Self-Regulatory Organizations; Boston Stock Exchange, Incorporated; Notice of Filing of Proposed Rule Change Relating to the Acquisition of the Boston Stock Exchange, Incorporated by The NASDAQ OMX Group, Inc., 26159-26170 [E8-10093]
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Federal Register / Vol. 73, No. 90 / Thursday, May 8, 2008 / Notices
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57757; File No. SR–BSE–
2008–23]
Self-Regulatory Organizations; Boston
Stock Exchange, Incorporated; Notice
of Filing of Proposed Rule Change
Relating to the Acquisition of the
Boston Stock Exchange, Incorporated
by The NASDAQ OMX Group, Inc.
May 1, 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 Boston Stock Exchange,
Incorporated (‘‘Exchange’’ or ‘‘BSE’’)
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.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes: (i) To amend
and restate its Certificate of
Incorporation and its Constitution in
their entirety to reflect the planned
acquisition of the Exchange by The
NASDAQ OMX Group, Inc. (‘‘NASDAQ
OMX’’); (ii) to redesignate its
Constitution as the By-Laws of the
Exchange (‘‘By-Laws’’); (iii) to amend
the governance framework of Boston
Options Exchange Regulation, LLC
(‘‘BOXR’’) by adopting a written
operating agreement and amending the
BOXR by-laws (‘‘BOXR By-Laws’’); (iv)
to obtain approval for a change of
control of BSX Group, LLC (‘‘BSX’’) and
make related amendments to the Third
Amended and Restated Operating
Agreement of BSX; (v) to adopt two
related rules; and (vi) to obtain
Commission approval for affiliation
between the Exchange and certain
broker-dealer subsidiaries of NASDAQ
OMX. The text of the proposed rule
change is available on the Exchange’s
Web site (https://www.bostonstock.com),
at the Exchange, and at the
Commission’s Public Reference Room.
The text of Exhibit 5 of the proposed
rule change is also available on the
Commission’s Web site (https://
www.sec.gov/rules/sro.shtml).
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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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
The Merger
On October 2, 2007, the Exchange
announced that it had entered into an
agreement with The Nasdaq Stock
Market, Inc. (now NASDAQ OMX)
pursuant to which NASDAQ OMX will
acquire all of the outstanding
membership interests in the Exchange
and the Exchange will be merged with
and into Yellow Merger Corporation, a
Delaware corporation and wholly
owned subsidiary of NASDAQ OMX,
with the Exchange surviving the merger
(‘‘Merger’’). As a result of the Merger,
the Exchange will become a Delaware
stock corporation, with 100% of its
outstanding stock owned by NASDAQ
OMX. Exchange Members will receive
cash as consideration for their
ownership interests, and therefore will
not retain ownership interests in the
Exchange or its affiliates. NASDAQ
OMX will then operate the Exchange as
a wholly owned subsidiary, with rules,
membership rosters, and listings that are
separate and distinct from the rules,
membership rosters, and listings of The
NASDAQ Stock Market LLC (‘‘Nasdaq
Exchange’’). The Exchange will propose
substantial amendments to its rules in a
separate filing.
To reflect its changed status from an
independent membership corporation to
a wholly owned stock corporation, the
Exchange proposes to amend and restate
its Certificate of Incorporation and its
Constitution in their entirety. The
amended Constitution will be
redesignated as the By-Laws of the
Exchange. In addition, the Exchange
proposes to adopt two new rules to
reflect its status as a subsidiary of
NASDAQ OMX, which is a public
company.
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The Exchange also proposes to amend
the governance framework of BOXR by
adopting a written operating agreement
(the Amended and Restated Limited
Liability Company Agreement of Boston
Options Exchange Regulation, LLC
(‘‘BOXR LLC Agreement’’)) and
amending the BOXR By-Laws. BOXR is
a wholly owned subsidiary of the
Exchange that regulates the Boston
Options Exchange (‘‘BOX’’), an
electronic options market operated as a
facility of the Exchange by Boston
Options Exchange Group LLC (‘‘BOX
LLC’’). BOX LLC was established in
2002 as a joint venture among the
´
Exchange, Bourse de Montreal (‘‘MX’’),
and several other investors. The
Exchange has agreed to sell its equity
interest in BOX LLC to MX, but the
Exchange will continue to regulate BOX
through BOXR for a period of time
following the Merger. BOXR’s
operations are governed by a Plan of
Delegation of Functions and Authority
by the Exchange to BOXR and by its bylaws, both of which are rules of the
Exchange approved by the Commission.
The BOXR LLC Agreement, and the
BOXR By-Law amendments reflect
changes that will be made to the
governance and management of BOXR
as it remains the designated entity that
will regulate the BOX market until
alternative arrangements acceptable to
the Commission are made. The
amendments to the BOXR By-Laws also
make technical amendments to conform
to the changes proposed to the Exchange
Constitution.3
Finally, under Section 8.1 of the
Third Amended and Restated Operating
Agreement of BSX dated March 13, 2007
(‘‘BSX Operating Agreement’’), the
Exchange must obtain Commission
approval for certain transfers of
ownership interests in BSX. In
connection with the Merger, NASDAQ
OMX will acquire direct interests in
BSX, which, together with the
Exchange’s interests, will result in BSX
becoming a wholly owned subsidiary of
NASDAQ OMX. Specifically, following
the Merger, the Exchange will continue
to own ‘‘Units’’ of ownership interest in
BSX equivalent to 53.21% of the
outstanding Units, while NASDAQ
OMX will own the remaining 46.79%.
3 In a separate filing (SR–BSE–2008–27), the
Exchange is proposing to amend the BOX LLC
Operating Agreement and to adopt resolutions
establishing an independent committee of the
Exchange’s Board of Governors (to be redesignated
as the Board of Directors) that will review BOX rule
changes and certain other BOX-related regulatory
matters. In addition, the Exchange has submitted a
filing to amend the Exchange’s Certificate to allow
for the distribution of the net proceeds from the
Exchange’s intended sale of its equity interests in
BOX (SR–BSE–2008–02).
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Accordingly, the filing seeks approval
for this transfer. The filing also proposes
amendments to the BSX Operating
Agreement to reflect BSX’s acquisition.
Exchange Certificate of Incorporation
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Article First and Second of the
amended and restated Certificate (as
proposed to be amended and restated,
the ‘‘Restated Certificate’’) state the
name and registered agent of the
Exchange. Although NASDAQ OMX
may propose to change the name of the
Exchange in the future, at closing, the
name of the Exchange will remain
‘‘Boston Stock Exchange, Incorporated.’’
Article Third of the Restated
Certificate provides that the Exchange
may engage in any lawful act or activity
for which corporations may be
organized under the General
Corporation Law of the State of
Delaware and any and all activities
necessary or incidental to the foregoing.
Without limiting these general powers,
Article Third also specifically provides
that the Exchange’s activities shall
include actions that support its
regulatory responsibilities under the
Act.4
Article Fourth of the Restated
Certificate provides that the Exchange is
authorized to issue 1,000 shares of
common stock, par value $0.01, all of
which shall be held by NASDAQ OMX.
The Restated Certificate further provides
that NASDAQ OMX may not transfer or
assign any shares of stock of the
Exchange, in whole or in part, to any
entity, unless such transfer or
assignment shall be filed with and
approved by the Commission under
Section 19 of the Act and the rules
promulgated thereunder.
Article Fifth pertains to the governing
board of the Exchange, which is being
designated as a Board of Directors
(‘‘Board’’), rather than a Board of
Governors. The total number of
Directors constituting the entire Board
will be fixed from time to time by the
stockholders (i.e., NASDAQ OMX), and
4 In a separate filing (SR–NASDAQ–2008–035),
NASDAQ OMX is proposing to amend its by-laws
to reflect the proposed acquisition of the Exchange.
The proposed amendments include, among other
protections, a stipulation that for so long as
NASDAQ OMX shall control the Exchange, the
board of directors, officers, employees and agents of
NASDAQ OMX shall give due regard to the
preservation of the independence of the selfregulatory function of the Exchange and to its
obligations to investors and the general public and
shall not take any actions which would interfere
with the effectuation of any decisions by the board
of directors of the Exchange relating to its
regulatory functions (including disciplinary
matters) or the market structure which it regulates
or which would interfere with the ability of the
Exchange to carry out its responsibilities under the
Act.
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will be elected by the stockholders to
hold office until their respective
successors have been duly elected and
qualified, subject, however, to prior
death, resignation, retirement,
disqualification, or removal from office.
However, the exact composition of the
Board is also subject to the requirements
of the By-Laws relating to independence
and fair representation of members,
which are described in detail below.
Article Fifth also contains standard
corporate provisions governing meetings
of stockholders. Because NASDAQ
OMX will be the sole stockholder,
however, Article Seventh provides that
any action required or permitted to be
taken at an annual or special meeting of
stockholders may be taken without a
meeting, without prior notice and
without a vote, if a consent in writing,
setting forth the action so taken, is
signed by the holders of outstanding
stock having not less than the minimum
number of votes that would be
necessary to authorize or take such
action at a meeting at which all shares
entitled to vote thereon were present
and voted. Thus, it is expected that most
stockholder actions will be taken
through written consent, rather than
meetings.
Finally, Article Fifth provides that
vacancies or newly created
directorships resulting from an increase
in the authorized number of Directors
are filled as provided in the By-Laws
(described below); that no decrease in
the number of Directors shortens the
term of an incumbent Director; and that
Directors may be removed by the
holders of a majority of the shares at the
time entitled to vote at an election of
Directors. However, the stockholders’
removal authority is also limited by the
By-Laws (as described below).
Article Sixth limits the liability of
Directors to the Exchange in the manner
permitted under Delaware law; and
Article Eighth provides that the Board
(in addition to the stockholders) may
adopt, amend or repeal By-Laws. Article
Ninth reserves the right to amend, alter,
change, or repeal any provisions
contained in the Restated Certificate; 5
and Article Tenth provides that the
Exchange has perpetual existence.
By-Laws
The By-Laws reflect NASDAQ OMX’s
expectation that the Exchange will be
operated with governance, regulatory,
and market structures similar to those of
the Nasdaq Exchange. Accordingly, the
5 All such changes must be filed with the
Commission under Section 19(b) of the Act, 15
U.S.C. 78s(b), and become effective thereunder
before being implemented.
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Exchange proposes to adopt By-Laws
that are similar in all material respects
to the By-Laws of the Nasdaq Exchange.
The most significant differences result
from the fact that the Nasdaq Exchange
is a limited liability company whereas
the Exchange will be organized as a
stock corporation.
Article I of the By-Laws contains key
definitions used in the By-Laws. Article
II provides for the registered office of
the Exchange in Delaware and such
other offices as it may establish. Article
III contains standard corporate
provisions governing meetings of
stockholders, as well as a provision
consistent with the Restated Certificate
allowing stockholder action by written
consent.
Article IV contains key provisions
regarding the powers, composition, and
selection of the Board. The property,
business, and affairs of the Exchange
will be managed under the direction of
the Board. The exact number of
Directors will be determined by the
stockholders of the Exchange (i.e.,
NASDAQ OMX), but shall in no event
be less than ten Directors. No decrease
in the number of Directors shall shorten
the term of any incumbent Director.
As is the case with the Nasdaq
Exchange, the Board composition will
be required to reflect a balance among
‘‘Industry Directors,’’ ‘‘Member
Representative Directors,’’ and ‘‘NonIndustry Directors,’’ including ‘‘Public
Directors.’’ An Industry Director is a
person with direct ties to the securities
industry as a result of connections to a
broker-dealer, the Exchange or its
affiliates, the Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’),
or certain service providers to such
entities.6 The By-Laws also permit up to
6 Specifically, Article I of the By-Laws defines an
Industry Director as a person who: (i) Is or has
served in the prior 3 years as an officer, director,
or employee of a broker or dealer, excluding an
outside director or a director not engaged in the
day-to-day management of a broker or dealer; (ii) is
an officer, director (excluding an outside director),
or employee of an entity that owns more than 10%
of the equity of a broker or dealer, and the broker
or dealer accounts for more than 5% of the gross
revenues received by the consolidated entity; (iii)
owns more than 5% of the equity securities of any
broker or dealer, whose investments in brokers or
dealers exceed 10% of his or her net worth, or
whose ownership interest otherwise permits him or
her to be engaged in the day-to-day management of
a broker or dealer; (iv) provides professional
services to brokers or dealers, and such services
constitute 20% or more of the professional revenues
received by the Director or 20% or more of the gross
revenues received by the Director’s firm or
partnership; (v) provides professional services to a
director, officer, or employee of a broker, dealer, or
corporation that owns 50% or more of the voting
stock of a broker or dealer, and such services relate
to the director’s, officer’s, or employee’s
professional capacity and constitute 20% or more
of the professional revenues received by the
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two officers of the Exchange, who
would otherwise be considered Industry
Directors, to be designated as ‘‘Staff
Directors’’ and thereby be excluded
from the definition of Industry Director.
With the exception of the initial
Member Representative Directors,
Member Representative Directors are
nominated by a Member Nominating
Committee composed of registered
representatives of Exchange Members,
or are voted upon by Exchange
Members.7 A Member Representative
Director may, but is not required to be,
an officer, director, employee, or agent
of an Exchange Member. The process for
election of Member Representative
Directors is described in greater detail
below. A Non-Industry Director is a
Director (excluding Staff Directors) who
is: (i) A Public Director; (ii) an officer or
employee of an issuer of securities listed
on the Exchange; or (iii) any other
individual who would not be an
Industry Director. A Public Director is a
Director who has no material business
relationship with a broker or dealer, the
Exchange or its affiliates, or FINRA.
With the exception of the initial
Directors, Directors other than the
Member Representative Directors are
nominated by a Nominating Committee
appointed by the Board and are then
elected by NASDAQ OMX as the sole
stockholder.
Section 4.3 of the By-Laws provides
that the number of Non-Industry
Directors, including at least three Public
Directors and at least one Director
representative of issuers and investors,8
must equal or exceed the sum of the
number of Industry Directors and
Member Representative Directors. At
least 20% of the Directors must be
Member Representative Directors. The
By-Laws further stipulate that, as is
currently the case, one Industry Director
must be selected as a representative of
a firm or organization that is registered
with the Exchange for the purposes of
participating in options trading on
Director or 20% or more of the gross revenues
received by the Director’s firm or partnership; or
(vi) has a consulting or employment relationship
with or provides professional services to the
Exchange or any affiliate thereof or to FINRA or has
had any such relationship or provided any such
services at any time within the prior 3 years.
