Self-Regulatory Organizations; National Stock ExchangeSM, 34660-34672 [E6-9354]
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Federal Register / Vol. 71, No. 115 / Thursday, June 15, 2006 / Notices
intends to implement the proposed rule
change, as amended, on July 3, 2006.
At any time within 60 days of the
filing of the proposed rule change, as
amended, the Commission may
summarily abrogate such rule change if
it appears to the Commission that 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.12
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change, as amended, is consistent with
the Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NASD–2006–065 on the
subject line.
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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–NASD–2006–065. 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
12 The effective date of the original proposed rule
change is May 23, 2006, and the effective date of
Amendment No. 1 is May 31, 2006. For purposes
of calculating the 60-day period within which the
Commission may summarily abrogate the proposed
rule change, as amended, under Section 19(b)(3)(C)
of the Act, the Commission considers the period to
commence on May 31, 2006, the date on which
NASD submitted Amendment No. 1. See 15 U.S.C.
78s(b)(3)(C).
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available for inspection and copying at
the principal office of NASD. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–NASD–2006–065 and
should be submitted on or before July 6,
2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.13
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06–5419 Filed 6–14–06; 8:45 am]
Rule 19b–4 thereunder,2 a proposed rule
change to effect a series of proposed
changes to the Exchange’s corporate
structure that would allow for the
demutualization of the Exchange. On
April 19, 2006, the NSX submitted
Amendment No. 1 to the proposed rule
change.3 On April 25, 2006, the NSX
submitted Amendment No. 2 to the
proposed rule change, as amended.4 The
proposed rule change, as amended, was
published for comment in the Federal
Register on May 3, 2006.5 The
Commission has received one comment
on the proposal.6 The NSX submitted a
response to the comment on June 5,
2006.7 This order approves the
proposed rule change, as amended.
BILLING CODE 8010–01–M
II. Description of Proposed Rule Change
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53963, File No. SR–NSX–
2006–03]
Self-Regulatory Organizations;
National Stock ExchangeSM; Order
Approving Proposed Rule Change and
Amendment Nos. 1 and 2 Thereto
Relating to the Demutualization of the
National Stock Exchange
June 8, 2006.
I. Introduction
On April 5, 2006, the National Stock
ExchangeSM (‘‘NSX’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’),1 and
13 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Amendment No. 1 (‘‘Amendment No. 1’’) made
revisions to the proposed: Holdings Certificate of
Incorporation, Sections (b)(iii)(B) and (C); Holdings
By-Laws, Article III, Sections 3.1 and 3.4; NSX ByLaws, Article III, Section 3.2(b); and NSX Rule 2.10.
In addition, Amendment No. 1 added new proposed
Section 3.6 to Article III of the Holdings By-Laws,
requiring Holdings to take reasonable steps
necessary to cause its officers, directors, and
employees to consent to the applicability to them
of Article III of the Holdings By-Laws. Finally,
Amendment No. 1 made corresponding changes to
Item 3 of Form 19b–4 and Exhibit 1 to describe the
effect of the foregoing Exhibit 5 revisions and also
add a description of proposed NSX Rule 2.10.
4 Amendment No. 2 (‘‘Amendment No. 2’’) made
changes to Item 3 of Form 19b–4 and Exhibit 1,
which changes were incorporated into the notice;
see infra, note 5.
5 See Securities Exchange Act Release No. 53721
(April 25, 2006), 71 FR 26155 (May 3, 2006)
(’’Demutualization Notice’’).
6 See Letter from Ann Yerger, Executive Director,
Council of Institutional Investors to Nancy M.
Morris, Secretary, Commission, dated May 11, 2006
(‘‘CII Letter’’).
7 See Letter from James C. Yong, Chief Regulatory
Officer, Exchange to Nancy M. Morris, Secretary,
Commission, dated June 5, 2006 (‘‘NSX Response’’).
1 15
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a. Description of Demutualization
Transaction
Currently, NSX is a non-stock
nonprofit Ohio corporation. NSX
proposes to demutualize by reorganizing
as a Delaware for-profit stock
corporation that would be a direct and
wholly-owned subsidiary of a new
Delaware for-profit stock holding
company (‘‘Holdings’’). To accomplish
the demutualization, NSX has
established (i) two new Delaware stock
for-profit corporations: Holdings, a
direct and wholly-owned subsidiary of
NSX, and NSX Delaware Merger Sub,
Inc. (‘‘NSX Delaware Merger Sub’’), a
direct and wholly-owned subsidiary of
Holdings, and (ii) one transitory Ohio
stock for-profit corporation, NSX Ohio
Merger Sub, Inc. (‘‘NSX Ohio Merger
Sub’’), also a direct and wholly-owned
subsidiary of Holdings.8
Pursuant to an agreement and plan of
merger, NSX would merge (‘‘Merger
#1’’) with and into NSX Ohio Merger
Sub, with NSX Ohio Merger Sub
surviving the merger as an Ohio forprofit stock corporation that is a direct
and wholly-owned subsidiary of
Holdings. As a result of Merger #1, NSX
Ohio Merger Sub will be the initial
successor-in-interest to NSX.
Immediately following Merger #1,
pursuant to a second agreement and
plan of merger, NSX Ohio Merger Sub
would merge (‘‘Merger #2’’) with and
into NSX Delaware Merger Sub, with
NSX Delaware Merger Sub renamed
National Stock Exchange, Inc. surviving
the merger as a Delaware for-profit stock
8 The Exchange stated that the establishment of
NSX Ohio Merger Sub and the process of
demutualization through two mergers (as described
more fully in this document) are necessitated
because under Ohio law, NSX, as an Ohio nonprofit
corporation, may not merge directly with and into
a foreign for-profit corporation, such as NSX
Delaware Merger Sub.
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corporation that is a direct and whollyowned subsidiary of Holdings.9
In the Demutualization Notice, the
Exchange stated that upon completion
of Merger #2, NSX, the Delaware forprofit stock corporation, would be, in
effect, the successor-in-interest to NSX,
the current Ohio non-stock nonprofit
corporation, and would assume all of
the assets and liabilities of the
Exchange, including, without limitation,
the adherence to, and the performance
of, the undertakings under the Order
Instituting Administrative and Ceaseand-Desist Proceedings Pursuant to
Sections 19(b) and 21C of the Securities
Exchange Act of 1934, Making Findings
and Imposing Sanctions, entered by the
Commission on May 19, 2005 10 (the
‘‘Order’’).11 NSX stated that it would
continue to engage in the business of
operating a national securities exchange
registered under Section 6 of the Act.12
Presently, the members of NSX hold
certificates of proprietary membership
in NSX and have a right to trade on the
exchange operated by NSX. On the
effective date of the demutualization
(the ‘‘Effective Date’’), each member of
NSX would receive 1,000 shares of
Holdings Class A common stock 13 for
the first certificate of proprietary
membership of NSX held by the
member and would receive a modestly
discounted number of shares of Class A
common stock (determined by a formula
set forth in the Merger #1 merger
agreement) for each additional
9 The term ‘‘NSX’’ in this document will also refer
to the Exchange as a Delaware for-profit stock
corporation after the demutualization.
10 See Securities Exchange Act Release No. 51714.
11 See Demutualization Notice.
12 15 U.S.C. 78f. Following the demutualization,
the Exchange stated that earnings of NSX not
retained in its business may be distributed to its
parent, Holdings, and Holdings would be
authorized to pay dividends to the stockholders of
Holdings as and when they are declared by the
Board of Directors of Holdings, but subject to the
limitation under the proposed NSX By-Laws that
any revenues received by NSX from regulatory fees
or penalties may not be used to pay dividends. See
proposed NSX By-Laws, Section 10.4.
13 Holdings would be authorized to issue
1,100,000 shares of common stock having a par
value of $.0001 per share (of which 900,000 shares
will be designated as Class A common stock,
100,000 shares will designated as Class B common
stock and 100,000 shares will be designated as Class
C common stock) and 100,000 shares of preferred
stock having a par value of $.0001 per share. The
Class A common stock would be entitled to one
vote per share, absent a provision in the Holdings
Certificate of Incorporation fixing or denying voting
rights. Neither the Class B nor Class C common
stock would be entitled to vote, unless the matter
at issue would the alter the rights, preferences,
privileges or limitations (other than the right to
vote) of that stock, respectively, without also
altering the rights, preferences, privileges and
limitations of the Class A common stock in an
identical manner. See proposed Holdings Certificate
of Incorporation, Article Fourth, and proposed
Holdings By-Laws, Section 4.10.
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certificate held. If, however, the total
number of Class A shares to be received
by a member that would hold an equity
trading permit entitling it to trading
access on the Exchange after the
demutualization (an ‘‘ETP Holder’’),
together with any Class A shares to be
received by that member’s Related
Persons,14 would exceed 20% of the
total number of Class A shares issued
(and thus be in violation of an
ownership limitation under the
proposed Holdings Certificate of
Incorporation 15), that member would
receive shares of Class C common
stock 16 (which would generally not be
entitled to the right to vote) in lieu of
the shares of Class A common stock that
are in excess of the 20% ownership
limitation (and that the member would
have received were the 20% ownership
limitation not in effect under the
proposed Holdings Certificate of
Incorporation).
The Chicago Board Options Exchange,
Incorporated (‘‘CBOE’’) owns certificates
of proprietary membership in NSX but
is not a member of NSX. In the
demutualization, CBOE would receive
shares of Holdings Class B common
14 Under the proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (a)(ii),
‘‘Related Persons’’ means, with respect to any
Person: (A) Any ‘‘affiliate’’ of such Person (as such
term is defined in Rule 12b–2 under the Act); (B)
any other Person with which such first Person has
any agreement, arrangement or understanding
(whether or not in writing) to act together for the
purpose of acquiring, voting, holding or disposing
of shares of the capital stock of the Corporation; (C)
in the case of a Person that is a company,
corporation or similar entity, any executive officer
(as defined under Rule 3b–7 under the Act) or
director of such Person and, in the case of a Person
that is a partnership or limited liability company,
any general partner, managing member or manager
of such Person, as applicable; (D) in the case of an
ETP Holder, any Person that is associated with the
ETP Holder (as determined using the definition of
‘‘person associated with a member’’ as defined
under Section 3(a)(21) of the Act); (E) in the case
of a Person that is an individual, any relative or
spouse of such Person, or any relative of such
spouse who has the same home as such Person or
who is a director or officer of the Corporation or any
of its parents or subsidiaries; (F) in the case of a
Person that is an executive officer (as defined under
Rule 3b–7 under the Act) or a director of a
company, corporation or similar entity, such
company, corporation or entity, as applicable; and
(G) in the case of a Person that is a general partner,
managing member or manager of a partnership or
limited liability company, such partnership or
limited liability company, as applicable.
15 See infra subsection II.b.(1)(a)(iv).
16 Each share of Class C common stock issued
would be convertible, at the option of its holder, to
one share of Class A common stock upon the
satisfaction of certain notification and other
requirements under the Holdings Certificate of
Incorporation, but only to the extent that the
conversion does not violate the limitations on
ownership, transfer and voting applicable to Class
A common stock under the Holdings Certificate of
Incorporation, as more fully described in this
document. See proposed Holdings Certificate of
Incorporation, Article Fourth, paragraph (d).
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stock (which is generally not entitled to
the right to vote) in exchange for its
certificates of proprietary membership
in NSX that are subject to put and call
rights under a Termination of Rights
Agreement between NSX and CBOE
dated September 27, 2004 (the
‘‘TORA’’),17 and would receive shares of
Holdings Class A common stock in
exchange for the remainder of its
certificates of proprietary
membership.18 The number of Class A
and Class B shares received by CBOE
would be based on the discount formula
set forth in the Merger #1 merger
agreement.
Following the demutualization,
persons and entities who have been
qualified for membership under the
Exchange’s current Rules and, as a
result, have access to the Exchange’s
trading facilities would separately
receive NSX equity trading permits
(‘‘ETPs’’) entitling them to maintain
their trading access to NSX and, as
noted above, would be referred to as
‘‘ETP Holders.’’ Shares of Holdings
capital stock and ETPs would not be
tied together. Following the
demutualization, former NSX members
would be able to sell the shares of
Holdings capital stock they receive in
connection with the demutualization,
subject to the applicable restrictions in
the proposed Holdings Certificate of
Incorporation and Holdings By-Laws (as
described more fully below), while
retaining the ability to trade and operate
on the Exchange pursuant to their ETPs.
Any other person or entity that satisfies
the regulatory requirements set forth in
the NSX Rules also would be able to
obtain an ETP without regard to
whether such person is a stockholder of
Holdings.
b. Summary of Proposed Rule Change
The proposed rule change, as
amended, consists of the proposed
17 In 1986, NSX and CBOE entered into an
agreement of affiliation pursuant to which CBOE
obtained certificates of proprietary membership in
NSX and certain rights associated with NSX,
including the right to hold certain seats on the
Board of Directors of NSX and certain put rights in
connection with its certificates of proprietary
membership in NSX. Under the TORA, CBOE
agreed to relinquish, upon certain terms, certain of
these rights in exchange for cash payments and
other undertakings. See Securities Exchange Act
Release No. 34–51033 (January 13, 2005), 70 FR
3085 (January 19, 2005) (File No. SR–NSX–2004–
12). See also infra subsection II.b.(1)(b)(ii).
18 Each share of Class B common stock would
automatically convert to one share of Class A
common stock upon its transfer, in accordance with
the TORA, to a bona fide third party purchaser
unaffiliated with CBOE. See proposed Holdings
Certificate of Incorporation, Article Fourth,
paragraph (c). NSX stated that the Class B shares
would be transferable only under extraordinary
circumstances.
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Federal Register / Vol. 71, No. 115 / Thursday, June 15, 2006 / Notices
Holdings Certificate of Incorporation
and Holdings By-Laws and the proposed
changes to the Articles of Incorporation
and By-Laws of the Exchange that
reflect governance and corporate form
changes. In addition, the proposed rule
change includes proposed changes to
the Rules of the Exchange that are
necessary to implement the proposed
equity trading permit structure. NSX
also proposes to move certain
provisions in the current By-Laws of
NSX respecting members, listing
standards, and other matters not relating
to the Exchange’s corporate governance
to the NSX Rules.
(1) Corporate Structure
(a) Holdings
Following the demutualization,
Holdings would be the parent company
and sole stockholder of NSX. NSX
stated that all of the issued and
outstanding stock of Holdings initially
would be owned by the former owners
of certificates of proprietary
membership in the Exchange.
As sole stockholder of NSX, Holdings
would have the right to elect the Board
of Directors of NSX, subject to certain
provisions in the Holdings By-Laws that
require Holdings to vote for certain
persons nominated for ETP Holder
Director positions and certain persons
nominated for CBOE Director positions,
in each case in accordance with the
revised governance documents of NSX.
The Holdings Certificate of
Incorporation and the Holdings By-Laws
would govern the activities of Holdings.
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(i) Holdings Board of Directors
The business and affairs of Holdings
would be managed by its Board of
Directors (‘‘Holdings Board’’). The
Holdings Board would consist of
between 10 and 16 persons, as
determined by the Holdings Board, one
of which shall be the Chief Executive
Officer (‘‘CEO’’) of Holdings. The
Holdings Board would initially have 13
directors after the demutualization. No
person that is subject to any ‘‘statutory
disqualification’’ (within the meaning of
Section 3(a)(39) of the Act) may be a
director of Holdings.19
The directors of Holdings would be
divided into three classes, which would
be as nearly equal in number as the total
number of directors then constituting
the entire Holdings Board. After
completion of an initial phase-in
schedule, the directors of Holdings
would serve staggered three-year terms,
19 See proposed Holdings Certificate of
Incorporation, Article Sixth, Section (a), and
proposed Holdings By-Laws, Sections 2.2(a) and (b).
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with the term of office of one class
expiring each year.20
The Holdings Board would elect its
Chairman from among the directors on
the Holdings Board, and may elect a
vice-chairman to perform the functions
of the Chairman in his or her absence.21
At each annual meeting of the
stockholders of Holdings at which a
quorum is present, the individuals
receiving a plurality of the votes cast of
the Class A shares would be elected
directors of Holdings.22 At an election of
directors, each Holdings stockholder
would be entitled to one vote for each
share of Class A common stock owned
by that stockholder.23 Class B and Class
C shares shall not be entitled to vote at
an election of directors.24
In most cases, vacancies on the
Holdings Board would be filled by the
remaining directors of Holdings. If the
vacancy has resulted from a director
being removed for cause by the
stockholders of Holdings, however, that
vacancy may be filled by the
stockholders of Holdings at the same
meeting at which the director was
removed. Any director appointed to fill
a vacancy will serve until the expiration
of the term of office of the replaced
director or until the end of the term for
a newly-created directorship.25
(ii) Committees of Holdings
The Holdings Board would have an
Audit Committee, a Governance and
Nominating Committee, and such other
committees that the Holdings Board
establishes.26 The Chairman of the
Holdings Board would appoint the
members of all committees of the
Holdings Board, and may remove any
member so appointed, subject to the
approval of the Holdings Board.27 Each
committee would have the authority
and duties prescribed for it in the
Holdings By-Laws or by the Holdings
Board.28
(iii) Officers of Holdings
The officers of Holdings would be a
CEO, a President, a Secretary, a
Treasurer, and such other officers as the
20 See proposed Holdings Certificate of
Incorporation, Article Sixth, Section (b), and
proposed Holdings By-Laws, Section 2.2(c).
