Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change Relating to Changes to Phlx's Governing Documents in Connection With the Acquisition of Phlx by the Nasdaq Stock Market, Inc., 23293-23301 [E8-9323]
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Federal Register / Vol. 73, No. 83 / Tuesday, April 29, 2008 / Notices
SECURITIES AND EXCHANGE
COMMISSION
Commission’s Web site (https://
www.sec.gov/rules/sro/phlx.shtml).
[Release No. 34–57703; File No. SR–Phlx–
2008–31]
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of, and basis for,
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C, below, of
the most significant aspects of such
statements.
Self-Regulatory Organizations;
Philadelphia Stock Exchange, Inc.;
Notice of Filing of Proposed Rule
Change Relating to Changes to Phlx’s
Governing Documents in Connection
With the Acquisition of Phlx by the
Nasdaq Stock Market, Inc.
April 23, 2008.
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 April 21,
2008, the Philadelphia Stock Exchange,
Inc. (‘‘Phlx’’ or ‘‘Exchange’’) 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. 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
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The Phlx proposes to: (1) Amend the
Exchange’s Restated Certificate of
Incorporation (‘‘Certificate of
Incorporation’’), By-Laws, and Rules of
the Board of Governors (‘‘Rules’’), and
adopt certain Rules to reflect changes in
connection with the proposed
acquisition of the Exchange by The
Nasdaq Stock Market, Inc. now known
as The NASDAQ OMX Group, Inc.
(‘‘NASDAQ OMX’’); and (2) update
certain language and make other minor,
technical amendments to the Certificate
of Incorporation, By-Laws, and Rules.
The Exchange also requests Commission
approval for an affiliation between the
Exchange and certain broker-dealer
subsidiaries of the NASDAQ OMX, as
described herein. The Exchange
requests that the proposed rule change
become operative upon consummation
of the Nasdaq OMX Merger.3
The text of the proposed rule change
is available at the Exchange, the
Commission’s Public Reference Room,
and https://www.Phlx.com/exchange/
phlx_rule_fil.htm. The text of Exhibits
5A through 5C of the proposed rule
change is also available on the
1 15
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Telephone conversation between Cynthia
Hoekstra, Vice President, Phlx, and Richard Holley
III, Senior Special Counsel, Division of Trading and
Markets, Commission, on April 23, 2008.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
On November 7, 2007, NASDAQ
OMX announced that it had entered into
an agreement with the Exchange
pursuant to which NASDAQ OMX
would acquire all of the outstanding
capital stock of the Exchange. In
connection with this acquisition,
Pinnacle Merger Corp., a Delaware
corporation and wholly owned
subsidiary of NASDAQ OMX, would be
merged with and into the Exchange,
with the Exchange surviving the merger
(‘‘NASDAQ OMX Merger’’).4 As a result
of the NASDAQ OMX Merger, all of the
Exchange’s common stock would be
owned by NASDAQ OMX; Phlx
shareholders would receive cash
consideration for their shares and would
not retain any ownership interest in the
Exchange.
Thereafter, NASDAQ OMX would
operate the Exchange as a whollyowned subsidiary. The Exchange would
continue to be registered as a national
securities exchange, with separate
Rules, membership rosters, and listings,
distinct from the rules, membership
rosters, and listings of The NASDAQ
Stock Market LLC (the ‘‘NASDAQ
Exchange’’). Additionally, the Exchange
would continue to be a separate selfregulatory organization (‘‘SRO’’).
The purpose of the proposed rule
change is to amend the Exchange’s
Certificate of Incorporation, By-Laws,
and Rules to reflect NASDAQ OMX’s
proposed ownership of the Exchange.
4 The NASDAQ OMX Merger is defined as the
merger of a wholly owned subsidiary of NASDAQ
OMX with and into the Exchange, with the
Exchange as the surviving corporation, in
connection with the acquisition of the Exchange by
NASDAQ OMX. See proposed By-Law Article I,
Section 1–1(ii).
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Most of the amendments reflect the
Exchange’s new ownership structure
and some are designed to conform
Phlx’s governance provisions to those
that are currently applicable to the
NASDAQ Exchange. These revised
governance provisions collectively
regulate the Exchange and its directors,
officers, and employees in light of its
ownership by NASDAQ OMX, and,
among other things, are designed to
preserve the Exchange’s independent
Board of Governors (‘‘Board’’).
a. Stock
Specifically, Article SECOND of the
Certificate of Incorporation would be
updated to reflect the address of the
Exchange’s registered office. Article
FOURTH would be amended to: (1)
Reduce the amount of Common Stock
that the Exchange has authority to issue
to 100 shares; (2) eliminate the
designation of Class A and Class B
Common Stock;5 and (3) reduce the
amount of Preferred Stock that the
Exchange has authority to issue to 100
shares. Of the 100 shares of Preferred
Stock that may be issued, there would
continue to be one share that is
designated as Series A Preferred Stock.6
All of the authorized shares of
Common Stock shall be issued and
outstanding, and shall initially be held
by NASDAQ OMX. The Exchange
would not issue additional Preferred
Stock, other than the existing one share
of Series A Preferred Stock, unless the
resolution(s) providing for the issuance
of such Preferred Stock has been filed
with and approved by the Commission
under Section 19 of the Act 7 and the
rules promulgated thereunder.
Additionally, Common Stock and
Preferred Stock (including the Series A
Preferred Stock) may not be transferred
or assigned, in whole or in part, to any
entity, unless such transfer shall be filed
with and approved by the Commission
5 See similar changes to current Exchange By-Law
Article I, Section 1–1(d).
6 The one authorized share of Series A Preferred
stock is currently issued and outstanding, and held
by the Trust pursuant to the Trust Agreement. See
By-Law Article I, Section 1–1(ee) and proposed
Section 1–1(mm). At this time, there are no other
outstanding shares of Preferred Stock. The single
share of Series A Preferred stock is held by the
Trust for the purpose of electing those ‘‘Designated
Governors’’ voted for by Phlx Members as provided
in By-Law Articles I and III. Pursuant to the Trust
Agreement, the Holder of the Series A Preferred
Stock is required to elect the nominees for Governor
elected by the Members. The NASDAQ OMX
Merger would not result in a transfer of ownership
of the Series A Preferred Stock.
7 15 U.S.C. 78s.
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under Section 19 of the Act 8 and the
rules promulgated thereunder.9
Additional changes to the Certificate
of Incorporation are being proposed in
connection with Common Stock
dividend rights,10 voting rights,11
required notice by stockholders to the
Exchange of Common Stock ownership
in excess of certain thresholds,12
ownership concentration limits,13 and
automatic conversion of Class A
Common Stock.14 These changes are
being made to delete language
customarily applicable to non-public
companies with several stockholders,
which is no longer necessary because
NASDAQ OMX would become the sole
holder of Common Stock.
b. Board
With respect to the composition of the
board of directors, the Exchange’s Board
is currently composed of the Chairman
of the Board, who is the individual
holding the office of the Chief Executive
Officer of the Exchange, and 22 other
Governors, consisting of two Governors
who are Member Governors, one
Governor who is a Philadelphia Board
of Trade (‘‘PBOT’’) 15 Governor, six
Governors who are Stockholder
Governors, 12 Governors who are
Independent Governors, and one
Governor who is the Vice-Chairman of
the Board.16 The Exchange proposes to
amend the current composition of the
Board so that the number and
qualifications of the Governors would
be fixed from time to time by the Board
in accordance with the By-Laws. The
Board would be composed of a majority
of Independent Governors.17
Specifically, the Board would include
one Governor who is the Chief
Executive Officer of the Exchange, one
Governor who is the Vice-Chair of the
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8 Id.
9 See proposed Certificate of Incorporation,
Article FOURTH, and proposed By-Law Article
XXIX, Section 29–4.
10 See proposed Article FOURTH, (c)(ii).
11 See proposed Article FOURTH, (c)(iii).
12 See Article FOURTH, (c)(iv).
13 See Article FOURTH, (c)(v).
14 See Article FOURTH, (c)(vi).
15 The Philadelphia Board of Trade is Phlx’s
futures exchange subsidiary, and at this time,
would continue to operate as such after the
NASDAQ OMX merger.
16 See By-Law Article IV, Section 4–1.
17 See proposed Certificate of Incorporation
Article SIXTH and By-Law Article IV, Section 4–
1. ‘‘Independent Governor’’ would continue to be
defined as a Governor who is a person affirmatively
determined by the Board as having no Material
Relationship with the Exchange or any affiliate of
the Exchange, any Member of the Exchange or any
affiliate of such Member, or any issuer of securities
that are listed or traded on the Exchange or a
facility of the Exchange. See By-Law, Article I,
Sections 1–1(f), 1–1(o) and (p).
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Board,18 one PBOT Governor,19 one
Member Governor,20 one Stockholder
Governor,21 and a number of Designated
Independent Governors.22 The
Designated Governors (i.e., Designated
Independent Governors, the Member
Governor, and the PBOT Governor) 23
are intended to comply with the
requirement in Section 6(b)(3) of the
Act,24 which requires that the rules of
an exchange assure a fair representation
of its members in the selection of its
directors and administration of its
affairs and provide that one or more
directors shall be representative of
issuers and investors and not be
associated with a member of an
exchange, broker, or dealer (the ‘‘fair
representation requirement’’). The
Designated Independent Governors,
together with the Member Governor and
the PBOT Governor, would equal at
least 20% of the total number of
Governors. All remaining Governors
would be Independent Governors. A
Governor would be permitted to fill
only one position on the Board.
In terms of the election process, the
Designated Governors would be elected
by the vote of the holder of the Series
18 The Vice-Chair would continue to be an
individual who, anytime within the prior three
years, has been a Member primarily engaged in
business on the Exchange’s equity market or equity
options market or who is a general partner,
executive officer (vice-president or above) or a
Member associated with a Member Organization
primarily engaged in business on the Exchange’s
equity market or equity options market. See By-Law
Article V, Section 5–3.
19 A PBOT Governor would continue to be
defined as a Governor who is a member of PBOT
and is duly elected to fill the one vacancy on the
Board allocated to the PBOT Governor. See By-Law
Article I, Section 1–1(aa).
20 A Member Governor would continue to be
defined as a Governor who is a Member or a general
partner or an executive officer (vice-president and
above) of a Member Organization and is duly
elected to fill the vacancy on the Board allocated
to the Member Governor. See By-Law Article I,
Section 1–1(u).
21 A Stockholder Governor is defined as a
Governor who is an officer, director (or a person in
a similar position in business entities that are not
corporations), designee or an employee of a holder
of Common Stock or any affiliate or subsidiary of
such holder of Common Stock and is duly elected
to fill the vacancy on the Board allocated to the
Stockholder Governor. See By-Law Article I,
Section 1–1(hh), and Article IV, Section 4–1 and
proposed language in Certificate of Incorporation
Article SIXTH.
22 ‘‘Designated Independent Governors’’ would
continue to be defined as those Independent
Governors who are elected by the holder of the
Series A Preferred Stock in accordance with Article
SIXTH of the Certificate of Incorporation. See ByLaw Article I, Section 1–1(f).
23 The term ‘‘designated’’ refers to a governor who
is elected by the Holder of Series A Preferred Stock
to reflect the vote of the Members. See also
proposed changes to Article FOURTH of the
Exchange’s Certificate of Incorporation and By-Law
Article I, Sections 1–1(e) and (f).
24 15 U.S.C. 78f(b)(3).
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A Preferred Stock (i.e., the ‘‘Trust’’) in
accordance with the results of the vote
of Members conducted under By-Law
Article III. All other Governors (i.e.,
Independent Governors, Vice-Chair,
Chief Executive Officer, and
Shareholder Governor) would be elected
by a plurality vote of the holder of
Common Stock (i.e., NASDAQ OMX).
All Governors would be elected for
terms of one year as recommended by
NASDAQ OMX to conform with its
understanding of current corporate best
practices by allowing frequent review of
the performance of all Governors.25
Article SIXTH would also be
amended to provide that Governors,
other than Designated Governors, may
be removed with or without cause by
vote of the holder of the Common Stock
(i.e., NASDAQ OMX). This change
would reflect the Exchange’s proposed
status as a wholly-owned subsidiary of
NASDAQ OMX. Provisions governing
the removal of Designated Governors
would be simplified to make it clear that
such removal may be made with or
without cause but requires a vote of
Member Organization Representatives
under By-Law Article III. A new Article
SEVENTH would provide that the
stockholders (i.e., NASDAQ OMX) may
act by unanimous written consent, again
reflecting the Exchange’s proposed
status as a wholly-owned subsidiary.
c. By-Laws
The proposed amendments to the ByLaws include changes to conform to
changes proposed for the Certificate of
Incorporation, such as the simplification
of the Exchange’s capital structure and
restrictions on stock transfer and the
changes to the composition of the Board
described above. With regard to the
composition of the Board immediately
following a closing of the NASDAQ
OMX Merger, amended By-Law Article
IV, Section 4–3 would provide that the
directors of Pinnacle Merger
Corporation, Inc. (the ‘‘Merger
Subsidiary’’), the wholly-owned
subsidiary of NASDAQ OMX that would
be merged with and into the Exchange
through the NASDAQ OMX Merger,
would become the Board of Governors
of the Exchange immediately after the
effective time of the NASDAQ OMX
Merger. The directors of the Merger
Subsidiary would satisfy the
compositional requirements of the
25 Currently, Phlx Governors are divided into
three classes. Each such class is constituted by
election or appointment each year to serve for three
years and until their successors are elected and
qualify. Except for the Chairman and ViceChairman of the Board, Governors do not serve
more than two consecutive full three-year terms.
