Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Granting Approval of Proposed Rule Change as Amended by Amendment No. 1 Regarding Restrictions on Affiliations Between Nasdaq and Its Members, 42149-42151 [E6-11796]

Download as PDF Federal Register / Vol. 71, No. 142 / Tuesday, July 25, 2006 / Notices sroberts on PROD1PC70 with NOTICES sharing agreement between a selfregulatory organization proposing to list a stock index derivative product and the self-regulatory organization trading the stocks underlying the derivative product is an important measure for surveillance of the derivative and underlying securities markets. When a new derivative securities product based upon domestic securities is listed and traded on an exchange or national securities association pursuant to Rule 19b–4(e) under the Act, the selfregulatory organization should determine that the markets upon which all of the U.S. component securities trade are members of the Intermarket Surveillance Group (‘‘ISG’’), which provides information relevant to the surveillance of the trading of securities on other market centers.23 For derivative securities products based on previously approved indexes that contain securities from one or more foreign markets, the self-regulatory organization should have a comprehensive Intermarket Surveillance Agreement, as prescribed in the prior Commission order, which covers the securities underlying the new securities product.24 With respect to indexes not previously approved by the Commission, the Commission finds that Nasdaq’s commitment to implement comprehensive surveillance sharing agreements,25 as necessary, and the definitive requirements that: (i) Each component security shall be a registered reporting company under the Act; and (ii) no more than 20 percent of the weight of the Underlying Index or Underlying Indexes may be comprised of foreign country securities or ADRs not subject to a comprehensive surveillance sharing agreement,26 will make possible adequate surveillance of trading of Index Securities listed pursuant to the proposed generic listing standards. With regard to actual oversight, Nasdaq represents that its surveillance procedures are sufficient to detect fraudulent trading among members in the trading of Index Securities pursuant to the proposed generic listing standards. 23 See Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 63 FR 70952 (Dec. 22, 1998) (File No. S7–13–98). ISG was formed on July 14, 1983, to, among other things, coordinate more effectively surveillance and investigative information sharing arrangements in the stock and options markets. The Commission notes that all of the registered national securities exchanges, as well as the NASD, are members of the ISG. 24 Id. 25 Proposed Nasdaq Rule 4420(m)(9). 26 Proposed Nasdaq Rules 4420(m)(7)(viii)–(ix). VerDate Aug<31>2005 18:02 Jul 24, 2006 Jkt 208001 C. Acceleration The Commission finds good cause for approving proposed rule change, as amended, prior to the 30th day after the date of publication of notice of filing thereof in the Federal Register. The proposal implements generic listing standards substantially identical to those already approved for the Nasdaq Market. The Commission does not believe that Nasdaq’s proposal raises any novel regulatory issues. The proposed generic listing criteria should enable more expeditious review and listing of Index Securities by Nasdaq, thereby reducing administrative burdens and benefiting the investing public. Thus, the Commission finds good cause to accelerate approval of the proposed rule change, as amended. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,27 that the proposed rule change (SR–NASDAQ– 2006–002), as amended, is hereby approved on an accelerated basis. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.28 Nancy M. Morris, Secretary. [FR Doc. E6–11788 Filed 7–24–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54170; File No. SR– NASDAQ–2006–006] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Granting Approval of Proposed Rule Change as Amended by Amendment No. 1 Regarding Restrictions on Affiliations Between Nasdaq and Its Members July 18, 2006. I. Introduction On April 5, 2006, The NASDAQ Stock Market LLC (‘‘Nasdaq’’), filed with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’), 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 govern affiliations between Nasdaq and its members and to limit in certain respects Nasdaq’s regulatory authority with respect to members with which it is affiliated On April 12, 2006, PO 00000 27 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. 28 17 Frm 00075 Fmt 4703 Sfmt 4703 42149 Nasdaq filed Amendment No. 1 to the proposed rule change. The proposed rule change, as amended, was published for comment in the Federal Register on April 28, 2006.3 The Commission received three comment letters on the proposal.4 On June 20, 2006, Nasdaq filed a response to comments.5 This order approves the proposed rule change, as amended. II. Description of Proposal Nasdaq Rule 2140 would prohibit Nasdaq or an entity with which it is affiliated from acquiring or maintaining an ownership interest in, or engaging in a business venture 6 with, a Nasdaq member or an affiliate of a Nasdaq member in the absence of an effective filing with the Commission under Section 19(b) of the Act.7 Further, the rule would prohibit a Nasdaq member from becoming an affiliate 8 of Nasdaq or an affiliate of an entity affiliated with Nasdaq in the absence of an effective filing under Section 19(b) of the Act.9 However, Nasdaq’s rule excludes from this restriction two types of affiliations. First, a Nasdaq member or an affiliate of a Nasdaq member could acquire or hold an equity interest in The Nasdaq Stock Market, Inc. that is permitted pursuant to Nasdaq Rule 2130 without filing such acquisition or holding under Section 19(b) of the Act.10 Second, Nasdaq or an entity affiliated with Nasdaq could acquire or maintain an 3 See Securities Exchange Act Release No. 53697 (April 21, 2006), 71 FR 25265. 