Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of a Proposed Rule Change Relating to the Establishment of the NASDAQ Options Market LLC, 58137-58142 [E7-20081]

Download as PDF Federal Register / Vol. 72, No. 197 / Friday, October 12, 2007 / Notices FINRA’s rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. FINRA is amending IM– 2210–4 to reflect its new corporate identity and to ensure that its rule regarding the use of its corporate name is current and accurate. B. Self-Regulatory Organization’s Statement on Burden on Competition FINRA does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The proposed rule change has become effective pursuant to section 19(b)(3)(A) of the Act 11 and Rule 19b–4(f)(6) thereunder,12 because the foregoing proposed rule does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest. At any time within 60 days of the filing of such proposed rule change 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.13 jlentini on PROD1PC65 with NOTICES IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). 13 15 U.S.C. 78s(b)(3)(C). • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–FINRA–2007–014 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–FINRA–2007–014. 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 (http://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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal offices of FINRA. 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–FINRA–2007–014 and should be submitted on or before November 2, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.14 Nancy M. Morris, Secretary. [FR Doc. E7–20118 Filed 10–11–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56604; File No. SR– NASDAQ–2007–080] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of a Proposed Rule Change Relating to the Establishment of the NASDAQ Options Market LLC October 3, 2007. 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 September 17, 2007, The NASDAQ Stock Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by Nasdaq. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Nasdaq proposes to establish the NASDAQ Options Market, LLC (‘‘NOM LLC’’), a Delaware limited liability company that will operate the NASDAQ Options Market (‘‘NOM’’) as a Nasdaq facility, as that term is defined in section 3(a)(2) of the Act.3 In this filing, Nasdaq is submitting to the Commission NOM LLC’s Limited Liability Company Agreement (‘‘LLC Agreement’’), which is the source of NOM LLC’s governance and operating authority, and therefore, functions much like the articles of incorporation and bylaws for a corporation. Nasdaq also is submitting a Delegation Agreement whereby Nasdaq will make a limited delegation to NOM LLC as described in detail below. The texts of the LLC Agreement and the Delegation Agreement, are available on Nasdaq’s Web site at http:// www.nasdaq.com, on the Commission’s Web site at http://www.sec.gov, at Nasdaq, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, Nasdaq included statements concerning the purpose of and basis for the proposed rule change and discussed any 11 15 1 15 12 17 2 17 VerDate Aug<31>2005 16:35 Oct 11, 2007 14 17 Jkt 214001 PO 00000 CFR 200.30–3(a)(12). Frm 00092 Fmt 4703 Sfmt 4703 58137 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78c(a)(2). E:\FR\FM\12OCN1.SGM 12OCN1 58138 Federal Register / Vol. 72, No. 197 / Friday, October 12, 2007 / Notices comments it had received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. Nasdaq has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Nasdaq is a registered national securities exchange and a self-regulatory organization (‘‘SRO’’) under section 6 of the Act.4 Under section 6(b) of the Act,5 a national securities exchange must be so organized and have the capacity to be able to carry out the purposes of the Act and to comply, and (subject to any rule or order of the Commission pursuant to section 17(d) or 19(g)(2) of the Act) 6 to enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of the exchange. Nasdaq has submitted a separate rule proposal to establish rules relating to listing, membership and trading on NOM.7 Here, Nasdaq proposes that NOM be created as a Nasdaq facility, as that term is defined in section 3(a)(2) of the Act,8 and that it be operated by NOM LLC, a wholly-owned subsidiary of Nasdaq. As such, NOM LLC will be an extension of Nasdaq, and NOM and NOM LLC will be subject to selfregulation by Nasdaq and oversight by the Commission. As a facility of Nasdaq, NOM will be subject to Nasdaq’s selfregulatory functions and Nasdaq will have regulatory responsibility for the activities of NOM. Nasdaq represents that it has the ability to discharge all regulatory functions related to the facility that it has undertaken to perform by virtue of forming NOM as a facility of Nasdaq. As part of this filing, Nasdaq is submitting to the Commission the LLC Agreement of NOM LLC, which specifically relates to the governance of NOM LLC that will ensure that Nasdaq has authority over NOM LLC to fulfill Nasdaq’s responsibility for all regulatory functions related to NOM. The primary purpose of this rule filing is to establish jlentini on PROD1PC65 with NOTICES 4 15 U.S.C. 78f.(b). U.S.C. 78f(b)(5). 6 15 U.S.C. 78q(d) or 15 U.S.C. 78s(g)(2), respectively. 7 See Securities Exchange Act Release No. 55667 (April 25, 2007), 72 FR 23869 (May 1, 2007) (SR– NASDAQ–2007–004) (‘‘Proposed NOM Rules’’). 8 See 15 U.S.C. 78c(a)(2). 5 15 VerDate Aug<31>2005 16:35 Oct 11, 2007 Jkt 214001 that Nasdaq’s current corporate and selfregulatory structures along with the proposed structure of NOM LLC as a wholly-owned subsidiary are sufficient to ensure that NOM LLC and NOM will be operated and regulated in a manner that is consistent with the Act. Nasdaq Corporate Structure: The Commission, in approving Nasdaq’s registration as a national securities exchange, determined that Nasdaq’s current structure and self-regulatory functions are adequately designed to ensure the completeness and independence of regulation of the Exchange.9 The Nasdaq Stock Market, Inc. (‘‘NASDAQ Inc.’’) is currently organized as a holding company with multiple subsidiaries, including the Exchange and the Trade Reporting Facility LLC, which operates the joint Nasdaq/FINRA TRF. Although NASDAQ Inc. does not itself carry out regulatory functions, its activities with respect to the operation of the Exchange were designed to be consistent with, and not interfere with, the Exchange’s self-regulatory obligations. Thus, NASDAQ Inc. corporate documents include provisions that maintain the independence of the Exchange’s selfregulatory function from NASDAQ Inc., enable the Exchange to operate in a manner that complies with the federal securities laws, and facilitate the ability of the Exchange and the Commission to fulfill their regulatory and oversight obligations under the Act. For example, NASDAQ Inc. submitted to the Commission’s jurisdiction with respect to activities relating to the Exchange, and agreed to provide the Commission with access to its books and records. NASDAQ Inc. also agreed to keep confidential non-public information relating to the selfregulatory function of the Exchange and not to use such information for any non regulatory purpose. In addition, the board of directors of NASDAQ Inc., as well as its officers, employees, and agents are required to give due regard to the preservation of the independence of the Exchange’s self-regulatory function. Finally, the NASDAQ Inc. By-Laws require that any changes to the NASDAQ Inc. Certificate of Incorporation and By-Laws be submitted to the Board of Directors of the Exchange (‘‘Exchange Board’’), and, if the Exchange Board determines that such amendment is required to be filed with the Commission pursuant to section 19(b) of the Act, such change shall not be effective until filed with, or 9 See Securities Exchange Act Release No. