Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval to a Proposed Rule Change, as Modified by Amendments No. 1 and 2 Thereto, Relating to Changes to Phlx's Governing Documents in Connection With the Acquisition of Phlx by The NASDAQ OMX Group, Inc., 42874-42888 [E8-16760]

Download as PDF 42874 Federal Register / Vol. 73, No. 142 / Wednesday, July 23, 2008 / Notices a national securities exchange.6 In particular, the Commission finds that the proposal is consistent with Section 6(b)(5) of the Act,7 which requires, among other things, that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Commission believes that this proposed rule change will better capture the floor-based activities of Former Floor Participants by focusing on the status of, or type of, activity performed by those persons. In addition, it should provide a clearer standard that should allow Exchange staff, as well as members and individuals, to better determine who is subject to the Series 7 requirement. This should make the administration, as well as compliance and enforcement, of the Series 7 requirement more efficient. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,8 that the proposed rule change (SR–Phlx–2008– 12), as modified by Amendment No. 1, be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 Florence E. Harmon, Acting Secretary. [FR Doc. E8–16758 Filed 7–22–08; 8:45 am] BILLING CODE 8010–01–P ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change in connection with the acquisition of the Exchange by The Nasdaq Stock Market, Inc., now known as The NASDAQ OMX Group, Inc. (‘‘NASDAQ OMX’’). On April 29, 2008, the proposed rule change was published for comment in the Federal Register.3 The Exchange filed Amendment Nos. 1 and 2 to the proposed rule change on May 30, 2008 and July 2, 2008, respectively.4 The Commission received no comments on the proposed rule change. This order provides notice of filing of Amendment No. 2 to the proposed rule change, and grants accelerated approval to the proposed rule change, as modified by Amendments Nos. 1 and 2. II. Background On November 7, 2007, NASDAQ OMX announced that it had entered into an agreement with the Exchange, pursuant to which NASDAQ OMX would acquire all of the common stock of the Exchange.5 Phlx shareholders would receive cash consideration for their common stock and would not retain any ownership interest in the Exchange. The proposed acquisition would be effected through the merger of Pinnacle Merger Corporation, Inc. (‘‘Merger 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 57703 (April 23, 2008), 73 FR 23293 (‘‘Notice’’). 4 In Amendment No. 1, Phlx represented that, on May 6, 2008, the Exchange obtained shareholder approval of the proposed rule change, as required by Delaware General Corporation Law, and that no further action by the Exchange in connection with the proposed rule change is required. See also General Instruction E to Form 19b–4 (concerning completion of action by a self-regulatory organization on a proposed rule change). Phlx also clarified that routing by NASDAQ Execution Services, LLC (‘‘NES’’) to Phlx, on behalf of The NASDAQ Stock Market LLC (‘‘NASDAQ Exchange’’), takes two forms. Amendment No. 1 is technical in nature, and therefore is not subject to notice and comment. In Amendment No. 2, Phlx filed the complete Certificate of Incorporation and amended By-Laws of NASDAQ OMX in order to propose their adoption as rules of Phlx. The By-Laws contained minor amendments to terminology to apply to Phlx all of the same provisions that are currently specifically applicable to the NASDAQ Exchange. The amended By-Laws were published for comment in a separate NASDAQ Exchange filing. See Securities Exchange Act Release No. 57761 (May 1, 2008), 73 FR 26182 (May 8, 2008) (notice of SR– NASDAQ–2008–035) (‘‘Nasdaq Stock Market Proposal’’). 5 The Exchange demutualized in 2004, though it is not publicly traded. See Securities Exchange Act Release No. 49098 (January 16, 2004), 69 FR 3974 (January 27, 2004) (SR–PHLX–2003–73) (approval order). 2 17 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–58179; File No. SR–Phlx– 2008–31] Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval to a Proposed Rule Change, as Modified by Amendments No. 1 and 2 Thereto, Relating to Changes to Phlx’s Governing Documents in Connection With the Acquisition of Phlx by The NASDAQ OMX Group, Inc. July 17, 2008. mstockstill on PROD1PC66 with NOTICES I. Introduction On April 21, 2008, the Philadelphia Stock Exchange, Inc. (‘‘Phlx’’ or 6 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 7 15 U.S.C. 78f(b)(5). 8 15 U.S.C. 78s(b)(2). 9 17 CFR 200.30–3(a)(12). VerDate Aug<31>2005 18:14 Jul 22, 2008 Jkt 214001 PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 Subsidiary’’), a Delaware corporation and wholly-owned subsidiary of NASDAQ OMX, with and into the Exchange, with the Exchange surviving the merger (the ‘‘Merger’’).6 The members of the board of directors of Merger Subsidiary would be selected by NASDAQ OMX from among the current Governors of the Exchange and would become the Board of Governors of Phlx (‘‘Board’’) immediately after the effective time of the Merger.7 The Exchange represents that the directors of Merger Subsidiary, and therefore the new Board, would satisfy the compositional requirements of the new Board, discussed below.8 After the Merger, the Exchange would be a wholly-owned subsidiary of NASDAQ OMX.9 NASDAQ OMX would operate the Exchange as a separate selfregulatory organization (‘‘SRO’’). Accordingly, Phlx would maintain its current registration as a national securities exchange, and maintain separate rules, membership rosters, and listings that would be distinct from the rules, membership rosters, and listings of NASDAQ OMX’s other national securities exchanges. Additionally, after the Merger, the Exchange would continue to operate the Stock Clearing Corporation of Philadelphia (‘‘SCCP’’),10 its wholly-owned clearing agency, and The Philadelphia Board of Trade (‘‘PBOT’’), its wholly-owned futures exchange subsidiary. Separately, NASDAQ OMX also entered into an agreement with the Boston Stock Exchange, Inc. (‘‘BSE’’), pursuant to which NASDAQ OMX would acquire all of the outstanding membership interests in BSE (‘‘BSE Acquisition’’).11 Following the closing of the BSE Acquisition and the Merger, NASDAQ OMX will be the sole owner of five SROs: NASDAQ Exchange, BSE, the 6 See proposed Section 1–1(ii) of the By-Laws (defining ‘‘NASDAQ OMX Merger’’). 7 See proposed Section 4–3(b) of the By-Laws and Notice, supra note 3, 73 FR at 23295. 8 See infra notes 61–69 and accompanying text (discussing proposed compositional requirements of the Board). 9 The Exchange would have a single class of common stock, all of which would be held by NASDAQ OMX. 10 See Securities Exchange Act Release No. 58180 (July 17, 2008) (SR–SCCP–2008–01) (approving changes to SCCP’s articles of incorporation, including language clarifying that all of the authorized shares of SCCP common stock are issued and outstanding and are held by Phlx). 11 See Securities Exchange Act Release No. 57757 (May 1, 2008), 73 FR 26159 (SR–BSE–2008–23) (notice of proposed rule change related to BSE Acquisition); Securities Exchange Act Release No. 57782 (May 6, 2008), 73 FR 27583 (May 13, 2008) (SR–BSECC–2008–01) (notice of proposal to amend the articles of organization and by-laws of the BSECC to reflect its proposed acquisition by NASDAQ OMX). E:\FR\FM\23JYN1.SGM 23JYN1 Federal Register / Vol. 73, No. 142 / Wednesday, July 23, 2008 / Notices Boston Stock Exchange Clearing Corporation (‘‘BSECC’’), Phlx, and SCCP (collectively, ‘‘SRO Subsidiaries’’). In the present filing, the Exchange has proposed to amend its certificate of incorporation (‘‘Certificate’’), by-laws (‘‘By-Laws’’), and certain rules (‘‘Rules’’) to reflect NASDAQ OMX’s proposed ownership of the Exchange. In general, the proposed changes are designed to address the Exchange’s proposed new ownership structure and conform Phlx’s governance provisions to those that are currently applicable to the NASDAQ Exchange. The Exchange is also using this opportunity to make several other changes to its governing documents to update certain language and make other minor changes that are not directly related to the proposed Merger.12 In addition, NASDAQ OMX has amended its By-Laws to make applicable to all of NASDAQ OMX’s SRO subsidiaries, including Phlx and SCCP (after the Merger), certain provisions of NASDAQ OMX’s Restated Certificate of Incorporation and NASDAQ OMX’s By-Laws. These provisions of NASDAQ OMX’s governing documents are designed to maintain the independence of each SRO subsidiary’s self-regulatory function, enable each SRO subsidiary to operate in a manner that complies with the federal securities laws, and facilitate the ability of each SRO subsidiary and the Commission to fulfill their regulatory and oversight obligations under the Act.13 mstockstill on PROD1PC66 with NOTICES III. Discussion After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.14 In particular, the Commission finds that the proposed rule change is consistent with: (1) Section 6(b)(1) of the Act,15 which requires a national securities exchange to be so organized and have the capacity to carry out the purposes of the Act and to enforce compliance by its members and persons associated with its 12 For example, as discussed in Section III.E.6, infra, the language relating to how the Exchange’s Weekly Bulletin is distributed would be updated to not restrict its distribution to mail, but rather to permit distribution by e-mail and posting on the Exchange’s Web site. See Section 12–5(d) of the ByLaws. 13 See Amendment No. 2, supra note 4 (including the amended By-Laws of NASDAQ OMX to the Phlx’s proposal). 14 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 15 15 U.S.C. 78f(b)(1). VerDate Aug<31>2005 18:14 Jul 22, 2008 Jkt 214001 members with the provisions of the Act; (2) Section 6(b)(3) of the Act,16 which requires that the rules of a national securities exchange assure the fair representation of its members in the selection of its directors and administration of its affairs, and provide that one or more directors shall be representative of issuers and investors and not be associated with a member of the exchange, broker, or dealer (the ‘‘fair representation requirement’’); and (3) Section 6(b)(5) of the Act,17 in that it is designed, among other things, to prevent fraudulent and manipulative acts and practices; to promote just and equitable principles of trade; to remove impediments to and perfect the mechanism of a free and open market and a national market system; and, in general, to protect investors and the public interest. As noted above, the Merger would result in NASDAQ OMX owning two additional SROs (Phlx and SCCP). The Commission believes that the ownership of Phlx and SCCP by the same public holding company that owns the NASDAQ Exchange would not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.18 Further, the Commission does not believe that the ownership by one holding company of two exchanges and one clearing agency presents any adverse competitive implications in the current marketplace. The Commission notes that it has previously approved proposals in which a holding company owns multiple SROs.19 The Commission continues to monitor such entities and notes that its experience to date with the issues raised by this ownership structure has not presented any concerns that have not been addressed, for example by the protections afforded at the holding company level. In particular, as discussed below, though NASDAQ OMX is not itself an SRO, its activities with respect to the operation of Phlx and SCCP must be consistent with, and must not interfere with, the self-regulatory obligations of Phlx and SCCP.20 Further, certain provisions of NASDAQ OMX’s Certificate of Incorporation and By-Laws are rules of an exchange if they are stated policies, practice, or U.S.C. 78f(b)(3). U.S.C. 78f(b)(5). 18 15 U.S.C. 78f(b)(8) and 15 U.S.C. 78q–1(b)(3)(I). 19 See, e.g., Securities Exchange Act Release No. 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (SR–NYSE–2005–77) (approving the combination of the New York Stock Exchange, Inc. and Archipelago Holdings, Inc.). 20 See infra Section III.C.1 (discussing the relationship between NASDAQ OMX and Phlx). PO 00000 16 15 17 15 Frm 00105 Fmt 4703 Sfmt 4703 42875 interpretations, as defined in Rule 19b– 4 under the Act, of the exchange, and must be filed with the Commission pursuant to Section 19(b) of the Act and Rule 19b–4 thereunder.21 Accordingly, Phlx has filed with the Commission the Certificate and amended By-Laws of NASDAQ OMX. Notably, NASDAQ OMX’s amended By-Laws would make applicable to all of NASDAQ OMX’s SRO subsidiaries, including Phlx and SCCP (after the Merger), certain provisions of NASDAQ OMX’s Restated Certificate of Incorporation and NASDAQ OMX’s By-Laws that are designed to maintain the independence of each of its SRO subsidiaries’ selfregulatory function. These provisions facilitate the ability of each SRO subsidiary and the Commission to fulfill their regulatory and oversight obligations under the Act. Furthermore, the Commission believes that there is robust competition among market centers, as exchanges face increasing competition from nonexchange entities that trade the same or similar financial instruments, such as alternative trading systems.22 In addition, despite consolidation among exchanges, other entities have recently applied for exchange registration, which evidences the continued ability of entities to enter the marketplace and further increase competition among SROs.23 Accordingly, as described above, the Commission does not believe that ownership by a single holding company of multiple SROs presents any burden on competition in violation of the Act.24 Nevertheless, the Commission 21 15 U.S.C. 78s(b) and 17 CFR 240.19b–4, respectively. 22 See, e.g., Securities Exchange Act Release No. 58092 (July 3, 2008), 73 FR 40144, 40144 (July 11, 2008) (where the Commission recognized that ‘‘[n]ational securities exchanges registered under Section 6(a) of the Exchange Act face increased competitive pressures from entities that trade the same or similar financial instruments * * *’’). 23 See, e.g., Securities Exchange Act Release No. 57322 (February 13, 2008), 73 FR 9370 (February 20, 2008) (File No. 10–182) (notice of filing of application and Amendment No. 1 thereto by BATS Exchange, Inc. for registration as a national securities exchange). 24 The Commission notes that NASDAQ OMX also entered into an agreement with the BSE, pursuant to which NASDAQ OMX would acquire all of the outstanding membership interests in BSE. See Securities Exchange Act Release Nos. 57757 (May 1, 2008), 73 FR 26159 (May 8, 2008) (SR–BSE– 2008–23) (notice of proposed rule change related to BSE Acquisition); and 57782 (May 6, 2008), 73 FR 27583 (May 13, 2008) (SR–BSECC–2008–01) (notice of proposal to amend the articles of organization and by-laws of the BSECC to reflect its proposed acquisition by NASDAQ OMX). If the Commission also were to approve the BSE Acquisition, NASDAQ OMX would be the sole owner of five SROs: NASDAQ Exchange, Phlx, SCCP, BSE, and the BSECC. The Commission will consider the E:\FR\FM\23JYN1.SGM Continued 23JYN1 42876 Federal Register / Vol. 73, No. 142 / Wednesday, July 23, 2008 / Notices will continue to monitor SROs, including those that are under common ownership, for compliance with the Act and the rules and regulations thereunder, as well as the SROs’ own rules. mstockstill on PROD1PC66 with NOTICES A. Capital Stock The proposed Merger would result in NASDAQ OMX owning all of the issued, authorized, and outstanding common stock of the Exchange.25 Accordingly, the Exchange proposes to amend the Certificate to reduce the amount of common and preferred stock, and to explicitly state that NASDAQ OMX will hold all of the common stock of the Exchange. Specifically, the Exchange proposes to: (1) Reduce the amount of common stock that the Exchange has authority to issue from one million to 100 shares; 26 (2) state that all authorized shares of common stock shall be issued, outstanding, and held by NASDAQ OMX; 27 (3) eliminate the designation of Class A and Class B common stock; 28 (4) reduce the amount of preferred stock that the Exchange has authority to issue from 100,000 to 100 shares; 29 and (5) state that only one share of preferred stock, the single share of Series A Preferred Stock,30 is implications of those proposed acquisitions when it reviews that proposal. 25 See proposed Article FOURTH(c)(iv) of the Certificate and proposed Section 29–4(c) of the ByLaws. 26 See proposed Article FOURTH of the Certificate. 27 See proposed Article FOURTH(c)(iv) of the Certificate. 28 See, e.g., proposed Article FOURTH of the Certificate and proposed Section 1–1(d) of the ByLaws. For example, Article FOURTH(b)(ii) sets forth the different dividend priority of holders of Class A common stock and Class B common stock in the event of a Liquidity Event (as defined in that subparagraph). This provision would be obsolete once only one class of common stock is authorized and outstanding. Correspondingly, the Exchange proposes to eliminate that language. Similarly, the Exchange proposes to eliminate Article FOURTH(c)(vi) of the Certificate, which governs the automatic conversion of Class A common stock, and language in Article FOURTH(c)(iii) of the Certificate that distinguishes between the voting rights of holders of Class A and Class B common stock. On January 20, 2007, all Class A common stock converted to Class B common stock shares. See Phlx Annual Report 2006 at 42. Upon conversion to Class B, the eligibility of holders of Class A shares for a contingent dividend terminated. See id. The former holders of the Class A shares otherwise continued to have the same rights and privileges, including voting, as the Class B holders. See id. 29 See proposed Article FOURTH of the Certificate. 30 The share of Series A Preferred Stock, which is currently issued and outstanding, is held by the Trust pursuant to the Trust Agreement. See Section 1–1(mm) of the By-Laws (defining ‘‘Trust’’) and Section 1–1(ee) of the By-Laws (defining ‘‘Trust Agreement’’). The Trustee of the Trust is required, under Section 4.1 of the Trust Agreement, to vote the share as directed by the vote of the Member Organization Representatives of Member VerDate Aug<31>2005 18:14 Jul 22, 2008 Jkt 214001 outstanding.31 In addition, the Exchange proposes to delete or amend several provisions applicable to the Exchange’s common stock that would become obsolete after the Merger because NASDAQ OMX would control 100% of the common stock.32 These changes are necessary to reflect the change in ownership of the Exchange after the Merger, and the Commission finds them to be consistent with the Act. B. Ownership Concentration Limitations and Voting Limits Phlx proposes to amend the Certificate to replace the current ownership concentration limitations and voting limitations with new restrictions that would recognize that, following the Merger, NASDAQ OMX would own all of the common stock of the Exchange. As discussed below, the Exchange proposes to delete language in Article FOURTH of the Certificate, which limits the amount of common stock of the Exchange that any person may own or vote, directly or indirectly, without prior Commission approval. In place of this restriction, Phlx proposes to amend its Certificate and By-Laws to prohibit Phlx from transferring or assigning its common stock without prior Commission approval and from issuing, transferring, or assigning its preferred stock without prior Commission approval.33 The current Certificate imposes limits on direct and indirect changes in control of Phlx through voting and Organizations entitled to vote. This voting arrangement is designed to give Members a voice in the management of the Exchange and is necessary because, under Delaware law, only stockholders can elect the directors of a Delaware corporation. See Securities Exchange Act Release No. 49098, supra note 5, 69 FR at 3979. The Merger would not result in a transfer of ownership of the Series A Preferred Stock. 31 See proposed Article FOURTH(b)(iv) of the Certificate. 32 For example, Phlx proposes to amend the dividend rights of common stock (see proposed Article FOURTH(c)(ii) of the Certificate) and eliminate provisions governing common stock incentive compensation. See infra note 146 and accompanying text (discussing the proposal to eliminate incentive compensation). 33 See proposed Article FOURTH(c)(iv) of the Certificate (restriction on transferring or assigning common stock). This subparagraph also provides that all authorized shares of common stock of the Exchange (100 shares) be issued and outstanding and reflects that all of the common stock would be held by NASDAQ OMX. The Commission notes that any proposed issuance of common stock would constitute an amendment to that provision, which would be subject to the filing of a proposed rule change with the Commission. See also proposed Section 29–4(c) of the By-Laws. See proposed Article FOURTH(a) and (b)(v) of the Certificate and proposed Section 29–4(d) of the By-Laws (restriction on issuing, transferring, or assigning preferred stock). See also infra note 43 (restrictions on the issuance of preferred stock). PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 ownership limits applicable to holders of its common stock. These provisions enable the Commission, as well as the Exchange, to monitor potential changes in control of the Exchange, and thereby assist both the Commission and the Exchange in carrying out their regulatory responsibilities under the Act.34 In particular, the Certificate currently provides that, unless approved by the Board and by the Commission under Section 19(b) of the Act, no Person (either alone or together with its Related Persons) may own (of record or beneficially), whether directly or indirectly, more than 40% of the thenoutstanding shares of Phlx common stock. To the extent that such Person (or its Related Persons) purports to own more than 40% of the then outstanding shares of common stock of the Exchange, the Person (and its Related Persons) is not entitled to exercise any rights and privileges incident to ownership of shares in excess of the 40% limit.35 The Certificate also provides that no Member (either alone or together with its Related Persons) may own, of record or beneficially, whether directly or indirectly, more than 20% of the then outstanding shares of common stock of the Exchange.36 Moreover, unless approved by the Board and by the Commission under Section 19(b) of the Act, no Person, either alone or together with its Related Persons, has any right to vote, or to give any consent or proxy with respect to, more than 20% of the then outstanding shares of common stock of the Exchange.37 Currently, the Board would need to approve an amendment to the By-Laws to permit any Person, together with its Related Persons, to exercise voting rights with respect to the shares in excess of the 20% voting limit or to own more than 40% of the outstanding shares of common stock.38 Such amendment would need to be filed with the Commission pursuant to Section 19(b) of the Act,39 which allows the Commission an opportunity to determine, among other things, whether any additional measures may be necessary to provide sufficient regulatory jurisdiction over the proposed controlling persons.40 34 See Securities Exchange Act Release No. 49098, supra note 5, 69 FR at 3985. 