7 Article I defines a Member Representative
Director as a Director who has been elected by the
stockholders after having been nominated by the
Member Nominating Committee or voted upon by
Exchange Members pursuant to the By-Laws (or
elected by the stockholders without such
nomination or voting in the case of the initial
Member Representative Directors elected pursuant
to Section 4.3(b) of the By-Laws).
8 Section 6(b)(3) of the Act, 15 U.S.C. 78f(b)(3),
requires that one or more directors shall be
representative of issuers and investors and not be
associated with a member of the Exchange, broker,
or dealer.
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BOX.9 A Director may not be subject to
a statutory disqualification.10
The process for selecting Member
Representative Directors is described in
Section 4.4 and Section 4.14. Section
4.14 provides that the Board will
appoint a Member Nominating
Committee consisting of no fewer than
three and no more than six members.
All members of the Member Nominating
Committee must be a current associated
person of a current Exchange Member.
The Board will appoint such
individuals after appropriate
consultation with representatives of
Exchange Members. The Member
Nominating Committee will then
nominate a slate of candidates for
Member Representative Director
positions to be filled. Although the
Member Nominating Committee would
have authority to nominate a number of
candidates in excess of the number of
Board seats up for election, the Member
Nominating Committee would likely
nominate a number of candidates equal
to the number of seats. The candidates
nominated by the Member Nominating
Committee will be stated on a formal
‘‘List of Candidates.’’
An Exchange Member may nominate
an additional candidate for inclusion on
the List of Candidates by submitting a
timely and duly executed written
petition to the Secretary of the
Exchange. To be timely, an Exchange
Member’s notice must be delivered to
the Secretary at the principal executive
offices of the Exchange not later than
the close of business on the 90th day
nor earlier than the close of business on
the 120th day prior to the first
anniversary of the preceding year’s
‘‘Voting Date’’ 11 (provided, however,
9 Section 6(b)(3) of the Act, 15 U.S.C. 78f(b)(3),
requires that the rules of the Exchange assure a fair
representation of its members in the selection of its
directors and administration of its affairs. The
Member Representative Directors and the BOX
Participant Director satisfy this requirement
because they are selected through processes that
rely on nominations made by nominating
committees composed of representatives of member
firms, with an opportunity for nomination of
alternate candidates by members. See Section 4.4 of
the proposed By-Laws of the Exchange and Section
14 of the BOXR By-Laws.
10 Section 3(a)(39) of the Act, 15 U.S.C. 78c(a)(39).
11 The By-Laws define Voting Date as ‘‘a date
selected by the Board for Exchange Members to vote
with respect to Member Representative Directors in
the event of a Contested Vote.’’ As described below,
the Board will select a Voting Date each year;
however, a vote would be conducted on the Voting
Date only in the event of a Contested Vote (i.e., if
there is more than one candidate for a Board seat).
In order to make the intent of this definition
clearer, immediately following the closing of the
Merger, the Exchange will propose to the newly
constituted Board of the Exchange an amendment
to the definition to read as follows: ‘‘ ‘Voting Date’
means the date selected by the Board on an annual
basis, on which Exchange Members may vote with
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that in the event that the Voting Date is
more than 30 days before or more than
70 days after such anniversary date,
notice by the Exchange Member must be
so delivered not earlier than the close of
business on the 120th day prior to such
Voting Date and not later than the close
of business on the later of the 90th day
prior to such Voting Date or the 10th
day following the day on which public
announcement of such Voting Date is
first made by the Exchange).12 The
Exchange Member’s notice must
include: (i) As to the person whom the
Exchange Member proposes for election
as a Member Representative Director, all
information relating to that person that
is required to be disclosed in
solicitations of proxies for election of
Directors in an election contest, or is
otherwise required, in each case
pursuant to Regulation 14A under the
Act and the rules thereunder (and such
person’s written consent to be named in
the List of Candidates and to serving as
a Director if elected); (ii) a petition in
support of the candidate duly executed
by the authorized representatives of
10% or more of all Exchange Members;
and (iii) the name and address of the
Exchange Member making the proposal.
The Exchange may require any
proposed candidate to furnish such
other information as it may reasonably
require to determine the eligibility of
such person to serve as a Member
Representative Director.
After the Member Nominating
Committee creates the List of
Candidates, the Board will determine a
Voting Date and a ‘‘Member Voting
Record Date.’’ 13 Promptly after
selection of the Voting Date, in a Notice
to Exchange Members and in a
prominent location on a publicly
accessible Web site, the Exchange will
announce the Voting Date and the List
of Candidates, and describe the
procedures for Exchange Members to
propose candidates for election at the
respect to Member Representative Directors in the
event of a Contested Vote.’’ Following approval by
the Board, the Exchange will file the amendment as
a proposed rule change for approval by the
Commission.
12 Because the voting procedures contemplated by
the By-Laws are new, the alternate time frames
would apply in the case of the first annual meeting
held under the By-Laws. Therefore, a nomination
would be considered timely if delivered not earlier
than the close of business on the 120th day prior
to the first Voting Date and not later than the close
of business on the later of the 90th day prior to the
first Voting Date, or the 10th day following the day
on which public announcement of such Voting Date
is first made.
13 The By-Laws define ‘‘Member Voting Record
Date’’ as a date selected by the Board for the
purpose of determining the Exchange Members
entitled to vote for Member Representative
Directors on a Voting Date in the event of a
Contested Vote.
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next annual meeting. If, by the date on
which an Exchange Member may no
longer submit a timely nomination,
there is only one candidate for each
Member Representative Director seat,
the Member Representative Directors
would be elected by the stockholders
directly from the List of Candidates
nominated by the Member Nominating
Committee. If, however, there is more
than one candidate for a seat (i.e., if
there is a contested vote), a formal
notice of the Voting Date and the List of
Candidates will be sent by the Exchange
at least 10 days but no more than 60
days prior to the Voting Date to the
Exchange Members who were Exchange
Members on the Member Voting Record
Date, by any means, including
electronic transmission, as determined
by the Board or a committee thereof.
In the event of a Contested Vote, each
Exchange Member will have the right to
cast one vote for each Member
Representative Director position to be
filled; 14 provided, however, that any
such vote must be cast for a person on
the List of Candidates. The votes may
not be cumulated. The votes shall be
cast by written ballot, electronic
transmission or any other means as set
forth in a notice to the Exchange
Members sent by the Exchange prior to
the Voting Date. Only votes received
prior to 11:59 p.m. Eastern Time on the
Voting Date shall be counted. The
persons on the List of Candidates who
receive the most votes shall be
submitted to the stockholders for
election, and the stockholders shall
elect that candidate.
Notwithstanding the foregoing, the
initial Board immediately following the
Merger and the adoption of these ByLaws will be selected by NASDAQ OMX
(as the sole stockholder) without use of
the nomination or election processes
required for subsequent elections.
Specifically, the stockholders will hold
a special meeting (or sign a consent in
lieu thereof) for the purpose of electing
the Board, which shall include
individuals satisfying the classifications
required by Section 4.3(a) of the ByLaws but which shall not have been
nominated or voted upon in accordance
with Section 4.4. The initial Member
14 In order to limit the influence that a single
affiliated group of members might exercise over the
Exchange, immediately following the closing of the
Merger, the Exchange will propose to the newly
constituted Board of the Exchange an amendment
to stipulate that no Member, either alone or together
with its affiliates, may account for more than 20%
of the votes cast for a candidate, and any votes cast
by such Member, either alone or together with its
affiliates, in excess of such 20% limitation shall be
disregarded. Following approval by the Board, the
Exchange will file the amendment as a proposed
rule change for approval by the Commission.
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Representative Directors will be officers,
directors or employees of Exchange
Members. The initial Board will consist
of at least three Public Directors, one or
two Staff Directors, at least two Member
Representative Directors, an Industry
Director representing ‘‘BOX
Participants,’’ 15 at least one NonIndustry Director representative of
issuers and investors, and such
additional Industry and Non-Industry
Directors as NASDAQ OMX as the sole
stockholder shall deem appropriate,
consistent with the compositional
requirements of the By-Laws. As soon as
practicable thereafter, the Exchange
shall hold its annual meeting for the
purpose of electing Directors in
accordance with the normal processes
contemplated by the By-Laws.
Section 4.5 of the By-Laws provides
that Directors may be removed from
office by the stockholders, with the
vacancy thus created also filled by the
stockholders, but that the stockholders
may remove a Member Representative
Director only for cause, which shall
include, without limitation, the failure
of such Director to be free of a statutory
disqualification. In addition, a Director
is disqualified and his or her term of
office terminates immediately upon a
determination by the Board, by a
majority vote of the remaining Directors:
(a) that the Director no longer satisfies
the classification for which the Director
was elected; and (b) that the Director’s
continued service as such would violate
the compositional requirements of the
Board set forth in Section 4.3. Thus, for
example, if a Public Director became
employed by a broker-dealer and the
Board thereby had an inadequate
number of Public Directors, the Director
would be disqualified and removed. If a
Director is disqualified and removed,
and the remaining term of office of such
Director at the time of termination is not
more than 6 months, a replacement for
the Director is not required until the
next annual meeting.
Section 4.7 of the By-Laws provides
that if any Director position other than
a Member Representative Director
position becomes vacant, the
Nominating Committee will nominate,
and the Board will appoint by majority
vote, a person satisfying the
classification (Industry, Non-Industry,
or Public Director) for the directorship
to fill the vacancy. Whenever a Member
Representative Director position
becomes vacant, the Member
Nomination Committee will nominate,
15 ‘‘BOX Participant’’ means a firm or
organization that is registered with the Exchange for
the purposes of participating in options trading in
the BOX market.
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and the Board will appoint by majority
vote, a person to fill the vacancy, except
that if the remaining term of office for
the vacant Member Representative
Director position is less than 6 months,
no replacement is required.
Sections 4.8, 4.9, and 4.10 contain
standard provisions for a Delaware
corporation governing the quorum and
voting requirements of the Board, the
appropriateness of reliance by Directors
upon the records, officers, and agents of
the Exchange, and the rules governing
conduct of meetings of the Board.
Section 4.9 also recognizes the
Exchange’s status as a self-regulatory
organization by providing that the
Board, when evaluating any proposal,
shall, to the fullest extent permitted by
applicable law, take into account: (i)
The potential impact thereof on the
integrity, continuity and stability of the
Exchange and the other operations of
the Exchange, on the ability to prevent
fraudulent and manipulative acts and
practices and on investors and the
public, and (ii) whether such would
promote just and equitable principles of
trade, foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to and
facilitating transactions in securities, or
assist in the removal of impediments to
or perfection of the mechanisms for a
free and open market and a national
market system.
Section 4.12 provides that the Board
may delegate to one or more committees
that consist solely of one or more
Directors the power and authority to act
on behalf of the Board in the
management of the business and affairs
of the Exchange. However, no
committee may have the power or
authority of the Board in reference to:
(i) Approving or adopting, or
recommending to the stockholders, any
action or matter (other than the election
of Directors) expressly required by
Delaware law to be submitted to
stockholders for approval; or (ii)
adopting, amending, or repealing any
By-Law of the Exchange. The section
also contains standard provisions for a
Delaware corporation pertaining to the
conduct and populating of Board
committees.
Section 4.13 establishes several
standing Board committees and
delineates their general duties and
compositional requirements:
• The Executive Committee may
exercise all the powers and authority of
the Board in the management of the
business and affairs of the Exchange
between meetings of the Board (subject
to the limits described above). The
number of Non-Industry Directors on
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the Executive Committee must equal or
exceed the number of Industry Directors
on the Executive Committee. The
percentage of Public Directors on the
Executive Committee must be at least as
great as the percentage of Public
Directors on the whole Board, and the
percentage of Member Representative
Directors on the Executive Committee
must be at least as great as the
percentage of Member Representative
Directors on the whole Board.
• The Finance Committee shall
advise the Board with respect to the
oversight of the financial operations and
conditions of the Exchange, including
recommendations for the Exchange’s
annual operating and capital budgets
and proposed changes to the rates and
fees charged by the Exchange.
• The Management Compensation
Committee shall consider and
recommend compensation policies,
programs, and practices for employees
of the Exchange. A majority of
Management Compensation Committee
members shall be Non-Industry
Directors. The Chief Executive Officer of
the Exchange shall be an ex-officio, nonvoting member of the Management
Compensation Committee.
• The Audit Committee shall consist
of four or five Directors, none of whom
shall be officers or employees of the
Exchange. A majority of the Audit
Committee members shall be NonIndustry Directors. The Audit
Committee shall include two Public
Directors. A Public Director shall serve
as Chair of the Committee. The Audit
Committee shall: (A) Provide oversight
over the Exchange’s financial reporting
process and the financial information
that is provided to the stockholders and
others; (B) provide oversight over the
systems of internal controls established
by management and the Board and the
Exchange’s legal and compliance
process; (C) select, evaluate and, where
appropriate, replace the Exchange’s
independent auditors (or nominate the
independent auditors to be proposed for
ratification by the stockholders); and (D)
direct and oversee all the activities of
the Exchange’s internal audit function,
including but not limited to
management’s responsiveness to
internal audit recommendations. The
Audit Committee shall have exclusive
authority to: (A) Hire or terminate the
head of the Exchange’s Internal Audit
Department; (B) determine the
compensation of the head of the Internal
Audit Department; and (C) determine
the budget for the Internal Audit
Department. The Internal Audit
Department and its head shall report
directly to the Audit Committee. The
Audit Committee may, in its discretion,
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direct that the Internal Audit
Department also report to senior
management of the Exchange on matters
the Audit Committee deems appropriate
and may request that senior
management of the Exchange perform
such operational oversight as necessary
and proper, consistent with preservation
of the independence of the internal
audit function. The Internal Audit
Department and its head may also be
employees of one or more affiliates of
the Exchange (i.e., NASDAQ OMX), and
may serve in a similar capacity with
respect to such affiliate(s).
