Self-Regulatory Organizations; Pacific Exchange, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 2 Relating to the Certificate of Incorporation and Bylaws of Archipelago Holdings, Inc., 11271-11277 [E6-3093]
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Federal Register / Vol. 71, No. 43 / Monday, March 6, 2006 / Notices
(‘‘Separated OTRs’’).232 These
commenters argue that they held on to
their Separated OTRs, even after the
NYSE exited the options business in
1997, with the expectation that their
ownership of the Separated OTRs would
afford them full rights to trade options
under the auspices of the NYSE or its
successor entity. They now argue that
such ownership does, and should
continue to after the Merger, give them
such right.
The NYSE has not traded options
since 1997, when the Commission
approved the transfer of NYSE’s options
business to the Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’).233 At
that time, the NYSE and CBOE put in
place a program to provide certain
persons that traded options on the
NYSE with trading permits to trade
options on CBOE. Benefits from the
leasing of the CBOE options trading
permits not so issued (‘‘lease pool’’)
were distributed to a group of
approximately 92 persons that owned
OTRs.234 The CBOE trading permits and
lease pool had a duration of seven years.
The Commission found the 1997
proposal to be consistent with the Act,
noting that there is nothing in the Act
that compels the NYSE to continue to
trade a particular product line and the
NYSE was free to terminate its options
business entirely (in which case OTR
holders would not have received any
lease payments).235
It has been over eight years since the
NYSE operated an options business. The
Commission notes, as do the OTR
investors in their comment letter, that
holders of Separated OTRs do not have
any membership vote and do not have
ownership in the assets of the NYSE. As
a result, the Commission finds it is
consistent with Section 6(b)(1) of the
Act 236 and the NYSE’s rules for the
NYSE to eliminate its rules that provide
for options trading rights.
be cost-based and that market data
revenue should not be used to crosssubsidize the costs of regulation, and
that a for-profit entity may be motivated
to engage in profit-motivated market
data pricing.238 The Commission notes
that the fees charged for consolidated
market data (i.e., the ‘‘top-of-book’’
quotations of SROs and all reported
trades) are established by the joint SRO
plans that govern the collection,
consolidation, and dissemination of
such market data, and that all such fees
must be filed with the Commission
pursuant to the Act. In addition, ‘‘depthof-book’’ quotations can be
disseminated by all SROs, as well as
non-SRO entities, such as ATSs.239 The
question of what steps, if any, should be
taken by the Commission to address the
level and use of market data revenue, as
well as transparency of regulatory
revenue and expenses, is part of a larger
Commission review of the selfregulatory structure of our markets, and
is better addressed in the context of this
larger review.240
hsrobinson on PROD1PC70 with NOTICES
J. Market Data
One commenter raises a concern
about the market data function of the
NYSE being within the control of a forprofit entity.237 This commenter
believes that all market data fees should
III. Conclusion
For the foregoing reasons, the
Commission finds that the proposed
rule change, as amended, is consistent
with the Act and the rules and
regulations thereunder applicable to a
national securities exchange.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act 241 that the
proposed rule change (SR–NYSE–2005–
77), as amended, is approved, and
Amendment Nos. 6 and 8 are approved
on an accelerated basis.
It is therefore further ordered,
pursuant to Section 11A(b)(1) of the Act,
that NYSE Market shall be exempt from
registration as a securities information
processor for a period of thirty (30) days
following the date of closing of the
Merger.
It is therefore further ordered,
pursuant to Section 11A(b)(1) of the Act,
that upon the filing by NYSE Market of
an application for registration or an
exemption from registration as a
securities information processor within
the 30-day period prescribed above,
NYSE Market shall be exempt from
232 See OTR Investors Letter, supra note 6. See
also OTR Investors Letter II, supra note 6, filed in
response to the NYSE Response to Comments.
233 See Securities Exchange Act Release No.
38542 (April 23, 1997), 62 FR 23521 (April 30,
1997).
234 Holders of Separated OTRs were included in
this group, and were allowed to participate in the
lease pool without surrendering their OTRs.
235 See Securities Exchange Act Release No.
38542 (April 23, 1997), 62 FR 23521 (April 30,
1997).
236 15 U.S.C. 78f(b)(1).
237 See SIA/TBMA Letter, supra note 6, at 19.
238 Id. The commenter believes that tying market
data fees to the cost of producing the data, while
keeping costs of regulation separate, will enable full
and transparent funding of regulation without
overcharging for market data. Id.
239 The NYSE notes in its response to comments
that each of the members of Consolidated Tape
Association can compete with the NYSE (and each
other) by providing its own depth-of-book data.
NYSE Response to Comments, supra note 7, at 19.
240 See Concept Release Concerning SelfRegulation, supra note 26. See also SRO
Governance Proposal, supra note 230.
241 15 U.S.C. 78s(b)(2).
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11271
registration as a securities information
processor for an additional period of
ninety (90) days following the end of the
original 30-day period.
By the Commission (Chairman Cox and
Commissioners Glassman, Atkins, Campos,
and Nazareth).
Nancy M. Morris,
Secretary.
[FR Doc. 06–2033 Filed 3–3–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53383; File No. SR–PCX–
2005–134]
Self-Regulatory Organizations; Pacific
Exchange, Inc.; Order Approving
Proposed Rule Change and
Amendment No. 1 and Notice of Filing
and Order Granting Accelerated
Approval to Amendment No. 2 Relating
to the Certificate of Incorporation and
Bylaws of Archipelago Holdings, Inc.
February 27, 2006.
I. Introduction
On December 5, 2005, pursuant to
Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 the Pacific
Exchange, Inc. (‘‘PCX’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) a
proposed rule change in connection
with the proposed merger (‘‘Merger’’) of
New York Stock Exchange, Inc., a New
York Type A not-for-profit corporation
(‘‘NYSE’’), and Archipelago Holdings,
Inc., a Delaware corporation and the
parent company of the Exchange
(‘‘Archipelago’’). On December 15, 2005,
the Exchange amended its proposal.3
The proposed rule change, as amended,
was published for comment on January
12, 2006.4 On February 13, 2006, the
Exchange filed Amendment No. 2.5 This
order approves the proposed rule
change, as amended, grants accelerated
approval to Amendment No. 2 to the
proposed rule change, and solicits
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Amendment No. 1 replaced PCX’s original filing
in its entirety.
4 Securities Exchange Act Release No. 53077
(January 9, 2006), 71 FR 2095.
5 In Amendment No. 2, the Exchange clarified
that the proposed rule change would become
operative concurrently with the closing of the
Merger. The complete text of Amendment No. 2 is
available on the Commission’s Web site https://
www.sec.gov/rules/sro.shtml, at the Commission’s
Public Reference Room, at the Exchange, and on
PCX’s Web site, https://www.pacificex.com.
2 17
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Federal Register / Vol. 71, No. 43 / Monday, March 6, 2006 / Notices
comments from interested persons on
Amendment No. 2.
After careful review, the Commission
finds the proposed rule change, as
amended, is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a national securities exchange.6 In
particular, the Commission finds that
the proposed rule change, as amended,
is consistent with Section 6(b)(1) of the
Act,7 which requires a national
securities exchange to be so organized
and have the capacity to carry out the
purposes of the Act and to enforce
compliance by its members and persons
associated with its members with the
provisions of the Act, the rules or
regulations thereunder, and the rules of
the exchange. The Commission also
finds that the proposed rule change, as
amended, is consistent with Section
6(b)(5) of the Act,8 in that it is designed,
among other things, to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
A. Accelerated Approval of Amendment
No. 2
hsrobinson on PROD1PC70 with NOTICES
The Commission also finds good
cause for approving Amendment No. 2
to the proposed rule change prior to the
thirtieth day after publishing notice of
Amendment No. 2 in the Federal
Register pursuant to Section 19(b)(2) of
the Act.9
In Amendment No. 2, the Exchange
represented that the proposed rule
change would be operative concurrently
with the closing of the Merger.
Amendment No. 2 does not otherwise
modify or change PCX’s proposal. The
Commission believes that Amendment
No. 2 clarifies the timing of the rule
changes proposed by PCX, raises no
novel issues, and is consistent with the
Act. Therefore, the Commission finds
good cause exists to accelerate approval
of Amendment No. 2, pursuant to
Section 19(b)(2) of the Act.10
6 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
7 15 U.S.C. 78f(b)(1).
8 15 U.S.C. 78f(b)(5).
9 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2)
of the Act, the Commission may not approve any
proposed rule change, or amendment thereto, prior
to the thirtieth day after the date of publication of
the notice thereof, unless the Commission finds
good cause for so doing.
10 15 U.S.C. 78s(b)(2).
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comment letters on February 9, 2006
and a further response on February 27,
2006.12 Each of the commenters
expressed concern about Gerald
Putnam’s fitness to serve as an officer of
NYSE Group, Inc. (‘‘NYSE Group’’) or to
lead the NYSE upon consummation of
the Merger.13
The issue of Mr. Putnam’s fitness to
Electronic Comments
serve as an officer or director of a public
company or the NYSE is not before the
• Use the Commission’s Internet
Commission in the context of this rule
comment form (https://www.sec.gov/
filing. Pursuant to Section 19(b)(1) of
rules/sro.shtml); or
the Act,14 a self-regulatory organization
• Send an e-mail to rule(‘‘SRO’’) (such as PCX) is required to file
comments@sec.gov. Please include File
with the Commission any proposed rule
Number SR–PCX–2005–134 on the
or any proposed change in, addition to,
subject line.
or deletion from the rules of such SRO.
Paper Comments
Further, pursuant to Section 19(b)(2) of
the Act,15 the Commission shall approve
• Send paper comments in triplicate
a proposed rule change filed by an SRO
to Nancy M. Morris, Secretary,
if the Commission finds that such
Securities and Exchange Commission,
proposed rule change is consistent with
100 F Street, NE., Washington, DC
the requirements of the Act and the
20549–1090.
rules and regulations thereunder
All submissions should refer to File
applicable to the SRO. PCX is not
Number SR–PCX–2005–134. This file
providing in this filing for any
number should be included on the
subject line if e-mail is used. To help the particular person to serve as an officer
or director of NYSE Group or any of its
Commission process and review your
subsidiaries. In addition, Section
comments more efficiently, please use
16
only one method. The Commission will 19(h)(4) of the Act authorizes the
post all comments on the Commission’s Commission, if in its opinion such
action is necessary or appropriate in the
Internet Web site (https://www.sec.gov/
public interest, for the protection of
rules/sro.shtml). Copies of the
investors, or otherwise in furtherance of
submission, all subsequent
the purposes of the Act, to remove or
amendments, all written statements
censure an officer or director of a
with respect to the proposed rule
national securities exchange if it finds,
change that are filed with the
after notice and opportunity for a
Commission, and all written
hearing, that such officer or director has
communications relating to the
proposed rule change between the
Kanovitz, Attorney,
Commission and any person, other than (‘‘Kopecky Letter’’); Michael Morris, Secretary,
Loevy & Loevy, to Nancy M.
those that may be withheld from the
Commission, dated February 2, 2006 (enclosing a
statement from Lewis J. Borsellino to the
public in accordance with the
Commission); Philip J. Nathanson, Attorney, Philip
provisions of 5 U.S.C. 552, will be
J. Nathanson & Associates, to Christopher Cox,
available for inspection and copying in
Chairman, Commission, dated February 3, 2006
the Commission’s Public Reference
(following up on the Kopecky Letter); and letter
Room. Copies of such filing also will be from Fane Lozman to Christopher Cox, Chairman,
Commission, dated February 22, 2006, with
available for inspection and copying at
attachments (responding to PCX Response to
the principal office of the Exchange. All Comments, infra note 12).