See By-Law Article IV, Section 4–3.
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Exchange Board contained in the
proposed By-Laws, as determined by
NASDAQ OMX. The Designated
Governors serving immediately after the
effective time of the NASDAQ OMX
Merger would consist of certain
directors of the Merger Subsidiary who
had been serving as Designated
Governors of the Exchange immediately
before the effective time of the NASDAQ
OMX Merger, as selected by NASDAQ
OMX.
Article III, Section 3–3(a), Removal of
Designated Governors, currently
provides that Designated Governors may
be removed only for cause, unless a
majority of the Board recommends that
one or more Designated Governors be
removed in accordance with Section 4–
4 of the By-Laws, in which case such
Designated Governor(s) may be removed
without cause. In either case, removal of
the Designated Governor requires a vote
by Member Organization
Representatives at an annual or special
meeting. As proposed to be amended,
Section 3–3 would provide that
Designated Governors may be removed,
with or without cause, only by vote of
Member Organization Representatives at
an annual or special meeting.26
Article IV, Section 4–4, Duties and
Powers, provides that in the event of the
refusal or failure of any Governor to
discharge his duties or for any reason
deemed sufficient by the Board, the
Board may, by the affirmative vote of a
majority of Governors then in office,
recommend to the Stockholders (and in
the case of a Designated Governor, the
Members) that such Governor be
removed and call a special meeting of
the Stockholders 27 (and, in the case of
a Designated Governor, a special
meeting of the Members and Member
Organizations and subsequently a
special meeting of the holder of the
Series A Preferred Stock, who shall be
required to vote in accordance with
Article SIXTH of the Certificate of
Incorporation and the Trust Agreement)
for the purpose of voting on such
removal. The Exchange believes that the
process set forth in Article IV, Section
4–4, remains an appropriate and
suitable process for the Board to address
the refusal or failure of a Governor
elected by the Members to discharge his
duties. Thus, in all cases, authority to
remove Designated Governors would
rest with the Members pursuant to
Section 3–3, but the Board could
26 A special meeting could be called by Members
or the Board. See By-Law Article III, Section 3–2(b).
27 This action may also be taken without a
meeting. See proposed By-Law Article XXVIII,
Section 28–13 (providing for Stockholder action
without a meeting).
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recommend removal and call a special
meeting under Section 4–4.
Article IV, Section 4–17,
Interpretation of By-Laws, would be
amended to clarify that the Board shall
determine whether an interpretation of
the By-Laws and the Rules must be filed
with the Commission as a proposed rule
change, and if so, then such change
would not become effective until filed
with, or filed with and approved by, the
Commission, as required under Section
19 of the Act 28 and the rules
promulgated thereunder.
Article IV, Section 4–21, Annual
Financial Report, would be amended to
reflect that the Board of Governors
would no longer send out annual
financial reports as described in Section
4–21. However, annual financial reports
of the Exchange would continue to be
available at the Exchange and would
also be reflected in the public
consolidated financial statements of
NASDAQ OMX.
Article V of the By-Laws would be
amended to set forth in detail the
powers and duties relating to the Chair,
Vice-Chair, and officers of the Exchange.
Specifically, the Exchange proposes to
insert language in By-Law Article V,
Section 5–1, Board’s Appointive
Powers, to state that the Board would
appoint the officers of the Exchange as
provided in the By-Laws and shall fix
their duties, responsibilities, and terms
of employment. Additionally, language
would be added to Section 5–2, Chair of
the Board of Governors, to set forth the
powers of the Chair of the Board and to
establish that the Board would select its
Chair from among the members of the
Board who are Independent Governors.
Proposed Sections 5–4, Chief Executive
Officer, and 5–5, President, set forth the
duties and powers of these officers of
the Exchange.29
Article VI, Equity Stock
Compensation, Section 6–1, Stock
Incentive and Option Plans, would be
deleted as this provision is no longer
applicable due to the fact that NASDAQ
OMX would be the sole owner of the
Exchange’s Common Stock and any
potential equity stock compensation is
likely to consist of NASDAQ OMX stock
rather than Phlx stock.
Additionally, By-Law Article IX,
Trustees of Stock Exchange Fund,
Sections 9–1 through 9–6 would be
deleted, as these provisions are no
longer deemed necessary after the
acquisition of the Exchange by
28 15
U.S.C. 78s.
provisions are consistent with current
NASDAQ OMX By-Law Article VII, and NASDAQ
Exchange By-Law Article IV.
29 These
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23295
NASDAQ OMX.30 The change reflects a
simplification of the Exchange’s
financial management, under which the
Exchange’s assets would be subject to
the oversight of the Board rather than
separate trustees and also subject to
public company financial controls
established by NASDAQ OMX.31
d. Standing Committees
Generally, the Standing Committees
of the Board would remain the same,
except as discussed below. By-Law
Article X, Standing Committees, would
also be updated to reflect the
elimination of the Automation
Committee and Marketing Committee,
as these committees are deemed no
longer necessary at this time because
automation and marketing would be
guided and handled at the parent
company level. Additionally, the
responsibilities of the Audit Committee
would be updated to conform with
similar responsibilities and processes of
the Audit Committees of NASDAQ
OMX and the NASDAQ Exchange.32
The composition of the Executive
Committee and the Finance Committee
would be amended to reflect the
proposed changes to the composition of
the Board.
Several Exchange committees that
currently review proposed rule changes
may review such proposals before the
proposals are presented to either the
Executive Committee 33 or the Board for
approval for filing with the
Commission.34 These committees on
30 The purpose of the Stock Exchange Fund was
to appoint trustees to manage the investment of
certain funds of the Exchange and collect interest,
dividends and income from the funds for the
Exchange.
31 The applicable references to the Stock
Exchange Fund in Article IV, Section 4–4, Duties
and Powers, Removal of governors or trustees of
gratuity fund and stock exchange for cause, would
also be deleted and this section would be updated
to reflect that there is no longer a gratuity fund.
32 See NASDAQ OMX Audit Committee Charter
approved April 18, 2007 and NASDAQ Exchange
By-Law Article III.
33 The Executive Committee currently consists of
nine Governors; the Chairman of the Board; the
Vice-Chairman of the Board; the Chairman of the
Finance Committee; the Chairmen of two floor
committees; two Stockholder Governors; and two
Independent Governors. See By-Law Article X,
Section 10–14. As proposed herein, the Executive
Committee would be amended so that it would
consist of the Chair of the Board, the Vice-Chair of
the Board, the Stockholder Governor, a number of
designated Governors equal to at least 20% of the
total number of Governors on the Executive
Committee, and such other Governors as the Board
may appoint. See proposed By-Law Article X,
Section 10–14.
34 Members using XLE (the Exchange’s equity
trading system) are represented on the Exchange’s
Board through the exercise of their voting rights for
members of the Board. Currently, there is no
designated committee that reviews proposed rule
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which Exchange members serve would
continue to perform this function after
the NASDAQ OMX merger. For
example, the Business Conduct
Committee (‘‘BCC’’) may review
proposed changes to the disciplinary
Rules that are set forth in Exchange Rule
960 before these Rules are presented to
the Executive Committee or the Board.
The BCC currently consists (and will
continue to consist) of nine members as
follows: three Independent Governors;
one Member or person associated with
a Member Organization who conducts
business on XLE; one Member who
conducts options business at the
Exchange; and four persons who are
Members or persons associated with a
Member Organization.35
Furthermore, the Options Committee
makes or recommends for adoption such
Rules as it deems necessary for the
convenient and orderly transaction of
business upon the equity and index
options trading floor, as well as makes
and enforces Rules and regulations
relating to order, decorum, health, safety
and welfare on the equity and index
options trading floor and the
immediately adjacent premises of the
Exchange. Fifty percent of the Members
of the Options Committee are permit
holders or associated with a Member
Organization.36 Thus, Member
representation on Exchange committees
would continue.
Additionally, By-Law Article X,
Section 10–15, Finance Committee,
would be amended such that the Chair
of the Finance Committee would be the
Chair of the Board and would no longer
be either the Vice-Chair, Stockholder
Governor or Member Governor. The
Exchange also proposes to amend the
description of the composition of the
Finance Committee members to allow
any Member or persons associated with
a Member Organization, who conducts
business on XLE to be a member of the
Committee. Currently, the language
states, in part, that the Finance
Committee shall include two Members
or persons associated with a Member
Organization, who may be Governors,
one of whom conducts business
primarily on XLE or on the equity
options floor. Although this proposed
change is not directly related to the
NASDAQ OMX Merger, the Exchange
proposes to delete the word ‘‘primarily’’
in order to allow a greater pool of
changes covering equity Rules. The Board or
Executive Committee performs this function.
35 See By-Law Article X, Section 10–11.
36 See By-Law Article X, Section 10–20.
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candidates to be eligible to serve on the
Finance Committee.37
The purpose of deleting the
supplementary material in Section 10–
15 is to reflect the updated
responsibilities of the Finance
Committee.38 The Board would
establish capital expenditure policies,
which may include delegation to Board
committees and/or officers, but would
no longer reflect these policies in the
By-Laws. This reflects a more flexible
approach, consistent with NASDAQ
OMX’s processes and the functions of a
public company parent.
Also, in By-Law Article X, Section
10–19, Nominating, Elections and
Governance Committee, the Exchange
proposes to delete the term limit
applicable to this Committee and delete
the prohibition on Committee members
standing for re-election to the Board.
These changes are designed to increase
the pool of candidates eligible to serve
on the Committee and the Board.
Moreover, the deletion of these
restrictions is also supported by the fact
that all Board members, including those
serving on the Committee, would serve
for one-year terms and would therefore
have their qualifications for continued
Board service under more frequent
review.
In addition, the Nominating, Elections
and Governance Committee would no
longer select all Chairs of the Standing
Committees in accordance with Article
X. The Board would now appoint a
person to fill any vacancy in a Standing
Committee, including Chairs, except for
the Chair of the Executive Committee,
the Chair of the Nominating, Elections
and Governance Committee and the
Chair of the Finance Committee.39 This
37 This proposed change is consistent with a
recent By-Law change to Section 10–11, Business
Conduct Committee, relating to the composition of
the Business Conduct Committee. In that proposal,
the Exchange expanded the type of business that
may be conducted to qualify as a BCC member. See
Securities Exchange Act Release No. 57023
(December 20, 2007), 72 FR 74398 (December 31,
2007) (SR–Phlx–2007–83).
38 Currently, the supplementary material relates
to directives that are applicable to the Finance
Committee in the exercise of its duties, powers and
authority under the By-Laws. For example, the
supplementary material states that the Finance
Committee may authorize certain expenditures of
any budgeted line items; may delegate to the staff
of the Exchange so much of its authority to make
expenditures as it deems appropriate; and shall
perform its functions and act with the same powers
and limitations for the Exchange and all
subsidiaries of the Exchange. See By-Law Article X,
Section 10–15, Supplementary Material.
39 Pursuant to the By-Laws, the Chair of the Board
is the Chair of the Executive Committee and the
Finance Committee and the Chair of the
Nominating, Elections and Governance Committee
is selected from among the members of such
Committee who are Independent Governors. See
By-Law Article X, Sections 10–14(a), 10–15 and 10–
19(a).
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change reflects a general philosophy
that the full Board should have control
over the composition of Standing
Committees, including the selection of
their Chairs and is consistent with how
NASDAQ OMX currently operates.40
Additionally, in By-Law Article X,
Section 10–21, the Exchange proposes
to clarify the composition of the Quality
of Markets Committee by specifically
stating that the members of this
Committee would include at least as
many Independent members as it does
the ‘‘combined number’’ of Stockholderchosen members 41 and members who
are Members of the Exchange.42 The
Exchange believes that adding the
language ‘‘combined number’’ should
clarify that the number of Stockholderchosen Committee members 43 are
added to the number of Members
serving on the Committee 44 and that
total is then compared to the number of
‘‘Independent’’ Committee members
(not to be confused with ‘‘Independent
Governors,’’ which also rely on the
definition of ‘‘Independent’’ in By-Law
Article I, Section 1–1(o)).
In addition, the Exchange proposes to
adopt for the Quality of Markets
Committee a ‘‘fair representation
requirement’’ consistent with Section
6(b)(3) of the Act, 45 which requires that
the rules of an exchange assure a fair
representation of its members in the
selection of its directors and
administration of its affairs. This
language is intended to ensure fair
Member representation on the Quality
of Markets Committee.46
By-Law Article XI, Section 11–1(b)
would be amended to delete references
to a ‘‘special committee of the Board of
Governors’’ that hears appeals from
determinations of the Nominating,
Elections and Governance Committee
regarding eligibility for election to the
Board. The special committee had been
composed of Governors not then
standing for re-election. However,
because the proposed amendments to
Section 4–3 eliminate the ‘‘staggering’’
of the Board, requiring all Governors to
be elected annually, it would not be
possible to form such a special
40 See NASDAQ OMX By-Law Article IV, Section
4.13.
41 See By-Law Article I, Section 1–1(gg).
42 See By-Law Article I, Section 1–1(t).
43 NASDAQ OMX, as Stockholder, would select
the Stockholder member(s) of this Committee,
subject to Board approval pursuant to By-Law
Article X, Section 10–1(b).
44 The Board would select the Member(s) serving
on the Committee pursuant to By-Law Article X,
Section 10–1(b).
45 15 U.S.C. 78f(b)(3).
46 This provision is similar to the NASDAQ
Exchange’s Quality of Markets Committee. See
NASDAQ Exchange By-Law Article III, Section 6.