21 See proposed Holdings By-Laws, Section 2.3(a).
22 See proposed Holdings By-Laws, Section 4.8.
23 See proposed Holdings Certificate of
Incorporation, Article Fourth, paragraph (b), and
proposed Holdings By-Laws, Section 4.10.
24 See proposed Holdings Certificate of
Incorporation, Article Fourth, paragraphs (c) and
(d).
25 See proposed Holdings By-Laws, Section 2.4.
26 See proposed Holdings By-Laws, Section 5.1.
27 See proposed Holdings By-Laws, Section 5.2.
28 See proposed Holdings By-Laws, Section 5.3.
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Holdings Board determines.29 The CEO
would be responsible to the Holdings
Board for management of the business
affairs of Holdings.30 The officers of
Holdings would have the duties and
authority set forth in the Holdings ByLaws or given to them by the Holdings
Board, and in the case of the President,
the Secretary, and the Treasurer, given
to them by the Chief Executive Officer.31
Any two or more offices may be held by
the same person, except that the
Secretary may not also serve as the CEO
or the President. No person that is
subject to any ‘‘statutory
disqualification’’ (within the meaning of
Section 3(a)(39) of the Act) may be an
officer of Holdings.32
(iv) Stockholder Restrictions
The Holdings Certificate of
Incorporation and the Holdings By-Laws
place certain restrictions on the ability
to transfer, own, and vote the capital
stock of Holdings.
(1) Restrictions on Voting
The Holdings Certificate of
Incorporation prohibits any Person,33
either alone or together with its Related
Persons, from (a) voting or giving a
proxy or consent with respect to shares
representing more than 20% of the
voting power of the then-issued and
outstanding capital stock of Holdings; or
(b) entering into any agreement, plan, or
arrangement that would result in the
shares of Holdings subject to that
agreement, plan, or arrangement not
being voted on a matter, or any proxy
relating thereto being withheld, where
the effect of that agreement, plan, or
arrangement would be to enable any
Person, alone or together with its
Related Persons, to obtain more than
20% of the voting power of the thenissued and outstanding capital stock of
Holdings.34
This restriction would not apply to
the Class B or Class C common stock
and, as to the Class A common stock
owned by Persons other than ETP
Holders and their Related Persons, may
be waived by Holdings Board pursuant
to a resolution adopted by the Holdings
29 See
proposed Holdings By-Laws, Section 6.1.
proposed Holdings By-Laws, Section 6.4.
31 See proposed Holdings By-Laws, Sections 6.1,
6.4, 6.5, 6.6, and 6.7.
32 See proposed Holdings By-Laws, Section 6.1.
33 Article Fifth of the proposed Holdings
Certificate of Incorporation defines a ‘‘Person’’ to
mean ‘‘an individual, partnership (general or
limited), joint stock company, corporation, limited
liability company, trust or unincorporated
organization, or any governmental entity or agency
or political subdivision thereof.’’
34 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (b)(ii)(C).
30 See
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Board.35 Before adopting such
resolution, however, the Holdings Board
must determine that, among other
things, the waiver of the voting
limitation will not impair the ability of
NSX to carry out its functions and
responsibilities under the Act and the
rules and regulations promulgated
thereunder, and will not impair the
Commission’s ability to enforce the Act
and the rules and regulations
promulgated thereunder.36 In addition,
the Holdings Board also must determine
that a Person and its Related Persons
that would vote more than 20% of the
outstanding stock of Holdings are not
subject to an applicable ‘‘statutory
disqualification’’ (within the meaning of
Section 3(a)(39) of the Act).37 Finally,
any resolution of the Holdings Board
that would permit a Person to vote more
than 20% of the outstanding stock of
Holdings must be filed with and
approved by the Commission before it
becomes effective.38
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(2) Restrictions on Ownership
Under the proposed Holdings
Certificate of Incorporation, no Person,
either alone or together with its Related
Persons, may own shares constituting
more than 40% of any class of capital
stock of Holdings (other than a class of
stock without general voting rights).39
The Holdings Board may waive this
ownership limitation pursuant to a
resolution adopted by the Holdings
Board. Before adopting such resolution,
however, the Holdings Board must
determine that, among other things, the
waiver of the ownership limitation
would not impair the ability of NSX to
carry out its functions and
responsibilities under the Act and the
rules and regulations promulgated
thereunder and would not impair the
Commission’s ability to enforce the Act
and the rules and regulations
promulgated thereunder.40
In addition, the Holdings Board also
must determine that any Person and its
Related Persons that would own more
than 40% of any class of capital stock
of Holdings are not subject to any
applicable ‘‘statutory disqualification’’
35 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraphs (b)(iii)(A)
and (B). See Amendment No. 1, supra note 3.
36 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (b)(iii)(B).
37 15 U.S.C. 78c(a)(39); see proposed Holdings
Certificate of Incorporation, Article Fifth, paragraph
(b)(iv).
38 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (b)(iii)(B).
39 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraphs (b)(ii)(A)
and (b)(iii)(A).
40 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (b)(iii)(B).
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(within the meaning of Section 3(a)(39)
of the Act).41 Finally, any Holdings
Board resolution that would permit
ownership of Holdings capital stock in
excess of the ownership limitation
described above must be filed with and
approved by the Commission before it
becomes effective.42
In addition to the ownership
restriction described above, no ETP
Holder, whether alone or together with
its Related Persons, may own shares
constituting more than 20% of any class
of capital stock of Holdings.43 However,
this ownership restriction would not
apply to any ETP Holder, with respect
to shares of Class C common stock of
Holdings issued to the ETP Holder in
connection with, and from the date of,
the demutualization of NSX so long as
the ETP Holder becomes compliant with
the ownership limitation promptly after
such issuance.44
extent of the violation.46 Further, if any
stockholder purports to sell, transfer,
assign, pledge, vote, or own any shares
that would violate the ownership and
voting restrictions, Holdings would
have the right to, and would generally
be required to promptly, redeem such
shares at a price equal to the par value
of the shares.47 Also, a stockholder that
alone or together with its Related
Persons owns five percent or more of
the then outstanding shares of the
capital stock of Holdings entitled to vote
in an election of directors must, upon
acquiring knowledge of such ownership,
immediately give the Holdings Board
written notice of such ownership.48
Holdings may also require any Person
reasonably believed to be subject to and
in violation of the voting and ownership
restrictions to provide to Holdings
information relating to such potential
violation.49
(3) Other Stockholder Ownership and
Voting Restriction Requirements
(4) Restrictions on Transfer
Members, former members, and other
equity owners of NSX who receive
shares of capital stock of Holdings in the
demutualization may not sell, transfer,
or otherwise dispose of those shares for
the first thirty days following their
issuance, unless the Holdings Board
waives this transfer restriction.50
Also, unless waived by the Holdings
Board or pursuant to a redemption of
shares by Holdings, each stockholder of
Holdings would be prohibited from
selling, transferring, or otherwise
disposing of common shares of Holdings
except in amounts of at least 1,000
shares (unless the stockholder is
transferring all shares owned), and no
stockholder would be permitted to
transfer any capital stock of Holdings
(other than pursuant to a redemption of
shares by Holdings) until all amounts
due and owing from that stockholder to
NSX have been paid.51
In the event that a stockholder desires
to transfer shares of capital stock of
Holdings to any person (other than an
affiliate of the stockholder or to another
holder of the same class of capital stock)
prior to January 1, 2011, Holdings
would have a right of first refusal
permitting it to purchase those shares,
The proposed Holdings Certificate of
Incorporation contains several
provisions that would enable Holdings
to enforce restrictions on the ownership
and voting of Holdings capital stock
described in the preceding section.
Specifically, if a stockholder purports to
sell, transfer, assign, or pledge to any
Person (other than Holdings) any shares
of Holdings that would violate the
ownership restrictions, Holdings would
record on its books the transfer of only
the number of shares that would not
violate the restrictions and would treat
the remaining shares as owned by the
purported transferor, for all purposes,
including, without limitation, voting,
payment of dividends, and
distributions.45
In addition, if any stockholder
purports to vote, or to grant any proxy
or enter into any agreement, plan, or
arrangement relating to the voting of
shares that would violate the voting
restrictions, Holdings would not honor
such vote, proxy, or agreement, plan, or
other arrangement to the extent that the
restrictions would be violated, and any
shares subject to that arrangement
would not be entitled to be voted to the
46 Id.
41 15
U.S.C. 78c(a)(39); see proposed Holdings
Certificate of Incorporation, Article Fifth, paragraph
(b)(iv).
42 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraphs (b)(iii)(B)
and (C).
43 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (b)(ii)(B).
44 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (b)(iii)(C).
See Amendment No. 1, supra note 3.
45 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (d).
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47 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (e).
48 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (c)(i). Such
notice must also be updated under certain
circumstances. See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (c)(ii).
49 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (c)(iii).
50 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (b)(i).
51 See proposed Holdings By-Laws, Sections 9.4
and 9.5(b).
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except for transfers by bequest,
operation of law, or judicial decree
under certain circumstances.52
In addition to these transfer
restrictions, shares of Holdings would
be ‘‘restricted securities’’ under the
Securities Act of 1933 (‘‘Securities Act’’)
and only may be transferred pursuant to
an effective registration statement under
the Securities Act and in accordance
with applicable state securities laws or,
if an exemption from registration is
available, upon delivery to Holdings of
a satisfactory opinion of counsel that
such transfer may be effected pursuant
to the exemption. In addition, counsel
to Holdings may require delivery of
documentation to ensure that the
transfer complies with the Securities
Act and state securities laws before such
transfer is effected.53 In the
Demutualization Notice, the Exchange
stated that Holdings had no intention to
register its common stock under the
Securities Act or the Act, and, unless
waived in writing by the Holdings
Board, no transfer would be honored by
Holdings that would cause Holdings to
have to do so or to become subject to the
reporting requirements of the Act.54
(v) Self-Regulatory Function and
Oversight
The Holdings By-Laws contain
various provisions designed to protect
the independence of the self-regulatory
function of NSX. For example, under
the Holdings By-Laws, for as long as
Holdings controls NSX, the Holdings
Board and the directors, officers, and
employees of Holdings must give due
regard to the preservation of the
independence of the self-regulatory
function of NSX and to its obligations to
investors and the general public, and are
prohibited from taking actions that
would interfere with the effectuation of
decisions by the Board of Directors of
NSX (‘‘NSX Board’’) relating to NSX’s
regulatory functions, including
disciplinary matters, or which would
interfere with NSX’s ability to carry out
its responsibilities under the Act.55
The Holdings By-Laws also contain a
specific requirement that all books and
records of NSX, and the information
contained therein, that reflect
confidential information pertaining to
the self-regulatory function of NSX,
which come into the possession of
Holdings, must be retained in
confidence by Holdings and its Board,
officers, employees, and agents, and
must not be used for any non-regulatory
52 See
proposed Holdings By-Laws, Section 9.6.
proposed Holdings By-Laws, Section 9.5(a).
54 See proposed Holdings By-Laws, Section 9.5(c).
55 See proposed Holdings By-Laws, Section 3.1.
53 See
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purposes.56 In addition, the Holdings
By-Laws provide that, to the extent they
are related to the activities of NSX, the
books, records, premises, officers,
directors, agents, and employees of
Holdings are deemed to be the books,
records, premises, officers, directors,
agents, and employees of NSX for the
purposes of, and subject to oversight
pursuant to, the Act.57
Pursuant to the Holdings By-Laws,
Holdings must comply with the Federal
securities laws and the rules and
regulations promulgated thereunder.
The Holdings By-Laws also provide that
Holdings must cooperate with the
Commission and NSX pursuant to and
to the extent of their respective
regulatory authority, and that the
officers, directors, employees, and
agents of Holdings, by virtue of their
acceptance of such position, are deemed
to agree to cooperate with the
Commission and NSX in respect of the
Commission’s oversight responsibilities
regarding NSX and the self-regulatory
function and responsibilities of NSX.58
In addition, the Holdings By-Laws
provide that Holdings, its officers,
directors, employees, and agents, by
virtue of their acceptance of such
positions, are deemed to irrevocably
submit to the jurisdiction of the U.S.
federal courts, the Commission and
NSX, for the purpose of any suit, action,
or proceeding pursuant to the U.S.
federal securities laws, and the rules
and regulations promulgated
thereunder, arising out of, or relating to,
the activities of NSX.59
Finally, the Holdings Certificate of
Incorporation and the Holdings By-Laws
provide that, as long as Holdings
controls NSX, before any change to the
Holdings Certificate of Incorporation or
the Holdings By-Laws, respectively, will
be effective, such change must be
submitted to the NSX Board, and if the
NSX Board determines that the change
must be filed with or filed with and
approved by the Commission before it
may be effective, the change will not be
effective until it is filed with, or filed
56 See
proposed Holdings By-Laws, Section 3.2.
proposed Holdings By-Laws, Section 3.3.
This provision also requires Holdings to maintain
its books and records in the United States.
58 See proposed Holdings By-Laws, Section 3.4.
See Amendment No. 1, supra note 3.
59 See proposed Holdings By-Laws, Section 3.5.
Pursuant to the Holdings By-Laws, Holdings would
be required to take reasonable steps necessary to
cause its officers, directors, and employees, prior to
accepting a position as an officer, director, or
employee, as applicable, of Holdings, to consent in
writing to the applicability to them of the
provisions described in this and the preceding two
paragraphs with respect to their activities related to
NSX; see Amendment No. 1, supra note 3.
57 See
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with and approved by, the Commission,
as the case may be.60
(b) NSX
Following the demutualization, NSX
would become a Delaware for-profit
stock corporation, with the authority to
issue 1,000 shares of common stock. At
all times, all of the voting stock of NSX
would be owned by Holdings.61 NSX
would continue to be the entity
registered as a national securities
exchange under Section 6 of the Act 62
and, accordingly, NSX would continue
to be a self-regulatory organization
(‘‘SRO’’).63
(i) Governing Documents and NSX Rules
The proposed NSX Certificate of
Incorporation,64 NSX By-Laws, and
NSX Rules (with the proposed changes
described in this document) would
govern the activities of NSX. NSX stated
that these rules and governance
documents reflect, among other things,
NSX’s status as a wholly-owned
subsidiary of Holdings, its management
by the NSX Board and its designated
officers, and its self-regulatory
responsibilities pursuant to NSX’s
registration under Section 6 of the Act.
NSX’s proposed governance documents
are designed to be consistent with its
current governance structure, with
certain changes based upon its proposed
new corporate form.
(ii) Board of Directors
After the demutualization, the NSX
Board would initially consist of 13
directors. The NSX Board would be
initially comprised of the CEO of NSX,
60 See proposed Holdings Certificate of
Incorporation, Article Twelfth, and proposed
Holdings By-Laws, Article VIII. These provisions
additionally state, respectively, that (i) any change
to the proposed Holdings Certificate of
Incorporation must also be first approved by the
Holdings Board and (ii) any change to the proposed
Holdings By-Laws may be made by either the
stockholders of Holdings or the Holdings Board. In
addition, under Article Fourth, paragraph (e) of the
proposed Holdings Certificate of Incorporation,
holders of preferred stock (voting separately as
single class) must approve any change to the
Holdings Certificate of Incorporation that would
change the terms of that preferred stock. No
preferred stock is currently issued and outstanding.
61 See proposed NSX Certificate of Incorporation,
Article Fourth.
62 15 U.S.C. 78f.
63 In addition, NSX stated that it would continue
to adhere to the undertakings in the Order (see
supra note 10) including, without limitation, the
structure provisions of a Regulatory Oversight
Committee, the separation of the regulatory
functions from the commercial interests of the
Exchange, and the retention of third parties to
review the Exchange’s regulatory functions.
64 Due to differences in terminology between
Ohio and Delaware law, the Exchange’s Articles of
Incorporation are proposed to be renamed its
‘‘Certificate of Incorporation.’’
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3 ETP Holder Directors,65 7
Independent Directors,66 and 2 directors
who are executive officers of CBOE, its
members,67 or executive officers of
CBOE member organizations.68
Currently, the Exchange’s Board of
Directors consists of the CEO of NSX, 3
proprietary members or executive
officers of proprietary members, 7
independent directors, and 2 executive
officers of CBOE, CBOE members, or
executive officers of CBOE member
organizations.
Under the proposed rule change, the
NSX Board may by resolution increase
its size to up to 20 directors. Directors
added to the NSX Board to fill these
new director positions will be (i)
Independent Directors, to the extent
necessary for the NSX Board to include
at least 50% Independent Directors; (ii)
ETP Holder Directors, to the extent
necessary for the NSX Board to include
at least 20% ETP Holder Directors; and
(iii) persons who do not qualify as
Independent Directors (‘‘At-Large
Directors’’), for the remainder of the
positions added to the NSX Board that
are not filled with Independent
Directors or ETP Holder Directors
pursuant to clauses (i) and (ii) above. At
all times, the NSX Board must include
the CEO of NSX, at least 50%
Independent Directors and 3 ETP
Holder Directors (or such greater
number of ETP Holder Directors as is
necessary to comprise at least 20% of
the NSX Board).69
No two or more directors under the
proposed NSX By-Laws may be
partners, officers, or directors of the
same person or be affiliated with the
same person, unless such affiliation is
with a national securities exchange or
Holdings.70 Directors of NSX other than
65 An ETP Holder Director is defined under the
proposed NSX By-Laws as a director who is an ETP
Holder or a director, officer, managing member or
partner of an entity that is an ETP Holder. See
proposed NSX By-Laws, Section 1.1(E)(2).