35 See Article FOURTH(b)(v)(A) of the Certificate. 36 See Article FOURTH(b)(v)(B) of the Certificate. 37 See Article FOURTH(b)(iii)(B) of the Certificate. 38 The Board cannot approve such amendment with respect to Members. 39 See Article FOURTH(b)(iii)(B)(1) and FOURTH(b)(v)(A)(1) of the Certificate. 40 See Securities Exchange Act Release No. 49098, supra note 5, 69 FR at 3985. The Commission notes E:\FR\FM\23JYN1.SGM 23JYN1 Federal Register / Vol. 73, No. 142 / Wednesday, July 23, 2008 / Notices mstockstill on PROD1PC66 with NOTICES As proposed, NASDAQ OMX would acquire all of the common stock of the Exchange. To reflect such ownership by one entity, the Exchange proposes to eliminate the 40% ownership and 20% voting limits. Phlx also proposes to eliminate the prohibition on any Member, either alone or together with its Related Persons, from owning (of record or beneficially) more than 20% of its outstanding common stock of the Exchange.41 In place of these restrictions, Phlx proposes to adopt new restrictions on the transfer or assignment of common stock. Specifically, proposed Article FOURTH(c)(iv) of the Certificate would be revised to state that: (1) All 100 authorized shares of common stock of the Exchange shall be issued and outstanding, and shall be held by NASDAQ OMX; and (2) NASDAQ OMX may not transfer or assign any shares of Phlx common stock to any entity, unless such transaction is approved by the Commission.42 The Exchange also proposes to adopt a restriction on the issuance of preferred stock, as well as similar restrictions on the transfer or assignment of preferred stock.43 In addition, the NASDAQ OMX Certificate of Incorporation imposes limits on direct and indirect changes in control, which are designed to prevent any shareholder from exercising undue control over the operation of its SRO subsidiaries and to ensure that its SRO subsidiaries and the Commission are able to carry out their regulatory obligations under the Act. Specifically, no person who beneficially owns shares of common stock, preferred stock, or notes of NASDAQ OMX in excess of 5% of the securities generally entitled to vote may vote the shares in excess of that this proposed rule change satisfies the requirements in existing Article FOURTH(b)(v)(A) and (b)(iii)(B) of the Certificate and that the Commission’s approval will allow NASDAQ OMX to exceed the existing ownership and voting limits in existing Article FOURTH. The proposed rule change will become operative upon consummation of the Merger. 41 See Article FOURTH(c)(v)(B) of the Certificate. 42 See also proposed Section 29–4(c) of the ByLaws. 43 See proposed Section 29–4(d) of the By-Laws. The Exchange would have authority to issue 100 shares of preferred stock, of which one share would be designated Series A Preferred. See proposed Article FOURTH of the Certificate. Phlx has not issued, and does not currently intend to issue, any preferred stock other than the Series A Preferred Stock. See Notice, supra note 3, 73 FR at 23293. The restrictions on transfer or assignment would also apply to the Series A Preferred Stock. See proposed Article FOURTH(a) of the Certificate; see also proposed Article FOURTH(b)(v) of the Certificate. The proposed Merger would not impact the ownership of the one outstanding share of Series A Preferred Stock, which will continue to be held by the Trust pursuant to the Trust Agreement. VerDate Aug<31>2005 18:14 Jul 22, 2008 Jkt 214001 5%.44 This limitation would mitigate the potential for any NASDAQ OMX shareholder to exercise undue control over the operations of Phlx, and it facilitates Phlx’s and the Commission’s ability to carry out their regulatory obligations under the Act. The NASDAQ OMX Board may approve exemptions from the 5% voting limitation for any person that is not a broker-dealer, an affiliate of a brokerdealer, or a person subject to a statutory disqualification under Section 3(a)(39) of the Act,45 provided that the NASDAQ OMX Board also determines that granting such exemption would be consistent with the self-regulatory obligations of its SRO subsidiary.46 Further, any such exemption from the 5% voting limitation would not be effective until approved by the Commission pursuant to Section 19 of the Act.47 Phlx’s proposed rule change reflects an amendment to the NASDAQ OMX By-Laws to require the NASDAQ OMX Board, prior to approving any exemption from the 5% voting limitation, to determine that granting such exemption would also be consistent with Phlx’s self-regulatory obligations.48 The Commission approved the existing limits in Phlx’s Certificate to enable the Exchange to carry out its selfregulatory responsibilities, and to enable the Commission to fulfill its responsibilities under the Act.49 After the Merger, these goals would be achieved by the proposed new restrictions on the transfer or assignment of Phlx capital stock and on the issuance of preferred stock, together with the ownership and voting restrictions on NASDAQ OMX shareholders. In particular, the simplified provisions of Phlx’s Certificate and By-Laws are tailored to an exchange whose common stock is 44 See Article Fourth.C, NASDAQ OMX Certificate. 45 15 U.S.C. 78c(a)(39). See Article Fourth.C.6, NASDAQ OMX Certificate. 46 Specifically, the NASDAQ OMX Board must determine that granting such exemption would (1) not reasonably be expected to diminish the quality of, or public confidence in, NASDAQ OMX or the other operations of NASDAQ OMX, on the ability to prevent fraudulent and manipulative acts and practices and on investors and the public, and (2) promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to an 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. See Article Fourth.C.6, NASDAQ OMX Certificate. 47 See Section 12.5, NASDAQ OMX By-Laws. 48 See proposed Section 12.5, NASDAQ OMX ByLaws. 49 See supra note 34 and accompanying text. PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 42877 wholly-owned by one company. By explicitly stating that NASDAQ OMX would be the owner of 100% of the Exchange’s issued and outstanding common stock, and that no preferred stock has been issued other than the Series A Preferred Stock held by the Trust, any purported issuance, transfer, or assignment of any capital stock would constitute an amendment to the Certificate and By-Laws and therefore be subject to a filing with the Commission under Section 19 of the Act. Moreover, the NASDAQ OMX Certificate currently includes restrictions on any person voting shares in excess of 5%. The changes to the NASDAQ OMX By-Laws would require the NASDAQ OMX Board, prior to approving an exemption from the 5% voting limitation, to determine that granting such exemption would be consistent with Phlx’s selfregulatory obligations. Accordingly, the Commission finds that the elimination of the current ownership and voting limits and the adoption of new controls on the issuance, transfer, and assignment of Phlx capital stock, together with the ownership and voting limitations in NASDAQ OMX’s Certificate and ByLaws, are designed to prevent any shareholder from exercising undue control over the operation of Phlx and to ensure that Phlx and the Commission are able to carry out their regulatory obligations under the Act and thereby should minimize the potential that a person could improperly interfere with or restrict the ability of the Commission or Phlx to effectively carry out their respective regulatory oversight responsibilities under the Act. C. Management of the Exchange 1. Relationship between NASDAQ OMX and Phlx After the merger, Phlx would become a subsidiary of NASDAQ OMX. Although NASDAQ OMX is not an SRO and, therefore, will not itself carry out regulatory functions, its activities with respect to the operation of Phlx must be consistent with, and not interfere with, Phlx’s self-regulatory obligations. Proposed changes to NASDAQ OMX’s By-Laws would make applicable to all of NASDAQ OMX’s SRO subsidiaries, including Phlx (after the Merger), certain provisions of NASDAQ OMX’s Restated Certificate of Incorporation and NASDAQ OMX’s By-Laws that are designed to maintain the independence of each of its SRO subsidiaries’ selfregulatory function, enable each SRO subsidiary to operate in a manner that complies with the federal securities laws, and facilitate the ability of each E:\FR\FM\23JYN1.SGM 23JYN1 42878 Federal Register / Vol. 73, No. 142 / Wednesday, July 23, 2008 / Notices mstockstill on PROD1PC66 with NOTICES SRO subsidiary and the Commission to fulfill their regulatory and oversight obligations under the Act.50 Although NASDAQ OMX will not itself carry out regulatory functions, its activities with respect to the operation of its SRO subsidiaries, including Phlx and SCCP, must be consistent with, and not interfere with, those subsidiaries’ self-regulatory obligations. The By-Laws of NASDAQ OMX include certain provisions to address this concern. In particular, the By-Laws of NASDAQ OMX specify that NASDAQ OMX and its officers, directors, employees, and agents irrevocably submit to the jurisdiction of the United States federal courts, the Commission, and each selfregulatory subsidiary of NASDAQ OMX for the purposes of any suit, action or proceeding pursuant to the United States federal securities laws, and the rules and regulations thereunder, arising out of, or relating to, the activities of any self-regulatory subsidiary.51 Further, NASDAQ OMX agreed to provide the Commission with access to its books and records.52 NASDAQ OMX also agreed to keep confidential non-public information relating to the selfregulatory function 53 of the Exchange and not to use such information for any non-regulatory purpose. In addition, the NASDAQ OMX Board, as well as its officers, employees, and agents are required to give due regard to the preservation of the independence of Phlx’s self-regulatory function.54 Similarly, the NASDAQ OMX Board, when evaluating any issue, would be required to take into account the potential impact on the integrity, continuity, and stability of the its SRO 50 See Amendment No. 2, supra note 4 (including the amended By-Laws of NASDAQ OMX to the Phlx’s proposal). 51 See proposed Section 12.3, NASDAQ OMX ByLaws. 52 See proposed Section 12.1(c), NASDAQ OMX By-Laws. To the extent that they relate to the activities of Phlx, all books, records, premises, officers, directors, and employees of NASDAQ OMX would be deemed to be those of the Phlx. See id. 53 This requirement to keep confidential nonpublic information relating to the self-regulatory function shall not limit the Commission’s ability to access and examine such information or limit the ability of directors, officers, or employees of the Nasdaq Holding Company from disclosing such information to the Commission. See proposed Section 12.1(b), NASDAQ OMX By-Laws. Holding companies with SRO subsidiaries have undertaken similar commitments. See, e.g., Securities Exchange Act Release No. 56955 (December 13, 2007), 72 FR 71979, 71983 (December 19, 2007) (SR–ISE–2007– 101) (order approving the acquisition of International Securities Exchange, LLC’s parent, International Securities Exchange Holdings, Inc., by Eurex Frankfurt AG). 54 See Section 12.1(a), NASDAQ OMX By-Laws. VerDate Aug<31>2005 18:14 Jul 22, 2008 Jkt 214001 subsidiaries.55 Finally, the NASDAQ OMX By-Laws require that any changes to the NASDAQ OMX Certificate and By-Laws be submitted to the Board of Directors of each of its SRO subsidiaries, including the Exchange, and, if such amendment is required to be filed with the Commission pursuant to Section 19(b) of the Act, such change shall not be effective until filed with, or filed with and approved by, the Commission. The Commission believes that the NASDAQ OMX By-Laws, as amended to accommodate the Merger, are designed to facilitate the Phlx’s ability to fulfill its self-regulatory obligations and are, therefore, consistent with the Act. In particular, the Commission believes these changes are consistent with Section 6(b)(1) of the Act,56 which requires, among other things, that a national securities exchange be so organized and have the capacity to carry out the purposes of the Act, and to comply and enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of the exchange. The Commission also believes that under Section 20(a) of the Act 57 any person with a controlling interest in NASDAQ OMX would be jointly and severally liable with and to the same extent that NASDAQ OMX is liable under any provision of the Act, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action. In addition, Section 20(e) of the Act 58 creates aiding and abetting liability for any person who knowingly provides substantial assistance to another person in violation of any provision of the Act or rule thereunder. Further, Section 21C of the Act 59 authorizes the Commission to enter a cease-and-desist order against any person who has been ‘‘a cause of’’ a violation of any provision of the Act through an act or omission that the person knew or should have known would contribute to the violation. 2. Composition and Term of Board The Exchange proposes to give its Board discretion to determine its size from time to time,60 and after the Merger the Board would likely be reduced in 55 See proposed Section 12.7, NASDAQ OMX ByLaws. 56 15 U.S.C. 78f(b)(1). 57 15 U.S.C. 78t(a). 58 15 U.S.C. 78t(e). 59 15 U.S.C. 78u–3. 60 See proposed Article SIXTH(a) of the Certificate and proposed Section 4–1 of the ByLaws. PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 size from its current slate of 23 Governors. Specifically, the Board would include one Governor who is the CEO, one Governor who is the ViceChair of the Board,61 one PBOT Governor,62 one Member Governor,63 one Stockholder Governor,64 and a number of Independent Governors determined by the Board,65 including the Designated Independent Governors. ‘‘Designated Independent Governors’’ would continue to be defined as those Independent Governors who are voted for by Members, and who are then elected to the Board by the Holder of the Series A Preferred Stock according to the vote of the Members.66 Though it may be reduced in size, the Board would be composed, as it currently is, of a majority of Independent Governors, who, by definition, would have no Material Relationship with the Exchange, any affiliate of the Exchange, any Member of the Exchange, any Member affiliate, or any issuer of securities that are listed or 61 The Vice-Chair would continue to be an individual who, anytime within the prior three years, has been a Member primarily engaged in business on the Exchange’s equity market or equity options market or who is a general partner, executive officer (vice-president or above) or a Member associated with a Member Organization primarily engaged in business on the Exchange’s equity market or equity options market. See Section 5–3 of the By-Laws. The term ‘‘Member Organization’’ is defined in Section 1–1(v) of the By-Laws. 62 A PBOT Governor would continue to be defined as a Governor who is a member of PBOT and is duly elected to fill the one vacancy on the Board allocated to the PBOT Governor. See Section 1–1(aa) of the By-Laws. 63 A Member Governor would continue to be defined as a Governor who is a Member or a general partner or an executive officer (vice-president and above) of a Member Organization and is duly elected to fill the vacancy on the Board allocated to the Member Governor. See Section 1–1(u) of the By-Laws. Phlx proposes to amend its Certificate and By-Laws to reflect its proposal that the new Board consist of only one Member Governor. See proposed Article SIXTH(a)(ii) of the Certificate and proposed Sections 1–1(e), 1–1(u) and 4–1 of the By-Laws. 64 See proposed Section 4–1 of the By-Laws and proposed Article SIXTH(a)(iii) of the Certificate. A Stockholder Governor would be defined as a Governor who is an officer, director (or a person in a similar position in business entities that are not corporations), designee or an employee of a holder of common stock or any affiliate or subsidiary of such holder of common stock and is duly elected to fill the vacancy on the Board allocated to the Stockholder Governor. See proposed Section 1– 1(hh) of the By-Laws; see also proposed Article SIXTH(a)(ix) of the Certificate. 65 As discussed below, Independent Governors would continue to constitute a majority of the Board, and Designated Independent Governors, would, together with the Member Governor and the PBOT Governor, equal at least 20% of the total number of Governors. See Section 4–1 of the ByLaws. 66 See Section 1–1(f) of the By-Laws and Article FOURTH(a)(iii) of the Certificate, which Phlx proposes to renumber (see proposed Article FOURTH(b)(iii)). E:\FR\FM\23JYN1.SGM 23JYN1 Federal Register / Vol. 73, No. 142 / Wednesday, July 23, 2008 / Notices mstockstill on PROD1PC66 with NOTICES traded on the Exchange or a facility of the Exchange.67 Notably, the new Board would select its Chair from among its members that are Independent Governors, instead of the current arrangement where the CEO also serves as the Chairman of the Board.68 The Commission finds that the proposed changes regarding the composition of the Board are consistent with the Act, including Section 6(b)(1) of the Act,69 which requires, among other things, that a national securities exchange be organized to carry out the purposes of the Act and comply with the requirements of the Act. Phlx proposes to set forth in detail the powers and duties of the Chair and Vice-Chair.70 This provision is intended to be generally consistent with current NASDAQ Exchange By-Law Article VII, and the Commission finds it consistent with the Act. The Exchange also proposes to change the term of office for all Governors from three years to one year 71 and eliminate term limits for Governors.72 The Commission finds this consistent with the Act and notes that establishing oneyear terms for directors is consistent with other proposals previously approved by the Commission.73 Further, the Commission notes that neither Phlx’s proposed parent company, NASDAQ OMX, nor NASDAQ Exchange have term limits for their respective boards.74 67 See proposed Section 4–1 of the By-Laws (the Board shall be composed of a majority of Independent Governors); proposed Article SIXTH(a)(vii) of the Certificate (defining ‘‘Independent Governor’’). The terms ‘‘Independent,’’ ‘‘Material Relationship,’’ and ‘‘Member’’ are defined in Sections 1–1(o), 1–1(s), and 1–1(t) of the By-Laws, respectively. 68 See proposed Section 5–2 of the By-Laws. Currently, the Chairman of the Board is the CEO. See Article SIXTH(a)(v) of the Certificate and Sections 4–1 and 5–1 of the By-Laws (all providing that the Chairman of the Board shall be the individual then holding the office of CEO). 69 15 U.S.C. 78f(b)(1). 70 See Article V of the By-Laws. 71 See proposed Section 4–3(a) of the By-Laws. That section currently provides that the Stockholder Governors, Independent Governors (including the Designated Independent Governors), Member Governors, and the PBOT Governor serve for three-year terms, which are staggered. 72 See proposed Section 4–3(a) of the By-Laws. That section currently prohibits Governors, except for the Chairman of the Board and the ViceChairman of the Board, from serving for more than two consecutive full terms. 73 See, e.g., Securities Exchange Act Release No. 55293 (February 14, 2007), 72 FR 8033 (February 22, 2007) (SR–NYSE–2006–120) (approving oneyear terms for NYSE Euronext directors). Additionally, the Restated Certificate of Incorporation of the NASDAQ Stock Market, Inc. also provides for one-year terms for directors other than Preferred Stock Directors. 74 See Article IV of the NASDAQ OMX By-Laws and Article III of the NASDAQ Exchange By-Laws. VerDate Aug<31>2005 18:14 Jul 22, 2008 Jkt 214001 In addition, Phlx proposes that, in the event of a vacancy in the office of ViceChair, the Nominating, Elections and Governance Committee would select a replacement to serve the remainder of the unexpired term, subject to approval by the Board.75 This provision is intended to be generally consistent with current NASDAQ Exchange By-Law Article IV. Section 4–19 of the By-Laws designates, with specificity, when a Governor’s term begins, and provides that a Governor’s term ends only when his or her successor is elected and qualifies, or when the Governor resigns or is removed. The Exchange proposes to modify this provision to eliminate the reference to a Governor’s term beginning at a particular time and provides that a Governor’s term will end when a successor is elected or upon their earlier resignation, removal, or death. The Commission finds these changes consistent with the Act and believes that they should provide additional clarity and, therefore, would facilitate orderly successions of Governors.76 3. Nomination, Election, and Removal of Non-Designated Governors The Exchange proposes changes to the nomination and election process for non-Designated Governors (i.e., Independent Governors, the Vice-Chair, the CEO, and the Shareholder Governor). These changes are primarily designed to simplify the process to accommodate a single Stockholder. Currently, the non-Designated Governors are nominated through different mechanisms, including: (1) The Nominating, Elections and Governance Committee nominates the individual then holding the office of CEO as Chairman of the Board for election by the Stockholders; (2) the Chairman recommends a Vice-Chairman candidate to the Nominating, Elections and Governance Committee for election by Stockholders; and (3) the Nominating, Elections and Governance Committee review the qualifications of nominees, including independent nominees, for the Stockholder Governors and Independent Governors (excluding the Designated Independent Governors).77 Phlx now proposes that the holder of its common stock present for nomination to the Nominating, Elections and Governance Committee proposed Section 5–3 of the By-Laws. proposed change is identical to a proposal by another national securities exchange recently approved by the Commission. See Securities Exchange Act Release No. 56955 (December 13, 2007), 72 FR 71979 (SR–ISE–2007–101) (approving proposed Section 3.2 of the by-laws of the International Securities Exchange, LLC). 77 See Section 28–3 of the By-Laws. PO 00000 75 See 76 This Frm 00109 Fmt 4703 Sfmt 4703 42879 the candidates for Vice-Chair, Stockholder Governor, and Independent Governors.78 These candidates would be placed on the ballot and elected by the holder of common stock at the annual meeting of Shareholders. Thus, NASDAQ OMX, as sole holder of common stock of the Exchange, would nominate and elect all of the nonDesignated Governors. This approach is consistent with the NASDAQ Exchange’s processes for nomination of non-Member Representative Directors by a nominating committee that may seek the input and recommendations of NASDAQ OMX as the owner of the NASDAQ Exchange.79 The Exchange also proposes to change the process for removing nonDesignated Governors. Currently, nonDesignated Governors may be removed only for cause, except that upon a recommendation by the Board to Stockholders such Governors may be removed without cause. An affirmative vote of two-thirds of the total number of Stockholders entitled to vote thereon is required to remove a non-Designated Governor. The proposed change would more explicitly permit the removal of non-Designated Governors with or without cause, and to allow removal of such Governors by the affirmative vote of a majority of the voting power entitled to vote for their election (i.e., NASDAQ OMX).80 This change would reflect the Exchange’s proposed status as a wholly-owned subsidiary of NASDAQ OMX. The Board would continue to have the ability to recommend to the Stockholder that a Governor be removed for any reason deemed sufficient by the Board,81 but such recommendation would no longer be a prerequisite for removal. The Commission finds that the proposed changes to the nomination, election, and removal processes for nonDesignated Governors are consistent with Section 6(b)(1) of the Act, which 78 See proposed Section 28–3 of the By-Laws. As proposed, Section 28–3 has no provision for the nomination or election of the Chair of the Board because the Board would appoint its Chair from among the members of the Board who are Independent Governors. See proposed Section 5–2 of the By-Laws. 79 See NASDAQ Exchange By-Law Article III, Section 6. 