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committee. Now that the Exchange
proposes to reduce the size of its Board,
the Exchange believes that at this time,
it would be more practical for the full
Board to hear an appeal pursuant to
Section 11–1(b) because all Governors
would stand for re-election annually.
In By-Law Sections 13–5, Liability of
Officers, Directors and Substantial
Stockholders, 13–7, Violation of Terms
of Registration, 17–4, Time for
Settlement of Insolvent Member or
Participant, Extension, and 18–3,
Responsibility of Member or Participant
for Acts of His Organization, references
to receiving an affirmative vote of either
14 or 15 Governors (which used to
represent a supermajority) would be
changed to require an affirmative vote of
a majority of all Governors. This change
is necessary as the number of Board
members may be reduced after the
NASDAQ OMX Merger and therefore a
vote of 14 or 15 Governors may no
longer be possible.
Article XXII, Amending the By-Laws,
would be amended to state affirmatively
that By-Law amendments must be filed
with, and/or approved by, the
Commission as required under Section
19 of the Act 47 and that the holders of
a majority of the shares of Common
Stock then issued and outstanding must
affirmatively vote for By-Law
amendments.
Article XXVIII, Section 28–3,
Nomination of Chairman and ViceChairman of the Board of Governors;
Independent Nominations by
Stockholders; Election of Nominees for
Stockholder and Independent
Governors, currently provides for a
nomination process in connection with
nominating and electing the abovereferenced individuals. The Exchange
proposes to amend Section 28–3 to
reflect that the Holder of Common Stock
would present to the Nominating,
Elections and Governance Committee its
candidate recommendations for ViceChair, Shareholder Governor and
Independent Governors for placement
on the ballot for election by the Holder
of Common Stock at the annual meeting
of Stockholders. These nominees would
be placed on the ballot and elected by
the Holder of Common Stock.
Additionally, the Board would now
appoint the Chair from among the
members of the Board who are
Independent Governors.48 This
approach is consistent with the
NASDAQ Exchange’s processes for
nomination of non-Member
Representative Directors by a
nominating committee that may seek the
47 15
U.S.C. 78s.
proposed By-Law Article V, Section 5–2.
48 See
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input and recommendations of
NASDAQ OMX as the owner of the
NASDAQ Exchange.49
Article XXVIII, proposed Section 28–
13, Action Without Meeting, sets forth
provisions relating to action that may be
taken without a meeting and the
accompanying requirements relating to
taking such action. This provision sets
forth specifically that any action
required or permitted to be taken at any
annual or special meeting of
Stockholders may be taken by
Stockholders without a meeting as set
forth in detail in Section 28–13, unless
otherwise specified in the Certificate of
Incorporation of the Exchange. This
language should assist in providing
greater flexibility in connection with
taking any action required or permitted
to be taken at any annual or special
meeting of Stockholders and is
consistent with proposed Article
SEVENTH of the Exchange’s Certificate
of Incorporation.
Article XXIX, Capital Stock, would be
updated. The proposed changes to
Sections 29–1 through 29–7 are similar
to NASDAQ OMX By-Law Article IX,
Capital Stock, Sections 9.1 through 9.7,
reflect standard provisions for a
Delaware stock corporation and also
reflect the contemplated ownership of
all Common Stock by NASDAQ OMX.
Existing provisions in Article XXIX that
contemplated a possible public offering
of the Exchange’s stock would be
deleted and replaced with restrictions
on stock transfer comparable to the
restrictions included in the Certificate of
Incorporation and discussed above.
Additionally, proposed Section 29–8,
Dividends, is similar to Section 15 of
the LLC Agreement of the NASDAQ
Exchange, and prohibits the Exchange
from using Regulatory Funds to pay
dividends.50
Additionally, further changes to the
Certificate of Incorporation and By-Laws
would be made to correct typographical
errors and to update the language to
more accurately reflect current
practices. For example, the language
relating to how the Exchange’s Weekly
Bulletin is distributed would be
updated to not restrict its distribution to
mail, but rather to permit distribution
by e-mail and posting on the Exchange’s
49 See NASDAQ Exchange By-Law Article III,
Section 6.
50 ‘‘Regulatory Funds’’ are defined as fees, fines,
or penalties derived from the regulatory operations
of the Exchange. However, ‘‘Regulatory Funds’’
shall not be construed to include revenues derived
from listing fees, market data revenues, transaction
revenues, or any other aspect of the commercial
operations of the Exchange even if a portion of such
revenues are used to pay costs associated with the
regulatory operations of the Exchange. See
proposed By-Law Article I, Section 1–1(kk).
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Web site.51 As a second example,
references to ‘‘Chairman’’ would be
replaced with ‘‘Chair.’’ Additionally,
references to the ‘‘director’’ of either the
Membership Services or Examinations
Departments in Sections 17–1,
Suspension for Insolvency on
Declaration, and 17–3, Investigation of
Insolvency, would be deleted in favor of
more general references to the
departments. Therefore, notices would
still be required to be sent to these
departments, but not necessarily to the
director. This change should allow more
flexibility in connection with sending
notices to these departments.
e. Rules
The Exchange also proposes to amend
the following current Exchange Rules:
(1) Rule 1, Definitions; (2) Rule 98,
Emergency Committee; (3) Rule 164,
Trading Halts; and (4) Rule 972,
Continuation of Status After the Merger.
More specifically, the Exchange
proposes to update Rule 1, Definitions,
to include a definition of the NASDAQ
OMX Merger, which will apply to Rule
972.
Rule 98, Emergency Committee, is
proposed to be amended to reflect that
the Board shall establish the Emergency
Committee and determine its
composition, which not only revises the
members that comprise the Committee,
but allows for greater flexibility in
appointing members to this Committee.
Currently, the Emergency Committee
consists of the following: the Chairman
of the Board, the On-Floor ViceChairman of the Exchange, the Off-Floor
Vice-Chairman of the Exchange (this
position, however, no longer exists and
reference to this position was
inadvertently not deleted previously
from Rule 98), and the Chairmen of the
Options and Foreign Currency Options
Committees.
Rule 164, Trading Halts, is proposed
to be amended to provide that the
officers of the Exchange designated by
the Board shall have the power to
suspend trading in any and all securities
traded on XLE whenever in their
opinion such suspension would be in
the public interest. Currently, only the
Chairman and Chief Executive Officer or
his designee has the authority to
suspend trading pursuant to Rule 164.
Under this proposal, there would no
longer be one position entitled
‘‘Chairman and Chief Executive
Officer.’’ Accordingly, the proposed
change allows for greater flexibility in
designating individuals responsible for
declaring any trading halts and updates
the rule to reflect the proposed revisions
51 See,
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relating to the officers of the
Exchange.52
Proposed Rule 972, Continuation of
Status After the NASDAQ OMX Merger,
is being amended to reflect that current
members, 53 inactive nominees, member
organizations, foreign currency options
participants, foreign currency options
participant organizations, as well as
approved lessors of foreign currency
options participations holding such
status prior to the NASDAQ OMX
Merger would continue to hold such
status following the NASDAQ OMX
Merger. This provision was adopted in
connection with and currently refers to
the Exchange’s 2004 demutualization.54
It is being amended to refer specifically
to the proposed NASDAQ OMX merger
and to serve the same purpose as the
original provision, which is to make
clear that the merger does not affect
membership status generally.
Additionally, the Exchange proposes
to adopt two new Rules that would
reflect its status as a wholly-owned
subsidiary of NASDAQ OMX upon the
effectiveness of the NASDAQ OMX
Merger. The purpose of the Rules is to
guard against any possibility that the
Exchange may exercise, or forebear to
exercise, regulatory authority with
respect to an affiliated entity in a
manner that is influenced by
commercial considerations, to provide
an opportunity for Commission review
of certain proposed affiliations, and to
ensure that certain affiliated members
do not receive advantaged access to
information in comparison with
unaffiliated members. The Exchange
believes that the proposed Rules would
provide added assurance of regulatory
integrity without subjecting the
Exchange and its affiliates to
unwarranted restrictions on their
commercial activities.
First, the Exchange proposes to adopt
Rule 990, which is comparable to
NASDAQ Exchange Rule 4370. The rule
provides that if a security issued by
NASDAQ OMX or any of its affiliates is
listed on the Exchange, the Exchange
will apply special procedures to the
regulation of that listing, including
reporting to the Commission and
conducting an annual independent
audit of the security’s compliance with
Exchange listing standards.
Second, proposed Exchange Rule
985(a) would limit ownership of
NASDAQ OMX’s voting securities by
52 See proposed By-Law Article V, Sections 5–1
through 5–5.
53 The term ‘‘member,’’ defined in Rule 1(n), is
not capitalized, unlike the Exchange’s By-Laws.
54 See Securities Exchange Act Release No. 49098
(January 16, 2004), 69 FR 3974 (January 27, 2004)
(SR–Phlx–2003–73).
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members of the Exchange and their
associated persons (i.e., their registered
representatives). The Rule is comparable
to Rule 2130 of the NASDAQ Exchange,
and provides that no member or
associated person of a member shall be
the beneficial owner of greater than 20%
of the then-outstanding voting securities
of NASDAQ OMX. ‘‘Beneficial
ownership’’ is defined with reference to
NASDAQ OMX’s certificate of
incorporation, which in turn provides
that a person shall be deemed the
‘‘beneficial owner’’ of, shall be deemed
to have ‘‘beneficial ownership’’ of and
shall be deemed to ‘‘beneficially own’’
any securities: (i) Which such person or
any of such person’s affiliates is deemed
to beneficially own, directly or
indirectly, within the meaning of Rule
13d–3 under the Act; 55 (ii) subject to
certain narrow exceptions described in
the certificate of incorporation, which
such person or any of such person’s
affiliates has the right to acquire or to
vote pursuant to any agreement,
arrangement, or understanding or
otherwise; or (iii) subject to certain
narrow exceptions described in the
certificate of incorporation, which are
beneficially owned, directly or
indirectly, by any other person and with
respect to which such person or any of
such person’s affiliates has any
agreement, arrangement or
understanding for the purpose of
acquiring, holding, voting or disposing
of such securities.
Third, proposed Exchange Rule 985(b)
would regulate the affiliation between
the Exchange and its affiliates, on the
one hand, and Exchange members, on
the other hand, in a manner comparable
to Rule 2140 of the NASDAQ Exchange.
In general, the proposed rule provides
that the Exchange must file a proposed
rule change with the Commission before
the Exchange or an entity with which it
is affiliated directly or indirectly
acquires or maintains an ownership
interest in, or engages in a business
venture with, an Exchange member or
an affiliate of an Exchange member.56
The rule defines ‘‘affiliate’’ with
reference to Rule 12b–2 under the Act,57
which provides that if one person
controls, is controlled by, or is under
55 Rule 13d–3 under the Act, 17 CFR 240.13d–3,
in turn provides that a beneficial owner of a
security includes any person who, directly or
indirectly, through any contract, arrangement,
understanding, relationship, or otherwise has or
shares voting power or investment power.
56 As used in the rule, the term ‘‘affiliate’’
includes natural persons, but the term ‘‘entity,’’
when used to describe an affiliate, excludes natural
persons.
57 17 CFR 240.12b–2.
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common control of another person, the
persons are affiliates.
The proposed rule would make it
clear that in a case where the Exchange
or an affiliate of the Exchange proposes
an acquisition of, or a merger or
business venture with, an Exchange
member, a proposed rule change would
be required. In order to make it clear
that the obligation to avoid affiliations
that have not been filed is imposed by
the rule both on the Exchange and its
members, moreover, the rule provides
that an Exchange member shall not be
or become an affiliate of the Exchange,
or an affiliate of any entity affiliated
with the Exchange, without a proposed
rule change.
The term ‘‘business venture,’’ as used
in the rule, is defined as an arrangement
under which the Exchange or an entity
with which it is affiliated, on the one
hand, and an Exchange member or
affiliate thereof, on the other hand,
engage in joint activities with an
expectation of shared profit and a risk
of shared loss from common
entrepreneurial efforts. Thus, the term
does not include, and the proposed rule
does not regulate, contracts with
members or their affiliates to provide
goods, products, or services for
consideration, including, but not
limited to, asset or stock purchase
agreements that do not result in ongoing
ties with a member or its affiliates,58
credit or debt facilities, licenses of
intellectual property, contracts for
investment banking, financial advisory,
or consulting services,59 or the
provision of transaction services or data
to a broker-dealer member or products
or services to a listed company that is
or that owns a member broker-dealer.
The rule limits possible expansive
interpretations of the term ‘‘affiliate’’ by
stipulating that one entity is not deemed
to be an affiliate of another entity solely
by virtue of having a common director.
For example, if one of the Governors of
the Exchange is also a director of an
Exchange member, that member would
not be deemed to be an affiliate of the
Exchange solely because of the common
director. In addition, the rule should not
be construed to regulate in any manner
58 For example, in the case of an acquisition of
a non-Membersubsidiary of a Member in a
transaction that did not result in an ongoing
affiliation with the Member, the transaction would
not be regulated by the rule.
59 In some cases, such contracts may involve
sharing of confidential information with a Member
in circumstances where a Member acts as a
fiduciary for Phlx or one of its affiliates. The
Member would be required to take measures to
prevent such information from being misused, and
a failure to do so may constitute a violation of
Rules, including, depending on the circumstances,
Exchange Rules 707, 708, and 1020.
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the selection of Governors or standing
committee members of the Exchange,
NASDAQ OMX, the NASDAQ
Exchange, or their affiliates, provided
such selections are conducted in
accordance with applicable provisions
of governing corporate documents.