66 An Independent Director is defined under the
proposed NSX By-Laws as a member of the NSX
Board that the NSX Board has determined to have
no material relationship with NSX or any affiliate
of NSX, or any ETP Holder or any affiliate of any
such ETP Holder, other than as a member of the
NSX Board. See proposed NSX By-Laws, Section
1.1(I)(1). This definition is consistent with the
definition of Independent Director in the current
By-Laws of NSX. NSX states that at least one
Independent Director will be representative of
investors; see Amendment No. 1, supra note 3.
67 A CBOE member is defined under the proposed
NSX By-Laws as an individual CBOE member or a
CBOE member organization that is a regular
member or special member of CBOE (as such terms
are described in the Constitution of the CBOE), as
such CBOE members may exist from time to time.
See proposed NSX By-Laws, Section 1.1(C)(2).
68 See proposed NSX By-Laws, Section 3.2(a).
69 See proposed NSX By-Laws, Section 3.2(b); see
Amendment No. 1, supra note 3.
70 See proposed NSX By-Laws, Section 3.2(c).
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the CEO and the CBOE Directors would
be divided into three classes, consisting
as nearly as possible of equal numbers
of directors.71 After completion of an
initial phase-in schedule, these directors
would serve for staggered three-year
terms, with the term of one class
expiring each year. The CEO’s
appointment as a director would
coincide with his or her term as CEO of
NSX.72 The CBOE Directors would each
serve a one year term.73
Under the proposed NSX By-Laws,
the NSX Board is subject to change
upon certain events in accordance with
the TORA between CBOE and NSX.74
Under the TORA, CBOE was provided
with 4 put rights to transfer its equity
interests in NSX to NSX and NSX was
provided with 4 call rights on those
equity interests. According to NSX, as of
March 10, 2006, the first of these put
rights was exercised by CBOE,
decreasing the number of director
positions of NSX filled by a
representative of CBOE from 3 to 2 and
increasing the number of positions filled
by independent directors from 6 to 7.
Under the proposed NSX By-Laws:
• On the second closing of a put or
call under the TORA, the number of
positions on the NSX Board filled by
representatives of CBOE will be reduced
from 2 to 1. The vacant director position
must be filled by an At-Large Director,
unless an Independent Director is
needed to maintain at least 50%
Independent Directors on the NSX
Board.75
• On the earlier of the date CBOE
owns less than 5% of the outstanding
capital stock of Holdings or the third
anniversary of the fourth closing of a
put or call under the TORA, CBOE’s
appointed positions on the NSX board
will decrease to zero. The vacant
director position must be filled with an
At-Large Director, unless an
Independent Director is needed to
maintain at least 50% Independent
Directors on the NSX Board.76
The NSX Board would elect its
Chairman from among the directors of
the NSX Board. The Chairman of the
NSX Board may also serve as the CEO
and President of NSX, but may hold no
other offices in NSX. Unless the
Chairman also serves as the CEO of
NSX, the NSX Board must elect the
Chairman from among the Independent
Directors of the NSX Board.77
71 See
proposed NSX By-Laws, Section 3.4.
proposed NSX By-Laws, Section 3.4(a).
73 See proposed NSX By-Laws, Section 3.4(d).
74 See generally proposed NSX By-Laws, Section
3.3.
75 See proposed NSX By-Laws, Section 3.3(a).
76 See proposed NSX By-Laws, Section 3.3(b).
77 See proposed NSX By-Laws, Section 3.6.
72 See
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34665
In most cases, vacancies on the NSX
Board would be filled by the remaining
directors of NSX. If the vacancy has
resulted from a director being removed
for cause by the stockholders of NSX,
however, that vacancy may be filled by
the stockholder of NSX (i.e., Holdings)
at the same meeting at which the
director was removed. Any director
appointed to fill a vacancy would serve
until the expiration of the term of office
of the replaced director or until the end
of the term for a newly-created
directorship.78
(iii) Nomination and Election of
Directors
After the formation of the initial NSX
Board, the NSX Governance and
Nominating Committee would nominate
directors for each director position
(other than CBOE director positions)
standing for election at the annual
meeting of stockholders that year.
Candidates for CBOE Directors would be
nominated by the Board of Directors of
CBOE at its annual meeting or within 20
days of NSX’s annual stockholders’
meeting. Because ETPs are not equity
interests in NSX, ETP Holders are not
entitled to directly elect members of the
NSX Board. Rather, Holdings, as the
sole stockholder of NSX, would have
the sole right and the obligation to vote
for the directors of the NSX Board.79
Specifically, the ETP Holder Director
Nominating Committee of NSX (which
would be composed solely of ETP
Holder Directors and/or ETP Holder
representatives) would consult with the
NSX Governance and Nominating
Committee, the Chairman, and the CEO
of NSX and solicit comments from ETP
Holders for the purpose of approving
and submitting names of ETP Holder
Director candidates.80 These initial
candidates for nomination would be
announced to ETP Holders, who would
then have the opportunity to identify
additional candidates for nomination to
ETP Holder Director positions by
submitting a petition signed by at least
ten percent of the ETP Holders. An ETP
Holder may endorse as many candidates
as there are ETP Holder Director
positions to be filled. If no petitions are
submitted within the time frame
prescribed by the NSX By-Laws, the
initial candidates approved and
submitted by the ETP Holder Director
Nominating Committee would be
78 See
proposed NSX By-Laws, Section 3.7(a).
Section 10.5(a) of the proposed By-Laws
of Holdings, the power to vote the stock of NSX
held by Holdings would be with the CEO of
Holdings, unless the Holdings Board instructs
otherwise or unless the Holdings Board or the CEO
of Holdings confers such power on another person.
80 See proposed NSX By-Laws, Section 3.5.
79 Under
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nominated. If one or more valid
petitions are submitted, the ETP Holders
would vote on the entire group of
potential candidates, and the
individuals receiving the largest number
of votes would be the ETP Holder
Director nominees.81
(iv) Committees
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The NSX Board would have the
following committees: (1) A Business
Conduct Committee; (2) a Securities
Committee; (3) an Appeals Committee;
(4) a Governance and Nominating
Committee; (5) an ETP Holder Director
Nominating Committee; (6) a Regulatory
Oversight Committee; (7) a
Compensation Committee; (8) an
Executive Committee; and (9) an Audit
Committee.82 The NSX Board may
establish other committees from time to
time. Each committee would have the
authority and responsibilities prescribed
for it in the NSX By-Laws, the rules of
the Exchange, or by the NSX Board.83
The Chairman of the NSX Board
would appoint, and may remove, the
members of the committees, subject to
the approval of the NSX Board.84 Each
committee must have at least 3
members.85 The Executive Committee
would have the powers that the NSX
Board delegates to it, except the power
to change the membership of, or fill
vacancies in, the Executive
Committee.86 The ETP Holder Director
Nominating Committee would have the
power to approve and submit names of
candidates for election to the position of
ETP Holder Director in accordance with
the NSX By-Laws.87 The Regulatory
Oversight Committee would oversee all
of the regulatory functions and
responsibilities of NSX and advise the
81 Under Section 3.5(e) of the proposed NSX ByLaws, each ETP Holder, regardless of its affiliation
with other ETP Holders, will have one vote with
respect to each ETP Holder Director position to be
filled, but may not cast such votes cumulatively.
The CBOE directors are elected by the Board of
Directors of CBOE at its January meeting or as soon
thereafter as possible. The current By-Laws of NSX
also contain a procedure for proprietary member
director nominations, whereby one proprietary
member director candidate is nominated by the
Nominating Committee and additional proprietary
member director candidates may be nominated by
a petition signed by ten percent or more of the
proprietary members. At an annual election during
the annual meeting of members, the proprietary
members vote for the proprietary member directors
among the nominated candidates.
82 See proposed NSX By-Laws, Section 5.1.
83 See proposed NSX By-Laws, Sections 5.1 and
5.3.
84 Under Section 5.2 of the proposed NSX ByLaws, the terms of committee members are subject
to the appointment and removal process of the
Chairman and NSX Board.
85 See proposed NSX By-Laws, Section 5.2.
86 See proposed NSX By-Laws, Section 5.5.
87 See proposed NSX By-Laws, Section 5.7.
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NSX Board on regulatory matters.88 The
Regulatory Oversight Committee’s
duties and responsibilities are outlined
in its charter.89
(v) Management
The officers of NSX would be a CEO,
a President, a Chief Regulatory Officer,
a Secretary, and a Treasurer, and such
other officers as the NSX Board may
determine.90 Any two or more offices
may be held by the same person, except
that the Chief Regulatory Officer and the
Secretary may not be the CEO or the
President.91 The Chairman of the NSX
Board, subject to approval of the NSX
Board, may designate one or more
officers or other employees of NSX to
serve as an Arbitration Director, who
would perform or delegate all
ministerial duties in connection with
matters submitted for arbitration
pursuant to the rules of NSX.92
(vi) Self-Regulatory Function and
Oversight
Following the demutualization, NSX
would continue to be registered as a
national securities exchange under
Section 6 of the Act and thus would
continue to be an SRO.93 As an SRO,
NSX would be obligated to carry out its
statutory responsibilities, including
enforcing compliance by ETP Holders
with the provisions of the Federal
securities laws and the applicable rules
of NSX. Further, it would retain the
responsibility to administer and enforce
the rules that govern NSX and the
activities of its ETP Holders. In
addition, it would continue to be
required to file with the Commission,
pursuant to Section 19(b) of the Act 94
and Rule 19b–4 thereunder,95 any
changes to its rules and governing
documents. The structural protections
adopted by NSX pursuant to the Order
help to ensure that NSX’s regulatory
functions are independent from the
commercial interests of NSX and its
members would remain in effect
following demutualization.
Like the proposed Holdings By-Laws,
the proposed NSX By-Laws contain
specific provisions relating to the self88 See
proposed NSX By-Laws, Section 5.6.
stated that the Regulatory Oversight
Committee’s charter following demutualization
would be the same as the charter previously filed
with the Commission, and is consistent with the
terms of the Order. See Securities Exchange Act
Release No. 34–52573 (October 7, 2005), 70 FR
60113 (October 14, 2005) (File No. SR-NSX–2005–
07). strategies of the Exchange’s ETP Holders.
90 See proposed NSX By-Laws, Section 6.1.
91 See proposed NSX By-Laws, Section 6.1.
92 See proposed NSX By-Laws, Section 6.6.
93 See 15 U.S.C. 78c(a)(26).
94 15 U.S.C. 78s(b).
95 17 CFR 240.19b–4.
89 NSX
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regulatory function of NSX.96 For
example, the proposed NSX By-Laws
require the NSX Board to consider
applicable requirements under Section
6(b) of the Act in connection with the
management of the Exchange.97 In
addition, meetings of the NSX Board
and of the committees of NSX that
pertain to the self-regulatory function of
NSX must be closed to persons who are
not members of the NSX Board or NSX
officers, staff, counsel, or other advisors
whose participation is necessary or
appropriate to the self-regulatory
function of NSX, or representatives of
the Commission.98
Further, the NSX books and records
reflecting confidential information
relating to the self-regulatory function of
NSX must be kept confidential, must
not be used for non-regulatory purposes,
and must not be made available to any
person other than those directors,
officers, and agents of NSX to the extent
necessary or appropriate to properly
discharge NSX’s self-regulatory
responsibilities, and the books and
records of NSX must be maintained in
the U.S.99 The proposed NSX By-Laws
also provide that any revenues received
by NSX from fees derived from its
regulatory function or regulatory
penalties must be applied to fund the
legal and regulatory operations of NSX
or to pay restitution and disgorgement
of funds intended for NSX customers,
and may not be used to pay
dividends.100
96 See
proposed NSX By-Laws, Article X.
proposed NSX By-Laws, Section 10.1.
Section 6(b) of the Act requires, among other things,
that the Exchange’s rules be designed to protect
investors and the public interest. It also requires
that the Exchange be so organized that it has the
capacity to carry out the purposes of the Act and
to enforce compliance by its members with the Act,
the rules and regulations promulgated thereunder,
and the rules of the Exchange.
98 See proposed NSX By-Laws, Section 10.2. In
addition, members of the Holdings Board who are
also not members of the NSX Board and any
officers, staff, counsel, or advisors of Holdings who
do not hold similar positions with respect to NSX
would not be allowed to participate in any meeting
of the NSX Board (or any committee of NSX) that
pertains to the self-regulatory function of NSX.
These requirements and the requirements relating
to the confidentiality of records are not, however,
designed to prevent the Exchange from sharing with
Holdings the type of information about the
Exchange’s business that would ordinarily be
shared with a parent corporation, including
information relating to the Exchange’s compliance
with applicable laws, reports from the Commission
or others evaluating the Exchange’s self-regulatory
programs, and information about the trading
activities and business strategies of the Exchange’s
ETP Holders.
99 See proposed NSX By-Laws, Sections 10.3.
100 See proposed NSX By-Laws, Section 10.4.
97 See
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(vii) Restrictions on Ownership and
Transfer
Although there are no percentagebased restrictions on the ownership of
NSX, the proposed NSX Certificate of
Incorporation confirms that Holdings
will own all of the voting stock of NSX
at all times.101
(viii) Changes to Certificate of
Incorporation and By-Laws
Under the proposed NSX Certificate
of Incorporation, any change to that
document must first be approved by the
NSX Board and, if required to be
approved or filed with the Commission
before it may become effective, cannot
take effect until the procedures of the
Commission necessary to make it
effective have been satisfied.102
Similarly, under the proposed NSX
By-Laws, any change to that document
that is required to be approved by or
filed with the Commission before it may
become effective cannot take effect until
the procedures of the Commission
necessary to make it effective have been
satisfied.103 Changes to the NSX ByLaws as proposed may be made by
either the stockholders of NSX or the
NSX Board, except that certain
provisions relating to the NSX Board,
and to the voting of NSX stockholders
may not be changed without the
approval of the stockholder of NSX.104
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(c) Other Provisions in the Certificates of
Incorporation and By-Laws
The proposed Holdings By-Laws,
Holdings Certificate of Incorporation,
NSX Certificate of Incorporation, and
NSX By-Laws contain other customary
provisions of for-profit corporations,
such as provisions relating to corporate
offices and corporate purposes; 105
director meetings, voting, removal,
compensation and limitation of
liability; 106 indemnification of, and
insurance for, directors, officers,
101 See proposed NSX Certificate of Incorporation,
Article Fourth.
102 See proposed NSX Certificate of Incorporation,
Article Eleventh.
103 See proposed NSX Certificate of Incorporation,
Article Seventh.
104 See proposed NSX Certificate of Incorporation,
Article Seventh and proposed NSX By-Laws,
Section 8.1. In addition, Sections 3.1(b) and 8.2 of
the proposed NSX By-Laws permit the NSX Board
to amend, repeal, and adopt new Rules of the
Exchange.
105 See proposed NSX Certificate of Incorporation,
Articles Second and Third, and proposed NSX ByLaws, Article II; see proposed Holdings Certificate
of Incorporation, Articles Second and Third, and
proposed Holdings By-Laws, Article I.
106 See proposed NSX Certificate of Incorporation,
Articles Fifth and Eighth, and proposed NSX ByLaws, Article III and Section 7.1; see proposed
Holdings Certificate of Incorporation, Articles Sixth
and Ninth, and proposed Holdings By-Laws, Article
II and Section 7.1.
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employees and agents, and
advancement of expenses related to
defending certain actions; 107 stock
certificate procedures; 108 stockholder
ownership, including provisions
relating to the timing and conduct of
meetings, record dates, quorum
requirements, proxies, and other
matters; 109 and other general
provisions.110
(2) National Market System Plans
NSX currently is a participant in
various National Market System
(‘‘NMS’’) plans, including, but not
limited to, the Consolidated Tape
Association Plan, the Consolidated
Quotation System Plan, the Intermarket
Trading System Plan, the Intermarket
Surveillance Group, and the Reporting
Plan for Nasdaq-Listed Securities
Traded on Exchanges on an Unlisted
Trading Privileges Basis (‘‘Nasdaq
UTP’’) Plan. These plans are joint
industry plans entered into by SROs for
the purpose of addressing last sale
reporting, quotation reporting, and
intermarket equities trading. Following
the completion of the demutualization,
NSX, in its continuing role as the SRO,
would continue to serve as the voting
member of these NMS plans, and a
representative of NSX would continue
to serve as the Exchange’s representative
with respect to dealing with these plans.
(3) Equity Trading Permits;
Administrative Changes
The proposed rule change includes
proposed changes to the Rules of the
Exchange that are necessary to
implement the proposed ETP structure.
Following NSX’s demutualization,
persons and firms who have been
qualified for membership pursuant to
the Exchange’s current Rules and ByLaws and, as a result, have access to the
Exchange’s trading facilities would
receive ETPs entitling them to maintain
their trading access to NSX and would
be referred to as ETP Holders.
References to ‘‘members,’’ ‘‘member
107 See proposed NSX By-Laws, Article VII, and
proposed Holdings By-Laws, Article VII. In
addition, under these provisions, neither
corporation is liable for any loss or damage
sustained by a current or former member of NSX
or ETP Holder relating to such person’s use of the
facilities of the Exchange or its subsidiaries.
108 See proposed NSX By-Laws, Article IX, and
proposed Holdings By-Laws, Article IX.