80 See proposed Article SIXTH (b)(i) of the Certificate. The Exchange also proposes to allow any action required or permitted to be taken at any annual or special meeting of Stockholders to be taken by Stockholders (i.e., NASDAQ OMX) without a meeting, unless otherwise specified in the Certificate. See proposed Article SEVENTH of the Certificate and proposed Section 28–13 of the ByLaws. In light NASDAQ OMX’s ownership of all of the common stock of the Exchange, the Commission finds this change to be consistent with the Act. 81 See proposed Section 4–4 of the By-Laws. E:\FR\FM\23JYN1.SGM 23JYN1 42880 Federal Register / Vol. 73, No. 142 / Wednesday, July 23, 2008 / Notices requires an exchange to be organized in a manner that allows it to carry out the purposes of the Act. The proposed changes appropriately streamline the nomination, election, and removal processes for non-Designated Governors in light of NASDAQ OMX’s ownership of all of the common stock of the Exchange. Fair Representation Section 6(b)(3) of the Act requires that the rules of an exchange assure fair representation of its members in the selection of its directors and administration of its affairs.82 As discussed above, the Exchange proposes to give its Board discretion to determine its size.83 Members would, nevertheless, continue to select at least 20% of the Board after the Merger, including the Member Governor, the PBOT Governor,84 and the Designated Independent Governors (collectively, the ‘‘Designated Governors’’).85 These Designated Governors would continue to be elected by the Holder of Series A Preferred Stock (i.e., the Trust 86), and therefore they would continue to be elected indirectly by the Members. Phlx proposes to change Section 3–7(a) of the By-Laws, which prohibits a Member Organization from endorsing more than one nominee for Governor, to clarify that Member Organizations are prohibited from endorsing more than one nominee per vacancy. This proposed change is designed to clarify the rights of Members in the independent nomination process by eliminating any ambiguity that each Member Organization may endorse one independent nominee per Designated Governor vacancy, not one independent nominee per election. Designated Governors currently may be removed only for cause, unless the Board recommends that they be removed without cause. In either case, removal of a Designated Governor requires a vote by Member Organization Representatives at an annual or special meeting.87 Phlx proposes to simplify the process to provide that Designated 82 15 U.S.C. 78f(b)(3). supra note 60 and accompanying text. 84 A PBOT Governor would continue to be defined as a Governor who is a member of PBOT and is duly elected to fill the one vacancy on the Board allocated to the PBOT Governor. See Section 1–1(aa) of the By-Laws; see also proposed Article SIXTH(a)(i) of the Certificate. 85 The nominations process for Designated Governors (i.e., the Designated Independent Governors, the Member Governor, and the PBOT Governor) is described in Section 3–7 of the ByLaws. 86 See supra note 30 (discussing the purpose and operation of the Trust). 87 See Article SIXTH(b)(iii) of the Certificate. mstockstill on PROD1PC66 with NOTICES 83 See VerDate Aug<31>2005 18:14 Jul 22, 2008 Jkt 214001 Governors may be removed, with or without cause, only by vote of Member Organization Representatives at an annual or special meeting.88 The Board would continue to have the ability to recommend to the Members that a Designated Governor be removed for any reason deemed sufficient by the Board,89 but such recommendation would no longer be a prerequisite for removal. Importantly, the Commission notes that the Designated Governors, which are selected by a vote of the Members, may only be removed upon the affirmative vote of Members. While the Board may recommend to the Members that a Designated Governor be removed, the Board may not unilaterally remove a Designated Governor. In addition, Members will be represented on key Standing Committees. Specifically, under the ByLaws, at least half of the Admissions Committee and the Foreign Currency Options Committee will continue to be required to be permit holders or participants or be associated with a Member Organization or participant organization,90 and at least half of the Options Committee will continue to be required to be permit holders or be associated with a Member Organization.91 Further, the By-Laws will continue to require that the Business Conduct Committee share jurisdiction over the revocation of permits and foreign currency options participations in connection with disciplinary matters with the Admissions Committee.92 Several Standing Committees also may review proposed rule changes before such proposals are presented to the Executive Committee or the Board for approval for filing with the Commission. These committees on which Members serve would continue to perform this function after the Merger. For example, the Business Conduct Committee may review proposed changes to the disciplinary provisions that are set forth in Rule 960 before such proposals are presented to the Executive Committee or the Board.93 88 See proposed Section 3–3 of the By-Laws. A special meeting of the Members could be called either by Members, the Board, or the Chair of the Board. See Section 3–2(b) of the By-Laws. Such Governors could be removed by the holder of the Series A Preferred Stock following a vote of the Member Organization Representatives. See proposed Article SIXTH (b)(ii) of the Certificate. 89 See proposed Section 4–4 of the By-Laws. 90 See Sections 10–6(a) and 10–17 of the By-Laws. 91 See Section 10–20 of the By-Laws. 92 See Section 10–6(b) of the By-Laws. 93 The Business Conduct Committee is composed of nine members as follows: three Independent Governors; one Member or person associated with a Member Organization who conducts business on PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 Further, the Options Committee makes or recommends for adoption such rules as it deems necessary for the convenient and orderly transaction of business upon the equity and index options trading floor, as well as makes and enforces rules and regulations relating to order, decorum, health, safety and welfare on the equity and index options trading floor and the immediately adjacent premises of the Exchange.94 Additionally, the Exchange proposes to ensure Member representation on the Quality of Markets Committee.95 Finally, Designated Governors, which are selected by Members, would compose at least 20% of the Executive Committee.96 The Commission finds that the selection of at least 20% of Governors of the Board,97 the manner in which such Designated Governors will be nominated and elected,98 the process for removing Designated Governors,99 together with the representation of Members on key Standing Committees, satisfy the fair representation requirements of Section 6(b)(3) of the Act,100 which requires that an exchange assure a fair representation of its members in the selection of its directors and administration of its affairs. The Commission also notes that these provisions are consistent with previous proposals approved by the Commission.101 4. Special Committee of the Board Phlx proposes to delete references to a ‘‘special committee of the Board of Governors’’ that hears appeals from determinations of the Nominating, Elections and Governance Committee on appeals concerning eligibility for election to the Board.102 The special committee had been composed of Governors who were not then standing for re-election. However, because the XLE; one Member who conducts options business at the Exchange; and four persons who are Members or persons associated with a Member Organization. See Section 10–11 of the By-Laws. 94 See Section 10–20 of the By-Laws. 95 See infra notes 133–134 and accompanying text (discussing Member representation on the Quality of Markets Committee). 96 See infra text accompanying note 110 (discussing the composition of the Executive Committee). 97 See proposed Article SIXTH(a)(iv) of the Certificate and proposed Section 4–1 of the ByLaws. 98 See supra Section III.C.2 and infra Section III.C.4, respectively. 99 See supra Section III.C.3. 100 15 U.S.C. 78f(b)(3). 101 See, e.g., Securities Exchange Act Release Nos. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) (approving the application of the NASDAQ Exchange for registration as a national securities exchange) and 49098, supra note 5. 102 See proposed Section 11–1(b) of the By-Laws. E:\FR\FM\23JYN1.SGM 23JYN1 Federal Register / Vol. 73, No. 142 / Wednesday, July 23, 2008 / Notices Exchange proposes to eliminate the staggering of the Board and require all Governors to be elected annually, it would not be possible to form such a special committee. Instead, the Exchange proposes that the full Board preside over such appeals.103 The Commission finds that this proposal is consistent with Sections 6(b)(1) and 6(b)(3) of the Act.104 In particular, the Commission notes that Designated Governors selected by the Members will constitute at least 20% of the Board, and therefore Members will be represented when the Board acts as an adjudicative body to hear appeals concerning eligibility for election to the Board. 5. Standing Committees of the Board The Exchange proposes several changes to its Standing Committees, which reflect incremental modifications to the structure and scope of its current committees. As discussed below, the Commission finds these changes to be consistent with the Act, including Section 6(b)(1) of the Act,105 which requires that a national securities exchange be organized in such a manner as to allow the exchange to carry out the purposes of the Act, comply with the requirements of the Act, and enforce compliance with the Act by its members and persons associated with its members. Automation Committee and the Marketing Committee. The Exchange proposes to eliminate two Standing Committees: the Automation Committee 106 and the Marketing Committee.107 According to the Exchange, these committees are no longer necessary because, after the NASDAQ OMX Merger, these functions would be guided and handled at the parent company level.108 The Commission believes that the elimination of these Exchange committees, combined with Phlx’s reliance on NASDAQ OMX to perform the functions of those committees, is consistent with Section 6(b)(1) of the Act, which requires a national securities exchange to be so organized and have the capacity to carry out the purposes of the Act and to enforce compliance by its 103 See id. U.S.C. 78f(b)(1) and 15 U.S.C. 78f(b)(3). 105 15 U.S.C. 78f(b)(1). 106 See Section 10–10 of the By-Laws. The Automation Committee currently is charged with periodically reviewing and approving automation plans affecting the trading floors, subsidiaries and the Exchange’s administrative areas. 107 See Section 10–18 of the By-Laws. The Marketing Committee currently acts in an advisory capacity to the officers of the Exchange in marketing the services of the Exchange. 108 See Notice, supra note 3, 73 FR at 23295. mstockstill on PROD1PC66 with NOTICES 104 15 VerDate Aug<31>2005 18:14 Jul 22, 2008 Jkt 214001 members and persons associated with its members with the provisions of the Act. The Commission notes that, as the Exchange contemplates future changes to its automated trading systems, the Exchange would be required to file any changes to its rules with the Commission pursuant to Section 19(b) of the Act and Rule 19b–4 thereunder.109 Executive Committee. In addition, the Exchange proposes to change the composition of the Executive Committee and limit its authority. Currently, Section 10–14(a) provides that the Executive Committee be composed of the following nine members: the Chairman of the Board, who serves as Chair of the Committee; the ViceChairman of the Board; the Chairman of the Finance Committee; the Chairmen of two floor committees; two Stockholder Governors; and two Independent Governors. Phlx proposes to amend this provision to allow the Board to determine the size of the committee, except that the Committee must include: the Chair of the Board, who would be the Chair of the Committee; the ViceChair of the Board; the Stockholder Governor; and a number of Designated Governors equal to at least 20% of the total number of Governors on the committee.110 The Executive Committee currently appoints, subject to approval by the Board, all members (except the Chairmen) of the Standing Committees, excluding the Nominating, Elections and Governance Committee and the Executive Committee.111 The Exchange now proposes to instead provide that the Board, instead of the Executive Committee, select all members of Standing Committees,112 including most Standing Committee Chairs.113 This 109 15 U.S.C. 78s(b) and 17 CFR 240.19b–4, respectively. 110 See supra text accompanying note 96 (discussing the representation of Designated Governors on the Executive Committee). 111 See Sections 10–1(b), 10–4, and 10–14(c) of the By-Laws. Chairmen of the Standing Committees are selected, subject to Board approval, by the Nominating, Elections and Governance Committee. See Section 10–19(d) of the By-Laws. 112 See proposed Sections 10–1(b) and 10–4 of the By-Laws. Correspondingly, the Exchange proposes to delete Sections 10–14(c) and 10–19(d) of the ByLaws which provide, respectively, that the Executive Committee shall appoint members of the Standing Committees (excluding their Chairmen), subject to Board approval, and that the Nominating, Elections and Governance Committee shall select all Standing Committee Chairmen, subject to approval by the Board. 113 As amended, the By-Laws would specifically provide that: (1) The Chair of the Board is the Chair of the Executive Committee; (2) the Chair of the Board is the Chair of the Finance Committee; and (3) the Nominating, Elections and Governance Committee select its own Chair from among the PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 42881 change would conform the Exchange’s practice to how NASDAQ OMX currently operates.114 The Commission finds that these changes are consistent with Sections 6(b)(1) and 6(b)(3) of the Act.115 Audit Committee. Phlx proposes to modify the responsibilities of the Audit Committee to conform to similar responsibilities and processes of the Audit Committees of NASDAQ OMX and the NASDAQ Exchange.116 Specifically, Phlx proposes to replace the enumerated duties of the committee with respect to external auditors with a more general charge to select, evaluate and, where appropriate, replace the Exchange’s independent auditors (or nominate the independent auditors to be proposed for ratification by the Stockholders).117 Phlx would also confer to the committee more specific responsibilities with respect to the Exchange’s Internal Audit Department (‘‘IAD’’), including authority to hire or terminate the head of the IAD and determine the IAD’s budget. Further, Phlx proposes to eliminate the requirement that the committee review all legal matters that may materially impact the Exchange’s financial statements and all regulatory examination, inspection, and other reports. The Commission finds these changes consistent with Section 6(b)(1) of the Act, and notes that such changes are based on the Audit Committees of NASDAQ OMX and the NASDAQ Exchange. Finance Committee. The Exchange proposes to change the composition of the Finance Committee and update the description of the committee’s responsibilities.118 Currently, the committee is composed of the following nine members: the Chairman of the Board; the Vice-Chairman of the Board; one Stockholder Governor; four Independent Governors, and two Members or persons associated with a Member Organization, one of whom conducts business primarily on XLE or on the equity options floor. Phlx members of such Committee who are Independent Governors. See proposed Sections 10–14(a), 10–15 and 10–19(a) of the By-Laws, respectively. 114 See NASDAQ OMX By-Law Article IV, Section 4.13. 115 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78f(b)(3). 116 See NASDAQ OMX Audit Committee Charter approved April 18, 2007 and NASDAQ Exchange By-Law Article III. 117 Compare Section 10–9(b) of the By-Laws with proposed Section 10–9 of the By-Laws. 118 See proposed Section 10–15 of the By-Laws. The Exchange proposed to delete the Supplementary Material in Section 10–15, which sets forth a series of directives issued by the Board that were specifically applicable to the Finance Committee. These proposed changes are not directly related to the Merger. E:\FR\FM\23JYN1.SGM 23JYN1 42882 Federal Register / Vol. 73, No. 142 / Wednesday, July 23, 2008 / Notices mstockstill on PROD1PC66 with NOTICES proposes that following the Merger, the Finance Committee would be composed of: the Chair of the Board; the ViceChair of the Board; a number of Designated Independent Governors equal to at least 20% of the total number of voting members on the Finance Committee; two Members or persons associated with a Member Organization who may be Governors one of whom conducts business on XLE or on the equity options floor; 119 and such other Governors as the Board may appoint.120 Phlx states that the elimination of the requirement that one of the committee members ‘‘primarily’’ conduct business on XLE or the equities option floor would allow a greater pool of candidates to be eligible to serve on the Finance Committee and is consistent with a recent change to Section 10–11 of the By-Laws.121 The Exchange also would eliminate the current restriction that prohibits the Chair of the Board from creating tie votes of the Finance Committee, and would designate the Chair of the Board as the Finance Committee Chair.122 Finally, the Exchange proposes to delete the Supplementary Material that sets forth a series of directives issued by the Board that are specifically applicable to the Finance Committee.123 Elimination of the Supplementary Material is designed to allow the Board flexibility in establishing capital expenditure policies, which may include delegation to Board committees and/or officers. The Exchange states that this more flexible approach is consistent with NASDAQ OMX’s processes.124 The Commission finds that this proposal is 119 Under the proposal, these committee members need not be Governors, but any non-Governor would serve in a non-voting capacity. See proposed Section 10–15 of the By-Laws. 120 See proposed Section 10–15 of the By-Laws. 121 See Notice, supra note 3, 73 FR at 23296. The Commission notes that this change is similar to a recently-approved change to a different By-Law. See Securities Exchange Act Release No. 57023 (December 20, 2007), 72 FR 74398 (December 31, 2007) (SR–Phlx–2007–83) (approving a proposal to similarly expand the type of business that may be conducted to qualify as a Business Conduct Committee member). 122 Under the current provision, the Chair of the Committee must be either the Vice-Chair, Stockholder Governor, or Member Governor. 123 Currently, the supplementary material relates to directives that are applicable to the Finance Committee in the exercise of its duties, powers and authority under the By-Laws. For example, the supplementary material states that the Finance Committee may authorize certain expenditures of any budgeted line items; may delegate to the staff of the Exchange so much of its authority to make expenditures as it deems appropriate; and shall perform its functions and act with the same powers and limitations for the Exchange and all subsidiaries of the Exchange. See Supplementary Material to Section 10–15 of the By-Laws. 124 See Notice, supra note 3, 73 FR at 23296. VerDate Aug<31>2005 18:14 Jul 22, 2008 Jkt 214001 consistent with Section 6(b)(1) of the Act, and notes that Phlx’s obligation to adequately fund its regulatory oversight program 125 is unaffected by the proposed elimination of the Supplementary Material to Section 10– 15 of the By-Laws. Nominating, Elections and Governance Committee. The Exchange also proposes certain changes to the composition of the Nominating, Elections and Governance Committee. Currently, the committee is composed of three Independent Governors, at least one of which is a Designated Independent Governor, one Stockholder Governor, and one Member Governor. As proposed, the committee would be composed of four Independent Governors and one Member Governor.126 The Exchange also proposes to delete the term limit applicable to this committee and delete the prohibition against members of this committee standing for re-election to the Board. These proposals are designed, according to the Exchange, to increase the pool of candidates eligible to serve on the Committee and the Board.127 The Commission finds that these changes are consistent with Section 6(b)(1) of the Act. The Commission notes that it recently approved a similar Phlx proposal to increase the pool of candidates eligible to serve on one of Phlx’s Standing Committees.128 Quality of Markets Committee. Phlx proposes to clarify the requirement that the Quality of Markets Committee include at least as many Independent members 129 as it does the ‘‘combined number’’ of Stockholder-chosen members and members who are Members of the Exchange.130 The addition of the language ‘‘combined number’’ makes clear that the number of Stockholder-chosen committee members 131 are added to the number of Members serving on the committee 132 and that total is then compared to the number of ‘‘Independent’’ committee members, who do not have to be Governors. Additionally, the Exchange proposes to adopt a new requirement that at least U.S.C. 78s(g). proposed Section 10–19(a) of the By-Laws. 127 See Notice, supra note 3, 73 FR at 23296. 128 See Securities Exchange Act Release No. 57023, supra note 121. 129 ‘‘Independent’’ committee members would be ‘‘Independent’’ within the meaning of Section 1– 1(o) of the By-Laws. 130 See proposed Section 10–21 of the By-Laws. 131 NASDAQ OMX, as Stockholder, would select the Stockholder member(s) of this committee. See Notice, supra note 3, 73 FR 23296. 