Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of Filing of Proposed Rule Change, and Amendment No. 1 Thereto, Relating to the Exchange's By-Laws, Regulatory Oversight Committee and Referee Program, 40265-40269 [E9-19143]
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Federal Register / Vol. 74, No. 153 / Tuesday, August 11, 2009 / Notices
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
Commission may summarily abrogate
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
IV. Solicitation of Comments
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change: (i) Does not significantly affect
the protection of investors or the public
interest; (ii) does not impose any
significant burden on competition; and
(iii) by its terms, does not become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, if
consistent with the protection of
investors and the public interest, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 5 and Rule 19b–
4(f)(6) thereunder.6
A proposed rule change filed under
Rule 19b–4(f)(6) normally may not
become operative prior to 30 days after
the date of filing.7 However, Rule 19b–
4(f)(6)(iii) 8 permits the Commission to
designate a shorter time if such action
is consistent with the protection of
investors and the public interest. The
Exchange has requested that the
Commission waive the 30-day operative
delay so that the proposal may be
operative in conjunction with the
release of the Primary Until 9:45 Order
in order to eliminate potential confusion
associated with the GTC or GTD
designation of a Primary Until 9:45
Order. The Commission believes such
waiver is consistent with the protection
of investors and the public interest.9
At any time within 60 days of the
filing of the proposed rule change, the
5 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
7 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change at least five business
days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has complied with this
requirement.
8 Id.
9 For purposes only of waiving the 30-day
operative delay of this proposal, the Commission
has considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
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submitted on or before September 1,
2009.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–19144 Filed 8–10–09; 8:45 am]
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
BILLING CODE 8010–01–P
Electronic Comments
Self-Regulatory Organizations;
NASDAQ OMX PHLX, Inc.; Notice of
Filing of Proposed Rule Change, and
Amendment No. 1 Thereto, Relating to
the Exchange’s By-Laws, Regulatory
Oversight Committee and Referee
Program
• 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–NYSEArca–2009–69 on the
subject line.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–60431; File No. SR–Phlx–
2009–59]
August 4, 2009.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘Act’’
• Send paper comments in triplicate
or ‘‘Exchange Act’’) 1 and Rule 19b–4
to Elizabeth M. Murphy, Secretary,
thereunder,2 notice is hereby given that,
Securities and Exchange Commission,
on July 27, 2009, NASDAQ OMX PHLX,
100 F Street, NE., Washington, DC
Inc. (‘‘Phlx’’ or ‘‘Exchange’’) filed with
20549–1090.
the Securities and Exchange
All submissions should refer to File
Commission (‘‘Commission’’) the
Number SR–NYSEArca–2009–69. This
proposed rule change as described in
file number should be included on the
Items I, II, and III below, which Items
subject line if e-mail is used. To help the have been prepared by the Exchange.
Commission process and review your
On July 30, 2009, the Exchange filed
comments more efficiently, please use
Amendment No. 1 to the proposed rule
only one method. The Commission will change.3 The Commission is publishing
post all comments on the Commission’s this notice to solicit comments on the
Internet Web site (https://www.sec.gov/
proposed rule change, as amended, from
rules/sro.shtml). Copies of the
interested persons.
submission, all subsequent
I. Self-Regulatory Organization’s
amendments, all written statements
Statement of the Terms of Substance of
with respect to the proposed rule
the Proposed Rule Change
change that are filed with the
The Exchange proposes to amend its
Commission, and all written
By-Laws to establish a regulatory
communications relating to the
oversight committee of the Board of
proposed rule change between the
Commission and any person, other than Governors (the ‘‘Board’’); describe the
office and responsibilities of the chief
those that may be withheld from the
regulatory officer in the By-Laws;
public in accordance with the
eliminate the audit committee and
provisions of 5 U.S.C. 552, will be
compensation committee of the Board,
available for inspection and copying in
with their duties being assigned to other
the Commission’s Public Reference
Room on official business days between board committees of Phlx or its parent
corporation, The NASDAQ OMX Group,
the hours of 10 a.m. and 3 p.m. Copies
Inc. (‘‘NASDAQ OMX’’); amend the
of such filing also will be available for
Exchange’s By-Laws to delete the
inspection and copying at the principal
Referee process and establish a new
office of the Exchange. All comments
received will be posted without change; Options Trade Review Committee in
the Commission does not edit personal
10 17 CFR 200.30–3(a)(12).
identifying information from
1 15 U.S.C. 78s(b)(1).
submissions. You should submit only
2 17 CFR 240.19b–4.
information that you wish to make
3 By Amendment No. 1, the Exchange updated its
available publicly. All submissions
proposal to reflect that The NASDAQ Stock Market
should refer to File Number SR–
LLC and NASDAQ OMX BX, Inc. have already
eliminated their audit committees.
NYSEArca–2009–69 and should be
Paper Comments
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Federal Register / Vol. 74, No. 153 / Tuesday, August 11, 2009 / Notices
lieu thereof; and make conforming
changes to the Exchange’s Rules and
Options Floor Procedure Advice.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://nasdaqomxphlx.cchwallstreet.
com/NASDAQOMXPHLX/Filings/, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of those
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Modifications to the Regulatory
Oversight Structure of the Board of
Governors
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On July 24, 2008, Phlx was acquired
by NASDAQ OMX. Following that
acquisition, Phlx has been assessing
means to improve its governance
structure and conform it more closely to
that of The NASDAQ Stock Market LLC
(the ‘‘NASDAQ Exchange’’), an effort
that has already resulted in the
submission of several proposed rule
changes to the Commission.4 In
addition, Phlx—together with the
NASDAQ Exchange and NASDAQ OMX
BX, Inc. (formerly the Boston Stock
Exchange, and also an exchange
subsidiary of NASDAQ OMX)—has
been evaluating means to realize
synergies in the operations of these
three exchanges while maintaining the
separate identity and member
representation structures of each.
4 See Securities Exchange Act Release No. 59764
(April 20, 2009), 74 FR 18761 (April 24, 2009) (SR–
Phlx–2009–17) (approving proposal to modify the
process for nominating Governors of the Exchange);
Securities Exchange Act Release No. 59697 (April
4, 2009), 74 FR 16249 (April 9, 2009) (SR–Phlx–
2009–23) (proposing to eliminate various standing
committees of the Exchange and making other
miscellaneous changes). The Commission notes that
the latter filing was approved by the Commission
on May 14, 2009. See Securities Exchange Act
Release No. 59924 (May 14, 2009), 74 FR 23759
(May 20, 2009).