• The Regulatory Oversight
Committee shall: (i) Oversee the
adequacy and effectiveness of the
Exchange’s regulatory and selfregulatory organization responsibilities;
(ii) assess the Exchange’s regulatory
performance; and (iii) assist the Board
and other committees of the Board in
reviewing the regulatory plan and the
overall effectiveness of the Exchange’s
regulatory functions. In furtherance of
its functions, the Regulatory Oversight
Committee shall: (A) Review the
Exchange’s regulatory budget and
specifically inquire into the adequacy of
resources available in the budget for
regulatory activities; (B) meet regularly
with the Exchange’s Chief Regulatory
Officer in executive session; and (C) be
informed about the compensation and
promotion or termination of the Chief
Regulatory Officer and the reasons
therefore. The Regulatory Oversight
Committee shall consist of three
members, each of whom shall be a
Public Director and an ‘‘independent
director’’ as defined in Rule 4200 of the
Rules of the Nasdaq Stock Market.
Section 4.14 and Articles VI and VII
govern the appointment by the Board of
certain standing committees, not
composed of Directors, to be appointed
to administer various provisions of the
rules that the Exchange expects to
propose with respect to governance,
listing, equity trading, and member
discipline:
• The Member Nominating
Committee will nominate candidates for
each Member Representative Director
position on the Board, and will also
nominate candidates for appointment by
the Board for positions on certain
standing committees with positions
reserved for Member Representatives.
The Member Nominating Committee
shall consist of no fewer than three and
no more than six members. All members
of the Member Nominating Committee
shall be a current associated person of
a current Exchange Member. The Board
will appoint such individuals after
appropriate consultation with
representatives of Exchange Members.
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• The Nominating Committee will
nominate candidates for all other vacant
or new Director positions on the Board,
and candidates for all other vacant or
new positions on certain standing
committees. In nominating an Industry
Director who is representative of BOX
Participants, the Nominating Committee
shall adopt the recommendation of the
Nominating Committee of the
Exchange’s subsidiary, BOXR, and the
stockholders of the Exchange (i.e.,
NASDAQ OMX) shall elect the
candidate.16 The Nominating
Committee shall consist of no fewer
than six and no more than nine
members. The number of Non-Industry
members on the Nominating Committee
must equal or exceed the number of
Industry members on the Nominating
Committee. If the Nominating
Committee consists of six members, at
least two shall be Public members. If the
Nominating Committee consists of
seven or more members, at least three
shall be Public members. No officer or
employee of the Exchange shall serve as
a member of the Nominating Committee
in any voting or non-voting capacity. No
more than three of the Nominating
Committee members and no more than
two of the Industry members shall be
current Directors. A Nominating
Committee member may not
simultaneously serve on the Nominating
Committee and the Board, unless such
16 As noted above in footnote 8, the BOX
Participant Director, together with the Member
Representative Directors, allow the Exchange to
fulfill the requirement of Section 6(b)(3) of the Act,
15 U.S.C. 78f(b)(3) that the rules of the Exchange
assure a fair representation of its members in the
selection of its directors and administration of its
affairs. Article II, Section 4 of the Exchange’s
Constitution currently requires that the Exchange’s
Board of Governors select and appoint as governor
a candidate put forth by the BOXR Nominating
Committee for the position on the Board of
Governors reserved for a representative of BOX
Participants. It is the intent of the Exchange that a
person nominated by the BOXR Nominating
Committee for this position will, consistent with
the current requirement in the Exchange’s
Constitution, continue to be automatically
nominated and elected through the Exchange’s
Board selection process, unless such nominee is not
eligible for service under Section 4.3 of the By-Laws
(i.e., because the nominee is subject to a statutory
disqualification). The Exchange believes that this
intent is reflected in the text of the Restated
Certificate and By-Laws as approved by the
Exchange’s members, but could be reflected with
greater clarity through further limited amendments
to the text of the By-Laws. Accordingly,
immediately following the closing of the Merger,
the Exchange will propose to the newly constituted
Board of the Exchange an amendment to the ByLaws to make it clear that the person nominated by
the BOXR Nominating Committee shall also be
nominated by the Exchange Nominating Committee
and elected by the stockholders, unless such
nominee is not eligible for service under Section
4.3; and the Exchange shall file the amendment as
a proposed rule change for approval by the
Commission.
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member is in his or her final year of
service on the Board, and following that
year, that member may not stand for
election to the Board until such time as
he or she is no longer a member of the
Nominating Committee.
• The composition and duties of the
Exchange Listing and Hearings Review
Council are described in Articles VI.
Under the rules to be proposed with
respect to listings on the Exchange, the
Exchange Listing and Hearing Review
Council will review appeals from
decisions to deny issuers listings on the
Exchange, and will also consider and
make recommendations to the Board on
policy and rule changes relating to
issuer listings. The Exchange Listing
and Hearing Review Council will
consist of no fewer than eight and no
more than eighteen members, of which
not more than 50% may be engaged in
market-making activity or employed by
an Exchange Member whose revenues
from market-making activity exceed
10% of its total revenues. The Exchange
Listing and Hearing Review Council
will include at least five Non-Industry
members (including at least two Public
members), and a number of Member
Representative members that is equal to
at least 20% of the total number of
members of the Exchange Listing and
Hearing Review Council. A quorum of
the Exchange Listing and Hearing
Review Council will consist of a
majority of its members, including one
Non-Industry member and one Member
Representative member.
• The composition and duties of the
Exchange Review Council are described
in Article VII. Under the disciplinary
and membership rules to be proposed
for the Exchange, the Exchange Review
Council may be authorized to act with
respect to an appeal or review of a
disciplinary proceeding, a statutory
disqualification proceeding, or a
membership proceeding; a review of an
offer of settlement, a letter of
acceptance, waiver, and consent, and a
minor rule violation plan letter; the
exercise of exemptive authority; and
such other proceedings or actions as
may be authorized by the Exchange
Rules.17 The Exchange Review Council
also may consider and make
recommendations to the Board on
policy and rule changes relating to
business and sales practices of Exchange
Members and associated persons and
enforcement policies, including policies
with respect to fines and other
17 As provided in the current rules relating to
BOX, certain disciplinary matters pertaining to BOX
Participants may be subject to review by the BOXR
Board of Directors and the Exchange Board. The
Exchange Review Council is not expected to have
a role in BOX matters.
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sanctions. The Exchange Review
Council shall consist of no fewer than
eight and no more than twelve
members. The Exchange Review
Council shall include a number of
Member Representative members that is
equal to at least 20% of the total number
of members of the Exchange Review
Council. The number of Non-Industry
members, including at least three Public
members, shall equal or exceed the sum
of the number of Industry members and
Member Representative members. A
quorum of the Exchange Review
Council will consist of a majority of its
members, including not less than 50%
of its Non-Industry members and one
Member Representative member.
• The Quality of Markets Committee
will: (A) Provide advice and guidance to
the Board on issues relating to the
fairness, integrity, efficiency, and
competitiveness of the information,
order handling, and execution
mechanisms of the Exchange from the
perspective of investors, both individual
and institutional, retail firms, market
making firms, companies listed on the
Exchange, and other market
participants; and (B) advise the Board
with respect to national market system
plans and linkages between the facilities
of the Exchange and other markets. The
Quality of Markets Committee shall
include broad representation of
participants in the Exchange, including
investors, market makers, integrated
retail firms, and order entry firms. The
Quality of Markets Committee shall
include a number of Member
Representatives that is equal to at least
20% of the total number of members of
the Quality of Markets Committee. The
number of Non-Industry members of the
Quality of Markets Committee shall
equal or exceed the sum of the number
of Industry members and Member
Representative members. A quorum of
the Quality of Markets Committee will
consist of a majority of its members, and
at least 50% of its Non-Industry
members must either be present or must
waive attendance after receiving an
agenda of the meeting.
• The Market Operations Review
Committee will administer certain rules
planned for the Exchange, notably
appeals from decisions to cancel or
modify clearly erroneous trades on the
Exchange. The Market Operation
Review Committee must include a
number of Member Representatives that
is equal to at least 20% of the total
number of members of the Market
Operations Review Committee. No more
than 50% of the members of the Market
Operations Review Committee shall be
engaged in market making activity or
employed by an Exchange Member firm
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whose revenues from market making
activity exceed 10% of its total
revenues.
• The Arbitration and Mediation
Committee will: (i) Advise the Board on
the development and maintenance of an
equitable and efficient system of dispute
resolution that will equally serve the
needs of public investors and Exchange
Members; (ii) shall monitor rules and
procedures governing the conduct of
dispute resolution; and (iii) shall have
such other powers and authority as are
necessary to effectuate the purposes of
the Exchange Rules. The Arbitration and
Mediation Committee must consist of no
fewer than three and no more than ten
members, and shall have at least 50%
Non-Industry members. As is the case
with the Nasdaq Exchange, the
Arbitration Committee may be
populated with members of FINRA’s
Arbitration and Mediation Committee,
assuming the Exchange receives
regulatory services from FINRA.18 A
quorum of the Arbitration and
Mediation Committee will consist of a
majority of its members, and at least
50% of its Non-Industry members must
either be present or must waive
attendance after receiving an agenda of
the meeting.
• The Market Regulation Committee
will: (i) Advise the Board on regulatory
proposals and industry initiatives
relating to quotations, execution, trade
reporting, and trading practices; (ii)
advise the Board in its administration of
programs and systems for the
surveillance and enforcement of rules
governing Exchange Member’s conduct
and trading activities in the Exchange;
(iii) provide a pool of attorney panelists
for hearing panels under the Exchange
Rules; (iv) participate in the training of
hearing panelists on issues relating to
quotations, executions, trade reporting,
and trading practices; and (v) review
and recommend to the Exchange Review
Council changes to the Exchange’s
guidelines for sanctions to be imposed
on members for violations of Exchange
Rules. The Market Regulation
Committee shall not have any
involvement in deciding whether or not
to institute disciplinary proceedings.
The Market Regulation Committee shall
have at least 50% Non-Industry
members. As is the case with the
Nasdaq Exchange, the Market
Regulation Committee may be
18 ‘‘The Board shall appoint an Arbitration and
Mediation Committee, or shall cause the
Corporation to enter into an agreement with a selfregulatory organization that provides regulatory
services pursuant to which such self-regulatory
organization shall appoint an Arbitration and
Mediation Committee on the Corporation’s behalf.’’
Section 4.14(e) of the Restated Certificate.
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populated with members of FINRA’s
Market Regulation Committee, assuming
the Exchange receives regulatory
services from FINRA.19 A quorum of the
Market Regulation Committee will
consist of a majority of its members, and
at least 50% of its Non-Industry
members must either be present or must
waive attendance after receiving an
agenda of the meeting.
Sections 4.15, 4.16, and 4.17 contain
standard provisions for a Delaware
corporation requiring: (i) Recusal by
Directors and committee members
subject to conflicts of interest; (ii)
providing for the enforceability of
contracts in which a Director has an
interest if appropriately approved or
ratified by disinterested Directors or by
stockholders, or if fair to the Exchange;
(iii) allowing for compensation of Board
members; and (iv) allowing for Board
action by unanimous written consent.
Article V governs the appointment by
the Board of the Exchange’s officers,
agents, and employees, and specifically
provides for the appointment of a Chair
of the Board,20 a Chief Executive
Officer, a President, Vice Presidents, a
Chief Regulatory Officer, a Secretary, an
Assistant Secretary, a Treasurer, and an
Assistant Treasurer.
The Chief Regulatory Officer shall
have general supervision of the
regulatory operations of the Exchange,
including responsibility for overseeing
the Exchange’s surveillance,
examination, and enforcement functions
and for administering any regulatory
services agreements with another selfregulatory organization to which the
Exchange is a party. The Chief
Regulatory Officer shall meet with the
Regulatory Oversight Committee of the
Exchange in executive session at
regularly scheduled meetings of such
committee, and at any time upon
request of the Chief Regulatory Officer
or any member of the Regulatory
Oversight Committee. The Chief
Regulatory Officer may also serve as the
General Counsel of the Exchange.
Article VIII provides for
indemnification by the Exchange of
Directors, officers, employees and
agents in a manner consistent with that
19 The Board shall appoint a Market Regulation
Committee, or shall cause the Corporation to enter
into an agreement with a self-regulatory
organization that provides regulatory services
pursuant to which such self-regulatory organization
shall appoint a Market Regulation Committee on the
Corporation’s behalf.
20 The designation by the By-Laws of the Chair of
the Board as an officer of the Corporation within the
meaning of the By-Laws reflects standard corporate
practice for a Delaware corporation and would not
cause an independent Director chosen who is
selected as the Chair to cease to be an independent
Director.
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of most Delaware stock corporations,
and allows for the purchase of director
and officer liability insurance. Article IX
contains standard corporate provisions
relating to the Exchange’s capital stock,
including provisions relating to stock
certificates, the Exchange’s stock ledger,
and transfers of stock. However, like the
Restated Certificate, the By-Laws also
contain a stipulation that all shares of
Common Stock are held by NASDAQ
OMX, which may not transfer or assign
any shares of stock of the Exchange, in
whole or in part, to any entity, unless
such transfer or assignment shall be
filed with and approved by the
Commission under Section 19 of the Act
and the rules promulgated thereunder.
The Article also contains a stipulation
that dividends may not be paid to the
stockholders (i.e., to NASDAQ OMX)
using ‘‘Regulatory Funds,’’ which are
defined as fees, fines, or penalties
derived from the regulatory operations
of the Exchange. The definition further
provides, however, that the term 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.
Article X contains miscellaneous
standard corporate provisions relating to
the corporate seal, the fiscal year of the
Exchange, waiver of notice of meetings,
and the Exchange’s contracting
authority. Article XI authorizes
amendments to the By-Laws by either
the stockholders or the vote of a
majority of the whole Board,21 as well
as the adoption of emergency by-laws by
the Board. Article XII contains specific
authorization for the Board to adopt
rules needed to effect the Exchange’s
obligations as a self-regulatory
organization, to establish disciplinary
procedures and impose sanctions on
members, to establish standards for
membership, and to impose dues, fees,
assessments, and other charges. Finally,
Section 12.5 authorizes the Board, or
such person or persons as may be
designated by the Board, in the event of
an emergency or extraordinary market
conditions, to take any action regarding:
(a) The trading in or operation of the
Exchange or any other organized
securities markets that may be operated
by the Exchange, the operation of any
automated system owned or operated by
the Exchange, and the participation in
21 All
such changes must be filed with the
Commission under Section 19(b) of the Act, 15
U.S.C. 78s(b), and become effective thereunder
before being implemented.