109 See proposed NSX Certificate of Incorporation,
Article Ninth, and proposed NSX By-Laws, Article
IV; See proposed Holdings Certificate of
Incorporation, Article Tenth, and proposed
Holdings By-Laws, Article IV.
110 See, for example, proposed NSX Certificate of
Incorporation, Article Tenth, and proposed NSX
By-Laws, Article XI; See, e.g., proposed Holdings
Certificate of Incorporation, Article Eleventh, and
proposed Holdings By-Laws, Article X.
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organizations,’’ and similar terms in the
current Rules of the Exchange would be
replaced with references to ‘‘ETP
Holders’’ and similar terms in the NSX
Rules.
Each ETP would constitute a
revocable license allowing the holder of
the permit access to the Exchange’s
trading facilities in the same manner as
previously authorized for NSX’s
qualified trading members.111 The
demutualization and the
implementation of the use of ETPs
would not change current NSX member
access to the Exchange or their ability to
execute transactions. Persons holding
ETPs of NSX would be ‘‘members’’ of
the Exchange for purposes of the Act
and, as noted above, would be
characterized as ETP Holders subject to
NSX’s regulatory jurisdiction.112 ETP
Holders would not have any ownership
interest in NSX or in Holdings by virtue
of their ETPs.
Provisions of the current By-Laws of
NSX relating to members would be
moved to a single chapter in the NSX
Rules regarding ETP Holders, with
certain changes based upon the fact that
ETP Holders would be subject to
different application processes and
would not have to purchase and own a
certificate of proprietary
membership.113 Following the
demutualization, the Exchange would
require persons seeking ETPs to
complete appropriate application
materials and registration forms, satisfy
regulatory requirements, and pay
processing charges and application fees
as designated by the Exchange. Unlike
NSX’s current membership application
process, ETP Holders would not be
required to be approved by NSX’s
Membership Committee, ETP Holders
would be subject to the financial
responsibility requirements of Rule
15c3–1 under the Act (but would not be
subject to a separate net capital
requirement), and ETP applicants would
not need to purchase shares of either
NSX or Holdings.114
Once issued, an ETP would be
effective until voluntarily terminated by
the ETP Holder or until revoked by NSX
111 See proposed NSX Rules, Chapter II, Rules 2.1
and 2.2, and proposed NSX Rules, Chapter I, Rule
1.5 (definition of ‘‘ETP’’).
112 See proposed NSX Rules, Chapter I, Rule 1.5
(definition of ‘‘ETP Holder’’).
113 Currently, applicants for membership are
required to purchase and own a certificate of
proprietary membership in order to become a
member of NSX. See Article II, Section 5.2 of the
current By-Laws of NSX. In connection with the
demutualization, all outstanding certificates of
proprietary membership would be cancelled and no
other certificates of proprietary membership would
be issued by NSX following the demutualization.
114 See proposed NSX Rules, Chapter II.
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for, among other things, noncompliance
with the NSX Rules.115 NSX would have
the ability to revoke an ETP for the same
reasons that it is currently entitled to
revoke a membership.116 An ETP could
not be sold, leased, or otherwise
transferred.117 There would be nominal
processing charges and application fees
relating to the issuance of ETPs. In
addition, ETP Holders would be subject
to such fees as are designated by NSX
or set forth in the NSX Rules.118
Certain other provisions of the current
By-Laws of NSX respecting listing
standards and other matters not relating
to the Exchange’s corporate governance
would be moved to the NSX Rules. The
provisions contained in Article IV of the
current By-Laws of NSX (relating to
Securities Listed on the Exchange)
would be moved to a new Chapter XV
of the NSX Rules. In addition, current
Rules 13.6 and 13.7 (relating to Listing
Standards) would be moved to this new
Chapter XV of the NSX Rules.119
Finally, new NSX Rule 2.10 would
prohibit, without prior Commission
approval, either (i) NSX or any NSX
affiliate from directly or indirectly
acquiring or maintaining an ownership
interest in an ETP Holder, or (ii) an ETP
Holder being or becoming an affiliate of
NSX or any affiliate of NSX. Under
proposed Rule 2.10, the term ‘‘affiliate’’
has the meaning specified in Rule 12b–
2 of the Act. Proposed Rule 2.10 would
not prohibit any ETP Holder or its
affiliate from acquiring or holding an
equity interest in Holdings that is
permitted by the ownership and voting
limitations in the Holdings Certificate of
Incorporation, and would not prohibit
an ETP Holder or an officer, director,
manager, managing member, partner, or
affiliate of an ETP Holder being or
becoming an ETP Holder Director or an
At-Large Director on the NSX Board, or
a member of the Holdings Board.120
III. Summary of Comments
The Council of Institutional Investors
(‘‘CII’’) wrote to express its concern over
the potential conflict of interest that
could arise when an exchange is
responsible for regulating its members
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115 See
proposed NSX Rules, Chapter II, Rules 2.6
and 2.7.
116 See proposed NSX Rules, Chapter II, Rule 2.6.
117 See proposed NSX Rules, Chapter II, Rule 2.8.
118 See, generally proposed NSX Rules, Chapter
XI, Rule 11.10(B).
119 In addition, NSX also proposes to move to the
NSX Rules, and make technical changes to, certain
provisions under the current By-Laws of NSX
relating to Exchange Membership (Article II), Dues,
Assessments and Other Charges (Article III),
Securities Listed on the Exchange (Article IV),
Commissions (Article XI) and Off-Exchange
Transactions (Article XII).
120 See Amendment No. 1, supra note 3.
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and at the same time operating as a forprofit entity. The CII believes that this
conflict of interest is ‘‘untenable’’ and
has created problems in the past and
will continue to create problems in the
future.121 To address this conflict, the
CII recommends that: (1) Regulatory
operations of NSX should be made
independent of the Exchange and
adequately funded; and (2) listing
standard requirements should be made
a regulatory responsibility rather than
the responsibility of the Exchange.122
NSX responded to the CII comment
letter on June 5, 2006.123 The Exchange
asserted that the two concerns raised by
CII have already been addressed by the
Exchange prior to the filing of this
proposed rule change. The NSX noted
that it created a Regulatory Oversight
Committee (‘‘ROC’’) that is charged with
overseeing all regulatory functions and
responsibilities, including
recommending an adequate operating
budget for the Exchange’s regulatory
functions. The Exchange also created
the position of Chief Regulatory Officer
who reports directly to the ROC and not
the Chief Executive Officer. This
structure separates the regulatory
operations from the Exchange. NSX
stated that this structure assured that
listing standard requirements are a
regulatory rather than an Exchange
responsibility as they are the function of
the Regulatory Services Division.
IV. Discussion
After careful review, the Commission
finds that 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.124 In
particular, the Commission finds that
the proposed rule change, as amended,
is consistent with Section 6(b)(1) of the
Act,125 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 Commission
also finds that the proposed rule change,
as amended, is consistent with Section
6(b)(3) of the Act,126 which requires that
the rules of a national securities
exchange assure the fair representation
of its members in the selection of its
121 See
CII Letter, supra note 6.
Letter at 1.
123 See NSX Response, supra note 7.
124 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).
125 15 U.S.C. 78f(b)(1).
126 15 U.S.C. 78f(b)(3).
122 CII
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directors and administration of its
affairs, and provide that one or more
directors shall be representative of
issuers and investors and not be
associated with a member of the
exchange, broker, or dealer. Further, the
Commission finds that the proposed
rule change, as amended, is consistent
with Section 6(b)(5) of the Act,127 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. Holdings as Sole Shareholder
Following completion of the
demutualization, Holdings would be the
sole shareholder of NSX. Section 19(b)
of the Act 128 and Rule 19b–4
thereunder 129 require an SRO to file
proposed rule changes with the
Commission. Although Holdings is not
an SRO, certain provisions of its
Certificate of Incorporation and By-Laws
may be rules of an exchange 130 if they
are the stated policies, practices, or
interpretations, as defined in Rule 19b–
4 of the Act, of NSX. Any proposed rule
or any proposed change in, addition to,
or deletion from, the rules of an
exchange must be filed with the
Commission pursuant to Section 19(b)
of the Act and Rule 19b–4 thereunder.
Accordingly, NSX has filed the
Holdings Certificate of Incorporation
Holdings By-Laws with the
Commission. If Holdings decides to
change its Certificate of Incorporation or
By-Laws, it must submit such changes
to the NSX Board so that it can
determine if the changes must be filed
with, and approved by, the
Commission.131 The Commission
believes that these provisions would
assist NSX in fulfilling its selfregulatory obligations and in
administrating and complying with the
requirements under the Act.
127 15
U.S.C. 78f(b)(5).
U.S.C. 78s(b).
129 17 CFR 240.19b–4.
130 Section 3(a)(27) of the Act defines the rules of
an exchange to be the constitution, articles of
incorporation, By-Laws, and rules, or instruments
corresponding to the foregoing, of an exchange, and
such stated policies, practices, or interpretations of
such exchange as the Commission, by rule, may
determine to be necessary or appropriate in the
public interest or for the protection of investors to
be deemed to be rules of such exchange. 15 U.S.C.
78c(a)(27).
131 See proposed Holdings Certificate of
Incorporation, Article Twelfth and Holdings ByLaws Article VIII.
128 15
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B. Changes in Control of NSX
The Commission believes that the
restrictions in the Holdings Certificate
of Incorporation on direct and indirect
changes in control of Holdings are
sufficient to enable NSX to carry out its
self-regulatory responsibilities and to
enable the Commission to fulfill its
responsibilities under the Act.132
Specifically, as proposed, NSX would
be wholly-owned subsidiary of
Holdings, i.e., Holdings would own all
of the shares of NSX. The NSX
Certificate of Incorporation identifies
this ownership structure.133 Any
changes to the NSX Certificate of
Incorporation, including any change to
the provision that identifies NSX
shareholders, must be filed with, and
approved by, the Commission pursuant
to Section 19(b) of the Act.134
In addition, the Holdings Certificate
of Incorporation imposes limitations on
direct and indirect changes in control of
Holdings through voting and ownership
limitations placed on the capital stock
of Holdings and allows Holdings to
monitor potential changes in control
through a notification requirement once
a threshold percentage of ownership of
capital stock is reached.135 Specifically,
the Holdings Certificate of Incorporation
prohibits any Person, either alone or
together with its Related Persons, from
voting or giving a proxy or consent with
respect to shares representing more than
20% of the voting power of the issued
and outstanding capital stock of
Holdings.136 This restriction would not
132 The Commission notes that it is in the process
of reviewing issues related to new ownership
structures of SROs and has proposed rules relating
to the ownership of SROs, including limiting the
restrictions on ownership and voting to members of
an SRO or a facility of an SRO. See Securities
Exchange Act Release No. 50699 (November 18,
2004), 69 FR 71126 (December 8, 2004) (‘‘Proposed
Rulemaking’’). See also Securities Exchange Act
Release No. 51019 (January 11, 2005), 70 FR 2829
(January 18, 2005) (extending the comment period
for the Proposed Rulemaking until March 8, 2005).
133 See proposed NSX Certificate of Incorporation,
Article Fourth.
134 15 U.S.C. 78s(b); see proposed NSX Certificate
of Incorporation, Article Eleventh.
135 The proposed Holdings Certificate of
Incorporation requires that any person, either alone
or together with its affiliates or associates or any
other person, who at any time owns five percent or
more of then outstanding shares of capital stock and
who has the right to vote in the election of the NSX
Holdings Board, shall, immediately upon so owning
five percent or more of the then outstanding shares
of such stock, give the NSX Holdings Board a
written notice of such ownership and update that
notice promptly after an ownership change of a
specified percentage. See proposed Holdings
Certificate of Incorporation, Article Fifth, paragraph
(c).
136 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (b)(ii)(C); see
also proposed Holdings Certificate of Incorporation,
Article Fifth, paragraph (a) for definitions of
‘‘Person’’ and ‘‘Related Person.’’
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apply to the Class B or Class C common
stock and, as to the Class A common
stock owned by Persons other than ETP
Holders and their Related Persons, may
be waived by Holdings Board pursuant
to a resolution adopted by the Holdings
Board.137 Before adopting such
resolution, however, the Holdings Board
must determine that, among other
things, the waiver of the voting
limitation would not impair the ability
of NSX to carry out its functions and
responsibilities under the Act and the
rules and regulations promulgated
thereunder, and would not impair the
Commission’s ability to enforce the Act
and the rules and regulations
promulgated thereunder.138 In addition,
the Holdings Board also must determine
that a Person and its Related Persons
that would vote more than 20% of the
outstanding stock of Holdings are not
subject to an applicable ‘‘statutory
disqualification’’ (within the meaning of
Section 3(a)(39) of the Act).139 Finally,
any resolution of the Holdings Board
that would permit a Person to vote more
than 20% of the outstanding stock of
Holdings must be filed with and
approved by the Commission before it
becomes effective.140
Furthermore, the Holdings Certificate
of Incorporation limits the right of any
Person, either alone or together with its
Related Persons, to enter into any
agreement with respect to the
withholding of any vote or proxy where
the effect of the agreement would be to
enable any person or group to obtain
more than 20% of the outstanding
voting power.141 The Holdings
Certificate of Incorporation also restricts
the ability of any Person, either alone or
together with its Related Persons, from
owning, directly or indirectly, shares
constituting more than 40% of any class
of the outstanding shares of capital
stock of Holdings.142
If any shareholder votes, sells,
transfers, assigns, or pledges any shares
in violation of the voting and ownership
limitations, Holdings would treat those
shares as owned by the transferor for all
purposes, including, without limitation,
voting, payment of dividends, and
137 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraphs (b)(iii)(A)
and (B). See Amendment No. 1, supra note 3.
138 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (b)(iii)(B).
139 15 U.S.C. 78c(a)(39); see proposed Holdings
Certificate of Incorporation, Article Fifth, paragraph
(b)(iv).
140 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (b)(iii)(B).
141 See proposed NSX Holdings Certificate of
Incorporation, Article Fifth, paragraph (b)(ii)(C).
142 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (b)(ii)(A).
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distributions.143 In addition, if any
shareholder votes, sells, transfers,
assigns, or pledges any shares in
violation of the voting and ownership
limitations, Holdings has the right to
redeem those shares at a price equal to
the par value thereof, upon the approval
of the Holdings Board.144
NSX has also proposed to require
Holdings shareholders that own, of
record or beneficially, five percent or
more of the then outstanding shares to
give the Holdings Board written notice
of such ownership. This notice should
enable Holdings to monitor the
ownership of its stock to ensure that no
limitation is reached.145
The Holdings Certificate of
Incorporation also provides that no
Person, either alone or together with its
Related Persons, who is a ETP Holder
may own, directly or indirectly, shares
constituting more than 20% of any class
of capital stock of Holdings.146
However, this ownership restriction
would not apply to any ETP Holder
with respect to shares of Class C
common stock of Holdings (which is not
entitled to the right to vote) issued to
the ETP Holder in connection with, and
from the date of, the demutualization of
NSX so long as the ETP Holder becomes
compliant with the ownership
limitation promptly after such
issuance.147
The Commission finds that the
limitation on ownership of shares of
Holdings by NSX ETP Holders is
consistent with the Act. Under the
member-owned exchange model, a
member who trades securities through
the facilities of an exchange can have an
ownership interest in the exchange. A
regulatory concern can arise if a
member’s interest becomes so large as to
cast doubt on whether the exchange can
fairly and objectively exercise its selfregulatory responsibilities with respect
143 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (d).
144 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (e).
145 The Commission believes that NSX Holdings
should disclose periodically, or otherwise make
available upon request, information regarding the
number of outstanding shares of its capital stock,
so that persons that own stock of Holdings can
determine whether they are reaching or have
reached any of the thresholds that restrict that
person’s ability to vote or own the shares or require
that person to provide written notice under the
Article Fifth, paragraph (c) of the Holdings
Certificate of Incorporation.
146 See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (b)(ii)(B).
Unlike the 40% ownership and 20% voting
limitations discussed above, the NSX Holdings
Board may not waive the 20% ownership limitation
applicable to NSX trading permit holders.
147 See proposed proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (b)(iii)(C).
See Amendment No. 1, supra note 3.
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to that member. For example, a member
that directly or indirectly controls an
exchange might be tempted to exercise
that controlling influence by directing
the exchange to refrain from diligently
monitoring the member’s conduct or
from punishing any conduct that
violates the rules of the exchange or the
federal securities laws. An exchange
also might be reluctant to diligently
monitor and conduct surveillance of
trading conduct and to enforce its rules
and the federal securities laws against a
member that the exchange relies on for
a large source of capital. The
Commission believes that the proposed
limitation would help mitigate the
conflicts of interest that could occur if
a member were to control a significant
stake in the Exchange through
ownership in shares in the Exchange’s
parent company and are necessary and
appropriate to help ensure that the
Exchange can effectively carry out its
statutory obligations under Section 6(b)
of the Act.148
C. Regulatory Jurisdiction Over Holdings
The Commission believes that the
terms of Holdings By-Laws provide the
Commission with sufficient regulatory
jurisdiction over the controlling parties
of the Exchange to carry out its
oversight responsibilities under the Act.
The Holdings By-Laws provide that, to
the extent that they are related to the
activities of NSX, the books, records,
premises, officers, directors, agents, and
employees of Holdings are deemed to be
the books, records, premises, officers,
directors, agents, and employees of NSX
for purposes of and subject to oversight
pursuant to the Act.149 This provision
would enable the Commission to
exercise its authority under Section
19(h)(4) of the Act 150 with respect to
officers and directors of Holdings,
because all such officers and directors,
to the extent that they are acting on
matters related to NSX activities, would
be deemed to be officers and directors
of NSX. Furthermore, the books and
records of Holdings, to the extent that
they are related to the activities of NSX,
are subject to the Commission’s
148 15
U.S.C. 78f(b).
proposed Holdings By-Laws, Article III,
Section 3.3.