12 See letters from Kevin J. P. O’Hara, Chief
comments received will be posted
Administrative Officer, General Counsel &
without change; the Commission does
Secretary, PCX, to Nancy M. Morris, Secretary,
not edit personal identifying
Commission, dated February 8, 2006 (‘‘PCX
information from submissions. You
Response to Comments’’) and February 24, 2006.
should submit only information that
13 After the Merger, NYSE Group will be a
you wish to make available publicly. All publicly traded company and the holding company
submissions should refer to Amendment for the businesses of the NYSE and Archipelago.
New York Stock Exchange LLC will be a whollyNo. 2 of File Number SR–PCX–2005–
owned subsidiary of NYSE Group and will succeed
134 and should be submitted on or
to the registration of the NYSE as a national
securities exchange. Mr. Putnam is currently the
before March 27, 2006.
B. Solicitation of Comment
Interested persons are invited to
submit written data, views, and
arguments concerning Amendment No.
2, including whether Amendment No. 2
is consistent with the Act. Comments
may be submitted by any of the
following methods:
C. Comments on the Proposal
The Commission received four
comment letters on the proposed rule
change.11 PCX filed a response to the
11 See letters from James L. Kopecky, Attorney,
James L. Kopecky, P.C., to Christopher Cox,
Chairman, Commission, dated January 16, 2006
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chairman of the board of directors and chief
executive officer of Archipelago and the chairman
of PCX. Upon completion of the Merger, it is
intended that Mr. Putnam will be named as copresident and chief operating officer of NYSE
Group. See PCX Response to Comments, supra note
12, at 2.
14 15 U.S.C. 78s(b)(1).
15 15 U.S.C. 78s(b)(2).
16 15 U.S.C. 78s(h)(4).
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Federal Register / Vol. 71, No. 43 / Monday, March 6, 2006 / Notices
willfully violated any provision of the
Act, the rules or regulations thereunder,
or the rules of such exchange, willfully
abused his authority, or without
reasonable justification or excuse has
failed to enforce compliance with any
such provision by any member or
person associated with a member.
II. Discussion
On April 20, 2005, the NYSE and
Archipelago entered into an Agreement
and Plan of Merger (‘‘Merger
Agreement’’).17 Following the Merger,
the businesses of the NYSE and
Archipelago will be held under a single,
publicly traded holding company, NYSE
Group. In the Merger, NYSE members
will receive cash and/or shares of NYSE
Group common stock, and Archipelago
stockholders will receive solely shares
of NYSE Group common stock.
PCX proposes to allow NYSE Group
and its related persons to wholly own
and vote all of the outstanding capital
stock of Archipelago upon
consummation of the Merger, subject to
certain exceptions described herein.
PCX also proposes certain new rules of
PCX and PCX Equities, Inc. (‘‘PCXE’’)
prohibiting certain relationships
between NYSE Group and PCX
members. Finally, PCX proposes to
amend the rules of PCX and PCXE to
impose restrictions on certain rights of
PCX members with respect to the
nomination and election of the directors
of PCX and PCXE.
A. NYSE Group Ownership of
Archipelago
The Archipelago Certificate of
Incorporation imposes certain
limitations on ownership and voting of
Archipelago stock, unless waived by the
board of directors of Archipelago
(‘‘Archipelago Board’’) and approved by
the Commission.
1. Current PCX Rules
hsrobinson on PROD1PC70 with NOTICES
a. Ownership Limitation in the
Archipelago Certificate of Incorporation
The Archipelago Certificate of
Incorporation currently provides that no
person,18 either alone or together with
its related persons,19 may own
beneficially shares of Archipelago stock
17 See Amendment No. 3 to the Registration
Statement on Form S–4, Registration No. 333–
126780, filed with the Commission on November 3,
2005, for a description of the Merger Agreement and
the transactions contemplated thereby. See also
Securities Exchange Act Release No. 53382
(February 27, 2006) (SR–NYSE–2005–77) (‘‘NYSE
Order’’).
18 See Archipelago Certificate of Incorporation,
Article Fourth H(2) for the definition of a ‘‘Person.’’
19 See Archipelago Certificate of Incorporation,
Article Fourth H(3) for the definition of ‘‘Related
Persons.’’
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14:30 Mar 03, 2006
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representing in the aggregate more than
40% of the then outstanding votes
entitled to be cast on any matter
(‘‘Ownership Limitation’’). The
Ownership Limitation will apply unless
and until (1) a person, either alone or
with its related persons, delivers to the
Archipelago Board a notice in writing
regarding its intention to acquire shares
of Archipelago stock that would cause
such person, either alone or with its
related persons, to own beneficially
shares of stock of Archipelago in excess
of the Ownership Limitation, at least 45
days (or such shorter period as the
Archipelago Board may expressly
consent) prior to the intended
acquisition, and (2) such person, either
alone or with its related persons,
receives prior approval by the
Archipelago Board and the Commission
to exceed the Ownership Limitation.20
Specifically, (1) The Archipelago Board
must adopt a resolution approving such
person and its related persons to exceed
the Ownership Limitation, (2) the
resolution must be filed with the
Commission under Section 19(b) of the
Act,21 and (3) such proposed rule
change must be approved by the
Commission and become effective
thereunder.22
Pursuant to the Archipelago
Certificate of Incorporation, subject to
its fiduciary obligations under the
Delaware General Corporation Law, as
amended (‘‘DGCL’’), before adopting any
such resolution, the Archipelago Board
must first determine that: (1) Such
acquisition of beneficial ownership by
such person, either alone or with its
related persons, would not impair any
of Archipelago’s, PCX’s, 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; (2) such acquisition of
beneficial ownership by such person,
either alone or with its related persons,
would not impair the Commission’s
ability to enforce the Act; and (3) such
person and its related persons are not
subject to any statutory
disqualification.23
20 Archipelago Certificate of Incorporation,
Article Fourth D(1)(a).
21 15 U.S.C. 78s(b).
22 Archipelago Certificate of Incorporation,
Article Fourth D(1)(a).
23 Archipelago Certificate of Incorporation,
Article Fourth D(1)(b). The term ‘‘statutory
disqualification’’ is defined in Section 3(a)(39) of
the Act, 15 U.S.C. 78c(a)(39). In making such
determinations, the Archipelago Board may impose
any conditions and restrictions on such person and
its related persons owning any shares of stock of
Archipelago entitled to vote on any matter as the
Archipelago Board in its sole discretion deems
necessary, appropriate, or desirable in furtherance
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11273
In addition, the Archipelago
Certificate of Incorporation provides
that for so long as Archipelago
Exchange, L.L.C. (‘‘ArcaEx’’) remains a
facility of PCX and PCXE and the
Facility Services Agreement among
Archipelago, PCX, and PCXE, dated as
of March 22, 2002 (‘‘Facility Services
Agreement’’), which currently governs
the regulatory relationship of PCX and
PCXE to ArcaEx, remains in full force
and effect, no Equity Trading Permit
Holder (‘‘ETP Holder’’),24 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
20% of the then outstanding votes
entitled to be cast on any matter.25
Furthermore, unlike the Ownership
Limitation described earlier, the
Archipelago Certificate of Incorporation
does not give the Archipelago Board the
authority to waive the 20% ownership
limitation with respect to ETP Holders
and their related persons.
b. Voting Limitation in the Archipelago
Certificate of Incorporation
The Archipelago Certificate of
Incorporation also currently provides
that no person, either alone or with its
related persons, shall be entitled to (1)
vote or cause the voting of shares of
Archipelago stock to the extent such
shares represent in the aggregate more
than 20% of the then outstanding votes
entitled to be cast on any matter
(‘‘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, possess
the right 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 (‘‘Nonvoting Agreement
Prohibition’’).26 The Voting Limitation
and the Nonvoting Agreement
Prohibition shall apply unless and until
(1) a person, either alone or with its
related persons, delivers to the
Archipelago Board a notice in writing
regarding such person’s intention to
vote, possess the right to vote, or cause
the voting of shares of Archipelago stock
that would cause such person, either
alone or with its related persons, to
violate the Voting Limitation or the
of the objectives of the Act and the governance of
Archipelago. Archipelago Certificate of
Incorporation, Article Fourth D(1)(b).
24 ‘‘ETP Holder’’ is defined in PCXE Rule 1.1.
25 Archipelago Certificate of Incorporation,
Article Fourth D(2).
26 Archipelago Certificate of Incorporation,
Article Fourth C(1).
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Nonvoting Agreement Prohibition, at
least 45 days (or such shorter period as
the Archipelago Board may expressly
consent) prior to the intended vote and
(2) such person, either alone or with its
related persons, receives prior approval
from the Archipelago Board and the
Commission to exceed the Voting
Limitation or enter into an agreement,
plan, or arrangement not otherwise
allowed pursuant to the Nonvoting
Agreement Prohibition.27 Specifically,
(1) The Archipelago Board must adopt
a resolution approving such person and
its related persons to exceed the Voting
Limitation or to enter into an agreement,
plan, or arrangement not otherwise
allowed pursuant to the Nonvoting
Agreement Prohibition, (2) the
resolution must be filed with the
Commission under Section 19(b) of the
Act,28 and (3) such proposed rule
change must be approved by the
Commission and become effective
thereunder.29
Pursuant to the Archipelago
Certificate of Incorporation, subject to
its fiduciary obligations under the
DGCL, before adopting any such
resolution, the Archipelago Board must
first determine that: (1) The exercise of
such voting rights or the entering into of
such agreement, plan, or arrangement,
as applicable, by such person, either
alone or with its related persons, would
not impair Archipelago’s, PCX’s, 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; (2) the
exercise of such voting rights or the
entering into of such agreement, plan, or
arrangement would not impair the
Commission’s ability to enforce the Act;
(3) such person and its related persons
are not subject to any statutory
disqualification; 30 and (4) in the case of
a resolution to approve the exercise of
voting rights in excess of the Voting
Limitation, for so long as ArcaEx
remains a facility of PCX and PCXE and
the Facility Services Agreement is in
full force and effect, neither such person
nor its related persons are ETP
Holders.31
hsrobinson on PROD1PC70 with NOTICES
27 Archipelago
Certificate of Incorporation,
Article Fourth C(2).