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any such system or any or all persons
or the trading therein of any or all
securities; and (b) the operation of any
or all offices or systems of Exchange
Members, if, in the opinion of the Board
or the person or persons hereby
designated, such action is necessary or
appropriate for the protection of
investors or the public interest or for the
orderly operation of the marketplace or
the system.
BOXR LLC Agreement
Upon the creation of BOXR, the
Exchange filed a Certificate of
Formation with the State of Delaware.22
The purpose of the creation of BOXR
was specifically for supporting the
operation, regulation, and surveillance
of the BOX facility. In connection with
that, the Exchange drafted and filed
with the Commission the BOXR ByLaws, which filing was approved on
January 13, 2004,23 and incorporated
into the BOX Rules. However, no
written LLC operating agreement was
created for the entity. Accordingly,
since the time of formation, BOXR has
operated under an unwritten operating
agreement, with its written By-Laws
standing in place for, and reflecting, the
intention of the agreement of BOXR.
The Exchange therefore proposes to
adopt the BOXR LLC Agreement, which
includes all standard provisions
typically found in a State of Delaware
Limited Liability Company operating
agreement. These provisions include a
statement, found in Section 22 of the
agreement, that the BOXR LLC
Agreement may not be deemed to
provide rights to any persons other than
those named specifically in the
agreement. The provision stipulates,
however, that such rights include the
rights of BOX Participants in the
selection of directors of BOXR in the
manner currently provided by the BOXR
By-Laws. In addition, Section 20 of the
BOXR LLC Agreement will provide that
a transfer or assignment of the
Exchange’s limited liability company
interests in BOXR must be filed with
and approved by the Commission under
Section 19 of the Act. The BOXR LLC
Agreement also expands the recognized
officers of BOXR to include its Chief
Legal Officer and includes Schedules
that list the directors and officers of
BOXR as of April 15, 2008.
BOXR By-Laws
The BOXR By-Laws are being
amended for consistency with other
22 The Certificate of Formation was filed on
March 25, 2002.
23 See Securities Exchange Act Release No. 49065
(January 13, 2004), 69 FR 2768 (January 20, 2004)
(SR–BSE–2003–04).
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changes being made in the governance
of the Exchange. Specifically, the
proposed changes: (i) Replace references
to the Constitution of the Exchange with
references to the By-Laws and
references to the Board of Governors
with references to the Board of
Directors; (ii) add appropriate references
to the BOXR LLC Agreement; (iii)
amend the definition of ‘‘Public
Director’’ to exclude persons having a
material business relationship with
affiliates of the Exchange, BOX, or
BOXR; and (iv) make several clarifying
and corrective edits. In addition,
Section 14 is being amended to state
that the BOX Participant nominee
selected by BOX Participants for service
on the Exchange Board is recommended
for service on such Board, but is not
directly elected, to reflect the fact that
BOX Participants are not stockholders of
the Exchange. Section 14 is also
amended to provide that a disciplinary
decision of a BOXR Hearing Committee
or panel with respect to any BOX
Participant that is an affiliate of
NASDAQ OMX within the meaning of
proposed Chapter XXXIX, Section 2 of
the rules of the Exchange (as described
below) may not be appealed to or
reviewed by the BOXR Board of
Directors or the Exchange Board of
Directors, but rather shall constitute
final disciplinary action of the Exchange
for purposes of Commission Rule 19d–
1(c)(1) and may be appealed to the
Commission. Together with the new
rules described below, the limitation is
intended to guard against any
possibility that the Exchange may
exercise, or forebear to exercise,
regulatory authority with respect to an
affiliated member in a manner that is
influenced by commercial
considerations.24 Finally, the Exchange
is proposing to replace the
indemnification provisions of Section
24 with a cross-reference to updated
indemnification provisions being
adopted in the BOXR LLC Agreement.
Change of Control of BSX
BSX was formed in 2004 as a joint
venture between the Exchange and
several investors to operate an
electronic trading facility (‘‘Boston
Equities Exchange’’ or ‘‘BeX’’) for
trading cash equities. BeX ended its
operations in September 2007. In
connection with the Merger, NASDAQ
OMX is purchasing all of the
outstanding limited liability company
interests in BSX held by investors other
24 Prior to resuming trading of equities securities,
the Exchange will propose new rules that will
include a comparable restriction on review of
disciplinary decisions affecting an affiliated
member trading equities through the Exchange.
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than the Exchange. By virtue of this
purchase, NASDAQ OMX will directly
own 46.79% of these interests, and will
indirectly, through the Exchange, own
the remainder of the outstanding
interests in BSX. Section 8.1 of the BSX
Operating Agreement provides that the
Exchange must obtain Commission
approval for certain transfers of
ownership interests in BSX.
Accordingly, the Exchange, through this
filing, seeks Commission approval for
the transfer of ownership interests to
NASDAQ OMX contemplated by the
Merger. Following such transfer, the
Exchange and NASDAQ OMX will be
the sole members of BSX, and the
admission of additional or substitute
members would require approval by the
Commission pursuant to a filing under
Section 19 of the Act. In addition, the
Exchange is also proposing amendments
to the BSX Operating Agreement to
reflect its status as a wholly owned
subsidiary of NASDAQ OMX, and to
remove references to BeX. Notably, the
Exchange is proposing to make the
following amendments:
• Section 4.1 is amended to provide
that a five-member Board of Directors
will be selected by BSE.
• Section 4.4 is amended to replace a
provision requiring a super-majority of
director votes in favor of BSX taking
certain significant actions, such as entry
into a new line of business or replacing
BSE as BSX’s regulatory service
provider, with more general authority of
BSE to veto or mandate actions as
dictated by regulatory requirements.
• Article VII and Sections 8.2 and 8.3
are amended to remove provisions that
allow members to exercise rights of first
refusal in the event that one member
proposes to transfer its ownership
interests in BSX to another member or
BSX proposes to issue additional units
of ownership.
• Section 8.4(f) (redesignated as
8.2(f)) is amended to clarify terms used
to describe certain ownership interests
in a Member of BSX.
• Various amendments are being
made to delete references to BeX.
• Sections 8.5 and 8.6 (redesignated
as Sections 8.3 and 8.4), which
restricted ownership and voting of
ownership interests in BSX above the
20% level by a BeX participant or its
affiliates, are being retained but
amended. The amendments replace
‘‘BeX Participant’’ with ‘‘BSE member’’
to apply more broadly to any person
that is a member of the Exchange.
However, the amendments also provide
that the restrictions of these provisions
shall not be construed to limit the
ownership of membership interests by
NASDAQ OMX or BSE. This proviso is
PO 00000
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necessary because, as discussed in
greater detail below, the Nasdaq
Exchange owns two broker-dealers, the
ownership of which has been previously
approved by the Commission. These
broker-dealers are, and will continue to
be, members of the Exchange.
• Article 9, which governs
distributions to Members, is being
amended to adopt a restriction on
distributions of Regulatory Funds
comparable to the restriction proposed
for inclusion in the Exchange’s ByLaws.
• Article 13, which governs disputes
among members via arbitration, is being
deleted to reflect the BSX’s wholly
owned status.
• Section 16.2, which governs the
confidentiality obligations of Members,
is being amended: (i) To clarify that
Members may use confidential
information pursuant to the Act and the
rules and regulations thereunder; (ii) to
stipulate that directors, officers, and
employees receiving confidential
information must themselves be under
confidentiality obligations; and (iii) to
require Members to conduct their
business activities so as to limit the
applicability of legal disclosure
obligations that may supersede the
confidentiality requirements of the BSX
Operating Agreement.
• New Section 16.7 is being added to
provide that to the fullest extent
permitted by applicable law, all
confidential information pertaining to
the self-regulatory function of the
Exchange or the Exchange’s equity
business (including but not limited to
disciplinary matters, trading data,
trading practices and audit information)
contained in the books and records of
BSX shall: (a) Not be made available to
any person (other than as provided in
the proviso of this sentence) other than
to those officers, directors, employees
and agents of BSX who have a
reasonable need to know the contents
thereof; (b) be retained in confidence by
BSX and its officers, directors,
employees and agents; and (c) not be
used for any commercial purposes;
provided, that nothing in this sentence
shall be interpreted so as to limit or
impede the rights of the Commission or
the Exchange to access and examine
such confidential information pursuant
to the federal securities laws and the
rules and regulations thereunder, or to
limit or impede the ability of any
officers, directors, employees or agents
of BSX to disclose such confidential
information to the Commission or the
Exchange.
• Amending Section 18.6 to clarify
that the jurisdiction of the U.S. federal
courts, the Commission, and the
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Exchange over BSX, its Members, and
the officers, directors, agents, and
employees of the Company and its
Members is exclusive (subject, however,
to Delaware jurisdiction over matters
relating to the organization or internal
affairs of BSX), adding conforming
references with respect to the
provision’s waiver of claims as to lack
of personal jurisdiction, and providing
for the waiver of any foreign secrecy or
blocking statutes or regulations to the
fullest extent permitted by law.
Prior to resuming trading of cash
equities, the Exchange will file amended
rules with the Commission that would
replace the current BeX rules, as well as
certain other rules of the Exchange. At
this time, the Exchange expects to
operate its cash equities market through
the BSX entity. However, the Exchange
will not resume cash equities trading
until the new rule set is approved. If
necessary to accurately reflect BSX’s
operations and to impose any additional
regulatory safeguards deemed necessary
by the Exchange or the Commission, the
new rule set will include further
amendments to the BSX Operating
Agreement. In addition, the Exchange
will provide the Commission with the
opportunity to review, and if necessary,
approve, any agreements between BSX
and the Exchange or any third party to
support BSX’s operations of a facility of
the Exchange, such as an amended BSE
Facility Services Agreement. References
to superseded agreements that formerly
supported BeX, such as agreements with
Lava Trading, Inc., and Atos Euronext
S.A., are being deleted from the BSX
Operating Agreement, as are other
provisions that were applicable to BSX’s
initial formation and operation.
New Rules
The Exchange proposes to adopt two
new rules that will reflect its status as
a wholly owned subsidiary of NASDAQ
OMX upon the effectiveness of the
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 member 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 will
provide added assurance of regulatory
integrity without subjecting the
Exchange and its affiliates to
unwarranted restrictions on their
commercial activities.
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First, Chapter XXXIX, Section 1 will
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 thenoutstanding 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 * * *; 25 (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 (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.
Second, Chapter XXXIX, Section 2
regulates 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 acquires or maintains an
ownership interest in, or engages in a
business venture with, an Exchange
member or an affiliate of an Exchange
member.26 The rule defines ‘‘affiliate’’
with reference to Rule 12b–2 under the
Act,27 which provides that if one person
controls, is controlled by, or is under
25 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.
26 As used in the rule, the term ‘‘affiliate’’
includes natural persons, but the term ‘‘entity,’’
when used to describe an affiliate, excludes natural
persons.
27 17 CFR 240.12b–2.
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26167
common control 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 Commission filing will 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
Commission filing.
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,28
credit or debt facilities, licenses of
intellectual property, contracts for
investment banking, financial advisory,
or consulting services,29 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 member
representative directors of the Exchange
is also a director of an Exchange
member, that member would not be
deemed to be an affiliate of the
28 For example, in the case of an acquisition of
a non-member subsidiary 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.
29 In some cases, such contracts may involve
sharing of confidential information with a member
in circumstances where a member acts as a
fiduciary for BSE 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 would constitute a violation of
BSE rules, including, depending on the
circumstances, Chapter II, Sections 14, 25, and 36,
and Chapter XXXVII, Section 11. Amended rules to
be proposed by BSE to govern equity trading in the
future will maintain comparable prohibitions.
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Exchange solely because of the common
director. In addition, the rule should not
be construed to regulate in any manner
the selection of directors 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 may, in
appropriate cases, permit a filing to be
submitted on an immediately effective
basis under Section 19(b)(3)(A) of the
Act 30 and Rule 19b–4(f) thereunder.31
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,32 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 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 Chapter XXXIX, Section 1
(discussed above). Second, no filing is
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) Will
not be provided an informational
advantage concerning the operation of
the Exchange and its facilities, and will
not be provided changes or
improvements to the trading system that
are not available to the industry
generally or other Exchange members;
(ii) will not have knowledge in advance
of other members of proposed changes,
modifications, or improvements to the
operations or trading systems of the
30 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f).
32 15 U.S.C. 78c.
31 17
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Exchange and its facilities, including
advance knowledge of Exchange filings
pursuant to Section 19(b) of the Act; (iii)
will 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)
will not share employees, office space,
or databases with the Exchange or its
facilities, NASDAQ OMX, or any entity
that is controlled by NASDAQ OMX.33
The Exchange’s Regulatory Oversight
Committee must certify, on an annual
basis, to the Director of the 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, it is also necessary for the
Exchange to seek Commission approval
under the rule for the affiliation that
will 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 The Nasdaq Stock Market, Inc.
(now NASDAQ OMX) was approved by
the Commission in 2004 and 2005.34
The rules under which NES currently
routes orders to other market centers
were approved by the Commission in
33 BSE will not construe these limitations to bar
an employee of an affiliated member from serving
on a BSE advisory committee, since: (i) Such
committee members will 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.
34 See 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., Securities Exchange Act Release No.
50311 (September 3, 2004), 69 FR 54818 (September
10, 2004); Order Approving a Proposed Rule
Change To Establish Rules Governing the Operation
of the INET System, Securities Exchange Act
Release No. 52902 (December 7, 2005), 70 FR 73810
(December 13, 2005) (SR–NASD–2005–128).
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2006 and subsequently amended on
several occasions.35 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 will 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 will operate as a
facility, as defined in Section 3(a)(2) of
the Act, of the Nasdaq Exchange; (4) for
purposes of Commission Rule 17d–1,
the designated examining authority of
NES will 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.
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
35 See Securities Exchange Act Release No. 56867
(November 29, 2007), 72 FR 69263 (December 7,
2007) (SR–NASDAQ–2007–065); Securities
Exchange Act Release No. 56708 (October 26, 2007),
72 FR 61925 (November 1, 2007) (SR–NASDAQ–
2007–078); Securities Exchange Act Release No.