132 The Board would select the Member(s) serving on the committee pursuant to Section 10–1(b) of the By-Laws. PO 00000 125 15 126 See Frm 00112 Fmt 4703 Sfmt 4703 20% of the total number of committee members be Members.133 This is designed to provide fair representation of Phlx members on this committee and harmonize the role of the committee with that of the NASDAQ Exchange’s Quality of Markets Committee.134 6. Officers of the Exchange The Exchange proposes various changes with respect to officers of the Exchange. First, the Exchange proposes to separate the roles of Chairman of the Board and CEO. The CEO would be ineligible to serve as Chair of the Board,135 and the By-Laws would be amended to describe separately the responsibilities of the Chair of the Board and the CEO.136 Second, under the proposed rule change, the Board, instead of the CEO/ Chairman, would appoint all officers of the Exchange, and would fix their duties, responsibilities, and terms of appointment.137 Third, Phlx proposes to set forth in detail the powers and duties relating to the Chair, Vice-Chair, and officers of the Exchange.138 Fourth, the Exchange proposes to create an office of the President who would, in the absence of the Chair of the Board and the CEO, preside at all meetings of the Board at which the President is present. Additionally, the President would have all powers and duties usually incident to the office of the President, except as specifically limited by the Board, and would be charged with general supervision of Exchange operations.139 The Exchange also proposes to delete current Section 5–5 of the By-Laws, which addresses contingencies in the event the Chairman of the Board is unable to serve. The elimination of this provision reflects the changes to the role of the Chair of the Board and the creation of a separate CEO position, as well as the new position of President. The Commission finds that these proposed changes are consistent with the Act, including Section 6(b)(1) of the 133 See proposed Section 10–21 of the By-Laws. NASDAQ Exchange By-Law Article III, Section 6. See supra text accompanying notes 95 and 97–100. 135 The Board would select its Chair from among the Independent Governors. See proposed Section 5–2 of the By-Laws. 136 See proposed Sections 5–2 and 5–4 of the ByLaws. Under the current By-Laws, only the responsibilities of the Chairman of the Board are described (in Section 5–1 of the By-Laws). 137 See proposed Sections 5–1, 5–4, 5–5, 5–8, 5– 9 and 5–10 of the By-Laws. 138 See Article V of the By-Laws. These provisions are intended to be generally consistent with current NASDAQ OMX By-Law Article VII, and NASDAQ Exchange By-Law Article IV. 139 See proposed Section 5–5 of the By-Laws. 134 See E:\FR\FM\23JYN1.SGM 23JYN1 Federal Register / Vol. 73, No. 142 / Wednesday, July 23, 2008 / Notices Act, which requires, among other things, that a national securities exchange be organized to carry out the purposes of the Act and comply with the requirements of the Act. Under these circumstances, the Commission believes that the creation of an independent Chair of the Board should foster a greater degree of independent decisionmaking by the governing body of the Exchange and mitigate the conflict between an SRO’s regulatory functions on the one hand, and its business operations on the other. D. Interpretations of and Amendments to the By-Laws The Exchange proposes to clarify the process governing By-Law interpretations and amendments. With respect to interpretations, Section 4–17 of the By-Laws grants to the Board power to interpret the By-Laws and rules adopted pursuant thereto, and provides that any such interpretations are final, binding, and conclusive. Phlx proposes to clarify that the Board must determine affirmatively whether such interpretations must be filed with the Commission as proposed rule changes, and, if so, provides that any such interpretation not become effective until filed with, or filed with and approved by, the Commission.140 With respect to amendments, Section 22–1 currently allows the By-Laws to be amended by either: (1) An affirmative vote of a majority of the entire Board at any regular or special meeting of the Board; or (2) the affirmative vote of the holders of a majority of the shares of common stock of the Exchange then issued and outstanding at any regular or special meeting of the Stockholders. The Exchange proposes to amend this provision to state affirmatively that ByLaw amendments must be filed with, or filed with and approved by, the Commission. The Exchange also proposes to require that both the Board and the holder of common stock of the Exchange approve proposed By-Law amendments.141 The Commission finds that proposed Sections 4–17 and 22–1 of the By-Laws are consistent with Section 6(b)(1) of the Act,142 because they reflect the obligation of the Board to ensure compliance with the rule filing 140 See proposed Section 4–17 of the By-Laws. proposed Section 22–1 of the By-Laws. Under the current provision, By-Law amendments must be approved by either the Board or the holders of a majority of common stock of the Exchange. The Commission notes that Stockholder approval could be obtained outside of a regular or special meeting of the Stockholders by unanimous written consent pursuant to proposed Section 28–13 of the By-Laws. 142 15 U.S.C. 78f(b)(1). mstockstill on PROD1PC66 with NOTICES 141 See VerDate Aug<31>2005 18:14 Jul 22, 2008 Jkt 214001 requirements under the Act. Additionally, the Commission finds these changes to be consistent with Section 19(b)(1) of the Act and Rule 19b–4 under the Act, which require that an SRO file with the Commission all proposed rules, as well as all proposed changes in, additions to, and deletions of its existing rules. These provisions clarify that certain By-Law interpretations and all By-Law amendments constitute proposed rule changes within the meaning of Section 19(b)(2) of the Act and Rule 19b–4 under the Act,143 and obligate the Exchange’s Board to affirmatively make those determinations. E. Other Changes 1. Provisions Applicable to Common Stock Phlx proposes a number of changes that reflect the proposed ownership by NASDAQ OMX of all the common stock of the Exchange. For example, Phlx proposes to delete the following provisions: (1) Article FOURTH(b)(iv) of the Certificate, which requires written notice to the Board of intention to acquire more than 5% of the Exchange’s outstanding common stock; (2) Section 29–1 of the By-Laws, which requires that sales, transfers, and other dispositions of common stock be in blocks of 100 shares; (3) Section 29–2 of the By-Laws, governing lockups; (4) Section 29–5 of the By-Laws, regarding reimbursement for expenses incurred in connection with any transfer of capital stock; (5) Section 30–1 of the By-Laws, regarding stock certificates; (6) Section 30–2 of the By-Laws, concerning closing of the transfer books and determination of record dates; and (7) Article FOURTH(c)(v)(C) of the Certificate and Sections 29–4 and 30–3 of the By-Laws, which allow the Exchange to not register any transfer of capital stock of the Exchange that violates certain provisions of the Certificate or By-Laws. Additionally, existing provisions in Article XXIX of the By-Laws that contemplate a possible public offering of the Exchange’s stock would be deleted and replaced with restrictions on stock transfer discussed above.144 Because these provisions are applicable to non-public companies with several stockholders, the Exchange does not believe these provisions would be applicable following the Merger. In addition, the Exchange proposes to delete provisions that govern the use of 143 See Section 3(a)(27) of the Act (defining proposed rule change). 144 See supra notes 33–43 and accompanying text (discussing the proposed limits on issuing, transferring, and assigning Phlx capital stock). PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 42883 common stock and/or common stock option incentive compensation that may be awarded to Governors and officers of the Exchange,145 because such compensation would no longer be feasible if NASDAQ OMX owned 100% of the common stock of the Exchange.146 The Commission finds that the elimination of these obsolete provisions are consistent with the Act and do not raise any novel regulatory issues. 2. Specified Board Votes Sections 13–5,147 13–7,148 17–4,149 and 18–3 150 of the By-Laws reference an affirmative vote of either 14 or 15 Governors, which used to represent a supermajority of the Board. The Exchange proposes to modify these provisions to remove the numerical reference and instead require an affirmative vote of a majority of all Governors. This change is consistent with the governing documents of Phlx’s proposed parent company, NASDAQ OMX, where a supermajority vote is required only when the voting power of the then-outstanding stock entitled to vote is implicated.151 The Commission finds that these changes maintain the requirement of a minimum majority Board vote and are consistent with Section 6 of the Act. 145 See Section 6–1 of the By-Laws. Exchange notes that, in the future, potential equity stock compensation would likely consist of NASDAQ OMX stock. See Notice, supra note 3, 73 FR at 23295. 147 Section 13–5 of the By-Laws (Liability of Officers, Directors and Substantial Stockholders) imposes personal liability on officers, directors, and substantial stockholders of a Member Organization that is an Exchange Member when that corporation violates the By-Laws or the Rules. The Board, however, may vote to relieve the person of such personal liability. 148 Section 13–7 of the By-Laws (Violation of Terms of Registration) provides the Board may vote to terminate the registration of a Member Organization for violating or failing to meet of the terms and conditions of its registration. 149 Section 17–4 of the by-Laws (Time for Settlement of Insolvent Member or Participant) allows for the termination of a permit or participation when a Member or foreign currency options participant whose permit or rights and privileges have been suspended fails to settle with his creditors and apply for reinstatement within six months from the time of such suspension (or within such further time as the Board of Governors grants) or fails to obtain reinstatement. The Board, however, may vote to grant to extend the time for settlement. 150 Section 18–3 of the By-Laws (Responsibility of Member or Participant for Acts of His Organization) imposes personal liability on a Member or foreign currency options participant that is a general partner in a Member Organization or participant organization for violations of the By-Laws or Rules by the partnership. The Board, however, may vote to relieve the general partner of such personal liability or reduce the amount of such liability. 151 See, e.g., Section 4.6 of the NASDAQ OMX ByLaws. 146 The E:\FR\FM\23JYN1.SGM 23JYN1 42884 Federal Register / Vol. 73, No. 142 / Wednesday, July 23, 2008 / Notices 3. Capital Stock purposes, such as to fund executive compensation. Current Section 4–14 of the By-Laws empowers only the Chairman of the Board or, in certain, circumstances, the Vice-Chairman of the Board, to call special meetings of the Board. The Exchange proposes to broaden this provision to also allow the interim Chair of the Board to call special meetings of the Board, under certain circumstances. The Commission finds that this proposal is consistent with Section 6(b)(1) of the Act, which requires a national securities exchange to be organized in such a way so as to be capable of carrying out the purposes of the Act. In particular, the Commission believes that this change will provide additional flexibility where appropriate to the Board to convene special meetings to conduct the business of the Exchange. 4. Payment of Dividends 6. Annual Report and Weekly Bulletin Proposed Section 29–8 of the ByLaws, which is similar to Section 15 of the LLC Agreement of the NASDAQ Exchange, would prohibit the Exchange from using Regulatory Funds to pay dividends.154 The Commission finds that the prohibition on the use of regulatory fines, fees, or penalties to fund dividends is consistent with Section 6(b)(1) of the Act because it will further Phlx’s ability to effectively comply with its statutory obligations and is designed to ensure that the regulatory authority of the Exchange is not improperly used.155 This restriction on the use of regulatory funds is intended to preclude Phlx from using its authority to raise regulatory funds for the purpose of benefiting its shareholders, or for other non-regulatory mstockstill on PROD1PC66 with NOTICES The Exchange proposes to eliminate the current provisions of Article XXIX of the By-Laws that govern restrictions on transfers of capital stock of the Exchange. The proposed new provisions of Article XXIX include but are not limited to transfer restrictions on the capital stock of the Exchange.152 In particular, proposed Sections 29–1, –2, –3, –5, –6, and –7 address stock certificates, stock ledgers, transfers of stock, and record date, respectively. The Exchange states that these are standard provisions for a Delaware stock corporation and contemplate ownership of all common stock of the Exchange by NASDAQ OMX.153 The Commission notes that these new provisions are based on NASDAQ OMX By-Law Article IX, Capital Stock, Sections 9.1 through 9.7. The Commission finds that these changes are consistent with Section 6 of the Act and do not raise any novel regulatory issues. Section 4–21 of the By-Laws requires the distribution of an annual, independently-audited financial report of the Exchange to Stockholders, Members, participants, Member Organizations, and participant organizations. Phlx proposes to delete this requirement and instead require that annual financial reports be kept on file at the Exchange and made available for inspection upon request to any Stockholder, Member, participant, Member Organization, or participant organization. The Exchange states that financial information on the Exchange also would be reflected in the public consolidated financial statements of NASDAQ OMX once the Merger is complete, and the Commission notes that this proposal does not affect the requirement that Phlx comply with Rule 6a–2 under the Act to amend its Form 1.156 Further, Phlx proposes to change how its Weekly Bulletin is distributed. Section 12–5(d) of the By-Laws provides that it must be mailed, and the Exchange proposes to update this provision to permit distribution by e-mail and posting on the Exchange’s Web site. The Commission finds that these changes are consistent with Section 6 of the Act and do not raise any novel regulatory issues. 152 The proposed restrictions on Phlx capital stock are discussed supra notes 33, 43, and accompanying text. 153 See Notice, supra note 3, 73 FR at 23297. 154 Proposed Section 1–1(kk) of the By-Laws defines ‘‘Regulatory Funds’’ as fees, fines, or penalties derived from the regulatory operations of the Exchange. However, Regulatory Funds do not include revenues derived from listing fees, market data revenues, transaction revenues, or any other aspect of the commercial operations of the Exchange even if a portion of such revenues are used to pay costs associated with the regulatory operations of the Exchange. See id. 155 See, e.g., Securities Exchange Act Release No. 51029 (January 12, 2005), 70 FR 3233, 3241 (January 21, 2005) (SR–ISE–2004–29) (approving an International Securities Exchange, LLC rule interpretation that requires that revenues received from regulatory fees or regulatory penalties be segregated and applied to fund the legal, regulatory, and surveillance operations of the Exchange and not used to pay dividends to the holders of Class A Common Stock). VerDate Aug<31>2005 18:14 Jul 22, 2008 Jkt 214001 5. Special Meetings 7. Stock Exchange Fund and Gratuity Fund The Exchange proposes to eliminate Sections 9–1 through 9–6 of the ByLaws relating to the Stock Exchange PO 00000 156 17 CFR 249.1. Frm 00114 Fmt 4703 Sfmt 4703 Fund.157 The purpose of the Stock Exchange Fund is to appoint trustees to manage the investment of certain funds of the Exchange and collect interest, dividends, and income from the funds for the Exchange. The Exchange believes these provisions are unnecessary because, after the Merger, the financial management of the Exchange will be overseen directly by the Board and subject to public company financial controls established by NASDAQ OMX. Similarly, the Exchange proposes to delete a provision in Section 4–4 of the By-Laws relating to the gratuity fund. This provision is obsolete, as the Exchange states that the fund no longer exists.158 8. Miscellaneous Changes Additionally, the Exchange proposes to make the following changes to the Certificate and By-Laws to correct typographical errors, effect stylistic changes, move text, and/or update the language to more accurately reflect current practices. The Exchange proposes to: • Change the title of the Certificate; • Update the address of its registered office in Delaware; 159 • Correct an error by changing the term ‘‘Board of Directors’’ to ‘‘Board of Governors;’’ 160 • Update cross-references; 161 • Add new definitions to its By-Laws and Rules; 162 • Eliminate certain language from the Certificate that is also in the ByLaws; 163 • Replace the term ‘‘Chairman’’ with ‘‘Chair’’ in referencing the head of the 157 Correspondingly, the Exchange proposes to delete references to the Stock Exchange Fund in Section 4–4 of the By-Laws. 158 See Notice, supra note 3, 73 FR at 23295, n.31. 159 See proposed Article SECOND of the Certificate. 160 See Article FOURTH of the Certificate. 161 See proposed Article FOURTH(b)(iii) of the Certificate and proposed Sections 1–1(w) of the ByLaws. 162 For example, the Exchange proposes to add a definition of the terms: ‘‘Commission;’’ ‘‘NASDAQ OMX Merger’’ (Phlx also proposes to define the term ‘‘NASDAQ OMX Merger’’ in its proposed Rule 1(qq)); ‘‘Regulatory Funds;’’ ‘‘Preferred Stock;’’ and ‘‘Trust,’’ and update the definition of the term ‘‘Trust Agreement.’’ Additionally, Phlx would eliminate the defined term ‘‘Class A Common Stock’’ and modify the term ‘‘Common Stock,’’ in accordance with its proposal to issue only one class of common stock. The Exchange also proposes to modify the definitions of ‘‘Member Governor’’ and ‘‘Stockholder Governor’’ to correspond with its proposal to decrease the number of Member Governors from two to one, and the number of Stockholder Governors from six to one. 163 The language in Article SIXTH(b)(i)–(ii) of the Certificate, which Phlx proposes to eliminate, is also in Section 4–4(b)(ix)–(x) of the By-Laws. E:\FR\FM\23JYN1.SGM 23JYN1 Federal Register / Vol. 73, No. 142 / Wednesday, July 23, 2008 / Notices Board 164 and the heads of Board committees; 165 • Replace the term ‘‘Vice-Chairman’’ with ‘‘Vice-Chair;’’ 166 • Replace references to the ‘‘director’’ of either the Membership Services or Examinations Departments in Sections 17–1 and 17–3 of the By-Laws with more general references to the departments; 167 • Replace the terms ‘‘Stockholder’’ and ‘‘Stockholders’’ with stockholder and stockholders, respectively; 168 • Replace ‘‘without’’ with ‘‘outside of’’ in Article TWELFTH of the Certificate; • Use the defined term ‘‘Member’’ (instead of ‘‘member’’) in the definition of ‘‘non-member;’’ 169 • Use the term ‘‘Member Organization’’ instead of ‘‘member organization;’’ 170 • Update the definition of ‘‘Trust Agreement;’’ 171 and • Correct typographical errors in Section 4–4 of the By-Laws (i.e., add ‘‘the’’ to (b)(i), add ‘‘a’’ to (b)(vi), and replace ‘‘also’’ with ‘‘and.’’ The Commission finds these changes to be consistent with Section 6 of the Act generally, including Section 6(b)(1). The proposed minor changes update the Exchange’s governing documents and make them more internally consistent, and thereby facilitate Members’ understanding of their obligations and the Exchange’s ability to administer its rules. F. Changes to Exchange Rules mstockstill on PROD1PC66 with NOTICES The Exchange proposes to amend Rule 98 (Emergency Committee) to provide the Board with discretion concerning the composition of the Emergency Committee. Currently, the composition of the Emergency Committee is fixed to consist of the Chairman of the Board, the On-Floor Vice-Chairman of the Exchange, the Off164 See, e.g., proposed Section 4–11 of the ByLaws. 165 See, e.g., proposed Section 8–1 of the ByLaws. 166 See, e.g., proposed Section 4–14 of the ByLaws. 167 Under the proposed rule, notices would still be required to be sent to these departments, but not necessarily to the director. 168 See, e.g., Article TENTH of the Certificate. The term ‘‘Stockholder Governor’’ would remain, although the term ‘‘Stockholder Governors’’ would be made singular (i.e., ‘‘Stockholder Governor’’) to reflect the Exchange’s proposal to reduce the number of such Governors from six to one. 169 See proposed Sections 1–1(o), 1–1(y), 3–12(a), 10–14(d), 12–7, 13–1, 13–5, 13–8, 14–11, 16–1, and 20–3 of the By-Laws. 170 See proposed Sections 4–6(b), 10–14(d), 10– 17, and 17–2 (adding both Member Organization and participant organization) of the By-Laws. 171 See proposed Section 1–1(ee) of the By-Laws. VerDate Aug<31>2005 18:14 Jul 22, 2008 Jkt 214001 Floor Vice-Chairman of the Exchange,172 and the Chairmen of the Options and Foreign Currency Options Committees. The Commission notes that other exchanges also have an emergency committee whose composition is determined by the board of the exchange.173 The Commission believes that the proposed changes to Rule 98 (Emergency Committee) should provide the Board with greater flexibility to manage the affairs of the Exchange in an emergency and are consistent with Sections 6(b)(1) of the Act,174 which requires, among other things, a national securities exchange to be so organized and have the capacity to carry out the purposes of the Act. The Exchange also proposes to amend Rule 164 (Trading Halts) to provide the Board with discretion in designating the officers of the Exchange responsible for declaring any trading halts when in their opinion such suspension would be in the public interest. Currently, only the Chairman and Chief Executive Officer or his designee has the authority to suspend trading pursuant to Rule 164. The Commission believes that the proposed change to Rule 164 (Trading Halts) is consistent with the Act, and in particular with Sections 6(b)(1) and 6(b)(5) of the Act,175 which require, among other things, that an exchange be organized and have the capacity to carry out the purposes of the Act and have rules designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, remove impediments and to perfect the mechanism of a free and open market and a national market system, and in general, to protect investors and the public interest, because it will continue to allow the Exchange to respond in a timely manner, consistent with the Exchange’s rules, to a situation where suspension of trading would be in the public interest. Currently, the Chairman and Chief Executive Officer 176 is authorized to suspend trading pursuant to Rule 164 or to delegate that power to another 172 The Exchange states that the position of OffFloor Vice-Chairman of the Exchange no longer exists and reference to this position remained in Rule 98 inadvertently. See Notice, supra note 3, 73 FR at 23297. 173 See, e.g., American Stock Exchange LLC Constitution, Article XII, Emergency Committee. 174 15 U.S.C. 78f(b)(1). 175 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78f(b)(5), respectively. 176 Under the proposed rule change, there would no longer be one position entitled ‘‘Chairman and Chief Executive Officer.’’ See supra Section III.C.7 and more specifically note 136 and accompanying text (explaining the proposal to separate the roles of Chairman and Chief Executive Officer). PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 42885 individual.177 The Commission believes that, by making the Board responsible for trading suspension decisions, or alternatively for deciding to which Exchange officers that authority should be delegated, the proposal strengthens Board oversight of decisions to halt trading and makes Rule 164 less susceptible to any potential abuse of discretion. Finally, the Exchange proposes to add to Rule 1 (Definitions) a definition of the NASDAQ OMX Merger.178 The Exchange also proposes to amend Rule 972 (Continuation of Status After the NASDAQ OMX Merger) to reflect that current members, inactive nominees, member organizations, foreign currency options participants, foreign currency options participant organizations, as well as approved lessors of foreign currency options participations holding such status prior to the Merger would continue to hold such status following the Merger.179 This change clarifies that current members and participants would continue in their current status following the Merger and would continue to have uninterrupted access to the Exchange.180 G. Additional Reporting Requirements for Listing Affiliated Securities The Exchange proposes to adopt new Rule 990, which is based on NASDAQ Exchange Rule 4370.181 Rule 990 would impose heightened requirements on Phlx if it lists a security of NASDAQ OMX or any of its affiliates (‘‘Nasdaq Affiliates’’). In the event that a Nasdaq Affiliate lists a security (the ‘‘Affiliate Security’’) on Phlx, the proposed rule would require Phlx to file a report with the Commission on a quarterly basis detailing Phlx’s monitoring of: (1) The Nasdaq Affiliate’s compliance with the provisions of the Rule 800 Series; and (2) the trading of the Affiliate Security, including summaries of all related surveillance alerts, complaints, regulatory referrals, trades cancelled or adjusted pursuant to Rule 163, investigations, examinations, formal and informal disciplinary actions, exception reports and trading data. 177 See Securities Exchange Act Release No. 54538 (September 28, 2006), 71 FR 59184, 59188 (October 6, 2006) (SR–Phlx–2006–43) (approving current Rule 164). 178 See proposed Rule 1(qq). 179 This provision was adopted in connection with, and currently refers to, the Exchange’s 2004 demutualization. 180 This provision was adopted in connection with, and currently refers to, the Exchange’s 2004 demutualization. 181 See NASDAQ Exchange Rule 4370. See also NYSE Rule 497, Additional Requirements for Listed Securities Issued by NYSE Euronext or its Affiliates. E:\FR\FM\23JYN1.SGM 23JYN1 42886 Federal Register / Vol. 73, No. 142 / Wednesday, July 23, 2008 / Notices mstockstill on PROD1PC66 with NOTICES The Exchange also would be required to notify the Commission at the same time it notifies the Nasdaq Affiliate if the Exchange determines that the Nasdaq Affiliate was not in compliance with any of its listing standards. Phlx would be required to notify the Commission within five business days of its receipt of a plan of compliance from the Nasdaq Affiliate and advise the Commission on whether the plan of compliance was accepted by Phlx or what other action was taken with respect to the plan, and the time period provided to regain compliance with the Rule 800 Series, if any. In addition, the Exchange would be required to commission an annual review and report by an independent accounting firm of the compliance of the Affiliate Security with the Rule 800 Series. The Exchange would be required to furnish promptly a copy of the report to the Commission. The listing of an Affiliate Security on Phlx could potentially create a conflict of interest between the Phlx’s regulatory responsibilities to vigorously oversee the listing and trading of an Affiliate Security on Phlx, and its own commercial or economic interests. Such listing may raise questions as to the Phlx’s ability to independently and effectively enforce the Commission’s and the Exchange’s rules against a Nasdaq Affiliate. Proposed Rule 990 is designed to address this concern. The Commission finds that that proposed Rule 990 is consistent with Sections 6(b)(1) and 6(b)(5) of the Act 182 because it requires heightened reporting by Phlx to the Commission with respect to oversight of the listing and trading on Phlx of an Affiliate Security and will assist Phlx in effectively enforcing its Rules with respect to the listing and trading of these securities. In addition, the requirement that an independent accounting firm review such issuer’s compliance with Phlx’s listing standards adds a degree of independent oversight to Phlx’s regulation of the listing of these securities, which may mitigate any potential or actual conflicts of interest and should help ensure thorough oversight of the Affiliate Security on the same basis as any other listed security. 182 15 U.S.C 78f(b)(1) and 15 U.S.C. 78f(b)(5), respectively. VerDate Aug<31>2005 18:14 Jul 22, 2008 Jkt 214001 H. Restriction on Affiliation with NASDAQ OMX 1. Limitation on Phlx Members’ Ownership of NASDAQ OMX The Exchange proposes to adopt new Rule 985(a) to prohibit Members 183 and persons associated with Members from beneficially owning more than 20% of the then-outstanding voting securities of NASDAQ OMX.184 Members that trade on an exchange traditionally had ownership interests in such exchange. As the Commission has noted in the past, however, a member’s interest in an exchange could become so large as to cast doubt on whether the exchange can fairly and objectively exercise its selfregulatory responsibilities with respect to that member.185 A member that is a controlling shareholder of an exchange or an exchange’s holding company might be tempted to exercise that controlling influence by pressuring or directing the exchange to refrain from, or the exchange otherwise may hesitate to, diligently monitor and surveil the member’s conduct or diligently enforce its rules and the federal securities laws with respect to conduct by the member that violates such provisions.186 The Commission finds that the ownership restriction in proposed Rule 985(a), combined with the voting limitations in NASDAQ OMX’s Certificate of Incorporation Article Fourth.C and By-Law 12.5,187 is 183 The Rules use the term ‘‘members’’ to refer to members of the Exchange (previously defined as ‘‘Members’’). 184 See proposed Rule 985(a). The Commission also notes that NASDAQ OMX’s Restated Certificate of Incorporation imposes limits on direct and indirect changes in control that are designed to prevent any shareholder from exercising undue control over the operation of the exchange and to ensure that the exchange and the Commission are able to carry out their regulatory obligations under the Act. Specifically, no person, which would include any Member, who beneficially owns shares of common stock, preferred stock, or notes in excess of five percent of the securities generally entitled to vote may vote the shares in excess of five percent. See NASDAQ OMX Certificate of Incorporation Article Fourth.C. 185 See Securities Exchange Act Release Nos. 57478 (March 12, 2008), 73 FR 14521, 14523 (March 18, 2008) (SR–NASDAQ–2007–004 and SR– NASDAQ–2007–080); 55389 (March 2, 2007) 72 FR 10575, 10578 (March 8, 2007) (SR–CBOE–2006– 110); 55293 (February 14, 2007), 72 FR 8033, 8037 (February 22, 2007) (SR–NYSE–2006–120); 53382 (February 27, 2006), 71 FR 11251, 11257 (March 6, 2006) (SR–NYSE–2005–77); 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10– 131); 51149 (February 8, 2005), 70 FR 7531, 7538 (February 14, 2005) (SR–CHX–2004–26); 49718 (May 17, 2004), 69 FR 29611, 29624 (May 24, 2004) (SR–PCX–2004–08); 49098, supra note 5 at 3986; and 49067 (January 13, 2004), 69 FR 2761, 2767 (January 20, 2004) (SR–BSE–2003–19). 186 See, e.g., Securities Exchange Act Release No. 49718, supra note 185 at 29624. 187 See supra Section III.B (discussing the voting limits applicable to NASDAQ OMX securities). PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 consistent with the Act, including Sections 6(b)(1) and 6(b)(5) of the Act. These limitations should minimize the potential that a Phlx member could improperly interfere with or restrict the ability of the Commission or the Exchange to effectively carry out their regulatory oversight responsibilities under the Act. 2. Limitations on Affiliation between Phlx and Its Members Proposed Rule 985(b) would prohibit Phlx or an entity with which it is affiliated from acquiring or maintaining an ownership interest in, or engaging in a business venture 188 with, a Phlx member or an affiliate of a Phlx member in the absence of an effective filing with the Commission under Section 19(b) of the Act.189 Further, the rule would prohibit a Phlx member from becoming an affiliate of Phlx or an affiliate of an entity affiliated 190 with Phlx in the absence of an effective filing under Section 19(b) of the Act. However, Rule 985(b) would exclude from this restriction two types of affiliations. First, a Phlx member or an affiliate of a Phlx member could acquire or hold an equity interest in NASDAQ OMX that is permitted pursuant to proposed Rule 985(a) (i.e., less than 20% of the outstanding voting securities) without the need for the Exchange to file such acquisition or holding under Section 19(b) of the Act.191 Second, Phlx or an entity affiliated with Phlx could acquire or maintain an ownership interest in, or engage in a business venture with, an affiliate of a Phlx member without the need for the Exchange to file such affiliation under Section 19(b) of the Act, if there were information barriers between the member and Phlx and its facilities. These information barriers would have to prevent the member from having an ‘‘informational advantage’’ concerning the operation of Phlx or its facilities or ‘‘knowledge in advance of other Phlx members’’ of any proposed 188 Phlx would define a ‘‘business venture’’ as an arrangement under which (A) Phlx or an entity with which it is affiliated and (B) a Member or an affiliate of a Member, engage in joint activities with the expectation of shared profit and a risk of shared loss from common entrepreneurial efforts. See proposed Rule 985(b)(i). 189 15 U.S.C. 78s(b). 190 Phlx defines the term ‘‘affiliate’’ under proposed Rule 985(b) as having the meaning specified in Rule 12b–2 under the Act; provided, however, that for purposes of Rule 985(b), one entity shall not be deemed to be an affiliate of another entity solely by reason of having a common director. 191 As discussed above, proposed Rule 985(a) provides that ‘‘[n]o member or person associated with a member shall be the beneficial owner of greater than twenty percent (20%) of the thenoutstanding voting securities of The NASDAQ OMX Group Inc.’’ E:\FR\FM\23JYN1.SGM 23JYN1 Federal Register / Vol. 73, No. 142 / Wednesday, July 23, 2008 / Notices mstockstill on PROD1PC66 with NOTICES changes to the operations of Phlx or its trading systems. Further, Phlx may only notify an affiliated member of any proposed changes to its operations or trading systems in the same manner as it notifies non-affiliated members. Additionally, Phlx and its affiliated member may not share employees, office space, or data bases. Finally, the Board must certify, annually, that Phlx has taken all reasonable steps to implement, and comply with, the rule. Proposed Rule 985 is based on the rules of Nasdaq, which the Commission previously found consistent with the Act.192 The Commission similarly finds that proposed Rule 985 is consistent with the requirements of Section 6(b)(5) of the Act, which requires that an exchange have rules designed, among other things, to promote just and equitable principles of trade, to remove impediments and to perfect the mechanism of a free and open market and a national market system, and in general, to protect investors and the public interest.193 The Commission is concerned about the potential for unfair competition and conflicts of interest between an exchange’s self-regulatory obligations and its commercial interests that could exist if an exchange were to otherwise become affiliated with one of its members, as well as the potential for unfair competitive advantage that the affiliated member could have by virtue of informational or operational advantages, or the ability to receive preferential treatment.194 The Commission believes that Phlx’s proposed rule is designed to mitigate these concerns by requiring that Phlx file a proposed rule change in connection with proposed affiliations between Phlx and Members unless such affiliation is due to a Member’s interest in NASDAQ OMX permitted under proposed Rule 985(a) or conforms to the specified information barrier requirements. If Phlx entered into an affiliation with a member (or any other party) that 192 See Nasdaq Rule 2130 and Securities Exchange Act Release No. 53128, supra note 101. See also Nasdaq Rule 2140 and Securities Exchange Act Release No. 54170 (July 18, 2006), 71 FR 42149 (July 25, 2006) (SR–NASDAQ–2006–006) (order approving Nasdaq’s proposal to adopt Nasdaq Rule 2140, restricting affiliations between Nasdaq and its members). 193 15 U.S.C. 78f(b)(5). 194 See Securities Exchange Act Release No. 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (SR–NYSE–2005–77) (order approving the New York Stock Exchange, Inc.’s merger with Archipelago Holdings, Inc.). See also Securities Exchange Act Release No. 54170 supra note 192 (order approving Nasdaq’s proposal to adopt a similar rule, Nasdaq Rule 2140, restricting affiliations between Nasdaq and its members). VerDate Aug<31>2005 18:14 Jul 22, 2008 Jkt 214001 resulted in a change to a Rule or the need to establish new Rules, as defined under the Act, then such affiliation would be subject to the requirements of Section 19(b) of the Act and Rule 19b– 4 thereunder. Proposed Rule 985(b) would not affect this statutory rule filing requirement. 3. Exceptions to Limitations on Affiliation Between Phlx and Its Members NASDAQ OMX currently owns two broker-dealers: NES and NASDAQ Options Services, LLC (‘‘NOS’’). NES and NOS are members of Phlx. Absent relief, after the closing of NASDAQ OMX’s acquisition of Phlx, NASDAQ OMX’s ownership of NES and NOS would cause NES and NOS to violate the provision in proposed Rule 985(b) prohibiting Members from being affiliated with the Exchange. Phlx has proposed that NES and NOS be permitted to become affiliates of the Exchange, subject to certain conditions and limitations. First, Phlx proposes that NES and NOS would only route orders to Phlx that first attempt to access liquidity on the NASDAQ Exchange.195 Second, NES and NOS will remain facilities of the NASDAQ Exchange. Under NASDAQ Exchange rules, NES operates as a facility 196 of NASDAQ Exchange and routes orders to other market centers as directed by NASDAQ Exchange. Similarly, NOS is operated and regulated as a facility of NASDAQ Exchange with respect to its routing of System Securities (‘‘NOS 195 NES currently provides to NASDAQ Exchange members optional routing services to other market centers, including Phlx, as set forth in NASDAQ Exchange’s rules. See NASDAQ Exchange Rules 4751, 4755, and 4758. NOS provides to NASDAQ Exchange members that are Nasdaq Options Market (‘‘NOM’’) participants routing services to other market centers. Pursuant to NASDAQ Exchange’s rules, NOS: (1) routes orders in options currently trading on NOM, referred to as ‘‘System Securities;’’ and (2) routes orders in options that are not currently trading on NOM (‘‘Non-System Securities’’). See NOM Rules, Chapter VI Sections 1(b) and 11. See also Securities Exchange Act Release No. 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR–NASDAQ–2007–004 and SR– NASDAQ–2007–080) (‘‘NOM Approval Order’’). With respect to System Securities, NOM participants may designate orders to be routed to another market center when trading interest is not available on NOM or to execute only on NOM. See NOM Rules, Chapter VI, Section 11. See also NOM Approval Order, 73 FR at 14532–14533. 196 See NASDAQ Exchange Rule 4758(b)(3). See also Securities Exchange Act Release No. 56708 (October 26, 2007), 72 FR 61925 (November 1, 2007) (SR–NASDAQ–2007–078) (‘‘NES Routing Release’’). As a facility of NASDAQ Exchange, NASDAQ Exchange Rule 4758(b) acknowledges that NASDAQ Exchange is responsible for filing with the Commission rule changes related to the operation of, and fees for services provided by, NES and that NES is subject to exchange non-discrimination requirements. PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 42887 facility function’’), and, consequently, the operation of NOS in this capacity will be subject to Exchange oversight, as well as Commission oversight.197 NASDAQ Exchange is responsible for ensuring that NES and NOS, each a facility of the NASDAQ Exchange, are operated consistent with Section 6 of the Act and NASDAQ Exchange’s rules. In addition, NASDAQ Exchange must file with the Commission rule changes and fees relating to NES and NOS. Third, use of NES’s and NOS’s routing function by NASDAQ Exchange members will continue to be optional. Parties that do not desire to use NES may enter orders into the NASDAQ Exchange as immediate-or-cancel orders or any other order-type available through the NASDAQ Exchange that is ineligible for routing.198 Similarly, NOM participants are not required to use NOS to route orders, and a NOM participant may route its orders through any available router it selects.199 In addition, the Commission notes that NES and NOS are members of an SRO unaffiliated with the NASDAQ Exchange, which serves as their designated examining authority under Rule 17d–1.200 In the past, the Commission has expressed concern that the affiliation of an exchange with one of its members raises potential conflicts of interest, and the potential for unfair competitive advantage.201 Although the Commission continues to be concerned about potential unfair competition and conflict of interest between an exchange’s self-regulatory obligations and its commercial interest when the exchange is affiliated with one of its members, the Commission believes that it is appropriate and consistent with the Act to permit NES and NOS to become affiliates of Phlx for the limited purpose of providing routing services for NASDAQ Exchange for orders that first attempt to access liquidity on NASDAQ Exchange’s systems before routing to Phlx, and in light of the protections afforded by the other conditions described above. 197 See NOM Rules, Chapter 11(e). See also NOM Approval Order, supra note 195, 73 FR at 14533. 198 See NASDAQ Exchange Rule 4758(b)(7). 199 See NOM Rules, Chapter VI, Section 11(a) (allowing Participants to designate orders as available for routing or not available for routing). See also NOM Approval Order, supra note 195, 73 FR at 14533, n.91 and accompanying text. 200 See NASDAQ Exchange Rule 4758(b)(4), and NOM Rules, Chapter 11(e). See NES Routing Release, supra note 196; and NOM Approval Order, supra note 195, 73 FR at 14533, n.189 and accompanying text. 201 See supra note 194 and accompanying text. E:\FR\FM\23JYN1.SGM 23JYN1 42888 Federal Register / Vol. 73, No. 142 / Wednesday, July 23, 2008 / Notices III. Accelerated Approval The Commission finds good cause, pursuant to Section 19(b)(2) of the Act,202 for approving the proposal, as modified by Amendment Nos. 1 and 2, prior to the thirtieth day after the date of publication of notice of filing of Amendment No. 2 in the Federal Register.203 In Amendment No. 2, Phlx proposed to adopt as rules of the Exchange the Certificate of Incorporation and By-Laws of NASDAQ OMX. The Certificate of Incorporation, as filed by the Exchange, was previously approved by the Commission as rules of Nasdaq.204 The NASDAQ OMX By-Laws were similarly approved by the Commission.205 As filed by the Exchange, the NASDAQ OMX By-Laws include certain new terminology to reflect the acquisition of Phlx by NASDAQ OMX. These changes were filed by NASDAQ Exchange as a proposed rule change, and were published for comment.206 The Commission received no comments on the proposed changes to the NASDAQ OMX By-Laws. As discussed more fully above and in the NASDAQ Stock Market Proposal, certain provisions of NASDAQ OMX’s Certificate and By-Laws are designed to facilitate the ability of NASDAQ OMX’s SRO Subsidiaries, including Phlx, to maintain the independence of each of the SRO Subsidiaries’ self-regulatory function, enable each SRO Subsidiary to operate in a manner that complies with the federal securities laws, and facilitate the ability of each SRO subsidiary and the Commission to fulfill their regulatory and oversight obligations under the Act.207 As stated above, the Commission finds that such provisions are consistent with the Act.208 Notably, the NASDAQ OMX Certificate and ByLaws are rules of NASDAQ Exchange that have been approved previously by the Commission, as noted above, and the changes to the NASDAQ OMX ByLaws were published for notice and comment, as noted above, and the 202 15 U.S.C. 78s(b)(2). to Section 19(b)(2) of the Act, 15 U.S.C. 78s(b)(2), the Commission may not approve any proposed rule change, or amendment thereto, prior to the thirtieth day after the date of publication of the notice thereof, unless the Commission finds good cause for so doing. 204 See Securities Exchange Act Release No. 51328, supra note 101. 205 See id. 206 See Securities Exchange Act Release No. 57761, supra note 4. 207 See supra Section III.C.1 (discussing, for example the duty of the board, officers, employees and agents NASDAQ OMX to give due regard to the preservation of the independence of the Phlx’s selfregulatory function). 208 See supra note 56 and accompanying text. mstockstill on PROD1PC66 with NOTICES 203 Pursuant VerDate Aug<31>2005 18:14 Jul 22, 2008 Jkt 214001 Commission did not receive any comments thereon. Accordingly, the Commission finds good cause for approving the Phlx’s proposal, as modified by Amendment Nos. 1 and 2, on an accelerated basis, pursuant to Section 19(b)(2) of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning Amendment No. 2, including whether Amendment No. 2 is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–Phlx–2008–31 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–Phlx–2008–31. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–Phlx–2008–31 and should PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 be submitted on or before August 13, 2008. V. Conclusion For the foregoing reasons, the Commission finds that the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,209 that the proposed rule change (SR–Phlx–2008– 31), as modified by Amendment Nos. 1 and 2 thereto, be and hereby is approved on an accelerated basis. By the Commission. Florence E. Harmon, Acting Secretary. [FR Doc. E8–16760 Filed 7–22–08; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–58185; File No. SR–Phlx– 2008–54] Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Participation Guarantees for Crossing and Facilitation Orders July 17, 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 July 14, 2008, the Philadelphia Stock Exchange, Inc. (‘‘Phlx’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Phlx. The Phlx has submitted the proposed rule change as a ‘‘non-controversial’’ proposed rule change pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b–4(f)(6) thereunder.4 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Phlx proposes to amend Exchange Rule 1064, ‘‘Crossing, Facilitation and Solicited Orders,’’ to 209 15 U.S.C. 78s(b)(2). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–4(f)(6). 1 15 E:\FR\FM\23JYN1.SGM 23JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 73, Number 142 (Wednesday, July 23, 2008)]
[Notices]
[Pages 42874-42888]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-16760]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58179; File No. SR-Phlx-2008-31]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Amendment No. 2 and Order Granting Accelerated 
Approval to a Proposed Rule Change, as Modified by Amendments No. 1 and 
2 Thereto, Relating to Changes to Phlx's Governing Documents in 
Connection With the Acquisition of Phlx by The NASDAQ OMX Group, Inc.

