any OTP Holder or OTP Firm, either alone
or together with its related persons, from accumulating a substantial
number of outstanding votes entitled to be cast on any matter without
Commission review. PCX believes that the imposition of such 20%
ownership and voting limitations would help ensure that Archipelago,
and therefore PCX, would not be subject to undue influence from an OTP
Holder or OTP Firm, or a group of OTP Holders or OTP Firms that control
a substantial number of outstanding votes entitled to be cast on any
matter that may be adverse to PCX's or the Commission's regulatory
oversight responsibilities. The proposed voting limitations, along with
the related ownership limitation, would serve to protect the integrity
of PCX's and the Commission's regulatory oversight responsibilities and
would allow PCX to review the acquisition of substantial voting power
of Archipelago, and therefore PCX and PCXE, by any OTP Holder, OTP Firm
and their related persons.
(iii) Certain Matters Related to the Implementation of the Ownership
and Voting Limitations
The proposed PCX Rule 3.4(d) provides that in the event that any
OTP Holder or OTP Firm, either alone or with its related persons
(including any related persons who are OTP Associates of such OTP
Holder or OTP Firm), at any time owns beneficially shares of
Archipelago stock in excess of the Ownership Limitation, Archipelago
shall promptly call from such OTP Holder or OTP Firm, or an OTP
Associate of such OTP Holder or OTP Firm, at a price per share equal to
the par value thereof, shares of Archipelago stock owned by such OTP
Holder, OTP Firm or OTP Associate that are necessary to decrease the
beneficial ownership of such OTP Holder or OTP Firm, either alone or
with its related persons, to 20% of the then outstanding votes entitled
to be cast on any matter after giving effect to the redemption of the
shares of Archipelago stock.\54\
---------------------------------------------------------------------------
\54\ Proposed PCX Rule 3.4(d)(1). For purposes of illustration,
if there are 1,000,000 votes entitled to be cast in total and an OTP
Holder acquires beneficial ownership of shares of Archipelago stock
representing in the aggregate 300,000 votes, then Archipelago has to
call such number of shares from such OTP Holder so that the number
of votes that the OTP Holder beneficially owns after giving effect
to the reduction in such OTP Holder's stake and the consequent
reduction in the total number of votes entitled to be cast, is not
more than 20% of the new total number of votes entitled to be cast.
Thus, using the number provided in this example, Archipelago would
have to call shares of Archipelago stock representing in the
aggregate 125,000 votes, leaving the OTP Holder with shares of
Archipelago stock representing in the aggregate 175,000 votes, or
20% of the new 875,000 votes entitled to be cast in total.
In addition, assuming there is a second OTP Holder who
beneficially owns shares of Archipelago stock representing 190,000
votes, the calling of the shares of the first OTP Holder described
above would result in an increase of the second OTP Holder's
ownership from 19% to 21.7%. In this scenario, Archipelago would
have to call shares of Archipelago stock representing 20,000 votes
from the second OTP Holder and additional shares representing 5,000
votes from the first OTP Holder (for a total of 130,000 shares
called from the first OTP Holder) such that upon completion of these
calls, each of these two OTP Holders owns shares of Archipelago
stock representing 170,000 votes, or 20% of the new 850,000 votes
entitled to be cast in total.
The proposed PCX Rule 3.4(d)(1) further provides that in the
event Archipelago shall call shares of Archipelago stock pursuant to
the proposed PCX Rule 3.4(d)(1), notice of such call shall be given
promptly by first-class mail, postage prepaid to the holders of the
shares of Archipelago stock to be so called (such holders shall
include holders whose ownership of Archipelago stock exceeded the
20% ownership limitation solely as a result of the reduction in the
total number of outstanding votes due to calls of shares of
Archipelago stock from other stockholders), at such holders'
addresses as the same appears on the stock register of Archipelago.