4 See e-mail from Richard Gold, Missoula, MT, dated April 28, 2006 (‘‘Gold E-mail’’); and letters to Nancy M. Morris, Secretary, Commission from George R. Kramer, Deputy General Counsel, Securities Industry Association, dated May 19, 2006 (‘‘SIA Letter’’), and Kim Bang, Bloomberg L.P., dated May 17, 2006 (‘‘Bloomberg Letter’’). One commenter expressed general concerns about already approved Nasdaq rules requiring members to be broker-dealers, and did not address the substance of the proposal. See Gold E-mail. 5 See letter to Nancy M. Morris, Secretary, Commission, from Edward S. Knight, Executive Vice President and General Counsel, Nasdaq, dated June 20, 2006 (‘‘Nasdaq Response Letter’’). 6 Nasdaq defines a ‘‘business venture’’ as an arrangement under which (A) Nasdaq or an entity with which it is affiliated and (B) a Nasdaq member or an affiliate of a Nasdaq member, engage in joint activities with the expectation of shared profit and a risk of shared loss from common entrepreneurial efforts. 7 15 U.S.C. 78s(b). 8 Nasdaq defines the term ‘‘affiliate’’ under proposed Rule 2140 as having the meaning specified in Commission Rule 12b–2 under the Act; provided, however, that for purposes of Nasdaq Rule 2140, one entity shall not be deemed to be an affiliate of another entity solely by reason of having a common director. 9 15 U.S.C. 78s(b). 10 Nasdaq Rule 2130 provides that ‘‘[n]o member or person associated with a member shall be the beneficial owner of greater than twenty percent (20%) of the then-outstanding voting securities of The Nasdaq Stock Market, Inc.’’ E:\FR\FM\25JYN1.SGM 25JYN1 42150 Federal Register / Vol. 71, No. 142 / Tuesday, July 25, 2006 / Notices sroberts on PROD1PC70 with NOTICES ownership interest in, or engage in a business venture with, an affiliate of the Nasdaq member without filing such affiliation under Section 19(b) of the Act, if there were information barriers between the member and Nasdaq and its facilities. These information barriers would have to prevent the member from having an ‘‘informational advantage’’ concerning the operation of Nasdaq or its facilities or ‘‘knowledge in advance of other Nasdaq members’’ of any proposed changes to the operations of Nasdaq or its trading systems. Further, Nasdaq may only notify an affiliated member of any proposed changes to its operations or trading systems in the same manner as it notifies non-affiliated members. Nasdaq and its affiliated member may not share employees, office space, or data bases. Finally, the Nasdaq Regulatory Oversight Committee must certify, annually, that Nasdaq has taken all reasonable steps to implement, and comply with, the rule. Finally, Nasdaq proposed to amend several of its disciplinary rules to provide that Nasdaq will not consider appeals of disciplinary actions by affiliated members. Instead, after an initial decision is rendered, the affiliated member could appeal directly to the Commission. III. Summary of Comments The Commission received three comments on the proposed rule change, as amended.11 Two commenters believed that the rule was unclear and questioned whether it would be consistent with the requirements of Section 19(b) of the Act.12 Specifically, one commenter believed that the rule would curtail the Commission’s ability to review Nasdaq rules and provide an exemption to a broad category of core Nasdaq facilities from Commission review.13 The other commenter believed that, by carving out many types of business arrangements (licensing agreements, provision of transactional services or data etc.) as outside of the definition of ‘‘business venture,’’ certain provisions of agreements ‘‘that today rise to the level of ‘SRO rules’ subject to Section 19(b) safeguards might potentially be avoided by simply shifting them to a new affiliate.’’ 14 Both commenters also questioned why Nasdaq’s proposed exemptions from the general rule requiring a filing with the Commission did not include all of the conditions set forth in an earlier 11 See supra note 4. 12 See SIA Letter supra note 4; Bloomberg Letter supra note 4. 13 See Bloomberg Letter supra note 4, at 1–2. 14 See SIA Letter supra note 4, at 3. VerDate Aug<31>2005 18:02 Jul 24, 2006 Jkt 208001 Commission order (the ‘‘FSI Order’’),15 which allowed NASD and Nasdaq to develop trade analytics through a separate subsidiary without filing proposed rule changes on behalf of the subsidiary.16 The commenters noted that the Commission granted the relief at issue in the FSI Order on several conditions ‘‘designed to ensure that (a) the activities of FSI would not involve core functions of Nasdaq and (b) FSI would not obtain any informational benefit from Nasdaq that would give it a commercial advantage over its competitors.’’ 