55335 (February 23, 2007), 72 FR 9369 (March 1,
2007) (SR–NASDAQ–2007–005); Securities
Exchange Act Release No. 54613 (October 17, 2006),
71 FR 62325 (October 24, 2006) (SR–NASDAQ–
2006–043); Securities Exchange Act Release No.
54271 (August 3, 2006), 71 FR 45876 (August 10,
2006) (SR–NASDAQ–2006–027); and Securities
Exchange Act Release No. 54155 (July 14, 2006), 71
FR 41291 (July 20, 2006) (SR–NASDAQ–2006–001).
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all superior 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 NOM Rule Chapter VI,
Section 11: (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 self-regulatory
organization which is the designated
examining authority for the brokerdealer; (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; (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.36
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.
36 See Securities Exchange Act Release No. 57478
(March 12, 2008), 73 FR 14521 (March 18, 2008)
(SR–NASDAQ–2007–004 and –080) (‘‘NOM
Approval Order’’).
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Although not explicitly stated in
Chapter VI, Section 11, NOS, like NES,
will be subject to exchange nondiscrimination requirements, and the
use of NOS will be optional.37 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 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 (including a planned
Exchange facility for trading equities).
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 (including
BOX). Routing of orders that check the
Nasdaq Exchange and NOM books prior
to routing to the Exchange will
continue.
The Exchange notes that at a later
date, an equity trading system operated
by the Exchange may opt to use NES to
route on behalf of the Exchange.
Similarly, if the Exchange operates an
options trading system other than BOX
following a future termination of
relations between the Exchange and
BOX, the Exchange may opt to use NOS
to perform routing.38 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.
In light of the foregoing facts and
circumstances, and in accordance with
proposed Exchange Rule Chapter
XXXIX, Section 2(a)(2), 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
thereof, unless such orders first attempt
37 Consistent with this restriction, Chapter VI,
Section 11 currently states that NOM participants
can designate orders as either available for routing
or not available for routing.
38 In this regard, it should be noted that both the
New York Stock Exchange LLC and NYSE Arca, Inc.
(‘‘NYSE Arca’’) use NYSE Arca’s broker-dealer
subsidiary to perform routing.
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26169
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 the
proposed rule change is consistent with
the provisions of Section 6 of the Act,39
in general, and with Sections 6(b)(1),
(b)(3) and (b)(5) of the Act,40 in
particular, in that the proposal: enables
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
Exchange Members and persons
associated with Exchange Members with
provisions of the Act, the rules and
regulations thereunder, and the rules of
the Exchange; is designed to assure a
fair representation of Exchange
Members in the selection of Directors;
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 market 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 result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
39 15
40 15
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90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–BSE–2008–23 and should
be submitted on or before May 29, 2008.
(A) By order approve such proposed rule
change, or
(B) Institute proceedings to determine
whether the proposed rule change should be
disapproved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.41
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–10093 Filed 5–7–08; 8:45 am]
IV. Solicitation of Comments
BILLING CODE 8010–01–P
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
mstockstill on PROD1PC66 with NOTICES
• 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–BSE–2008–23 on the
subject line.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57762; File No. SR–BSE–
2008–25]
Self-Regulatory Organizations; Boston
Stock Exchange, Inc.; Notice of Filing
of a Proposed Rule Change Relating to
Proposal to Transfer Boston Stock
Exchange, Inc.’s Ownership Interest in
Boston Options Exchange Group, LLC
May 1, 2008.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
Paper Comments
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 23,
• Send paper comments in triplicate
2008, the Boston Stock Exchange, Inc.
to Nancy M. Morris, Secretary,
(‘‘BSE’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission,
Securities and Exchange Commission
Station Place, 100 F Street, NE.,
(‘‘Commission’’ or ‘‘SEC’’) the proposed
Washington, DC 20549–1090.
rule change as described in Items I, II,
All submissions should refer to File
and III below, which Items have been
Number SR–BSE–2008–23. This file
substantially prepared by the BSE. The
number should be included on the
subject line if e-mail is used. To help the Commission is publishing this notice to
solicit comments on the proposed rule
Commission process and review your
change from interested persons.
comments more efficiently, please use
only one method. The Commission will I. Self-Regulatory Organization’s
post all comments on the Commission’s Statement of the Terms of Substance of
Internet Web site (https://www.sec.gov/
the Proposed Rule Change
rules/sro.shtml). Copies of the
The Exchange proposes to transfer its
submission, all subsequent
21.87% ownership interest in the
amendments, all written statements
Boston Options Exchange Group, LLC
with respect to the proposed rule
(‘‘BOX’’), the operator of its Boston
change that are filed with the
Options Exchange facility (‘‘BOX
Commission, and all written
Market’’) 3 to MX US 2, Inc. (‘‘MX US’’),
communications relating to the
a wholly-owned U.S. subsidiary of the
proposed rule change between the
´
Montreal Exchange Inc. (‘‘MX’’), such
Commission and any person, other than
that, following the transfer, the
those that may be withheld from the
Exchange’s aggregate Percentage Interest
public in accordance with the
will be 0% and MX US’s Percentage
provisions of 5 U.S.C. 552, will be
Interest will increase to 53.24%.4 The
available for inspection and copying in
Exchange will remain the Regulatory
the Commission’s Public Reference
Room, 100 F Street, NE., Washington,
41 17 CFR 200.30–3(a)(12).
DC 20549, on official business days
1 15 U.S.C. 78s(b)(1).
between the hours of 10 a.m. and 3 p.m.
2 17 CFR 240.19b–4.
3 15 U.S.C. 78c(a)(2).
Copies of the filing also will be available
4 MX US currently has a 31.37% ownership
for inspection and copying at the
interest in BOX. The BSE notes that in SR–BSE–
principal office of the Exchange. All
2008–06, MX US’s ownership interest in BOX was
comments received will be posted
rounded up to 31.4%. See Securities Exchange Act
without change; the Commission does
Release No. 57260 (February 1, 2008), 73 FR 7617
(February 8, 2008) (SR–BSE–2008–06).
not edit personal identifying
VerDate Aug<31>2005
17:22 May 07, 2008
Jkt 214001
PO 00000
Frm 00097
Fmt 4703
Sfmt 4703
Authority 5 for the BOX Market and is
submitting the proposed rule change to
the Commission to approve the transfer
of interests to MX US and to amend the
Fifth Amended and Restated Operating
Agreement (the ‘‘5th BOX LLC
Agreement’’) of BOX accordingly (such
agreement, as amended, the ‘‘6th BOX
LLC Agreement’’).6 The Exchange is
requesting confidential treatment of the
sections of the 6th BOX LLC Agreement,
which contain confidential business
information and do not relate to the
control and governance of BOX.
The text of the proposed rule change
is available at the BSE, the
Commission’s Public Reference Room,
and https://www.bostonstock.com. The
text of Exhibits 3A and 3B of the
proposed rule change are also available
on the Exchange’s Web site and on the
Commission’s Web site (https://
www.sec.gov/rules/sro/bse.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
BSE 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 BSE 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 the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
On January 13, 2004, the Commission
approved four BSE proposals that
together established the BOX Market as
a facility of the Exchange.7 This
5 The ‘‘Regulatory Authority’’ is defined as the
BSE as the non-equity, non-Member authority of
BOX and, together with and pursuant to delegated
authority from BSE, the Boston Options Exchange
Regulation LLC (‘‘BOXR’’), as approved by the SEC.
See Section 1.1, 6th BOX LLC Agreement.
6 Capitalized terms not otherwise defined herein
shall have the meanings set forth in the 6th BOX
LLC Agreement.
7 See Securities Exchange Act Release Nos. 49066
(January 13, 2004), 69 FR 2773 (January 20, 2004)
(SR–BSE–2003–17) (establishing a fee schedule for
the proposed BOX Market); 49065 (January 13,
2004), 69 FR 2768 (January 20, 2004) (SR–BSE–
2003–04) (creating BOXR to which the BSE would
delegate its self-regulatory functions with respect to
the BOX Market); 49068 (January 13, 2004), 69 FR
2775 (January 20, 2004) (SR–BSE–2002–15)
(approving trading rules for the BOX Market); and
49067 (January 13, 2004), 69 FR 2761 (January 20,
2004) (SR–BSE–2003–19) (approving certain
regulatory provisions of the operating agreement of
BOX).
E:\FR\FM\08MYN1.SGM
08MYN1
]]>Agencies
[Federal Register Volume 73, Number 90 (Thursday, May 8, 2008)]
[Notices]
[Pages 26159-26170]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-10093]
[[Page 26159]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57757; File No. SR-BSE-2008-23]
Self-Regulatory Organizations; Boston Stock Exchange,
Incorporated; Notice of Filing of Proposed Rule Change Relating to the
Acquisition of the Boston Stock Exchange, Incorporated by The NASDAQ
OMX Group, Inc.
May 1, 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 Boston Stock Exchange, Incorporated
(``Exchange'' or ``BSE'') 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 Exchange proposes: (i) To amend and restate its Certificate of
Incorporation and its Constitution in their entirety to reflect the
planned acquisition of the Exchange by The NASDAQ OMX Group, Inc.
(``NASDAQ OMX''); (ii) to redesignate its Constitution as the By-Laws
of the Exchange (``By-Laws''); (iii) to amend the governance framework
of Boston Options Exchange Regulation, LLC (``BOXR'') by adopting a
written operating agreement and amending the BOXR by-laws (``BOXR By-
Laws''); (iv) to obtain approval for a change of control of BSX Group,
LLC (``BSX'') and make related amendments to the Third Amended and
Restated Operating Agreement of BSX; (v) to adopt two related rules;
and (vi) to obtain Commission approval for affiliation between the
Exchange and certain broker-dealer subsidiaries of NASDAQ OMX. The text
of the proposed rule change is available on the Exchange's Web site
(https://www.bostonstock.com), at the Exchange, and at the Commission's
Public Reference Room. The text of Exhibit 5 of the proposed rule
change is also available on the Commission's Web site (https://
www.sec.gov/rules/sro.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
The Merger
On October 2, 2007, the Exchange announced that it had entered into
an agreement with The Nasdaq Stock Market, Inc. (now NASDAQ OMX)
pursuant to which NASDAQ OMX will acquire all of the outstanding
membership interests in the Exchange and the Exchange will be merged
with and into Yellow Merger Corporation, a Delaware corporation and
wholly owned subsidiary of NASDAQ OMX, with the Exchange surviving the
merger (``Merger''). As a result of the Merger, the Exchange will
become a Delaware stock corporation, with 100% of its outstanding stock
owned by NASDAQ OMX. Exchange Members will receive cash as
consideration for their ownership interests, and therefore will not
retain ownership interests in the Exchange or its affiliates. NASDAQ
OMX will then operate the Exchange as a wholly owned subsidiary, with
rules, membership rosters, and listings that are separate and distinct
from the rules, membership rosters, and listings of The NASDAQ Stock
Market LLC (``Nasdaq Exchange''). The Exchange will propose substantial
amendments to its rules in a separate filing.
To reflect its changed status from an independent membership
corporation to a wholly owned stock corporation, the Exchange proposes
to amend and restate its Certificate of Incorporation and its
Constitution in their entirety. The amended Constitution will be
redesignated as the By-Laws of the Exchange. In addition, the Exchange
proposes to adopt two new rules to reflect its status as a subsidiary
of NASDAQ OMX, which is a public company.
The Exchange also proposes to amend the governance framework of
BOXR by adopting a written operating agreement (the Amended and
Restated Limited Liability Company Agreement of Boston Options Exchange
Regulation, LLC (``BOXR LLC Agreement'')) and amending the BOXR By-
Laws. BOXR is a wholly owned subsidiary of the Exchange that regulates
the Boston Options Exchange (``BOX''), an electronic options market
operated as a facility of the Exchange by Boston Options Exchange Group
LLC (``BOX LLC''). BOX LLC was established in 2002 as a joint venture
among the Exchange, Bourse de Montr[eacute]al (``MX''), and several
other investors. The Exchange has agreed to sell its equity interest in
BOX LLC to MX, but the Exchange will continue to regulate BOX through
BOXR for a period of time following the Merger. BOXR's operations are
governed by a Plan of Delegation of Functions and Authority by the
Exchange to BOXR and by its by-laws, both of which are rules of the
Exchange approved by the Commission. The BOXR LLC Agreement, and the
BOXR By-Law amendments reflect changes that will be made to the
governance and management of BOXR as it remains the designated entity
that will regulate the BOX market until alternative arrangements
acceptable to the Commission are made. The amendments to the BOXR By-
Laws also make technical amendments to conform to the changes proposed
to the Exchange Constitution.\3\
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\3\ In a separate filing (SR-BSE-2008-27), the Exchange is
proposing to amend the BOX LLC Operating Agreement and to adopt
resolutions establishing an independent committee of the Exchange's
Board of Governors (to be redesignated as the Board of Directors)
that will review BOX rule changes and certain other BOX-related
regulatory matters. In addition, the Exchange has submitted a filing
to amend the Exchange's Certificate to allow for the distribution of
the net proceeds from the Exchange's intended sale of its equity
interests in BOX (SR-BSE-2008-02).
---------------------------------------------------------------------------
Finally, under Section 8.1 of the Third Amended and Restated
Operating Agreement of BSX dated March 13, 2007 (``BSX Operating
Agreement''), the Exchange must obtain Commission approval for certain
transfers of ownership interests in BSX. In connection with the Merger,
NASDAQ OMX will acquire direct interests in BSX, which, together with
the Exchange's interests, will result in BSX becoming a wholly owned
subsidiary of NASDAQ OMX. Specifically, following the Merger, the
Exchange will continue to own ``Units'' of ownership interest in BSX
equivalent to 53.21% of the outstanding Units, while NASDAQ OMX will
own the remaining 46.79%.
[[Page 26160]]
Accordingly, the filing seeks approval for this transfer. The filing
also proposes amendments to the BSX Operating Agreement to reflect
BSX's acquisition.
Exchange Certificate of Incorporation
Article First and Second of the amended and restated Certificate
(as proposed to be amended and restated, the ``Restated Certificate'')
state the name and registered agent of the Exchange. Although NASDAQ
OMX may propose to change the name of the Exchange in the future, at
closing, the name of the Exchange will remain ``Boston Stock Exchange,
Incorporated.''