In circumstances where a Commission
filing is required, the rule allows the
Exchange to file, in appropriate cases, a
proposed rule change on an
immediately effective basis under
Section 19(b)(3)(A) of the Act 60 and
Rule 19b–4(f) thereunder.61 For
example, in cases where a proposed
affiliation or business venture would
not result in the establishment of a
‘‘facility’’ of the Exchange within the
meaning of Section 3 of the Act,62 a
filing to establish Rules to govern the
operation of the affiliate or business
venture would not be required or
appropriate. Rather, in such
circumstances, the Exchange would
expect to engage in informal
consultation with the Commission’s
Division of Trading and Markets and/or
members of the Commission, and would
then submit a filing to amend the rule
itself, to establish that the affiliation or
business venture could exist as an
exception to the rule. Depending on the
circumstances, such a filing might be
submitted on an immediately effective
basis.
There are also several important
exceptions to the general filing
requirement of the rule. First, the rule
would not require a filing for
transactions that result in an Exchange
member acquiring or holding an interest
in NASDAQ OMX that is consistent
with Rule 985(a) (discussed above).
Second, no filing would be required for
the Exchange or an entity affiliated with
the Exchange acquiring or maintaining
an ownership interest in, or engaging in
a business venture with, an affiliate of
an Exchange member if there are
information barriers between the
member and the Exchange and its
facilities, such that the member: (i)
Would not be provided an informational
advantage concerning the operation of
the Exchange and its facilities, and
would not be provided changes or
improvements to the trading system that
are not available to the industry
generally or other Exchange members;
(ii) would not have knowledge in
advance of other members of proposed
changes, modifications, or
improvements to the operations or
trading systems of the Exchange and its
facilities, including advance knowledge
60 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f).
62 15 U.S.C. 78c.
61 17
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of Exchange filings pursuant to Section
19(b) of the Act; 63 (iii) would be
notified of any proposed changes,
modifications, or improvements to the
operations or trading systems of the
Exchange and its facilities in the same
manner as other Exchange members are
notified; and (iv) would not share
employees, office space, or databases
with the Exchange or its facilities,
NASDAQ OMX, or any entity that is
controlled by NASDAQ OMX.64 The
Exchange’s Board must certify, on an
annual basis, to the Director of the
Commission’s Division of Trading and
Markets that the Exchange has taken all
reasonable steps to implement the
foregoing requirements with respect to
any affiliate to which they apply and is
in compliance therewith.
This exception is aimed at
circumstances in which the Exchange or
an affiliated entity acquires, or enters
into a business venture with, an affiliate
of an Exchange member, and the
Exchange erects information barriers
between the member and the Exchange
and its facilities. Thus, the Exchange
ensures that the member does not
receive any advantage as a result of its
affiliation.
In connection with the adoption of
this rule, the Exchange hereby requests
Commission approval under the rule for
the affiliation that would result by
virtue of the merger between the
Exchange and the two broker-dealer
subsidiaries of the NASDAQ Exchange:
Nasdaq Execution Services, LLC
(‘‘NES’’) and NASDAQ Options
Services, LLC (‘‘NOS’’). The acquisition
of the entities that are now NES and
NOS by NASDAQ OMX was approved
by the Commission in 2004 and 2005.65
The rules under which NES currently
routes orders to other market centers
were approved by the Commission in
2006 and subsequently amended on
63 15
U.S.C. 78s(b).
would not construe these limitations to
bar an employee of an affiliated member from
serving on a Phlx standing committee, since: (i)
Such committee members would be required to sign
confidentiality agreements with regard to
information received through committee service;
and (ii) the committee member employed by the
affiliate would receive information provided
through committee service at the same time as other
committee members.
65 See Securities Exchange Act Release Nos.
50311 (September 3, 2004), 69 FR 54818 (September
10, 2004) (Order Granting Application for a
Temporary Conditional Exemption Pursuant To
Section 36(a) of the Exchange Act by the National
Association of Securities Dealers, Inc. Relating to
the Acquisition of an ECN by The Nasdaq Stock
Market, Inc.) and 52902 (December 7, 2005), 70 FR
73810 (December 13, 2005) (SR–NASD–2005–128)
(Order Approving a Proposed Rule Change To
Establish Rules Governing the Operation of the
INET System).
64 Phlx
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several occasions.66 Notably, NASDAQ
Exchange Rule 4758(b) establishes the
parameters for operation of NES as
follows: (1) All routing of equities by the
NASDAQ Exchange is performed by
NES, which, in turn, routes orders to
other market centers as directed by the
NASDAQ Exchange; (2) NES would not
engage in any business other than: (a)
As a outbound router for the NASDAQ
Exchange, and (b) any other activities it
may engage in as approved by the
Commission; (3) NES would operate as
a facility, as defined in Section 3(a)(2)
of the Act,67 of the NASDAQ Exchange;
(4) for purposes of Rule 17d–1 under the
Act,68 the designated examining
authority of NES would be a selfregulatory organization unaffiliated with
the NASDAQ Exchange or any of its
affiliates; (5) the NASDAQ Exchange
shall be responsible for filing with the
Commission rule changes related to the
operation of, and fees for services
provided by, NES, and NES shall be
subject to exchange non-discrimination
requirements; (6) the books, records,
premises, officers, agents, directors and
employees of NES, as a facility of the
NASDAQ Exchange, shall be deemed to
be the books, records, premises, officers,
agents, directors and employees of the
NASDAQ Exchange for purposes of, and
subject to oversight pursuant to, the Act,
and the books and records of NES, as a
facility of the NASDAQ Exchange, shall
be subject at all times to inspection and
copying by the Commission; and (7) use
of NES is optional.
Currently, routing by NES on behalf of
the NASDAQ Exchange takes two forms:
(i) Orders that access any liquidity on
the NASDAQ Exchange book that has a
price equal to or superior to the prices
available on other ‘‘automated market
centers’’ and thereafter route to seek the
best available price; and (ii) routing of
‘‘directed orders’’ to automated market
centers other than the NASDAQ
Exchange on an ‘‘immediate-or-cancel’’
basis. Such directed orders may be
designated as ‘‘intermarket sweep
orders,’’ which may be executed by the
receiving venue based on the
representation of the market participant
that it has routed to all superior
66 See Securities Exchange Act Release Nos.
56867 (November 29, 2007), 72 FR 69263
(December 7, 2007) (SR–NASDAQ–2007–065);
56708 (October 26, 2007), 72 FR 61925 (November
1, 2007) (SR–NASDAQ–2007–078); 55335 (February
23, 2007), 72 FR 9369 (March 1, 2007) (SR–
NASDAQ–07–005); 54613 (October 17, 2006), 71 FR
62325 (October 24, 2006) (SR–NASDAQ–2006–043);
54271 (August 3, 2006), 71 FR 45876 (August 10,
2006) (SR–NASDAQ–2006–027); and 54155 (July
14, 2006), 71 FR 41291 (July 20, 2006) (SR–
NASDAQ–2006–001).
67 15 U.S.C. 78c(a)(2).
68 17 CFR 240.17d–1.
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protected quotations, or not so
designated, in which case the orders
will execute only if their execution
would not result in a trade-through.
NOS serves as the outbound router for
the Nasdaq Options Market (‘‘NOM’’),
which commenced operations on March
31, 2008. Under Rule Chapter VI,
Section 11 for NOM,69 (1) NOM will
route orders in options via NOS, which
serves as the sole ‘‘Routing Facility’’ of
NOM; (2) the sole function of the
Routing Facility will be to route orders
in options listed and open for trading on
NOM to away markets pursuant to NOM
rules, solely on behalf of NOM; (3) NOS
is a member of an unaffiliated SRO
which is the designated examining
authority for the broker-dealer; (4) the
Routing Facility is subject to regulation
as a facility of the NASDAQ Exchange,
including the requirement to file
proposed rule changes under Section 19
of the Act; 70 (5) NOM shall establish
and maintain procedures and internal
controls reasonably designed to
adequately restrict the flow of
confidential and proprietary
information between the NASDAQ
Exchange and its facilities (including
the Routing Facility), and any other
entity; and (6) the books, records,
premises, officers, directors, agents, and
employees of the Routing Facility, as a
facility of the NASDAQ Exchange, shall
be deemed to be the books, records,
premises, officers, directors, agents, and
employees of the NASDAQ Exchange
for purposes of and subject to oversight
pursuant to the Act, and the books and
records of the Routing Facility, as a
facility of the Exchange, shall be subject
at all times to inspection and copying by
the NASDAQ Exchange and the
Commission.
Unlike NES, NOS does not have a
‘‘directed order’’ for options that are
trading on NOM; rather, all routable
orders for options that are trading on
NOM check the NOM book prior to
routing. However, NOS also routes
orders in options that are not trading on
NOM. When routing orders in options
that are not listed and open for trading
on NOM, NOS will not be regulated as
a facility of the NASDAQ Exchange but
rather as a broker-dealer regulated by its
designated examining authority.
However, as provided by Chapter IV,
Section 5 of the NOM rules, all orders
routed by NOS under these
circumstances will be routed to away
69 See Securities Exchange Act Release No. 57478
(March 12, 2008), 73 FR 14521 (March 18, 2008)
(SR–NASDAQ–2007–004 and –080) (the ‘‘NOM
Approval Order’’).
70 15 U.S.C. 78s.
VerDate Aug<31>2005
21:01 Apr 28, 2008
Jkt 214001
markets that are at the best price, and
solely on an immediate-or-cancel basis.
Although not explicitly stated in
Chapter VI, Section 11 of the NOM
Rules, NOS, like NES, will be subject to
exchange non-discrimination
requirements, and the use of NOS will
be optional.71 In addition, NOS will not
engage in any business other than the
activities approved by the Commission
in the NOM Approval Order and such
other activities as may be approved by
the Commission at a later date.
In order to further restrict the
interaction between the Exchange and
NES and NOS, the NASDAQ Exchange
has agreed that it will, prior to the
closing of the NASDAQ OMX Merger,
amend its rules to change the routing
practices of NES and NOS. With respect
to NES, directed orders will not be
eligible for routing to Exchange
facilities. With respect to NOS, when
routing orders in options that are not
listed and open for trading on NOM,
NOS will not route to Exchange
facilities. Routing of orders that check
the NASDAQ Exchange and NOM books
prior to routing will continue and such
orders may be routed to the Exchange as
appropriate.
The Exchange notes that at a later
date, the Exchange may opt to use NES
and/or NOS to route on behalf of the
Exchange.72 Such future uses of NES or
NOS would be reflected in filings to
establish the terms and conditions of
such routing, but would not allow for
routing of directed orders to the
NASDAQ Exchange, NOM, or any other
affiliated exchange or trading facility
thereof.73
In light of the foregoing facts and
circumstances, in accordance with
proposed Exchange Rule 985(b)(i)(B),
the Exchange proposes that NES and
NOS be permitted to become affiliates of
the Exchange subject to the following:
• With respect to NES, NES remains
a facility of the NASDAQ Exchange; use
of NES’s routing function by NASDAQ
Exchange members continues to be
optional; and NES does not provide
routing of directed orders to the
Exchange or any trading facilities
71 Consistent
with this restriction, Chapter VI,
Section 11 of the NOM rules provides that routing
will be based on the user’s instructions and that a
participant can designate an order as not available
for routing.
72 Currently, the Exchange uses PRO Securities
LLC (‘‘PRO’’) to route equity orders. PRO is a
wholly-owned subsidiary of Order Execution
Services Holdings, Inc. The Exchange routes
options orders through the Intermarket Option
Linkage system.
73 In this regard, it should be noted that both the
New York StockExchange and the NYSE Arca use
NYSE Arca’s broker-dealer subsidiary to perform
routing.
PO 00000
Frm 00123
Fmt 4703
Sfmt 4703
thereof, unless such orders first attempt
to access any liquidity on the NASDAQ
Exchange book.
• With respect to NOS, NOS remains
a facility of the NASDAQ Exchange; use
of NOS’s Routing Facility function by
NASDAQ Exchange members continues
to be optional; and NOS does not
provide routing of orders in options that
are not listed and open for trading on
NOM to the Exchange or any trading
facilities thereof.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 74 in general, and furthers the
objectives of Sections 6(b)(1) and 6(b)(5)
of the Act 75 in particular, in that it is
designed to enable the Exchange to be
so organized as to have the capacity to
be able to carry out the purposes of the
Act and to comply with and enforce
compliance by members and persons
associated with members with
provisions of the Act, the rules and
regulations thereunder, and Rules, and
is designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national system, and, in general,
to protect investors and the public
interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or 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
74 15
75 15
E:\FR\FM\29APN1.SGM
U.S.C. 78f(b).
U.S.C. 78f(b)(1) and (b)(5).
29APN1
Federal Register / Vol. 73, No. 83 / Tuesday, April 29, 2008 / Notices
(ii) as to which the Exchange consents,
the Commission will:
A. By order approve such proposed
rule change, or
B. Institute proceedings to determine
whether the proposed rule change
should be disapproved.
The Exchange has requested
accelerated approval of this proposed
rule change prior to the 30th day after
the date of publication of the notice of
the filing thereof in the Federal
Register. The Commission is
considering the Exchange’s request to
grant accelerated approval of the
proposed rule change following the
conclusion of the 21-day comment
period.
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:
sroberts on PROD1PC70 with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–Phlx–2008–31 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–Phlx–2008–31. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room, 100 F Street, NE., Washington,
DC 20549, on official business days
between the hours of 10 a.m. and 3 p.m.