150 15 U.S.C. 78s(h)(4). Section 19(h)(4) authorizes
the Commission, by order, to remove from office or
censure any officer or director of a national
securities exchange if it finds, after notice and an
opportunity for hearing, that such officer or
director: (1) has willfully violated any provision of
the Act or the rules and regulations thereunder, or
the rules of a national securities exchange; (2)
willfully abused his or her authority; or (3) without
reasonable justification or excuse, has failed to
enforce compliance with any such provision by a
member or person associated with a member of the
national securities exchange.
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149 See
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examination authority under Section
17(b)(1) of the Act,151 as these records
would be deemed to be the records of
NSX itself.
In addition, pursuant to the Holdings
By-Laws, Holdings officers, directors,
employees, and agents, by virtue of their
acceptance of such position, are deemed
to irrevocably submit to the jurisdiction
of the U.S. Federal courts, the
Commission, and NSX for the purposes
of any suit, action, or proceeding
pursuant to the U.S. federal securities
laws and the rules and regulations
thereunder, arising out of, or relating to,
the activities of the Exchange.152
Moreover, Holdings and such officers,
directors, employees, and agents, by
virtue of their acceptance of any such
position, are deemed to waive and agree
not to assert by way of motion as a
defense or otherwise in any such suit,
action, or proceeding any claims that it
or they are not personally subject to the
jurisdiction of the U.S. Federal courts,
the Commission, or NSX, that the suit,
action, or proceeding is an inconvenient
forum, or that the venue of the suit,
action, or proceeding is improper, or
that the subject matter of that suit,
action, or proceeding may not be
enforced in or by such courts or
agency.153 Finally, the Holdings ByLaws provide that the officers, directors,
employees, and agents of Holdings, by
virtue of their acceptance of such
position, are deemed to agree to
cooperate with the Commission and
NSX in respect of the Commission’s
oversight responsibilities regarding NSX
and the self-regulatory functions and
responsibilities of NSX.154
The Commission also notes that, even
in the absence of these provisions of the
Holdings By-Laws, Section 20(a) of the
Act 155 provides that any person with a
controlling interest in NSX would be
jointly and severally liable with and to
the same extent that NSX is liable under
any provision of the Act, unless the
controlling person acted in good faith
and did not directly or indirectly induce
the act or acts constituting the violation
or cause of action. In addition, Section
20(e) of the Act 156 creates aiding and
abetting liability for any person who
knowingly provides substantial
assistance to another person in violation
of any provision of the Act or rule
thereunder, and Section 21C of the
U.S.C. 78q(b)(1).
proposed NSX Holdings By-Laws, Article
III, Section 3.5.
153 See proposed NSX Holdings By-Laws, Article
III, Section 3.5.
154 See proposed NSX Holdings By-Laws, Article
III, Section 3.4.
155 15 U.S.C. 78t(a).
156 15 U.S.C. 78t(e).
Act 157 authorizes the Commission to
enter a cease-and-desist order against
any person who has been ‘‘a cause of’’
a violation of any provision of the Act
through an act or omission that the
person knew or should have known
would contribute to the violation. The
Commission believes that, taken
together, these provisions grant the
Commission sufficient jurisdictional
authority over the controlling persons of
NSX. Moreover, NSX is required to
enforce compliance with these
provisions because they are ‘‘rules of the
exchange’’ within the meaning of
Section 3(a)(27) of the Act.158 A failure
on the part of NSX to enforce its rules
could result in suspension or revocation
of NSX’s registration under Section
19(h)(1) of the Act.159
D. Self-Regulatory Function of NSX
Following the demutualization, the
rules and By-Laws of NSX would reflect
its status as a wholly-owned subsidiary
of Holdings, under management of the
NSX Board and its designated officers
and with self-regulatory obligations
pursuant to NSX’s registration as a
national securities exchange under
Section 6 of the Act.160
As the sole shareholder of NSX, the
Commission believes that Holdings’
activities with respect to its ownership
of NSX must be consistent with NSX’s
obligations under the Act. The
Commission recognizes that the
ownership structure of for-profit
exchanges could present potential
conflicts of interest.161 However, the
Commission believes that NSX has
taken steps to address this conflict.162
Under the Holdings By-Laws, the
Holdings Board and the officers,
employees, and agents of Holdings must
give due regard to the preservation of
the independence of the self-regulatory
function of NSX and to its obligations to
investors and the general public and not
take any actions that would interfere
with the effectuation of any decisions by
the NSX Board relating to its regulatory
functions or the structure of the market
it regulates or which would interfere
with the ability of NSX to carry out its
responsibilities under the Act.163 In
addition, all books and records of NSX
reflecting confidential information
pertaining to its self-regulatory function
(including but not limited to
disciplinary matters, trading data,
151 15
152 See
PO 00000
Frm 00082
Fmt 4703
Sfmt 4703
157 15
U.S.C. 78u–3.
U.S.C. 78c(a)(27).
159 15 U.S.C. 78s(h)(1).
160 See 15 U.S.C. 78c(a)(26).
161 See CII Letter. See also supra note 132.
162 See also supra, note 132.
163 See proposed NSX Holdings By-Laws, Article
III, Section 3.1.
158 15
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Federal Register / Vol. 71, No. 115 / Thursday, June 15, 2006 / Notices
trading practices, and audit information)
which come into the possession of
Holdings, and the information
contained therein, must be retained in
confidence by Holdings and its
directors, officers, employees, and
agents and must not be used for any
non-regulatory purposes.164 The
Commission believes that these
provisions, which are designed to
acknowledge the need to maintain the
independence of the self-regulatory role
of NSX following the demutualization
and protect from improper use
information pertaining to its selfregulatory function, are appropriate.
Further, the Commission notes that
the NSX By-Laws expressly require that
the NSX Board consider applicable
requirements for registration as a
national securities exchange under
Section 6(b) of the Act,165 including the
requirement that the rules of the
Exchange be designed to protect
investors and the public interest and the
requirement that the Exchange 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 members with
the provisions of the Act, the rules and
regulations thereunder and with the
rules of the Exchange.166 In the
Commission’s view, this provision
should serve to remind the NSX Board
that it must consider the interests of the
Exchange’s constituents and the
requirements of the Act when taking
action on behalf of the Exchange.
jlentini on PROD1PC65 with NOTICES
E. Fair Representation
Section 6(b)(3) of the Act 167 requires
that the rules of an exchange assure fair
representation of its members in the
selection of its directors and
administration of its affairs and provide
that one or more directors be
representative of issuers and investors
and not be associated with a member of
the exchange or with a broker or dealer.
In addition, Section 6(b)(1) of the Act 168
requires that an exchange be so
organized and have the capacity to be
able to carry out the purposes of the Act.
After the demutualization, the NSX
Board would initially consist of 13
directors. The NSX Board would be
initially comprised of the CEO of NSX,
3 ETP Holder Directors,169 7
164 See proposed NSX Holdings By-Laws, Article
III, Section 3.2.
165 15 U.S.C. 78f(b).
166 See proposed NSX By-Laws, Article X, Section
3.1.
167 15 U.S.C. 78f(b)(3).
168 15 U.S.C. 78f(b)(1).
169 An ETP Holder Director is defined under the
proposed NSX By-Laws as a director who is an ETP
Holder or a director, officer, managing member or
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Independent Directors,170 and 2
directors who are executive officers of
CBOE, its members,171 or executive
officers of CBOE member
organizations.172 Under the proposed
rule change, the NSX Board may by
resolution increase its size to up to 20
directors. Directors added to the NSX
Board to fill these new director
positions would be (i) Independent
Directors, to the extent necessary for the
NSX Board to include at least 50%
Independent Directors; (ii) ETP Holder
Directors, to the extent necessary for the
NSX Board to include at least 20% ETP
Holder Directors; and (iii) persons who
do not qualify as Independent Directors
(‘‘At-Large Directors’’), for the
remainder of the positions added to the
NSX Board that are not filled with
Independent Directors or ETP Holder
Directors pursuant to clauses (i) and (ii)
above. At all times, the NSX Board must
include the CEO of NSX, at least 50%
Independent Directors and 3 ETP
Holder Directors (or such greater
number of ETP Holder Directors as is
necessary to comprise at least 20% of
the NSX Board).173
Because NSX ETP Holders would not
be shareholders of NSX, they would not
directly elect members of the NSX
Board. As the sole shareholder of NSX,
Holdings would have the sole right and
obligation to vote for the director
nominees nominated by the NSX
Governance and Nominating
Committee. The NSX By-Laws,
however, establish a procedure that
would allow ETP Holders to be involved
in the selection of candidates to fill ETP
Director positions on the NSX Board.174
Each participant would have one vote
partner of an entity that is an ETP Holder. See
proposed NSX By-Laws, Section 1.1(E)(2).
170 An Independent Director is defined under the
proposed NSX By-Laws as a member of the NSX
Board that the NSX Board has determined to have
no material relationship with NSX or any affiliate
of NSX, or any ETP Holder or any affiliate of any
such ETP Holder, other than as a member of the
NSX Board. See proposed NSX By-Laws, Section
1.1(I)(1). The Commission notes that NSX has stated
that at least one Independent Director will be
representative of investors; see Amendment No. 1,
supra note 3.
171 A CBOE member is defined under the
proposed NSX By-Laws as an individual CBOE
member or a CBOE member organization that is a
regular member or special member of CBOE (as
such terms are described in the Constitution of the
CBOE), as such CBOE members may exist from time
to time. See proposed NSX By-Laws, Section
1.1(C)(2). See also supra subsection II.b.(1)(b)(ii) for
a discussion of CBOE’s equity interest in the
Exchange.
172 See proposed NSX By-Laws, Section 3.2(a).
See also supra note 20.
173 See proposed NSX By-Laws, Section 3.2(b);
see Amendment No. 1, supra note 3.
174 See proposed NSX By-Laws, Section 3.5; see
discussion of nominating process in Discussion
section supra.
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34671
per trading permit with respect to each
Participant Director position to be
filled.175
The ETP Holder Director Nominating
Committee, comprised entirely of ETP
Holders Directors and/or ETP Holder
representatives would consult with the
Governance and Nominating
Committee, the Chairman of the Board
and the Chief Executive Officer, and
solicit comments from the ETP Holders
and submit a list of candidates for
election to the position of ETP Holder
Director to the Governance and
Nominating Committee. ETP Holder
may petition in a timely manner to add
additional nominees provided that the
petition is signed by 10 or more percent
of all ETP Holders. The ETP Holder
Director candidates receiving the most
votes from ETP Holders shall be the
directors elected to the NSX Board as
ETP Directors by NSX Holdings. If no
timely petitions are received, the slate of
candidates put forth by the ETP Holder
Director Nominating Committee shall be
the ETP Directors elected to the NSX
Board by NSX Holdings.176
The Commission finds that the
requirement that at least one-half of the
directors of the NSX Board be
Independent Directors is consistent with
Sections 6(b)(1) and 6(b)(3) of the Act,
which requires that one or more
directors be representative of issuers
and investors. The Commission also
finds that the requirement that at least
20% of the directors be ETP Directors
and the manner in which such directors
would be nominated and elected,
satisfies the fair representation
requirements in Section 6(b)(3) of the
Act. The Commission notes, however,
that after the demutualization trading
privileges would be separated from
corporate ownership of NSX and would
be available exclusively through trading
permits. Therefore, the Commission
expects that trading permits would not
be issued in a manner that would
undermine or circumvent the
requirement in Section 6(b)(3) of the Act
for fair representation of members. The
Commission also notes that participants
would retain a voice in the
administration of the affairs of NSX
following the demutualization,
including rulemaking and the
disciplinary process, through
participants’ participation on the NSX
Board.
175 Under Section 3.5(e) of the proposed NSX ByLaws, each ETP Holder, regardless of its affiliation
with other ETP Holders, will have one vote with
respect to each ETP Holder Director position to be
filled, but may not cast such votes cumulatively.
176 See proposed NSX By-Laws, Sections 3.5 and
5.1.
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Federal Register / Vol. 71, No. 115 / Thursday, June 15, 2006 / Notices
Finally, the Commission notes that it
is in the process of reviewing a range of
governance issues relating to SROs,
including possible steps to strengthen
the framework for the governance of
SROs and ways to improve the
transparency of the governance
procedures of all SROs and has
proposed rules in furtherance of this
goal.177 Depending on the results of the
proposed rules, NSX may be required to
make further changes to strengthen its
governance structure. The Commission
also believes that the NSX Board should
continue to monitor and evaluate its
governance structure and process on an
ongoing basis and propose further
changes as appropriate.
F. Dividends
With the demutualization, the holders
of capital stock of NSX, in this case
Holdings, would have the dividend and
other distribution rights of a shareholder
in a Delaware stock corporation. The
NSX By-Laws allow the NSX Board to
declare dividends.178 However, the NSX
By-Laws further provide that any
revenues received by NSX from
regulatory fees or regulatory penalties
would be applied to fund the legal and
regulatory operations, including the
surveillance and enforcement activities,
of NSX and would not be used to pay
dividends.179 This limitation would
preclude NSX from providing dividends
derived from regulatory fees or penalties
to the sole shareholder of NSX, i.e.,
Holdings. As a result, Holdings would
not be able to provide dividends derived
from regulatory fees or penalties
belonging to NSX to the shareholders of
Holdings. The Commission finds that
the prohibition on the use of regulatory
fees or penalties to fund dividends is
consistent with Section 6(b)(1) of the
Act because it would ensure that the
regulatory authority of NSX is not used
improperly to benefit Holdings and its
shareholders.
jlentini on PROD1PC65 with NOTICES
G. Other Changes
Following the demutualization, NSX
would continue to serve as a voting
member of various NMS plans
addressing last sale reporting, quotation
reporting, and intermarket equities
trading. In addition, following the
demutualization, NSX will put into
effect certain rule changes necessary to
implement its proposed ETP structure,
including referring to persons and firms
who are currently qualified for
177 See
Proposed Rulemaking, supra note 134.
proposed NSX By-Laws, Section 11.2.
179 For purposes of this provision, regulatory
penalties include restitution and disgorgement of
funds intended for customers. See proposed NSX
By-Laws, Section 10.4.
178 See
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Exchange membership under its current
Rules and By-Laws as ETP Holders,
entitling them to maintain their trading
access to the Exchange; corresponding
changes to references in the Exchange’s
Rules to ‘‘members,’’ ‘‘member
organizations,’’ and similar terms would
also be made. ETP Holders would have
revocable licenses allowing them to
access the Exchange’s trading facilities
in the same manner currently
authorized for qualified trading
members. In addition, ETP Holders
would be ‘‘members’’ of the Exchange
for purposes of the Act and would be
subject to NSX’s regulatory jurisdiction
and oversight. However, ETP Holders
would not have any ownership interest
in the Exchange or in Holdings by virtue
of their ETPs. The Exchange would
subject potential ETP Holders to an
application process, and ETP Holders
would be subject to the financial
responsibility requirements of Rule
15c3–1 under the Act. ETPs would be
effective until voluntarily terminated by
the ETP Holder or until revoked by the
Exchange. ETPs could not be sold,
leased, or otherwise transferred.
As part of the demutualization, the
Exchange would move certain noncorporate governance-related provisions
currently in the NSX By-Laws to the
NSX Rules. Finally, new NSX Rule 2.10
would prohibit, without prior
Commission approval, either (i) NSX or
any NSX affiliate from directly or
indirectly acquiring or maintaining an
ownership interest in an ETP Holder, or
(ii) an ETP Holder being or becoming an
affiliate of NSX or any affiliate of NSX.
The term ‘‘affiliate’’ would have the
meaning specified in Rule 12b–2 of the
Act. Proposed Rule 2.10 would not
prohibit any ETP Holder or its affiliate
from acquiring or holding an equity
interest in Holdings that is permitted by
the ownership and voting limitations in
the Holdings Certificate of
Incorporation, and would not prohibit
an ETP Holder or an officer, director,
manager, managing member, partner, or
affiliate of an ETP Holder being or
becoming an ETP Holder Director or an
At-Large Director on the NSX Board, or
a member of the Holdings Board.
The Commission finds that these
proposed rule changes are consistent
with the requirements of the Acts and
the rules and regulations thereunder. In
particular, the Commission finds that
the proposed rule changes relating to
ETP Holders and their affiliates are
consistent with Section 6(b)(1) of the
Act,180 which requires a national
securities exchange to be so organized
180 15
PO 00000
U.S.C. 78f(b)(1).
Frm 00084
Fmt 4703
Sfmt 4703
and have the capacity to carry out the
purposes of the Act.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,181 that the
proposed rule change (SR–NSX–2006–
03), as amended, is approved.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.182
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6–9354 Filed 6–14–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53958; File No. SR–NYSE–
2006–34]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Order Granting Accelerated
Approval of Proposed Rule Change To
Delete an Obsolete Provision in Its
Minor Rule Violation Plan
June 8, 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 June 2,
2006, the New York Stock Exchange
LLC (‘‘NYSE’’ or ‘‘Exchange’’) 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
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 is proposing to amend
NYSE Rule 476A (Imposition of Fines
for Minor Violation(s) of Rules) to
reflect the deletion of NYSE Rule
124(A). The text of the proposed rule
change is available on the Exchange’s
Web site (https://www.nyse.com), at the
Exchange’s principal office, and at the
Commission’s Public Reference Room.