July 17, 2008.

I. Introduction

    On April 21, 2008, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change in connection with the acquisition of the Exchange 
by The Nasdaq Stock Market, Inc., now known as The NASDAQ OMX Group, 
Inc. (``NASDAQ OMX''). On April 29, 2008, the proposed rule change was 
published for comment in the Federal Register.\3\ The Exchange filed 
Amendment Nos. 1 and 2 to the proposed rule change on May 30, 2008 and 
July 2, 2008, respectively.\4\ The Commission received no comments on 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 57703 (April 23, 
2008), 73 FR 23293 (``Notice'').
    \4\ In Amendment No. 1, Phlx represented that, on May 6, 2008, 
the Exchange obtained shareholder approval of the proposed rule 
change, as required by Delaware General Corporation Law, and that no 
further action by the Exchange in connection with the proposed rule 
change is required. See also General Instruction E to Form 19b-4 
(concerning completion of action by a self-regulatory organization 
on a proposed rule change). Phlx also clarified that routing by 
NASDAQ Execution Services, LLC (``NES'') to Phlx, on behalf of The 
NASDAQ Stock Market LLC (``NASDAQ Exchange''), takes two forms. 
Amendment No. 1 is technical in nature, and therefore is not subject 
to notice and comment.
    In Amendment No. 2, Phlx filed the complete Certificate of 
Incorporation and amended By-Laws of NASDAQ OMX in order to propose 
their adoption as rules of Phlx. The By-Laws contained minor 
amendments to terminology to apply to Phlx all of the same 
provisions that are currently specifically applicable to the NASDAQ 
Exchange. The amended By-Laws were published for comment in a 
separate NASDAQ Exchange filing. See Securities Exchange Act Release 
No. 57761 (May 1, 2008), 73 FR 26182 (May 8, 2008) (notice of SR-
NASDAQ-2008-035) (``Nasdaq Stock Market Proposal'').
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    This order provides notice of filing of Amendment No. 2 to the 
proposed rule change, and grants accelerated approval to the proposed 
rule change, as modified by Amendments Nos. 1 and 2.

II. Background

    On November 7, 2007, NASDAQ OMX announced that it had entered into 
an agreement with the Exchange, pursuant to which NASDAQ OMX would 
acquire all of the common stock of the Exchange.\5\ Phlx shareholders 
would receive cash consideration for their common stock and would not 
retain any ownership interest in the Exchange.
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    \5\ The Exchange demutualized in 2004, though it is not publicly 
traded. See Securities Exchange Act Release No. 49098 (January 16, 
2004), 69 FR 3974 (January 27, 2004) (SR-PHLX-2003-73) (approval 
order).
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    The proposed acquisition would be effected through the merger of 
Pinnacle Merger Corporation, Inc. (``Merger Subsidiary''), a Delaware 
corporation and wholly-owned subsidiary of NASDAQ OMX, with and into 
the Exchange, with the Exchange surviving the merger (the 
``Merger'').\6\ The members of the board of directors of Merger 
Subsidiary would be selected by NASDAQ OMX from among the current 
Governors of the Exchange and would become the Board of Governors of 
Phlx (``Board'') immediately after the effective time of the Merger.\7\ 
The Exchange represents that the directors of Merger Subsidiary, and 
therefore the new Board, would satisfy the compositional requirements 
of the new Board, discussed below.\8\
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    \6\ See proposed Section 1-1(ii) of the By-Laws (defining 
``NASDAQ OMX Merger'').
    \7\ See proposed Section 4-3(b) of the By-Laws and Notice, supra 
note 3, 73 FR at 23295.
    \8\ See infra notes 61-69 and accompanying text (discussing 
proposed compositional requirements of the Board).
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    After the Merger, the Exchange would be a wholly-owned subsidiary 
of NASDAQ OMX.\9\ NASDAQ OMX would operate the Exchange as a separate 
self-regulatory organization (``SRO''). Accordingly, Phlx would 
maintain its current registration as a national securities exchange, 
and maintain separate rules, membership rosters, and listings that 
would be distinct from the rules, membership rosters, and listings of 
NASDAQ OMX's other national securities exchanges. Additionally, after 
the Merger, the Exchange would continue to operate the Stock Clearing 
Corporation of Philadelphia (``SCCP''),\10\ its wholly-owned clearing 
agency, and The Philadelphia Board of Trade (``PBOT''), its wholly-
owned futures exchange subsidiary. Separately, NASDAQ OMX also entered 
into an agreement with the Boston Stock Exchange, Inc. (``BSE''), 
pursuant to which NASDAQ OMX would acquire all of the outstanding 
membership interests in BSE (``BSE Acquisition'').\11\ Following the 
closing of the BSE Acquisition and the Merger, NASDAQ OMX will be the 
sole owner of five SROs: NASDAQ Exchange, BSE, the

[[Page 42875]]

Boston Stock Exchange Clearing Corporation (``BSECC''), Phlx, and SCCP 
(collectively, ``SRO Subsidiaries'').
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    \9\ The Exchange would have a single class of common stock, all 
of which would be held by NASDAQ OMX.
    \10\ See Securities Exchange Act Release No. 58180 (July 17, 
2008) (SR-SCCP-2008-01) (approving changes to SCCP's articles of 
incorporation, including language clarifying that all of the 
authorized shares of SCCP common stock are issued and outstanding 
and are held by Phlx).
    \11\ See Securities Exchange Act Release No. 57757 (May 1, 
2008), 73 FR 26159 (SR-BSE-2008-23) (notice of proposed rule change 
related to BSE Acquisition); Securities Exchange Act Release No. 
57782 (May 6, 2008), 73 FR 27583 (May 13, 2008) (SR-BSECC-2008-01) 
(notice of proposal to amend the articles of organization and by-
laws of the BSECC to reflect its proposed acquisition by NASDAQ 
OMX).
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    In the present filing, the Exchange has proposed to amend its 
certificate of incorporation (``Certificate''), by-laws (``By-Laws''), 
and certain rules (``Rules'') to reflect NASDAQ OMX's proposed 
ownership of the Exchange. In general, the proposed changes are 
designed to address the Exchange's proposed new ownership structure and 
conform Phlx's governance provisions to those that are currently 
applicable to the NASDAQ Exchange. The Exchange is also using this 
opportunity to make several other changes to its governing documents to 
update certain language and make other minor changes that are not 
directly related to the proposed Merger.\12\
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    \12\ For example, as discussed in Section III.E.6, infra, the 
language relating to how the Exchange's Weekly Bulletin is 
distributed would be updated to not restrict its distribution to 
mail, but rather to permit distribution by e-mail and posting on the 
Exchange's Web site. See Section 12-5(d) of the By-Laws.
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    In addition, NASDAQ OMX has amended its By-Laws to make applicable 
to all of NASDAQ OMX's SRO subsidiaries, including Phlx and SCCP (after 
the Merger), certain provisions of NASDAQ OMX's Restated Certificate of 
Incorporation and NASDAQ OMX's By-Laws. These provisions of NASDAQ 
OMX's governing documents are designed to maintain the independence of 
each SRO subsidiary's self-regulatory function, enable each SRO 
subsidiary to operate in a manner that complies with the federal 
securities laws, and facilitate the ability of each SRO subsidiary and 
the Commission to fulfill their regulatory and oversight obligations 
under the Act.\13\
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    \13\ See Amendment No. 2, supra note 4 (including the amended 
By-Laws of NASDAQ OMX to the Phlx's proposal).
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\14\ In particular, the Commission finds that the proposed 
rule change is consistent with: (1) Section 6(b)(1) of the Act,\15\ 
which requires a national securities exchange to be so organized and 
have the capacity to carry out the purposes of the Act and to enforce 
compliance by its members and persons associated with its members with 
the provisions of the Act; (2) Section 6(b)(3) of the Act,\16\ which 
requires that the rules of a national securities exchange assure the 
fair representation of its members in the selection of its directors 
and administration of its affairs, and provide that one or more 
directors shall be representative of issuers and investors and not be 
associated with a member of the exchange, broker, or dealer (the ``fair 
representation requirement''); and (3) Section 6(b)(5) of the Act,\17\ 
in that it is designed, among other things, to prevent fraudulent and 
manipulative acts and practices; to promote just and equitable 
principles of trade; to remove impediments to and perfect the mechanism 
of a free and open market and a national market system; and, in 
general, to protect investors and the public interest.
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    \14\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(1).
    \16\ 15 U.S.C. 78f(b)(3).
    \17\ 15 U.S.C. 78f(b)(5).
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    As noted above, the Merger would result in NASDAQ OMX owning two 
additional SROs (Phlx and SCCP). The Commission believes that the 
ownership of Phlx and SCCP by the same public holding company that owns 
the NASDAQ Exchange would not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act.\18\ 
Further, the Commission does not believe that the ownership by one 
holding company of two exchanges and one clearing agency presents any 
adverse competitive implications in the current marketplace. The 
Commission notes that it has previously approved proposals in which a 
holding company owns multiple SROs.\19\ The Commission continues to 
monitor such entities and notes that its experience to date with the 
issues raised by this ownership structure has not presented any 
concerns that have not been addressed, for example by the protections 
afforded at the holding company level.
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    \18\ 15 U.S.C. 78f(b)(8) and 15 U.S.C. 78q-1(b)(3)(I).
    \19\ See, e.g., Securities Exchange Act Release No. 53382 
(February 27, 2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) 
(approving the combination of the New York Stock Exchange, Inc. and 
Archipelago Holdings, Inc.).
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    In particular, as discussed below, though NASDAQ OMX is not itself 
an SRO, its activities with respect to the operation of Phlx and SCCP 
must be consistent with, and must not interfere with, the self-
regulatory obligations of Phlx and SCCP.\20\ Further, certain 
provisions of NASDAQ OMX's Certificate of Incorporation and By-Laws are 
rules of an exchange if they are stated policies, practice, or 
interpretations, as defined in Rule 19b-4 under the Act, of the 
exchange, and must be filed with the Commission pursuant to Section 
19(b) of the Act and Rule 19b-4 thereunder.\21\ Accordingly, Phlx has 
filed with the Commission the Certificate and amended By-Laws of NASDAQ 
OMX. Notably, NASDAQ OMX's amended By-Laws would make applicable to all 
of NASDAQ OMX's SRO subsidiaries, including Phlx and SCCP (after the 
Merger), certain provisions of NASDAQ OMX's Restated Certificate of 
Incorporation and NASDAQ OMX's By-Laws that are designed to maintain 
the independence of each of its SRO subsidiaries' self-regulatory 
function. These provisions facilitate the ability of each SRO 
subsidiary and the Commission to fulfill their regulatory and oversight 
obligations under the Act.
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    \20\ See infra Section III.C.1 (discussing the relationship 
between NASDAQ OMX and Phlx).
    \21\ 15 U.S.C. 78s(b) and 17 CFR 240.19b-4, respectively.
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    Furthermore, the Commission believes that there is robust 
competition among market centers, as exchanges face increasing 
competition from non-exchange entities that trade the same or similar 
financial instruments, such as alternative trading systems.\22\ In 
addition, despite consolidation among exchanges, other entities have 
recently applied for exchange registration, which evidences the 
continued ability of entities to enter the marketplace and further 
increase competition among SROs.\23\ Accordingly, as described above, 
the Commission does not believe that ownership by a single holding 
company of multiple SROs presents any burden on competition in 
violation of the Act.\24\ Nevertheless, the Commission

[[Page 42876]]

will continue to monitor SROs, including those that are under common 
ownership, for compliance with the Act and the rules and regulations 
thereunder, as well as the SROs' own rules.
---------------------------------------------------------------------------

    \22\ See, e.g., Securities Exchange Act Release No. 58092 (July 
3, 2008), 73 FR 40144, 40144 (July 11, 2008) (where the Commission 
recognized that ``[n]ational securities exchanges registered under 
Section 6(a) of the Exchange Act face increased competitive 
pressures from entities that trade the same or similar financial 
instruments * * *'').
    \23\ See, e.g., Securities Exchange Act Release No. 57322 
(February 13, 2008), 73 FR 9370 (February 20, 2008) (File No. 10-
182) (notice of filing of application and Amendment No. 1 thereto by 
BATS Exchange, Inc. for registration as a national securities 
exchange).
    \24\ The Commission notes that NASDAQ OMX also entered into an 
agreement with the BSE, pursuant to which NASDAQ OMX would acquire 
all of the outstanding membership interests in BSE. See Securities 
Exchange Act Release Nos. 57757 (May 1, 2008), 73 FR 26159 (May 8, 
2008) (SR-BSE-2008-23) (notice of proposed rule change related to 
BSE Acquisition); and 57782 (May 6, 2008), 73 FR 27583 (May 13, 
2008) (SR-BSECC-2008-01) (notice of proposal to amend the articles 
of organization and by-laws of the BSECC to reflect its proposed 
acquisition by NASDAQ OMX). If the Commission also were to approve 
the BSE Acquisition, NASDAQ OMX would be the sole owner of five 
SROs: NASDAQ Exchange, Phlx, SCCP, BSE, and the BSECC. The 
Commission will consider the implications of those proposed 
acquisitions when it reviews that proposal.
---------------------------------------------------------------------------