17 By failing to cite the FSI Order and adhering to its conditions, one commenter believed that the proposal would allow business ventures involving affiliates to be executed without a filing with the Commission even where such agreements involved ‘‘fundamentally important or core services,’’ allowing the business venture to ‘‘benefit from Nasdaq’s monopoly powers’’ with respect to such services.18 Finally, one commenter raised concerns with the broad exception to the filing requirement when certain information barriers exist between Nasdaq and its member or affiliate, noting that ‘‘[i]t is not clear how, absent a filing explaining how such conditions would be met in a particular business venture, anyone on the outside could determine in any given instance if Nasdaq and its venture partner in fact meet the requirements.’’ 19 IV. Nasdaq’s Response to Comments On June 20, 2006, Nasdaq responded to the issues raised by the commenters.20 As a general preface, Nasdaq stated that it believed the concerns raised by the commenters reflected a ‘‘fundamental misunderstanding of the proposed rule change.’’ 21 Nasdaq explained that it designed the proposal to stipulate that Nasdaq would be required to file a rule change regarding a proposed affiliation under the circumstances described in the rule ‘‘even if the Act does not require it to do so’’ to address a concern that there may be conditions under which the Commission would have a ‘‘strong policy interest in reviewing an affiliation between a self-regulatory 15 See Securities Exchange Act Release No. 42713 (April 24, 2000) (2000 SEC LEXIS 807). 16 See Bloomberg Letter supra note 4, at 2; See also SIA Letter supra note 4, at 3. 17 See Bloomberg Letter supra note 4, at 2. See also SIA Letter supra note 4, at 3. 18 See Bloomberg Letter supra note 4, at 3. 19 See SIA Letter supra note 4, at 2. 20 See Nasdaq Response Letter supra note 5. 21 See Nasdaq Response Letter supra note 5, at 1. PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 organization * * * and one of its members.’’ 22 Nasdaq, citing the language of Rule 19b–4 referring to ‘‘facilities of the selfregulatory organization’’ and the definition of ‘‘facility’’ in Section 3(a)(2) of the Act,23 explained that it was wellestablished that the rule filing obligations of Section 19(b) of the Act are triggered by changes to an SRO’s facilities.24 Conversely, Nasdaq stated, ‘‘business ventures that do not constitute SRO facilities, such as the state-regulated insurance brokerages that Nasdaq owns, are not subject to Section 19 of the Act.’’ 25 At the same time, contrary to the concerns expressed in the SIA Letter about Nasdaq avoiding the application of Section 19 by shifting certain operations to an affiliate, to the extent such activities constituted the operations of a facility, Section 19 would apply and require a filing, regardless of where the operations were located.26 Nasdaq makes clear that it was neither the intent nor effect of the proposal to alter the Section 19 rule filing obligations applicable to Nasdaq. Rather, proposed Rule 2140(a) imposes a rule filing obligation where Nasdaq or one of its affiliates seeks to ‘‘acquire or maintain an ownership interest in, or engage in a business venture with, a Nasdaq member or an affiliate’’ and proposed Rule 2140(b) makes clear that ‘‘[n]othing in this rule shall prohibit, or require a filing’’ (emphasis added) in the circumstances described in that part of the rule.27 Nasdaq explains that the rule does not purport to describe the circumstances under which Section 19 of the Act would require a filing, and that in any event, Nasdaq could not by rule ‘‘place limits on the requirements of Section 19 in the absence of an exercise of the Commission’s exemptive authority under Section 36 of the Act * * *.’’ 28 Nasdaq further states that the exceptions in Rule 2140(b) are exceptions only to the requirement in Rule 2140(a) and that ‘‘[w]hether Section 19 would require a filing in such circumstances would depend on the nature of the business venture, as it does today.’’ 29 Nasdaq provided a hypothetical example to illustrate its point. According to Nasdaq, if the Nasdaq Stock Market Inc. and a diversified 22 Id. 23 15 U.S.C. 78c(a)(2). Nasdaq Response Letter supra note 5, at 1– 24 See 2. 25 Id. at 2. at 2, n.3. 27 Id. at 2. 28 Id. 29 Id. at 3. 26 Id. E:\FR\FM\25JYN1.SGM 25JYN1 42151 Federal Register / Vol. 71, No. 142 / Tuesday, July 25, 2006 / Notices financial services holding company that also owned a Nasdaq member established a joint venture for trading precious metals in the spot market or for brokering commercial real estate in lower Manhattan, Nasdaq explained, the underlying activity would not be subject to a filing requirement under Section 19 because the joint venture would engage in activities not subject to Commission jurisdiction and would not be operated as a facility of Nasdaq. Although the joint venture would arguably result in an indirect affiliation between Nasdaq and one of its members, Nasdaq pointed out that its rule would not require a filing if the specified conditions of separation between the parties were in place. Nasdaq contrasted this scenario with a joint venture in which the hypothetical financial services holding company in question sold Nasdaq market data, in which case Section 19 of the Act would require a filing, regardless of its Rule 2140. V. Discussion and Commission Findings sroberts