181 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
182 17
E:\FR\FM\15JNN1.SGM
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]]>Agencies
[Federal Register Volume 71, Number 115 (Thursday, June 15, 2006)]
[Notices]
[Pages 34660-34672]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-9354]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53963, File No. SR-NSX-2006-03]
Self-Regulatory Organizations; National Stock ExchangeSM; Order
Approving Proposed Rule Change and Amendment Nos. 1 and 2 Thereto
Relating to the Demutualization of the National Stock Exchange
June 8, 2006.
I. Introduction
On April 5, 2006, the National Stock ExchangeSM (``NSX''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to effect a series of proposed changes to the
Exchange's corporate structure that would allow for the demutualization
of the Exchange. On April 19, 2006, the NSX submitted Amendment No. 1
to the proposed rule change.\3\ On April 25, 2006, the NSX submitted
Amendment No. 2 to the proposed rule change, as amended.\4\ The
proposed rule change, as amended, was published for comment in the
Federal Register on May 3, 2006.\5\ The Commission has received one
comment on the proposal.\6\ The NSX submitted a response to the comment
on June 5, 2006.\7\ This order approves the proposed rule change, as
amended.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 (``Amendment No. 1'') made revisions to the
proposed: Holdings Certificate of Incorporation, Sections
(b)(iii)(B) and (C); Holdings By-Laws, Article III, Sections 3.1 and
3.4; NSX By-Laws, Article III, Section 3.2(b); and NSX Rule 2.10. In
addition, Amendment No. 1 added new proposed Section 3.6 to Article
III of the Holdings By-Laws, requiring Holdings to take reasonable
steps necessary to cause its officers, directors, and employees to
consent to the applicability to them of Article III of the Holdings
By-Laws. Finally, Amendment No. 1 made corresponding changes to Item
3 of Form 19b-4 and Exhibit 1 to describe the effect of the
foregoing Exhibit 5 revisions and also add a description of proposed
NSX Rule 2.10.
\4\ Amendment No. 2 (``Amendment No. 2'') made changes to Item 3
of Form 19b-4 and Exhibit 1, which changes were incorporated into
the notice; see infra, note 5.
\5\ See Securities Exchange Act Release No. 53721 (April 25,
2006), 71 FR 26155 (May 3, 2006) (''Demutualization Notice'').
\6\ See Letter from Ann Yerger, Executive Director, Council of
Institutional Investors to Nancy M. Morris, Secretary, Commission,
dated May 11, 2006 (``CII Letter'').
\7\ See Letter from James C. Yong, Chief Regulatory Officer,
Exchange to Nancy M. Morris, Secretary, Commission, dated June 5,
2006 (``NSX Response'').
---------------------------------------------------------------------------
II. Description of Proposed Rule Change
a. Description of Demutualization Transaction
Currently, NSX is a non-stock nonprofit Ohio corporation. NSX
proposes to demutualize by reorganizing as a Delaware for-profit stock
corporation that would be a direct and wholly-owned subsidiary of a new
Delaware for-profit stock holding company (``Holdings''). To accomplish
the demutualization, NSX has established (i) two new Delaware stock
for-profit corporations: Holdings, a direct and wholly-owned subsidiary
of NSX, and NSX Delaware Merger Sub, Inc. (``NSX Delaware Merger
Sub''), a direct and wholly-owned subsidiary of Holdings, and (ii) one
transitory Ohio stock for-profit corporation, NSX Ohio Merger Sub, Inc.
(``NSX Ohio Merger Sub''), also a direct and wholly-owned subsidiary of
Holdings.\8\
---------------------------------------------------------------------------
\8\ The Exchange stated that the establishment of NSX Ohio
Merger Sub and the process of demutualization through two mergers
(as described more fully in this document) are necessitated because
under Ohio law, NSX, as an Ohio nonprofit corporation, may not merge
directly with and into a foreign for-profit corporation, such as NSX
Delaware Merger Sub.
---------------------------------------------------------------------------
Pursuant to an agreement and plan of merger, NSX would merge
(``Merger 1'') with and into NSX Ohio Merger Sub, with NSX
Ohio Merger Sub surviving the merger as an Ohio for-profit stock
corporation that is a direct and wholly-owned subsidiary of Holdings.
As a result of Merger 1, NSX Ohio Merger Sub will be the
initial successor-in-interest to NSX. Immediately following Merger
1, pursuant to a second agreement and plan of merger, NSX Ohio
Merger Sub would merge (``Merger 2'') with and into NSX
Delaware Merger Sub, with NSX Delaware Merger Sub renamed National
Stock Exchange, Inc. surviving the merger as a Delaware for-profit
stock
[[Page 34661]]
corporation that is a direct and wholly-owned subsidiary of
Holdings.\9\
---------------------------------------------------------------------------
\9\ The term ``NSX'' in this document will also refer to the
Exchange as a Delaware for-profit stock corporation after the
demutualization.
---------------------------------------------------------------------------
In the Demutualization Notice, the Exchange stated that upon
completion of Merger 2, NSX, the Delaware for-profit stock
corporation, would be, in effect, the successor-in-interest to NSX, the
current Ohio non-stock nonprofit corporation, and would assume all of
the assets and liabilities of the Exchange, including, without
limitation, the adherence to, and the performance of, the undertakings
under the Order Instituting Administrative and Cease-and-Desist
Proceedings Pursuant to Sections 19(b) and 21C of the Securities
Exchange Act of 1934, Making Findings and Imposing Sanctions, entered
by the Commission on May 19, 2005 \10\ (the ``Order'').\11\ NSX stated
that it would continue to engage in the business of operating a
national securities exchange registered under Section 6 of the Act.\12\
---------------------------------------------------------------------------
\10\ See Securities Exchange Act Release No. 51714.
\11\ See Demutualization Notice.
\12\ 15 U.S.C. 78f. Following the demutualization, the Exchange
stated that earnings of NSX not retained in its business may be
distributed to its parent, Holdings, and Holdings would be
authorized to pay dividends to the stockholders of Holdings as and
when they are declared by the Board of Directors of Holdings, but
subject to the limitation under the proposed NSX By-Laws that any
revenues received by NSX from regulatory fees or penalties may not
be used to pay dividends. See proposed NSX By-Laws, Section 10.4.
---------------------------------------------------------------------------
Presently, the members of NSX hold certificates of proprietary
membership in NSX and have a right to trade on the exchange operated by
NSX. On the effective date of the demutualization (the ``Effective
Date''), each member of NSX would receive 1,000 shares of Holdings
Class A common stock \13\ for the first certificate of proprietary
membership of NSX held by the member and would receive a modestly
discounted number of shares of Class A common stock (determined by a
formula set forth in the Merger 1 merger agreement) for each
additional certificate held. If, however, the total number of Class A
shares to be received by a member that would hold an equity trading
permit entitling it to trading access on the Exchange after the
demutualization (an ``ETP Holder''), together with any Class A shares
to be received by that member's Related Persons,\14\ would exceed 20%
of the total number of Class A shares issued (and thus be in violation
of an ownership limitation under the proposed Holdings Certificate of
Incorporation \15\), that member would receive shares of Class C common
stock \16\ (which would generally not be entitled to the right to vote)
in lieu of the shares of Class A common stock that are in excess of the
20% ownership limitation (and that the member would have received were
the 20% ownership limitation not in effect under the proposed Holdings
Certificate of Incorporation).
---------------------------------------------------------------------------
\13\ Holdings would be authorized to issue 1,100,000 shares of
common stock having a par value of $.0001 per share (of which
900,000 shares will be designated as Class A common stock, 100,000
shares will designated as Class B common stock and 100,000 shares
will be designated as Class C common stock) and 100,000 shares of
preferred stock having a par value of $.0001 per share. The Class A
common stock would be entitled to one vote per share, absent a
provision in the Holdings Certificate of Incorporation fixing or
denying voting rights. Neither the Class B nor Class C common stock
would be entitled to vote, unless the matter at issue would the
alter the rights, preferences, privileges or limitations (other than
the right to vote) of that stock, respectively, without also
altering the rights, preferences, privileges and limitations of the
Class A common stock in an identical manner. See proposed Holdings
Certificate of Incorporation, Article Fourth, and proposed Holdings
By-Laws, Section 4.10.
\14\ Under the proposed Holdings Certificate of Incorporation,
Article Fifth, paragraph (a)(ii), ``Related Persons'' means, with
respect to any Person: (A) Any ``affiliate'' of such Person (as such
term is defined in Rule 12b-2 under the Act); (B) any other Person
with which such first Person has any agreement, arrangement or
understanding (whether or not in writing) to act together for the
purpose of acquiring, voting, holding or disposing of shares of the
capital stock of the Corporation; (C) in the case of a Person that
is a company, corporation or similar entity, any executive officer
(as defined under Rule 3b-7 under the Act) or director of such
Person and, in the case of a Person that is a partnership or limited
liability company, any general partner, managing member or manager
of such Person, as applicable; (D) in the case of an ETP Holder, any
Person that is associated with the ETP Holder (as determined using
the definition of ``person associated with a member'' as defined
under Section 3(a)(21) of the Act); (E) in the case of a Person that
is an individual, any relative or spouse of such Person, or any
relative of such spouse who has the same home as such Person or who
is a director or officer of the Corporation or any of its parents or
subsidiaries; (F) in the case of a Person that is an executive
officer (as defined under Rule 3b-7 under the Act) or a director of
a company, corporation or similar entity, such company, corporation
or entity, as applicable; and (G) in the case of a Person that is a
general partner, managing member or manager of a partnership or
limited liability company, such partnership or limited liability
company, as applicable.
\15\ See infra subsection II.b.(1)(a)(iv).
\16\ Each share of Class C common stock issued would be
convertible, at the option of its holder, to one share of Class A
common stock upon the satisfaction of certain notification and other
requirements under the Holdings Certificate of Incorporation, but
only to the extent that the conversion does not violate the
limitations on ownership, transfer and voting applicable to Class A
common stock under the Holdings Certificate of Incorporation, as
more fully described in this document. See proposed Holdings
Certificate of Incorporation, Article Fourth, paragraph (d).
---------------------------------------------------------------------------
The Chicago Board Options Exchange, Incorporated (``CBOE'') owns
certificates of proprietary membership in NSX but is not a member of
NSX. In the demutualization, CBOE would receive shares of Holdings
Class B common stock (which is generally not entitled to the right to
vote) in exchange for its certificates of proprietary membership in NSX
that are subject to put and call rights under a Termination of Rights
Agreement between NSX and CBOE dated September 27, 2004 (the
``TORA''),\17\ and would receive shares of Holdings Class A common
stock in exchange for the remainder of its certificates of proprietary
membership.\18\ The number of Class A and Class B shares received by
CBOE would be based on the discount formula set forth in the Merger
1 merger agreement.
---------------------------------------------------------------------------
\17\ In 1986, NSX and CBOE entered into an agreement of
affiliation pursuant to which CBOE obtained certificates of
proprietary membership in NSX and certain rights associated with
NSX, including the right to hold certain seats on the Board of
Directors of NSX and certain put rights in connection with its
certificates of proprietary membership in NSX. Under the TORA, CBOE
agreed to relinquish, upon certain terms, certain of these rights in
exchange for cash payments and other undertakings. See Securities
Exchange Act Release No. 34-51033 (January 13, 2005), 70 FR 3085
(January 19, 2005) (File No. SR-NSX-2004-12). See also infra
subsection II.b.(1)(b)(ii).
\18\ Each share of Class B common stock would automatically
convert to one share of Class A common stock upon its transfer, in
accordance with the TORA, to a bona fide third party purchaser
unaffiliated with CBOE. See proposed Holdings Certificate of
Incorporation, Article Fourth, paragraph (c). NSX stated that the
Class B shares would be transferable only under extraordinary
circumstances.
---------------------------------------------------------------------------
Following the demutualization, persons and entities who have been
qualified for membership under the Exchange's current Rules and, as a
result, have access to the Exchange's trading facilities would
separately receive NSX equity trading permits (``ETPs'') entitling them
to maintain their trading access to NSX and, as noted above, would be
referred to as ``ETP Holders.'' Shares of Holdings capital stock and
ETPs would not be tied together. Following the demutualization, former
NSX members would be able to sell the shares of Holdings capital stock
they receive in connection with the demutualization, subject to the
applicable restrictions in the proposed Holdings Certificate of
Incorporation and Holdings By-Laws (as described more fully below),
while retaining the ability to trade and operate on the Exchange
pursuant to their ETPs. Any other person or entity that satisfies the
regulatory requirements set forth in the NSX Rules also would be able
to obtain an ETP without regard to whether such person is a stockholder
of Holdings.
b. Summary of Proposed Rule Change
The proposed rule change, as amended, consists of the proposed
[[Page 34662]]
Holdings Certificate of Incorporation and Holdings By-Laws and the
proposed changes to the Articles of Incorporation and By-Laws of the
Exchange that reflect governance and corporate form changes. In
addition, the proposed rule change includes proposed changes to the
Rules of the Exchange that are necessary to implement the proposed
equity trading permit structure. NSX also proposes to move certain
provisions in the current By-Laws of NSX respecting members, listing
standards, and other matters not relating to the Exchange's corporate
governance to the NSX Rules.
(1) Corporate Structure
(a) Holdings
Following the demutualization, Holdings would be the parent company
and sole stockholder of NSX. NSX stated that all of the issued and
outstanding stock of Holdings initially would be owned by the former
owners of certificates of proprietary membership in the Exchange.
As sole stockholder of NSX, Holdings would have the right to elect
the Board of Directors of NSX, subject to certain provisions in the
Holdings By-Laws that require Holdings to vote for certain persons
nominated for ETP Holder Director positions and certain persons
nominated for CBOE Director positions, in each case in accordance with
the revised governance documents of NSX. The Holdings Certificate of
Incorporation and the Holdings By-Laws would govern the activities of
Holdings.
(i) Holdings Board of Directors
The business and affairs of Holdings would be managed by its Board
of Directors (``Holdings Board''). The Holdings Board would consist of
between 10 and 16 persons, as determined by the Holdings Board, one of
which shall be the Chief Executive Officer (``CEO'') of Holdings. The
Holdings Board would initially have 13 directors after the
demutualization. No person that is subject to any ``statutory
disqualification'' (within the meaning of Section 3(a)(39) of the Act)
may be a director of Holdings.\19\
---------------------------------------------------------------------------
\19\ See proposed Holdings Certificate of Incorporation, Article
Sixth, Section (a), and proposed Holdings By-Laws, Sections 2.2(a)
and (b).
---------------------------------------------------------------------------
The directors of Holdings would be divided into three classes,
which would be as nearly equal in number as the total number of
directors then constituting the entire Holdings Board. After completion
of an initial phase-in schedule, the directors of Holdings would serve
staggered three-year terms, with the term of office of one class
expiring each year.\20\
---------------------------------------------------------------------------
\20\ See proposed Holdings Certificate of Incorporation, Article
Sixth, Section (b), and proposed Holdings By-Laws, Section 2.2(c).
---------------------------------------------------------------------------
The Holdings Board would elect its Chairman from among the
directors on the Holdings Board, and may elect a vice-chairman to
perform the functions of the Chairman in his or her absence.\21\
---------------------------------------------------------------------------
\21\ See proposed Holdings By-Laws, Section 2.3(a).
---------------------------------------------------------------------------
At each annual meeting of the stockholders of Holdings at which a
quorum is present, the individuals receiving a plurality of the votes
cast of the Class A shares would be elected directors of Holdings.\22\
At an election of directors, each Holdings stockholder would be
entitled to one vote for each share of Class A common stock owned by
that stockholder.\23\ Class B and Class C shares shall not be entitled
to vote at an election of directors.\24\
---------------------------------------------------------------------------
\22\ See proposed Holdings By-Laws, Section 4.8.
\23\ See proposed Holdings Certificate of Incorporation, Article
Fourth, paragraph (b), and proposed Holdings By-Laws, Section 4.10.
\24\ See proposed Holdings Certificate of Incorporation, Article
Fourth, paragraphs (c) and (d).
---------------------------------------------------------------------------
In most cases, vacancies on the Holdings Board would be filled by
the remaining directors of Holdings. If the vacancy has resulted from a
director being removed for cause by the stockholders of Holdings,
however, that vacancy may be filled by the stockholders of Holdings at
the same meeting at which the director was removed. Any director
appointed to fill a vacancy will serve until the expiration of the term
of office of the replaced director or until the end of the term for a
newly-created directorship.\25\
---------------------------------------------------------------------------
\25\ See proposed Holdings By-Laws, Section 2.4.
---------------------------------------------------------------------------
(ii) Committees of Holdings
The Holdings Board would have an Audit Committee, a Governance and
Nominating Committee, and such other committees that the Holdings Board
establishes.\26\ The Chairman of the Holdings Board would appoint the
members of all committees of the Holdings Board, and may remove any
member so appointed, subject to the approval of the Holdings Board.\27\
Each committee would have the authority and duties prescribed for it in
the Holdings By-Laws or by the Holdings Board.\28\
---------------------------------------------------------------------------
\26\ See proposed Holdings By-Laws, Section 5.1.
\27\ See proposed Holdings By-Laws, Section 5.2.