Article Third of the Restated Certificate provides that the
Exchange may engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the
State of Delaware and any and all activities necessary or incidental to
the foregoing. Without limiting these general powers, Article Third
also specifically provides that the Exchange's activities shall include
actions that support its regulatory responsibilities under the Act.\4\
---------------------------------------------------------------------------
\4\ In a separate filing (SR-NASDAQ-2008-035), NASDAQ OMX is
proposing to amend its by-laws to reflect the proposed acquisition
of the Exchange. The proposed amendments include, among other
protections, a stipulation that for so long as NASDAQ OMX shall
control the Exchange, the board of directors, officers, employees
and agents of NASDAQ OMX shall give due regard to the preservation
of the independence of the self-regulatory function of the Exchange
and to its obligations to investors and the general public and shall
not take any actions which would interfere with the effectuation of
any decisions by the board of directors of the Exchange relating to
its regulatory functions (including disciplinary matters) or the
market structure which it regulates or which would interfere with
the ability of the Exchange to carry out its responsibilities under
the Act.
---------------------------------------------------------------------------
Article Fourth of the Restated Certificate provides that the
Exchange is authorized to issue 1,000 shares of common stock, par value
$0.01, all of which shall be held by NASDAQ OMX. The Restated
Certificate further provides that NASDAQ OMX may not transfer or assign
any shares of stock of the Exchange, in whole or in part, to any
entity, unless such transfer or assignment shall be filed with and
approved by the Commission under Section 19 of the Act and the rules
promulgated thereunder.
Article Fifth pertains to the governing board of the Exchange,
which is being designated as a Board of Directors (``Board''), rather
than a Board of Governors. The total number of Directors constituting
the entire Board will be fixed from time to time by the stockholders
(i.e., NASDAQ OMX), and will be elected by the stockholders to hold
office until their respective successors have been duly elected and
qualified, subject, however, to prior death, resignation, retirement,
disqualification, or removal from office. However, the exact
composition of the Board is also subject to the requirements of the By-
Laws relating to independence and fair representation of members, which
are described in detail below.
Article Fifth also contains standard corporate provisions governing
meetings of stockholders. Because NASDAQ OMX will be the sole
stockholder, however, Article Seventh provides that any action required
or permitted to be taken at an annual or special meeting of
stockholders may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so
taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote
thereon were present and voted. Thus, it is expected that most
stockholder actions will be taken through written consent, rather than
meetings.
Finally, Article Fifth provides that vacancies or newly created
directorships resulting from an increase in the authorized number of
Directors are filled as provided in the By-Laws (described below); that
no decrease in the number of Directors shortens the term of an
incumbent Director; and that Directors may be removed by the holders of
a majority of the shares at the time entitled to vote at an election of
Directors. However, the stockholders' removal authority is also limited
by the By-Laws (as described below).
Article Sixth limits the liability of Directors to the Exchange in
the manner permitted under Delaware law; and Article Eighth provides
that the Board (in addition to the stockholders) may adopt, amend or
repeal By-Laws. Article Ninth reserves the right to amend, alter,
change, or repeal any provisions contained in the Restated Certificate;
\5\ and Article Tenth provides that the Exchange has perpetual
existence.
---------------------------------------------------------------------------
\5\ All such changes must be filed with the Commission under
Section 19(b) of the Act, 15 U.S.C. 78s(b), and become effective
thereunder before being implemented.
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By-Laws
The By-Laws reflect NASDAQ OMX's expectation that the Exchange will
be operated with governance, regulatory, and market structures similar
to those of the Nasdaq Exchange. Accordingly, the Exchange proposes to
adopt By-Laws that are similar in all material respects to the By-Laws
of the Nasdaq Exchange. The most significant differences result from
the fact that the Nasdaq Exchange is a limited liability company
whereas the Exchange will be organized as a stock corporation.
Article I of the By-Laws contains key definitions used in the By-
Laws. Article II provides for the registered office of the Exchange in
Delaware and such other offices as it may establish. Article III
contains standard corporate provisions governing meetings of
stockholders, as well as a provision consistent with the Restated
Certificate allowing stockholder action by written consent.
Article IV contains key provisions regarding the powers,
composition, and selection of the Board. The property, business, and
affairs of the Exchange will be managed under the direction of the
Board. The exact number of Directors will be determined by the
stockholders of the Exchange (i.e., NASDAQ OMX), but shall in no event
be less than ten Directors. No decrease in the number of Directors
shall shorten the term of any incumbent Director.
As is the case with the Nasdaq Exchange, the Board composition will
be required to reflect a balance among ``Industry Directors,'' ``Member
Representative Directors,'' and ``Non-Industry Directors,'' including
``Public Directors.'' An Industry Director is a person with direct ties
to the securities industry as a result of connections to a broker-
dealer, the Exchange or its affiliates, the Financial Industry
Regulatory Authority, Inc. (``FINRA''), or certain service providers to
such entities.\6\ The By-Laws also permit up to
[[Page 26161]]
two officers of the Exchange, who would otherwise be considered
Industry Directors, to be designated as ``Staff Directors'' and thereby
be excluded from the definition of Industry Director. With the
exception of the initial Member Representative Directors, Member
Representative Directors are nominated by a Member Nominating Committee
composed of registered representatives of Exchange Members, or are
voted upon by Exchange Members.\7\ A Member Representative Director
may, but is not required to be, an officer, director, employee, or
agent of an Exchange Member. The process for election of Member
Representative Directors is described in greater detail below. A Non-
Industry Director is a Director (excluding Staff Directors) who is: (i)
A Public Director; (ii) an officer or employee of an issuer of
securities listed on the Exchange; or (iii) any other individual who
would not be an Industry Director. A Public Director is a Director who
has no material business relationship with a broker or dealer, the
Exchange or its affiliates, or FINRA. With the exception of the initial
Directors, Directors other than the Member Representative Directors are
nominated by a Nominating Committee appointed by the Board and are then
elected by NASDAQ OMX as the sole stockholder.
---------------------------------------------------------------------------
\6\ Specifically, Article I of the By-Laws defines an Industry
Director as a person who: (i) Is or has served in the prior 3 years
as an officer, director, or employee of a broker or dealer,
excluding an outside director or a director not engaged in the day-
to-day management of a broker or dealer; (ii) is an officer,
director (excluding an outside director), or employee of an entity
that owns more than 10% of the equity of a broker or dealer, and the
broker or dealer accounts for more than 5% of the gross revenues
received by the consolidated entity; (iii) owns more than 5% of the
equity securities of any broker or dealer, whose investments in
brokers or dealers exceed 10% of his or her net worth, or whose
ownership interest otherwise permits him or her to be engaged in the
day-to-day management of a broker or dealer; (iv) provides
professional services to brokers or dealers, and such services
constitute 20% or more of the professional revenues received by the
Director or 20% or more of the gross revenues received by the
Director's firm or partnership; (v) provides professional services
to a director, officer, or employee of a broker, dealer, or
corporation that owns 50% or more of the voting stock of a broker or
dealer, and such services relate to the director's, officer's, or
employee's professional capacity and constitute 20% or more of the
professional revenues received by the Director or 20% or more of the
gross revenues received by the Director's firm or partnership; or
(vi) has a consulting or employment relationship with or provides
professional services to the Exchange or any affiliate thereof or to
FINRA or has had any such relationship or provided any such services
at any time within the prior 3 years.
\7\ Article I defines a Member Representative Director as a
Director who has been elected by the stockholders after having been
nominated by the Member Nominating Committee or voted upon by
Exchange Members pursuant to the By-Laws (or elected by the
stockholders without such nomination or voting in the case of the
initial Member Representative Directors elected pursuant to Section
4.3(b) of the By-Laws).
---------------------------------------------------------------------------
Section 4.3 of the By-Laws provides that the number of Non-Industry
Directors, including at least three Public Directors and at least one
Director representative of issuers and investors,\8\ must equal or
exceed the sum of the number of Industry Directors and Member
Representative Directors. At least 20% of the Directors must be Member
Representative Directors. The By-Laws further stipulate that, as is
currently the case, one Industry Director must be selected as a
representative of a firm or organization that is registered with the
Exchange for the purposes of participating in options trading on
BOX.\9\ A Director may not be subject to a statutory
disqualification.\10\
---------------------------------------------------------------------------
\8\ Section 6(b)(3) of the Act, 15 U.S.C. 78f(b)(3), requires
that one or more directors shall be representative of issuers and
investors and not be associated with a member of the Exchange,
broker, or dealer.
\9\ Section 6(b)(3) of the Act, 15 U.S.C. 78f(b)(3), requires
that the rules of the Exchange assure a fair representation of its
members in the selection of its directors and administration of its
affairs. The Member Representative Directors and the BOX Participant
Director satisfy this requirement because they are selected through
processes that rely on nominations made by nominating committees
composed of representatives of member firms, with an opportunity for
nomination of alternate candidates by members. See Section 4.4 of
the proposed By-Laws of the Exchange and Section 14 of the BOXR By-
Laws.
\10\ Section 3(a)(39) of the Act, 15 U.S.C. 78c(a)(39).
---------------------------------------------------------------------------
The process for selecting Member Representative Directors is
described in Section 4.4 and Section 4.14. Section 4.14 provides that
the Board will appoint a Member Nominating Committee consisting of no
fewer than three and no more than six members. All members of the
Member Nominating Committee must be a current associated person of a
current Exchange Member. The Board will appoint such individuals after
appropriate consultation with representatives of Exchange Members. The
Member Nominating Committee will then nominate a slate of candidates
for Member Representative Director positions to be filled. Although the
Member Nominating Committee would have authority to nominate a number
of candidates in excess of the number of Board seats up for election,
the Member Nominating Committee would likely nominate a number of
candidates equal to the number of seats. The candidates nominated by
the Member Nominating Committee will be stated on a formal ``List of
Candidates.''
An Exchange Member may nominate an additional candidate for
inclusion on the List of Candidates by submitting a timely and duly
executed written petition to the Secretary of the Exchange. To be
timely, an Exchange Member's notice must be delivered to the Secretary
at the principal executive offices of the Exchange not later than the
close of business on the 90th day nor earlier than the close of
business on the 120th day prior to the first anniversary of the
preceding year's ``Voting Date'' \11\ (provided, however, that in the
event that the Voting Date is more than 30 days before or more than 70
days after such anniversary date, notice by the Exchange Member must be
so delivered not earlier than the close of business on the 120th day
prior to such Voting Date and not later than the close of business on
the later of the 90th day prior to such Voting Date or the 10th day
following the day on which public announcement of such Voting Date is
first made by the Exchange).\12\ The Exchange Member's notice must
include: (i) As to the person whom the Exchange Member proposes for
election as a Member Representative Director, all information relating
to that person that is required to be disclosed in solicitations of
proxies for election of Directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the
Act and the rules thereunder (and such person's written consent to be
named in the List of Candidates and to serving as a Director if
elected); (ii) a petition in support of the candidate duly executed by
the authorized representatives of 10% or more of all Exchange Members;
and (iii) the name and address of the Exchange Member making the
proposal. The Exchange may require any proposed candidate to furnish
such other information as it may reasonably require to determine the
eligibility of such person to serve as a Member Representative
Director.
---------------------------------------------------------------------------
\11\ The By-Laws define Voting Date as ``a date selected by the
Board for Exchange Members to vote with respect to Member
Representative Directors in the event of a Contested Vote.'' As
described below, the Board will select a Voting Date each year;
however, a vote would be conducted on the Voting Date only in the
event of a Contested Vote (i.e., if there is more than one candidate
for a Board seat).
In order to make the intent of this definition clearer,
immediately following the closing of the Merger, the Exchange will
propose to the newly constituted Board of the Exchange an amendment
to the definition to read as follows: `` `Voting Date' means the
date selected by the Board on an annual basis, on which Exchange
Members may vote with respect to Member Representative Directors in
the event of a Contested Vote.'' Following approval by the Board,
the Exchange will file the amendment as a proposed rule change for
approval by the Commission.
\12\ Because the voting procedures contemplated by the By-Laws
are new, the alternate time frames would apply in the case of the
first annual meeting held under the By-Laws. Therefore, a nomination
would be considered timely if delivered not earlier than the close
of business on the 120th day prior to the first Voting Date and not
later than the close of business on the later of the 90th day prior
to the first Voting Date, or the 10th day following the day on which
public announcement of such Voting Date is first made.
---------------------------------------------------------------------------
After the Member Nominating Committee creates the List of
Candidates, the Board will determine a Voting Date and a ``Member
Voting Record Date.'' \13\ Promptly after selection of the Voting Date,
in a Notice to Exchange Members and in a prominent location on a
publicly accessible Web site, the Exchange will announce the Voting
Date and the List of Candidates, and describe the procedures for
Exchange Members to propose candidates for election at the
[[Page 26162]]
next annual meeting. If, by the date on which an Exchange Member may no
longer submit a timely nomination, there is only one candidate for each
Member Representative Director seat, the Member Representative
Directors would be elected by the stockholders directly from the List
of Candidates nominated by the Member Nominating Committee. If,
however, there is more than one candidate for a seat (i.e., if there is
a contested vote), a formal notice of the Voting Date and the List of
Candidates will be sent by the Exchange at least 10 days but no more
than 60 days prior to the Voting Date to the Exchange Members who were
Exchange Members on the Member Voting Record Date, by any means,
including electronic transmission, as determined by the Board or a
committee thereof.
---------------------------------------------------------------------------
\13\ The By-Laws define ``Member Voting Record Date'' as a date
selected by the Board for the purpose of determining the Exchange
Members entitled to vote for Member Representative Directors on a
Voting Date in the event of a Contested Vote.
---------------------------------------------------------------------------
In the event of a Contested Vote, each Exchange Member will have
the right to cast one vote for each Member Representative Director
position to be filled; \14\ provided, however, that any such vote must
be cast for a person on the List of Candidates. The votes may not be
cumulated. The votes shall be cast by written ballot, electronic
transmission or any other means as set forth in a notice to the
Exchange Members sent by the Exchange prior to the Voting Date. Only
votes received prior to 11:59 p.m. Eastern Time on the Voting Date
shall be counted. The persons on the List of Candidates who receive the
most votes shall be submitted to the stockholders for election, and the
stockholders shall elect that candidate.