28 15 U.S.C. 78s(b).
29 Archipelago Certificate of Incorporation,
Article Fourth C(2).
30 See supra note 23.
31 Archipelago Certificate of Incorporation,
Article Fourth C(3). In making such determinations,
the Archipelago Board may impose any conditions
and restrictions on such person and its related
persons owning any shares of Archipelago stock
entitled to vote on any matter as the Archipelago
Board in its sole discretion deems necessary,
appropriate, or desirable in furtherance of the
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c. Additional Matters Relating to OTP
Holders and OTP Firms of PCX
Archipelago’s amended and restated
bylaws (‘‘Archipelago Bylaws’’) provide
that the Archipelago Board will not
adopt any resolution waiving the Voting
Limitation, the Nonvoting Agreement
Prohibition, and the Ownership
Limitation with respect to any Options
Trading Permit Holder (‘‘OTP
Holder’’) 32 or Options Trading Permit
Firm (‘‘OTP Firm’’) 33 or its related
persons.34 PCX rules provide that for as
long as Archipelago controls, directly or
indirectly, PCX, no OTP Holder or OTP
Firm, either alone or together with its
related persons, shall: (i) 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; (ii)
have the right to vote, vote, or cause the
voting of shares of Archipelago stock to
the extent such shares represent in the
aggregate more than 20% of the then
outstanding votes entitled to be cast on
any matter; or (iii) enter into any
agreement, plan, or arrangement not to
vote shares of Archipelago stock, the
effect of which would enable any
person, either alone or together with its
related persons, to vote, possess the
right to vote, or cause the voting of
shares what would represent in the
aggregate more than 20% of the then
outstanding votes entitled to be cast on
any matter.35
2. Resolution of the Archipelago Board
Under the terms of the Merger
Agreement, NYSE Group will wholly
own and vote all of the outstanding
capital stock of Archipelago upon
consummation of the Merger. Absent a
waiver, the Merger would cause NYSE
Group to violate the Ownership
Limitation and the Voting Limitation.
Accordingly, as required by the
Archipelago Certificate of Incorporation,
on October 19, 2005, NYSE Group
delivered a written notice to the
Archipelago Board requesting approval
of its ownership and voting of
Archipelago stock in excess of the
Ownership Limitation and the Voting
objectives of the Act and the governance of
Archipelago. Id.
32 ‘‘OTP Holder’’ is defined in PCX Rule 1.1.
33 ‘‘OTP Firm’’ is defined in PCX Rule 1.1.
34 Archipelago Bylaws, Section 6.8(d). This
provision of the Archipelago Bylaws may not be
amended, modified, or repealed unless such
amendment, modification, or repeal is filed with
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. Archipelago Bylaws, Section 6.8(g). 35 See
PCX Rules 3.4(a) and (b).
35 See PCX Rules 3.4(a) and (b).
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Limitation. On October 20, 2005, the
Archipelago Board adopted a resolution
approving the request.36 The Exchange
then filed the resolution with the
Commission under Section 19(b) of the
Act 37 and requested that, upon
consummation of the Merger, NYSE
Group be allowed to wholly own and
vote all the outstanding common stock
of Archipelago, either alone or with its
related persons, except for any related
person of NYSE Group that is an ETP
Holder, an OTP Holder, or an OTP Firm.
The Commission notes that the NYSE
Group Certificate of Incorporation
imposes certain restrictions on NYSE
Group stockholders’ ability to own and
vote shares of stock of NYSE Group
similar to those contained in the
Archipelago Certificate of Incorporation
and PCX rules.38 These ownership and
voting limitations are designed to
prevent a shareholder or group of
shareholders acting together from
exercising undue influence or control
over the operations of NYSE Group’s
regulated subsidiaries, including PCX
and NYSE Regulation, Inc. (‘‘NYSE
Regulation’’), which will carry out
certain regulatory services on behalf of
PCX.39
Specifically, the NYSE Group
Certificate of Incorporation provides
that no person, either alone or together
with its related persons, may at any time
beneficially own shares of NYSE Group
stock representing in the aggregate more
than 20% of the then outstanding votes
entitled to be cast on any matter.40 The
36 In adopting the resolution approving NYSE
Group’s request, the Archipelago Board determined
that (1) the acquisition of beneficial ownership of,
and the exercise of voting rights with respect to,
100% of the outstanding shares of Archipelago
common stock by NYSE Group, either alone or with
its related persons, would not impair any of
Archipelago’s, PCX’s, or PCXE’s ability to discharge
its responsibilities under the Act and the rules and
regulations thereunder and are otherwise in the best
interests of Archipelago and its stockholders; (2)
such acquisition would not impair the
Commission’s ability to enforce the Act; (3) neither
NYSE Group nor any of its related persons is
subject to any statutory disqualification; and (4)
neither NYSE Group nor any of its related persons
is an ETP Holder, OTP Holder, or OTP Firm.
37 15 U.S.C. 78s(b).
38 The Commission is today approving proposed
rule changes filed by the NYSE in connection with
the Merger. See NYSE Order, supra note 17.
39 PCX and NYSE Regulation intend to enter into
a Regulatory Services Agreement specifying the
regulatory functions that NYSE Regulation will
perform.
40 In the event that a person, either alone or
together with its related persons, beneficially owns
shares of stock of NYSE Group in excess of the 20%
threshold, such person and its related persons will
be obligated to sell promptly, and NYSE Group will
be obligated to purchase promptly, at a price equal
to the par value of such shares of stock and to the
extent that funds are legally available for such
purchase, that number of shares necessary to reduce
the ownership level of such person and its related
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NYSE Group Certificate of Incorporation
also provides that no person, either
alone or together with its related
persons, will be entitled to vote or cause
the voting of shares of NYSE Group
stock representing in the aggregate more
than 10% of the total number of votes
entitled to be cast on any matter, and no
person, either alone or together with its
related persons, may acquire the ability
to vote more than 10% of the aggregate
number of votes being cast on any
matter by virtue of agreements entered
into with other persons not to vote
shares of NYSE Group’s outstanding
capital stock.41 Moreover, the NYSE
Group Certificate of Incorporation
includes a provision restricting the
NYSE Group board of directors (‘‘NYSE
Group Board’’) from waiving these
ownership and voting limitations for
ETP Holders, OTP Holders, and OTP
Firms that is analogous to provisions in
the current Archipelago Certificate of
Incorporation and Archipelago Bylaws.
Specifically, like Archipelago, the NYSE
Group Board will be prohibited from
waiving the applicable ownership and
voting limitations in excess of 20% for
ETP Holders, OTP Holders, and OTP
Firms.42
The Commission also notes that the
NYSE Group Certificate of Incorporation
contains certain other provisions
designed to facilitate the ability of the
regulated subsidiaries of NYSE Group
and the Commission to fulfill their
regulatory and oversight obligations
under the Act. These provisions are
analogous to provisions contained in the
Archipelago Certificate of Incorporation
and the Archipelago Bylaws and relate,
in part, to the Commission’s access to
NYSE Group’s books and records, the
Commission’s jurisdiction over NYSE
Group and its officers, directors, and
employees, the protection of
confidential information, and the filing
with the Commission of amendments to
NYSE Group’s governing documents.
The Commission therefore finds that it
is consistent with the Act, in particular
Section 6(b)(1) of the Act,43 to allow
NYSE Group and its related persons,
other than any related person of NYSE
Group that is an ETP Holder, OTP
Holder, or OTP Firm, to wholly own
persons to below the permitted threshold, after
taking into account that such repurchased shares
will become treasury shares and will no longer be
deemed to be outstanding. See NYSE Order, supra
note 17.
41 NYSE Group will disregard any such votes
purported to be cast in excess of this limitation. See
id.
42 See id.
43 15 U.S.C. 78f(b)(1).
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and vote all of the outstanding capital
stock of Archipelago.
B. Certain Relationships Between NYSE
Group and OTP Holders, OTP Firms,
and ETP Holders
Upon consummation of the Merger,
NYSE Group will become the parent
company of Archipelago and the
successor to the NYSE, New York Stock
Exchange LLC. To protect the integrity
and independence of the regulatory
responsibilities of PCX and PCXE after
the consummation of the Merger, PCX
and PCXE propose certain new rules
designed to minimize any potential
conflicts of interest that may result from
ownership relationships or affiliations
between OTP Holders, OTP Firms, and
ETP Holders, i.e., PCX members, on the
one hand and NYSE Group and its
subsidiaries, including PCX and PCXE,
on the other hand.
Specifically, proposed PCX Rule 3.10
and proposed PCXE Rule 3.10 provide
that, unless approved by the
Commission, (a) no OTP Holder, OTP
Firm, or ETP Holder shall be affiliated 44
with NYSE Group or any of its affiliated
entities, and (b) neither NYSE Group
nor any of its affiliates shall hold,
directly or indirectly, an ownership
interest in any OTP Firm or ETP Holder.
The proposed PCX and PCXE rules
further provide that any person who
fails to meet the requirements described
in the preceding sentence shall not be
eligible to become an OTP Holder, OTP
Firm, or ETP Holder, as the case may
be.45 In addition, in the event of any
failure by any OTP Holder, OTP Firm,
or ETP Holder to comply with the
applicable provisions of the proposed
PCX Rule 3.10 and proposed PCXE Rule
3.10, PCX or PCXE shall suspend all
trading rights and privileges of such
OTP Holder, OTP Firm, or ETP Holder,
as the case may be, in accordance with
the proposed PCX and PCXE rules,
subject to the procedures provided
therein.46
44 A person ‘‘affiliated’’ with a specified person is
a person that directly, or indirectly through one or
more intermediaries, controls, is controlled by, or
is under common control with, the person
specified. 17 CFR 240.12b–2.
45 Proposed PCX Rule 3.10(c) and proposed PCXE
Rule 3.10(c).
46 The proposed PCX and PCXE rules provide that
in the event of any such failure to comply with
proposed PCX Rule 3.10 and proposed PCXE Rule
3.10, respectively, PCX or PCXE shall: (1) Provide
notice to the applicable OTP Holder, OTP Firm, or
ETP Holder, as the case may be, within five
business days of learning of the failure to comply;
(2) allow the applicable OTP Holder, OTP Firm, or
ETP Holder fifteen calendar days to cure any such
failure to comply; (3) in the event that the
applicable OTP Holder, OTP Firm, or ETP Holder
does not cure such failure to comply within such
fifteen calendar day cure period, schedule a hearing
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The Commission finds that proposed
PCX Rule 3.10 and proposed PCXE Rule
3.10 are consistent with the Act, in
particular Section 6(b)(1) of the Act.47
These proposed rules are designed to
minimize any potential conflicts of
interest that may result from ownership
relationships or affiliations between
PCX members on the one hand and
NYSE Group and its affiliates, including
PCX and PCXE, on the other hand. By
proscribing ownership and affiliation
between these groups, the Commission
believes that proposed PCX Rule 3.10
and proposed PCXE 3.10 will help
protect the integrity and independence
of the regulatory responsibilities of the
Exchange after the consummation of the
Merger.