\28\ See proposed Holdings By-Laws, Section 5.3.
---------------------------------------------------------------------------
(iii) Officers of Holdings
The officers of Holdings would be a CEO, a President, a Secretary,
a Treasurer, and such other officers as the Holdings Board
determines.\29\ The CEO would be responsible to the Holdings Board for
management of the business affairs of Holdings.\30\ The officers of
Holdings would have the duties and authority set forth in the Holdings
By-Laws or given to them by the Holdings Board, and in the case of the
President, the Secretary, and the Treasurer, given to them by the Chief
Executive Officer.\31\ Any two or more offices may be held by the same
person, except that the Secretary may not also serve as the CEO or the
President. No person that is subject to any ``statutory
disqualification'' (within the meaning of Section 3(a)(39) of the Act)
may be an officer of Holdings.\32\
---------------------------------------------------------------------------
\29\ See proposed Holdings By-Laws, Section 6.1.
\30\ See proposed Holdings By-Laws, Section 6.4.
\31\ See proposed Holdings By-Laws, Sections 6.1, 6.4, 6.5, 6.6,
and 6.7.
\32\ See proposed Holdings By-Laws, Section 6.1.
---------------------------------------------------------------------------
(iv) Stockholder Restrictions
The Holdings Certificate of Incorporation and the Holdings By-Laws
place certain restrictions on the ability to transfer, own, and vote
the capital stock of Holdings.
(1) Restrictions on Voting
The Holdings Certificate of Incorporation prohibits any Person,\33\
either alone or together with its Related Persons, from (a) voting or
giving a proxy or consent with respect to shares representing more than
20% of the voting power of the then-issued and outstanding capital
stock of Holdings; or (b) entering into any agreement, plan, or
arrangement that would result in the shares of Holdings subject to that
agreement, plan, or arrangement not being voted on a matter, or any
proxy relating thereto being withheld, where the effect of that
agreement, plan, or arrangement would be to enable any Person, alone or
together with its Related Persons, to obtain more than 20% of the
voting power of the then-issued and outstanding capital stock of
Holdings.\34\
---------------------------------------------------------------------------
\33\ Article Fifth of the proposed Holdings Certificate of
Incorporation defines a ``Person'' to mean ``an individual,
partnership (general or limited), joint stock company, corporation,
limited liability company, trust or unincorporated organization, or
any governmental entity or agency or political subdivision
thereof.''
\34\ See proposed Holdings Certificate of Incorporation, Article
Fifth, paragraph (b)(ii)(C).
---------------------------------------------------------------------------
This restriction would not apply to the Class B or Class C common
stock and, as to the Class A common stock owned by Persons other than
ETP Holders and their Related Persons, may be waived by Holdings Board
pursuant to a resolution adopted by the Holdings
[[Page 34663]]
Board.\35\ Before adopting such resolution, however, the Holdings Board
must determine that, among other things, the waiver of the voting
limitation will not impair the ability of NSX to carry out its
functions and responsibilities under the Act and the rules and
regulations promulgated thereunder, and will not impair the
Commission's ability to enforce the Act and the rules and regulations
promulgated thereunder.\36\ In addition, the Holdings Board also must
determine that a Person and its Related Persons that would vote more
than 20% of the outstanding stock of Holdings are not subject to an
applicable ``statutory disqualification'' (within the meaning of
Section 3(a)(39) of the Act).\37\ Finally, any resolution of the
Holdings Board that would permit a Person to vote more than 20% of the
outstanding stock of Holdings must be filed with and approved by the
Commission before it becomes effective.\38\
---------------------------------------------------------------------------
\35\ See proposed Holdings Certificate of Incorporation, Article
Fifth, paragraphs (b)(iii)(A) and (B). See Amendment No. 1, supra
note 3.
\36\ See proposed Holdings Certificate of Incorporation, Article
Fifth, paragraph (b)(iii)(B).
\37\ 15 U.S.C. 78c(a)(39); see proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (b)(iv).
\38\ See proposed Holdings Certificate of Incorporation, Article
Fifth, paragraph (b)(iii)(B).
---------------------------------------------------------------------------
(2) Restrictions on Ownership
Under the proposed Holdings Certificate of Incorporation, no
Person, either alone or together with its Related Persons, may own
shares constituting more than 40% of any class of capital stock of
Holdings (other than a class of stock without general voting
rights).\39\ The Holdings Board may waive this ownership limitation
pursuant to a resolution adopted by the Holdings Board. Before adopting
such resolution, however, the Holdings Board must determine that, among
other things, the waiver of the ownership limitation would not impair
the ability of NSX to carry out its functions and responsibilities
under the Act and the rules and regulations promulgated thereunder and
would not impair the Commission's ability to enforce the Act and the
rules and regulations promulgated thereunder.\40\
---------------------------------------------------------------------------
\39\ See proposed Holdings Certificate of Incorporation, Article
Fifth, paragraphs (b)(ii)(A) and (b)(iii)(A).
\40\ See proposed Holdings Certificate of Incorporation, Article
Fifth, paragraph (b)(iii)(B).
---------------------------------------------------------------------------
In addition, the Holdings Board also must determine that any Person
and its Related Persons that would own more than 40% of any class of
capital stock of Holdings are not subject to any applicable ``statutory
disqualification'' (within the meaning of Section 3(a)(39) of the
Act).\41\ Finally, any Holdings Board resolution that would permit
ownership of Holdings capital stock in excess of the ownership
limitation described above must be filed with and approved by the
Commission before it becomes effective.\42\
---------------------------------------------------------------------------
\41\ 15 U.S.C. 78c(a)(39); see proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (b)(iv).
\42\ See proposed Holdings Certificate of Incorporation, Article
Fifth, paragraphs (b)(iii)(B) and (C).
---------------------------------------------------------------------------
In addition to the ownership restriction described above, no ETP
Holder, whether alone or together with its Related Persons, may own
shares constituting more than 20% of any class of capital stock of
Holdings.\43\ However, this ownership restriction would not apply to
any ETP Holder, with respect to shares of Class C common stock of
Holdings issued to the ETP Holder in connection with, and from the date
of, the demutualization of NSX so long as the ETP Holder becomes
compliant with the ownership limitation promptly after such
issuance.\44\
---------------------------------------------------------------------------
\43\ See proposed Holdings Certificate of Incorporation, Article
Fifth, paragraph (b)(ii)(B).
\44\ See proposed Holdings Certificate of Incorporation, Article
Fifth, paragraph (b)(iii)(C). See Amendment No. 1, supra note 3.
---------------------------------------------------------------------------
(3) Other Stockholder Ownership and Voting Restriction Requirements
The proposed Holdings Certificate of Incorporation contains several
provisions that would enable Holdings to enforce restrictions on the
ownership and voting of Holdings capital stock described in the
preceding section. Specifically, if a stockholder purports to sell,
transfer, assign, or pledge to any Person (other than Holdings) any
shares of Holdings that would violate the ownership restrictions,
Holdings would record on its books the transfer of only the number of
shares that would not violate the restrictions and would treat the
remaining shares as owned by the purported transferor, for all
purposes, including, without limitation, voting, payment of dividends,
and distributions.\45\
---------------------------------------------------------------------------
\45\ See proposed Holdings Certificate of Incorporation, Article
Fifth, paragraph (d).
---------------------------------------------------------------------------
In addition, if any stockholder purports to vote, or to grant any
proxy or enter into any agreement, plan, or arrangement relating to the
voting of shares that would violate the voting restrictions, Holdings
would not honor such vote, proxy, or agreement, plan, or other
arrangement to the extent that the restrictions would be violated, and
any shares subject to that arrangement would not be entitled to be
voted to the extent of the violation.\46\ Further, if any stockholder
purports to sell, transfer, assign, pledge, vote, or own any shares
that would violate the ownership and voting restrictions, Holdings
would have the right to, and would generally be required to promptly,
redeem such shares at a price equal to the par value of the shares.\47\
Also, a stockholder that alone or together with its Related Persons
owns five percent or more of the then outstanding shares of the capital
stock of Holdings entitled to vote in an election of directors must,
upon acquiring knowledge of such ownership, immediately give the
Holdings Board written notice of such ownership.\48\ Holdings may also
require any Person reasonably believed to be subject to and in
violation of the voting and ownership restrictions to provide to
Holdings information relating to such potential violation.\49\
---------------------------------------------------------------------------
\46\ Id.
\47\ See proposed Holdings Certificate of Incorporation, Article
Fifth, paragraph (e).
\48\ See proposed Holdings Certificate of Incorporation, Article
Fifth, paragraph (c)(i). Such notice must also be updated under
certain circumstances. See proposed Holdings Certificate of
Incorporation, Article Fifth, paragraph (c)(ii).
\49\ See proposed Holdings Certificate of Incorporation, Article
Fifth, paragraph (c)(iii).
---------------------------------------------------------------------------
(4) Restrictions on Transfer
Members, former members, and other equity owners of NSX who receive
shares of capital stock of Holdings in the demutualization may not
sell, transfer, or otherwise dispose of those shares for the first
thirty days following their issuance, unless the Holdings Board waives
this transfer restriction.\50\
---------------------------------------------------------------------------
\50\ See proposed Holdings Certificate of Incorporation, Article
Fifth, paragraph (b)(i).
---------------------------------------------------------------------------
Also, unless waived by the Holdings Board or pursuant to a
redemption of shares by Holdings, each stockholder of Holdings would be
prohibited from selling, transferring, or otherwise disposing of common
shares of Holdings except in amounts of at least 1,000 shares (unless
the stockholder is transferring all shares owned), and no stockholder
would be permitted to transfer any capital stock of Holdings (other
than pursuant to a redemption of shares by Holdings) until all amounts
due and owing from that stockholder to NSX have been paid.\51\
---------------------------------------------------------------------------
\51\ See proposed Holdings By-Laws, Sections 9.4 and 9.5(b).
---------------------------------------------------------------------------
In the event that a stockholder desires to transfer shares of
capital stock of Holdings to any person (other than an affiliate of the
stockholder or to another holder of the same class of capital stock)
prior to January 1, 2011, Holdings would have a right of first refusal
permitting it to purchase those shares,
[[Page 34664]]
except for transfers by bequest, operation of law, or judicial decree
under certain circumstances.\52\
---------------------------------------------------------------------------
\52\ See proposed Holdings By-Laws, Section 9.6.
---------------------------------------------------------------------------
In addition to these transfer restrictions, shares of Holdings
would be ``restricted securities'' under the Securities Act of 1933
(``Securities Act'') and only may be transferred pursuant to an
effective registration statement under the Securities Act and in
accordance with applicable state securities laws or, if an exemption
from registration is available, upon delivery to Holdings of a
satisfactory opinion of counsel that such transfer may be effected
pursuant to the exemption. In addition, counsel to Holdings may require
delivery of documentation to ensure that the transfer complies with the
Securities Act and state securities laws before such transfer is
effected.\53\ In the Demutualization Notice, the Exchange stated that
Holdings had no intention to register its common stock under the
Securities Act or the Act, and, unless waived in writing by the
Holdings Board, no transfer would be honored by Holdings that would
cause Holdings to have to do so or to become subject to the reporting
requirements of the Act.\54\
---------------------------------------------------------------------------
\53\ See proposed Holdings By-Laws, Section 9.5(a).
\54\ See proposed Holdings By-Laws, Section 9.5(c).
---------------------------------------------------------------------------
(v) Self-Regulatory Function and Oversight
The Holdings By-Laws contain various provisions designed to protect
the independence of the self-regulatory function of NSX. For example,
under the Holdings By-Laws, for as long as Holdings controls NSX, the
Holdings Board and the directors, officers, and employees of Holdings
must give due regard to the preservation of the independence of the
self-regulatory function of NSX and to its obligations to investors and
the general public, and are prohibited from taking actions that would
interfere with the effectuation of decisions by the Board of Directors
of NSX (``NSX Board'') relating to NSX's regulatory functions,
including disciplinary matters, or which would interfere with NSX's
ability to carry out its responsibilities under the Act.\55\
---------------------------------------------------------------------------
\55\ See proposed Holdings By-Laws, Section 3.1.
---------------------------------------------------------------------------
The Holdings By-Laws also contain a specific requirement that all
books and records of NSX, and the information contained therein, that
reflect confidential information pertaining to the self-regulatory
function of NSX, which come into the possession of Holdings, must be
retained in confidence by Holdings and its Board, officers, employees,
and agents, and must not be used for any non-regulatory purposes.\56\
In addition, the Holdings By-Laws provide that, to the extent they are
related to the activities of NSX, the books, records, premises,
officers, directors, agents, and employees of Holdings are deemed to be
the books, records, premises, officers, directors, agents, and
employees of NSX for the purposes of, and subject to oversight pursuant
to, the Act.\57\
---------------------------------------------------------------------------
\56\ See proposed Holdings By-Laws, Section 3.2.
\57\ See proposed Holdings By-Laws, Section 3.3. This provision
also requires Holdings to maintain its books and records in the
United States.
---------------------------------------------------------------------------
Pursuant to the Holdings By-Laws, Holdings must comply with the
Federal securities laws and the rules and regulations promulgated
thereunder. The Holdings By-Laws also provide that Holdings must
cooperate with the Commission and NSX pursuant to and to the extent of
their respective regulatory authority, and that the officers,
directors, employees, and agents of Holdings, by virtue of their
acceptance of such position, are deemed to agree to cooperate with the
Commission and NSX in respect of the Commission's oversight
responsibilities regarding NSX and the self-regulatory function and
responsibilities of NSX.\58\ In addition, the Holdings By-Laws provide
that Holdings, its officers, directors, employees, and agents, by
virtue of their acceptance of such positions, are deemed to irrevocably
submit to the jurisdiction of the U.S. federal courts, the Commission
and NSX, for the purpose of any suit, action, or proceeding pursuant to
the U.S. federal securities laws, and the rules and regulations
promulgated thereunder, arising out of, or relating to, the activities
of NSX.\59\
---------------------------------------------------------------------------
\58\ See proposed Holdings By-Laws, Section 3.4. See Amendment
No. 1, supra note 3.
\59\ See proposed Holdings By-Laws, Section 3.5. Pursuant to the
Holdings By-Laws, Holdings would be required to take reasonable
steps necessary to cause its officers, directors, and employees,
prior to accepting a position as an officer, director, or employee,
as applicable, of Holdings, to consent in writing to the
applicability to them of the provisions described in this and the
preceding two paragraphs with respect to their activities related to
NSX; see Amendment No. 1, supra note 3.
---------------------------------------------------------------------------
Finally, the Holdings Certificate of Incorporation and the Holdings
By-Laws provide that, as long as Holdings controls NSX, before any
change to the Holdings Certificate of Incorporation or the Holdings By-
Laws, respectively, will be effective, such change must be submitted to
the NSX Board, and if the NSX Board determines that the change must be
filed with or filed with and approved by the Commission before it may
be effective, the change will not be effective until it is filed with,
or filed with and approved by, the Commission, as the case may be.\60\
---------------------------------------------------------------------------
\60\ See proposed Holdings Certificate of Incorporation, Article
Twelfth, and proposed Holdings By-Laws, Article VIII. These
provisions additionally state, respectively, that (i) any change to
the proposed Holdings Certificate of Incorporation must also be
first approved by the Holdings Board and (ii) any change to the
proposed Holdings By-Laws may be made by either the stockholders of
Holdings or the Holdings Board. In addition, under Article Fourth,
paragraph (e) of the proposed Holdings Certificate of Incorporation,
holders of preferred stock (voting separately as single class) must
approve any change to the Holdings Certificate of Incorporation that
would change the terms of that preferred stock. No preferred stock
is currently issued and outstanding.
---------------------------------------------------------------------------
(b) NSX
Following the demutualization, NSX would become a Delaware for-
profit stock corporation, with the authority to issue 1,000 shares of
common stock. At all times, all of the voting stock of NSX would be
owned by Holdings.\61\ NSX would continue to be the entity registered
as a national securities exchange under Section 6 of the Act \62\ and,
accordingly, NSX would continue to be a self-regulatory organization
(``SRO'').\63\
---------------------------------------------------------------------------
\61\ See proposed NSX Certificate of Incorporation, Article
Fourth.
\62\ 15 U.S.C. 78f.
\63\ In addition, NSX stated that it would continue to adhere to
the undertakings in the Order (see supra note 10) including, without
limitation, the structure provisions of a Regulatory Oversight
Committee, the separation of the regulatory functions from the
commercial interests of the Exchange, and the retention of third
parties to review the Exchange's regulatory functions.
---------------------------------------------------------------------------
(i) Governing Documents and NSX Rules
The proposed NSX Certificate of Incorporation,\64\ NSX By-Laws, and
NSX Rules (with the proposed changes described in this document) would
govern the activities of NSX. NSX stated that these rules and
governance documents reflect, among other things, NSX's status as a
wholly-owned subsidiary of Holdings, its management by the NSX Board
and its designated officers, and its self-regulatory responsibilities
pursuant to NSX's registration under Section 6 of the Act. NSX's
proposed governance documents are designed to be consistent with its
current governance structure, with certain changes based upon its
proposed new corporate form.
---------------------------------------------------------------------------
\64\ Due to differences in terminology between Ohio and Delaware
law, the Exchange's Articles of Incorporation are proposed to be
renamed its ``Certificate of Incorporation.''