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In making this evaluation, Phlx and
its sister exchanges have given
consideration to the experiences of their
respective boards and have reviewed the
governance documents of other
exchanges. In particular, Phlx and the
other exchanges have reviewed the
board structures established by NYSE
Euronext and its exchange subsidiaries.
In Securities Exchange Act Release No.
55293,5 the Commission approved a
structure in which certain committees of
the board of directors of NYSE
Euronext, the public holding company,
perform functions for exchange
subsidiaries, which do not themselves
have these committees. Specifically, the
Commission’s approval order states that
‘‘the NYSE Euronext board of directors
will have an audit committee, a human
resource and compensation committee,
and a nominating and governance
committee. Each of the audit committee,
human resource and compensation
committee, and nominating and
governance committee of the NYSE
Euronext board of directors will consist
solely of directors meeting the
independence requirements of NYSE
Euronext.
These committees also will perform
relevant functions for NYSE Group,6 the
Exchange,7 NYSE Market,8 NYSE
Regulation,9 Archipelago,10 NYSE
Arca,11 and NYSE Arca Equities,12 as
well as other subsidiaries of NYSE
Euronext, except that the board of
directors of NYSE Regulation will
continue to have its own compensation
committee and nominating and
governance committee.’’
Phlx and the other exchanges owned
by NASDAQ OMX have also considered
the experience of the NASDAQ
Exchange in operating as a subsidiary of
a public company since 2006. During
the period, the board of each of the
NASDAQ Exchange and its parent
corporation (currently NASDAQ OMX,
and formerly The Nasdaq Stock Market,
5 Securities Exchange Act Release No. 55293
(February 14, 2007), 72 FR 8033 (February 22, 2007)
(SR–NYSE–2006–120).
6 NYSE Group, Inc., the former public holding
company of NYSE Euronext’s U.S. exchanges.
7 New York Stock Exchange LLC (‘‘NYSE’’), a
registered national securities exchange.
8 NYSE Market, Inc., a subsidiary of NYSE to
which it has delegated certain operational
authority.
9 NYSE Regulation, Inc., a subsidiary of NYSE to
which it has delegated certain operational
authority.
10 Archipelago Holdings, Inc., formerly the public
holding company of the entities now known as
NYSE Arca, Inc. and NYSE Arca Equities, Inc.
11 NYSE Arca, Inc., a registered national securities
exchange.
12 NYSE Arca Equities, Inc., a subsidiary of NYSE
Arca to which it has delegated certain operational
authority.
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Inc.) has appointed its own audit
committee and management
compensation committee. However,
these committees at the NASDAQ
Exchange level have generally found
themselves duplicating the work of
other committees at the exchange or
holding company level. The NASDAQ
OMX audit committee has broad
authority to review the financial
information that will be provided to
shareholders and others, systems of
internal controls, and audit, financial
reporting and legal and compliance
processes. Because NASDAQ OMX’s
financial statements are prepared on a
consolidated basis that includes the
financial results of NASDAQ OMX’s
subsidiaries, including Phlx and the
other exchange subsidiaries, the
NASDAQ OMX audit committee’s
purview necessarily includes these
subsidiaries. The committee is
composed of four or five directors, all of
whom must be independent under the
standards established by Section
10A(m) of the Act 13 and Rule 4200(a) of
the NASDAQ Exchange. All committee
members must be able to read and
understand financial statements, and at
least one member must have past
employment experience in finance or
accounting, requisite professional
certification in accounting, or any other
comparable experience or background
that results in the individual’s financial
sophistication.
By contrast, the audit committee of
the NASDAQ Exchange has a more
limited role, focused solely on the
exchange entity and its subsidiaries that
operate as facilities of the NASDAQ
Exchange. As described in the current
By-Laws of the NASDAQ Exchange
(which are, in this respect, virtually
identical to the current By-Laws of
Phlx), the primary functions of the audit
committee are (i) oversight over
financial reporting, (ii) oversight over
the systems of internal controls
established by management and the
Board and the legal and compliance
process, (iii) selection and evaluation of
independent auditors, and (iv) direction
and oversight of the internal audit
function. However, to the extent that the
committee reviews financial and
accounting matters, its activities are
duplicative of the activities of the
NASDAQ OMX audit committee, which
is also charged with providing oversight
over financial reporting and
independent auditor selection for
NASDAQ OMX and all of its
subsidiaries, including the NASDAQ
Exchange, BX, and Phlx and their
subsidiaries. Similarly, the NASDAQ
13 15
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OMX audit committee has general
responsibility for oversight over internal
controls and direction and oversight
over the internal audit function for
NASDAQ OMX and all of its
subsidiaries. Thus, the responsibilities
of the exchanges’ audit committees are
fully duplicated by the responsibilities
of the NASDAQ OMX audit committee.
Accordingly, the NASDAQ Exchange
has eliminated its audit committee by
amending Article III, Section 5 of the
By-Laws.14
Similarly, drawing upon the model
established by NYSE Euronext and the
experience of the NASDAQ Exchange,
Phlx is proposing to amend Section 10–
9 of its By-Laws to eliminate its audit
committee. While the committee
formerly played a vital role in oversight
of the preparation of Phlx’s financial
statements when Phlx was owned by a
group of investors and sat at the top of
a holding company structure, that role
has been assumed by the NASDAQ
OMX audit committee now that Phlx is
a wholly owned subsidiary. Moreover,
since Phlx does not currently have a
regulatory oversight committee, Phlx is
now proposing to establish such a
committee so that regulatory oversight
functions formerly performed by the
audit committee may be assumed by the
new committee.15 The new committee
will oversee the adequacy and
effectiveness of Phlx’s regulatory and
self-regulatory organization
responsibilities; assess Phlx’s regulatory
performance; and assist the Board and
its standing committees in reviewing the
regulatory plan and the overall
effectiveness of Phlx’s regulatory
functions. In furtherance of its
functions, the committee shall (a)
review Phlx’s regulatory budget and
specifically inquire into the adequacy of
resources available in the budget for
regulatory activities; (b) meet regularly
with Phlx’s chief regulatory officer in
executive session; and (c) be informed
about the compensation and promotion
or termination of the chief regulatory
officer and the reasons therefor.16 The
committee shall consist of three
members, each of whom shall be an
independent governor.17
Phlx believes that even in light of the
NASDAQ OMX audit committee’s
overall responsibilities for internal
controls and the internal audit function,
it is nevertheless important for the Phlx
Board to maintain its own independent
oversight over Phlx’s controls and
internal audit matters relating to Phlx’s
operations. In this regard, Phlx notes
that its regulatory oversight committee,
like the NASDAQ Exchange’s regulatory
oversight committee, will have broad
authority to oversee the adequacy and
effectiveness of Phlx’s regulatory and
self-regulatory organization
responsibilities, and will therefore be
able to maintain oversight over controls
in tandem with the NASDAQ OMX
audit committee’s overall control
oversight responsibilities. Similarly, it is
already the practice of NASDAQ OMX’s
Internal Audit Department, which
performs internal audit functions for all
NASDAQ OMX subsidiaries, to report to
the Phlx Board on all internal audit
matters relating to Phlx. This practice
will be formally reflected in the
Department’s written procedures, which
will now direct such reports to the
regulatory oversight committee. In
addition, to ensure that the Phlx Board
retains authority to direct the
Department’s activities with respect to
Phlx, the Department’s written
procedures will be amended to stipulate
that the Phlx regulatory oversight
committee may, at any time, direct the
Department to conduct an audit of a
matter of concern to it and report the
results of the audit both to the Phlx
regulatory oversight committee and the
NASDAQ OMX audit committee.