C. Rights of OTP Holders and ETP
Holders With Respect to the Nomination
and Election of Their Representatives to
the PCX Board and PCXE Board
The bylaws of PCX and PCXE (‘‘PCX
Bylaws’’ and ‘‘PCXE Bylaws,’’
respectively) contain certain
compositional requirements with
respect to the boards of directors of PCX
and PCXE (‘‘PCX Board’’ and ‘‘PCXE
Board,’’ respectively). Specifically, the
PCX Bylaws provide that at least 20%
of the directors of PCX shall consist of
individuals nominated by trading
permit holders, with at least one
director nominated by ETP Holders and
at least one director nominated by OTP
Holders.48 The PCXE Bylaws provide
that at least 20% of the directors (but no
fewer than two directors) of PCXE shall
be nominees of the ETP/Equity ASAP
Nominating Committee, as provided
under PCXE Rule 3.49 The procedures
for the nomination, appointment, and
election of the directors of PCX and
PCXE are governed by PCX and PCXE
rules.50 To ensure that the director
nomination and election processes of
each of PCX and PCXE are not subject
to any undue influence from the
concentration of rights in any one OTP
Holder 51 or ETP Holder, either alone or
together with certain affiliates, PCX
proposes to amend its rules and PCXE’s
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, OTP Firm, or ETP Holder no later than
ten calendar days following the date of such
hearing. Proposed PCX Rule 13.2(a)(2)(F) and
proposed PCXE Rule 11.2(a)(2)(v).
47 15 U.S.C. 78f(b)(1).
48 PCX Bylaws, Section 3.02(a).
49 PCXE Bylaws, Section 3.02(a).
50 PCX Rule 3.2(b)(2) and PCXE Rule 3.2(b)(2).
51 Even though OTP Firms also hold options
trading permits, they do not have any voting rights
with respect to the nomination and election of the
OTP Holder representative on the PCX Board.
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rules to limit the participation of
affiliated OTP Holders and ETP Holders
in the director nomination and election
processes.
Specifically, PCX rules currently
provide that the PCX nominating
committee (‘‘PCX Nominating
Committee’’) shall have seven members,
consisting of six OTP Holders and one
person from the public. The PCX
Nominating Committee must nominate
any candidate for these OTP Holders’
positions on the PCX Nominating
Committee endorsed by the written
petition of the lesser of 35 OTP Holders
or 10% of OTP Holders. PCX proposes
that no OTP Holder, either alone or
together with (x) other OTP Holders
associated with the same OTP Firm that
such OTP Holder is associated with 52
and (y) OTP Holders associated with
OTP Firms that are affiliated 53 with the
OTP Firm that such OTP Holder is
associated with, may account for more
than 50% of the signatories to the
petition endorsing a particular petition
nominee for an OTP Holders’ position
on the PCX Nominating Committee.
PCX rules also currently provide that,
in the event that there are more than six
nominees to fill the OTP Holders’
positions on the PCX Nominating
Committee as a result of petition by OTP
Holders, the PCX Nominating
Committee must submit the nominees to
OTP Holders for election.54 PCX
proposes that no OTP Holder, either
alone or together with (x) other OTP
Holders associated with the same OTP
Firm that such OTP Holder is associated
with and (y) OTP Holders associated
with OTP Firms that are affiliated with
the OTP Firm that such OTP Holder is
associated with, may account for more
than 20% of the votes cast for a
particular nominee for an OTP Holders’
position on the PCX Nominating
Committee.
With respect to the nomination and
election of the OTP Holder
representative on the PCX Board, PCX
rules currently provide that, in addition
to the candidate nominated by the PCX
Nominating Committee for the OTP
Holders’ position on the PCX Board, the
PCX Nominating Committee must
nominate any eligible candidate
52 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).
53 See supra note 43.
54 PCX Rules 3.2(b)(2)(B).
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endorsed by the written petition of the
lesser of 35 OTP Holders or 10% of OTP
Holders in good standing on or before
the tenth business day after the PCX
Nominating Committee publishes its
nominee for the PCX Board.55 PCX
proposes that no OTP Holder, either
alone or together with (x) other OTP
Holders associated with the same OTP
Firm that such OTP Holder is associated
with and (y) OTP Holders associated
with OTP Firms that are affiliated with
the OTP Firm that such OTP Holder is
associated with, may account for more
than 50% of the signatories to the
petition endorsing a particular petition
nominee for the OTP Holders’ position
on the PCX Board.
In addition, PCX rules currently
provide that if there are two or more
nominees for the PCX Holder’s position
on the PCX Board as a result of petition
by OTP Holders, the PCX Nominating
Committee must submit the contested
nomination(s) to OTP Holders for
election.56 PCX proposes that no OTP
Holder, either alone or together with (x)
other OTP Holders associated with the
same OTP Firm that such OTP Holder
is associated with and (y) OTP Holders
associated with OTP Firms that are
affiliated with the OTP Firm that such
OTP Holder is associated with, may
account for more than 20% of the votes
cast for a particular nominee for the
OTP Holders’ position on the PCX
Board.
Similarly, PCXE rules currently
provide that the PCXE nominating
committee (‘‘PCXE Nominating
Committee’’) shall have seven members,
consisting of six ETP Holders and one
person from the public. The PCXE
Nominating Committee must nominate
any candidate for these ETP Holders’
positions on the PCXE Nominating
Committee endorsed by the written
petition of at least 10% of ETP Holders.
PCX proposes that no ETP Holder,
either alone or together with other ETP
Holders who are deemed its affiliates,57
may account for more than 50% of the
signatories to the petition endorsing a
particular petition nominee for an ETP
Holders’ position on the PCXE
Nominating Committee.
PCXE rules also currently provide that
in the event that there are more than six
nominees to fill the ETP Holders’
positions on the PCXE Nominating
Committee as a result of petition by ETP
Holders, the PCXE Nominating
Committee must submit the nominees to
ETP Holders for election.58 PCX
55 PCX
Rule 3.2(b)(2)(C)(ii).
Rule 3.2(b)(2)(C)(iii).
57 See supra note 43.
58 PCXE Rules 3.2(b)(2)(B)(iii).
56 PCX
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proposes that no ETP Holder, either
alone or together with other ETP
Holders who are deemed its affiliates,
may account for more than 20% of the
votes cast for a particular nominee for
an ETP Holders’ position on the PCXE
Nominating Committee.
With respect to the nomination and
election of the ETP Holder
representatives on the PCX Board and
PCXE Board, PCXE rules currently
provide that in addition to the
candidates nominated by the PCXE
Nominating Committee for the ETP
Holders’ positions on the PCX Board
and PCXE Board, the PCXE Nominating
Committee must nominate any eligible
candidate endorsed by the written
petition of at least 10% of ETP Holders
in good standing to the PCX Board or
PCXE Board, as the case may be, within
the time period set forth in PCXE
rules.59 PCX proposes that no ETP
Holder, either alone or together with
other ETP Holders who are deemed its
affiliates, may account for more than
50% of the signatories to a petition
endorsing a particular petition nominee
for an ETP Holders’ position on the PCX
Board or PCXE Board.
In addition, PCXE rules also currently
provide that if there are three or more
nominees for the ETP Holders’ positions
on the PCXE Board or two or more
nominees for the ETP Holder’s position
on the PCX Board, the PCXE
Nominating Committee shall submit the
contested nomination(s) to the ETP
Holders for election.60 PCX proposes
that no ETP Holder, either alone or
together with other ETP Holders who
are deemed its affiliates, may account
for more than 20% of the votes cast for
a particular nominee for an ETP
Holders’ position on the PCX Board or
PCXE Board.61
The Commission finds that these
proposed PCX and PCXE rules related to
the director nomination and election
process are consistent with the Act, in
particular Section 6(b)(3) of the Act.62
These proposed rule changes, which
will limit the ability of affiliated OTP
Holders or ETP Holders to control such
process, should serve to strengthen and
improve fair representation of all
members. The Commission therefore
believes that the proposal will help to
protect PCX and PCXE Boards from any
59 PCXE
Rule 3.2(b)(2)(C)(i).
Rule 3.2(b)(2)(C)(ii).
61 Aside from trading rights that such permit
holders are entitled to and rights described in this
section, the Exchange represents that permit
holders have no other voting, nomination, petition,
or other rights under the organizational documents
and rules of PCX and PCXE, as applicable.
62 15 U.S.C. 78f(b)(3).
60 PCXE
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inappropriate influences of a group of
related OTP Holders or ETP Holders.
D. SIP Registration
Section 11A(b)(1) of the Act 63
provides for the registration with the
Commission of a securities information
processor (‘‘SIP’’) 64 that is acting as an
exclusive processor.65 Because ArcaEx
engages on an exclusive basis on behalf
of the Exchange in collecting,
processing, or preparing for distribution
or publication information with respect
to transactions or quotations on or
effected or made by means of a facility
of the Exchange, it is an exclusive
processor that is required to register
pursuant to Section 11A(b) of the Act.66
Section 11A(b)(1) of the Act 67
provides that the Commission may, by
rule or order, upon its own motion or
upon application by a SIP, conditionally
or unconditionally exempt any SIP from
any provision of Section 11A of the Act
or the rules or regulation thereunder, if
the Commission finds that such
exemption is consistent with the public
interest, the protection of investors, and
the purposes of Section 11A of the Act,
including the maintenance of fair and
orderly markets in securities and the
removal of impediments to and
perfection of the mechanism of a
national market system.68
The Commission has determined to
grant ArcaEx a temporary exemption
from registration under Section
11A(b)(1) of the Act and Rule 609
thereunder for a period of thirty (30)
days from the date of closing of the
Merger, while an application for
registration or an application for an
exemption pursuant to Section
11A(b)(1) of the Act and Rule 609
thereunder is prepared.69 The
U.S.C. 78k–1(b)(1).
Section 3(a)(22)(A) of the Act, 15 U.S.C.
78c(a)(22)(A), for the definition of a SIP. A SRO is
explicitly excluded from the definition of a SIP.
65 Section 3(a)(22)(B) of the Act, 15 U.S.C.
78c(a)(22)(B), defines an exclusive processor. Rule
609 under the Act, 17 CFR 242.609, requires that
the registration of a SIP be on Form SIP, 17 CFR
249.1001.
66 15 U.S.C. 78k–1(b)(1). A SRO that is an
exclusive processor is exempt from registration
under Section 11A(b)(1) of the Act because it is
excluded from designation as a SIP.
67 15 U.S.C. 78k–1(b)(1).
68 15 U.S.C. 78k–1(b)(1). See also Rule 609(c), 17
CFR 242.609(c).