on PROD1PC70 with NOTICES The Commission has carefully reviewed the proposed rule change, as amended, the comment letters, and the Nasdaq Response Letter, and finds that the proposed rule change, as amended, is consistent with the requirements of the Act 30 and the rules and regulations thereunder applicable to a national securities exchange.31 In particular, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of Section 6(b)(5) of the Act,32 which requires that the an exchange have rules designed, among other things, to promote just and equitable principles of trade, to remove impediments and to perfect the mechanism of a free and open market and a national market system, and in general, to protect investors and the public interest. The Commission recently stated that it ‘‘is concerned about [the] potential for unfair competition and conflicts of interest between an exchange’s selfregulatory obligations and its commercial interests that could exist if an exchange were to otherwise become affiliated with one of its members, as well as the potential for unfair competitive advantage that the affiliated member could have by virtue of informational or operational advantages, or the ability to receive preferential 30 15 U.S.C. 78f. 31 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See U.S.C. 78c(f). 32 15 U.S.C. 78f(b)(5). VerDate Aug<31>2005 18:02 Jul 24, 2006 Jkt 208001 treatment.’’ 33 The Commission believes that Nasdaq’s proposed rule is designed to mitigate these concerns. Nasdaq’s rule makes it clear that affiliations between Nasdaq and its members must be filed with the Commission unless such affiliation is due to a member’s interest in The Nasdaq Stock Market, Inc. permitted under Rule 2130 or conforms to the specified information barrier requirements. In its response letter, Nasdaq correctly noted that its rule does not, in any way, limit the Commission’s authority under the Act. If Nasdaq entered into an affiliation with a member (or any other party) that resulted in a change to a Nasdaq rule or the need to establish new Nasdaq rules, as defined under the Act, then such affiliation would be subject to the rule filing requirements of Section 19(b) of the Act. Nasdaq Rule 2140 would have no affect on this statutory rule filing requirement. Finally, the Commission believes that Nasdaq’s revisions to certain disciplinary rules are consistent with the Act and are designed to protect the integrity of the disciplinary process. These modifications, which specify that Nasdaq may not be involved in certain disciplinary actions involving members with which it is affiliated, insulate Nasdaq’s role as an SRO from its commercial interests. VI. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,34 that the proposed rule change (SR–Nasdaq– 2006–006) be, and hereby is, approved, as amended. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.35 Nancy M. Morris, Secretary. [FR Doc. E6–11796 Filed 7–24–06; 8:45 am] SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54166; File No. SR–NYSE Arca–2006–45] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto To Permit the Listing and Trading of Quarterly Options Series July 18, 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 July 12, 2006, NYSE Arca, Inc. (‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been substantially prepared by the Exchange. The Exchange has designated this proposal as non-controversial under Section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b–4(f)(6) thereunder,4 which renders the proposed rule change effective upon filing with the Commission. The Exchange filed Amendment No. 1 to the proposed rule change on July 18, 2006.5 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its rules to permit the listing and trading of quarterly options series.6 The text of the proposed rule change, as amended, is set forth below. Proposed new language is in italics; language proposed to be deleted is in [brackets]. * * * * * Rules of NYSE Arca, Inc. Rule 5. Option Contracts Traded on the Exchange BILLING CODE 8010–01–P * * * 1 15 PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 * U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(iii). 4 17 CFR 240.19b–4(f)(6). 5 In Amendment No. 1, a partial amendment, the Exchange made minor modifications to the proposed rule text. 6 This proposal is substantially identical to a recently approved proposal by the International Securities Exchange (‘‘ISE’’) to list Quarterly Options Series on a pilot basis. See Securities Exchange Act Releases No. 53857 (May 24, 2006), 71 FR 31246 (June 1, 2006) (notice of filing); and 54113 (July 7, 2006), 71 FR 39694 (July 13, 2006) (approval order). 2 17 33 See Securities Exchange Act Release No. 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (order approving the New York Stock Exchange’s merger with the Pacific Exchange). 34 15 U.S.C. 78s(b)(2). 35 17 CFR 200.30–3(a)(12). * E:\FR\FM\25JYN1.SGM 25JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 71, Number 142 (Tuesday, July 25, 2006)]
[Notices]
[Pages 42149-42151]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-11796]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54170; File No. SR-NASDAQ-2006-006]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Granting Approval of Proposed Rule Change as Amended by Amendment No. 1 
Regarding Restrictions on Affiliations Between Nasdaq and Its Members