Finally, although language regarding the
audit committee’s authority to conduct
special reviews of any alleged improper
conduct is being removed, Phlx believes
that such authority is inherent in the
powers of its Board, the NASDAQ OMX
Board, and their respective committees.
Accordingly, retaining this language for
a specific committee is unnecessary.18
Although the position of chief
regulatory officer has long existed, Phlx
has concluded that the position should
14 Securities Exchange Act Release No. 60276
(July 9, 2009), 74 FR 34840 (July 17, 2009) (SR–
NASDAQ–2009–042) (‘‘Release No. 34–60276’’).
Similarly, BX has eliminated its audit committee.
Securities Exchange Act Release No. 60247 (July 17,
2009), 74 FR 33495 (July 13, 2009) (SR–BX–2009–
021) (‘‘Release No. 34–60247’’).
15 Section 10–9 of the By-Laws.
16 The audit committee also currently performs
functions relating to the Referee, who has authority
to review certain decisions of Options Exchange
Officials. As described below, the Exchange
proposes to replace the Referee with a new Options
Trade Review Committee.
17 An independent governor is one who has no
material relationship with Phlx or any affiliate of
Phlx, any member of Phlx or any affiliate of such
member, or any issuer of securities that are traded
on Phlx or a facility of Phlx.
18 Phlx also notes that authority of the audit
committee with respect to the Exchange’s Code of
Conduct and whistleblowing regarding accounting
practices have been assumed by NASDAQ OMX,
which, as a public company, maintains a Code of
Ethics program and anonymous whistleblower
hotline for NASDAQ OMX and its subsidiaries in
compliance with the requirements of the SarbanesOxley Act, 15 U.S.C. 78j–1, 7264.
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be formally described in the By-Laws.
Accordingly, new Section 5–6 of the ByLaws will provide that the chief
regulatory officer will have general
supervision of Phlx’s regulatory
operations, including the responsibility
for overseeing its surveillance,
examination, and enforcement functions
and for administering any regulatory
services agreements with another selfregulatory organization to which Phlx is
a party. The chief regulatory officer
shall meet with the regulatory oversight
committee in executive session at
regularly scheduled meetings, and at
any time upon request of the chief
regulatory officer or any member of the
committee.
Phlx also proposes to amend Section
4–13 of the By-Laws in order to follow
the NYSE Euronext model with respect
to allowing the elimination of its
compensation committee and the
performance of its function by the
NASDAQ OMX compensation
committee and/or subsidiary boards.19
The NASDAQ OMX By-Laws provide
that its compensation committee
considers and recommends
compensation policies, programs, and
practices for employees of NASDAQ
OMX. Because many employees
performing work for Phlx are also
employees of NASDAQ OMX, its
compensation committee already
performs these functions for such
employees. Moreover, certain of its
senior officers are also officers of
NASDAQ OMX and other NASDAQ
OMX subsidiaries because their
responsibilities relate to multiple
entities within the NASDAQ OMX
corporate structure. Accordingly,
NASDAQ OMX pays these individuals
and establishes compensation policy for
them. Most notably, the former Chief
Executive Officer of Phlx was also an
‘‘executive officer’’ of NASDAQ OMX
within the meaning of NASDAQ
Exchange Rule 4350.20 Under that rule,
the compensation of executive officers
of an issuer of securities, such as the
common stock of NASDAQ OMX, that
is listed on the NASDAQ Exchange,
must be determined by, or
recommended to the board of directors
for determination by, a majority of
independent directors or a
compensation committee comprised
19 The Commission notes that it recently
approved proposals by BX and the NASDAQ
Exchange to eliminate their compensation
committees. See Release Nos. 34–60247 and 60276,
supra note 14. These exchanges have eliminated
those committees. See e-mail from Edith Hallahan,
Counsel, Phlx, to Nancy Burke-Sanow, Assistant
Director, Commission, dated August 3, 2009.
20 The position of Chief Executive Officer of Phlx
is currently vacant, pending selection of a
successor.
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solely of independent directors.
Accordingly, the NASDAQ OMX board
of directors and/or its compensation
committee was legally required to
establish the compensation for this
individual. Although the individual
recently resigned his positions with
NASDAQ OMX and its subsidiaries in
order to pursue another opportunity, it
is likely that his successor as Chief
Executive Officer of Phlx will serve in
a similar position at NASDAQ OMX and
therefore be subject to comparable
compensation requirements. To the
extent that policies, programs, and
practices must also be established for
any Phlx officers or employees who are
not also NASDAQ OMX officers or
employees, the Phlx Board will perform
such actions without the use of a
compensation committee (but subject to
the recusal of the Chief Executive
Officer and the Stockholder
Governor).21
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Replacement of the Exchange’s Referee
With an Options Trade Review
Committee
The Exchange proposes to replace the
current Referee process with an Options
Trade Review Committee, which is
similar to the processes of other
exchanges, including the NASDAQ
Exchange.22 As explained further below,
the Exchange believes that this
committee should effectively provide
fair and neutral review of Options
Exchange Officials’ rulings.
Currently, the Exchange’s By-Laws
and rules provide that the Referee is an
Exchange employee (or independent
contractor), supervised by the audit
committee,23 who reviews Options
Exchange Official rulings concerning
the nullification and/or adjustment of
transactions. In addition, the Referee
can act in the capacity of an Options
Exchange Official respecting initial
rulings concerning requests for relief
from the requirements of certain
21 Two seats on the Phlx Board are reserved for
the Chief Executive Officer and an officer, designee,
director, or employee of NASDAQ OMX. To the
extent that these Governors are officers or
employees of both Phlx and NASDAQ OMX, they
would be permitted to participate in discussions
concerning compensation of Phlx employees, since
the Phlx Board would not be responsible for setting
their compensation. They would, however, recuse
themselves from a vote on the subject to allow the
determination to be made by directors that are not
officers or employees of Phlx. If one of these
Governors was an officer or employee of Phlx but
not of NASDAQ OMX, that Governor would also
absent himself or herself from any deliberations
regarding his or her compensation.