69 See Securities Exchange Act Release No. 12079
(February 6, 1976) (order granting temporary
exemption from SIP registration for Nasdaq for (1)
a period of 30 days following the consummation of
the sale of the Nasdaq system to the NASD and the
assignment of the NASD’s rights in such purchase
to Nasdaq, a subsidiary of the NASD and (2) an
additional period of ninety (90) days following the
day of publication of notice of filing of an
application for registration or exemption from
registration, if such application is received within
Commission also has determined to
grant a conditional continuation of the
30-day temporary exemption from
registration of ArcaEx, conditioned
upon its filing of an application for
registration or application for an
exemption from registration within the
30-day time period. Such continuation
shall continue for a period of 90 days
following the end of the 30-day period
and will afford interested persons an
opportunity to submit written
comments concerning the application
filed with the Commission.70
ArcaEx currently operates the equities
trading facility of PCX and is regulated
as a facility of PCX.71 The Commission
therefore finds that such temporary
exemptions are consistent with the
public interest, the protection of
investors, and the purposes of Section
11A of the Act. The exemptions are for
a limited period of time during which
the Commission will have regulatory
authority over ArcaEx.
III. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,72 that the
proposed rule change (SR–PCX–2005–
134), as amended, is approved and
Amendment No. 2 is approved on an
accelerated basis.
It is therefore further ordered,
pursuant to Section 11A(b)(1) of the
Act,73 that ArcaEx shall be exempt from
registration as a securities information
processor for a period of thirty (30) days
following the date of closing of the
Merger.
It is therefore further ordered,
pursuant to Section 11A(b)(1) of the
Act,74 that upon the filing by ArcaEx of
an application for registration or an
exemption from registration as a
securities information processor within
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64 See
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the original 30 days). See also Securities Exchange
Act Release Nos. 13278 (February 17, 1977)
(granting Bradford National Clearing Corporation,
which was to perform SIP functions for the Pacific
Exchange, a 90-day temporary exemption from
registration as a SIP pending Commission
determination of Bradford’s application for a
permanent exemption, such 90-day period to begin
from the consummation of the agreement calling for
Bradford’s assumption of the SIP services) and
27957 (April 27, 1990), 55 FR 19140 (May 8, 1990)
(granting the NASD a 90-day temporary exemption
from registration of its subsidiary, Market Services,
Inc., which was to operate the NASD’s PORTAL
market, as a SIP pending Commission review of its
application for registration filed with the
Commission).
70 Publication of notice of the filing of an
application for registration is required by Section
11A(b)(3) of the Act, 15 U.S.C. 78k–1(b)(3).
71 See Securities Exchange Act Release No. 44983
(October 25, 2001), 66 FR 55225 (November 1,
2001).
72 15 U.S.C. 78s(b)(2).
73 15 U.S.C. 78k–1(b)(1).
74 Id.
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11277
the 30-day period prescribed above,
ArcaEx shall be exempt from
registration as a securities information
processor for an additional period of
ninety (90) days following the end of the
original 30-day period.
By the Commission (Chairman Cox and
Commissioners Glassman, Atkins, Campos,
and Nazareth).
Nancy M. Morris,
Secretary.
[FR Doc. E6–3093 Filed 3–3–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53370; File No. SR–PCX–
2006–11]
Self-Regulatory Organizations; Pacific
Exchange, Inc.; Notice of Filing and
Order Granting Accelerated Approval
of Proposed Rule Change Requiring
Archipelago Securities, L.L.C. To Enter
Two-Sided Quotes
February 24, 2006.
Pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on February
9, 2006, the Pacific Exchange, Inc.
(‘‘PCX’’ or ‘‘Exchange’’), through its
wholly-owned subsidiary PCX Equities,
Inc. (‘‘PCXE’’), filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons and is
approving the proposal on an
accelerated basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange, through PCXE,
proposes to amend its rules governing
the Archipelago Exchange (‘‘ArcaEx’’),
the equities trading facility of PCXE.
The Exchange proposes to amend PCXE
Rule 7.58 to specify that its brokerdealer facility, Archipelago Securities,
L.L.C. (‘‘Arca Securities’’), would be
responsible for entering two-sided
orders in all stocks eligible for trading
on ArcaEx for purposes of fulfilling the
two-sided quote requirement found in
section 6(a)(i)(B) of the Intermarket
Trading System Plan (‘‘ITS Plan’’).
Further, the Exchange proposes to
expand certain exceptions recently
1 15
2 17
U.S.C 78s(b)(1).
CFR 240.19b–4.
E:\FR\FM\06MRN1.SGM
06MRN1
]]>Agencies
[Federal Register Volume 71, Number 43 (Monday, March 6, 2006)]
[Notices]
[Pages 11271-11277]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-3093]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53383; File No. SR-PCX-2005-134]
Self-Regulatory Organizations; Pacific Exchange, Inc.; Order
Approving Proposed Rule Change and Amendment No. 1 and Notice of Filing
and Order Granting Accelerated Approval to Amendment No. 2 Relating to
the Certificate of Incorporation and Bylaws of Archipelago Holdings,
Inc.
February 27, 2006.
I. Introduction
On December 5, 2005, pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ the
Pacific Exchange, Inc. (``PCX'' or ``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') a proposed rule
change in connection with the proposed merger (``Merger'') of New York
Stock Exchange, Inc., a New York Type A not-for-profit corporation
(``NYSE''), and Archipelago Holdings, Inc., a Delaware corporation and
the parent company of the Exchange (``Archipelago''). On December 15,
2005, the Exchange amended its proposal.\3\ The proposed rule change,
as amended, was published for comment on January 12, 2006.\4\ On
February 13, 2006, the Exchange filed Amendment No. 2.\5\ This order
approves the proposed rule change, as amended, grants accelerated
approval to Amendment No. 2 to the proposed rule change, and solicits
[[Page 11272]]
comments from interested persons on Amendment No. 2.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 replaced PCX's original filing in its
entirety.
\4\ Securities Exchange Act Release No. 53077 (January 9, 2006),
71 FR 2095.
\5\ In Amendment No. 2, the Exchange clarified that the proposed
rule change would become operative concurrently with the closing of
the Merger. The complete text of Amendment No. 2 is available on the
Commission's Web site https://www.sec.gov/rules/sro.shtml, at the
Commission's Public Reference Room, at the Exchange, and on PCX's
Web site, https://www.pacificex.com.
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After careful review, the Commission finds the proposed rule
change, as amended, is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\6\ In particular, the Commission finds that the
proposed rule change, as amended, is consistent with Section 6(b)(1) of
the Act,\7\ which requires a national securities exchange to be so
organized and have the capacity to carry out the purposes of the Act
and to enforce compliance by its members and persons associated with
its members with the provisions of the Act, the rules or regulations
thereunder, and the rules of the exchange. The Commission also finds
that the proposed rule change, as amended, is consistent with Section
6(b)(5) of the Act,\8\ in that it is designed, among other things, to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general, to protect investors and the public interest.
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\6\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\7\ 15 U.S.C. 78f(b)(1).
\8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
A. Accelerated Approval of Amendment No. 2
The Commission also finds good cause for approving Amendment No. 2
to the proposed rule change prior to the thirtieth day after publishing
notice of Amendment No. 2 in the Federal Register pursuant to Section
19(b)(2) of the Act.\9\
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\9\ 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2) of the
Act, the Commission may not approve any proposed rule change, or
amendment thereto, prior to the thirtieth day after the date of
publication of the notice thereof, unless the Commission finds good
cause for so doing.
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In Amendment No. 2, the Exchange represented that the proposed rule
change would be operative concurrently with the closing of the Merger.
Amendment No. 2 does not otherwise modify or change PCX's proposal. The
Commission believes that Amendment No. 2 clarifies the timing of the
rule changes proposed by PCX, raises no novel issues, and is consistent
with the Act. Therefore, the Commission finds good cause exists to
accelerate approval of Amendment No. 2, pursuant to Section 19(b)(2) of
the Act.\10\
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\10\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
B. Solicitation of Comment
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 2, including whether Amendment No. 2
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 rule-comments@sec.gov. Please include
File Number SR-PCX-2005-134 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-PCX-2005-134. 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 change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
Amendment No. 2 of File Number SR-PCX-2005-134 and should be submitted
on or before March 27, 2006.
C. Comments on the Proposal
The Commission received four comment letters on the proposed rule
change.\11\ PCX filed a response to the comment letters on February 9,
2006 and a further response on February 27, 2006.\12\ Each of the
commenters expressed concern about Gerald Putnam's fitness to serve as
an officer of NYSE Group, Inc. (``NYSE Group'') or to lead the NYSE
upon consummation of the Merger.\13\
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\11\ See letters from James L. Kopecky, Attorney, James L.
Kopecky, P.C., to Christopher Cox, Chairman, Commission, dated
January 16, 2006 (``Kopecky Letter''); Michael Kanovitz, Attorney,
Loevy & Loevy, to Nancy M. Morris, Secretary, Commission, dated
February 2, 2006 (enclosing a statement from Lewis J. Borsellino to
the Commission); Philip J. Nathanson, Attorney, Philip J. Nathanson
& Associates, to Christopher Cox, Chairman, Commission, dated
February 3, 2006 (following up on the Kopecky Letter); and letter
from Fane Lozman to Christopher Cox, Chairman, Commission, dated
February 22, 2006, with attachments (responding to PCX Response to
Comments, infra note 12).
\12\ See letters from Kevin J. P. O'Hara, Chief Administrative
Officer, General Counsel & Secretary, PCX, to Nancy M. Morris,
Secretary, Commission, dated February 8, 2006 (``PCX Response to
Comments'') and February 24, 2006.
\13\ After the Merger, NYSE Group will be a publicly traded
company and the holding company for the businesses of the NYSE and
Archipelago. New York Stock Exchange LLC will be a wholly-owned
subsidiary of NYSE Group and will succeed to the registration of the
NYSE as a national securities exchange. Mr. Putnam is currently the
chairman of the board of directors and chief executive officer of
Archipelago and the chairman of PCX. Upon completion of the Merger,
it is intended that Mr. Putnam will be named as co-president and
chief operating officer of NYSE Group. See PCX Response to Comments,
supra note 12, at 2.
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The issue of Mr. Putnam's fitness to serve as an officer or
director of a public company or the NYSE is not before the Commission
in the context of this rule filing. Pursuant to Section 19(b)(1) of the
Act,\14\ a self-regulatory organization (``SRO'') (such as PCX) is
required to file with the Commission any proposed rule or any proposed
change in, addition to, or deletion from the rules of such SRO.
Further, pursuant to Section 19(b)(2) of the Act,\15\ the Commission
shall approve a proposed rule change filed by an SRO if the Commission
finds that such proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to the SRO. PCX is not providing in this filing for any
particular person to serve as an officer or director of NYSE Group or
any of its subsidiaries. In addition, Section 19(h)(4) of the Act \16\
authorizes the Commission, if in its opinion such action is necessary
or appropriate in the public interest, for the protection of investors,
or otherwise in furtherance of the purposes of the Act, to remove or
censure an officer or director of a national securities exchange if it
finds, after notice and opportunity for a hearing, that such officer or
director has
[[Page 11273]]
willfully violated any provision of the Act, the rules or regulations
thereunder, or the rules of such exchange, willfully abused his
authority, or without reasonable justification or excuse has failed to
enforce compliance with any such provision by any member or person
associated with a member.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78s(b)(1).