 July 18, 2006.

I. Introduction

    On April 5, 2006, The NASDAQ Stock Market LLC (``Nasdaq''), filed 
with the Securities and Exchange Commission (``Commission'' or 
``SEC''), 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 govern affiliations between Nasdaq and its members and to 
limit in certain respects Nasdaq's regulatory authority with respect to 
members with which it is affiliated On April 12, 2006, Nasdaq filed 
Amendment No. 1 to the proposed rule change. The proposed rule change, 
as amended, was published for comment in the Federal Register on April 
28, 2006.\3\ The Commission received three comment letters on the 
proposal.\4\ On June 20, 2006, Nasdaq filed a response to comments.\5\ 
This order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 53697 (April 21, 
2006), 71 FR 25265.
    \4\ See e-mail from Richard Gold, Missoula, MT, dated April 28, 
2006 (``Gold E-mail''); and letters to Nancy M. Morris, Secretary, 
Commission from George R. Kramer, Deputy General Counsel, Securities 
Industry Association, dated May 19, 2006 (``SIA Letter''), and Kim 
Bang, Bloomberg L.P., dated May 17, 2006 (``Bloomberg Letter''). One 
commenter expressed general concerns about already approved Nasdaq 
rules requiring members to be broker-dealers, and did not address 
the substance of the proposal. See Gold E-mail.
    \5\ See letter to Nancy M. Morris, Secretary, Commission, from 
Edward S. Knight, Executive Vice President and General Counsel, 
Nasdaq, dated June 20, 2006 (``Nasdaq Response Letter'').
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II. Description of Proposal

    Nasdaq Rule 2140 would prohibit Nasdaq or an entity with which it 
is affiliated from acquiring or maintaining an ownership interest in, 
or engaging in a business venture \6\ with, a Nasdaq member or an 
affiliate of a Nasdaq member in the absence of an effective filing with 
the Commission under Section 19(b) of the Act.\7\ Further, the rule 
would prohibit a Nasdaq member from becoming an affiliate \8\ of Nasdaq 
or an affiliate of an entity affiliated with Nasdaq in the absence of 
an effective filing under Section 19(b) of the Act.\9\ However, 
Nasdaq's rule excludes from this restriction two types of affiliations.
---------------------------------------------------------------------------