VerDate Aug<31>2005
21:01 Apr 28, 2008
Jkt 214001
Copies of the filing also will be available
for inspection and copying at the
principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–Phlx–2008–31 and should
be submitted on or before May 20, 2008.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.76
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–9323 Filed 4–28–08; 8:45 am]
BILLING CODE 8010–01–P
DEPARTMENT OF STATE
[Public Notice 6201]
Notice of Availability of the Draft
Environmental Assessment for the
Proposed Frontera Juarez Pipeline
Project
Department of State.
Notice of Availability of the
Draft Environmental Assessment (EA)
for the Proposed Frontera Juarez
Pipeline Project.
AGENCY:
ACTION:
A draft Environmental Assessment
(EA) for the Proposed Frontera Juarez
Pipeline Project has been prepared by
P.M.I. Services North America (‘‘PMI’’)
in support of its application to the
Department for a Presidential permit.
On January 18, 2008, The Department of
State received an application from PMI
for a Presidential permit, pursuant to
Executive Order 13337 of April 30,
2004, as amended, to construct, connect,
operate, and maintain facilities at the
border for a 10.75-inch diameter liquid
hydrocarbon (gasoline and diesel)
pipeline at the U.S.-Mexico border near
San Elizario, Texas, for the purpose of
transporting gasoline and diesel
between the United States and Mexico.
PMI has stated that it seeks this
authorization in connection with its
Frontera Juarez Pipeline Project
(‘‘Frontera’’), which is designed to
transport gasoline and diesel from the
Longhorn Partners Pipeline Terminal in
El Paso County, Texas, to the U.S.Mexico border near San Elizario, Texas.
The Secretary of State is designated
and empowered to receive all
applications for Presidential permits, as
referred to in Executive Order 13337, as
amended, for the construction,
76 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00124
Fmt 4703
Sfmt 4703
23301
connection, operation, or maintenance,
at the borders of the United States, of
facilities for the exportation or
importation of petroleum, petroleum
products, coal, or other fuels to or from
a foreign country.
On March 26, 2008, the Department of
State published in the Federal Register
a Notice of Receipt of the PMI
application and of intent to prepare an
Environmental Assessment (EA),
soliciting public comments on the
application. In accordance with section
102(C) of the National Environmental
Policy Act of 1969 (NEPA) (42 U.S.C.
4332(C)) and implementing regulations
promulgated by the Council on
Environmental Quality (40 CFR parts
1500–1508) and the Department of State
(22 CFR part 161), including in
particular 22 CFR 161.7(c)(1), a draft
environmental assessment (EA) was
prepared by PMI to determine if there
are any potential significant impacts, to
address alternatives to the proposed
action, and to determine possible
impacts to traditional or cultural
properties under section 106 of the
National Historic Preservation Act. In
light of public comments submitted on
the application, PMI has now revised its
draft EA and made it available for
further review.
The purpose of this Notice of
Availability is to invite public comment
on the draft EA prepared by PMI. Any
person wishing to comment on the draft
EA may do so. To ensure consideration
of comments prior to a Department of
State decision on the application, it is
important that we receive your
comments by no later than 30 days from
publication of notice. Options for
submitting comments on the draft EA
are as follows:
• By mail to: Elizabeth Orlando, OES/
ENV Room 2657, U.S. Department of
State, Washington, DC 20520. Please
note that Department of State mail can
be delayed due to security screening.
• Fax to: (202) 647–1052, attention
Elizabeth Orlando.
• E-mail to: orlandoea2@state.gov.
In addition to or in lieu of sending
written comments, the Department of
State invites you to attend a public
meeting in the project area to submit
comments on the draft EA. A court
reporter will be present and will accept
comments for the record. The date and
location for the public meeting is: May
7, 2008; 7 p.m. to 10 p.m. (local time).
At the Lower Valley Water District, 1557
FM Road 1110, Clint, Texas 79836.
(Signs will be posted at address).
After comments are reviewed,
significant new issues (if any) are
investigated, and modifications (if any)
are made to the draft EA, a final EA will
E:\FR\FM\29APN1.SGM
29APN1
]]>Agencies
[Federal Register Volume 73, Number 83 (Tuesday, April 29, 2008)]
[Notices]
[Pages 23293-23301]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-9323]
[[Page 23293]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57703; File No. SR-Phlx-2008-31]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change Relating to Changes to Phlx's
Governing Documents in Connection With the Acquisition of Phlx by the
Nasdaq Stock Market, Inc.
April 23, 2008.
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 April 21, 2008, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') 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. 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.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx proposes to: (1) Amend the Exchange's Restated Certificate
of Incorporation (``Certificate of Incorporation''), By-Laws, and Rules
of the Board of Governors (``Rules''), and adopt certain Rules to
reflect changes in connection with the proposed acquisition of the
Exchange by The Nasdaq Stock Market, Inc. now known as The NASDAQ OMX
Group, Inc. (``NASDAQ OMX''); and (2) update certain language and make
other minor, technical amendments to the Certificate of Incorporation,
By-Laws, and Rules. The Exchange also requests Commission approval for
an affiliation between the Exchange and certain broker-dealer
subsidiaries of the NASDAQ OMX, as described herein. The Exchange
requests that the proposed rule change become operative upon
consummation of the Nasdaq OMX Merger.\3\
---------------------------------------------------------------------------
\3\ Telephone conversation between Cynthia Hoekstra, Vice
President, Phlx, and Richard Holley III, Senior Special Counsel,
Division of Trading and Markets, Commission, on April 23, 2008.
---------------------------------------------------------------------------
The text of the proposed rule change is available at the Exchange,
the Commission's Public Reference Room, and https://www.Phlx.com/
exchange/phlx_rule_fil.htm. The text of Exhibits 5A through 5C of the
proposed rule change is also available on the Commission's Web site
(https://www.sec.gov/rules/sro/phlx.shtml).
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange 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
On November 7, 2007, NASDAQ OMX announced that it had entered into
an agreement with the Exchange pursuant to which NASDAQ OMX would
acquire all of the outstanding capital stock of the Exchange. In
connection with this acquisition, Pinnacle Merger Corp., a Delaware
corporation and wholly owned subsidiary of NASDAQ OMX, would be merged
with and into the Exchange, with the Exchange surviving the merger
(``NASDAQ OMX Merger'').\4\ As a result of the NASDAQ OMX Merger, all
of the Exchange's common stock would be owned by NASDAQ OMX; Phlx
shareholders would receive cash consideration for their shares and
would not retain any ownership interest in the Exchange.
---------------------------------------------------------------------------
\4\ The NASDAQ OMX Merger is defined as the merger of a wholly
owned subsidiary of NASDAQ OMX with and into the Exchange, with the
Exchange as the surviving corporation, in connection with the
acquisition of the Exchange by NASDAQ OMX. See proposed By-Law
Article I, Section 1-1(ii).
---------------------------------------------------------------------------
Thereafter, NASDAQ OMX would operate the Exchange as a wholly-owned
subsidiary. The Exchange would continue to be registered as a national
securities exchange, with separate Rules, membership rosters, and
listings, distinct from the rules, membership rosters, and listings of
The NASDAQ Stock Market LLC (the ``NASDAQ Exchange''). Additionally,
the Exchange would continue to be a separate self-regulatory
organization (``SRO'').
The purpose of the proposed rule change is to amend the Exchange's
Certificate of Incorporation, By-Laws, and Rules to reflect NASDAQ
OMX's proposed ownership of the Exchange. Most of the amendments
reflect the Exchange's new ownership structure and some are designed to
conform Phlx's governance provisions to those that are currently
applicable to the NASDAQ Exchange. These revised governance provisions
collectively regulate the Exchange and its directors, officers, and
employees in light of its ownership by NASDAQ OMX, and, among other
things, are designed to preserve the Exchange's independent Board of
Governors (``Board'').
a. Stock
Specifically, Article SECOND of the Certificate of Incorporation
would be updated to reflect the address of the Exchange's registered
office. Article FOURTH would be amended to: (1) Reduce the amount of
Common Stock that the Exchange has authority to issue to 100 shares;
(2) eliminate the designation of Class A and Class B Common Stock;\5\
and (3) reduce the amount of Preferred Stock that the Exchange has
authority to issue to 100 shares. Of the 100 shares of Preferred Stock
that may be issued, there would continue to be one share that is
designated as Series A Preferred Stock.\6\
---------------------------------------------------------------------------
\5\ See similar changes to current Exchange By-Law Article I,
Section 1-1(d).
\6\ The one authorized share of Series A Preferred stock is
currently issued and outstanding, and held by the Trust pursuant to
the Trust Agreement. See By-Law Article I, Section 1-1(ee) and
proposed Section 1-1(mm). At this time, there are no other
outstanding shares of Preferred Stock. The single share of Series A
Preferred stock is held by the Trust for the purpose of electing
those ``Designated Governors'' voted for by Phlx Members as provided
in By-Law Articles I and III. Pursuant to the Trust Agreement, the
Holder of the Series A Preferred Stock is required to elect the
nominees for Governor elected by the Members. The NASDAQ OMX Merger
would not result in a transfer of ownership of the Series A
Preferred Stock.
---------------------------------------------------------------------------
All of the authorized shares of Common Stock shall be issued and
outstanding, and shall initially be held by NASDAQ OMX. The Exchange
would not issue additional Preferred Stock, other than the existing one
share of Series A Preferred Stock, unless the resolution(s) providing
for the issuance of such Preferred Stock has been filed with and
approved by the Commission under Section 19 of the Act \7\ and the
rules promulgated thereunder. Additionally, Common Stock and Preferred
Stock (including the Series A Preferred Stock) may not be transferred
or assigned, in whole or in part, to any entity, unless such transfer
shall be filed with and approved by the Commission
[[Page 23294]]
under Section 19 of the Act \8\ and the rules promulgated
thereunder.\9\
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78s.
\8\ Id.
\9\ See proposed Certificate of Incorporation, Article FOURTH,
and proposed By-Law Article XXIX, Section 29-4.
---------------------------------------------------------------------------
Additional changes to the Certificate of Incorporation are being
proposed in connection with Common Stock dividend rights,\10\ voting
rights,\11\ required notice by stockholders to the Exchange of Common
Stock ownership in excess of certain thresholds,\12\ ownership
concentration limits,\13\ and automatic conversion of Class A Common
Stock.\14\ These changes are being made to delete language customarily
applicable to non-public companies with several stockholders, which is
no longer necessary because NASDAQ OMX would become the sole holder of
Common Stock.
---------------------------------------------------------------------------
\10\ See proposed Article FOURTH, (c)(ii).
\11\ See proposed Article FOURTH, (c)(iii).
\12\ See Article FOURTH, (c)(iv).
\13\ See Article FOURTH, (c)(v).
\14\ See Article FOURTH, (c)(vi).
---------------------------------------------------------------------------
b. Board
With respect to the composition of the board of directors, the
Exchange's Board is currently composed of the Chairman of the Board,
who is the individual holding the office of the Chief Executive Officer
of the Exchange, and 22 other Governors, consisting of two Governors
who are Member Governors, one Governor who is a Philadelphia Board of
Trade[reg] (``PBOT'') \15\ Governor, six Governors who are Stockholder
Governors, 12 Governors who are Independent Governors, and one Governor
who is the Vice-Chairman of the Board.\16\ The Exchange proposes to
amend the current composition of the Board so that the number and
qualifications of the Governors would be fixed from time to time by the
Board in accordance with the By-Laws. The Board would be composed of a
majority of Independent Governors.\17\ Specifically, the Board would
include one Governor who is the Chief Executive Officer of the
Exchange, one Governor who is the Vice-Chair of the Board,\18\ one PBOT
Governor,\19\ one Member Governor,\20\ one Stockholder Governor,\21\
and a number of Designated Independent Governors.\22\ The Designated
Governors (i.e., Designated Independent Governors, the Member Governor,
and the PBOT Governor) \23\ are intended to comply with the requirement
in Section 6(b)(3) of the Act,\24\ which requires that the rules of an
exchange assure a fair representation of its members in the selection
of its directors and administration of its affairs and provide that one
or more directors shall be representative of issuers and investors and
not be associated with a member of an exchange, broker, or dealer (the
``fair representation requirement''). The Designated Independent
Governors, together with the Member Governor and the PBOT Governor,
would equal at least 20% of the total number of Governors. All
remaining Governors would be Independent Governors. A Governor would be
permitted to fill only one position on the Board.
---------------------------------------------------------------------------
\15\ The Philadelphia Board of Trade[reg] is Phlx's futures
exchange subsidiary, and at this time, would continue to operate as
such after the NASDAQ OMX merger.
\16\ See By-Law Article IV, Section 4-1.
\17\ See proposed Certificate of Incorporation Article SIXTH and
By-Law Article IV, Section 4-1. ``Independent Governor'' would
continue to be defined as a Governor who is a person affirmatively
determined by the Board as having no Material Relationship with the
Exchange or any affiliate of the Exchange, any Member of the
Exchange or any affiliate of such Member, or any issuer of
securities that are listed or traded on the Exchange or a facility
of the Exchange. See By-Law, Article I, Sections 1-1(f), 1-1(o) and
(p).
\18\ The Vice-Chair would continue to be an individual who,
anytime within the prior three years, has been a Member primarily
engaged in business on the Exchange's equity market or equity
options market or who is a general partner, executive officer (vice-
president or above) or a Member associated with a Member
Organization primarily engaged in business on the Exchange's equity
market or equity options market. See By-Law Article V, Section 5-3.
\19\ A PBOT Governor would continue to be defined as a Governor
who is a member of PBOT and is duly elected to fill the one vacancy
on the Board allocated to the PBOT Governor. See By-Law Article I,
Section 1-1(aa).