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10–131). PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 filed with and approved by, the Commission. NASDAQ Inc.’s Certificate of Incorporation imposes limits on direct and indirect changes in control, which prevent any shareholder from exercising undue control over the operation of the Exchange. Specifically, no person who beneficially owns shares of common stock, preferred stock, or notes in excess of five percent of the securities generally entitled to vote may vote the shares in excess of five percent. The Exchange’s rules also prohibit Exchange members and persons associated with Exchange members from beneficially owning more than twenty percent of the thenoutstanding voting securities of NASDAQ Inc. These rules prevent a member that is a controlling shareholder of an exchange from exerting that controlling influence to direct or otherwise cause the exchange to refrain from diligently monitoring and surveiling the member’s conduct or diligently enforcing its rules and the federal securities laws with respect to conduct by the member that may violate such provisions. The protections, limitations, and requirements provided by the structure established in NASDAQ Inc.’s Certificate of Incorporation and Bylaws will continue to exist and, under this proposal, will apply with equal force to NOM LLC as a facility and whollyowned subsidiary of the Exchange upon its creation. Moreover, Commission approval would be required in order to modify the protections provided by NASDAQ Inc.’s Certificate of Incorporation or Bylaws. In addition to protections contained in the NASDAQ Inc. structure, the Exchange structure also provides protections via the composition of its Board of Directors, Board Committees, and several regulatory structures. Under the Exchange’s By-laws, twenty percent of the Directors on the Exchange Board, which is the governing body of the Exchange and possesses all of the powers necessary for the execution of its self-regulatory responsibilities, must be ‘‘Member Representative Directors.’’ In addition, the number of ‘‘Non-Industry Directors’’ must equal or exceed the sum of the number of ‘‘Industry Directors’’ and ‘‘Member Representative Directors.’’ The Exchange Board also must include at least one ‘‘Public Director’’ and at least one issuer representative (or at least two if the Exchange Board consists of ten or more members). The requirement that twenty percent of the directors be ‘‘Member Representative Directors’’ and the means by which they are elected by members provides for the fair representation of members in the E:\FR\FM\12OCN1.SGM 12OCN1 Federal Register / Vol. 72, No. 197 / Friday, October 12, 2007 / Notices selection of directors and the administration of the Exchange consistent with the requirement in Section 6(b)(3) of the Act.10 This requirement helps to ensure that members have a voice in the use of selfregulatory authority, and that the Exchange is administered in a way that is equitable to all those who trade on its market or through its facilities. In Nasdaq’s view, the protections provided by the composition and selection of the Exchange’s Board of Directors carry through to NOM by virtue of the fact that all NOM Options Participants 11 will be members of the Exchange. As a result, NOM Options Participants will have an equal opportunity to elect Member Representative Directors who, along with the entire Exchange Board, will have a duty to ensure that NOM is administered in a fair and equitable manner. As Exchange members, NOM participants will also be protected by several committees established by the Exchange’s By-laws that are composed solely of directors: An Executive Committee, a Finance Committee, a Management Compensation Committee, an Audit Committee, and a Regulatory Oversight Committee (‘‘ROC’’). In addition, the Exchange has these other committees that are not required to be composed solely of directors: Nasdaq Listing and Hearing Review Committee, a Nasdaq Review Council (‘‘NRC’’), a Nominating Committee, a Member Nominating Committee, a Quality of Markets Committee, a Market Operations Review Committee, an Arbitration and Mediation Committee, and a Market Regulation Committee. The Exchange’s committees enable it to carry out its responsibilities under the Act. The ROC plays a central role in the regulation of the Exchange and its facilities. It consists of three members, each of whom must be a Public Director and ‘‘independent director’’ as defined by Nasdaq Exchange Rule 4200. The ROC is responsible for monitoring the adequacy and effectiveness of the Exchange’s regulatory program, assessing the Exchange’s regulatory performance, assisting the Exchange Board in reviewing the Exchange’s regulatory plan and the overall effectiveness of the Exchange’s 10 15 U.S.C. 78f(b)(3). proposed to define the term ‘‘Options Participant’’ to mean ‘‘a firm or organization that is registered with the Exchange * * * for the purposes of participating in options trading on NOM as a ‘Nasdaq Options Order Entry Firm’ or ‘Nasdaq Options Market Maker.’ ’’ See Section 1(a)(40) of Ch. I of the Proposed NOM Rules, supra note 7. jlentini on PROD1PC65 with NOTICES 11 Nasdaq VerDate Aug<31>2005 16:35 Oct 11, 2007 Jkt 214001 regulatory functions. The ROC meets with the Chief Regulatory Officer (‘‘CRO’’) in executive session at regularly scheduled meetings and at any time upon request of the CRO or any member of the ROC. The ROC is informed about the CRO’s compensation, promotion, or termination (including reasons). Finally, the Exchange regulatory budget is presented to the ROC so that its members may inquire as to the adequacy of resources available for the Nasdaq Exchange’s regulatory program. Under this proposal, the ROC and the Exchange CRO will assume responsibility for regulating quoting and trading on NOM and conduct by NOM participants. The Exchange’s CRO has general supervision of the regulatory operations of the Exchange, including overseeing surveillance, examination, and enforcement functions. The CRO administers the regulatory services agreement with NASD Regulation. Although the Exchange is an SRO with all of the attendant regulatory obligations under the Act, it has entered into the Regulatory Contract with NASDR, under which NASDR performs certain regulatory functions on its behalf. In addition to performing certain membership functions for the Exchange, NASDR performs certain disciplinary and enforcement functions for the Exchange. Generally, NASDR investigates members, issue complaints, and conducts hearings pursuant to the Exchange’s rules. Appeals of disciplinary hearings, however, will be handled by the NRC. The Regulatory Contract between the Exchange and NASDR governs the Exchange and its facilities and therefore will automatically govern NOM. In connection with the creation of NOM, the Exchange and NASDR will modify the Regulatory Contract as necessary to ensure complete and high quality regulation of all quoting and trading on NOM as well as the conduct of NOM participants. Notwithstanding the Regulatory Contract, the Exchange retains ultimate legal responsibility for the regulation of its members and its market. The Exchange’s By-Laws and rules provide that it has disciplinary jurisdiction over its members so that it can enforce its members’ compliance with its rules and the federal securities laws. The Exchange’s rules also permit it to sanction members for violations of its rules and violations of the federal securities laws by, among other things, expelling or suspending members, limiting members’ activities, functions, or operations, fining or censuring PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 58139 members, or suspending or barring a person from being associated with a member. The Exchange’s rules also provide for the imposition of fines for minor rule violations in lieu of commencing disciplinary proceedings. The Exchange has an independent regulatory department, Nasdaq Regulation, which carries out many of the Exchange’s regulatory functions, including administering its membership and disciplinary rules and is functionally separate from the Exchange’s business lines. Nasdaq Regulation includes MarketWatch, which performs real-time intraday surveillance over all Nasdaq Exchangelisted companies and all Nasdaq Exchange market participants. More specifically, MarketWatch oversees the complete and timely disclosure of Nasdaq Exchange issuers’ material information to determine if a trading halt is necessary to maintain an orderly market for the release of material news. In addition, MarketWatch, through its automated detection system, monitors the trading activity of each security and will generate a price and volume alert to aid in the assessment of unusual market activity. MarketWatch also coordinates and executes the release of initial public offerings; administers market participants’ excused withdrawals and passive market making requests; and handles the clearly erroneous trade adjudication process. If MarketWatch observes any activity that may involve a violation of Commission or Exchange rules, MarketWatch immediately refers the activity to NASDR’s Market Regulation Department for further investigation and potential disciplinary action. Nasdaq Regulation, including MarketWatch, will perform the same regulatory role with respect to NOM, including operating automated detection systems to perform real-time surveillance of quoting and trading on NOM and to maintain a fair and orderly market. NOM