\15\ 15 U.S.C. 78s(b)(2).
\16\ 15 U.S.C. 78s(h)(4).
---------------------------------------------------------------------------
II. Discussion
On April 20, 2005, the NYSE and Archipelago entered into an
Agreement and Plan of Merger (``Merger Agreement'').\17\ Following the
Merger, the businesses of the NYSE and Archipelago will be held under a
single, publicly traded holding company, NYSE Group. In the Merger,
NYSE members will receive cash and/or shares of NYSE Group common
stock, and Archipelago stockholders will receive solely shares of NYSE
Group common stock.
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\17\ See Amendment No. 3 to the Registration Statement on Form
S-4, Registration No. 333-126780, filed with the Commission on
November 3, 2005, for a description of the Merger Agreement and the
transactions contemplated thereby. See also Securities Exchange Act
Release No. 53382 (February 27, 2006) (SR-NYSE-2005-77) (``NYSE
Order'').
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PCX proposes to allow NYSE Group and its related persons to wholly
own and vote all of the outstanding capital stock of Archipelago upon
consummation of the Merger, subject to certain exceptions described
herein. PCX also proposes certain new rules of PCX and PCX Equities,
Inc. (``PCXE'') prohibiting certain relationships between NYSE Group
and PCX members. Finally, PCX proposes to amend the rules of PCX and
PCXE to impose restrictions on certain rights of PCX members with
respect to the nomination and election of the directors of PCX and
PCXE.
A. NYSE Group Ownership of Archipelago
The Archipelago Certificate of Incorporation imposes certain
limitations on ownership and voting of Archipelago stock, unless waived
by the board of directors of Archipelago (``Archipelago Board'') and
approved by the Commission.
1. Current PCX Rules
a. Ownership Limitation in the Archipelago Certificate of Incorporation
The Archipelago Certificate of Incorporation currently provides
that no person,\18\ either alone or together with its related
persons,\19\ may 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 (``Ownership Limitation''). The
Ownership Limitation will apply unless and until (1) a person, either
alone or with its related persons, delivers to the Archipelago Board a
notice in writing regarding its intention to acquire shares of
Archipelago stock that would cause such person, either alone or with
its related persons, to own beneficially shares of stock of Archipelago
in excess of the Ownership Limitation, at least 45 days (or such
shorter period as the Archipelago Board may expressly consent) prior to
the intended acquisition, and (2) such person, either alone or with its
related persons, receives prior approval by the Archipelago Board and
the Commission to exceed the Ownership Limitation.\20\ Specifically,
(1) The Archipelago Board must adopt a resolution approving such person
and its related persons to exceed the Ownership Limitation, (2) the
resolution must be filed with the Commission under Section 19(b) of the
Act,\21\ and (3) such proposed rule change must be approved by the
Commission and become effective thereunder.\22\
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\18\ See Archipelago Certificate of Incorporation, Article
Fourth H(2) for the definition of a ``Person.''
\19\ See Archipelago Certificate of Incorporation, Article
Fourth H(3) for the definition of ``Related Persons.''
\20\ Archipelago Certificate of Incorporation, Article Fourth
D(1)(a).
\21\ 15 U.S.C. 78s(b).
\22\ Archipelago Certificate of Incorporation, Article Fourth
D(1)(a).
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Pursuant to the Archipelago Certificate of Incorporation, subject
to its fiduciary obligations under the Delaware General Corporation
Law, as amended (``DGCL''), before adopting any such resolution, the
Archipelago Board must first determine that: (1) Such acquisition of
beneficial ownership by such person, either alone or with its related
persons, would not impair any of Archipelago's, PCX's, 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; (2) such acquisition of beneficial
ownership by such person, either alone or with its related persons,
would not impair the Commission's ability to enforce the Act; and (3)
such person and its related persons are not subject to any statutory
disqualification.\23\
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\23\ Archipelago Certificate of Incorporation, Article Fourth
D(1)(b). The term ``statutory disqualification'' is defined in
Section 3(a)(39) of the Act, 15 U.S.C. 78c(a)(39). In making such
determinations, the Archipelago Board may impose any conditions and
restrictions on such person and its related persons owning any
shares of stock of Archipelago entitled to vote on any matter as the
Archipelago Board in its sole discretion deems necessary,
appropriate, or desirable in furtherance of the objectives of the
Act and the governance of Archipelago. Archipelago Certificate of
Incorporation, Article Fourth D(1)(b).
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In addition, the Archipelago Certificate of Incorporation provides
that for so long as Archipelago Exchange, L.L.C. (``ArcaEx'') remains a
facility of PCX and PCXE and the Facility Services Agreement among
Archipelago, PCX, and PCXE, dated as of March 22, 2002 (``Facility
Services Agreement''), which currently governs the regulatory
relationship of PCX and PCXE to ArcaEx, remains in full force and
effect, no Equity Trading Permit Holder (``ETP Holder''),\24\ 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 20% of the then outstanding votes entitled to be
cast on any matter.\25\ Furthermore, unlike the Ownership Limitation
described earlier, the Archipelago Certificate of Incorporation does
not give the Archipelago Board the authority to waive the 20% ownership
limitation with respect to ETP Holders and their related persons.
---------------------------------------------------------------------------
\24\ ``ETP Holder'' is defined in PCXE Rule 1.1.
\25\ Archipelago Certificate of Incorporation, Article Fourth
D(2).
---------------------------------------------------------------------------
b. Voting Limitation in the Archipelago Certificate of Incorporation
The Archipelago Certificate of Incorporation also currently
provides that no person, either alone or with its related persons,
shall be entitled to (1) vote or cause the voting of shares of
Archipelago stock to the extent such shares represent in the aggregate
more than 20% of the then outstanding votes entitled to be cast on any
matter (``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, possess the right 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
(``Nonvoting Agreement Prohibition'').\26\ The Voting Limitation and
the Nonvoting Agreement Prohibition shall apply unless and until (1) a
person, either alone or with its related persons, delivers to the
Archipelago Board a notice in writing regarding such person's intention
to vote, possess the right to vote, or cause the voting of shares of
Archipelago stock that would cause such person, either alone or with
its related persons, to violate the Voting Limitation or the
[[Page 11274]]
Nonvoting Agreement Prohibition, at least 45 days (or such shorter
period as the Archipelago Board may expressly consent) prior to the
intended vote and (2) such person, either alone or with its related
persons, receives prior approval from the Archipelago Board and the
Commission to exceed the Voting Limitation or enter into an agreement,
plan, or arrangement not otherwise allowed pursuant to the Nonvoting
Agreement Prohibition.\27\ Specifically, (1) The Archipelago Board must
adopt a resolution approving such person and its related persons to
exceed the Voting Limitation or to enter into an agreement, plan, or
arrangement not otherwise allowed pursuant to the Nonvoting Agreement
Prohibition, (2) the resolution must be filed with the Commission under
Section 19(b) of the Act,\28\ and (3) such proposed rule change must be
approved by the Commission and become effective thereunder.\29\
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\26\ Archipelago Certificate of Incorporation, Article Fourth
C(1).
\27\ Archipelago Certificate of Incorporation, Article Fourth
C(2).
\28\ 15 U.S.C. 78s(b).
\29\ Archipelago Certificate of Incorporation, Article Fourth
C(2).
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Pursuant to the Archipelago Certificate of Incorporation, subject
to its fiduciary obligations under the DGCL, before adopting any such
resolution, the Archipelago Board must first determine that: (1) The
exercise of such voting rights or the entering into of such agreement,
plan, or arrangement, as applicable, by such person, either alone or
with its related persons, would not impair Archipelago's, PCX's, 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; (2) the exercise of such voting
rights or the entering into of such agreement, plan, or arrangement
would not impair the Commission's ability to enforce the Act; (3) such
person and its related persons are not subject to any statutory
disqualification; \30\ and (4) in the case of a resolution to approve
the exercise of voting rights in excess of the Voting Limitation, for
so long as ArcaEx remains a facility of PCX and PCXE and the Facility
Services Agreement is in full force and effect, neither such person nor
its related persons are ETP Holders.\31\
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\30\ See supra note 23.
\31\ Archipelago Certificate of Incorporation, Article Fourth
C(3). In making such determinations, the Archipelago Board may
impose any conditions and restrictions on such person and its
related persons owning any shares of Archipelago stock entitled to
vote on any matter as the Archipelago Board in its sole discretion
deems necessary, appropriate, or desirable in furtherance of the
objectives of the Act and the governance of Archipelago. Id.
---------------------------------------------------------------------------
c. Additional Matters Relating to OTP Holders and OTP Firms of PCX
Archipelago's amended and restated bylaws (``Archipelago Bylaws'')
provide that the Archipelago Board will not adopt any resolution
waiving the Voting Limitation, the Nonvoting Agreement Prohibition, and
the Ownership Limitation with respect to any Options Trading Permit
Holder (``OTP Holder'') \32\ or Options Trading Permit Firm (``OTP
Firm'') \33\ or its related persons.\34\ PCX rules provide that for as
long as Archipelago controls, directly or indirectly, PCX, no OTP
Holder or OTP Firm, either alone or together with its related persons,
shall: (i) 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; (ii) have the right to vote, vote, or cause the
voting of shares of Archipelago stock to the extent such shares
represent in the aggregate more than 20% of the then outstanding votes
entitled to be cast on any matter; or (iii) enter into any agreement,
plan, or arrangement not to vote shares of Archipelago stock, the
effect of which would enable any person, either alone or together with
its related persons, to vote, possess the right to vote, or cause the
voting of shares what would represent in the aggregate more than 20% of
the then outstanding votes entitled to be cast on any matter.\35\
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\32\ ``OTP Holder'' is defined in PCX Rule 1.1.
\33\ ``OTP Firm'' is defined in PCX Rule 1.1.
\34\ Archipelago Bylaws, Section 6.8(d). This provision of the
Archipelago Bylaws may not be amended, modified, or repealed unless
such amendment, modification, or repeal is filed with 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. Archipelago
Bylaws, Section 6.8(g). 35 See PCX Rules 3.4(a) and (b).
\35\ See PCX Rules 3.4(a) and (b).