---------------------------------------------------------------------------
\14\ In order to limit the influence that a single affiliated
group of members might exercise over the Exchange, immediately
following the closing of the Merger, the Exchange will propose to
the newly constituted Board of the Exchange an amendment to
stipulate that no Member, either alone or together with its
affiliates, may account for more than 20% of the votes cast for a
candidate, and any votes cast by such Member, either alone or
together with its affiliates, in excess of such 20% limitation shall
be disregarded. Following approval by the Board, the Exchange will
file the amendment as a proposed rule change for approval by the
Commission.
---------------------------------------------------------------------------
Notwithstanding the foregoing, the initial Board immediately
following the Merger and the adoption of these By-Laws will be selected
by NASDAQ OMX (as the sole stockholder) without use of the nomination
or election processes required for subsequent elections. Specifically,
the stockholders will hold a special meeting (or sign a consent in lieu
thereof) for the purpose of electing the Board, which shall include
individuals satisfying the classifications required by Section 4.3(a)
of the By-Laws but which shall not have been nominated or voted upon in
accordance with Section 4.4. The initial Member Representative
Directors will be officers, directors or employees of Exchange Members.
The initial Board will consist of at least three Public Directors, one
or two Staff Directors, at least two Member Representative Directors,
an Industry Director representing ``BOX Participants,'' \15\ at least
one Non-Industry Director representative of issuers and investors, and
such additional Industry and Non-Industry Directors as NASDAQ OMX as
the sole stockholder shall deem appropriate, consistent with the
compositional requirements of the By-Laws. As soon as practicable
thereafter, the Exchange shall hold its annual meeting for the purpose
of electing Directors in accordance with the normal processes
contemplated by the By-Laws.
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\15\ ``BOX Participant'' means a firm or organization that is
registered with the Exchange for the purposes of participating in
options trading in the BOX market.
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Section 4.5 of the By-Laws provides that Directors may be removed
from office by the stockholders, with the vacancy thus created also
filled by the stockholders, but that the stockholders may remove a
Member Representative Director only for cause, which shall include,
without limitation, the failure of such Director to be free of a
statutory disqualification. In addition, a Director is disqualified and
his or her term of office terminates immediately upon a determination
by the Board, by a majority vote of the remaining Directors: (a) that
the Director no longer satisfies the classification for which the
Director was elected; and (b) that the Director's continued service as
such would violate the compositional requirements of the Board set
forth in Section 4.3. Thus, for example, if a Public Director became
employed by a broker-dealer and the Board thereby had an inadequate
number of Public Directors, the Director would be disqualified and
removed. If a Director is disqualified and removed, and the remaining
term of office of such Director at the time of termination is not more
than 6 months, a replacement for the Director is not required until the
next annual meeting.
Section 4.7 of the By-Laws provides that if any Director position
other than a Member Representative Director position becomes vacant,
the Nominating Committee will nominate, and the Board will appoint by
majority vote, a person satisfying the classification (Industry, Non-
Industry, or Public Director) for the directorship to fill the vacancy.
Whenever a Member Representative Director position becomes vacant, the
Member Nomination Committee will nominate, and the Board will appoint
by majority vote, a person to fill the vacancy, except that if the
remaining term of office for the vacant Member Representative Director
position is less than 6 months, no replacement is required.
Sections 4.8, 4.9, and 4.10 contain standard provisions for a
Delaware corporation governing the quorum and voting requirements of
the Board, the appropriateness of reliance by Directors upon the
records, officers, and agents of the Exchange, and the rules governing
conduct of meetings of the Board. Section 4.9 also recognizes the
Exchange's status as a self-regulatory organization by providing that
the Board, when evaluating any proposal, shall, to the fullest extent
permitted by applicable law, take into account: (i) The potential
impact thereof on the integrity, continuity and stability of the
Exchange and the other operations of the Exchange, on the ability to
prevent fraudulent and manipulative acts and practices and on investors
and the public, and (ii) whether such would promote just and equitable
principles of trade, foster cooperation and coordination with persons
engaged in regulating, clearing, settling, processing information with
respect to and facilitating transactions in securities, or assist in
the removal of impediments to or perfection of the mechanisms for a
free and open market and a national market system.
Section 4.12 provides that the Board may delegate to one or more
committees that consist solely of one or more Directors the power and
authority to act on behalf of the Board in the management of the
business and affairs of the Exchange. However, no committee may have
the power or authority of the Board in reference to: (i) Approving or
adopting, or recommending to the stockholders, any action or matter
(other than the election of Directors) expressly required by Delaware
law to be submitted to stockholders for approval; or (ii) adopting,
amending, or repealing any By-Law of the Exchange. The section also
contains standard provisions for a Delaware corporation pertaining to
the conduct and populating of Board committees.
Section 4.13 establishes several standing Board committees and
delineates their general duties and compositional requirements:
The Executive Committee may exercise all the powers and
authority of the Board in the management of the business and affairs of
the Exchange between meetings of the Board (subject to the limits
described above). The number of Non-Industry Directors on
[[Page 26163]]
the Executive Committee must equal or exceed the number of Industry
Directors on the Executive Committee. The percentage of Public
Directors on the Executive Committee must be at least as great as the
percentage of Public Directors on the whole Board, and the percentage
of Member Representative Directors on the Executive Committee must be
at least as great as the percentage of Member Representative Directors
on the whole Board.
The Finance Committee shall advise the Board with respect
to the oversight of the financial operations and conditions of the
Exchange, including recommendations for the Exchange's annual operating
and capital budgets and proposed changes to the rates and fees charged
by the Exchange.
The Management Compensation Committee shall consider and
recommend compensation policies, programs, and practices for employees
of the Exchange. A majority of Management Compensation Committee
members shall be Non-Industry Directors. The Chief Executive Officer of
the Exchange shall be an ex-officio, non-voting member of the
Management Compensation Committee.
The Audit Committee shall consist of four or five
Directors, none of whom shall be officers or employees of the Exchange.
A majority of the Audit Committee members shall be Non-Industry
Directors. The Audit Committee shall include two Public Directors. A
Public Director shall serve as Chair of the Committee. The Audit
Committee shall: (A) Provide oversight over the Exchange's financial
reporting process and the financial information that is provided to the
stockholders and others; (B) provide oversight over the systems of
internal controls established by management and the Board and the
Exchange's legal and compliance process; (C) select, evaluate and,
where appropriate, replace the Exchange's independent auditors (or
nominate the independent auditors to be proposed for ratification by
the stockholders); and (D) direct and oversee all the activities of the
Exchange's internal audit function, including but not limited to
management's responsiveness to internal audit recommendations. The
Audit Committee shall have exclusive authority to: (A) Hire or
terminate the head of the Exchange's Internal Audit Department; (B)
determine the compensation of the head of the Internal Audit
Department; and (C) determine the budget for the Internal Audit
Department. The Internal Audit Department and its head shall report
directly to the Audit Committee. The Audit Committee may, in its
discretion, direct that the Internal Audit Department also report to
senior management of the Exchange on matters the Audit Committee deems
appropriate and may request that senior management of the Exchange
perform such operational oversight as necessary and proper, consistent
with preservation of the independence of the internal audit function.
The Internal Audit Department and its head may also be employees of one
or more affiliates of the Exchange (i.e., NASDAQ OMX), and may serve in
a similar capacity with respect to such affiliate(s).
The Regulatory Oversight Committee shall: (i) Oversee the
adequacy and effectiveness of the Exchange's regulatory and self-
regulatory organization responsibilities; (ii) assess the Exchange's
regulatory performance; and (iii) assist the Board and other committees
of the Board in reviewing the regulatory plan and the overall
effectiveness of the Exchange's regulatory functions. In furtherance of
its functions, the Regulatory Oversight Committee shall: (A) Review the
Exchange's regulatory budget and specifically inquire into the adequacy
of resources available in the budget for regulatory activities; (B)
meet regularly with the Exchange's Chief Regulatory Officer in
executive session; and (C) be informed about the compensation and
promotion or termination of the Chief Regulatory Officer and the
reasons therefore. The Regulatory Oversight Committee shall consist of
three members, each of whom shall be a Public Director and an
``independent director'' as defined in Rule 4200 of the Rules of the
Nasdaq Stock Market.
Section 4.14 and Articles VI and VII govern the appointment by the
Board of certain standing committees, not composed of Directors, to be
appointed to administer various provisions of the rules that the
Exchange expects to propose with respect to governance, listing, equity
trading, and member discipline:
The Member Nominating Committee will nominate candidates
for each Member Representative Director position on the Board, and will
also nominate candidates for appointment by the Board for positions on
certain standing committees with positions reserved for Member
Representatives. The Member Nominating Committee shall consist of no
fewer than three and no more than six members. All members of the
Member Nominating Committee shall be a current associated person of a
current Exchange Member. The Board will appoint such individuals after
appropriate consultation with representatives of Exchange Members.
The Nominating Committee will nominate candidates for all
other vacant or new Director positions on the Board, and candidates for
all other vacant or new positions on certain standing committees. In
nominating an Industry Director who is representative of BOX
Participants, the Nominating Committee shall adopt the recommendation
of the Nominating Committee of the Exchange's subsidiary, BOXR, and the
stockholders of the Exchange (i.e., NASDAQ OMX) shall elect the
candidate.\16\ The Nominating Committee shall consist of no fewer than
six and no more than nine members. The number of Non-Industry members
on the Nominating Committee must equal or exceed the number of Industry
members on the Nominating Committee. If the Nominating Committee
consists of six members, at least two shall be Public members. If the
Nominating Committee consists of seven or more members, at least three
shall be Public members. No officer or employee of the Exchange shall
serve as a member of the Nominating Committee in any voting or non-
voting capacity. No more than three of the Nominating Committee members
and no more than two of the Industry members shall be current
Directors. A Nominating Committee member may not simultaneously serve
on the Nominating Committee and the Board, unless such
[[Page 26164]]
member is in his or her final year of service on the Board, and
following that year, that member may not stand for election to the
Board until such time as he or she is no longer a member of the
Nominating Committee.
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\16\ As noted above in footnote 8, the BOX Participant Director,
together with the Member Representative Directors, allow the
Exchange to fulfill the requirement of Section 6(b)(3) of the Act,
15 U.S.C. 78f(b)(3) that the rules of the Exchange assure a fair
representation of its members in the selection of its directors and
administration of its affairs. Article II, Section 4 of the
Exchange's Constitution currently requires that the Exchange's Board
of Governors select and appoint as governor a candidate put forth by
the BOXR Nominating Committee for the position on the Board of
Governors reserved for a representative of BOX Participants. It is
the intent of the Exchange that a person nominated by the BOXR
Nominating Committee for this position will, consistent with the
current requirement in the Exchange's Constitution, continue to be
automatically nominated and elected through the Exchange's Board
selection process, unless such nominee is not eligible for service
under Section 4.3 of the By-Laws (i.e., because the nominee is
subject to a statutory disqualification). The Exchange believes that
this intent is reflected in the text of the Restated Certificate and
By-Laws as approved by the Exchange's members, but could be
reflected with greater clarity through further limited amendments to
the text of the By-Laws. Accordingly, immediately following the
closing of the Merger, the Exchange will propose to the newly
constituted Board of the Exchange an amendment to the By-Laws to
make it clear that the person nominated by the BOXR Nominating
Committee shall also be nominated by the Exchange Nominating
Committee and elected by the stockholders, unless such nominee is
not eligible for service under Section 4.3; and the Exchange shall
file the amendment as a proposed rule change for approval by the
Commission.
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The composition and duties of the Exchange Listing and
Hearings Review Council are described in Articles VI. Under the rules
to be proposed with respect to listings on the Exchange, the Exchange
Listing and Hearing Review Council will review appeals from decisions
to deny issuers listings on the Exchange, and will also consider and
make recommendations to the Board on policy and rule changes relating
to issuer listings. The Exchange Listing and Hearing Review Council
will consist of no fewer than eight and no more than eighteen members,
of which not more than 50% may be engaged in market-making activity or
employed by an Exchange Member whose revenues from market-making
activity exceed 10% of its total revenues. The Exchange Listing and
Hearing Review Council will include at least five Non-Industry members
(including at least two Public members), and a number of Member
Representative members that is equal to at least 20% of the total
number of members of the Exchange Listing and Hearing Review Council. A
quorum of the Exchange Listing and Hearing Review Council will consist
of a majority of its members, including one Non-Industry member and one
Member Representative member.
The composition and duties of the Exchange Review Council
are described in Article VII. Under the disciplinary and membership
rules to be proposed for the Exchange, the Exchange Review Council may
be authorized to act with respect to an appeal or review of a
disciplinary proceeding, a statutory disqualification proceeding, or a
membership proceeding; a review of an offer of settlement, a letter of
acceptance, waiver, and consent, and a minor rule violation plan
letter; the exercise of exemptive authority; and such other proceedings
or actions as may be authorized by the Exchange Rules.\17\ The Exchange
Review Council also may consider and make recommendations to the Board
on policy and rule changes relating to business and sales practices of
Exchange Members and associated persons and enforcement policies,
including policies with respect to fines and other sanctions. The
Exchange Review Council shall consist of no fewer than eight and no
more than twelve members. The Exchange Review Council shall include a
number of Member Representative members that is equal to at least 20%
of the total number of members of the Exchange Review Council. The
number of Non-Industry members, including at least three Public
members, shall equal or exceed the sum of the number of Industry
members and Member Representative members. A quorum of the Exchange
Review Council will consist of a majority of its members, including not
less than 50% of its Non-Industry members and one Member Representative
member.
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\17\ As provided in the current rules relating to BOX, certain
disciplinary matters pertaining to BOX Participants may be subject
to review by the BOXR Board of Directors and the Exchange Board. The
Exchange Review Council is not expected to have a role in BOX
matters.