LLC Structure: NOM LLC will be established as a facility of, and a wholly-owned subsidiary owned and operated by, the Exchange in a manner designed to extend to options trading on NOM each and every regulatory protection provided by NASDAQ Inc. and the Exchange structures described above. Specifically, NOM LLC will be formed as a limited liability company under the laws of the State of Delaware. NOM LLC will be governed by the LLC Agreement, filed herewith, section 5 of which states that NOM LLC shall have a single member and that that member will be Nasdaq. Section 8 of the LLC Agreement states that the Member shall have all powers necessary to act for E:\FR\FM\12OCN1.SGM 12OCN1 jlentini on PROD1PC65 with NOTICES 58140 Federal Register / Vol. 72, No. 197 / Friday, October 12, 2007 / Notices NOM LLC, as well as to exercise all rights and powers conferred to NOM LLC under Delaware law. Section 9(b) requires NOM LLC and the Member to comply with the federal securities laws and the rules and regulations thereunder, and to cooperate with the SEC and NOM pursuant to their regulatory authority. By virtue of NOM LLC’s structure as a facility of the Exchange, and as singlemember LLC having the Exchange as the single member, NOM LLC will, ipso facto, be bound by all of the regulatory obligations of its SRO member, and it will be endowed with all of the selfregulatory protections provided by the NASDAQ Inc. and Exchange governing documents. NOM LLC will be under the complete control and discretion of the Exchange and will be able to act only through the action of the Exchange and its officers and directors by virtue of the fact that there will be no separate NOM LLC board and that all NOM LLC officers will be officers of the Exchange. The Exchange, in turn, is governed by its By-laws, its Exchange Board, and the numerous Committees that the Commission has rigorously scrutinized and found to be consistent with the Act. All actions by NOM LLC that, if taken by the Exchange would require a vote of the Exchange Board, will also require a vote of the Exchange Board. Any action by NOM LLC that, were it taken by the Exchange would require a proposed rule change under Section 19 of the Act, will likewise require a proposed rule change under section 19 of the Act. Not only is NOM LLC limited to acting exclusively through the Exchange, it is also limited to acting only through officers of the Exchange. Under Section 10 of the LLC Agreement, each officer of NOM LLC will also be an officer of the Exchange with the same powers, obligations, and responsibilities of an officer of the Exchange. Moreover, the LLC Agreement requires NOM LLC officers separately to agree to comply with the federal securities laws and the rules and regulations thereunder, and to cooperate with the SEC and Nasdaq pursuant to their regulatory authority and the provisions of the LLC Agreement. Any violation of the federal securities laws by an individual officer acting in her capacity as a NOM LLC officer would also be a violation by an Exchange officer and, in both cases, such violations would be subject to Commission jurisdiction. Finally, the Exchange’s rules provide an additional layer of regulatory protection by requiring that each brokerdealer that participates in the options trading on NOM must first be a member of the Exchange, as set forth in the VerDate Aug<31>2005 16:35 Oct 11, 2007 Jkt 214001 companion proposal on NOM rules.12 As a result, all options trading and all options participants will operate pursuant to Exchange rules, subject to Exchange regulation, and Commission oversight. The Exchange will regulate NOM activity just as it regulates equity trading through a combination of structural regulation by the Exchange, the Exchange Board, the ROC, and the Exchange CRO, and real-time surveillance by Nasdaq, as well as through participation in industry-wide joint regulatory agreements under Section 17(d) of the Act. Delegation and Protection of SRO Functions: The Exchange intends to delegate to NOM LLC certain limited responsibilities and obligations solely with respect to the operation of an options trading facility pursuant to the Nasdaq Delegation Agreement. The delegation is limited to Nasdaq’s options market functions and does not include equities market functions or other functions not specifically mentioned in the limited delegation. Specifically, Nasdaq will delegate performance of the following functions to NOM pursuant to the Nasdaq Delegation Agreement: 1. To operate NOM, including automated systems supporting it. 2. To provide and maintain a communications network infrastructure linking market participants for the efficient processing and handling of quotations, orders, transaction reports, and comparisons of transactions in options. 3. To act as a Securities Information Processor for quotations and transaction information related to securities traded on NOM and any trading facilities operated by NOM. 4. To administer the participation of Nasdaq in the National Market System plans governing the listing, quoting, trading, and regulation of options and Commission regulations related thereto. 5. To collect, process, consolidate, and provide to Nasdaq accurate information requisite to the operation of a surveillance audit trail for the quoting and trading of options. 6. To develop and adopt rules governing listing standards applicable to options listed on NOM in consultation with Nasdaq. 7. To establish and assess listing fees, access fees, transaction fees, market data fees and other fees for the products and services offered by NOM. 8. To develop, adopt, and administer rules governing participation in NOM. 9. To refer to Nasdaq any complaints of a regulatory nature involving 12 See PO 00000 Proposed NOM Rules, supra note 7. Frm 00095 Fmt 4703 Sfmt 4703 potential rule violations by member organizations or employees. 10. To establish the annual budget for NOM. 11. To determine allocation of NOM resources. 12. To manage external relations on matters related to trading on and the operation and functions of NOM with Congress, the Commission, state regulators, other SROs, business groups, and the public. Nasdaq will have ultimate responsibility for the operations, rules and regulations developed by NOM, as well as their enforcement. Actions taken pursuant to delegated authority will remain subject to review, approval or rejection by the Exchange Board in accordance with procedures established by that board of directors. In addition, Nasdaq will expressly retain the following authority and functions: 1. To exercise overall responsibility for ensuring that statutory and selfregulatory obligations and functions of Nasdaq are fulfilled and to perform any duties and functions not delegated. 2. To delegate authority to NOM to take actions on behalf of the Nasdaq. 3. To direct NOM to take action necessary to effectuate the purposes and functions of Nasdaq, consistent with the independence of Nasdaq’s regulatory functions, exchange rules, policies, and procedures, and the federal securities laws. In addition, for so long as NOM has any delegated market responsibility pursuant to the Nasdaq Delegation Agreement, NOM agrees that: 1. To the fullest extent permitted by applicable law, all confidential information pertaining to the selfregulatory function of Nasdaq or any Delegated Market Responsibility (including but not limited to disciplinary matters, trading data, trading practices, and audit information) contained in the books and records of Nasdaq that shall come into the possession of NOM shall: (a) Not be made available to any person (other than as provided in the next sentence) other than to those officers, directors, employees and agents of the NOM who have a reasonable need to know the contents thereof; (b) be retained in confidence by NOM and the officers, directors, employees and agents of NOM; and (c) not be used for any commercial purposes; provided, that nothing in this sentence shall be interpreted so as to limit or impede the rights of the Commission or Nasdaq to access and examine such confidential information pursuant to the federal securities laws and the rules and E:\FR\FM\12OCN1.SGM 12OCN1 jlentini on PROD1PC65 with NOTICES Federal Register / Vol. 72, No. 197 / Friday, October 12, 2007 / Notices regulations thereunder, or to limit or impede the ability of any officers, directors, employees or agents of NOM to disclose such confidential information to the Commission or Nasdaq. 2. NOM’s books and records shall be subject at all times to inspection and copying by (a) the Commission and (b) Nasdaq. 3. NOM’s books and records shall be maintained within the United States. 