22 See NASDAQ Exchange By-Laws, Article III,
Section 6(d).
23 For the establishment of the Referee program,
see Securities Exchange Act Release No. 54009
(June 16, 2006), 71 FR 36592 (June 27, 2006) (SR–
Phlx–2005–42).
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Exchange rules, Equity Floor Procedure
Advices and Option Floor Procedure
Advices.24
The Exchange proposes to eliminate
the Referee and replace that function
with an Options Trade Review
Committee, which will review Options
Exchange Official rulings. Even though
the Referee was able to, the Options
Trade Review Committee will not act in
the capacity of an Options Exchange
Official; its function will be limited to
reviewing such rulings.
In order to implement the Options
Trade Review Committee, the Exchange
is proposing to delete the By-Law
provision that currently vests
supervision over the Referee in the audit
committee and generally defines the
Referee’s role and background.25
Because the Exchange is proposing to
eliminate its audit committee, and
because appeals will now be handled by
a committee, rather than an exchange
employee (or independent contractor),
the Exchange believes that the Options
Trade Review Committee should be
sufficiently neutral and independent of
the regulatory processes and Options
Exchange Officials. The Options Trade
Review Committee will be appointed by
the Board pursuant to new By-Law
Article X, Section 10–10 as a standing
committee of the Board and shall
include a number of Member
Representative members 26 that is equal
to at least 20 percent of the total number
of members of the Committee;
furthermore, no more than 50 percent of
its members shall be engaged in market
making activity or employed by an
Exchange Member Organization whose
revenues from market making activity
exceed ten percent of its total
revenues.27
In addition, the Exchange proposes to
amend various rules that refer to the
Referee, including Rule 124, which
currently outlines in detail the
responsibilities of the Referee.
Specifically, Rule 124 is being amended
to establish the Options Trade Review
Committee’s role. In addition to the
language in By-Law Article X, Section
10–10, proposed new language in Rule
124 will state that the Options Trade
Review Committee may act through a
panel with a minimum of three
Committee members, of which no more
than 50% can be engaged in market
making activity or employed by an
Exchange Member Organization whose
revenues from market making activity
exceed ten percent of its total
24 See
Rule 124.02(a)(i)–(iv).
By-Law Article X, Section 10–9(d).
26 See By-Law Article I, Section 1–1(pp).
27 See proposed By-Law Article X, Section 10–10.
revenues.28 The Exchange anticipates
that in light of the time sensitivity of
rendering decisions in the trading
context, neither the entire Options
Trade Review Committee nor a quorum
thereof should be required. The
Exchange also anticipates that the panel
will be selected by Exchange regulatory
staff from the Committee members on a
rotating basis, taking into consideration
availability and prompt response as well
as frequency of service, keeping in mind
the importance of assembling a panel
quickly. The staff is likely to use
electronic means to do so, and the
panels would convene via conference
call. In addition, all appeals will be
presented to the panel on an anonymous
basis to reduce the risk of conflict or
bias. The staff would provide to the
panel a verbal and/or written
information packet containing relevant
documents. Member firm-identifying
information within the packet would be
redacted to make it difficult or
impossible to identify the parties to the
appeal. Regulatory staff will present the
information included in the kit to the
participants anonymously, which may
include written information provided by
any parties to the appeal.
Commentary .02 to Rule 124 is
proposed to be deleted, because it
details the role of the Referee. The
details regarding who can serve as
Referee, how the Referee is appointed,
designation of a Backup Referee, what
additional functions the Referee can
perform, and how the Referee is
supervised and evaluated are no longer
needed.
Other than the role of the Referee,
most aspects of the review process in
Rule 124 are not being changed; for
example, the time period to request a
review, the fee for a review that sustains
the ruling, and that rulings may be
sustained, overturned or modified all
remain unchanged. Decisions of the
Options Trade Review Committee, like
the Referee’s decisions, would not be
appealable. Because Advice F–27
corresponds to Rule 124, corresponding
changes to Advice F–27 are also
proposed.
Minor changes to Rule 124 include: (i)
[sic] removing references to Referee
decisions from Rule 124(b) in the
sentence that deals with rulings being
effective immediately and being
complied with promptly, because the
provision that Options Trade Review
Committee decisions are effective
immediately and must be complied with
promptly will appear instead in the
paragraph governing the Options Trade
25 See
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Federal Register / Vol. 74, No. 153 / Tuesday, August 11, 2009 / Notices
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Specifically, the proposed rule change
will eliminate two Board committees
whose roles have been diminished by
Phlx’s new status as a wholly owned
subsidiary of NASDAQ OMX, thereby
allowing governors to focus greater
attention on matters falling directly
within the purview of the Board,
including regulatory quality, market
structure, new product initiatives, and
review of proposed rule changes. In
addition, the creation of a regulatory
oversight committee and the inclusion
of the chief regulatory officer in the ByLaws will underscore the importance of
Phlx’s regulatory function and
specifically empower an independent
committee of the Board to oversee
regulation and meet regularly with the
chief regulatory officer. Finally, the
Exchange believes that replacing the
Referee with a new Options Trade
Review Committee should provide a
prompt and objective process for
reviewing rulings on trading disputes.
2. Statutory Basis
Phlx believes that its proposal is
consistent with Section 6(b) of the Act 30
in general, and furthers the objectives
of: (1) Section 6(b)(1) of the Act,31
which requires a national securities
exchange to be so organized and have
the capacity to carry out purposes of the
Act and to enforce compliance by its
members and persons associated with
its members with the provisions of the
Act; and (2) Section 6(b)(5) of the Act,32
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
sroberts on DSKD5P82C1PROD with NOTICES
Review Committee, in proposed subparagraph (d)(v). In addition, subparagraph (d)(vi) is proposed to be
deleted, because it duplicates a
provision in paragraph (b). The
Exchange is deleting the provision that
an Options Exchange Official that fails
to make any ruling in accordance with
Exchange rules may be subject to
possible disciplinary action by the
Exchange, because this provision
governs the Exchange’s own personnel
policies, which typically do not appear
in exchange rules.