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The Quality of Markets Committee will: (A) Provide advice
and guidance to the Board on issues relating to the fairness,
integrity, efficiency, and competitiveness of the information, order
handling, and execution mechanisms of the Exchange from the perspective
of investors, both individual and institutional, retail firms, market
making firms, companies listed on the Exchange, and other market
participants; and (B) advise the Board with respect to national market
system plans and linkages between the facilities of the Exchange and
other markets. The Quality of Markets Committee shall include broad
representation of participants in the Exchange, including investors,
market makers, integrated retail firms, and order entry firms. The
Quality of Markets Committee shall include a number of Member
Representatives that is equal to at least 20% of the total number of
members of the Quality of Markets Committee. The number of Non-Industry
members of the Quality of Markets Committee shall equal or exceed the
sum of the number of Industry members and Member Representative
members. A quorum of the Quality of Markets Committee will consist of a
majority of its members, and at least 50% of its Non-Industry members
must either be present or must waive attendance after receiving an
agenda of the meeting.
The Market Operations Review Committee will administer
certain rules planned for the Exchange, notably appeals from decisions
to cancel or modify clearly erroneous trades on the Exchange. The
Market Operation Review Committee must include a number of Member
Representatives that is equal to at least 20% of the total number of
members of the Market Operations Review Committee. No more than 50% of
the members of the Market Operations Review Committee shall be engaged
in market making activity or employed by an Exchange Member firm whose
revenues from market making activity exceed 10% of its total revenues.
The Arbitration and Mediation Committee will: (i) Advise
the Board on the development and maintenance of an equitable and
efficient system of dispute resolution that will equally serve the
needs of public investors and Exchange Members; (ii) shall monitor
rules and procedures governing the conduct of dispute resolution; and
(iii) shall have such other powers and authority as are necessary to
effectuate the purposes of the Exchange Rules. The Arbitration and
Mediation Committee must consist of no fewer than three and no more
than ten members, and shall have at least 50% Non-Industry members. As
is the case with the Nasdaq Exchange, the Arbitration Committee may be
populated with members of FINRA's Arbitration and Mediation Committee,
assuming the Exchange receives regulatory services from FINRA.\18\ A
quorum of the Arbitration and Mediation Committee will consist of a
majority of its members, and at least 50% of its Non-Industry members
must either be present or must waive attendance after receiving an
agenda of the meeting.
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\18\ ``The Board shall appoint an Arbitration and Mediation
Committee, or shall cause the Corporation to enter into an agreement
with a self-regulatory organization that provides regulatory
services pursuant to which such self-regulatory organization shall
appoint an Arbitration and Mediation Committee on the Corporation's
behalf.'' Section 4.14(e) of the Restated Certificate.
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The Market Regulation Committee will: (i) Advise the Board
on regulatory proposals and industry initiatives relating to
quotations, execution, trade reporting, and trading practices; (ii)
advise the Board in its administration of programs and systems for the
surveillance and enforcement of rules governing Exchange Member's
conduct and trading activities in the Exchange; (iii) provide a pool of
attorney panelists for hearing panels under the Exchange Rules; (iv)
participate in the training of hearing panelists on issues relating to
quotations, executions, trade reporting, and trading practices; and (v)
review and recommend to the Exchange Review Council changes to the
Exchange's guidelines for sanctions to be imposed on members for
violations of Exchange Rules. The Market Regulation Committee shall not
have any involvement in deciding whether or not to institute
disciplinary proceedings. The Market Regulation Committee shall have at
least 50% Non-Industry members. As is the case with the Nasdaq
Exchange, the Market Regulation Committee may be
[[Page 26165]]
populated with members of FINRA's Market Regulation Committee, assuming
the Exchange receives regulatory services from FINRA.\19\ A quorum of
the Market Regulation Committee will consist of a majority of its
members, and at least 50% of its Non-Industry members must either be
present or must waive attendance after receiving an agenda of the
meeting.
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\19\ The Board shall appoint a Market Regulation Committee, or
shall cause the Corporation to enter into an agreement with a self-
regulatory organization that provides regulatory services pursuant
to which such self-regulatory organization shall appoint a Market
Regulation Committee on the Corporation's behalf.
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Sections 4.15, 4.16, and 4.17 contain standard provisions for a
Delaware corporation requiring: (i) Recusal by Directors and committee
members subject to conflicts of interest; (ii) providing for the
enforceability of contracts in which a Director has an interest if
appropriately approved or ratified by disinterested Directors or by
stockholders, or if fair to the Exchange; (iii) allowing for
compensation of Board members; and (iv) allowing for Board action by
unanimous written consent.
Article V governs the appointment by the Board of the Exchange's
officers, agents, and employees, and specifically provides for the
appointment of a Chair of the Board,\20\ a Chief Executive Officer, a
President, Vice Presidents, a Chief Regulatory Officer, a Secretary, an
Assistant Secretary, a Treasurer, and an Assistant Treasurer.
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\20\ The designation by the By-Laws of the Chair of the Board as
an officer of the Corporation within the meaning of the By-Laws
reflects standard corporate practice for a Delaware corporation and
would not cause an independent Director chosen who is selected as
the Chair to cease to be an independent Director.
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The Chief Regulatory Officer shall have general supervision of the
regulatory operations of the Exchange, including responsibility for
overseeing the Exchange's surveillance, examination, and enforcement
functions and for administering any regulatory services agreements with
another self-regulatory organization to which the Exchange is a party.
The Chief Regulatory Officer shall meet with the Regulatory Oversight
Committee of the Exchange in executive session at regularly scheduled
meetings of such committee, and at any time upon request of the Chief
Regulatory Officer or any member of the Regulatory Oversight Committee.
The Chief Regulatory Officer may also serve as the General Counsel of
the Exchange.
Article VIII provides for indemnification by the Exchange of
Directors, officers, employees and agents in a manner consistent with
that of most Delaware stock corporations, and allows for the purchase
of director and officer liability insurance. Article IX contains
standard corporate provisions relating to the Exchange's capital stock,
including provisions relating to stock certificates, the Exchange's
stock ledger, and transfers of stock. However, like the Restated
Certificate, the By-Laws also contain a stipulation that all shares of
Common Stock are held by NASDAQ OMX, which may not transfer or assign
any shares of stock of the Exchange, in whole or in part, to any
entity, unless such transfer or assignment shall be filed with and
approved by the Commission under Section 19 of the Act and the rules
promulgated thereunder. The Article also contains a stipulation that
dividends may not be paid to the stockholders (i.e., to NASDAQ OMX)
using ``Regulatory Funds,'' which are defined as fees, fines, or
penalties derived from the regulatory operations of the Exchange. The
definition further provides, however, that the term 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.
Article X contains miscellaneous standard corporate provisions
relating to the corporate seal, the fiscal year of the Exchange, waiver
of notice of meetings, and the Exchange's contracting authority.
Article XI authorizes amendments to the By-Laws by either the
stockholders or the vote of a majority of the whole Board,\21\ as well
as the adoption of emergency by-laws by the Board. Article XII contains
specific authorization for the Board to adopt rules needed to effect
the Exchange's obligations as a self-regulatory organization, to
establish disciplinary procedures and impose sanctions on members, to
establish standards for membership, and to impose dues, fees,
assessments, and other charges. Finally, Section 12.5 authorizes the
Board, or such person or persons as may be designated by the Board, in
the event of an emergency or extraordinary market conditions, to take
any action regarding: (a) The trading in or operation of the Exchange
or any other organized securities markets that may be operated by the
Exchange, the operation of any automated system owned or operated by
the Exchange, and the participation in any such system or any or all
persons or the trading therein of any or all securities; and (b) the
operation of any or all offices or systems of Exchange Members, if, in
the opinion of the Board or the person or persons hereby designated,
such action is necessary or appropriate for the protection of investors
or the public interest or for the orderly operation of the marketplace
or the system.
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\21\ All such changes must be filed with the Commission under
Section 19(b) of the Act, 15 U.S.C. 78s(b), and become effective
thereunder before being implemented.
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BOXR LLC Agreement
Upon the creation of BOXR, the Exchange filed a Certificate of
Formation with the State of Delaware.\22\ The purpose of the creation
of BOXR was specifically for supporting the operation, regulation, and
surveillance of the BOX facility. In connection with that, the Exchange
drafted and filed with the Commission the BOXR By-Laws, which filing
was approved on January 13, 2004,\23\ and incorporated into the BOX
Rules. However, no written LLC operating agreement was created for the
entity. Accordingly, since the time of formation, BOXR has operated
under an unwritten operating agreement, with its written By-Laws
standing in place for, and reflecting, the intention of the agreement
of BOXR. The Exchange therefore proposes to adopt the BOXR LLC
Agreement, which includes all standard provisions typically found in a
State of Delaware Limited Liability Company operating agreement. These
provisions include a statement, found in Section 22 of the agreement,
that the BOXR LLC Agreement may not be deemed to provide rights to any
persons other than those named specifically in the agreement. The
provision stipulates, however, that such rights include the rights of
BOX Participants in the selection of directors of BOXR in the manner
currently provided by the BOXR By-Laws. In addition, Section 20 of the
BOXR LLC Agreement will provide that a transfer or assignment of the
Exchange's limited liability company interests in BOXR must be filed
with and approved by the Commission under Section 19 of the Act. The
BOXR LLC Agreement also expands the recognized officers of BOXR to
include its Chief Legal Officer and includes Schedules that list the
directors and officers of BOXR as of April 15, 2008.
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\22\ The Certificate of Formation was filed on March 25, 2002.
\23\ See Securities Exchange Act Release No. 49065 (January 13,
2004), 69 FR 2768 (January 20, 2004) (SR-BSE-2003-04).
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BOXR By-Laws
The BOXR By-Laws are being amended for consistency with other
[[Page 26166]]
changes being made in the governance of the Exchange. Specifically, the
proposed changes: (i) Replace references to the Constitution of the
Exchange with references to the By-Laws and references to the Board of
Governors with references to the Board of Directors; (ii) add
appropriate references to the BOXR LLC Agreement; (iii) amend the
definition of ``Public Director'' to exclude persons having a material
business relationship with affiliates of the Exchange, BOX, or BOXR;
and (iv) make several clarifying and corrective edits. In addition,
Section 14 is being amended to state that the BOX Participant nominee
selected by BOX Participants for service on the Exchange Board is
recommended for service on such Board, but is not directly elected, to
reflect the fact that BOX Participants are not stockholders of the
Exchange. Section 14 is also amended to provide that a disciplinary
decision of a BOXR Hearing Committee or panel with respect to any BOX
Participant that is an affiliate of NASDAQ OMX within the meaning of
proposed Chapter XXXIX, Section 2 of the rules of the Exchange (as
described below) may not be appealed to or reviewed by the BOXR Board
of Directors or the Exchange Board of Directors, but rather shall
constitute final disciplinary action of the Exchange for purposes of
Commission Rule 19d-1(c)(1) and may be appealed to the Commission.
Together with the new rules described below, the limitation is intended
to guard against any possibility that the Exchange may exercise, or
forebear to exercise, regulatory authority with respect to an
affiliated member in a manner that is influenced by commercial
considerations.\24\ Finally, the Exchange is proposing to replace the
indemnification provisions of Section 24 with a cross-reference to
updated indemnification provisions being adopted in the BOXR LLC
Agreement.
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\24\ Prior to resuming trading of equities securities, the
Exchange will propose new rules that will include a comparable
restriction on review of disciplinary decisions affecting an
affiliated member trading equities through the Exchange.
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Change of Control of BSX
BSX was formed in 2004 as a joint venture between the Exchange and
several investors to operate an electronic trading facility (``Boston
Equities Exchange'' or ``BeX'') for trading cash equities. BeX ended
its operations in September 2007. In connection with the Merger, NASDAQ
OMX is purchasing all of the outstanding limited liability company
interests in BSX held by investors other than the Exchange. By virtue
of this purchase, NASDAQ OMX will directly own 46.79% of these
interests, and will indirectly, through the Exchange, own the remainder
of the outstanding interests in BSX. Section 8.1 of the BSX Operating
Agreement provides that the Exchange must obtain Commission approval
for certain transfers of ownership interests in BSX. Accordingly, the
Exchange, through this filing, seeks Commission approval for the
transfer of ownership interests to NASDAQ OMX contemplated by the
Merger. Following such transfer, the Exchange and NASDAQ OMX will be
the sole members of BSX, and the admission of additional or substitute
members would require approval by the Commission pursuant to a filing
under Section 19 of the Act. In addition, the Exchange is also
proposing amendments to the BSX Operating Agreement to reflect its
status as a wholly owned subsidiary of NASDAQ OMX, and to remove
references to BeX. Notably, the Exchange is proposing to make the
following amendments:
Section 4.1 is amended to provide that a five-member Board
of Directors will be selected by BSE.
Section 4.4 is amended to replace a provision requiring a
super-majority of director votes in favor of BSX taking certain
significant actions, such as entry into a new line of business or
replacing BSE as BSX's regulatory service provider, with more general
authority of BSE to veto or mandate actions as dictated by regulatory
requirements.
Article VII and Sections 8.2 and 8.3 are amended to remove
provisions that allow members to exercise rights of first refusal in
the event that one member proposes to transfer its ownership interests
in BSX to another member or BSX proposes to issue additional units of
ownership.
Section 8.4(f) (redesignated as 8.2(f)) is amended to
clarify terms used to describe certain ownership interests in a Member
of BSX.
Various amendments are being made to delete references to
BeX.
Sections 8.5 and 8.6 (redesignated as Sections 8.3 and
8.4), which restricted ownership and voting of ownership interests in
BSX above the 20% level by a BeX participant or its affiliates, are
being retained but amended. The amendments replace ``BeX Participant''
with ``BSE member'' to apply more broadly to any person that is a
member of the Exchange. However, the amendments also provide that the
restrictions of these provisions shall not be construed to limit the
ownership of membership interests by NASDAQ OMX or BSE. This proviso is
necessary because, as discussed in greater detail below, the Nasdaq
Exchange owns two broker-dealers, the ownership of which has been
previously approved by the Commission. These broker-dealers are, and
will continue to be, members of the Exchange.
Article 9, which governs distributions to Members, is
being amended to adopt a restriction on distributions of Regulatory
Funds comparable to the restriction proposed for inclusion in the
Exchange's By-Laws.
Article 13, which governs disputes among members via
arbitration, is being deleted to reflect the BSX's wholly owned status.
Section 16.2, which governs the confidentiality
obligations of Members, is being amended: (i) To clarify that Members
may use confidential information pursuant to the Act and the rules and
regulations thereunder; (ii) to stipulate that directors, officers, and
employees receiving confidential information must themselves be und