4. The books, records, premises, officers, and employees of NOM shall be deemed to be the books, records, premises, officers and employees of Nasdaq for purposes of and subject to oversight pursuant to the Act. 5. NOM shall comply with the federal securities laws and the rules and regulations thereunder and shall cooperate with the Commission and Nasdaq pursuant to and to the extent of its regulatory authority, and shall take reasonable steps necessary to cause its agents to cooperate, with the Commission and, where applicable, Nasdaq, pursuant to their regulatory authority. 6. NOM, its officers and employees shall give due regard to the preservation of the independence of the selfregulatory function of Nasdaq and to obligations to investors and the general public and shall not take any actions that would interfere with the effectuation of any decisions by the board of directors or managers of Nasdaq relating to their regulatory functions (including disciplinary matters) or that would interfere with the ability of Nasdaq to carry out its responsibilities under the Act. 7. NOM, its officers, and those of its employees whose principal place of business and residence is outside of the United States shall be deemed to irrevocably submit to the jurisdiction of the United States federal courts and the Commission for the purposes of any suit, action or proceeding pursuant to the United States federal securities laws and the rules and regulations thereunder, commenced or initiated by the Commission arising out of, or relating to, the activities of Nasdaq or any delegated market responsibility (and shall be deemed to agree that NOM may serve as the U.S. agent for purposes of service of process in such suit, action, or proceeding), and NOM and each such officer or employee, in the case of any such officer or employee by virtue of his acceptance of any such position, shall be deemed to waive, and agree not to assert by way of motion, as a defense or otherwise in any such suit, action or proceeding, any claims that it or they are not personally subject to the VerDate Aug<31>2005 16:35 Oct 11, 2007 Jkt 214001 jurisdiction of the Commission, that such suit, action or proceeding is an inconvenient forum or that the venue of such suit, action or proceeding is improper, or that the subject matter thereof may not be enforced in or by such courts or agency. For so long as NOM has any delegated market responsibility pursuant to this Agreement, Nasdaq agrees that Nasdaq may not transfer or assign any of its ownership of NOM. The Nasdaq Delegation Agreement may not be modified except pursuant to a written agreement among Nasdaq and NOM provided that, prior to the effectiveness of any such amendment, such amendment shall be filed with, and approved by, the Commission under Section 19 of the Act and the rules promulgated thereunder. 2. Statutory Basis The Exchange believes the proposed rule change is consistent with the Act and the rules and regulations under the Act applicable to a national securities exchange and, in particular, the requirements of section 6(b) of the Act.13 Specifically, the Exchange believes the proposed rule change is consistent with the requirements of section 6(b)(5) of the Act 14 that the rules of an exchange be designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts and, in general, to protect investors and the public interest. B. Self-Regulatory Organization’s Statement on Burden on Competition Nasdaq does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding, or (ii) as to which Nasdaq consents, the Commission will: 13 15 14 15 PO 00000 U.S.C. 78f(b). U.S.C. 78f(b)(5). Frm 00096 Fmt 4703 Sfmt 4703 58141 (A) By order approve such proposed rule change; or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NASDAQ–2007–080 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NASDAQ–2007–080. 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 (http://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, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of Nasdaq. 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– NASDAQ–2007–080 and should be submitted on or before November 2, 2007. E:\FR\FM\12OCN1.SGM 12OCN1 58142 Federal Register / Vol. 72, No. 197 / Friday, October 12, 2007 / Notices For the Commission, by the Division of Market Regulation, pursuant to delegated authority.15 Nancy M. Morris, Secretary. [FR Doc. E7–20081 Filed 10–11–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Increase the Annual Membership Fee for Nasdaq Members October 4, 2007. 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 October 1, 2007, The NASDAQ Stock Market LLC (‘‘Nasdaq’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which items have been substantially prepared by the Exchange. Nasdaq filed this proposed rule change pursuant to section 19(b)(3)(A)(ii) of the Act 3 and Rule 19b–4(f)(2) 4 thereunder, which renders it effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Nasdaq proposes to increase the annual membership fee for Nasdaq members under Nasdaq Rule 7001. The text of the proposed rule change is available at Nasdaq, the Commission’s Public Reference Room, and Nasdaq’s Web site, http://www.nasdaq.com. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change jlentini on PROD1PC65 with NOTICES In its filing with the Commission, Nasdaq included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(ii). 4 17 CFR 240.19b–4(f)(2). 1 15 VerDate Aug<31>2005 16:35 Oct 11, 2007 Jkt 214001 A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose [Release No. 34–56617; File No. SR– NASDAQ–2007–083] 15 17 may be examined at the places specified in Item IV below. Nasdaq has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. Nasdaq is increasing its annual membership fee, which is assessed on all Nasdaq members as of a date determined by Nasdaq in December of each year, from $1,200 to $3,000 per year. The fee had initially been set at a level to ease the transition of the Nasdaq Market Center’s status as a facility of the Financial Industry Regulatory Authority, Inc. (f/k/a the National Association of Securities Dealers, Inc.) to a facility of a new self-regulatory organization (‘‘SRO’’). Now that Nasdaq has an established membership base, Nasdaq believes that the fee increase is warranted to ensure that its annual membership fee funds a greater portion of the cost of regulating the Nasdaq market. Nasdaq believes that even with the fee increase, the cost of Nasdaq membership is generally lower than the cost of membership in other SROs.5 In this regard, it is particularly notable that unlike other SROs, Nasdaq does not charge annual registration fees for each of a firm’s registered representatives. 2. Statutory Basis Nasdaq believes that the proposed rule change is consistent with the provisions of section 6 of the Act,6 in general, and with section 6(b)(4) of the Act,7 in particular, in that it provides for an equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using any facility or system which Nasdaq operates or controls. Nasdaq believes that an increased annual membership fee is reasonable and equitable method of ensuring that its annual membership fee funds a greater portion of the cost of regulating the Nasdaq market, and that the overall cost of Nasdaq membership is reasonable as 5 See, e.g., New York Stock Exchange Price List 2007 at http://www.nyse.com/pdfs/2007pricelist.pdf (itemizing numerous registration, regulation, and trading rights fees); NASD By-Laws, Schedule A, Section 1 at http://nasd.complinet.com/nasd/ display/display.html?rbid=1189&element _id=1159000126; Chicago Stock Exchange Fees and Assessments at http://wallstreet.cch.com/CHXtools/ PlatformViewer.asp?SelectedNode=chp_1_ 1&manual=/CHX/Admin/ chx-feesandassessments/. 6 15 U.S.C. 78f. 7 15 U.S.C. 78f(b)(4). PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 compared with the cost of membership in other SROs. B. Self-Regulatory Organization’s Statement on Burden on Competition Nasdaq does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing proposed rule change has become effective upon filing with the Commission pursuant to section 19(b)(3)(A)(ii) of the Act 8 and Rule 19b– 4(f)(2) thereunder,9 in that the proposed rule change establishes or changes a member due, fee, or other charge imposed by the SRO. At any time within 60 days of the filing of the proposed rule change, 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. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File No. SR–NASDAQ–2007–083 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NASDAQ–2007–083. This file number should be included on the subject line if e-mail is used. To help the 8 15 9 17 E:\FR\FM\12OCN1.SGM U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). 12OCN1