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2. Resolution of the Archipelago Board
Under the terms of the Merger Agreement, NYSE Group will wholly own
and vote all of the outstanding capital stock of Archipelago upon
consummation of the Merger. Absent a waiver, the Merger would cause
NYSE Group to violate the Ownership Limitation and the Voting
Limitation. Accordingly, as required by the Archipelago Certificate of
Incorporation, on October 19, 2005, NYSE Group delivered a written
notice to the Archipelago Board requesting approval of its ownership
and voting of Archipelago stock in excess of the Ownership Limitation
and the Voting Limitation. On October 20, 2005, the Archipelago Board
adopted a resolution approving the request.\36\ The Exchange then filed
the resolution with the Commission under Section 19(b) of the Act \37\
and requested that, upon consummation of the Merger, NYSE Group be
allowed to wholly own and vote all the outstanding common stock of
Archipelago, either alone or with its related persons, except for any
related person of NYSE Group that is an ETP Holder, an OTP Holder, or
an OTP Firm.
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\36\ In adopting the resolution approving NYSE Group's request,
the Archipelago Board determined that (1) the acquisition of
beneficial ownership of, and the exercise of voting rights with
respect to, 100% of the outstanding shares of Archipelago common
stock by NYSE Group, either alone or with its related persons, would
not impair any of Archipelago's, PCX's, or PCXE's ability to
discharge its responsibilities under the Act and the rules and
regulations thereunder and are otherwise in the best interests of
Archipelago and its stockholders; (2) such acquisition would not
impair the Commission's ability to enforce the Act; (3) neither NYSE
Group nor any of its related persons is subject to any statutory
disqualification; and (4) neither NYSE Group nor any of its related
persons is an ETP Holder, OTP Holder, or OTP Firm.
\37\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------
The Commission notes that the NYSE Group Certificate of
Incorporation imposes certain restrictions on NYSE Group stockholders'
ability to own and vote shares of stock of NYSE Group similar to those
contained in the Archipelago Certificate of Incorporation and PCX
rules.\38\ These ownership and voting limitations are designed to
prevent a shareholder or group of shareholders acting together from
exercising undue influence or control over the operations of NYSE
Group's regulated subsidiaries, including PCX and NYSE Regulation, Inc.
(``NYSE Regulation''), which will carry out certain regulatory services
on behalf of PCX.\39\
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\38\ The Commission is today approving proposed rule changes
filed by the NYSE in connection with the Merger. See NYSE Order,
supra note 17.
\39\ PCX and NYSE Regulation intend to enter into a Regulatory
Services Agreement specifying the regulatory functions that NYSE
Regulation will perform.
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Specifically, the NYSE Group Certificate of Incorporation provides
that no person, either alone or together with its related persons, may
at any time beneficially own shares of NYSE Group stock representing in
the aggregate more than 20% of the then outstanding votes entitled to
be cast on any matter.\40\ The
[[Page 11275]]
NYSE Group Certificate of Incorporation also provides that no person,
either alone or together with its related persons, will be entitled to
vote or cause the voting of shares of NYSE Group stock representing in
the aggregate more than 10% of the total number of votes entitled to be
cast on any matter, and no person, either alone or together with its
related persons, may acquire the ability to vote more than 10% of the
aggregate number of votes being cast on any matter by virtue of
agreements entered into with other persons not to vote shares of NYSE
Group's outstanding capital stock.\41\ Moreover, the NYSE Group
Certificate of Incorporation includes a provision restricting the NYSE
Group board of directors (``NYSE Group Board'') from waiving these
ownership and voting limitations for ETP Holders, OTP Holders, and OTP
Firms that is analogous to provisions in the current Archipelago
Certificate of Incorporation and Archipelago Bylaws. Specifically, like
Archipelago, the NYSE Group Board will be prohibited from waiving the
applicable ownership and voting limitations in excess of 20% for ETP
Holders, OTP Holders, and OTP Firms.\42\
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\40\ In the event that a person, either alone or together with
its related persons, beneficially owns shares of stock of NYSE Group
in excess of the 20% threshold, such person and its related persons
will be obligated to sell promptly, and NYSE Group will be obligated
to purchase promptly, at a price equal to the par value of such
shares of stock and to the extent that funds are legally available
for such purchase, that number of shares necessary to reduce the
ownership level of such person and its related persons to below the
permitted threshold, after taking into account that such repurchased
shares will become treasury shares and will no longer be deemed to
be outstanding. See NYSE Order, supra note 17.
\41\ NYSE Group will disregard any such votes purported to be
cast in excess of this limitation. See id.
\42\ See id.
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The Commission also notes that the NYSE Group Certificate of
Incorporation contains certain other provisions designed to facilitate
the ability of the regulated subsidiaries of NYSE Group and the
Commission to fulfill their regulatory and oversight obligations under
the Act. These provisions are analogous to provisions contained in the
Archipelago Certificate of Incorporation and the Archipelago Bylaws and
relate, in part, to the Commission's access to NYSE Group's books and
records, the Commission's jurisdiction over NYSE Group and its
officers, directors, and employees, the protection of confidential
information, and the filing with the Commission of amendments to NYSE
Group's governing documents. The Commission therefore finds that it is
consistent with the Act, in particular Section 6(b)(1) of the Act,\43\
to allow NYSE Group and its related persons, other than any related
person of NYSE Group that is an ETP Holder, OTP Holder, or OTP Firm, to
wholly own and vote all of the outstanding capital stock of
Archipelago.
---------------------------------------------------------------------------
\43\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------
B. Certain Relationships Between NYSE Group and OTP Holders, OTP Firms,
and ETP Holders
Upon consummation of the Merger, NYSE Group will become the parent
company of Archipelago and the successor to the NYSE, New York Stock
Exchange LLC. To protect the integrity and independence of the
regulatory responsibilities of PCX and PCXE after the consummation of
the Merger, PCX and PCXE propose certain new rules designed to minimize
any potential conflicts of interest that may result from ownership
relationships or affiliations between OTP Holders, OTP Firms, and ETP
Holders, i.e., PCX members, on the one hand and NYSE Group and its
subsidiaries, including PCX and PCXE, on the other hand.
Specifically, proposed PCX Rule 3.10 and proposed PCXE Rule 3.10
provide that, unless approved by the Commission, (a) no OTP Holder, OTP
Firm, or ETP Holder shall be affiliated \44\ with NYSE Group or any of
its affiliated entities, and (b) neither NYSE Group nor any of its
affiliates shall hold, directly or indirectly, an ownership interest in
any OTP Firm or ETP Holder. The proposed PCX and PCXE rules further
provide that any person who fails to meet the requirements described in
the preceding sentence shall not be eligible to become an OTP Holder,
OTP Firm, or ETP Holder, as the case may be.\45\ In addition, in the
event of any failure by any OTP Holder, OTP Firm, or ETP Holder to
comply with the applicable provisions of the proposed PCX Rule 3.10 and
proposed PCXE Rule 3.10, PCX or PCXE shall suspend all trading rights
and privileges of such OTP Holder, OTP Firm, or ETP Holder, as the case
may be, in accordance with the proposed PCX and PCXE rules, subject to
the procedures provided therein.\46\
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\44\ A person ``affiliated'' with a specified person is a person
that directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with, the
person specified. 17 CFR 240.12b-2.
\45\ Proposed PCX Rule 3.10(c) and proposed PCXE Rule 3.10(c).
\46\ The proposed PCX and PCXE rules provide that in the event
of any such failure to comply with proposed PCX Rule 3.10 and
proposed PCXE Rule 3.10, respectively, PCX or PCXE shall: (1)
Provide notice to the applicable OTP Holder, OTP Firm, or ETP
Holder, as the case may be, within five business days of learning of
the failure to comply; (2) allow the applicable OTP Holder, OTP
Firm, or ETP Holder fifteen calendar days to cure any such failure
to comply; (3) in the event that the applicable OTP Holder, OTP
Firm, or ETP Holder 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, OTP Firm, or ETP Holder no later than ten calendar days
following the date of such hearing. Proposed PCX Rule 13.2(a)(2)(F)
and proposed PCXE Rule 11.2(a)(2)(v).
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The Commission finds that proposed PCX Rule 3.10 and proposed PCXE
Rule 3.10 are consistent with the Act, in particular Section 6(b)(1) of
the Act.\47\ These proposed rules are designed to minimize any
potential conflicts of interest that may result from ownership
relationships or affiliations between PCX members on the one hand and
NYSE Group and its affiliates, including PCX and PCXE, on the other
hand. By proscribing ownership and affiliation between these groups,
the Commission believes that proposed PCX Rule 3.10 and proposed PCXE
3.10 will help protect the integrity and independence of the regulatory
responsibilities of the Exchange after the consummation of the Merger.
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\47\ 15 U.S.C. 78f(b)(1).
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C. Rights of OTP Holders and ETP Holders With Respect to the Nomination
and Election of Their Representatives to the PCX Board and PCXE Board
The bylaws of PCX and PCXE (``PCX Bylaws'' and ``PCXE Bylaws,''
respectively) contain certain compositional requirements with respect
to the boards of directors of PCX and PCXE (``PCX Board'' and ``PCXE
Board,'' respectively). Specifically, the PCX Bylaws provide that at
least 20% of the directors of PCX shall consist of individuals
nominated by trading permit holders, with at least one director
nominated by ETP Holders and at least one director nominated by OTP
Holders.\48\ The PCXE Bylaws provide that at least 20% of the directors
(but no fewer than two directors) of PCXE shall be nominees of the ETP/
Equity ASAP Nominating Committee, as provided under PCXE Rule 3.\49\
The procedures for the nomination, appointment, and election of the
directors of PCX and PCXE are governed by PCX and PCXE rules.\50\ To
ensure that the director nomination and election processes of each of
PCX and PCXE are not subject to any undue influence from the
concentration of rights in any one OTP Holder \51\ or ETP Holder,
either alone or together with certain affiliates, PCX proposes to amend
its rules and PCXE's
[[Page 11276]]
rules to limit the participation of affiliated OTP Holders and ETP
Holders in the director nomination and election processes.
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\48\ PCX Bylaws, Section 3.02(a).
\49\ PCXE Bylaws, Section 3.02(a).
\50\ PCX Rule 3.2(b)(2) and PCXE Rule 3.2(b)(2).
\51\ Even though OTP Firms also hold options trading permits,
they do not have any voting rights with respect to the nomination
and election of the OTP Holder representative on the PCX Board.
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Specifically, PCX rules currently provide that the PCX nominating
committee (``PCX Nominating Committee'') shall have seven members,
consisting of six OTP Holders and one person from the public. The PCX
Nominating Committee must nominate any candidate for these OTP Holders'
positions on the PCX Nominating Committee endorsed by the written
petition of the lesser of 35 OTP Holders or 10% of OTP Holders. PCX
proposes that no OTP Holder, either alone or together with (x) other
OTP Holders associated with the same OTP Firm that such OTP Holder is
associated with \52\ and (y) OTP Holders associated with OTP Firms that
are affiliated \53\ with the OTP Firm that such OTP Holder is
associated with, may account for more than 50% of the signatories to
the petition endorsing a particular petition nominee for an OTP
Holders' position on the PCX Nominating Committee.
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\52\ 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).
\53\ See supra note 43.