    \6\ Nasdaq defines a ``business venture'' as an arrangement 
under which (A) Nasdaq or an entity with which it is affiliated and 
(B) a Nasdaq member or an affiliate of a Nasdaq member, engage in 
joint activities with the expectation of shared profit and a risk of 
shared loss from common entrepreneurial efforts.
    \7\ 15 U.S.C. 78s(b).
    \8\ Nasdaq defines the term ``affiliate'' under proposed Rule 
2140 as having the meaning specified in Commission Rule 12b-2 under 
the Act; provided, however, that for purposes of Nasdaq Rule 2140, 
one entity shall not be deemed to be an affiliate of another entity 
solely by reason of having a common director.
    \9\ 15 U.S.C. 78s(b).
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    First, a Nasdaq member or an affiliate of a Nasdaq member could 
acquire or hold an equity interest in The Nasdaq Stock Market, Inc. 
that is permitted pursuant to Nasdaq Rule 2130 without filing such 
acquisition or holding under Section 19(b) of the Act.\10\ Second, 
Nasdaq or an entity affiliated with Nasdaq could acquire or maintain an

[[Page 42150]]

ownership interest in, or engage in a business venture with, an 
affiliate of the Nasdaq member without filing such affiliation under 
Section 19(b) of the Act, if there were information barriers between 
the member and Nasdaq and its facilities. These information barriers 
would have to prevent the member from having an ``informational 
advantage'' concerning the operation of Nasdaq or its facilities or 
``knowledge in advance of other Nasdaq members'' of any proposed 
changes to the operations of Nasdaq or its trading systems. Further, 
Nasdaq may only notify an affiliated member of any proposed changes to 
its operations or trading systems in the same manner as it notifies 
non-affiliated members. Nasdaq and its affiliated member may not share 
employees, office space, or data bases. Finally, the Nasdaq Regulatory 
Oversight Committee must certify, annually, that Nasdaq has taken all 
reasonable steps to implement, and comply with, the rule.
---------------------------------------------------------------------------

    \10\ Nasdaq Rule 2130 provides that ``[n]o member or person 
associated with a member shall be the beneficial owner of greater 
than twenty percent (20%) of the then-outstanding voting securities 
of The Nasdaq Stock Market, Inc.''
---------------------------------------------------------------------------

    Finally, Nasdaq proposed to amend several of its disciplinary rules 
to provide that Nasdaq will not consider appeals of disciplinary 
actions by affiliated members. Instead, after an initial decision is 
rendered, the affiliated member could appeal directly to the 
Commission.

III. Summary of Comments

    The Commission received three comments on the proposed rule change, 
as amended.\11\ Two commenters believed that the rule was unclear and 
questioned whether it would be consistent with the requirements of 
Section 19(b) of the Act.\12\ Specifically, one commenter believed that 
the rule would curtail the Commission's ability to review Nasdaq rules 
and provide an exemption to a broad category of core Nasdaq facilities 
from Commission review.\13\ The other commenter believed that, by 
carving out many types of business arrangements (licensing agreements, 
provision of transactional services or data etc.) as outside of the 
definition of ``business venture,'' certain provisions of agreements 
``that today rise to the level of `SRO rules' subject to Section 19(b) 
safeguards might potentially be avoided by simply shifting them to a 
new affiliate.'' \14\
---------------------------------------------------------------------------

    \11\ See supra note 4.
    \12\ See SIA Letter supra note 4; Bloomberg Letter supra note 4.
    \13\ See Bloomberg Letter supra note 4, at 1-2.
    \14\ See SIA Letter supra note 4, at 3.
---------------------------------------------------------------------------