 A. Capital Stock

    The proposed Merger would result in NASDAQ OMX owning all of the 
issued, authorized, and outstanding common stock of the Exchange.\25\ 
Accordingly, the Exchange proposes to amend the Certificate to reduce 
the amount of common and preferred stock, and to explicitly state that 
NASDAQ OMX will hold all of the common stock of the Exchange. 
Specifically, the Exchange proposes to: (1) Reduce the amount of common 
stock that the Exchange has authority to issue from one million to 100 
shares; \26\ (2) state that all authorized shares of common stock shall 
be issued, outstanding, and held by NASDAQ OMX; \27\ (3) eliminate the 
designation of Class A and Class B common stock; \28\ (4) reduce the 
amount of preferred stock that the Exchange has authority to issue from 
100,000 to 100 shares; \29\ and (5) state that only one share of 
preferred stock, the single share of Series A Preferred Stock,\30\ is 
outstanding.\31\ In addition, the Exchange proposes to delete or amend 
several provisions applicable to the Exchange's common stock that would 
become obsolete after the Merger because NASDAQ OMX would control 100% 
of the common stock.\32\ These changes are necessary to reflect the 
change in ownership of the Exchange after the Merger, and the 
Commission finds them to be consistent with the Act.
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    \25\ See proposed Article FOURTH(c)(iv) of the Certificate and 
proposed Section 29-4(c) of the By-Laws.
    \26\ See proposed Article FOURTH of the Certificate.
    \27\ See proposed Article FOURTH(c)(iv) of the Certificate.
    \28\ See, e.g., proposed Article FOURTH of the Certificate and 
proposed Section 1-1(d) of the By-Laws. For example, Article 
FOURTH(b)(ii) sets forth the different dividend priority of holders 
of Class A common stock and Class B common stock in the event of a 
Liquidity Event (as defined in that subparagraph). This provision 
would be obsolete once only one class of common stock is authorized 
and outstanding. Correspondingly, the Exchange proposes to eliminate 
that language. Similarly, the Exchange proposes to eliminate Article 
FOURTH(c)(vi) of the Certificate, which governs the automatic 
conversion of Class A common stock, and language in Article 
FOURTH(c)(iii) of the Certificate that distinguishes between the 
voting rights of holders of Class A and Class B common stock.
    On January 20, 2007, all Class A common stock converted to Class 
B common stock shares. See Phlx Annual Report 2006 at 42. Upon 
conversion to Class B, the eligibility of holders of Class A shares 
for a contingent dividend terminated. See id. The former holders of 
the Class A shares otherwise continued to have the same rights and 
privileges, including voting, as the Class B holders. See id.
    \29\ See proposed Article FOURTH of the Certificate.
    \30\ The share of Series A Preferred Stock, which is currently 
issued and outstanding, is held by the Trust pursuant to the Trust 
Agreement. See Section 1-1(mm) of the By-Laws (defining ``Trust'') 
and Section 1-1(ee) of the By-Laws (defining ``Trust Agreement''). 
The Trustee of the Trust is required, under Section 4.1 of the Trust 
Agreement, to vote the share as directed by the vote of the Member 
Organization Representatives of Member Organizations entitled to 
vote. This voting arrangement is designed to give Members a voice in 
the management of the Exchange and is necessary because, under 
Delaware law, only stockholders can elect the directors of a 
Delaware corporation. See Securities Exchange Act Release No. 49098, 
supra note 5, 69 FR at 3979. The Merger would not result in a 
transfer of ownership of the Series A Preferred Stock.
    \31\ See proposed Article FOURTH(b)(iv) of the Certificate.
    \32\ For example, Phlx proposes to amend the dividend rights of 
common stock (see proposed Article FOURTH(c)(ii) of the Certificate) 
and eliminate provisions governing common stock incentive 
compensation. See infra note 146 and accompanying text (discussing 
the proposal to eliminate incentive compensation).
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 B. Ownership Concentration Limitations and Voting Limits

    Phlx proposes to amend the Certificate to replace the current 
ownership concentration limitations and voting limitations with new 
restrictions that would recognize that, following the Merger, NASDAQ 
OMX would own all of the common stock of the Exchange. As discussed 
below, the Exchange proposes to delete language in Article FOURTH of 
the Certificate, which limits the amount of common stock of the 
Exchange that any person may own or vote, directly or indirectly, 
without prior Commission approval. In place of this restriction, Phlx 
proposes to amend its Certificate and By-Laws to prohibit Phlx from 
transferring or assigning its common stock without prior Commission 
approval and from issuing, transferring, or assigning its preferred 
stock without prior Commission approval.\33\
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    \33\ See proposed Article FOURTH(c)(iv) of the Certificate 
(restriction on transferring or assigning common stock). This 
subparagraph also provides that all authorized shares of common 
stock of the Exchange (100 shares) be issued and outstanding and 
reflects that all of the common stock would be held by NASDAQ OMX. 
The Commission notes that any proposed issuance of common stock 
would constitute an amendment to that provision, which would be 
subject to the filing of a proposed rule change with the Commission. 
See also proposed Section 29-4(c) of the By-Laws. See proposed 
Article FOURTH(a) and (b)(v) of the Certificate and proposed Section 
29-4(d) of the By-Laws (restriction on issuing, transferring, or 
assigning preferred stock). See also infra note 43 (restrictions on 
the issuance of preferred stock).
---------------------------------------------------------------------------

    The current Certificate imposes limits on direct and indirect 
changes in control of Phlx through voting and ownership limits 
applicable to holders of its common stock. These provisions enable the 
Commission, as well as the Exchange, to monitor potential changes in 
control of the Exchange, and thereby assist both the Commission and the 
Exchange in carrying out their regulatory responsibilities under the 
Act.\34\ In particular, the Certificate currently provides that, unless 
approved by the Board and by the Commission under Section 19(b) of the 
Act, no Person (either alone or together with its Related Persons) may 
own (of record or beneficially), whether directly or indirectly, more 
than 40% of the then-outstanding shares of Phlx common stock. To the 
extent that such Person (or its Related Persons) purports to own more 
than 40% of the then outstanding shares of common stock of the 
Exchange, the Person (and its Related Persons) is not entitled to 
exercise any rights and privileges incident to ownership of shares in 
excess of the 40% limit.\35\ The Certificate also provides that no 
Member (either alone or together with its Related Persons) may own, of 
record or beneficially, whether directly or indirectly, more than 20% 
of the then outstanding shares of common stock of the Exchange.\36\ 
Moreover, unless approved by the Board and by the Commission under 
Section 19(b) of the Act, no Person, either alone or together with its 
Related Persons, has any right to vote, or to give any consent or proxy 
with respect to, more than 20% of the then outstanding shares of common 
stock of the Exchange.\37\
---------------------------------------------------------------------------

    \34\ See Securities Exchange Act Release No. 49098, supra note 
5, 69 FR at 3985.
    \35\ See Article FOURTH(b)(v)(A) of the Certificate.
    \36\ See Article FOURTH(b)(v)(B) of the Certificate.
    \37\ See Article FOURTH(b)(iii)(B) of the Certificate.
---------------------------------------------------------------------------

    Currently, the Board would need to approve an amendment to the By-
Laws to permit any Person, together with its Related Persons, to 
exercise voting rights with respect to the shares in excess of the 20% 
voting limit or to own more than 40% of the outstanding shares of 
common stock.\38\ Such amendment would need to be filed with the 
Commission pursuant to Section 19(b) of the Act,\39\ which allows the 
Commission an opportunity to determine, among other things, whether any 
additional measures may be necessary to provide sufficient regulatory 
jurisdiction over the proposed controlling persons.\40\
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    \38\ The Board cannot approve such amendment with respect to 
Members.
    \39\ See Article FOURTH(b)(iii)(B)(1) and FOURTH(b)(v)(A)(1) of 
the Certificate.
    \40\ See Securities Exchange Act Release No. 49098, supra note 
5, 69 FR at 3985. The Commission notes that this proposed rule 
change satisfies the requirements in existing Article 
FOURTH(b)(v)(A) and (b)(iii)(B) of the Certificate and that the 
Commission's approval will allow NASDAQ OMX to exceed the existing 
ownership and voting limits in existing Article FOURTH. The proposed 
rule change will become operative upon consummation of the Merger.

---------------------------------------------------------------------------

[[Page 42877]]

    As proposed, NASDAQ OMX would acquire all of the common stock of 
the Exchange. To reflect such ownership by one entity, the Exchange 
proposes to eliminate the 40% ownership and 20% voting limits. Phlx 
also proposes to eliminate the prohibition on any Member, either alone 
or together with its Related Persons, from owning (of record or 
beneficially) more than 20% of its outstanding common stock of the 
Exchange.\41\
---------------------------------------------------------------------------

    \41\ See Article FOURTH(c)(v)(B) of the Certificate.
---------------------------------------------------------------------------

    In place of these restrictions, Phlx proposes to adopt new 
restrictions on the transfer or assignment of common stock. 
Specifically, proposed Article FOURTH(c)(iv) of the Certificate would 
be revised to state that: (1) All 100 authorized shares of common stock 
of the Exchange shall be issued and outstanding, and shall be held by 
NASDAQ OMX; and (2) NASDAQ OMX may not transfer or assign any shares of 
Phlx common stock to any entity, unless such transaction is approved by 
the Commission.\42\ The Exchange also proposes to adopt a restriction 
on the issuance of preferred stock, as well as similar restrictions on 
the transfer or assignment of preferred stock.\43\
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    \42\ See also proposed Section 29-4(c) of the By-Laws.
    \43\ See proposed Section 29-4(d) of the By-Laws. The Exchange 
would have authority to issue 100 shares of preferred stock, of 
which one share would be designated Series A Preferred. See proposed 
Article FOURTH of the Certificate. Phlx has not issued, and does not 
currently intend to issue, any preferred stock other than the Series 
A Preferred Stock. See Notice, supra note 3, 73 FR at 23293. The 
restrictions on transfer or assignment would also apply to the 
Series A Preferred Stock. See proposed Article FOURTH(a) of the 
Certificate; see also proposed Article FOURTH(b)(v) of the 
Certificate. The proposed Merger would not impact the ownership of 
the one outstanding share of Series A Preferred Stock, which will 
continue to be held by the Trust pursuant to the Trust Agreement.
---------------------------------------------------------------------------

    In addition, the NASDAQ OMX Certificate of Incorporation imposes 
limits on direct and indirect changes in control, which are designed to 
prevent any shareholder from exercising undue control over the 
operation of its SRO subsidiaries and to ensure that its SRO 
subsidiaries and the Commission are able to carry out their regulatory 
obligations under the Act. Specifically, no person who beneficially 
owns shares of common stock, preferred stock, or notes of NASDAQ OMX in 
excess of 5% of the securities generally entitled to vote may vote the 
shares in excess of 5%.\44\ This limitation would mitigate the 
potential for any NASDAQ OMX shareholder to exercise undue control over 
the operations of Phlx, and it facilitates Phlx's and the Commission's 
ability to carry out their regulatory obligations under the Act.
---------------------------------------------------------------------------

    \44\ See Article Fourth.C, NASDAQ OMX Certificate.
---------------------------------------------------------------------------

    The NASDAQ OMX Board may approve exemptions from the 5% voting 
limitation for any person that is not a broker-dealer, an affiliate of 
a broker-dealer, or a person subject to a statutory disqualification 
under Section 3(a)(39) of the Act,\45\ provided that the NASDAQ OMX 
Board also determines that granting such exemption would be consistent 
with the self-regulatory obligations of its SRO subsidiary.\46\ 
Further, any such exemption from the 5% voting limitation would not be 
effective until approved by the Commission pursuant to Section 19 of 
the Act.\47\ Phlx's proposed rule change reflects an amendment to the 
NASDAQ OMX By-Laws to require the NASDAQ OMX Board, prior to approving 
any exemption from the 5% voting limitation, to determine that granting 
such exemption would also be consistent with Phlx's self-regulatory 
obligations.\48\
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78c(a)(39). See Article Fourth.C.6, NASDAQ OMX 
Certificate.
    \46\ Specifically, the NASDAQ OMX Board must determine that 
granting such exemption would (1) not reasonably be expected to 
diminish the quality of, or public confidence in, NASDAQ OMX or the 
other operations of NASDAQ OMX, on the ability to prevent fraudulent 
and manipulative acts and practices and on investors and the public, 
and (2) promote just and equitable principles of trade, foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to an 
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. See Article Fourth.C.6, NASDAQ 
OMX Certificate.
    \47\ See Section 12.5, NASDAQ OMX By-Laws.
    \48\ See proposed Section 12.5, NASDAQ OMX By-Laws.
---------------------------------------------------------------------------

    The Commission approved the existing limits in Phlx's Certificate 
to enable the Exchange to carry out its self-regulatory 
responsibilities, and to enable the Commission to fulfill its 
responsibilities under the Act.\49\ After the Merger, these goals would 
be achieved by the proposed new restrictions on the transfer or 
assignment of Phlx capital stock and on the issuance of preferred 
stock, together with the ownership and voting restrictions on NASDAQ 
OMX shareholders. In particular, the simplified provisions of Phlx's 
Certificate and By-Laws are tailored to an exchange whose common stock 
is wholly-owned by one company. By explicitly stating that NASDAQ OMX 
would be the owner of 100% of the Exchange's issued and outstanding 
common stock, and that no preferred stock has been issued other than 
the Series A Preferred Stock held by the Trust, any purported issuance, 
transfer, or assignment of any capital stock would constitute an 
amendment to the Certificate and By-Laws and therefore be subject to a 
filing with the Commission under Section 19 of the Act. Moreover, the 
NASDAQ OMX Certificate currently includes restrictions on any person 
voting shares in excess of 5%. The changes to the NASDAQ OMX By-Laws 
would require the NASDAQ OMX Board, prior to approving an exemption 
from the 5% voting limitation, to determine that granting such 
exemption would be consistent with Phlx's self-regulatory obligations.
---------------------------------------------------------------------------

    \49\ See supra note 34 and accompanying text.
---------------------------------------------------------------------------

    Accordingly, the Commission finds that the elimination of the 
current ownership and voting limits and the adoption of new controls on 
the issuance, transfer, and assignment of Phlx capital stock, together 
with the ownership and voting limitations in NASDAQ OMX's Certificate 
and By-Laws, are designed to prevent any shareholder from exercising 
undue control over the operation of Phlx and to ensure that Phlx and 
the Commission are able to carry out their regulatory obligations under 
the Act and thereby should minimize the potential that a person could 
improperly interfere with or restrict the ability of the Commission or 
Phlx to effectively carry out their respective regulatory oversight 
responsibilities under the Act.

C. Management of the Exchange

1. Relationship between NASDAQ OMX and Phlx
    After the merger, Phlx would become a subsidiary of NASDAQ OMX. 
Although NASDAQ OMX is not an SRO and, therefore, will not itself carry 
out regulatory functions, its activities with respect to the operation 
of Phlx must be consistent with, and not interfere with, Phlx's self-
regulatory obligations. Proposed changes to NASDAQ OMX's By-Laws would 
make applicable to all of NASDAQ OMX's SRO subsidiaries, including Phlx 
(after the Merger), certain provisions of NASDAQ OMX's Restated 
Certificate of Incorporation and NASDAQ OMX's By-Laws that are designed 
to maintain the independence of each of its SRO subsidiaries' self-
regulatory function, enable each SRO subsidiary to operate in a manner 
that complies with the federal securities laws, and facilitate the 
ability of each

[[Page 42878]]

SRO subsidiary and the Commission to fulfill their regulatory and 
oversight obligations under the Act.\50\
---------------------------------------------------------------------------

    \50\ See Amendment No. 2, supra note 4 (including the amended 
By-Laws of NASDAQ OMX to the Phlx's proposal).
---------------------------------------------------------------------------

    Although NASDAQ OMX will not itself carry out regulatory functions, 
its activities with respect to the operation of its SRO subsidiaries, 
including Phlx and SCCP, must be consistent with, and not interfere 
with, those subsidiaries' self-regulatory obligations. The By-Laws of 
NASDAQ OMX include certain provisions to address this concern. In 
particular, the By-Laws of NASDAQ OMX specify that NASDAQ OMX and its 
officers, directors, employees, and agents irrevocably submit to the 
jurisdiction of the United States federal courts, the Commission, and 
each self-regulatory subsidiary of NASDAQ OMX for the purposes of any 
suit, action or proceeding pursuant to the United States federal 
securities laws, and the rules and regulations thereunder, arising out 
of, or relating to, the activities of any self-regulatory 
subsidiary.\51\ Further, NASDAQ OMX agreed to provide the Commission 
with access to its books and records.\52\ NASDAQ OMX also agreed to 
keep confidential non-public information relating to the self-
regulatory function \53\ of the Exchange and not to use such 
information for any non-regulatory purpose. In addition, the NASDAQ OMX 
Board, as well as its officers, employees, and agents are required to 
give due regard to the preservation of the independence of Phlx's self-
regulatory function.\54\ Similarly, the NASDAQ OMX Board, when 
evaluating any issue, would be required to take into account the 
potential impact on the integrity, continuity, and stability of the its 
SRO subsidiaries.\55\ Finally, the NASDAQ OMX By-Laws require that any 
changes to the NASDAQ OMX Certificate and By-Laws be submitted to the 
Board of Directors of each of its SRO subsidiaries, including the 
Exchange, and, if such amendment is required to be filed with the 
Commission pursuant to Section 19(b) of the Act, such change shall not 
be effective until filed with, or filed with and approved by, the 
Commission.
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    \51\ See proposed Section 12.3, NASDAQ OMX By-Laws.
    \52\ See proposed Section 12.1(c), NASDAQ OMX By-Laws. To the 
extent that they relate to the activities of Phlx, all books, 
records, premises, officers, directors, and employees of NASDAQ OMX 
would be deemed to be those of the Phlx. See id.
    \53\ This requirement to keep confidential non-public 
information relating to the self-regulatory function shall not limit 
the Commission's ability to access and examine such information or 
limit the ability of directors, officers, or employees of the Nasdaq 
Holding Company from disclosing such information to the Commission. 
See proposed Section 12.1(b), NASDAQ OMX By-Laws. Holding companies 
with SRO subsidiaries have undertaken similar commitments. See, 
e.g., Securities Exchange Act Release No. 56955 (December 13, 2007), 
72 FR 71979, 71983 (December 19, 2007) (SR-ISE-2007-101) (order 
approving the acquisition of International Securities Exchange, 
LLC's parent, International Securities Exchange Holdings, Inc., by 
Eurex Frankfurt AG).
    \54\ See Section 12.1(a), NASDAQ OMX By-Laws.
    \55\ See proposed Section 12.7, NASDAQ OMX By-Laws.
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    The Commission believes that the NASDAQ OMX By-Laws, as amended to 
accommodate the Merger, are designed to facilitate the Phlx's ability 
to fulfill its self-regulatory obligations and are, therefore, 
consistent with the Act. In particular, the Commission believes these 
changes are consistent with Section 6(b)(1) of the Act,\56\ which 
requires, among other things, that a national securities exchange be so 
organized and have the capacity to carry out the purposes of the Act, 
and to comply and enforce compliance by its members and persons 
associated with its members, with the provisions of the Act, the rules 
and regulations thereunder, and the rules of the exchange.
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    The Commission also believes that under Section 20(a) of the Act 
\57\ any person with a controlling interest in NASDAQ OMX would be 
jointly and severally liable with and to the same extent that NASDAQ 
OMX is liable under any provision of the Act, unless the controlling 
person acted in good faith and did not directly or indirectly induce 
the act or acts constituting the violation or cause of action. In 
addition, Section 20(e) of the Act \58\ creates aiding and abetting 
liability for any person who knowingly provides substantial assistance 
to another person in violation of any provision of the Act or rule 
thereunder. Further, Section 21C of the Act \59\ authorizes the 
Commission to enter a cease-and-desist order against any person who has 
been ``a cause of'' a violation of any provision of the Act through an 
act or omission that the person knew or should have known would 
contribute to the violation.
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78t(a).
    \58\ 15 U.S.C. 78t(e).
    \59\ 15 U.S.C. 78u-3.
---------------------------------------------------------------------------