Agencies

[Federal Register Volume 72, Number 197 (Friday, October 12, 2007)]
[Notices]
[Pages 58137-58142]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-20081]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56604; File No. SR-NASDAQ-2007-080]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of a Proposed Rule Change Relating to the 
Establishment of the NASDAQ Options Market LLC

October 3, 2007.
    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 September 17, 2007, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been substantially 
prepared by Nasdaq. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to establish the NASDAQ Options Market, LLC (``NOM 
LLC''), a Delaware limited liability company that will operate the 
NASDAQ Options Market (``NOM'') as a Nasdaq facility, as that term is 
defined in section 3(a)(2) of the Act.\3\ In this filing, Nasdaq is 
submitting to the Commission NOM LLC's Limited Liability Company 
Agreement (``LLC Agreement''), which is the source of NOM LLC's 
governance and operating authority, and therefore, functions much like 
the articles of incorporation and bylaws for a corporation. Nasdaq also 
is submitting a Delegation Agreement whereby Nasdaq will make a limited 
delegation to NOM LLC as described in detail below. The texts of the 
LLC Agreement and the Delegation Agreement, are available on Nasdaq's 
Web site at http://www.nasdaq.com, on the Commission's Web site at 
http://www.sec.gov, at Nasdaq, and at the Commission's Public Reference 
Room.
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    \3\ 15 U.S.C. 78c(a)(2).
---------------------------------------------------------------------------

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any

[[Page 58138]]

comments it had received on the proposed rule change. The text of these 
statements may be examined at the places specified in Item IV below. 
Nasdaq has prepared summaries, set forth in sections A, B, and C below, 
of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Nasdaq is a registered national securities exchange and a self-
regulatory organization (``SRO'') under section 6 of the Act.\4\ Under 
section 6(b) of the Act,\5\ a national securities exchange must be so 
organized and have the capacity to be able to carry out the purposes of 
the Act and to comply, and (subject to any rule or order of the 
Commission pursuant to section 17(d) or 19(g)(2) of the Act) \6\ to 
enforce compliance by its members and persons associated with its 
members, with the provisions of the Act, the rules and regulations 
thereunder, and the rules of the exchange.
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    \4\ 15 U.S.C. 78f.(b).
    \5\ 15 U.S.C. 78f(b)(5).
    \6\ 15 U.S.C. 78q(d) or 15 U.S.C. 78s(g)(2), respectively.
---------------------------------------------------------------------------

    Nasdaq has submitted a separate rule proposal to establish rules 
relating to listing, membership and trading on NOM.\7\ Here, Nasdaq 
proposes that NOM be created as a Nasdaq facility, as that term is 
defined in section 3(a)(2) of the Act,\8\ and that it be operated by 
NOM LLC, a wholly-owned subsidiary of Nasdaq. As such, NOM LLC will be 
an extension of Nasdaq, and NOM and NOM LLC will be subject to self-
regulation by Nasdaq and oversight by the Commission. As a facility of 
Nasdaq, NOM will be subject to Nasdaq's self-regulatory functions and 
Nasdaq will have regulatory responsibility for the activities of NOM. 
Nasdaq represents that it has the ability to discharge all regulatory 
functions related to the facility that it has undertaken to perform by 
virtue of forming NOM as a facility of Nasdaq.
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    \7\ See Securities Exchange Act Release No. 55667 (April 25, 
2007), 72 FR 23869 (May 1, 2007) (SR-NASDAQ-2007-004) (``Proposed 
NOM Rules'').
    \8\ See 15 U.S.C. 78c(a)(2).
---------------------------------------------------------------------------

    As part of this filing, Nasdaq is submitting to the Commission the 
LLC Agreement of NOM LLC, which specifically relates to the governance 
of NOM LLC that will ensure that Nasdaq has authority over NOM LLC to 
fulfill Nasdaq's responsibility for all regulatory functions related to 
NOM. The primary purpose of this rule filing is to establish that 
Nasdaq's current corporate and self-regulatory structures along with 
the proposed structure of NOM LLC as a wholly-owned subsidiary are 
sufficient to ensure that NOM LLC and NOM will be operated and 
regulated in a manner that is consistent with the Act.
    Nasdaq Corporate Structure: The Commission, in approving Nasdaq's 
registration as a national securities exchange, determined that 
Nasdaq's current structure and self-regulatory functions are adequately 
designed to ensure the completeness and independence of regulation of 
the Exchange.\9\ The Nasdaq Stock Market, Inc. (``NASDAQ Inc.'') is 
currently organized as a holding company with multiple subsidiaries, 
including the Exchange and the Trade Reporting Facility LLC, which 
operates the joint Nasdaq/FINRA TRF. Although NASDAQ Inc. does not 
itself carry out regulatory functions, its activities with respect to 
the operation of the Exchange were designed to be consistent with, and 
not interfere with, the Exchange's self-regulatory obligations. Thus, 
NASDAQ Inc. corporate documents include provisions that maintain the 
independence of the Exchange's self-regulatory function from NASDAQ 
Inc., enable the Exchange to operate in a manner that complies with the 
federal securities laws, and facilitate the ability of the Exchange and 
the Commission to fulfill their regulatory and oversight obligations 
under the Act.
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006) (File No. 10-131).
---------------------------------------------------------------------------