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PCX rules also currently provide that, in the event that there are
more than six nominees to fill the OTP Holders' positions on the PCX
Nominating Committee as a result of petition by OTP Holders, the PCX
Nominating Committee must submit the nominees to OTP Holders for
election.\54\ PCX proposes that no OTP Holder, either alone or together
with (x) other OTP Holders associated with the same OTP Firm that such
OTP Holder is associated with and (y) OTP Holders associated with OTP
Firms that are affiliated with the OTP Firm that such OTP Holder is
associated with, may account for more than 20% of the votes cast for a
particular nominee for an OTP Holders' position on the PCX Nominating
Committee.
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\54\ PCX Rules 3.2(b)(2)(B).
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With respect to the nomination and election of the OTP Holder
representative on the PCX Board, PCX rules currently provide that, in
addition to the candidate nominated by the PCX Nominating Committee for
the OTP Holders' position on the PCX Board, the PCX Nominating
Committee must nominate any eligible candidate endorsed by the written
petition of the lesser of 35 OTP Holders or 10% of OTP Holders in good
standing on or before the tenth business day after the PCX Nominating
Committee publishes its nominee for the PCX Board.\55\ PCX proposes
that no OTP Holder, either alone or together with (x) other OTP Holders
associated with the same OTP Firm that such OTP Holder is associated
with and (y) OTP Holders associated with OTP Firms that are affiliated
with the OTP Firm that such OTP Holder is associated with, may account
for more than 50% of the signatories to the petition endorsing a
particular petition nominee for the OTP Holders' position on the PCX
Board.
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\55\ PCX Rule 3.2(b)(2)(C)(ii).
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In addition, PCX rules currently provide that if there are two or
more nominees for the PCX Holder's position on the PCX Board as a
result of petition by OTP Holders, the PCX Nominating Committee must
submit the contested nomination(s) to OTP Holders for election.\56\ PCX
proposes that no OTP Holder, either alone or together with (x) other
OTP Holders associated with the same OTP Firm that such OTP Holder is
associated with and (y) OTP Holders associated with OTP Firms that are
affiliated with the OTP Firm that such OTP Holder is associated with,
may account for more than 20% of the votes cast for a particular
nominee for the OTP Holders' position on the PCX Board.
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\56\ PCX Rule 3.2(b)(2)(C)(iii).
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Similarly, PCXE rules currently provide that the PCXE nominating
committee (``PCXE Nominating Committee'') shall have seven members,
consisting of six ETP Holders and one person from the public. The PCXE
Nominating Committee must nominate any candidate for these ETP Holders'
positions on the PCXE Nominating Committee endorsed by the written
petition of at least 10% of ETP Holders. PCX proposes that no ETP
Holder, either alone or together with other ETP Holders who are deemed
its affiliates,\57\ may account for more than 50% of the signatories to
the petition endorsing a particular petition nominee for an ETP
Holders' position on the PCXE Nominating Committee.
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\57\ See supra note 43.
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PCXE rules also currently provide that in the event that there are
more than six nominees to fill the ETP Holders' positions on the PCXE
Nominating Committee as a result of petition by ETP Holders, the PCXE
Nominating Committee must submit the nominees to ETP Holders for
election.\58\ PCX proposes that no ETP Holder, either alone or together
with other ETP Holders who are deemed its affiliates, may account for
more than 20% of the votes cast for a particular nominee for an ETP
Holders' position on the PCXE Nominating Committee.
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\58\ PCXE Rules 3.2(b)(2)(B)(iii).
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With respect to the nomination and election of the ETP Holder
representatives on the PCX Board and PCXE Board, PCXE rules currently
provide that in addition to the candidates nominated by the PCXE
Nominating Committee for the ETP Holders' positions on the PCX Board
and PCXE Board, the PCXE Nominating Committee must nominate any
eligible candidate endorsed by the written petition of at least 10% of
ETP Holders in good standing to the PCX Board or PCXE Board, as the
case may be, within the time period set forth in PCXE rules.\59\ PCX
proposes that no ETP Holder, either alone or together with other ETP
Holders who are deemed its affiliates, may account for more than 50% of
the signatories to a petition endorsing a particular petition nominee
for an ETP Holders' position on the PCX Board or PCXE Board.
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\59\ PCXE Rule 3.2(b)(2)(C)(i).
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In addition, PCXE rules also currently provide that if there are
three or more nominees for the ETP Holders' positions on the PCXE Board
or two or more nominees for the ETP Holder's position on the PCX Board,
the PCXE Nominating Committee shall submit the contested nomination(s)
to the ETP Holders for election.\60\ PCX proposes that no ETP Holder,
either alone or together with other ETP Holders who are deemed its
affiliates, may account for more than 20% of the votes cast for a
particular nominee for an ETP Holders' position on the PCX Board or
PCXE Board.\61\
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\60\ PCXE Rule 3.2(b)(2)(C)(ii).
\61\ Aside from trading rights that such permit holders are
entitled to and rights described in this section, the Exchange
represents that permit holders have no other voting, nomination,
petition, or other rights under the organizational documents and
rules of PCX and PCXE, as applicable.
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The Commission finds that these proposed PCX and PCXE rules related
to the director nomination and election process are consistent with the
Act, in particular Section 6(b)(3) of the Act.\62\ These proposed rule
changes, which will limit the ability of affiliated OTP Holders or ETP
Holders to control such process, should serve to strengthen and improve
fair representation of all members. The Commission therefore believes
that the proposal will help to protect PCX and PCXE Boards from any
[[Page 11277]]
inappropriate influences of a group of related OTP Holders or ETP
Holders.
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\62\ 15 U.S.C. 78f(b)(3).
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D. SIP Registration
Section 11A(b)(1) of the Act \63\ provides for the registration
with the Commission of a securities information processor (``SIP'')
\64\ that is acting as an exclusive processor.\65\ Because ArcaEx
engages on an exclusive basis on behalf of the Exchange in collecting,
processing, or preparing for distribution or publication information
with respect to transactions or quotations on or effected or made by
means of a facility of the Exchange, it is an exclusive processor that
is required to register pursuant to Section 11A(b) of the Act.\66\
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\63\ 15 U.S.C. 78k-1(b)(1).
\64\ See Section 3(a)(22)(A) of the Act, 15 U.S.C.
78c(a)(22)(A), for the definition of a SIP. A SRO is explicitly
excluded from the definition of a SIP.
\65\ Section 3(a)(22)(B) of the Act, 15 U.S.C. 78c(a)(22)(B),
defines an exclusive processor. Rule 609 under the Act, 17 CFR
242.609, requires that the registration of a SIP be on Form SIP, 17
CFR 249.1001.
\66\ 15 U.S.C. 78k-1(b)(1). A SRO that is an exclusive processor
is exempt from registration under Section 11A(b)(1) of the Act
because it is excluded from designation as a SIP.
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Section 11A(b)(1) of the Act \67\ provides that the Commission may,
by rule or order, upon its own motion or upon application by a SIP,
conditionally or unconditionally exempt any SIP from any provision of
Section 11A of the Act or the rules or regulation thereunder, if the
Commission finds that such exemption is consistent with the public
interest, the protection of investors, and the purposes of Section 11A
of the Act, including the maintenance of fair and orderly markets in
securities and the removal of impediments to and perfection of the
mechanism of a national market system.\68\
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\67\ 15 U.S.C. 78k-1(b)(1).
\68\ 15 U.S.C. 78k-1(b)(1). See also Rule 609(c), 17 CFR
242.609(c).
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The Commission has determined to grant ArcaEx a temporary exemption
from registration under Section 11A(b)(1) of the Act and Rule 609
thereunder for a period of thirty (30) days from the date of closing of
the Merger, while an application for registration or an application for
an exemption pursuant to Section 11A(b)(1) of the Act and Rule 609
thereunder is prepared.\69\ The Commission also has determined to grant
a conditional continuation of the 30-day temporary exemption from
registration of ArcaEx, conditioned upon its filing of an application
for registration or application for an exemption from registration
within the 30-day time period. Such continuation shall continue for a
period of 90 days following the end of the 30-day period and will
afford interested persons an opportunity to submit written comments
concerning the application filed with the Commission.\70\
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\69\ See Securities Exchange Act Release No. 12079 (February 6,
1976) (order granting temporary exemption from SIP registration for
Nasdaq for (1) a period of 30 days following the consummation of the
sale of the Nasdaq system to the NASD and the assignment of the
NASD's rights in such purchase to Nasdaq, a subsidiary of the NASD
and (2) an additional period of ninety (90) days following the day
of publication of notice of filing of an application for
registration or exemption from registration, if such application is
received within the original 30 days). See also Securities Exchange
Act Release Nos. 13278 (February 17, 1977) (granting Bradford
National Clearing Corporation, which was to perform SIP functions
for the Pacific Exchange, a 90-day temporary exemption from
registration as a SIP pending Commission determination of Bradford's
application for a permanent exemption, such 90-day period to begin
from the consummation of the agreement calling for Bradford's
assumption of the SIP services) and 27957 (April 27, 1990), 55 FR
19140 (May 8, 1990) (granting the NASD a 90-day temporary exemption
from registration of its subsidiary, Market Services, Inc., which
was to operate the NASD's PORTAL market, as a SIP pending Commission
review of its application for registration filed with the
Commission).
\70\ Publication of notice of the filing of an application for
registration is required by Section 11A(b)(3) of the Act, 15 U.S.C.
78k-1(b)(3).
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ArcaEx currently operates the equities trading facility of PCX and
is regulated as a facility of PCX.\71\ The Commission therefore finds
that such temporary exemptions are consistent with the public interest,
the protection of investors, and the purposes of Section 11A of the
Act. The exemptions are for a limited period of time during which the
Commission will have regulatory authority over ArcaEx.
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\71\ See Securities Exchange Act Release No. 44983 (October 25,
2001), 66 FR 55225 (November 1, 2001).
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III. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\72\ that the proposed rule change (SR-PCX-2005-134), as amended,
is approved and Amendment No. 2 is approved on an accelerated basis.
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\72\ 15 U.S.C. 78s(b)(2).
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It is therefore further ordered, pursuant to Section 11A(b)(1) of
the Act,\73\ that ArcaEx shall be exempt from registration as a
securities information processor for a period of thirty (30) days
following the date of closing of the Merger.
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\73\ 15 U.S.C. 78k-1(b)(1).
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It is therefore further ordered, pursuant to Section 11A(b)(1) of
the Act,\74\ that upon the filing by ArcaEx of an application for
registration or an exemption from registration as a securities
information processor within the 30-day period prescribed above, ArcaEx
shall be exempt from registration as a securities information processor
for an additional period of ninety (90) days following the end of the
original 30-day period.
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\74\ Id.
By the Commission (Chairman Cox and Commissioners Glassman,
Atkins, Campos, and Nazareth).
Nancy M. Morris,
Secretary.
[FR Doc. E6-3093 Filed 3-3-06; 8:45 am]
BILLING CODE 8010-01-P