Each such notice shall state: (a) The call date; (b) the number of
shares to be called; (c) the aggregate call price; and (d) the place
or places where shares are to be surrendered for payment of the call
price. Failure to give notice as aforesaid, or any defect therein,
shall not affect the validity of the call of the shares. From and
after the call date (unless default shall be made by Archipelago in
providing funds for the payment of the call price), shares which
have been called as aforesaid shall be cancelled, shall no longer be
deemed to be outstanding, and all rights of the holder of such
shares as a stockholder of Archipelago (except the right to receive
from Archipelago the call price against delivery to Archipelago of
evidence of ownership of such shares) shall cease. Upon surrender in
accordance with said notice of evidence of ownership of the shares
of Archipelago stock so called (properly assigned for transfer, if
the board of directors of Archipelago shall so require and the
notice shall so state), such shares shall be called by Archipelago
at par value.
---------------------------------------------------------------------------
In addition, if any OTP Holder or OTP Firm, either alone or with
its related persons (including any related persons who are OTP
Associates of such OTP Holder or OTP Firm), acquires the right to vote
more than 20% of the then outstanding votes entitled to be cast by
stockholders of Archipelago on any matter, Archipelago shall have the
right to vote and shall vote such shares of Archipelago stock owned by
such OTP Holder, OTP Firm, or an OTP Associate of such OTP Holder or
OTP Firm, in excess of the 20% voting limitation in proportion with the
results of voting (excluding such excess shares) for such matter at a
meeting of Archipelago stockholders.\55\
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\55\ Proposed PCX Rule 3.4(d)(2). For example, if, with respect
to a particular proposal submitted to stockholder vote, 60% of the
vote cast by Archipelago stockholders (excluding the excess shares)
was in favor of the proposal and 40% of the vote cast by Archipelago
stockholders (excluding the excess shares) was against the proposal,
Archipelago would vote 60% of the excess shares in favor of the
proposal and 40% of the excess shares against the proposal. See
Amendment No. 1.
---------------------------------------------------------------------------
Furthermore, the proposed PCX rules provide that in the event of
any violation by any OTP Holder or OTP Firm of the Ownership
Limitation, Voting Limitation or Nonvoting Agreement Prohibition
(including, without limitation, any failure of an OTP Holder, OTP Firm
or OTP Associate to enter into the Ownership and Voting Agreement as
required by the proposed Rule 3.4(c) within the applicable time periods
specified therein or any breach of the Ownership and Voting Agreement
by an OTP Holder, OTP Firm or OTP Associate which is a party thereto),
the Exchange shall suspend all trading rights and privileges of such
OTP Holder or OTP Firm in accordance with proposed PCX Rule
13.2(a)(2)(E), subject to the procedures provided therein.\56\
---------------------------------------------------------------------------
\56\ Proposed PCX Rule 3.4(d)(3).
---------------------------------------------------------------------------
The proposed PCX Rule 13.2(a)(2)(E) provides that in the event of
any such failure to comply with Rule 3.4, the Exchange shall: (1)
Provide notice to the
[[Page 48618]]
applicable OTP Holder or OTP Firm within five business days of learning
of the failure to comply; (2) allow the applicable OTP Holder, OTP Firm
or OTP Associate of such OTP Holder or OTP Firm fifteen calendar days
to cure any such failure to comply; (3) in the event that the
applicable OTP Holder, OTP Firm or OTP Associate of such OTP Holder or
OTP Firm does not cure such failure to comply within such fifteen
calendar day cure period, schedule a hearing to occur within thirty
calendar days following the expiration of such fifteen calendar day
cure period; and (4) render its decision as to the suspension of all
trading rights and privileges of the applicable OTP Holder or OTP Firm
no later than ten calendar days following the date of such hearing.\57\
---------------------------------------------------------------------------
\57\ 57 Proposed PCX Rule 13.2(a)(2)(E).
---------------------------------------------------------------------------
Finally, the proposed PCX rules provide that in the event any OTP
Holder or OTP Firm, either alone or with its related persons (including
any related person that is an OTP Associate of such OTP Holder or OTP
Firm), has cast votes, in person or by proxy or through any voting
agreement or other arrangement, in excess of the Voting Limitation,
Archipelago may bring suit in a court of competent jurisdiction against
such OTP Holder, OTP Firm or OTP Associates seeking enforcement of the
Voting Limitation.\58\
---------------------------------------------------------------------------
\58\ Proposed PCX Rule 3.4(d)(4).