Rule 1092 is also being changed to
refer to the Options Trade Review
Committee, rather than the Referee in
paragraphs (f)(iv) and (g), which relate
to requesting a review of obvious error
and catastrophic error determinations.
The changes to the remaining
provisions are minor. Rule 1,
Definitions, is being amended to state
that the list of Options Exchange
Officials will be maintained by the Chief
Regulatory Officer rather than the
Referee.29 Rule 163, Erroneous
Transactions, is also being amended to
replace the Referee with the Options
Trade Review Committee, but, as a
practical matter, is not significant,
because the Exchange no longer
operates an equity trading system for
which Rule 163 was adopted, such that
Rule 163 cannot currently be invoked.
In summary, the Exchange believes
that, under this proposal, the Options
Trade Review Committee should further
the goal of impartial, objective
decisions, which should, in turn, result
in fairness and certainty in the overall
process of resolving trading disputes.
No written comments were either
solicited or received.
29 Rule 1(pp) is also being amended to delete
reference to the specific Web site address where the
list of Options Exchange Officials is maintained,
which has changed. The Exchange will continue to
post the list on its Web site, but would prefer not
to put the actual Web site address into the rule text.
30 15 U.S.C. 78f(b).
31 15 U.S.C. 78(b)(1).
32 15 U.S.C. 78f(b)(5).
VerDate Nov<24>2008
20:51 Aug 10, 2009
Jkt 217001
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission shall: (a) By order
approve such proposed rule change, or
(b) institute proceedings to determine
whether the proposed rule change
should be disapproved.
40269
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–2009–59 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–Phlx–2009–59. 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 the filing also will be available
for inspection and copying at the
principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–Phlx–2009–59 and should
be submitted on or before September 1,
2009.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–19143 Filed 8–10–09; 8:45 am]
BILLING CODE 8010–01–P
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]]>Agencies
[Federal Register Volume 74, Number 153 (Tuesday, August 11, 2009)]
[Notices]
[Pages 40265-40269]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-19143]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-60431; File No. SR-Phlx-2009-59]
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of
Filing of Proposed Rule Change, and Amendment No. 1 Thereto, Relating
to the Exchange's By-Laws, Regulatory Oversight Committee and Referee
Program
August 4, 2009.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that, on July 27, 2009, NASDAQ OMX PHLX, Inc. (``Phlx''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. On July
30, 2009, the Exchange filed Amendment No. 1 to the proposed rule
change.\3\ The Commission is publishing this notice to solicit comments
on the proposed rule change, as amended, from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ By Amendment No. 1, the Exchange updated its proposal to
reflect that The NASDAQ Stock Market LLC and NASDAQ OMX BX, Inc.
have already eliminated their audit committees.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its By-Laws to establish a
regulatory oversight committee of the Board of Governors (the
``Board''); describe the office and responsibilities of the chief
regulatory officer in the By-Laws; eliminate the audit committee and
compensation committee of the Board, with their duties being assigned
to other board committees of Phlx or its parent corporation, The NASDAQ
OMX Group, Inc. (``NASDAQ OMX''); amend the Exchange's By-Laws to
delete the Referee process and establish a new Options Trade Review
Committee in
[[Page 40266]]
lieu thereof; and make conforming changes to the Exchange's Rules and
Options Floor Procedure Advice.
The text of the proposed rule change is available on the Exchange's
Web site at https://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/Filings/, at the principal office of the Exchange, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of those statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Modifications to the Regulatory Oversight Structure of the Board of
Governors
On July 24, 2008, Phlx was acquired by NASDAQ OMX. Following that
acquisition, Phlx has been assessing means to improve its governance
structure and conform it more closely to that of The NASDAQ Stock
Market LLC (the ``NASDAQ Exchange''), an effort that has already
resulted in the submission of several proposed rule changes to the
Commission.\4\ In addition, Phlx--together with the NASDAQ Exchange and
NASDAQ OMX BX, Inc. (formerly the Boston Stock Exchange, and also an
exchange subsidiary of NASDAQ OMX)--has been evaluating means to
realize synergies in the operations of these three exchanges while
maintaining the separate identity and member representation structures
of each.
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 59764 (April 20,
2009), 74 FR 18761 (April 24, 2009) (SR-Phlx-2009-17) (approving
proposal to modify the process for nominating Governors of the
Exchange); Securities Exchange Act Release No. 59697 (April 4,
2009), 74 FR 16249 (April 9, 2009) (SR-Phlx-2009-23) (proposing to
eliminate various standing committees of the Exchange and making
other miscellaneous changes). The Commission notes that the latter
filing was approved by the Commission on May 14, 2009. See
Securities Exchange Act Release No. 59924 (May 14, 2009), 74 FR
23759 (May 20, 2009).
---------------------------------------------------------------------------
In making this evaluation, Phlx and its sister exchanges have given
consideration to the experiences of their respective boards and have
reviewed the governance documents of other exchanges. In particular,
Phlx and the other exchanges have reviewed the board structures
established by NYSE Euronext and its exchange subsidiaries. In
Securities Exchange Act Release No. 55293,\5\ the Commission approved a
structure in which certain committees of the board of directors of NYSE
Euronext, the public holding company, perform functions for exchange
subsidiaries, which do not themselves have these committees.
Specifically, the Commission's approval order states that ``the NYSE
Euronext board of directors will have an audit committee, a human
resource and compensation committee, and a nominating and governance
committee. Each of the audit committee, human resource and compensation
committee, and nominating and governance committee of the NYSE Euronext
board of directors will consist solely of directors meeting the
independence requirements of NYSE Euronext.
---------------------------------------------------------------------------
\5\ Securities Exchange Act Release No. 55293 (February 14,
2007), 72 FR 8033 (February 22, 2007) (SR-NYSE-2006-120).
---------------------------------------------------------------------------
These committees also will perform relevant functions for NYSE
Group,\6\ the Exchange,\7\ NYSE Market,\8\ NYSE Regulation,\9\
Archipelago,\10\ NYSE Arca,\11\ and NYSE Arca Equities,\12\ as well as
other subsidiaries of NYSE Euronext, except that the board of directors
of NYSE Regulation will continue to have its own compensation committee
and nominating and governance committee.''
---------------------------------------------------------------------------
\6\ NYSE Group, Inc., the former public holding company of NYSE
Euronext's U.S. exchanges.
\7\ New York Stock Exchange LLC (``NYSE''), a registered
national securities exchange.
\8\ NYSE Market, Inc., a subsidiary of NYSE to which it has
delegated certain operational authority.