    For example, NASDAQ Inc. submitted to the Commission's jurisdiction 
with respect to activities relating to the Exchange, and agreed to 
provide the Commission with access to its books and records. NASDAQ 
Inc. also agreed to keep confidential non-public information relating 
to the self-regulatory function of the Exchange and not to use such 
information for any non regulatory purpose. In addition, the board of 
directors of NASDAQ Inc., as well as its officers, employees, and 
agents are required to give due regard to the preservation of the 
independence of the Exchange's self-regulatory function. Finally, the 
NASDAQ Inc. By-Laws require that any changes to the NASDAQ Inc. 
Certificate of Incorporation and By-Laws be submitted to the Board of 
Directors of the Exchange (``Exchange Board''), and, if the Exchange 
Board determines that such amendment is required to be filed with the 
Commission pursuant to section 19(b) of the Act, such change shall not 
be effective until filed with, or filed with and approved by, the 
Commission.
    NASDAQ Inc.'s Certificate of Incorporation imposes limits on direct 
and indirect changes in control, which prevent any shareholder from 
exercising undue control over the operation of the Exchange. 
Specifically, no person who beneficially owns shares of common stock, 
preferred stock, or notes in excess of five percent of the securities 
generally entitled to vote may vote the shares in excess of five 
percent. The Exchange's rules also prohibit Exchange members and 
persons associated with Exchange members from beneficially owning more 
than twenty percent of the then-outstanding voting securities of NASDAQ 
Inc. These rules prevent a member that is a controlling shareholder of 
an exchange from exerting that controlling influence to direct or 
otherwise cause the exchange to refrain from diligently monitoring and 
surveiling the member's conduct or diligently enforcing its rules and 
the federal securities laws with respect to conduct by the member that 
may violate such provisions.
    The protections, limitations, and requirements provided by the 
structure established in NASDAQ Inc.'s Certificate of Incorporation and 
Bylaws will continue to exist and, under this proposal, will apply with 
equal force to NOM LLC as a facility and wholly-owned subsidiary of the 
Exchange upon its creation. Moreover, Commission approval would be 
required in order to modify the protections provided by NASDAQ Inc.'s 
Certificate of Incorporation or Bylaws.
    In addition to protections contained in the NASDAQ Inc. structure, 
the Exchange structure also provides protections via the composition of 
its Board of Directors, Board Committees, and several regulatory 
structures. Under the Exchange's By-laws, twenty percent of the 
Directors on the Exchange Board, which is the governing body of the 
Exchange and possesses all of the powers necessary for the execution of 
its self-regulatory responsibilities, must be ``Member Representative 
Directors.'' In addition, the number of ``Non-Industry Directors'' must 
equal or exceed the sum of the number of ``Industry Directors'' and 
``Member Representative Directors.'' The Exchange Board also must 
include at least one ``Public Director'' and at least one issuer 
representative (or at least two if the Exchange Board consists of ten 
or more members). The requirement that twenty percent of the directors 
be ``Member Representative Directors'' and the means by which they are 
elected by members provides for the fair representation of members in 
the

[[Page 58139]]

selection of directors and the administration of the Exchange 
consistent with the requirement in Section 6(b)(3) of the Act.\10\ This 
requirement helps to ensure that members have a voice in the use of 
self-regulatory authority, and that the Exchange is administered in a 
way that is equitable to all those who trade on its market or through 
its facilities. In Nasdaq's view, the protections provided by the 
composition and selection of the Exchange's Board of Directors carry 
through to NOM by virtue of the fact that all NOM Options Participants 
\11\ will be members of the Exchange. As a result, NOM Options 
Participants will have an equal opportunity to elect Member 
Representative Directors who, along with the entire Exchange Board, 
will have a duty to ensure that NOM is administered in a fair and 
equitable manner.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f(b)(3).
    \11\ Nasdaq proposed to define the term ``Options Participant'' 
to mean ``a firm or organization that is registered with the 
Exchange * * * for the purposes of participating in options trading 
on NOM as a `Nasdaq Options Order Entry Firm' or `Nasdaq Options 
Market Maker.' '' See Section 1(a)(40) of Ch. I of the Proposed NOM 
Rules, supra note 7.
---------------------------------------------------------------------------