    Both commenters also questioned why Nasdaq's proposed exemptions 
from the general rule requiring a filing with the Commission did not 
include all of the conditions set forth in an earlier Commission order 
(the ``FSI Order''),\15\ which allowed NASD and Nasdaq to develop trade 
analytics through a separate subsidiary without filing proposed rule 
changes on behalf of the subsidiary.\16\ The commenters noted that the 
Commission granted the relief at issue in the FSI Order on several 
conditions ``designed to ensure that (a) the activities of FSI would 
not involve core functions of Nasdaq and (b) FSI would not obtain any 
informational benefit from Nasdaq that would give it a commercial 
advantage over its competitors.'' \17\ By failing to cite the FSI Order 
and adhering to its conditions, one commenter believed that the 
proposal would allow business ventures involving affiliates to be 
executed without a filing with the Commission even where such 
agreements involved ``fundamentally important or core services,'' 
allowing the business venture to ``benefit from Nasdaq's monopoly 
powers'' with respect to such services.\18\
---------------------------------------------------------------------------

    \15\ See Securities Exchange Act Release No. 42713 (April 24, 
2000) (2000 SEC LEXIS 807).
    \16\ See Bloomberg Letter supra note 4, at 2; See also SIA 
Letter supra note 4, at 3.
    \17\ See Bloomberg Letter supra note 4, at 2. See also SIA 
Letter supra note 4, at 3.
    \18\ See Bloomberg Letter supra note 4, at 3.
---------------------------------------------------------------------------

    Finally, one commenter raised concerns with the broad exception to 
the filing requirement when certain information barriers exist between 
Nasdaq and its member or affiliate, noting that ``[i]t is not clear 
how, absent a filing explaining how such conditions would be met in a 
particular business venture, anyone on the outside could determine in 
any given instance if Nasdaq and its venture partner in fact meet the 
requirements.'' \19\
---------------------------------------------------------------------------

    \19\ See SIA Letter supra note 4, at 2.
---------------------------------------------------------------------------

IV. Nasdaq's Response to Comments

    On June 20, 2006, Nasdaq responded to the issues raised by the 
commenters.\20\ As a general preface, Nasdaq stated that it believed 
the concerns raised by the commenters reflected a ``fundamental 
misunderstanding of the proposed rule change.'' \21\ Nasdaq explained 
that it designed the proposal to stipulate that Nasdaq would be 
required to file a rule change regarding a proposed affiliation under 
the circumstances described in the rule ``even if the Act does not 
require it to do so'' to address a concern that there may be conditions 
under which the Commission would have a ``strong policy interest in 
reviewing an affiliation between a self-regulatory organization * * * 
and one of its members.'' \22\
---------------------------------------------------------------------------

    \20\ See Nasdaq Response Letter supra note 5.
    \21\ See Nasdaq Response Letter supra note 5, at 1.
    \22\ Id.
---------------------------------------------------------------------------

    Nasdaq, citing the language of Rule 19b-4 referring to ``facilities 
of the self-regulatory organization'' and the definition of 
``facility'' in Section 3(a)(2) of the Act,\23\ explained that it was 
well-established that the rule filing obligations of Section 19(b) of 
the Act are triggered by changes to an SRO's facilities.\24\ 
Conversely, Nasdaq stated, ``business ventures that do not constitute 
SRO facilities, such as the state-regulated insurance brokerages that 
Nasdaq owns, are not subject to Section 19 of the Act.'' \25\ At the 
same time, contrary to the concerns expressed in the SIA Letter about 
Nasdaq avoiding the application of Section 19 by shifting certain 
operations to an affiliate, to the extent such activities constituted 
the operations of a facility, Section 19 would apply and require a 
filing, regardless of where the operations were located.\26\
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    \23\ 15 U.S.C. 78c(a)(2).
    \24\ See Nasdaq Response Letter supra note 5, at 1-2.
    \25\ Id. at 2.
    \26\ Id. at 2, n.3.
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    Nasdaq makes clear that it was neither the intent nor effect of the 
proposal to alter the Section 19 rule filing obligations applicable to 
Nasdaq. Rather, proposed Rule 2140(a) imposes a rule filing obligation 
where Nasdaq or one of its affiliates seeks to ``acquire or maintain an 
ownership interest in, or engage in a business venture with, a Nasdaq 
member or an affiliate'' and proposed Rule 2140(b) makes clear that 
``[n]othing in this rule shall prohibit, or require a filing'' 
(emphasis added) in the circumstances described in that part of the 
rule.\27\ Nasdaq explains that the rule does not purport to describe 
the circumstances under which Section 19 of the Act would require a 
filing, and that in any event, Nasdaq could not by rule ``place limits 
on the requirements of Section 19 in the absence of an exercise of the 
Commission's exemptive authority under Section 36 of the Act * * *.'' 
\28\ Nasdaq further states that the exceptions in Rule 2140(b) are 
exceptions only to the requirement in Rule 2140(a) and that ``[w]hether 
Section 19 would require a filing in such circumstances would depend on 
the nature of the business venture, as it does today.'' \29\
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    \27\ Id. at 2.
    \28\ Id.
    \29\ Id. at 3.
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    Nasdaq provided a hypothetical example to illustrate its point. 
According to Nasdaq, if the Nasdaq Stock Market Inc. and a diversified