\9\ NYSE Regulation, Inc., a subsidiary of NYSE to which it has
delegated certain operational authority.
\10\ Archipelago Holdings, Inc., formerly the public holding
company of the entities now known as NYSE Arca, Inc. and NYSE Arca
Equities, Inc.
\11\ NYSE Arca, Inc., a registered national securities exchange.
\12\ NYSE Arca Equities, Inc., a subsidiary of NYSE Arca to
which it has delegated certain operational authority.
---------------------------------------------------------------------------
Phlx and the other exchanges owned by NASDAQ OMX have also
considered the experience of the NASDAQ Exchange in operating as a
subsidiary of a public company since 2006. During the period, the board
of each of the NASDAQ Exchange and its parent corporation (currently
NASDAQ OMX, and formerly The Nasdaq Stock Market, Inc.) has appointed
its own audit committee and management compensation committee. However,
these committees at the NASDAQ Exchange level have generally found
themselves duplicating the work of other committees at the exchange or
holding company level. The NASDAQ OMX audit committee has broad
authority to review the financial information that will be provided to
shareholders and others, systems of internal controls, and audit,
financial reporting and legal and compliance processes. Because NASDAQ
OMX's financial statements are prepared on a consolidated basis that
includes the financial results of NASDAQ OMX's subsidiaries, including
Phlx and the other exchange subsidiaries, the NASDAQ OMX audit
committee's purview necessarily includes these subsidiaries. The
committee is composed of four or five directors, all of whom must be
independent under the standards established by Section 10A(m) of the
Act \13\ and Rule 4200(a) of the NASDAQ Exchange. All committee members
must be able to read and understand financial statements, and at least
one member must have past employment experience in finance or
accounting, requisite professional certification in accounting, or any
other comparable experience or background that results in the
individual's financial sophistication.
---------------------------------------------------------------------------
\13\ 15 U.S.C. 78j-1(m).
---------------------------------------------------------------------------
By contrast, the audit committee of the NASDAQ Exchange has a more
limited role, focused solely on the exchange entity and its
subsidiaries that operate as facilities of the NASDAQ Exchange. As
described in the current By-Laws of the NASDAQ Exchange (which are, in
this respect, virtually identical to the current By-Laws of Phlx), the
primary functions of the audit committee are (i) oversight over
financial reporting, (ii) oversight over the systems of internal
controls established by management and the Board and the legal and
compliance process, (iii) selection and evaluation of independent
auditors, and (iv) direction and oversight of the internal audit
function. However, to the extent that the committee reviews financial
and accounting matters, its activities are duplicative of the
activities of the NASDAQ OMX audit committee, which is also charged
with providing oversight over financial reporting and independent
auditor selection for NASDAQ OMX and all of its subsidiaries, including
the NASDAQ Exchange, BX, and Phlx and their subsidiaries. Similarly,
the NASDAQ
[[Page 40267]]
OMX audit committee has general responsibility for oversight over
internal controls and direction and oversight over the internal audit
function for NASDAQ OMX and all of its subsidiaries. Thus, the
responsibilities of the exchanges' audit committees are fully
duplicated by the responsibilities of the NASDAQ OMX audit committee.
Accordingly, the NASDAQ Exchange has eliminated its audit committee by
amending Article III, Section 5 of the By-Laws.\14\
---------------------------------------------------------------------------
\14\ Securities Exchange Act Release No. 60276 (July 9, 2009),
74 FR 34840 (July 17, 2009) (SR-NASDAQ-2009-042) (``Release No. 34-
60276''). Similarly, BX has eliminated its audit committee.
Securities Exchange Act Release No. 60247 (July 17, 2009), 74 FR
33495 (July 13, 2009) (SR-BX-2009-021) (``Release No. 34-60247'').
---------------------------------------------------------------------------
Similarly, drawing upon the model established by NYSE Euronext and
the experience of the NASDAQ Exchange, Phlx is proposing to amend
Section 10-9 of its By-Laws to eliminate its audit committee. While the
committee formerly played a vital role in oversight of the preparation
of Phlx's financial statements when Phlx was owned by a group of
investors and sat at the top of a holding company structure, that role
has been assumed by the NASDAQ OMX audit committee now that Phlx is a
wholly owned subsidiary. Moreover, since Phlx does not currently have a
regulatory oversight committee, Phlx is now proposing to establish such
a committee so that regulatory oversight functions formerly performed
by the audit committee may be assumed by the new committee.\15\ The new
committee will oversee the adequacy and effectiveness of Phlx's
regulatory and self-regulatory organization responsibilities; assess
Phlx's regulatory performance; and assist the Board and its standing
committees in reviewing the regulatory plan and the overall
effectiveness of Phlx's regulatory functions. In furtherance of its
functions, the committee shall (a) review Phlx's regulatory budget and
specifically inquire into the adequacy of resources available in the
budget for regulatory activities; (b) meet regularly with Phlx's chief
regulatory officer in executive session; and (c) be informed about the
compensation and promotion or termination of the chief regulatory
officer and the reasons therefor.\16\ The committee shall consist of
three members, each of whom shall be an independent governor.\17\
---------------------------------------------------------------------------
\15\ Section 10-9 of the By-Laws.
\16\ The audit committee also currently performs functions
relating to the Referee, who has authority to review certain
decisions of Options Exchange Officials. As described below, the
Exchange proposes to replace the Referee with a new Options Trade
Review Committee.
\17\ An independent governor is one who has no material
relationship with Phlx or any affiliate of Phlx, any member of Phlx
or any affiliate of such member, or any issuer of securities that
are traded on Phlx or a facility of Phlx.