---------------------------------------------------------------------------
(ii) Board of Directors
After the demutualization, the NSX Board would initially consist of
13 directors. The NSX Board would be initially comprised of the CEO of
NSX,
[[Page 34665]]
3 ETP Holder Directors,\65\ 7 Independent Directors,\66\ and 2
directors who are executive officers of CBOE, its members,\67\ or
executive officers of CBOE member organizations.\68\ Currently, the
Exchange's Board of Directors consists of the CEO of NSX, 3 proprietary
members or executive officers of proprietary members, 7 independent
directors, and 2 executive officers of CBOE, CBOE members, or executive
officers of CBOE member organizations.
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\65\ An ETP Holder Director is defined under the proposed NSX
By-Laws as a director who is an ETP Holder or a director, officer,
managing member or partner of an entity that is an ETP Holder. See
proposed NSX By-Laws, Section 1.1(E)(2).
\66\ An Independent Director is defined under the proposed NSX
By-Laws as a member of the NSX Board that the NSX Board has
determined to have no material relationship with NSX or any
affiliate of NSX, or any ETP Holder or any affiliate of any such ETP
Holder, other than as a member of the NSX Board. See proposed NSX
By-Laws, Section 1.1(I)(1). This definition is consistent with the
definition of Independent Director in the current By-Laws of NSX.
NSX states that at least one Independent Director will be
representative of investors; see Amendment No. 1, supra note 3.
\67\ A CBOE member is defined under the proposed NSX By-Laws as
an individual CBOE member or a CBOE member organization that is a
regular member or special member of CBOE (as such terms are
described in the Constitution of the CBOE), as such CBOE members may
exist from time to time. See proposed NSX By-Laws, Section
1.1(C)(2).
\68\ See proposed NSX By-Laws, Section 3.2(a).
---------------------------------------------------------------------------
Under the proposed rule change, the NSX Board may by resolution
increase its size to up to 20 directors. Directors added to the NSX
Board to fill these new director positions will be (i) Independent
Directors, to the extent necessary for the NSX Board to include at
least 50% Independent Directors; (ii) ETP Holder Directors, to the
extent necessary for the NSX Board to include at least 20% ETP Holder
Directors; and (iii) persons who do not qualify as Independent
Directors (``At-Large Directors''), for the remainder of the positions
added to the NSX Board that are not filled with Independent Directors
or ETP Holder Directors pursuant to clauses (i) and (ii) above. At all
times, the NSX Board must include the CEO of NSX, at least 50%
Independent Directors and 3 ETP Holder Directors (or such greater
number of ETP Holder Directors as is necessary to comprise at least 20%
of the NSX Board).\69\
---------------------------------------------------------------------------
\69\ See proposed NSX By-Laws, Section 3.2(b); see Amendment No.
1, supra note 3.
---------------------------------------------------------------------------
No two or more directors under the proposed NSX By-Laws may be
partners, officers, or directors of the same person or be affiliated
with the same person, unless such affiliation is with a national
securities exchange or Holdings.\70\ Directors of NSX other than the
CEO and the CBOE Directors would be divided into three classes,
consisting as nearly as possible of equal numbers of directors.\71\
After completion of an initial phase-in schedule, these directors would
serve for staggered three-year terms, with the term of one class
expiring each year. The CEO's appointment as a director would coincide
with his or her term as CEO of NSX.\72\ The CBOE Directors would each
serve a one year term.\73\
---------------------------------------------------------------------------
\70\ See proposed NSX By-Laws, Section 3.2(c).
\71\ See proposed NSX By-Laws, Section 3.4.
\72\ See proposed NSX By-Laws, Section 3.4(a).
\73\ See proposed NSX By-Laws, Section 3.4(d).
---------------------------------------------------------------------------
Under the proposed NSX By-Laws, the NSX Board is subject to change
upon certain events in accordance with the TORA between CBOE and
NSX.\74\ Under the TORA, CBOE was provided with 4 put rights to
transfer its equity interests in NSX to NSX and NSX was provided with 4
call rights on those equity interests. According to NSX, as of March
10, 2006, the first of these put rights was exercised by CBOE,
decreasing the number of director positions of NSX filled by a
representative of CBOE from 3 to 2 and increasing the number of
positions filled by independent directors from 6 to 7. Under the
proposed NSX By-Laws:
---------------------------------------------------------------------------
\74\ See generally proposed NSX By-Laws, Section 3.3.
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On the second closing of a put or call under the TORA, the
number of positions on the NSX Board filled by representatives of CBOE
will be reduced from 2 to 1. The vacant director position must be
filled by an At-Large Director, unless an Independent Director is
needed to maintain at least 50% Independent Directors on the NSX
Board.\75\
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\75\ See proposed NSX By-Laws, Section 3.3(a).
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On the earlier of the date CBOE owns less than 5% of the
outstanding capital stock of Holdings or the third anniversary of the
fourth closing of a put or call under the TORA, CBOE's appointed
positions on the NSX board will decrease to zero. The vacant director
position must be filled with an At-Large Director, unless an
Independent Director is needed to maintain at least 50% Independent
Directors on the NSX Board.\76\
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\76\ See proposed NSX By-Laws, Section 3.3(b).
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The NSX Board would elect its Chairman from among the directors of
the NSX Board. The Chairman of the NSX Board may also serve as the CEO
and President of NSX, but may hold no other offices in NSX. Unless the
Chairman also serves as the CEO of NSX, the NSX Board must elect the
Chairman from among the Independent Directors of the NSX Board.\77\
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\77\ See proposed NSX By-Laws, Section 3.6.
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In most cases, vacancies on the NSX Board would be filled by the
remaining directors of NSX. If the vacancy has resulted from a director
being removed for cause by the stockholders of NSX, however, that
vacancy may be filled by the stockholder of NSX (i.e., Holdings) at the
same meeting at which the director was removed. Any director appointed
to fill a vacancy would serve until the expiration of the term of
office of the replaced director or until the end of the term for a
newly-created directorship.\78\
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\78\ See proposed NSX By-Laws, Section 3.7(a).
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(iii) Nomination and Election of Directors
After the formation of the initial NSX Board, the NSX Governance
and Nominating Committee would nominate directors for each director
position (other than CBOE director positions) standing for election at
the annual meeting of stockholders that year. Candidates for CBOE
Directors would be nominated by the Board of Directors of CBOE at its
annual meeting or within 20 days of NSX's annual stockholders' meeting.
Because ETPs are not equity interests in NSX, ETP Holders are not
entitled to directly elect members of the NSX Board. Rather, Holdings,
as the sole stockholder of NSX, would have the sole right and the
obligation to vote for the directors of the NSX Board.\79\
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\79\ Under Section 10.5(a) of the proposed By-Laws of Holdings,
the power to vote the stock of NSX held by Holdings would be with
the CEO of Holdings, unless the Holdings Board instructs otherwise
or unless the Holdings Board or the CEO of Holdings confers such
power on another person.
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Specifically, the ETP Holder Director Nominating Committee of NSX
(which would be composed solely of ETP Holder Directors and/or ETP
Holder representatives) would consult with the NSX Governance and
Nominating Committee, the Chairman, and the CEO of NSX and solicit
comments from ETP Holders for the purpose of approving and submitting
names of ETP Holder Director candidates.\80\ These initial candidates
for nomination would be announced to ETP Holders, who would then have
the opportunity to identify additional candidates for nomination to ETP
Holder Director positions by submitting a petition signed by at least
ten percent of the ETP Holders. An ETP Holder may endorse as many
candidates as there are ETP Holder Director positions to be filled. If
no petitions are submitted within the time frame prescribed by the NSX
By-Laws, the initial candidates approved and submitted by the ETP
Holder Director Nominating Committee would be
[[Page 34666]]
nominated. If one or more valid petitions are submitted, the ETP
Holders would vote on the entire group of potential candidates, and the
individuals receiving the largest number of votes would be the ETP
Holder Director nominees.\81\
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\80\ See proposed NSX By-Laws, Section 3.5.
\81\ Under Section 3.5(e) of the proposed NSX By-Laws, each ETP
Holder, regardless of its affiliation with other ETP Holders, will
have one vote with respect to each ETP Holder Director position to
be filled, but may not cast such votes cumulatively. The CBOE
directors are elected by the Board of Directors of CBOE at its
January meeting or as soon thereafter as possible. The current By-
Laws of NSX also contain a procedure for proprietary member director
nominations, whereby one proprietary member director candidate is
nominated by the Nominating Committee and additional proprietary
member director candidates may be nominated by a petition signed by
ten percent or more of the proprietary members. At an annual
election during the annual meeting of members, the proprietary
members vote for the proprietary member directors among the
nominated candidates.
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(iv) Committees
The NSX Board would have the following committees: (1) A Business
Conduct Committee; (2) a Securities Committee; (3) an Appeals
Committee; (4) a Governance and Nominating Committee; (5) an ETP Holder
Director Nominating Committee; (6) a Regulatory Oversight Committee;
(7) a Compensation Committee; (8) an Executive Committee; and (9) an
Audit Committee.\82\ The NSX Board may establish other committees from
time to time. Each committee would have the authority and
responsibilities prescribed for it in the NSX By-Laws, the rules of the
Exchange, or by the NSX Board.\83\
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\82\ See proposed NSX By-Laws, Section 5.1.
\83\ See proposed NSX By-Laws, Sections 5.1 and 5.3.
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The Chairman of the NSX Board would appoint, and may remove, the
members of the committees, subject to the approval of the NSX
Board.\84\ Each committee must have at least 3 members.\85\ The
Executive Committee would have the powers that the NSX Board delegates
to it, except the power to change the membership of, or fill vacancies
in, the Executive Committee.\86\ The ETP Holder Director Nominating
Committee would have the power to approve and submit names of
candidates for election to the position of ETP Holder Director in
accordance with the NSX By-Laws.\87\ The Regulatory Oversight Committee
would oversee all of the regulatory functions and responsibilities of
NSX and advise the NSX Board on regulatory matters.\88\ The Regulatory
Oversight Committee's duties and responsibilities are outlined in its
charter.\89\
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\84\ Under Section 5.2 of the proposed NSX By-Laws, the terms of
committee members are subject to the appointment and removal process
of the Chairman and NSX Board.84
\85\ See proposed NSX By-Laws, Section 5.2.
\86\ See proposed NSX By-Laws, Section 5.5.
\87\ See proposed NSX By-Laws, Section 5.7.
\88\ See proposed NSX By-Laws, Section 5.6.
\89\ NSX stated that the Regulatory Oversight Committee's
charter following demutualization would be the same as the charter
previously filed with the Commission, and is consistent with the
terms of the Order. See Securities Exchange Act Release No. 34-52573
(October 7, 2005), 70 FR 60113 (October 14, 2005) (File No. SR-NSX-
2005-07). strategies of the Exchange's ETP Holders.
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(v) Management
The officers of NSX would be a CEO, a President, a Chief Regulatory
Officer, a Secretary, and a Treasurer, and such other officers as the
NSX Board may determine.\90\ Any two or more offices may be held by the
same person, except that the Chief Regulatory Officer and the Secretary
may not be the CEO or the President.\91\ The Chairman of the NSX Board,
subject to approval of the NSX Board, may designate one or more
officers or other employees of NSX to serve as an Arbitration Director,
who would perform or delegate all ministerial duties in connection with
matters submitted for arbitration pursuant to the rules of NSX.\92\
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\90\ See proposed NSX By-Laws, Section 6.1.
\91\ See proposed NSX By-Laws, Section 6.1.
\92\ See proposed NSX By-Laws, Section 6.6.
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(vi) Self-Regulatory Function and Oversight
Following the demutualization, NSX would continue to be registered
as a national securities exchange under Section 6 of the Act and thus
would continue to be an SRO.\93\ As an SRO, NSX would be obligated to
carry out its statutory responsibilities, including enforcing
compliance by ETP Holders with the provisions of the Federal securities
laws and the applicable rules of NSX. Further, it would retain the
responsibility to administer and enforce the rules that govern NSX and
the activities of its ETP Holders. In addition, it would continue to be
required to file with the Commission, pursuant to Section 19(b) of the
Act \94\ and Rule 19b-4 thereunder,\95\ any changes to its rules and
governing documents. The structural protections adopted by NSX pursuant
to the Order help to ensure that NSX's regulatory functions are
independent from the commercial interests of NSX and its members would
remain in effect following demutualization.
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\93\ See 15 U.S.C. 78c(a)(26).
\94\ 15 U.S.C. 78s(b).
\95\ 17 CFR 240.19b-4.
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Like the proposed Holdings By-Laws, the proposed NSX By-Laws
contain specific provisions relating to the self-regulatory function of
NSX.\96\ For example, the proposed NSX By-Laws require the NSX Board to
consider applicable requirements under Section 6(b) of the Act in
connection with the management of the Exchange.\97\ In addition,
meetings of the NSX Board and of the committees of NSX that pertain to
the self-regulatory function of NSX must be closed to persons who are
not members of the NSX Board or NSX officers, staff, counsel, or other
advisors whose participation is necessary or appropriate to the self-
regulatory function of NSX, or representatives of the Commission.\98\
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\96\ See proposed NSX By-Laws, Article X.
\97\ See proposed NSX By-Laws, Section 10.1. Section 6(b) of the
Act requires, among other things, that the Exchange's rules be
designed to protect investors and the public interest. It also
requires that the Exchange be so organized that it has the capacity
to carry out the purposes of the Act and to enforce compliance by
its members with the Act, the rules and regulations promulgated
thereunder, and the rules of the Exchange.
\98\ See proposed NSX By-Laws, Section 10.2. In addition,
members of the Holdings Board who are also not members of the NSX
Board and any officers, staff, counsel, or advisors of Holdings who
do not hold similar positions with respect to NSX would not be
allowed to participate in any meeting of the NSX Board (or any
committee of NSX) that pertains to the self-regulatory function of
NSX. These requirements and the requirements relating to the
confidentiality of records are not, however, designed to prevent the
Exchange from sharing with Holdings the type of information about
the Exchange's business that would ordinarily be shared with a
parent corporation, including information relating to the Exchange's
compliance with applicable laws, reports from the Commission or
others evaluating the Exchange's self-regulatory programs, and
information about the trading activities and business strategies of
the Exchange's ETP Holders.
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Further, the NSX books and records reflecting confidential
information relating to the self-regulatory function of NSX must be
kept confidential, must not be used for non-regulatory purposes, and
must not be made available to any person other than those directors,
officers, and agents of NSX to the extent necessary or appropriate to
properly discharge NSX's self-regulatory responsibilities, and the
books and records of NSX must be maintained in the U.S.\99\ The
proposed NSX By-Laws also provide that any revenues received by NSX
from fees derived from its regulatory function or regulatory penalties
must be applied to fund the legal and regulatory operations of NSX or
to pay restitution and disgorgement of funds intended for NSX
customers, and may not be used to pay dividends.\100\
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\99\ See proposed NSX By-Laws, Sections 10.3.
\100\ See proposed NSX By-Laws, Section 10.4.
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[[Page 34667]]
(vii) Restrictions on Ownership and Transfer
Although there are no percentage-based restrictions on the
ownership of NSX, the proposed NSX Certificate of Incorporation
confirms that Holdings will own all of the voting stock of NSX at all
times.\101\
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\101\ See proposed NSX Certificate of Incorporation, Article
Fourth.
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(viii) Changes to Certificate of Incorporation and By-Laws
Under the proposed NSX Certificate of Incorporation, any change to
that document must first be approved by the NSX Board and, if required
to be approved or filed with the Commission before it may become
effective, cannot take effect until the procedures of the Commission
necessary to make it effective have been satisfied.\102\
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\102\ See proposed NSX Certificate of Incorporation, Article
Eleventh.
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Similarly, under the proposed NSX By-Laws, any change to that
document that is required to be approved by or filed with the
Commission before it may become effective cannot take effect until the
procedures of the Commission necessary to make it effective have been
satisfied.\103\ Changes to the NSX By-Laws as proposed may be made by
either the stockholders of NSX or the NSX Board, except that certain
provisions relating to the NSX Board, and to the voting of NSX
stockholders may not be changed without the approval of the stockholder
of NSX.\104\
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\103\ See proposed NSX Certificate of Incorporation, Article
Seventh.
\104\ See proposed NSX Certificate of Incorporation, Article
Seventh and proposed NSX By-Laws, Section 8.1. In addition, Sections
3.1(b) and 8.2 of the proposed NSX By-Laws permit the NSX Board to
amend, repeal, and adopt new Rules of the Exchange.
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(c) Other Provisions in the Certificates of Incorporation and By-Laws
The proposed Holdings By-Laws, Holdings Certificate of
Incorporation, NSX Certificate of Incorporation, and NSX By-Laws
contain other customary provisions of for-profit corporations, such as
provisions relating to corporate offices and corporate purposes; \105\
director meetings, voting, removal, compensation and limitation of
liability; \106\ indemnification of, and insurance for, directors,
officers, employees and agents, and advancement of expenses related to
defending certain actions; \107\ stock certificate procedures; \108\
stockholder ownership, including provisions relating to the timing and
conduct of meetings, record dates, quorum requirements, proxies, and
other matters; \109\ and other general provisions.\110\
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\105\ See proposed NSX Certificate of Incorporation, Articles
Second and Third, and proposed NSX By-Laws, Article II; see proposed
Holdings Certificate of Incorporation, Articles Second and Third,
and proposed Holdings By-Laws, Article I.
\106\ See proposed NSX Certificate of Incorporation, Articles
Fifth and Eighth, and proposed NSX By-Laws, Article III and Section
7.1; see proposed Holdings Certificate of Incorpo