\20\ A Member Governor would continue to be defined as a
Governor who is a Member or a general partner or an executive
officer (vice-president and above) of a Member Organization and is
duly elected to fill the vacancy on the Board allocated to the
Member Governor. See By-Law Article I, Section 1-1(u).
\21\ A Stockholder Governor is defined as a Governor who is an
officer, director (or a person in a similar position in business
entities that are not corporations), designee or an employee of a
holder of Common Stock or any affiliate or subsidiary of such holder
of Common Stock and is duly elected to fill the vacancy on the Board
allocated to the Stockholder Governor. See By-Law Article I, Section
1-1(hh), and Article IV, Section 4-1 and proposed language in
Certificate of Incorporation Article SIXTH.
\22\ ``Designated Independent Governors'' would continue to be
defined as those Independent Governors who are elected by the holder
of the Series A Preferred Stock in accordance with Article SIXTH of
the Certificate of Incorporation. See By-Law Article I, Section 1-
1(f).
\23\ The term ``designated'' refers to a governor who is elected
by the Holder of Series A Preferred Stock to reflect the vote of the
Members. See also proposed changes to Article FOURTH of the
Exchange's Certificate of Incorporation and By-Law Article I,
Sections 1-1(e) and (f).
\24\ 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------
In terms of the election process, the Designated Governors would be
elected by the vote of the holder of the Series A Preferred Stock
(i.e., the ``Trust'') in accordance with the results of the vote of
Members conducted under By-Law Article III. All other Governors (i.e.,
Independent Governors, Vice-Chair, Chief Executive Officer, and
Shareholder Governor) would be elected by a plurality vote of the
holder of Common Stock (i.e., NASDAQ OMX). All Governors would be
elected for terms of one year as recommended by NASDAQ OMX to conform
with its understanding of current corporate best practices by allowing
frequent review of the performance of all Governors.\25\
---------------------------------------------------------------------------
\25\ Currently, Phlx Governors are divided into three classes.
Each such class is constituted by election or appointment each year
to serve for three years and until their successors are elected and
qualify. Except for the Chairman and Vice-Chairman of the Board,
Governors do not serve more than two consecutive full three-year
terms. See By-Law Article IV, Section 4-3.
---------------------------------------------------------------------------
Article SIXTH would also be amended to provide that Governors,
other than Designated Governors, may be removed with or without cause
by vote of the holder of the Common Stock (i.e., NASDAQ OMX). This
change would reflect the Exchange's proposed status as a wholly-owned
subsidiary of NASDAQ OMX. Provisions governing the removal of
Designated Governors would be simplified to make it clear that such
removal may be made with or without cause but requires a vote of Member
Organization Representatives under By-Law Article III. A new Article
SEVENTH would provide that the stockholders (i.e., NASDAQ OMX) may act
by unanimous written consent, again reflecting the Exchange's proposed
status as a wholly-owned subsidiary.
c. By-Laws
The proposed amendments to the By-Laws include changes to conform
to changes proposed for the Certificate of Incorporation, such as the
simplification of the Exchange's capital structure and restrictions on
stock transfer and the changes to the composition of the Board
described above. With regard to the composition of the Board
immediately following a closing of the NASDAQ OMX Merger, amended By-
Law Article IV, Section 4-3 would provide that the directors of
Pinnacle Merger Corporation, Inc. (the ``Merger Subsidiary''), the
wholly-owned subsidiary of NASDAQ OMX that would be merged with and
into the Exchange through the NASDAQ OMX Merger, would become the Board
of Governors of the Exchange immediately after the effective time of
the NASDAQ OMX Merger. The directors of the Merger Subsidiary would
satisfy the compositional requirements of the
[[Page 23295]]
Exchange Board contained in the proposed By-Laws, as determined by
NASDAQ OMX. The Designated Governors serving immediately after the
effective time of the NASDAQ OMX Merger would consist of certain
directors of the Merger Subsidiary who had been serving as Designated
Governors of the Exchange immediately before the effective time of the
NASDAQ OMX Merger, as selected by NASDAQ OMX.
Article III, Section 3-3(a), Removal of Designated Governors,
currently provides that Designated Governors may be removed only for
cause, unless a majority of the Board recommends that one or more
Designated Governors be removed in accordance with Section 4-4 of the
By-Laws, in which case such Designated Governor(s) may be removed
without cause. In either case, removal of the Designated Governor
requires a vote by Member Organization Representatives at an annual or
special meeting. As proposed to be amended, Section 3-3 would provide
that Designated Governors may be removed, with or without cause, only
by vote of Member Organization Representatives at an annual or special
meeting.\26\
---------------------------------------------------------------------------
\26\ A special meeting could be called by Members or the Board.
See By-Law Article III, Section 3-2(b).
---------------------------------------------------------------------------
Article IV, Section 4-4, Duties and Powers, provides that in the
event of the refusal or failure of any Governor to discharge his duties
or for any reason deemed sufficient by the Board, the Board may, by the
affirmative vote of a majority of Governors then in office, recommend
to the Stockholders (and in the case of a Designated Governor, the
Members) that such Governor be removed and call a special meeting of
the Stockholders \27\ (and, in the case of a Designated Governor, a
special meeting of the Members and Member Organizations and
subsequently a special meeting of the holder of the Series A Preferred
Stock, who shall be required to vote in accordance with Article SIXTH
of the Certificate of Incorporation and the Trust Agreement) for the
purpose of voting on such removal. The Exchange believes that the
process set forth in Article IV, Section 4-4, remains an appropriate
and suitable process for the Board to address the refusal or failure of
a Governor elected by the Members to discharge his duties. Thus, in all
cases, authority to remove Designated Governors would rest with the
Members pursuant to Section 3-3, but the Board could recommend removal
and call a special meeting under Section 4-4.
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\27\ This action may also be taken without a meeting. See
proposed By-Law Article XXVIII, Section 28-13 (providing for
Stockholder action without a meeting).
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Article IV, Section 4-17, Interpretation of By-Laws, would be
amended to clarify that the Board shall determine whether an
interpretation of the By-Laws and the Rules must be filed with the
Commission as a proposed rule change, and if so, then such change would
not become effective until filed with, or filed with and approved by,
the Commission, as required under Section 19 of the Act \28\ and the
rules promulgated thereunder.
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\28\ 15 U.S.C. 78s.
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Article IV, Section 4-21, Annual Financial Report, would be amended
to reflect that the Board of Governors would no longer send out annual
financial reports as described in Section 4-21. However, annual
financial reports of the Exchange would continue to be available at the
Exchange and would also be reflected in the public consolidated
financial statements of NASDAQ OMX.
Article V of the By-Laws would be amended to set forth in detail
the powers and duties relating to the Chair, Vice-Chair, and officers
of the Exchange. Specifically, the Exchange proposes to insert language
in By-Law Article V, Section 5-1, Board's Appointive Powers, to state
that the Board would appoint the officers of the Exchange as provided
in the By-Laws and shall fix their duties, responsibilities, and terms
of employment. Additionally, language would be added to Section 5-2,
Chair of the Board of Governors, to set forth the powers of the Chair
of the Board and to establish that the Board would select its Chair
from among the members of the Board who are Independent Governors.
Proposed Sections 5-4, Chief Executive Officer, and 5-5, President, set
forth the duties and powers of these officers of the Exchange.\29\
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\29\ These provisions are consistent with current NASDAQ OMX By-
Law Article VII, and NASDAQ Exchange By-Law Article IV.
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Article VI, Equity Stock Compensation, Section 6-1, Stock Incentive
and Option Plans, would be deleted as this provision is no longer
applicable due to the fact that NASDAQ OMX would be the sole owner of
the Exchange's Common Stock and any potential equity stock compensation
is likely to consist of NASDAQ OMX stock rather than Phlx stock.
Additionally, By-Law Article IX, Trustees of Stock Exchange Fund,
Sections 9-1 through 9-6 would be deleted, as these provisions are no
longer deemed necessary after the acquisition of the Exchange by NASDAQ
OMX.\30\ The change reflects a simplification of the Exchange's
financial management, under which the Exchange's assets would be
subject to the oversight of the Board rather than separate trustees and
also subject to public company financial controls established by NASDAQ
OMX.\31\
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\30\ The purpose of the Stock Exchange Fund was to appoint
trustees to manage the investment of certain funds of the Exchange
and collect interest, dividends and income from the funds for the
Exchange.
\31\ The applicable references to the Stock Exchange Fund in
Article IV, Section 4-4, Duties and Powers, Removal of governors or
trustees of gratuity fund and stock exchange for cause, would also
be deleted and this section would be updated to reflect that there
is no longer a gratuity fund.
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d. Standing Committees
Generally, the Standing Committees of the Board would remain the
same, except as discussed below. By-Law Article X, Standing Committees,
would also be updated to reflect the elimination of the Automation
Committee and Marketing Committee, as these committees are deemed no
longer necessary at this time because automation and marketing would be
guided and handled at the parent company level. Additionally, the
responsibilities of the Audit Committee would be updated to conform
with similar responsibilities and processes of the Audit Committees of
NASDAQ OMX and the NASDAQ Exchange.\32\ The composition of the
Executive Committee and the Finance Committee would be amended to
reflect the proposed changes to the composition of the Board.
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\32\ See NASDAQ OMX Audit Committee Charter approved April 18,
2007 and NASDAQ Exchange By-Law Article III.
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Several Exchange committees that currently review proposed rule
changes may review such proposals before the proposals are presented to
either the Executive Committee \33\ or the Board for approval for
filing with the Commission.\34\ These committees on
[[Page 23296]]
which Exchange members serve would continue to perform this function
after the NASDAQ OMX merger. For example, the Business Conduct
Committee (``BCC'') may review proposed changes to the disciplinary
Rules that are set forth in Exchange Rule 960 before these Rules are
presented to the Executive Committee or the Board. The BCC currently
consists (and will continue to consist) of nine members as follows:
three Independent Governors; one Member or person associated with a
Member Organization who conducts business on XLE; one Member who
conducts options business at the Exchange; and four persons who are
Members or persons associated with a Member Organization.\35\
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\33\ The Executive Committee currently consists of nine
Governors; the Chairman of the Board; the Vice-Chairman of the
Board; the Chairman of the Finance Committee; the Chairmen of two
floor committees; two Stockholder Governors; and two Independent
Governors. See By-Law Article X, Section 10-14. As proposed herein,
the Executive Committee would be amended so that it would consist of
the Chair of the Board, the Vice-Chair of the Board, the Stockholder
Governor, a number of designated Governors equal to at least 20% of
the total number of Governors on the Executive Committee, and such
other Governors as the Board may appoint. See proposed By-Law
Article X, Section 10-14.
\34\ Members using XLE (the Exchange's equity trading system)
are represented on the Exchange's Board through the exercise of
their voting rights for members of the Board. Currently, there is no
designated committee that reviews proposed rule changes covering
equity Rules. The Board or Executive Committee performs this
function.
\35\ See By-Law Article X, Section 10-11.
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Furthermore, the Options Committee makes or recommends for adoption
such Rules as it deems necessary for the convenient and orderly
transaction of business upon the equity and index options trading
floor, as well as makes and enforces Rules and regulations relating to
order, decorum, health, safety and welfare on the equity and index
options trading floor and the immediately adjacent premises of the
Exchange. Fifty percent of the Members of the Options Committee are
permit holders or associated with a Member Organization.\36\ Thus,
Member representation on Exchange committees would continue.
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\36\ See By-Law Article X, Section 10-20.
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Additionally, By-Law Article X, Section 10-15, Finance Committee,
would be amended such that the Chair of the Finance Committee would be
the Chair of the Board and would no longer be either the Vice-Chair,
Stockholder Governor or Member Governor. The Exchange also proposes to
amend the description of the composition of the Finance Committee
members to allow any Member or persons associated with a Member
Organization, who conducts business on XLE to be a member of the
Committee. Currently, the language states, in part, that the Finance
Committee shall include two Members or persons associated with a Member
Organization, who may be Governors, one of whom conducts business
primarily on XLE or on the equity options floor. Although this proposed
change is not directly related to the NASDAQ OMX Merger, the Exchange
proposes to delete the word ``primarily'' in order to allow a greater
pool of candidates to be eligible to serve on the Finance
Committee.\37\
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\37\ This proposed change is consistent with a recent By-Law
change to Section 10-11, Business Conduct Committee, relating to the
composition of the Business Conduct Committee. In that proposal, the
Exchange expanded the type of business that may be conducted to
qualify as a BCC member. See Securities Exchange Act Release No.
57023 (December 20, 2007), 72 FR 74398 (December 31, 2007) (SR-Phlx-
2007-83).
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The purpose of deleting the supplementary material in Section 10-15
is to reflect the updated responsibilities of the Finance
Committee.\38\ The Board would establish capital expenditure policies,
which may include delegation to Board committees and/or officers, but
would no longer reflect these policies in the By-Laws. This reflects a
more flexible approach, consistent with NASDAQ OMX's processes and the
functions of a public company parent.
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\38\ Currently, the supplementary material relates to directives
that are applicable to the Finance Committee in the exercise of its
duties, powers and authority under the By-Laws. For example, the
supplementary material states that the Finance Committee may
authorize certain expenditures of any budgeted line items; may
delegate to the staff of the Exchange so much of its authority to
make expenditures as it deems appropriate; and shall perform its
functions and act with the same powers and limitations for the
Exchange and all subsidiaries of the Exchange. See By-Law Article X,
Section 10-15, Supplementary Material.