2. Composition and Term of Board
    The Exchange proposes to give its Board discretion to determine its 
size from time to time,\60\ and after the Merger the Board would likely 
be reduced in size from its current slate of 23 Governors. 
Specifically, the Board would include one Governor who is the CEO, one 
Governor who is the Vice-Chair of the Board,\61\ one PBOT Governor,\62\ 
one Member Governor,\63\ one Stockholder Governor,\64\ and a number of 
Independent Governors determined by the Board,\65\ including the 
Designated Independent Governors. ``Designated Independent Governors'' 
would continue to be defined as those Independent Governors who are 
voted for by Members, and who are then elected to the Board by the 
Holder of the Series A Preferred Stock according to the vote of the 
Members.\66\
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    \60\ See proposed Article SIXTH(a) of the Certificate and 
proposed Section 4-1 of the By-Laws.
    \61\ The Vice-Chair would continue to be an individual who, 
anytime within the prior three years, has been a Member primarily 
engaged in business on the Exchange's equity market or equity 
options market or who is a general partner, executive officer (vice-
president or above) or a Member associated with a Member 
Organization primarily engaged in business on the Exchange's equity 
market or equity options market. See Section 5-3 of the By-Laws. The 
term ``Member Organization'' is defined in Section 1-1(v) of the By-
Laws.
    \62\ A PBOT Governor would continue to be defined as a Governor 
who is a member of PBOT and is duly elected to fill the one vacancy 
on the Board allocated to the PBOT Governor. See Section 1-1(aa) of 
the By-Laws.
    \63\ A Member Governor would continue to be defined as a 
Governor who is a Member or a general partner or an executive 
officer (vice-president and above) of a Member Organization and is 
duly elected to fill the vacancy on the Board allocated to the 
Member Governor. See Section 1-1(u) of the By-Laws. Phlx proposes to 
amend its Certificate and By-Laws to reflect its proposal that the 
new Board consist of only one Member Governor. See proposed Article 
SIXTH(a)(ii) of the Certificate and proposed Sections 1-1(e), 1-1(u) 
and 4-1 of the By-Laws.
    \64\ See proposed Section 4-1 of the By-Laws and proposed 
Article SIXTH(a)(iii) of the Certificate. A Stockholder Governor 
would be defined as a Governor who is an officer, director (or a 
person in a similar position in business entities that are not 
corporations), designee or an employee of a holder of common stock 
or any affiliate or subsidiary of such holder of common stock and is 
duly elected to fill the vacancy on the Board allocated to the 
Stockholder Governor. See proposed Section 1-1(hh) of the By-Laws; 
see also proposed Article SIXTH(a)(ix) of the Certificate.
    \65\ As discussed below, Independent Governors would continue to 
constitute a majority of the Board, and Designated Independent 
Governors, would, together with the Member Governor and the PBOT 
Governor, equal at least 20% of the total number of Governors. See 
Section 4-1 of the By-Laws.
    \66\ See Section 1-1(f) of the By-Laws and Article 
FOURTH(a)(iii) of the Certificate, which Phlx proposes to renumber 
(see proposed Article FOURTH(b)(iii)).
---------------------------------------------------------------------------

    Though it may be reduced in size, the Board would be composed, as 
it currently is, of a majority of Independent Governors, who, by 
definition, would have no Material Relationship with the Exchange, any 
affiliate of the Exchange, any Member of the Exchange, any Member 
affiliate, or any issuer of securities that are listed or

[[Page 42879]]

traded on the Exchange or a facility of the Exchange.\67\ Notably, the 
new Board would select its Chair from among its members that are 
Independent Governors, instead of the current arrangement where the CEO 
also serves as the Chairman of the Board.\68\
---------------------------------------------------------------------------

    \67\ See proposed Section 4-1 of the By-Laws (the Board shall be 
composed of a majority of Independent Governors); proposed Article 
SIXTH(a)(vii) of the Certificate (defining ``Independent 
Governor''). The terms ``Independent,'' ``Material Relationship,'' 
and ``Member'' are defined in Sections 1-1(o), 1-1(s), and 1-1(t) of 
the By-Laws, respectively.
    \68\ See proposed Section 5-2 of the By-Laws. Currently, the 
Chairman of the Board is the CEO. See Article SIXTH(a)(v) of the 
Certificate and Sections 4-1 and 5-1 of the By-Laws (all providing 
that the Chairman of the Board shall be the individual then holding 
the office of CEO).
---------------------------------------------------------------------------

    The Commission finds that the proposed changes regarding the 
composition of the Board are consistent with the Act, including Section 
6(b)(1) of the Act,\69\ which requires, among other things, that a 
national securities exchange be organized to carry out the purposes of 
the Act and comply with the requirements of the Act.
---------------------------------------------------------------------------

    \69\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    Phlx proposes to set forth in detail the powers and duties of the 
Chair and Vice-Chair.\70\ This provision is intended to be generally 
consistent with current NASDAQ Exchange By-Law Article VII, and the 
Commission finds it consistent with the Act.
---------------------------------------------------------------------------

    \70\ See Article V of the By-Laws.
---------------------------------------------------------------------------

    The Exchange also proposes to change the term of office for all 
Governors from three years to one year \71\ and eliminate term limits 
for Governors.\72\ The Commission finds this consistent with the Act 
and notes that establishing one-year terms for directors is consistent 
with other proposals previously approved by the Commission.\73\ 
Further, the Commission notes that neither Phlx's proposed parent 
company, NASDAQ OMX, nor NASDAQ Exchange have term limits for their 
respective boards.\74\
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    \71\ See proposed Section 4-3(a) of the By-Laws. That section 
currently provides that the Stockholder Governors, Independent 
Governors (including the Designated Independent Governors), Member 
Governors, and the PBOT Governor serve for three-year terms, which 
are staggered.
    \72\ See proposed Section 4-3(a) of the By-Laws. That section 
currently prohibits Governors, except for the Chairman of the Board 
and the Vice-Chairman of the Board, from serving for more than two 
consecutive full terms.
    \73\ See, e.g., Securities Exchange Act Release No. 55293 
(February 14, 2007), 72 FR 8033 (February 22, 2007) (SR-NYSE-2006-
120) (approving one-year terms for NYSE Euronext directors). 
Additionally, the Restated Certificate of Incorporation of the 
NASDAQ Stock Market, Inc. also provides for one-year terms for 
directors other than Preferred Stock Directors.
    \74\ See Article IV of the NASDAQ OMX By-Laws and Article III of 
the NASDAQ Exchange By-Laws.
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    In addition, Phlx proposes that, in the event of a vacancy in the 
office of Vice-Chair, the Nominating, Elections and Governance 
Committee would select a replacement to serve the remainder of the 
unexpired term, subject to approval by the Board.\75\ This provision is 
intended to be generally consistent with current NASDAQ Exchange By-Law 
Article IV. Section 4-19 of the By-Laws designates, with specificity, 
when a Governor's term begins, and provides that a Governor's term ends 
only when his or her successor is elected and qualifies, or when the 
Governor resigns or is removed. The Exchange proposes to modify this 
provision to eliminate the reference to a Governor's term beginning at 
a particular time and provides that a Governor's term will end when a 
successor is elected or upon their earlier resignation, removal, or 
death. The Commission finds these changes consistent with the Act and 
believes that they should provide additional clarity and, therefore, 
would facilitate orderly successions of Governors.\76\
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    \75\ See proposed Section 5-3 of the By-Laws.
    \76\ This proposed change is identical to a proposal by another 
national securities exchange recently approved by the Commission. 
See Securities Exchange Act Release No. 56955 (December 13, 2007), 
72 FR 71979 (SR-ISE-2007-101) (approving proposed Section 3.2 of the 
by-laws of the International Securities Exchange, LLC).
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3. Nomination, Election, and Removal of Non-Designated Governors
    The Exchange proposes changes to the nomination and election 
process for non-Designated Governors (i.e., Independent Governors, the 
Vice-Chair, the CEO, and the Shareholder Governor). These changes are 
primarily designed to simplify the process to accommodate a single 
Stockholder. Currently, the non-Designated Governors are nominated 
through different mechanisms, including: (1) The Nominating, Elections 
and Governance Committee nominates the individual then holding the 
office of CEO as Chairman of the Board for election by the 
Stockholders; (2) the Chairman recommends a Vice-Chairman candidate to 
the Nominating, Elections and Governance Committee for election by 
Stockholders; and (3) the Nominating, Elections and Governance 
Committee review the qualifications of nominees, including independent 
nominees, for the Stockholder Governors and Independent Governors 
(excluding the Designated Independent Governors).\77\ Phlx now proposes 
that the holder of its common stock present for nomination to the 
Nominating, Elections and Governance Committee the candidates for Vice-
Chair, Stockholder Governor, and Independent Governors.\78\ These 
candidates would be placed on the ballot and elected by the holder of 
common stock at the annual meeting of Shareholders. Thus, NASDAQ OMX, 
as sole holder of common stock of the Exchange, would nominate and 
elect all of the non-Designated Governors. This approach is consistent 
with the NASDAQ Exchange's processes for nomination of non-Member 
Representative Directors by a nominating committee that may seek the 
input and recommendations of NASDAQ OMX as the owner of the NASDAQ 
Exchange.\79\
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    \77\ See Section 28-3 of the By-Laws.
    \78\ See proposed Section 28-3 of the By-Laws. As proposed, 
Section 28-3 has no provision for the nomination or election of the 
Chair of the Board because the Board would appoint its Chair from 
among the members of the Board who are Independent Governors. See 
proposed Section 5-2 of the By-Laws.
    \79\ See NASDAQ Exchange By-Law Article III, Section 6.
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    The Exchange also proposes to change the process for removing non-
Designated Governors. Currently, non-Designated Governors may be 
removed only for cause, except that upon a recommendation by the Board 
to Stockholders such Governors may be removed without cause. An 
affirmative vote of two-thirds of the total number of Stockholders 
entitled to vote thereon is required to remove a non-Designated 
Governor. The proposed change would more explicitly permit the removal 
of non-Designated Governors with or without cause, and to allow removal 
of such Governors by the affirmative vote of a majority of the voting 
power entitled to vote for their election (i.e., NASDAQ OMX).\80\ This 
change would reflect the Exchange's proposed status as a wholly-owned 
subsidiary of NASDAQ OMX. The Board would continue to have the ability 
to recommend to the Stockholder that a Governor be removed for any 
reason deemed sufficient by the Board,\81\ but such recommendation 
would no longer be a prerequisite for removal.
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    \80\ See proposed Article SIXTH (b)(i) of the Certificate. The 
Exchange also proposes to allow any action required or permitted to 
be taken at any annual or special meeting of Stockholders to be 
taken by Stockholders (i.e., NASDAQ OMX) without a meeting, unless 
otherwise specified in the Certificate. See proposed Article SEVENTH 
of the Certificate and proposed Section 28-13 of the By-Laws. In 
light NASDAQ OMX's ownership of all of the common stock of the 
Exchange, the Commission finds this change to be consistent with the 
Act.
    \81\ See proposed Section 4-4 of the By-Laws.
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    The Commission finds that the proposed changes to the nomination, 
election, and removal processes for non-Designated Governors are 
consistent with Section 6(b)(1) of the Act, which

[[Page 42880]]

requires an exchange to be organized in a manner that allows it to 
carry out the purposes of the Act. The proposed changes appropriately 
streamline the nomination, election, and removal processes for non-
Designated Governors in light of NASDAQ OMX's ownership of all of the 
common stock of the Exchange.
Fair Representation
    Section 6(b)(3) of the Act requires that the rules of an exchange 
assure fair representation of its members in the selection of its 
directors and administration of its affairs.\82\ As discussed above, 
the Exchange proposes to give its Board discretion to determine its 
size.\83\ Members would, nevertheless, continue to select at least 20% 
of the Board after the Merger, including the Member Governor, the PBOT 
Governor,\84\ and the Designated Independent Governors (collectively, 
the ``Designated Governors'').\85\ These Designated Governors would 
continue to be elected by the Holder of Series A Preferred Stock (i.e., 
the Trust \86\), and therefore they would continue to be elected 
indirectly by the Members. Phlx proposes to change Section 3-7(a) of 
the By-Laws, which prohibits a Member Organization from endorsing more 
than one nominee for Governor, to clarify that Member Organizations are 
prohibited from endorsing more than one nominee per vacancy. This 
proposed change is designed to clarify the rights of Members in the 
independent nomination process by eliminating any ambiguity that each 
Member Organization may endorse one independent nominee per Designated 
Governor vacancy, not one independent nominee per election.
---------------------------------------------------------------------------

    \82\ 15 U.S.C. 78f(b)(3).
    \83\ See supra note 60 and accompanying text.
    \84\ A PBOT Governor would continue to be defined as a Governor 
who is a member of PBOT and is duly elected to fill the one vacancy 
on the Board allocated to the PBOT Governor. See Section 1-1(aa) of 
the By-Laws; see also proposed Article SIXTH(a)(i) of the 
Certificate.
    \85\ The nominations process for Designated Governors (i.e., the 
Designated Independent Governors, the Member Governor, and the PBOT 
Governor) is described in Section 3-7 of the By-Laws.
    \86\ See supra note 30 (discussing the purpose and operation of 
the Trust).
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    Designated Governors currently may be removed only for cause, 
unless the Board recommends that they be removed without cause. In 
either case, removal of a Designated Governor requires a vote by Member 
Organization Representatives at an annual or special meeting.\87\ Phlx 
proposes to simplify the process to provide that Designated Governors 
may be removed, with or without cause, only by vote of Member 
Organization Representatives at an annual or special meeting.\88\ The 
Board would continue to have the ability to recommend to the Members 
that a Designated Governor be removed for any reason deemed sufficient 
by the Board,\89\ but such recommendation would no longer be a 
prerequisite for removal. Importantly, the Commission notes that the 
Designated Governors, which are selected by a vote of the Members, may 
only be removed upon the affirmative vote of Members. While the Board 
may recommend to the Members that a Designated Governor be removed, the 
Board may not unilaterally remove a Designated Governor.
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    \87\ See Article SIXTH(b)(iii) of the Certificate.
    \88\ See proposed Section 3-3 of the By-Laws. A special meeting 
of the Members could be called either by Members, the Board, or the 
Chair of the Board. See Section 3-2(b) of the By-Laws. Such 
Governors could be removed by the holder of the Series A Preferred 
Stock following a vote of the Member Organization Representatives. 
See proposed Article SIXTH (b)(ii) of the Certificate.
    \89\ See proposed Section 4-4 of the By-Laws.
---------------------------------------------------------------------------

    In addition, Members will be represented on key Standing 
Committees. Specifically, under the By-Laws, at least half of the 
Admissions Committee and the Foreign Currency Options Committee will 
continue to be required to be permit holders or participants or be 
associated with a Member Organization or participant organization,\90\ 
and at least half of the Options Committee will continue to be required 
to be permit holders or be associated with a Member Organization.\91\ 
Further, the By-Laws will continue to require that the Business Conduct 
Committee share jurisdiction over the revocation of permits and foreign 
currency options participations in connection with disciplinary matters 
with the Admissions Committee.\92\
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    \90\ See Sections 10-6(a) and 10-17 of the By-Laws.
    \91\ See Section 10-20 of the By-Laws.
    \92\ See Section 10-6(b) of the By-Laws.
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    Several Standing Committees also may review proposed rule changes 
before such proposals are presented to the Executive Committee or the 
Board for approval for filing with the Commission. These committees on 
which Members serve would continue to perform this function after the 
Merger. For example, the Business Conduct Committee may review proposed 
changes to the disciplinary provisions that are set forth in Rule 960 
before such proposals are presented to the Executive Committee or the 
Board.\93\ Further, the Options Committee makes or recommends for 
adoption such rules as it deems necessary for the convenient and 
orderly transaction of business upon the equity and index options 
trading floor, as well as makes and enforces rules and regulations 
relating to order, decorum, health, safety and welfare on the equity 
and index options trading floor and the immediately adjacent premises 
of the Exchange.\94\ Additionally, the Exchange proposes to ensure 
Member representation on the Quality of Markets Committee.\95\ Finally, 
Designated Governors, which are selected by Members, would compose at 
least 20% of the Executive Committee.\96\
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    \93\ The Business Conduct Committee is composed of nine members 
as follows: three Independent Governors; one Member or person 
associated with a Member Organization who conducts business on XLE; 
one Member who conducts options business at the Exchange; and four 
persons who are Members or persons associated with a Member 
Organization. See Section 10-11 of the By-Laws.
    \94\ See Section 10-20 of the By-Laws.
    \95\ See infra notes 133-134 and accompanying text (discussing 
Member representation on the Quality of Markets Committee).
    \96\ See infra text accompanying note 110 (discussing the 
composition of the Executive Committee).
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    The Commission finds that the selection of at least 20% of 
Governors of the Board,\97\ the manner in which such Designated 
Governors will be nominated and elected,\98\ the process for removing 
Designated Governors,\99\ together with the representation of Members 
on key Standing Committees, satisfy the fair representation 
requirements of Section 6(b)(3) of the Act,\100\ which requires that an 
exchange assure a fair representation of its members in the selection 
of its directors and administration of its affairs. The Commission also 
notes that these provisions are consistent with previous proposals 
approved by the Commission.\101\
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    \97\ See proposed Article SIXTH(a)(iv) of the Certificate and 
proposed Section 4-1 of the By-Laws.
    \98\ See supra Section III.C.2 and infra Section III.C.4, 
respectively.
    \99\ See supra Section III.C.3.
    \100\ 15 U.S.C. 78f(b)(3).
    \101\ See, e.g., Securities Exchange Act Release Nos. 53128 
(January 13, 2006), 71 FR 3550 (January 23, 2006) (approving the 
application of the NASDAQ Exchange for registration as a national 
securities exchange) and 49098, supra note 5.
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4. Special Committee of the Board
    Phlx proposes to delete references to a ``special committee of the 
Board of Governors'' that hears appeals from determinations of the 
Nominating, Elections and Governance Committee on appeals concerning 
eligibility for election to the Board.\102\ The special committee had 
been composed of Governors who were not then standing for re-election. 
However, because the

[[Page 42881]]

Exchange proposes to eliminate the staggering of the Board and require 
all Governors to be elected annually, it would not be possible to form 
such a special committee. Instead, the Exchange proposes that the full 
Board preside over such appeals.\103\
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    \102\ See proposed Section 11-1(b) of the By-Laws.
    \103\ See id.
---------------------------------------------------------------------------

    The Commission finds that this proposal is consistent with Sections 
6(b)(1) and 6(b)(3) of the Act.\104\ In particular, the Commission 
notes that Designated Governors selected by the Members will constitute 
at least 20% of the Board, and therefore Members will be represented 
when the Board acts as an adjudicative body to hear appeals concerning 
eligibility for election to the Board.
---------------------------------------------------------------------------

    \104\ 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------

5. Standing Committees of the Board
    The Exchange proposes several changes to its Standing Committees, 
which reflect incremental modifications to the structure and scope of 
its current committees. As discussed below, the Commission finds these 
changes to be consistent with the Act, including Section 6(b)(1) of the 
Act,\105\ which requires that a national securities exchange be 
organized in such a manner as to allow the exchange to carry out the 
purposes of the Act, comply with the requirements of the Act, and 
enforce compliance with the Act by its members and persons associated 
with its members.
---------------------------------------------------------------------------

    \105\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    Automation Committee and the Marketing Committee. The Exchange 
proposes to eliminate two Standing Committees: the Automation Committee 
\106\ and the Marketing Committee.\107\ According to the Exchange, 
these committees are no longer necessary because, after the NASDAQ OMX 
Merger, these functions would be guided and handled at the parent 
company level.\108\ The Commission believes that the elimination of 
these Exchange committees, combined with Phlx's reliance on NASDAQ OMX 
to perform the functions of those committees, is consistent with 
Section 6(b)(1) of the Act, which requires a national securities 
exchange to be so organized and have the capacity to carry out the 
purposes of the Act and to enforce compliance by its members and 
persons associated with its members with the provisions of the Act. The 
Commission notes that, as the Exchange contemplates future changes to 
its automated trading systems, the Exchange would be required to file 
any changes to its rules with the Commission pursuant to Section 19(b) 
of the Act and Rule 19

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