    As Exchange members, NOM participants will also be protected by 
several committees established by the Exchange's By-laws that are 
composed solely of directors: An Executive Committee, a Finance 
Committee, a Management Compensation Committee, an Audit Committee, and 
a Regulatory Oversight Committee (``ROC''). In addition, the Exchange 
has these other committees that are not required to be composed solely 
of directors: Nasdaq Listing and Hearing Review Committee, a Nasdaq 
Review Council (``NRC''), a Nominating Committee, a Member Nominating 
Committee, a Quality of Markets Committee, a Market Operations Review 
Committee, an Arbitration and Mediation Committee, and a Market 
Regulation Committee. The Exchange's committees enable it to carry out 
its responsibilities under the Act.
    The ROC plays a central role in the regulation of the Exchange and 
its facilities. It consists of three members, each of whom must be a 
Public Director and ``independent director'' as defined by Nasdaq 
Exchange Rule 4200. The ROC is responsible for monitoring the adequacy 
and effectiveness of the Exchange's regulatory program, assessing the 
Exchange's regulatory performance, assisting the Exchange Board in 
reviewing the Exchange's regulatory plan and the overall effectiveness 
of the Exchange's regulatory functions. The ROC meets with the Chief 
Regulatory Officer (``CRO'') in executive session at regularly 
scheduled meetings and at any time upon request of the CRO or any 
member of the ROC. The ROC is informed about the CRO's compensation, 
promotion, or termination (including reasons). Finally, the Exchange 
regulatory budget is presented to the ROC so that its members may 
inquire as to the adequacy of resources available for the Nasdaq 
Exchange's regulatory program. Under this proposal, the ROC and the 
Exchange CRO will assume responsibility for regulating quoting and 
trading on NOM and conduct by NOM participants.
    The Exchange's CRO has general supervision of the regulatory 
operations of the Exchange, including overseeing surveillance, 
examination, and enforcement functions. The CRO administers the 
regulatory services agreement with NASD Regulation. Although the 
Exchange is an SRO with all of the attendant regulatory obligations 
under the Act, it has entered into the Regulatory Contract with NASDR, 
under which NASDR performs certain regulatory functions on its behalf. 
In addition to performing certain membership functions for the 
Exchange, NASDR performs certain disciplinary and enforcement functions 
for the Exchange. Generally, NASDR investigates members, issue 
complaints, and conducts hearings pursuant to the Exchange's rules. 
Appeals of disciplinary hearings, however, will be handled by the NRC. 
The Regulatory Contract between the Exchange and NASDR governs the 
Exchange and its facilities and therefore will automatically govern 
NOM. In connection with the creation of NOM, the Exchange and NASDR 
will modify the Regulatory Contract as necessary to ensure complete and 
high quality regulation of all quoting and trading on NOM as well as 
the conduct of NOM participants.
    Notwithstanding the Regulatory Contract, the Exchange retains 
ultimate legal responsibility for the regulation of its members and its 
market. The Exchange's By-Laws and rules provide that it has 
disciplinary jurisdiction over its members so that it can enforce its 
members' compliance with its rules and the federal securities laws. The 
Exchange's rules also permit it to sanction members for violations of 
its rules and violations of the federal securities laws by, among other 
things, expelling or suspending members, limiting members' activities, 
functions, or operations, fining or censuring members, or suspending or 
barring a person from being associated with a member. The Exchange's 
rules also provide for the imposition of fines for minor rule 
violations in lieu of commencing disciplinary proceedings.
    The Exchange has an independent regulatory department, Nasdaq 
Regulation, which carries out many of the Exchange's regulatory 
functions, including administering its membership and disciplinary 
rules and is functionally separate from the Exchange's business lines. 
Nasdaq Regulation includes MarketWatch, which performs real-time 
intraday surveillance over all Nasdaq Exchange-listed companies and all 
Nasdaq Exchange market participants. More specifically, MarketWatch 
oversees the complete and timely disclosure of Nasdaq Exchange issuers' 
material information to determine if a trading halt is necessary to 
maintain an orderly market for the release of material news. In 
addition, MarketWatch, through its automated detection system, monitors 
the trading activity of each security and will generate a price and 
volume alert to aid in the assessment of unusual market activity. 
MarketWatch also coordinates and executes the release of initial public 
offerings; administers market participants' excused withdrawals and 
passive market making requests; and handles the clearly erroneous trade 
adjudication process. If MarketWatch observes any activity that may 
involve a violation of Commission or Exchange rules, MarketWatch 
immediately refers the activity to NASDR's Market Regulation Department 
for further investigation and potential disciplinary action. Nasdaq 
Regulation, including MarketWatch, will perform the same regulatory 
role with respect to NOM, including operating automated detection 
systems to perform real-time surveillance of quoting and trading on NOM 
and to maintain a fair and orderly market.
    NOM LLC Structure: NOM LLC will be established as a facility of, 
and a wholly-owned subsidiary owned and operated by, the Exchange in a 
manner designed to extend to options trading on NOM each and every 
regulatory protection provided by NASDAQ Inc. and the Exchange 
structures described above. Specifically, NOM LLC will be formed as a 
limited liability company under the laws of the State of Delaware. NOM 
LLC will be governed by the LLC Agreement, filed herewith, section 5 of 
which states that NOM LLC shall have a single member and that that 
member will be Nasdaq. Section 8 of the LLC Agreement states that the 
Member shall have all powers necessary to act for

[[Page 58140]]

NOM LLC, as well as to exercise all rights and powers conferred to NOM 
LLC under Delaware law. Section 9(b) requires NOM LLC and the Member to 
comply with the federal securities laws and the rules and regulations 
thereunder, and to cooperate with the SEC and NOM pursuant to their 
regulatory authority.
    By virtue of NOM LLC's structure as a facility of the Exchange, and 
as single-member LLC having the Exchange as the single member, NOM LLC 
will, ipso facto, be bound by all of the regulatory obligations of its 
SRO member, and it will be endowed with all of the self-regulatory 
protections provided by the NASDAQ Inc. and Exchange governing 
documents. NOM LLC will be under the complete control and discretion of 
the Exchange and will be able to act only through the action of the 
Exchange and its officers and directors by virtue of the fact that 
there will be no separate NOM LLC board and that all NOM LLC officers 
will be officers of the Exchange. The Exchange, in turn, is governed by 
its By-laws, its Exchange Board, and the numerous Committees that the 
Commission has rigorously scrutinized and found to be consistent with 
the Act. All actions by NOM LLC that, if taken by the Exchange would 
require a vote of the Exchange Board, will also require a vote of the 
Exchange Board. Any action by NOM LLC that, were it taken by the 
Exchange would require a proposed rule change under Section 19 of the 
Act, will likewise require a proposed rule change under section 19 of 
the Act.
    Not only is NOM LLC limited to acting exclusively through the 
Exchange, it is also limited to acting only through officers of the 
Exchange. Under Section 10 of the LLC Agreement, each officer of NOM 
LLC will also be an officer of the Exchange with the same powers, 
obligations, and responsibilities of an officer of the Exchange. 
Moreover, the LLC Agreement requires NOM LLC officers separately to 
agree to comply with the federal securities laws and the rules and 
regulations thereunder, and to cooperate with the SEC and Nasdaq 
pursuant to their regulatory authority and the provisions of the LLC 
Agreement. Any violation of the federal securities laws by an 
individual officer acting in her capacity as a NOM LLC officer would 
also be a violation by an Exchange officer and, in both cases, such 
violations would be subject to Commission jurisdiction.
    Finally, the Exchange's rules provide an additional layer of 
regulatory protection by requiring that each broker-dealer that 
participates in the options trading on NOM must first be a member of 
the Exchange, as set forth in the companion proposal on NOM rules.\12\ 
As a result, all options trading and all options participants will 
operate pursuant to Exchange rules, subject to Exchange regulation, and 
Commission oversight. The Exchange will regulate NOM activity just as 
it regulates equity trading through a combination of structural 
regulation by the Exchange, the Exchange Board, the ROC, and the 
Exchange CRO, and real-time surveillance by Nasdaq, as well as through 
participation in industry-wide joint regulatory agreements under 
Section 17(d) of the Act.
---------------------------------------------------------------------------

    \12\ See Proposed NOM Rules, supra note 7.
---------------------------------------------------------------------------