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Also, in By-Law Article X, Section 10-19, Nominating, Elections and
Governance Committee, the Exchange proposes to delete the term limit
applicable to this Committee and delete the prohibition on Committee
members standing for re-election to the Board. These changes are
designed to increase the pool of candidates eligible to serve on the
Committee and the Board. Moreover, the deletion of these restrictions
is also supported by the fact that all Board members, including those
serving on the Committee, would serve for one-year terms and would
therefore have their qualifications for continued Board service under
more frequent review.
In addition, the Nominating, Elections and Governance Committee
would no longer select all Chairs of the Standing Committees in
accordance with Article X. The Board would now appoint a person to fill
any vacancy in a Standing Committee, including Chairs, except for the
Chair of the Executive Committee, the Chair of the Nominating,
Elections and Governance Committee and the Chair of the Finance
Committee.\39\ This change reflects a general philosophy that the full
Board should have control over the composition of Standing Committees,
including the selection of their Chairs and is consistent with how
NASDAQ OMX currently operates.\40\
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\39\ Pursuant to the By-Laws, the Chair of the Board is the
Chair of the Executive Committee and the Finance Committee and the
Chair of the Nominating, Elections and Governance Committee is
selected from among the members of such Committee who are
Independent Governors. See By-Law Article X, Sections 10-14(a), 10-
15 and 10-19(a).
\40\ See NASDAQ OMX By-Law Article IV, Section 4.13.
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Additionally, in By-Law Article X, Section 10-21, the Exchange
proposes to clarify the composition of the Quality of Markets Committee
by specifically stating that the members of this Committee would
include at least as many Independent members as it does the ``combined
number'' of Stockholder-chosen members \41\ and members who are Members
of the Exchange.\42\ The Exchange believes that adding the language
``combined number'' should clarify that the number of Stockholder-
chosen Committee members \43\ are added to the number of Members
serving on the Committee \44\ and that total is then compared to the
number of ``Independent'' Committee members (not to be confused with
``Independent Governors,'' which also rely on the definition of
``Independent'' in By-Law Article I, Section 1-1(o)).
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\41\ See By-Law Article I, Section 1-1(gg).
\42\ See By-Law Article I, Section 1-1(t).
\43\ NASDAQ OMX, as Stockholder, would select the Stockholder
member(s) of this Committee, subject to Board approval pursuant to
By-Law Article X, Section 10-1(b).
\44\ The Board would select the Member(s) serving on the
Committee pursuant to By-Law Article X, Section 10-1(b).
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In addition, the Exchange proposes to adopt for the Quality of
Markets Committee a ``fair representation requirement'' consistent with
Section 6(b)(3) of the Act, \45\ which requires that the rules of an
exchange assure a fair representation of its members in the selection
of its directors and administration of its affairs. This language is
intended to ensure fair Member representation on the Quality of Markets
Committee.\46\
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\45\ 15 U.S.C. 78f(b)(3).
\46\ This provision is similar to the NASDAQ Exchange's Quality
of Markets Committee. See NASDAQ Exchange By-Law Article III,
Section 6.
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By-Law Article XI, Section 11-1(b) would be amended to delete
references to a ``special committee of the Board of Governors'' that
hears appeals from determinations of the Nominating, Elections and
Governance Committee regarding eligibility for election to the Board.
The special committee had been composed of Governors not then standing
for re-election. However, because the proposed amendments to Section 4-
3 eliminate the ``staggering'' of the Board, requiring all Governors to
be elected annually, it would not be possible to form such a special
[[Page 23297]]
committee. Now that the Exchange proposes to reduce the size of its
Board, the Exchange believes that at this time, it would be more
practical for the full Board to hear an appeal pursuant to Section 11-
1(b) because all Governors would stand for re-election annually.
In By-Law Sections 13-5, Liability of Officers, Directors and
Substantial Stockholders, 13-7, Violation of Terms of Registration, 17-
4, Time for Settlement of Insolvent Member or Participant, Extension,
and 18-3, Responsibility of Member or Participant for Acts of His
Organization, references to receiving an affirmative vote of either 14
or 15 Governors (which used to represent a supermajority) would be
changed to require an affirmative vote of a majority of all Governors.
This change is necessary as the number of Board members may be reduced
after the NASDAQ OMX Merger and therefore a vote of 14 or 15 Governors
may no longer be possible.
Article XXII, Amending the By-Laws, would be amended to state
affirmatively that By-Law amendments must be filed with, and/or
approved by, the Commission as required under Section 19 of the Act
\47\ and that the holders of a majority of the shares of Common Stock
then issued and outstanding must affirmatively vote for By-Law
amendments.
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\47\ 15 U.S.C. 78s.
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Article XXVIII, Section 28-3, Nomination of Chairman and Vice-
Chairman of the Board of Governors; Independent Nominations by
Stockholders; Election of Nominees for Stockholder and Independent
Governors, currently provides for a nomination process in connection
with nominating and electing the above-referenced individuals. The
Exchange proposes to amend Section 28-3 to reflect that the Holder of
Common Stock would present to the Nominating, Elections and Governance
Committee its candidate recommendations for Vice-Chair, Shareholder
Governor and Independent Governors for placement on the ballot for
election by the Holder of Common Stock at the annual meeting of
Stockholders. These nominees would be placed on the ballot and elected
by the Holder of Common Stock. Additionally, the Board would now
appoint the Chair from among the members of the Board who are
Independent Governors.\48\ This approach is consistent with the NASDAQ
Exchange's processes for nomination of non-Member Representative
Directors by a nominating committee that may seek the input and
recommendations of NASDAQ OMX as the owner of the NASDAQ Exchange.\49\
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\48\ See proposed By-Law Article V, Section 5-2.
\49\ See NASDAQ Exchange By-Law Article III, Section 6.
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Article XXVIII, proposed Section 28-13, Action Without Meeting,
sets forth provisions relating to action that may be taken without a
meeting and the accompanying requirements relating to taking such
action. This provision sets forth specifically that any action required
or permitted to be taken at any annual or special meeting of
Stockholders may be taken by Stockholders without a meeting as set
forth in detail in Section 28-13, unless otherwise specified in the
Certificate of Incorporation of the Exchange. This language should
assist in providing greater flexibility in connection with taking any
action required or permitted to be taken at any annual or special
meeting of Stockholders and is consistent with proposed Article SEVENTH
of the Exchange's Certificate of Incorporation.
Article XXIX, Capital Stock, would be updated. The proposed changes
to Sections 29-1 through 29-7 are similar to NASDAQ OMX By-Law Article
IX, Capital Stock, Sections 9.1 through 9.7, reflect standard
provisions for a Delaware stock corporation and also reflect the
contemplated ownership of all Common Stock by NASDAQ OMX. Existing
provisions in Article XXIX that contemplated a possible public offering
of the Exchange's stock would be deleted and replaced with restrictions
on stock transfer comparable to the restrictions included in the
Certificate of Incorporation and discussed above. Additionally,
proposed Section 29-8, Dividends, is similar to Section 15 of the LLC
Agreement of the NASDAQ Exchange, and prohibits the Exchange from using
Regulatory Funds to pay dividends.\50\
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\50\ ``Regulatory Funds'' are defined as fees, fines, or
penalties derived from the regulatory operations of the Exchange.
However, ``Regulatory Funds'' shall not be construed to include
revenues derived from listing fees, market data revenues,
transaction revenues, or any other aspect of the commercial
operations of the Exchange even if a portion of such revenues are
used to pay costs associated with the regulatory operations of the
Exchange. See proposed By-Law Article I, Section 1-1(kk).
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Additionally, further changes to the Certificate of Incorporation
and By-Laws would be made to correct typographical errors and to update
the language to more accurately reflect current practices. For example,
the language relating to how the Exchange's Weekly Bulletin is
distributed would be updated to not restrict its distribution to mail,
but rather to permit distribution by e-mail and posting on the
Exchange's Web site.\51\ As a second example, references to
``Chairman'' would be replaced with ``Chair.'' Additionally, references
to the ``director'' of either the Membership Services or Examinations
Departments in Sections 17-1, Suspension for Insolvency on Declaration,
and 17-3, Investigation of Insolvency, would be deleted in favor of
more general references to the departments. Therefore, notices would
still be required to be sent to these departments, but not necessarily
to the director. This change should allow more flexibility in
connection with sending notices to these departments.
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\51\ See, e.g., By-Law Article XII, Section 12-5(d).
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e. Rules
The Exchange also proposes to amend the following current Exchange
Rules: (1) Rule 1, Definitions; (2) Rule 98, Emergency Committee; (3)
Rule 164, Trading Halts; and (4) Rule 972, Continuation of Status After
the Merger. More specifically, the Exchange proposes to update Rule 1,
Definitions, to include a definition of the NASDAQ OMX Merger, which
will apply to Rule 972.
Rule 98, Emergency Committee, is proposed to be amended to reflect
that the Board shall establish the Emergency Committee and determine
its composition, which not only revises the members that comprise the
Committee, but allows for greater flexibility in appointing members to
this Committee. Currently, the Emergency Committee consists of the
following: the Chairman of the Board, the On-Floor Vice-Chairman of the
Exchange, the Off-Floor Vice-Chairman of the Exchange (this position,
however, no longer exists and reference to this position was
inadvertently not deleted previously from Rule 98), and the Chairmen of
the Options and Foreign Currency Options Committees.
Rule 164, Trading Halts, is proposed to be amended to provide that
the officers of the Exchange designated by the Board shall have the
power to suspend trading in any and all securities traded on XLE
whenever in their opinion such suspension would be in the public
interest. Currently, only the Chairman and Chief Executive Officer or
his designee has the authority to suspend trading pursuant to Rule 164.
Under this proposal, there would no longer be one position entitled
``Chairman and Chief Executive Officer.'' Accordingly, the proposed
change allows for greater flexibility in designating individuals
responsible for declaring any trading halts and updates the rule to
reflect the proposed revisions
[[Page 23298]]
relating to the officers of the Exchange.\52\
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\52\ See proposed By-Law Article V, Sections 5-1 through 5-5.
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Proposed Rule 972, Continuation of Status After the NASDAQ OMX
Merger, is being amended to reflect that current members, \53\ inactive
nominees, member organizations, foreign currency options participants,
foreign currency options participant organizations, as well as approved
lessors of foreign currency options participations holding such status
prior to the NASDAQ OMX Merger would continue to hold such status
following the NASDAQ OMX Merger. This provision was adopted in
connection with and currently refers to the Exchange's 2004
demutualization.\54\ It is being amended to refer specifically to the
proposed NASDAQ OMX merger and to serve the same purpose as the
original provision, which is to make clear that the merger does not
affect membership status generally.
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\53\ The term ``member,'' defined in Rule 1(n), is not
capitalized, unlike the Exchange's By-Laws.
\54\ See Securities Exchange Act Release No. 49098 (January 16,
2004), 69 FR 3974 (January 27, 2004) (SR-Phlx-2003-73).
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Additionally, the Exchange proposes to adopt two new Rules that
would reflect its status as a wholly-owned subsidiary of NASDAQ OMX
upon the effectiveness of the NASDAQ OMX Merger. The purpose of the
Rules is to guard against any possibility that the Exchange may
exercise, or forebear to exercise, regulatory authority with respect to
an affiliated entity in a manner that is influenced by commercial
considerations, to provide an opportunity for Commission review of
certain proposed affiliations, and to ensure that certain affiliated
members do not receive advantaged access to information in comparison
with unaffiliated members. The Exchange believes that the proposed
Rules would provide added assurance of regulatory integrity without
subjecting the Exchange and its affiliates to unwarranted restrictions
on their commercial activities.
First, the Exchange proposes to adopt Rule 990, which is comparable
to NASDAQ Exchange Rule 4370. The rule provides that if a security
issued by NASDAQ OMX or any of its affiliates is listed on the
Exchange, the Exchange will apply special procedures to the regulation
of that listing, including reporting to the Commission and conducting
an annual independent audit of the security's compliance with Exchange
listing standards.
Second, proposed Exchange Rule 985(a) would limit ownership of
NASDAQ OMX's voting securities by members of the Exchange and their
associated persons (i.e., their registered representatives). The Rule
is comparable to Rule 2130 of the NASDAQ Exchange, and provides that no
member or associated person of a member shall be the beneficial owner
of greater than 20% of the then-outstanding voting securities of NASDAQ
OMX. ``Beneficial ownership'' is defined with reference to NASDAQ OMX's
certificate of incorporation, which in turn provides that a person
shall be deemed the ``beneficial owner'' of, shall be deemed to have
``beneficial ownership'' of and shall be deemed to ``beneficially own''
any securities: (i) Which such person or any of such person's
affiliates is deemed to beneficially own, directly or indirectly,
within the meaning of Rule 13d-3 under the Act; \55\ (ii) subject to
certain narrow exceptions described in the certificate of
incorporation, which such person or any of such person's affiliates has
the right to acquire or to vote pursuant to any agreement, arrangement,
or understanding or otherwise; or (iii) subject to certain narrow
exceptions described in the certificate of incorporation, which are
beneficially owned, directly or indirectly, by any other person and
with respect to which such person or any of such person's affiliates
has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of such securities.
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\55\ Rule 13d-3 under the Act, 17 CFR 240.13d-3, in turn
provides that a beneficial owner of a security includes any person
who, directly or indirectly, through any contract, arrangement,
understanding, relationship, or otherwise has or shares voting power
or investment power.