[[Page 42151]]

financial services holding company that also owned a Nasdaq member 
established a joint venture for trading precious metals in the spot 
market or for brokering commercial real estate in lower Manhattan, 
Nasdaq explained, the underlying activity would not be subject to a 
filing requirement under Section 19 because the joint venture would 
engage in activities not subject to Commission jurisdiction and would 
not be operated as a facility of Nasdaq. Although the joint venture 
would arguably result in an indirect affiliation between Nasdaq and one 
of its members, Nasdaq pointed out that its rule would not require a 
filing if the specified conditions of separation between the parties 
were in place. Nasdaq contrasted this scenario with a joint venture in 
which the hypothetical financial services holding company in question 
sold Nasdaq market data, in which case Section 19 of the Act would 
require a filing, regardless of its Rule 2140.

V. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change, as 
amended, the comment letters, and the Nasdaq Response Letter, and finds 
that the proposed rule change, as amended, is consistent with the 
requirements of the Act \30\ and the rules and regulations thereunder 
applicable to a national securities exchange.\31\ In particular, the 
Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of Section 6(b)(5) of the Act,\32\ 
which requires that the an exchange have rules designed, among other 
things, to promote just and equitable principles of trade, to remove 
impediments and to perfect the mechanism of a free and open market and 
a national market system, and in general, to protect investors and the 
public interest.
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    \30\ 15 U.S.C. 78f.
    \31\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See U.S.C. 78c(f).
    \32\ 15 U.S.C. 78f(b)(5).
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    The Commission recently stated that it ``is concerned about [the] 
potential for unfair competition and conflicts of interest between an 
exchange's self-regulatory obligations and its commercial interests 
that could exist if an exchange were to otherwise become affiliated 
with one of its members, as well as the potential for unfair 
competitive advantage that the affiliated member could have by virtue 
of informational or operational advantages, or the ability to receive 
preferential treatment.'' \33\ The Commission believes that Nasdaq's 
proposed rule is designed to mitigate these concerns. Nasdaq's rule 
makes it clear that affiliations between Nasdaq and its members must be 
filed with the Commission unless such affiliation is due to a member's 
interest in The Nasdaq Stock Market, Inc. permitted under Rule 2130 or 
conforms to the specified information barrier requirements.
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    \33\ See Securities Exchange Act Release No. 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (order approving the New York 
Stock Exchange's merger with the Pacific Exchange).
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    In its response letter, Nasdaq correctly noted that its rule does 
not, in any way, limit the Commission's authority under the Act. If 
Nasdaq entered into an affiliation with a member (or any other party) 
that resulted in a change to a Nasdaq rule or the need to establish new 
Nasdaq rules, as defined under the Act, then such affiliation would be 
subject to the rule filing requirements of Section 19(b) of the Act. 
Nasdaq Rule 2140 would have no affect on this statutory rule filing 
requirement.
    Finally, the Commission believes that Nasdaq's revisions to certain 
disciplinary rules are consistent with the Act and are designed to 
protect the integrity of the disciplinary process. These modifications, 
which specify that Nasdaq may not be involved in certain disciplinary 
actions involving members with which it is affiliated, insulate 
Nasdaq's role as an SRO from its commercial interests.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\34\ that the proposed rule change (SR-Nasdaq-2006-006) be, and 
hereby is, approved, as amended.
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    \34\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-11796 Filed 7-24-06; 8:45 am]
BILLING CODE 8010-01-P

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