---------------------------------------------------------------------------
c. Bylaws of Archipelago
(i) Duration of Certain Bylaw Provisions
With respect to the ownership and voting limitations in the
certificate of incorporation of Archipelago that apply specifically to
ETP Holders and their related persons (as opposed to stockholders of
Archipelago in general) and certain other provisions of the certificate
of incorporation of Archipelago (such provisions, collectively, the
``ArcaEx Limitations''),\59\ the certificate of incorporation of
Archipelago provides that such provisions shall remain applicable for
so long as ArcaEx remains a facility (as defined in Section 3(a)(2) of
the Act) \60\ of PCX and PCXE and the Facility Services Agreement
remains in full force and effect.\61\ As described previously in Item
II.A.1, following completion of the Merger, ArcaEx will remain the
exclusive equities trading facility of PCX and PCXE, and the Facility
Services Agreement will remain in full force and effect in its current
form. In order to ensure the continued force and effect of the ArcaEx
Limitations in the event of any change in the relationship of PCX and
PCXE to ArcaEx or the effectiveness of the Facility Services Agreement,
PCX proposes to amend the bylaws of Archipelago to provide that
Archipelago will not take any action, and will not permit any of its
subsidiaries, which will include PCXH, PCX, PCXE and ArcaEx, to take
any action, that will cause (i) ArcaEx to cease to be a facility of PCX
and PCXE, or (ii) the Facility Services Agreement to cease to be in
full force and effect, unless each of the provisions in the certificate
of incorporation of Archipelago relating to the ArcaEx Limitations is
amended pursuant to the terms thereof, the bylaws and applicable law,
to provide that such provisions shall remain in full force and effect
whether or not ArcaEx remains a facility of PCX and PCXE or the
Facility Services Agreement is in full force and effect.\62\ The
foregoing bylaw provisions may not be amended, modified or repealed
unless such amendment, modification or repeal is (i) filed with and
approved by the Commission \63\ or (ii) approved by Archipelago
stockholders voting not less than 80% of the then outstanding votes
entitled to be cast in favor of any such amendment, modification or
repeal.\64\ PCX believes that, because Archipelago will own 100% of the
ownership interest in PCX, these proposed Archipelago bylaw provisions,
in conjunction with voting and ownership limitations currently in
place, and the ownership and voting limitations that will be imposed by
the Proposed Rule Changes on OTP Holders, OTP Firms and their related
persons, will ensure that, regardless of whether ArcaEx remains a
facility of PCX and PCXE or whether the Facility Services Agreement
remains in full force and effect, the regulatory oversight
responsibilities of PCX and PCXE will not be subject to any undue
influences from a PCX member or a group of PCX members that control a
substantial number of outstanding votes.
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\59\ Certificate of Incorporation of Archipelago, paragraphs
(C)(3)(y), (D)(2), (D)(2)(a) and (H)(3) of Article FOURTH, the third
paragraph of Article EIGHTH, the penultimate paragraph of Article
TENTH, Article THIRTEENTH, Article FOURTEENTH, Article FIFTEENTH,
Article SIXTEENTH, Article SEVENTEENTH and Article NINETEENTH.
\60\ Section 3(a)(2) defines the term ``facility,'' when used
with respect to an exchange, to include its premises, tangible or
intangible property whether on the premises or not, any right to the
use of such premises or property or any service thereof for the
purpose of effecting or reporting a transaction on an exchange
(including, among other things, any system of communication to or
from the exchange, by ticker or otherwise, maintained by or with the
consent of the exchange), and any right of the exchange to the use
of any property or service. 15 U.S.C. 78c(a)(2).
\61\ The Exchange clarified that the provisions discussed in
this section, the ArcaEx Limitations, include both the ownership and
voting limitations and other provisions. See August 12, 2005
Telephone Conversation.
\62\ Amended Bylaws of Archipelago, Section 6.8(c).
\63\ The current Bylaws of Archipelago provide that before any
amendment to the bylaws shall be effective, such amendment shall be
submitted to the Board of Directors of PCX and if such Board shall
determine that the same is required, under Section 19 of the Act and
the r