    Delegation and Protection of SRO Functions: The Exchange intends to 
delegate to NOM LLC certain limited responsibilities and obligations 
solely with respect to the operation of an options trading facility 
pursuant to the Nasdaq Delegation Agreement. The delegation is limited 
to Nasdaq's options market functions and does not include equities 
market functions or other functions not specifically mentioned in the 
limited delegation.
    Specifically, Nasdaq will delegate performance of the following 
functions to NOM pursuant to the Nasdaq Delegation Agreement:
    1. To operate NOM, including automated systems supporting it.
    2. To provide and maintain a communications network infrastructure 
linking market participants for the efficient processing and handling 
of quotations, orders, transaction reports, and comparisons of 
transactions in options.
    3. To act as a Securities Information Processor for quotations and 
transaction information related to securities traded on NOM and any 
trading facilities operated by NOM.
    4. To administer the participation of Nasdaq in the National Market 
System plans governing the listing, quoting, trading, and regulation of 
options and Commission regulations related thereto.
    5. To collect, process, consolidate, and provide to Nasdaq accurate 
information requisite to the operation of a surveillance audit trail 
for the quoting and trading of options.
    6. To develop and adopt rules governing listing standards 
applicable to options listed on NOM in consultation with Nasdaq.
    7. To establish and assess listing fees, access fees, transaction 
fees, market data fees and other fees for the products and services 
offered by NOM.
    8. To develop, adopt, and administer rules governing participation 
in NOM.
    9. To refer to Nasdaq any complaints of a regulatory nature 
involving potential rule violations by member organizations or 
employees.
    10. To establish the annual budget for NOM.
    11. To determine allocation of NOM resources.
    12. To manage external relations on matters related to trading on 
and the operation and functions of NOM with Congress, the Commission, 
state regulators, other SROs, business groups, and the public.
    Nasdaq will have ultimate responsibility for the operations, rules 
and regulations developed by NOM, as well as their enforcement. Actions 
taken pursuant to delegated authority will remain subject to review, 
approval or rejection by the Exchange Board in accordance with 
procedures established by that board of directors.
    In addition, Nasdaq will expressly retain the following authority 
and functions:
    1. To exercise overall responsibility for ensuring that statutory 
and self-regulatory obligations and functions of Nasdaq are fulfilled 
and to perform any duties and functions not delegated.
    2. To delegate authority to NOM to take actions on behalf of the 
Nasdaq.
    3. To direct NOM to take action necessary to effectuate the 
purposes and functions of Nasdaq, consistent with the independence of 
Nasdaq's regulatory functions, exchange rules, policies, and 
procedures, and the federal securities laws.
    In addition, for so long as NOM has any delegated market 
responsibility pursuant to the Nasdaq Delegation Agreement, NOM agrees 
that:
    1. To the fullest extent permitted by applicable law, all 
confidential information pertaining to the self-regulatory function of 
Nasdaq or any Delegated Market Responsibility (including but not 
limited to disciplinary matters, trading data, trading practices, and 
audit information) contained in the books and records of Nasdaq that 
shall come into the possession of NOM shall: (a) Not be made available 
to any person (other than as provided in the next sentence) other than 
to those officers, directors, employees and agents of the NOM who have 
a reasonable need to know the contents thereof; (b) be retained in 
confidence by NOM and the officers, directors, employees and agents of 
NOM; and (c) not be used for any commercial purposes; provided, that 
nothing in this sentence shall be interpreted so as to limit or impede 
the rights of the Commission or Nasdaq to access and examine such 
confidential information pursuant to the federal securities laws and 
the rules and

[[Page 58141]]

regulations thereunder, or to limit or impede the ability of any 
officers, directors, employees or agents of NOM to disclose such 
confidential information to the Commission or Nasdaq.
    2. NOM's books and records shall be subject at all times to 
inspection and copying by (a) the Commission and (b) Nasdaq.
    3. NOM's books and records shall be maintained within the United 
States.
    4. The books, records, premises, officers, and employees of NOM 
shall be deemed to be the books, records, premises, officers and 
employees of Nasdaq for purposes of and subject to oversight pursuant 
to the Act.
    5. NOM shall comply with the federal securities laws and the rules 
and regulations thereunder and shall cooperate with the Commission and 
Nasdaq pursuant to and to the extent of its regulatory authority, and 
shall take reasonable steps necessary to cause its agents to cooperate, 
with the Commission and, where applicable, Nasdaq, pursuant to their 
regulatory authority.
    6. NOM, its officers and employees shall give due regard to the 
preservation of the independence of the self-regulatory function of 
Nasdaq and to obligations to investors and the general public and shall 
not take any actions that would interfere with the effectuation of any 
decisions by the board of directors or managers of Nasdaq relating to 
their regulatory functions (including disciplinary matters) or that 
would interfere with the ability of Nasdaq to carry out its 
responsibilities under the Act.
    7. NOM, its officers, and those of its employees whose principal 
place of business and residence is outside of the United States shall 
be deemed to irrevocably submit to the jurisdiction of the United 
States federal courts and the Commission for the purposes of any suit, 
action or proceeding pursuant to the United States federal securities 
laws and the rules and regulations thereunder, commenced or initiated 
by the Commission arising out of, or relating to, the activities of 
Nasdaq or any delegated market responsibility (and shall be deemed to 
agree that NOM may serve as the U.S. agent for purposes of service of 
process in such suit, action, or proceeding), and NOM and each such 
officer or employee, in the case of any such officer or employee by 
virtue of his acceptance of any such position, shall be deemed to 
waive, and agree not to assert by way of motion, as a defense or 
otherwise in any such suit, action or proceeding, any claims that it or 
they are not personally subject to the jurisdiction of the Commission, 
that such suit, action or proceeding is an inconvenient forum or that 
the venue of such suit, action or proceeding is improper, or that the 
subject matter thereof may not be enforced in or by such courts or 
agency.
    For so long as NOM has any delegated market responsibility pursuant 
to this Agreement, Nasdaq agrees that Nasdaq may not transfer or assign 
any of its ownership of NOM. The Nasdaq Delegation Agreement may not be 
modified except pursuant to a written agreement among Nasdaq and NOM 
provided that, prior to the effectiveness of any such amendment, such 
amendment shall be filed with, and approved by, the Commission under 
Section 19 of the Act and the rules promulgated thereunder.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations under the Act applicable to a 
national securities exchange and, in particular, the requirements of 
section 6(b) of the Act.\13\ Specifically, the Exchange believes the 
proposed rule change is consistent with the requirements of section 
6(b)(5) of the Act \14\ that the rules of an exchange be designed to 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts and, in general, to protect investors and the 
public interest.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which Nasdaq consents, the Commission will:
    (A) By order approve such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2007-080 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2007-080. 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 (http://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, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal office of Nasdaq. 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-NASDAQ-2007-080 and should be submitted on or before 
November 2, 2007.


[[Page 58142]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E7-20081 Filed 10-11-07; 8:45 am]
BILLING CODE 8011-01-P