---------------------------------------------------------------------------
Phlx believes that even in light of the NASDAQ OMX audit
committee's overall responsibilities for internal controls and the
internal audit function, it is nevertheless important for the Phlx
Board to maintain its own independent oversight over Phlx's controls
and internal audit matters relating to Phlx's operations. In this
regard, Phlx notes that its regulatory oversight committee, like the
NASDAQ Exchange's regulatory oversight committee, will have broad
authority to oversee the adequacy and effectiveness of Phlx's
regulatory and self-regulatory organization responsibilities, and will
therefore be able to maintain oversight over controls in tandem with
the NASDAQ OMX audit committee's overall control oversight
responsibilities. Similarly, it is already the practice of NASDAQ OMX's
Internal Audit Department, which performs internal audit functions for
all NASDAQ OMX subsidiaries, to report to the Phlx Board on all
internal audit matters relating to Phlx. This practice will be formally
reflected in the Department's written procedures, which will now direct
such reports to the regulatory oversight committee. In addition, to
ensure that the Phlx Board retains authority to direct the Department's
activities with respect to Phlx, the Department's written procedures
will be amended to stipulate that the Phlx regulatory oversight
committee may, at any time, direct the Department to conduct an audit
of a matter of concern to it and report the results of the audit both
to the Phlx regulatory oversight committee and the NASDAQ OMX audit
committee. Finally, although language regarding the audit committee's
authority to conduct special reviews of any alleged improper conduct is
being removed, Phlx believes that such authority is inherent in the
powers of its Board, the NASDAQ OMX Board, and their respective
committees. Accordingly, retaining this language for a specific
committee is unnecessary.\18\
---------------------------------------------------------------------------
\18\ Phlx also notes that authority of the audit committee with
respect to the Exchange's Code of Conduct and whistleblowing
regarding accounting practices have been assumed by NASDAQ OMX,
which, as a public company, maintains a Code of Ethics program and
anonymous whistleblower hotline for NASDAQ OMX and its subsidiaries
in compliance with the requirements of the Sarbanes-Oxley Act, 15
U.S.C. 78j-1, 7264.
---------------------------------------------------------------------------
Although the position of chief regulatory officer has long existed,
Phlx has concluded that the position should be formally described in
the By-Laws. Accordingly, new Section 5-6 of the By-Laws will provide
that the chief regulatory officer will have general supervision of
Phlx's regulatory operations, including the responsibility for
overseeing its surveillance, examination, and enforcement functions and
for administering any regulatory services agreements with another self-
regulatory organization to which Phlx is a party. The chief regulatory
officer shall meet with the regulatory oversight committee in executive
session at regularly scheduled meetings, and at any time upon request
of the chief regulatory officer or any member of the committee.
Phlx also proposes to amend Section 4-13 of the By-Laws in order to
follow the NYSE Euronext model with respect to allowing the elimination
of its compensation committee and the performance of its function by
the NASDAQ OMX compensation committee and/or subsidiary boards.\19\ The
NASDAQ OMX By-Laws provide that its compensation committee considers
and recommends compensation policies, programs, and practices for
employees of NASDAQ OMX. Because many employees performing work for
Phlx are also employees of NASDAQ OMX, its compensation committee
already performs these functions for such employees. Moreover, certain
of its senior officers are also officers of NASDAQ OMX and other NASDAQ
OMX subsidiaries because their responsibilities relate to multiple
entities within the NASDAQ OMX corporate structure. Accordingly, NASDAQ
OMX pays these individuals and establishes compensation policy for
them. Most notably, the former Chief Executive Officer of Phlx was also
an ``executive officer'' of NASDAQ OMX within the meaning of NASDAQ
Exchange Rule 4350.\20\ Under that rule, the compensation of executive
officers of an issuer of securities, such as the common stock of NASDAQ
OMX, that is listed on the NASDAQ Exchange, must be determined by, or
recommended to the board of directors for determination by, a majority
of independent directors or a compensation committee comprised
[[Page 40268]]
solely of independent directors. Accordingly, the NASDAQ OMX board of
directors and/or its compensation committee was legally required to
establish the compensation for this individual. Although the individual
recently resigned his positions with NASDAQ OMX and its subsidiaries in
order to pursue another opportunity, it is likely that his successor as
Chief Executive Officer of Phlx will serve in a similar position at
NASDAQ OMX and therefore be subject to comparable compensation
requirements. To the extent that policies, programs, and practices must
also be established for any Phlx officers or employees who are not also
NASDAQ OMX officers or employees, the Phlx Board will perform such
actions without the use of a compensation committee (but subject to the
recusal of the Chief Executive Officer and the Stockholder
Governor).\21\
---------------------------------------------------------------------------
\19\ The Commission notes that it recently approved proposals by
BX and the NASDAQ Exchange to eliminate their compensation
committees. See Release Nos. 34-60247 and 60276, supra note 14.
These exchanges have eliminated those committees. See e-mail from
Edith Hallahan, Counsel, Phlx, to Nancy Burke-Sanow, Assistant
Director, Commission, dated August 3, 2009.
\20\ The position of Chief Executive Officer of Phlx is
currently vacant, pending selection of a successor.
\21\ Two seats on the Phlx Board are reserved for the Chief
Executive Officer and an officer, designee, director, or employee of
NASDAQ OMX. To the extent that these Governors are officers or
employees of both Phlx and NASDAQ OMX, they would be permitted to
participate in discussions concerning compensation of Phlx
employees, since the Phlx Board would not be responsible for setting
their compensation. They would, however, recuse themselves from a
vote on the subject to allow the determination to be made by
directors that are not officers or employees of Phlx. If one of
these Governors was an officer or employee of Phlx but not of NASDAQ
OMX, that Governor would also absent himself or herself from any
deliberations regarding his or her compensation.
---------------------------------------------------------------------------
Replacement of the Exchange's Referee With an Options Trade Review
Committee
The Exchange proposes to replace the current Referee process with
an Options Trade Review Committee, which is similar to the processes of
other exchanges, including the NASDAQ Exchange.\22\ As explained
further below, the Exchange believes that this committee should
effectively provide fair and neutral review of Options Exchange
Officials' rulings.
---------------------------------------------------------------------------
\22\ See NASDAQ Exchange By-Laws, Article III, Section 6(d).
---------------------------------------------------------------------------
Currently, the Exchange's By-Laws and rules provide that the
Referee is an Exchange employee (or independent contractor), supervised
by the audit committee,\23\ who reviews Options Exchange Official
rulings concerning the nullification and/or adjustment of transactions.
In addition, the Referee can act in the capacity of an Options Exchange
Official respecting initial rulings concerning requests for relief from
the requirements of certain Exchange rules, Equity Floor Procedure
Advices and Option Floor Procedure Advices.\24\
---------------------------------------------------------------------------
\23\ For the establishment of the Referee program, see
Securities Exchange Act Release No. 54009 (June 16, 2006), 71 FR
36592 (June 27, 2006) (SR-Phlx-2005-42).
\24\ See Rule 124.02(a)(i)-(iv).
---------------------------------------------------------------------------
The Exchange proposes to eliminate the Referee and replace that
function with an Options Trade Review Committee, which will review
Options Exchange Official rulings. Even though the Referee was able to,
the Options Trade Review Committee will not act in the capacity of an
Options Exchange Official; its function will be limited to reviewing
such rulings.