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Third, proposed Exchange Rule 985(b) would regulate the affiliation
between the Exchange and its affiliates, on the one hand, and Exchange
members, on the other hand, in a manner comparable to Rule 2140 of the
NASDAQ Exchange. In general, the proposed rule provides that the
Exchange must file a proposed rule change with the Commission before
the Exchange or an entity with which it is affiliated directly or
indirectly acquires or maintains an ownership interest in, or engages
in a business venture with, an Exchange member or an affiliate of an
Exchange member.\56\ The rule defines ``affiliate'' with reference to
Rule 12b-2 under the Act,\57\ which provides that if one person
controls, is controlled by, or is under common control of another
person, the persons are affiliates.
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\56\ As used in the rule, the term ``affiliate'' includes
natural persons, but the term ``entity,'' when used to describe an
affiliate, excludes natural persons.
\57\ 17 CFR 240.12b-2.
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The proposed rule would make it clear that in a case where the
Exchange or an affiliate of the Exchange proposes an acquisition of, or
a merger or business venture with, an Exchange member, a proposed rule
change would be required. In order to make it clear that the obligation
to avoid affiliations that have not been filed is imposed by the rule
both on the Exchange and its members, moreover, the rule provides that
an Exchange member shall not be or become an affiliate of the Exchange,
or an affiliate of any entity affiliated with the Exchange, without a
proposed rule change.
The term ``business venture,'' as used in the rule, is defined as
an arrangement under which the Exchange or an entity with which it is
affiliated, on the one hand, and an Exchange member or affiliate
thereof, on the other hand, engage in joint activities with an
expectation of shared profit and a risk of shared loss from common
entrepreneurial efforts. Thus, the term does not include, and the
proposed rule does not regulate, contracts with members or their
affiliates to provide goods, products, or services for consideration,
including, but not limited to, asset or stock purchase agreements that
do not result in ongoing ties with a member or its affiliates,\58\
credit or debt facilities, licenses of intellectual property, contracts
for investment banking, financial advisory, or consulting services,\59\
or the provision of transaction services or data to a broker-dealer
member or products or services to a listed company that is or that owns
a member broker-dealer.
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\58\ For example, in the case of an acquisition of a non-
Membersubsidiary of a Member in a transaction that did not result in
an ongoing affiliation with the Member, the transaction would not be
regulated by the rule.
\59\ In some cases, such contracts may involve sharing of
confidential information with a Member in circumstances where a
Member acts as a fiduciary for Phlx or one of its affiliates. The
Member would be required to take measures to prevent such
information from being misused, and a failure to do so may
constitute a violation of Rules, including, depending on the
circumstances, Exchange Rules 707, 708, and 1020.
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The rule limits possible expansive interpretations of the term
``affiliate'' by stipulating that one entity is not deemed to be an
affiliate of another entity solely by virtue of having a common
director. For example, if one of the Governors of the Exchange is also
a director of an Exchange member, that member would not be deemed to be
an affiliate of the Exchange solely because of the common director. In
addition, the rule should not be construed to regulate in any manner
[[Page 23299]]
the selection of Governors or standing committee members of the
Exchange, NASDAQ OMX, the NASDAQ Exchange, or their affiliates,
provided such selections are conducted in accordance with applicable
provisions of governing corporate documents.
In circumstances where a Commission filing is required, the rule
allows the Exchange to file, in appropriate cases, a proposed rule
change on an immediately effective basis under Section 19(b)(3)(A) of
the Act \60\ and Rule 19b-4(f) thereunder.\61\ For example, in cases
where a proposed affiliation or business venture would not result in
the establishment of a ``facility'' of the Exchange within the meaning
of Section 3 of the Act,\62\ a filing to establish Rules to govern the
operation of the affiliate or business venture would not be required or
appropriate. Rather, in such circumstances, the Exchange would expect
to engage in informal consultation with the Commission's Division of
Trading and Markets and/or members of the Commission, and would then
submit a filing to amend the rule itself, to establish that the
affiliation or business venture could exist as an exception to the
rule. Depending on the circumstances, such a filing might be submitted
on an immediately effective basis.
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\60\ 15 U.S.C. 78s(b)(3)(A).
\61\ 17 CFR 240.19b-4(f).
\62\ 15 U.S.C. 78c.
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There are also several important exceptions to the general filing
requirement of the rule. First, the rule would not require a filing for
transactions that result in an Exchange member acquiring or holding an
interest in NASDAQ OMX that is consistent with Rule 985(a) (discussed
above). Second, no filing would be required for the Exchange or an
entity affiliated with the Exchange acquiring or maintaining an
ownership interest in, or engaging in a business venture with, an
affiliate of an Exchange member if there are information barriers
between the member and the Exchange and its facilities, such that the
member: (i) Would not be provided an informational advantage concerning
the operation of the Exchange and its facilities, and would not be
provided changes or improvements to the trading system that are not
available to the industry generally or other Exchange members; (ii)
would not have knowledge in advance of other members of proposed
changes, modifications, or improvements to the operations or trading
systems of the Exchange and its facilities, including advance knowledge
of Exchange filings pursuant to Section 19(b) of the Act; \63\ (iii)
would be notified of any proposed changes, modifications, or
improvements to the operations or trading systems of the Exchange and
its facilities in the same manner as other Exchange members are
notified; and (iv) would not share employees, office space, or
databases with the Exchange or its facilities, NASDAQ OMX, or any
entity that is controlled by NASDAQ OMX.\64\ The Exchange's Board must
certify, on an annual basis, to the Director of the Commission's
Division of Trading and Markets that the Exchange has taken all
reasonable steps to implement the foregoing requirements with respect
to any affiliate to which they apply and is in compliance therewith.
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\63\ 15 U.S.C. 78s(b).
\64\ Phlx would not construe these limitations to bar an
employee of an affiliated member from serving on a Phlx standing
committee, since: (i) Such committee members would be required to
sign confidentiality agreements with regard to information received
through committee service; and (ii) the committee member employed by
the affiliate would receive information provided through committee
service at the same time as other committee members.
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This exception is aimed at circumstances in which the Exchange or
an affiliated entity acquires, or enters into a business venture with,
an affiliate of an Exchange member, and the Exchange erects information
barriers between the member and the Exchange and its facilities. Thus,
the Exchange ensures that the member does not receive any advantage as
a result of its affiliation.
In connection with the adoption of this rule, the Exchange hereby
requests Commission approval under the rule for the affiliation that
would result by virtue of the merger between the Exchange and the two
broker-dealer subsidiaries of the NASDAQ Exchange: Nasdaq Execution
Services, LLC (``NES'') and NASDAQ Options Services, LLC (``NOS''). The
acquisition of the entities that are now NES and NOS by NASDAQ OMX was
approved by the Commission in 2004 and 2005.\65\ The rules under which
NES currently routes orders to other market centers were approved by
the Commission in 2006 and subsequently amended on several
occasions.\66\ Notably, NASDAQ Exchange Rule 4758(b) establishes the
parameters for operation of NES as follows: (1) All routing of equities
by the NASDAQ Exchange is performed by NES, which, in turn, routes
orders to other market centers as directed by the NASDAQ Exchange; (2)
NES would not engage in any business other than: (a) As a outbound
router for the NASDAQ Exchange, and (b) any other activities it may
engage in as approved by the Commission; (3) NES would operate as a
facility, as defined in Section 3(a)(2) of the Act,\67\ of the NASDAQ
Exchange; (4) for purposes of Rule 17d-1 under the Act,\68\ the
designated examining authority of NES would be a self-regulatory
organization unaffiliated with the NASDAQ Exchange or any of its
affiliates; (5) the NASDAQ Exchange shall be responsible for filing
with the Commission rule changes related to the operation of, and fees
for services provided by, NES, and NES shall be subject to exchange
non-discrimination requirements; (6) the books, records, premises,
officers, agents, directors and employees of NES, as a facility of the
NASDAQ Exchange, shall be deemed to be the books, records, premises,
officers, agents, directors and employees of the NASDAQ Exchange for
purposes of, and subject to oversight pursuant to, the Act, and the
books and records of NES, as a facility of the NASDAQ Exchange, shall
be subject at all times to inspection and copying by the Commission;
and (7) use of NES is optional.
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\65\ See Securities Exchange Act Release Nos. 50311 (September
3, 2004), 69 FR 54818 (September 10, 2004) (Order Granting
Application for a Temporary Conditional Exemption Pursuant To
Section 36(a) of the Exchange Act by the National Association of
Securities Dealers, Inc. Relating to the Acquisition of an ECN by
The Nasdaq Stock Market, Inc.) and 52902 (December 7, 2005), 70 FR
73810 (December 13, 2005) (SR-NASD-2005-128) (Order Approving a
Proposed Rule Change To Establish Rules Governing the Operation of
the INET System).
\66\ See Securities Exchange Act Release Nos. 56867 (November
29, 2007), 72 FR 69263 (December 7, 2007) (SR-NASDAQ-2007-065);
56708 (October 26, 2007), 72 FR 61925 (November 1, 2007) (SR-NASDAQ-
2007-078); 55335 (February 23, 2007), 72 FR 9369 (March 1, 2007)
(SR-NASDAQ-07-005); 54613 (October 17, 2006), 71 FR 62325 (October
24, 2006) (SR-NASDAQ-2006-043); 54271 (August 3, 2006), 71 FR 45876
(August 10, 2006) (SR-NASDAQ-2006-027); and 54155 (July 14, 2006),
71 FR 41291 (July 20, 2006) (SR-NASDAQ-2006-001).
\67\ 15 U.S.C. 78c(a)(2).
\68\ 17 CFR 240.17d-1.
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Currently, routing by NES on behalf of the NASDAQ Exchange takes
two forms: (i) Orders that access any liquidity on the NASDAQ Exchange
book that has a price equal to or superior to the prices available on
other ``automated market centers'' and thereafter route to seek the
best available price; and (ii) routing of ``directed orders'' to
automated market centers other than the NASDAQ Exchange on an
``immediate-or-cancel'' basis. Such directed orders may be designated
as ``intermarket sweep orders,'' which may be executed by the receiving
venue based on the representation of the market participant that it has
routed to all superior
[[Page 23300]]
protected quotations, or not so designated, in which case the orders
will execute only if their execution would not result in a trade-
through.
NOS serves as the outbound router for the Nasdaq Options Market
(``NOM''), which commenced operations on March 31, 2008. Under Rule
Chapter VI, Section 11 for NOM,\69\ (1) NOM will route orders in
options via NOS, which serves as the sole ``Routing Facility'' of NOM;
(2) the sole function of the Routing Facility will be to route orders
in options listed and open for trading on NOM to away markets pursuant
to NOM rules, solely on behalf of NOM; (3) NOS is a member of an
unaffiliated SRO which is the designated examining authority for the
broker-dealer; (4) the Routing Facility is subject to regulation as a
facility of the NASDAQ Exchange, including the requirement to file
proposed rule changes under Section 19 of the Act; \70\ (5) NOM shall
establish and maintain procedures and internal controls reasonably
designed to adequately restrict the flow of confidential and
proprietary information between the NASDAQ Exchange and its facilities
(including the Routing Facility), and any other entity; and (6) the
books, records, premises, officers, directors, agents, and employees of
the Routing Facility, as a facility of the NASDAQ Exchange, shall be
deemed to be the books, records, premises, officers, directors, agents,
and employees of the NASDAQ Exchange for purposes of and subject to
oversight pursuant to the Act, and the books and records of the Routing
Facility, as a facility of the Exchange, shall be subject at all times
to inspection and copying by the NASDAQ Exchange and the Commission.
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\69\ See Securities Exchange Act Release No. 57478 (March 12,
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and -080)
(the ``NOM Approval Order'').
\70\ 15 U.S.C. 78s.
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Unlike NES, NOS does not have a ``directed order'' for options that
are trading on NOM; rather, all routable orders for options that are
trading on NOM check the NOM book prior to routing. However, NOS also
routes orders in options that are not trading on NOM. When routing
orders in options that are not listed and open for trading on NOM, NOS
will not be regulated as a facility of the NASDAQ Exchange but rather
as a broker-dealer regulated by its designated examining authority.
However, as provided by Chapter IV, Section 5 of the NOM rules, all
orders routed by NOS under these circumstances will be routed to away
markets that are at the best price, and solely on an immediate-or-
cancel basis.
Although not explicitly stated in Chapter VI, Section 11 of the NOM
Rules, NOS, like NES, will be subject to exchange non-discrimination
requirements, and the use of NOS will be optional.\71\ In addition, NOS
will not engage in any business other than the activities approved by
the Commission in the NOM Approval Order and such other activities as
may be approved by the Commission at a later date.
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\71\ Consistent with this restriction, Chapter VI, Section 11 of
the NOM rules provides that routing will be based on the user's
instructions and that a participant can designate an order as not
available for routing.
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In order to further restrict the interaction between the Exchange
and NES and NOS, the NASDAQ Exchange has agreed that it will, prior to
the closing of the NASDAQ OMX Merger, amend its rules to change the
routing practices of NES and NOS. With respect to NES, directed orders
will not be eligible for routing to Exchange facilities. With respect
to NOS, when routing orders in options that are not listed and open for
trading on NOM, NOS will not route to Exchange facilities. Routing of
orders that check the NASDAQ Exchange and NOM books prior to routing
will continue and such orders may be routed to the Exchange as
appropriate.
The Exchange notes that at a later date, the Exchange may opt to
use NES and/or NOS to route on behalf of the Exchange.\72\ Such future
uses of NES or NOS would be reflected in filings to establish the terms
and conditions of such routing, but would not allow for routing of
directed orders to the NASDAQ Exchange, NOM, or any other affiliated
exchange or trading facility thereof.\73\
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\72\ Currently, the Exchange uses PRO Securiti