In order to implement the Options Trade Review Committee, the
Exchange is proposing to delete the By-Law provision that currently
vests supervision over the Referee in the audit committee and generally
defines the Referee's role and background.\25\ Because the Exchange is
proposing to eliminate its audit committee, and because appeals will
now be handled by a committee, rather than an exchange employee (or
independent contractor), the Exchange believes that the Options Trade
Review Committee should be sufficiently neutral and independent of the
regulatory processes and Options Exchange Officials. The Options Trade
Review Committee will be appointed by the Board pursuant to new By-Law
Article X, Section 10-10 as a standing committee of the Board and shall
include a number of Member Representative members \26\ that is equal to
at least 20 percent of the total number of members of the Committee;
furthermore, no more than 50 percent of its members shall be engaged in
market making activity or employed by an Exchange Member Organization
whose revenues from market making activity exceed ten percent of its
total revenues.\27\
---------------------------------------------------------------------------
\25\ See By-Law Article X, Section 10-9(d).
\26\ See By-Law Article I, Section 1-1(pp).
\27\ See proposed By-Law Article X, Section 10-10.
---------------------------------------------------------------------------
In addition, the Exchange proposes to amend various rules that
refer to the Referee, including Rule 124, which currently outlines in
detail the responsibilities of the Referee. Specifically, Rule 124 is
being amended to establish the Options Trade Review Committee's role.
In addition to the language in By-Law Article X, Section 10-10,
proposed new language in Rule 124 will state that the Options Trade
Review Committee may act through a panel with a minimum of three
Committee members, of which no more than 50% can be engaged in market
making activity or employed by an Exchange Member Organization whose
revenues from market making activity exceed ten percent of its total
revenues.\28\ The Exchange anticipates that in light of the time
sensitivity of rendering decisions in the trading context, neither the
entire Options Trade Review Committee nor a quorum thereof should be
required. The Exchange also anticipates that the panel will be selected
by Exchange regulatory staff from the Committee members on a rotating
basis, taking into consideration availability and prompt response as
well as frequency of service, keeping in mind the importance of
assembling a panel quickly. The staff is likely to use electronic means
to do so, and the panels would convene via conference call. In
addition, all appeals will be presented to the panel on an anonymous
basis to reduce the risk of conflict or bias. The staff would provide
to the panel a verbal and/or written information packet containing
relevant documents. Member firm-identifying information within the
packet would be redacted to make it difficult or impossible to identify
the parties to the appeal. Regulatory staff will present the
information included in the kit to the participants anonymously, which
may include written information provided by any parties to the appeal.
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\28\ See NASDAQ Stock Market Rule 11890 and IM-11890-20 (Review
by Panels of the MORC).
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Commentary .02 to Rule 124 is proposed to be deleted, because it
details the role of the Referee. The details regarding who can serve as
Referee, how the Referee is appointed, designation of a Backup Referee,
what additional functions the Referee can perform, and how the Referee
is supervised and evaluated are no longer needed.
Other than the role of the Referee, most aspects of the review
process in Rule 124 are not being changed; for example, the time period
to request a review, the fee for a review that sustains the ruling, and
that rulings may be sustained, overturned or modified all remain
unchanged. Decisions of the Options Trade Review Committee, like the
Referee's decisions, would not be appealable. Because Advice F-27
corresponds to Rule 124, corresponding changes to Advice F-27 are also
proposed.
Minor changes to Rule 124 include: (i) [sic] removing references to
Referee decisions from Rule 124(b) in the sentence that deals with
rulings being effective immediately and being complied with promptly,
because the provision that Options Trade Review Committee decisions are
effective immediately and must be complied with promptly will appear
instead in the paragraph governing the Options Trade
[[Page 40269]]
Review Committee, in proposed sub-paragraph (d)(v). In addition, sub-
paragraph (d)(vi) is proposed to be deleted, because it duplicates a
provision in paragraph (b). The Exchange is deleting the provision that
an Options Exchange Official that fails to make any ruling in
accordance with Exchange rules may be subject to possible disciplinary
action by the Exchange, because this provision governs the Exchange's
own personnel policies, which typically do not appear in exchange
rules.
Rule 1092 is also being changed to refer to the Options Trade
Review Committee, rather than the Referee in paragraphs (f)(iv) and
(g), which relate to requesting a review of obvious error and
catastrophic error determinations.
The changes to the remaining provisions are minor. Rule 1,
Definitions, is being amended to state that the list of Options
Exchange Officials will be maintained by the Chief Regulatory Officer
rather than the Referee.\29\ Rule 163, Erroneous Transactions, is also
being amended to replace the Referee with the Options Trade Review
Committee, but, as a practical matter, is not significant, because the
Exchange no longer operates an equity trading system for which Rule 163
was adopted, such that Rule 163 cannot currently be invoked.
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\29\ Rule 1(pp) is also being amended to delete reference to the
specific Web site address where the list of Options Exchange
Officials is maintained, which has changed. The Exchange will
continue to post the list on its Web site, but would prefer not to
put the actual Web site address into the rule text.
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In summary, the Exchange believes that, under this proposal, the
Options Trade Review Committee should further the goal of impartial,
objective decisions, which should, in turn, result in fairness and
certainty in the overall process of resolving trading disputes.
2. Statutory Basis
Phlx believes that its proposal is consistent with Section 6(b) of
the Act \30\ in general, and furthers the objectives of: (1) Section
6(b)(1) of the Act,\31\ which requires a national securities exchange
to be so organized and have the capacity to carry out purposes of the
Act and to enforce compliance by its members and persons associated
with its members with the provisions of the Act; and (2) Section
6(b)(5) of the Act,\32\ 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.
Specifically, the proposed rule change will eliminate two Board
committees whose roles have been diminished by Phlx's new status as a
wholly owned subsidiary of NASDAQ OMX, thereby allowing governors to
focus greater attention on matters falling directly within the purview
of the Board, including regulatory quality, market structure, new
product initiatives, and review of proposed rule changes. In addition,
the creation of a regulatory oversight committee and the inclusion of
the chief regulatory officer in the By-Laws will underscore the
importance of Phlx's regulatory function and specifically empower an
independent committee of the Board to oversee regulation and meet
regularly with the chief regulatory officer. Finally, the Exchange
believes that replacing the Referee with a new Options Trade Review
Committee should provide a prompt and objective process for reviewing
rulings on trading disputes.
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\30\ 15 U.S.C. 78f(b).
\31\ 15 U.S.C. 78(b)(1).
\32\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
such proposed rule change, or (b) institute proceedings to determine
whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-Phlx-2009-59 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2009-59. 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 the filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-Phlx-2009-59 and should be
submitted on or before September 1, 2009.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-19143 Filed 8-10-09; 8:45 am]
BILLING CODE 8010-01-P
